Prudential plc — Interim / Quarterly Report 2020

Sep 8, 2020

We do life. Prudential plc 2020 Half Year Financial Report

Contents

**01 **	Group overview 01
	GroupChief Executive’s report 02
**02 **	Businessperformance 09
	Group Chief Financial Ofcer and Chief Operating Ofcer’s report on the 2020 frst half fnancialperformance 10
	Group Chief Risk and Compliance Ofcer’s report on the risks facing our business and how these are managed 28
**03 **	International Financial Reporting Standards(IFRS) basis results 49
**04 **	European Embedded Value(EEV) basis results 104
**05 **	Additional information 134
	Additional fnancial information 136
	Risk factors 156
	Corporategovernance 167
	Disclosure of interests of Directors 168
	Shareholder information 172
	How to contact us 174

Prudential helps people get the most out of life.

Summary financials

Summary fnancials
Continuing operations (ie excludingdemerged M&Gplc business in HY19)	Half year 2020 Half year 2019 Change on an actual exchange rate basis9 Change on a constant exchange rate basis9
Adjusted operating proft1	$2,541m $2,619m (3)% (2)%
Operating free surplus generated before the efects of US EEV modelling enhancements made in the second half of 20192,3	$1,979m $1,943m 2% 3%
Life new business proft4	$1,160m $2,125m (45)% (45)%
IFRS proft after tax5	$534m $1,158m (54)% (54)%
Net cash remittances from business units6	$432m $1,093m (60)% –
	30 June 2020 31 December 2019
	Total Per share Total Per share
LCSM shareholder surplus over Group minimum capital requirement7	$12.4bn n/a $9.5bn n/a
IFRS shareholders' funds	$19.1bn 732¢ $19.5bn 749¢
EEV shareholders' funds	$48.9bn 1,876¢ $54.7bn 2,103¢

First interim ordinary dividend

5.37 cents

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Notes

• 1 ‘Adjusted operating profit’ refers to adjusted IFRS operating profit based on longer-term investment returns from continuing operations. This alternative performance measure is reconciled to IFRS profit for the period in note B1.1 of the IFRS financial statements.

• 2 For insurance operations, operating free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax adjusted operating profit for the period. Further information is set out in note 10 of the EEV basis results.

• 3 During the second half of 2019, as part of the implementation of the NAIC’s changes to the US statutory reserve and capital framework, enhancements were made to the model used to allow for hedging within US statutory reporting, which were subsequently incorporated into the EEV model. HY20 has been prepared on the same basis as FY19. Accordingly, operating free surplus in HY20 is $(535) million lower than it would have been if the previous EEV modelling approach applied at HY19 had been used. After allowing for this, operating free surplus generated in the first half of 2020 is $1,444 million, down (25) per cent on a constant exchange rate basis and (26) per cent on an actual exchange rate basis.

• 4 New business profit, on a post-tax basis, on business sold in the period, calculated in accordance with EEV Principles.

• 5 IFRS profit after tax from continuing operations reflects the combined effects of operating results determined on the basis of longer-term investment returns, together with short-term investment variances which for HY20 were driven by the impact of lower interest rates and equity markets on the Group’s obligations to policyholders, together with amortisation of acquisition accounting adjustments, the impacts of the corporate transactions and tax.

• 6 Net cash amounts remitted by business units are included in the holding company cash flow, which is disclosed in detail in note I(iii) of the Additional financial information. This comprises dividends and other transfers from business units that are reflective of emerging earnings and capital generation.

• 7 Surplus over Group minimum capital requirement and estimated before allowing for first interim ordinary dividend. Shareholder business excludes the available capital and minimum requirement of participating business in Hong Kong, Singapore and Malaysia. Further information on the basis of calculation of the LCSM measure is contained in note I(i) of the Additional financial information.

• 8 Under the Group’s previous dividend policy, the first interim dividend would have been 12.28 cents per share.

• 9 Further information on actual and constant exchange rate bases is set out in note A1 of the IFRS financial statements.

Prudential plc 2020 Half Year Financial Report 01

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GROUP CHIEF EXECUTIVE’S REPORT

Delivering a resilient performance and positioning ourselves for the future

During the first half of 2020, our focus has been on supporting our customers, distributors, colleagues and communities through the challenges created by Covid-19.

At the same time, we are continuing to invest for the future and deliver on our strategic objectives, including with our announcement today that we intend to pursue the full separation and divestment of Jackson to enable the Group to focus exclusively on our high-growth Asia and Africa businesses.

Since the Covid-19 pandemic began, we have leveraged our ability to act at pace to help our customers and the communities in which we operate. Both as an organisation and as individuals, we have shown how we are able to learn from the changing conditions around us and quickly generate new ways to support all of our stakeholders.

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The Group’s purpose is to help people get the most out of life. We do this by making healthcare accessible and affordable, helping people accumulate wealth through growing their assets, and empowering our customers to save for their goals. In all our businesses, we see strong alignment with the benefits to the wider society of financial inclusion through the increased provision of health and protection and long-term savings. By helping to build better lives and stronger communities and to maintain the self-reinforcing growth cycle, we seek to create long-term value for both our customers and our shareholders.

We continue to respond to our customers’ needs for flexible and targeted products, alongside our more traditional comprehensive savings and protection solutions. During the first half we introduced in all markets free, limited-time, Covid-19 cover for new or existing customers or Pulse users and we continue to make improvements to our offerings. We have expanded the number of products we are able to market through virtual platforms thereby increasing our resilience. In total, 90 per cent of our products in Asia, based on APE sales[1] , can now be sold without face-to-face contact. In the second quarter, some 150,000 policies have been sold by our agents across Asia throughout virtual platforms, equivalent to 38 per cent of policies written by this channel.

Our agents, partners, bank staff and the other professionals who distribute our services form an important part of the wider Prudential family, and help to identify products that best fit customer needs. To that end, we have been finding new ways to help them to work effectively while staying safe. We have continued to hire agents across our markets, and we have launched a virtual sales process with some of our key partner banks in Asia. Jackson wholesalers are continuing to adapt to the virtual sales environment and have conducted more than 20,000 virtual meetings since March. We also successfully launched our new distribution relationship with State Farm, adding more than 5,700 agents offering Jackson annuity products.

Throughout this crisis, the health and well-being of our approximately 19,000 colleagues has been a top priority. As at the end of July, 56 per cent of our Asia workforce were working away from the office. In Africa that figure is around 40 per cent. In the United States and at our London office, close to 100 per cent of our colleagues were working remotely. A recent survey of our colleagues[19] found that 90 per cent felt confident in the company’s rapid response to the pandemic. Our agile workplace technology has proven well suited to remote working and our people have adapted well to this new environment. We are taking a cautious approach to reopening our offices, adapting them to local social distancing requirements.

Our people have been working tirelessly to support our communities in a variety of ways, both large and small. In particular, we have disbursed more than $1.8 million from the $2.5 million Covid-19 fund we announced in May. New initiatives include support for continued education and learning for vulnerable communities, ongoing provision of PPE and needed medical equipment to hospitals and clinics in Asia and, in our African markets, public health awareness campaigns, food relief for deprived communities and support for education. We have also taken steps to help our smaller suppliers deal with the particular pressures they are under at the current time.

Our teams are innovating with an eye to the world beyond Covid-19. Pulse by Prudential, our Asia digital health app, is now available in 11 markets and has been downloaded more than 8.1 million times[21] since its launch a year ago. New tools are being added weekly, focusing on promoting healthy lifestyles and in turn reducing major non-communicable diseases, such as heart disease and diabetes.

Meanwhile, we have continued to execute successfully throughout the half year on our key strategic objectives. In March, we announced a significant bancassurance deal with TMB in Thailand, which together with Thanachart Bank gives us access to a customer base of more than nine million people. Last month, Prudential Ghana and Fidelity Bank announced a 10-year extension to their exclusive bancassurance agreement. In June we announced major reinsurance and investment transactions with Athene in the US and we have today announced that we intend to pursue the full separation and divestment of Jackson.

Intended separation of US operations

The Board of Prudential plc has decided to pursue the full separation and divestment of Jackson to enable the Group to focus exclusively on its high-growth Asia and Africa businesses.

The separation would result in two separately listed companies with distinct investment propositions, which the Board believes would result in improved strategic outcomes for both businesses. The separation would improve alignment of management and employees to their businesses, customers and shareholders. The Group would maintain its dual primary listings in both London and Hong Kong and secondary listings in Singapore and the US. Jackson would be expected to be solely listed in the US.

The Group intends to commence separation by way of a minority IPO followed by future sell-downs over time, with the proceeds used to increase financial flexibility for further investment in our Asia and Africa business. Any required shareholder approvals for the separation will be sought in advance of its execution.

Preparations for the IPO, targeting the first half of 2021, continue to progress well. If market conditions are not supportive of an IPO, the Group’s current intention is that separation would be facilitated through a demerger of the Group’s stake in Jackson to our existing shareholders.

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GROUP CHIEF EXECUTIVE’S REPORT CONTINUED

Focus on growth opportunities in Asia and Africa

Prudential’s differentiated product and geographic portfolio is well positioned to meet the protection and savings needs of the growing populations in Asia and Africa, where insurance penetration is currently low and demand for savings solutions is rapidly developing.

We have a pan-Asian footprint, with our largest life and protection operations[18] in Hong Kong, Singapore, Indonesia and Malaysia. We also operate in Thailand, Vietnam, Taiwan, the Philippines, Cambodia, Laos and Myanmar and have successful partnerships in China and India. Within this footprint, Prudential has top three positions[2] in nine out of 13 life markets, with significant with-profits funds in three markets providing a distinct product offering. We have a focus on capital-efficient health and protection insurance products and fee-based earnings. In asset management, Eastspring manages $220 billion across 11 markets in Asia and provides focused investment solutions to third-party retail and institutional clients as well as to our internally sourced life funds.

Over the decade from 2009 to 2019, embedded value in Asia grew on average by 15 per cent[3,5] per annum and at 31 December 2019 was $39.2 billion[3] . On average over the same period, total assets under management[22] grew by 14 per cent[3,5] per annum from $69.7 billion[3] to $266.6 billion[3] , APE sales[4 ] grew by 12 per cent[3,5] per annum, new business profit[6] and adjusted operating profit[7] grew by 16 per cent[3,5] per annum and Asia operating free surplus generation[8] grew by 19 per cent[3,5] per annum.

Our joint venture operations in China and India provide us with scaled access to two of the largest economies in the region in which we see significant growth potential in both insurance and savings. In Indonesia, we continue to strengthen our market leadership and propel growth by broadening our product offerings, enhancing our agent quality, as well as digitalising our business model. In Thailand our new distribution agreements will enable us to leapfrog and play a major role in serving the growing retirement and investment needs of a rising middle class. As the four largest economies in our footprint, these markets offer us the most significant opportunities for growth going forward.

In Hong Kong, we will continue to build our already strong and substantial business through agent expansion and increased digitalisation of our service offering, including in the Greater Bay Area as policy guidance emerges. In Singapore, we see significant opportunities in expanding the servicing of the wealth and small and medium enterprise markets, alongside supporting a fast-ageing population to address uncovered retirement and health needs. In Malaysia, we have leading market positions in both the conventional and takaful markets, with the underprovided sharia market presenting substantial opportunity for growth. In our other high-potential markets of Vietnam, the Philippines, Cambodia, Laos and Myanmar, we see the opportunity for rapid growth through the roll-out of our efficient and scalable business model. In Africa, where we have a growing presence in some of the world’s most under-penetrated markets, we continue to focus on technology and distribution to build a scalable business.

We have been able to substantially accelerate our digital development and customer-centric digital ecosystem, materially amplifying our physical franchise. Pulse by Prudential, our new digital health app, is now live in 11 markets, and the number of downloads has increased to more than 8.1 million at the beginning of August[21] from 1.3 million when we announced our full-year results in March this year. Pulse is broadening our customer base, gathering new data and converting this into new sales. Seventy per cent of Pulse users are new to Prudential, representing an internet-savvy and materially younger demographic than our in-force customer base. This is a rich source of new relationships and leads, which support our future growth. We are at the start of the monetisation journey from this digitally-led customer engagement, with 1.5 million free introductory covers provided and around 200,000 policies from our full range of products sold direct or through online-tooffline agency referrals. We intend to scale these monetisation activities at pace, which are complementary to our existing routes-to-market.

Eastspring has a broad product set, as well as significant distribution capabilities and a strong long-term track record. Product areas cover equity, bonds and multi-asset products, which underpin the savings offered to life business customers and are distributed to third-party institutions and retail clients. Distribution channels include wholesale, intermediary and direct online formats, which are tailored as required, depending on the geography involved. This means that Eastspring can continue to grow and develop through both market cycles and changes to individual investment styles. Operational efficiency at Eastspring has led to industry-leading margins[20] and investment in technology to deliver common platforms, and world-class risk management and governance capabilities. We expect Eastspring to further expand its product capabilities, tailoring them to the fast-developing needs of the Group’s life business, as well as third-party clients.

Since 2014 we have also built a rapidly growing multi-product business in Africa, with operations now in eight countries across the continent. Further information on how we have been investing and developing this business is set out further below within the Africa performance section.

We intend to take full advantage of the long-term structural opportunities in our chosen markets and geographies, while both operating with discipline and continuing to innovate, to deliver profitable and increasingly diversified growth.

Our trusted brands and digitally enabled multi-channel distribution enable us to meet the growing needs of our customers for long-term savings and financial security, and to design differentiated and tailored consumer products, which integrate investment and protection solutions. This offering is delivered through efficient and agile infrastructure, which in turn allows us to innovate and deploy products rapidly as consumer demands evolve.

We have significant investment appetite that is based on the absolute size and demographic characteristics of each economy and on our ability to build competitive advantage leveraging our scale and expertise. While we will continue to build on our leading positions in Hong Kong and ASEAN, we see the greatest growth opportunities in the largest economies of China, India, Indonesia and Thailand.

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Our Asia-focused strategy will support long-term delivery of future shareholder returns through value appreciation, with a focus on achieving sustained double-digit growth in embedded value per share. This will in turn be supported by growth rates of new business profit, which is expected to substantially exceed GDP growth in the markets in which the Group operates.

Financial impacts of intended separation

Jackson intends to seek a strong credit rating and capitalisation and is expected to raise debt and target an RBC ratio in the circa 425-475 per cent range at the point of proposed listing. Jackson’s holding company would currently be expected to target financial leverage in the circa 20-25 per cent range. These ranges are subject to market conditions and will be kept under review.

The target RBC ratio would include the proceeds of any primary equity issued by Jackson at or before the IPO and the target financial leverage would be expected to be raised at Jackson’s holding company in advance of any IPO. Proceeds from the anticipated increase in Jackson’s debt would enable repayment of a portion of the Group’s existing debt during 2021 and 2022, and support Prudential’s intention to maintain its strong credit rating after any separation of Jackson. Proceeds from further sell-downs in Jackson following the IPO would provide further resources to fund the Group’s continued investment in Asia and Africa growth opportunities.

To support the intended separation process, other than any pre-separation returns of capital including from Jackson’s debt issuance, Prudential plc does not currently expect Jackson to remit any regular dividends in 2020 or 2021 prior to the IPO. Prudential will adopt a new dividend policy that is aligned to the Asia and Africa growth strategy and to the intended separation of Jackson. The new policy will apply with immediate effect.

The Group will continue to right-size its head-office costs with the evolving footprint of the business. The Group is aiming to deliver a further annual cost reduction of around $70 million by 2023 on top of the $180 million cost savings from 2021 previously announced as a result of the M&G demerger[27] . This reduction would take into account the intended smaller size of the Group, while still retaining the quality of reporting, risk management and governance required by our regulators and stakeholders. We would continue to maintain a cost-effective presence in London to support our most liquid primary listing and our capital markets relationships as well as to access the depth and quality of financial service talent based there.

Capital allocation

and dividend policy

Since 2013, Prudential has committed over $9 billion of capital to support growth in Asia, including around $5 billion of inorganic investments to grow our distribution reach and to build digital capability. Around one-third of this investment has been made since January 2019. Asia has grown significantly over the last 10 years and the Group continues to have substantial opportunities for value creation from further investment in Asia. This investment is expected to deliver profitable and sustainable compounding growth and high risk-adjusted returns for shareholders. Accordingly, the new dividend policy reflects a rebalancing of capital allocation from cash dividends to reinvestment of capital into the Asia business and will apply with immediate effect.

Reflecting the Group’s capital allocation priorities, dividends will be determined primarily based on Asia’s operating capital generation after allowing for the capital strain of writing new business and recurring central costs, with a portion of capital generation retained for reinvestment in the business. Dividends are expected to grow broadly in line with the growth in Asia operating free surplus generation net of right-sized central costs, and will be set taking into account financial prospects, investment opportunities and market conditions.

The total 2020 dividend will be subject to market conditions and financial performance in 2020 remaining in line with expectations. Based on current estimates of Asia’s full-year 2020 operating capital generation, the Group’s total 2020 dividend is expected to be around $420 million under the new policy, equivalent to around 16.10 cents per share.

For the 2020 first interim dividend, the Board has approved a dividend of 5.37 cents per share[13] , representing one third of the current expectation for the 2020 full-year dividend under the Group’s new dividend policy. The second interim dividend is expected to be approved by the Prudential Board in the first quarter of 2021 and paid to shareholders in May 2021, in accordance with the Group’s normal financial calendar.

Starting from the 2021 first interim dividend, the Board intends to apply a formulaic approach to first interim dividends, which will be calculated as one-third of the previous year’s full-year dividend.

Financial performance

In the first half of the year, the Group’s adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit[7] ) from our continuing operations decreased by (2) per cent on a constant exchange rate basis to $2,541 million (decreased by (3) per cent on an actual exchange rate basis). This comprised a 14 per cent increase in Asia adjusted operating profit[7] , reflecting the resilience of our business underpinned by the success of our health and protection offering, and a lower contribution from our US business reflecting the adverse effect of market movements, including the amortisation of DAC in the period.

Our IFRS profit after tax from continuing operations was $534 million in the first half of 2020 (2019: $1,158 million on an actual exchange rate basis). This principally reflects the impact of lower interest rates, as well as lower equity market levels on our guaranteed US liabilities, only partially offset by gains on hedge instruments held for equity and interest rate related risk management purposes. The Group also benefited from a $668 million post-tax gain ($846 million pre-tax) from the reinsurance transaction with Athene concluded in the period.

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GROUP CHIEF EXECUTIVE’S REPORT CONTINUED

Asia performance

In Asia, we have been focused on supporting our communities, customers and staff through the challenges created by Covid-19 this year. We have also made significant strategic progress and achieved a positive financial performance despite the difficult macro and operating environment.

At the start of this report I set out some of the ways we have been supporting our stakeholders through the Covid-19 pandemic. For example, in Hong Kong, we have teamed up with the Chinese University of Hong Kong and one of our health services partners, Prenetics, to provide free Covid-19 tests to the 30,000 healthcare workers and their families in the city. In Indonesia, we have provided free Covid-19 rapid tests to 100,000 consumers in Jakarta and Surabaya as well as free online doctor consultation with Halodoc and in Malaysia, we have organised fundraising to distribute provisions to low-income families and made donations to Mercy Malaysia.

Covid-19-related restrictions applied from the start of the year in Hong Kong and mainland China, and across the region during the second quarter of 2020, resulting in APE sales[4] declining (34) per cent[9] compared with 2019. However, we believe the Covid-19 disruptions have also acted to intensify our structural opportunities. The region’s growing population has a clear and increasing need for the broad-based products we deliver. Insurance penetration in Asia is only 2.7 per cent of GDP, compared with 7.5 per cent in the UK[10] , while mutual fund penetration is just 12 per cent in Asia, compared with 96 per cent in the US[11] . In China, for example, recent research[12] suggests that four out of five consumers intend to purchase more insurance products after the Covid-19 crisis.

Second quarter APE sales[4] were down (45) per cent[9] from the same period last year, compared with a reduction of (24) per cent[9] in the first quarter. The continued restriction of travel from mainland China to Hong Kong led to a (64) per cent[9] fall in APE sales[4] over the first half of the year in this market, with new business profit declining by (67) per cent[9] , additionally reflecting lower rates. In markets outside Hong Kong, APE sales[4] declined (12) per cent[9] over the first half of the year, while new business profit proved more resilient, down (6) per cent[9] . China, which entered and exited lockdown earlier than other markets, saw APE sales[4] down (5) per cent[9] over the first half of the year, with second quarter APE sales[4] 20 per cent[9] higher than the same period last year as restrictions eased. Improved business mix saw half year new business profit[6] rise by 4 per cent[9] in China. We consider this sales performance to be encouraging in the context of the disruption to traditional forms of distribution. The Covid-19 pandemic has, nevertheless, reinforced the structural demand for protection in the region, with seven of our life markets increasing the proportion of health and protection sales in the first half. The sales environment improved across our markets as restrictions were gradually eased, with all 13 of our life markets reporting higher monthly sales[4] in June compared with levels in April and May.

The strength of our diverse, high-quality platform, and our long-held focus on writing profitable, value-adding business are demonstrated in the 14 per cent[9] increase in Asia adjusted operating profit[7] . This continued positive earnings progression is supported by a 6 per cent growth[3] in life renewal premiums[16] to $9.7 billion, underpinned by our recurring premium business model, high customer retention rate of 95 per cent, focus on protection products and business model diversity.

As well as our progress with Pulse by Prudential, we have made significant advances in virtualising our customer and agent onboarding process through close engagement with regulators, customers and existing distribution teams. Some 90 per cent of our products (based on APE sales) can now be sold virtually, with 38 per cent (150,000) of policies sold by agents in the second quarter requiring no face-to-face contact. Agent engagement and management have moved online, supporting both 7 per cent growth[14] in new agent recruits and 7 per cent growth[15] in our overall agency force. An increased level of automation is evident across our business, with e-submission rates now at 88 per cent, and autounderwriting being performed on up to 60 per cent of all new cases.

Eastspring saw adjusted operating profit[7] rise by 10 per cent[9] in the first half of 2020 supported by a 12 per cent[9,23] increase in average funds under management. Cost management remains vigorous as the cost-income ratio further improved by 1 percentage point to 50 per cent. Funds under management declined to $209 billion at 31 March 2020 (31 December 2019: $241 billion) due to third-party net outflows and lower equity markets, but rebounded to $220 billion at 30 June 2020 as a result of positive Asia life flows ($2.9 billion in the first half) and recovering markets. We continue to expand our offerings despite adverse market conditions, with notable funds launched in Taiwan and Thailand as well as institutional top-ups in Japan and Malaysia. We also made good progress in China, where our Wholly Foreign-owned Enterprise’s total sourced and sub-advised FUM reached RMB2.8 billion at end-June.

We have also continued to expand and strengthen our strategic footprint in South-east Asia. In Thailand, our 15-year strategic partnership with TMB has significantly strengthened our distribution capabilities in the country’s fast-growing life insurance sector and strongly complemented our position in the mutual fund market. Meanwhile, we have also partnered with BFL in Laos, and expect to establish an exclusive partnership with Yoma Bank in Myanmar, which has started to contribute new business. We are investing in technology and bringing into play expertise from our other operations in these exciting new markets.

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The near-term outlook for the Asia business remains uncertain due to the risks around renewed restrictions on movements both of customers and distribution teams. Any such restrictions will likely vary during the period meaning that we will need to continue to be agile in our operational delivery. Our early move to full virtualisation of new business and agent onboarding means that we can continue to mitigate, in part, the impact on sales. The near-term outlook for sales and new business profit in Hong Kong will continue to be impacted by the closure of the border with mainland China, which may not re-open in 2020.

Africa performance

Despite the Covid-19 pandemic, APE sales[4] at Prudential Africa have grown by 59 per cent[9] to $54 million in the first six months of the year, with the number of active agents nearly doubling compared with the same period last year. The increase in active agents is a direct result of implementing a Rookie Development Programme in each market to help transition new agents, from the classroom to the field, and making those agents active within the first month of their recruitment. In most markets, as a response to Covid-19related restrictions, we rapidly innovated to create an end-to-end virtual sales submission process, and a virtual recruitment and onboarding process for distributors, as well as delivering training digitally, which has helped to support our APE growth. In Ghana, we have renewed our exclusive agreement with Fidelity Bank for an additional 10 years, building on a successful partnership over the past five years. Meanwhile, our team in Nigeria has launched a new partnership with the largest mobile operator in the country, MTN, in an effort to reach its subscriber base of over 70 million people, and provide protection to the millions of uninsured Nigerians. Integration of the recently acquired Beneficial businesses continues with all businesses performing well, supported by the ongoing transformation of the agency businesses’ operating model and relatively lighter Covid-19 restrictions. Finally, all of our businesses have identified organisations in their markets that will benefit from support from our Covid-19 relief fund. Over 100,000 people in Africa will be reached rapidly via this community initiative.

US performance

The US is the world’s largest retirement savings market[24] , with approximately four million Americans reaching retirement age every year[25] . This transition continues to trigger the unprecedented shift of trillions of dollars from savings accumulation to retirement income generation[26] .

Jackson believes that a retirement strategy that integrates an income guarantee will mitigate much of the risk of retirees running out of money during retirement. In response to this demand and the ongoing shift to fee-based solutions, Jackson has positioned itself with product innovation and distribution strategies to provide a wide spectrum of choice when selecting the retirement savings and income product that best fits customer needs. This will allow Jackson to enhance further its market-leading variable annuity position in the brokerage market, diversify in the fixed annuity and fixed indexed annuity space and grow in the advisory retirement solutions market.

Supporting this ambition is a flexible and scalable operating platform that enables excellent service to be delivered efficiently. In 2020, Service Quality Management awarded Jackson the 2019 Contact Center of the Year award. Also in 2020, the company received the number one overall operational ranking for 2019 from its broker-dealer partners, according to the Operations Managers’ Roundtable.

Jackson has supported our stakeholders during the Covid-19 pandemic by using funding from the Covid-19 relief fund to support a charity in each of our main office locations of Lansing, Nashville and Chicago. The projects will address systemic economic insecurity, which has been worsened by the virus, through financial coaching and direct assistance.

Recent events in the US have raised awareness and heightened discussion of issues related to racial bias, structural racism and social justice. Following these events, Jackson’s leadership have held meetings with the Diversity & Inclusion Advisory Council and Visions in Black Excellence (VIBE Business Resource Associate Group), participated in a panel on ‘Allyship’ organised by Jackson Pride Business Resource Associate Group and issued supportive communications to all Jackson’s associates. We have introduced panels and training opportunities for all associates and managers in this area, and have made significant charitable contributions to the Lansing Chapter of the National Association for the Advancement of Colored People, the Urban League of Middle Tennessee, and Facing History and Ourselves in Chicago. We will build on our longstanding existing activities and continue to engage with our associates on these issues.

In June we announced that Jackson had agreed to fully reinsure substantially all of its in-force fixed and fixed indexed annuity portfolio to Athene. In addition, Athene agreed to make a $500 million anchor equity investment in the US business, in return for an 11.1 per cent economic interest in the enlarged common equity of the US business. This illustrated successful progress on our third-party capital strategy, and meaningfully enhanced Jackson’s capital position, with an estimated RBC ratio above 400 per cent at 30 June 2020, reflecting the benefit of the reinsurance transaction with Athene from 1st June and surplus generated in the period, but before the equity investment had completed, as we continue to build to an independent US business.

Adjusted operating profit[7] fell (19) per cent in the period, largely as a result of the impact on DAC of market movements. Before allowing for DAC acceleration impacts, adjusted operating profit[7] , while reduced, was resilient (down by (6) per cent) despite market disruptions. Despite APE sales[4] being (9) per cent lower, we maintained our leadership position in the annuities market.

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GROUP CHIEF EXECUTIVE’S REPORT CONTINUED

A recent survey[17] indicated that nearly two-thirds of financial professionals are having more frequent annuity conversations with clients during the pandemic and 68 per cent indicated that they are more likely to discuss annuities with clients in the future. Our conservative credit strategy protected our capital position, and the Athene reinsurance transaction reduces our exposure to credit risk going forward.

Jackson expects that the current declines in interest rates will lead to lower sales of fixed and fixed indexed annuities compared with 2019, for the near term. US adjusted operating profit[7] is expected to remain sensitive at an operating level to the impact of equity markets on separate account balances, which drive fee revenues, and on DAC accounting effects. The reinsurance transaction with Athene, which reduced spread assets and liabilities, will lead to lower spread-related earnings, albeit with reduced exposure to credit risk as well. Additional portfolio repositioning after the reinsurance transaction has resulted in an even more conservative positioning in respect of US credit risk. Jackson’s estimated RBC position is significantly improved from the year end and its operating capital generation is expected to remain strong.

We will continue to operate with discipline in this business, utilising our strong brand, our prudent product design and risk management, our award-winning service and our single stack operating platform, which has industry-leading cost advantages and is highly scalable.

Outlook

The Covid-19 outbreak has disrupted the global economy and our individual markets to varying degrees and at different periods, and the extent to which we may be affected in the remaining part of the year is uncertain. However, the long-term structural opportunities for us in Asia remain clear. Our multi-channel and multi-product approach, employing digital sales, fulfilment and premium collection, is continuing to deliver on those opportunities. In Asia we have operations in 15 markets, with a total of over 15 million customers, and we have outstanding product, platform and distribution strengths. We believe we are well positioned both to weather the disruption caused by the pandemic and to support our customers and communities for many years to come.

We remain focused on our strategic priorities, including to enable our investors to benefit to the fullest extent from the opportunity presented by our business in Asia. We continue to invest and innovate to meet important needs for Asia consumers, we operate a highly resilient business model, and we are dedicated to our purpose of helping people get the most out of life. Our proposed separation and divestment of Jackson would enable the Group to focus exclusively on our high-growth Asia and Africa businesses, and I believe it would result in two separately listed companies with distinct investment propositions and improved strategic outcomes. I am confident that we will not only continue to demonstrate our agility and resilience through this period, but that we will emerge from it stronger, more digitally enabled and even better able to serve our customers.

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Mike Wells Group Chief Executive

Notes

• 1 Based on the APE sales mix achieved in Asia within the first half of 2020.

• 2 Based on full year 2019 (fiscal year 2020 for India). Sources include formal (eg competitors results release, local regulators and insurance association) and informal (industry exchange) market share data. Ranking based on new business (APE sales, weighted full year premium or full year premium depending on availability of data) or total weighted revenue premiums.

• 3 On an actual exchange rate basis.

• 4 APE sales is a measure of new business activity that comprises the aggregate of annualised regular premiums and one-tenth of single premiums on new business written down 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. See note II of the Additional financial information for further explanation.

• 5 CAGR is compound annual growth rate.

• 6 New business profit, on a post-tax basis, on business sold in the period, calculated in accordance with EEV Principles.

• 7 Adjusted IFRS operating profit based on longer-term investment returns 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 B1.1 of the IFRS financial statements.

• 8 For insurance operations, operating free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax adjusted operating profit for the period. Further information is set out in note 10 of the EEV basis results.

• 9 Period-on-period percentage increases are stated on a constant exchange rate basis unless otherwise stated. As in previous years, we comment on our performance in local currency terms (expressed on a constant exchange rate basis) to show the underlying business trends in periods of currency movement.

• 10 Source: Swiss Re Sigma 2017. Insurance penetration calculated as premiums on per cent of GDP. Asia penetration calculated on a weighted population basis.

• 11 Source: Investment Company Institute, industry association and Lipper.

• 12 Source: McKinsey & Company: Fast forward China: How COVID-19 is accelerating 5 key trends shaping the Chinese economy, May 2020.

• 13 Under the Group’s previous dividend policy, the first interim dividend would have been 12.28 cents per share.

• 14 Growth calculated as new agent recruits over half year 2020 compared with half year 2019, excluding India.

• 15 Growth calculated agents as at half year 2020 compared with half year 2019, excluding India.

• 16 See note II of the Additional financial information for definition and reconciliation to IFRS balances.

• 17 Source: Jackson® and the Insured Retirement Institute (IRI) surveyed 200 financial professionals between April 8 and April 17, 2020.

• 18 Based on adjusted operating profit to 30 June 2020.

• 19 Survey of our London and Asia colleagues.

• 20 When compared against global competitors. Industry margin source: BCG Global Asset Management Market-Sizing Database 2020; BCG Global Asset Management Benchmarking Database 2020.

• 21 Downloads as at 5 August 2020.

• 22 Comprising internal funds, primarily held by Asia insurance businesses, and external funds managed by Eastspring. Internal funds include internally managed funds held in joint ventures and associates but excludes assets attributable to external unit holders of the consolidated collective investment schemes alongside other adjustments.

• 23 On a constant exchange rates basis Eastspring average funds under management over the half year to 30 June 2019 were $200.2 billion (actual exchange rate basis: $206.7 billion). Average funds under management over the period to 30 June 2020 were $224.1 billion.

• 24 Source: Willis Towers Watson Global Pension Asset Study 2019.

• 25 Annual Estimates of the Resident Population by Single Year of Age and Sex for the United States: 1 April 2010 to 1 July 2018. Source: US Census Bureau, Population Division.

• 26 Source: 2016 Federal Reserve Board’s Triennial Survey of Consumer Finances.

• 27 As compared with 2018 and before a planned $10 million increase in Africa costs as previously disclosed.

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02 Business performance

Page Group Chief Financial Officer and Chief Operating Officer’s report 10 on the 2020 first half financial performance Group Chief Risk and Compliance Officer’s report on the risks 28 facing our business and how these are managed

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GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2020 FIRST HALF FINANCIAL PERFORMANCE

Maintaining focus on delivering our strategic objectives

Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer

The Group has demonstrated positive operating results while supporting our colleagues, distributors, customers and communities during the disruption caused by Covid-19, and continuing to invest for the future and deliver on our strategic objectives.

These 2020 half year results reflect the first full period of financial reporting after the demerger of M&G plc in October 2019.

Our businesses in Asia delivered a 14 per cent[1] increase in adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit[2] ), reflecting the benefits of our well positioned and broad-based portfolio, which has long focused on high quality, recurring premium business.

Our US business delivered a robust performance in particularly challenging market conditions, with its risk management process working as planned, while delivering operating in-force capital generation in line with our expectations. This, alongside the benefit from the reinsurance transaction with Athene, resulted in an estimated 30 June RBC ratio for Jackson of above 400 per cent as well as delivering a material reduction in credit-related exposure. The $500 million investment by Athene into the US business completed in July and contributed around 24 percentage points to Jackson’s coverage ratio[3] .

The first half of 2020 saw high levels of macro volatility. In the US, the S&P 500 index fell (20) per cent over the first quarter before recovering by 20 per cent in the second, resulting in a (4) per cent decline over the first half of the year. In Asia, equity indices were similarly volatile, with the MSCI Asia ex Japan index 18 per cent down in the first quarter and up 17 per cent in the second. Government bond yields were lower over the period, notably with the US 10-year government bond yield ending the period at 0.7 per cent (31 December 2019: 1.9 per cent). The first half of 2020 also saw significant volatility in credit spreads, for example spreads on US dollar denominated A-rated corporate bonds rose by 184 per cent in the first quarter and fell by 48 per cent in the second quarter.

In comparative results for the first six months of 2019, which have been re-presented in US dollars following the change in presentational currency in our 2019 Annual Report, discontinued operations refer to the results of M&G plc which was demerged in October 2019. As in previous years, growth rates referred to are on a constant exchange rate basis unless otherwise stated.

Covid-19

The Group Chief Executive’s report has set out how the Group has risen to the operational challenges presented by Covid-19. In terms of financial performance, the containment measures taken by governments across the globe have impacted sales levels and new business profitability in the first half of 2020, albeit we have seen strong recoveries in those markets where measures have eased such as China. These impacts are discussed later in this report. The sales trajectory going forward will remain at risk to further restrictions on movement for both our customers and distributors. The impact that Covid-19 has had on markets, with lower interest rates and equity markets, has negatively impacted profitability in the period as discussed below. The sensitivity of our IFRS, EEV and capital metrics to further market movements are set out in the financial statements later in this document.

In terms of the balance sheet, experience has largely been within our operating assumptions and no strengthening of assumptions has been required at 30 June 2020. In Asia, where we focus on health and protection business, we have seen very low levels of Covid-19 claims to date. We have provided our customers with premium grace periods in line with local regulations but no significant impacts on our financial position have arisen to date. There have been no impairments to goodwill or intangible assets at 30 June 2020 and we will continue to review for triggers for impairment in line with our normal accounting procedures. Our investments are largely at fair value in the balance sheet and no significant changes to our valuation procedures have been applied. There has been a small increase in losses on bonds sold by Jackson during the first half of 2020 to $(148) million (2019: $(24) million on an actual exchange rate basis) given the widening of credit spreads, especially in the first quarter.

Finally, our liquidity position remains healthy with $1.9 billion of central liquidity at 30 June 2020 alongside $2.6 billion of undrawn committed facilities. We have not breached any of the requirements of our core structural borrowings nor modified any of their terms.

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Adjusted operating profit before tax from continuing operations

For the first half of 2020, Prudential’s adjusted operating profit[2] from continuing operations was $2,541 million ((2) per cent lower than the same period in 2019 on a constant exchange rate and (3) per cent lower on an actual exchange rate basis).

This reflects the combination of a 14 per cent[1] increase in adjusted operating profit[2] from our Asia life and asset management operations, offset by a (19) per cent decrease in adjusted operating profit[2] from our US business, and lower central expenses. The decline in US adjusted operating profit[2] is driven by unfavourable DAC accounting adjustments in the current period and favourable DAC accounting adjustments in the prior period. Before allowing for DAC acceleration in the current period (2019: DAC deceleration), US adjusted operating profit[2] decreased by 6 per cent.

Central expenses were 7 per cent[1] lower than the prior period reflecting a reduction in interest expense on core borrowings following the transfer of debt to M&G plc in 2019, partly offset by increased restructuring costs of $(108) million (2019: $(30) million[4] ). Restructuring costs reflect the Group’s substantial and ongoing IFRS 17 project, and costs associated with the planned reduction in central overhead expenses. During the first half of 2020 our head office activities incurred costs of $(205) million (2019: $(212) million[4] ). We remain on track to deliver total annualised savings of circa $180 million[5] and have currently completed actions to deliver $160 million, targeting a revised run-rate from 1 January 2021[6] .

IFRS basis non-operating items from continuing operations

Non-operating items in the first half of 2020 consist of short-term fluctuations in investment returns on shareholder-backed business of negative $(2,706) million (2019: negative $(1,455) million[4] ), $846 million of net gains arising from the US reinsurance transaction with Athene (2019: gains on other corporate transactions of $17 million[4] ), and the amortisation of acquisition accounting adjustments of negative $(18) million (2019: negative $(22) million[4] ) arising mainly from the REALIC business acquired by Jackson in 2012.

Negative short-term fluctuations comprised negative $(448) million for Asia (2019: positive $544 million[4] ), negative $(2,288) million in the US (2019: negative $(1,968) million) and positive $30 million in

other operations (2019: negative $(31) million[4] ).

Falling interest rates in certain parts of Asia led to lower discount rates on certain policyholder liabilities under the local reserving basis applied, which were not fully offset by unrealised bond gains in the period. This together with the effect of falling equity markets led to the overall negative short-term investment fluctuations in Asia.

In the US, a significant portion of our liabilities are fair valued under ‘grandfathered’ US GAAP (the basis of our IFRS reporting) and, among other factors, assume that future market returns follow the risk-free curve. The sharp decline in US interest rates, alongside lower equity markets, in the period resulted in a significant increase in these liabilities leading to accounting losses. These were only partially offset by gains on equity and interest rate derivatives held to protect the economics of the business from large movements in investment markets and for which a degree of variability is accepted within the accounting results. Further discussion of Jackson’s non-operating items is contained in the US section of this report.

After allowing for non-operating items, the total profit after tax from continuing operations was $534 million (2019: $1,158 million[1] ).

In addition to the effects recorded directly in the reported after-tax profit as described above, movements on the Group’s IFRS shareholders’ funds also reflect the transfer of assets to Athene as part of the reinsurance transaction, reducing cumulative unrealised gains on debt securities by $(1.8) billion largely mitigated by the positive effect of lower interest rates in the period on the valuation of Jackson’s debt securities. Overall IFRS shareholders’ funds were $19.1 billion (31 December 2019: $19.5 billion[4] ).

IFRS effective tax rates

In the first half of 2020, the effective tax rate on adjusted operating profit based on longer-term investment returns from continuing operations was 18 per cent (2019: 16 per cent). This expected higher rate reflects losses arising in other operations on which no tax relief is expected to be available in future periods.

The effective tax rate on total IFRS profit in the first half of 2020 was 19 per cent (2019: less than 1 per cent), reflecting a reduction from 2019 in non-taxable investmentrelated marked-to-market gains arising in Asia.

Corporate transactions Extension of Thailand

bancassurance partnership

On 19 March, the Group announced that its Thailand business had entered into a strategic bancassurance partnership with TMB Bank Public Company Limited (TMB) with an initial term of 15 years to provide Prudential’s suite of health and wealth solutions to TMB’s customer base. The new agreement significantly expands and extends Prudential’s partnership with Thanachart Bank to TMB Bank, which, following their merger, is the sixth largest bank by deposits and fourth largest bank by branches in Thailand.

The extended exclusive partnership agreement will commence on 1 January 2021 and until this time the current arrangement with Thanachart Bank will continue. The fee for extending the current arrangements was Thai Baht 24.5 billion (equivalent to US$754 million based on the exchange rate at 18 March 2020), with Thai Baht 12.0 billion paid in April 2020 and the remainder due on 1 January 2021.

Jackson reinsurance of fixed and fixed indexed annuity business

In June 2020, Jackson reinsured substantially all of its in-force portfolio of US fixed and fixed indexed annuities with Athene (circa $27.6 billion of liabilities). The transaction excluded liabilities relating to Jackson’s legacy life and institutional business, the REALIC portfolio and group pay-out annuity business reinsured from John Hancock as well as investments in the general account by the variable annuity policyholders. At 30 June 2020 these remaining liabilities, net of reinsurance, totalled $34.8 billion, the vast majority of which attract spread type earnings. The transaction improved the capital position of Jackson by increasing the Jackson RBC ratio by 69 percentage points and the Group’s LCSM cover ratio by 25 percentage points. This is discussed further in the ‘Group capital position’ section below and the ‘Local statutory capital – Jackson National Life’ section within the discussion on the US financial performance.

The reinsurance agreement was effective on 1 June 2020 and resulted in an IFRS pre-tax gain recorded through the profit and loss account of $846 million. After allowing for tax and the reduction in unrealised gains recorded directly in other comprehensive income, the impact of the reinsurance transaction on IFRS shareholders’ equity is a reduction of $(1,135) million[19] . The policies reinsured to Athene contributed around $100 million to adjusted operating profit in 2019.

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This transaction reduced the Group’s EEV by $(423) million, which largely reflects the loss of future profits recorded in the value of in-force business as a result of the reinsurance and the loss of unrealised gains on assets passed to Athene partly offset by the reinsurance commission received after deducting tax.

In June 2020, Prudential announced an agreement with Athene for its subsidiary Athene Life Re Ltd to invest $500 million in Prudential’s US business in return for an 11.1 per cent economic interest for which the voting interest is 9.9 per cent. This transaction subsequently completed on 17 July 2020 and so will be accounted for in

the second half of 2020. If the transaction had completed at 30 June, the effect on the Group’s 30 June 2020 IFRS shareholders’ funds would be a further reduction of $(0.6) billion[3] and EEV shareholders’ equity would be further reduced by $(1.1) billion[3] .

IFRS profit

IFRS proft
	Actual exchange rate	Constant exchange rate
	Half year 2020$m Half year 2019$m Change%	Half year 2019$m Change%
Adjusted operating proft based on longer-term investment returns before tax from continuing operations Asia Long-term business Asset management	1,590 1,417 12 143 133 8	1,396 14 130 10
Total Asia	1,733 1,550 12	1,526 14
US Long-term business Asset management	1,256 1,556 (19) 10 16 (38)	1,556 (19) 16 (38)
Total US	1,266 1,572 (19)	1,572 (19)
Total segmentproft from continuingoperations	2,999 3,122 (4)	3,098 (3)
Other income and expenditure	(350) (473) 26	(466) 25
Total adjusted operating proft before tax and restructuring costs Restructuringand IFRS 17 implementation costs	2,649 2,649 – (108) (30) (260)	2,632 1 (28) (286)
Total adjusted operating proft before tax	2,541 2,619 (3)	2,604 (2)
Non-operating items: Short-term fuctuations in investment returns on shareholder-backed business Amortisation of acquisition accounting adjustments Gain on disposal of businesses and corporate transactions	(2,706) (1,455) (86) (18) (22) 18 846 17 n/a	(1,445) (87) (21) 14 20 n/a
Proft from continuing operations before tax attributable to shareholders	663 1,159 (43)	1,158 (43)
Tax (charge) credit attributable to shareholders’ returns	(129) (1) n/a	1 n/a
Proft from continuing operations for the period Proft from discontinued operations for the period, net of related tax	534 1,158 (54) – 835 n/a	1,159 (54) 813 n/a
Proft for theperiod	534 1,993 (73)	1,972 (73)
IFRS earnings per share
	Actual exchange rate	Constant exchange rate
	Half year 2020cents Half year 2019cents Change%	Half year 2019cents Change%
Basic earnings per share based on adjusted operating proft after tax from continuing operations Basic earnings per share based on: Total proft after tax from continuing operations Totalproft after tax from discontinued operations	79.0 84.5 (7) 19.7 44.6 (56) – 32.3 n/a	84.3 (6) 44.8 (56) 31.5 n/a

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Group capital position

Prudential is applying the local capital summation method (LCSM) that has been agreed with the Hong Kong Insurance Authority (IA) to determine Group regulatory capital requirements until the Group-wide Supervision (GWS) Framework is effective. The timing of finalisation and implementation of the GWS Framework remains uncertain, although it is expected to become effective in early 2021. The Legislative Council of the Hong Kong Special Administrative Region approved the enabling primary legislation in July and further implementation guidance is expected in due course. Subject to that guidance, we currently expect the GWS methodology to be largely consistent with that applied under LCSM.

The estimated shareholder LCSM cover ratio[7] at 30 June 2020 was 334 per cent (31 December 2019: 309 per cent) and included a 25 per cent benefit from the Athene reinsurance transaction.

Overall, LCSM surplus over group minimum capital requirements increased

by $2.9 billion since 31 December 2019 to $12.4 billion[17 ] at the end of June. LCSM in-force operating capital generation in the period was $1.2 billion, which supported $(0.2) billion of investment in new business. Non-operating items (excluding corporate transactions) were positive overall and contributed $2.6 billion to surplus and was after an increase in required capital of $0.8 billion, largely as a result of market movements in the period. This positive contribution arose largely from the derivative gains in Jackson more than offsetting the effect of market movements on policyholder liabilities as well the introduction of the new Singapore risk-based capital framework (RBC2) effective 31 March 2020. Corporate transactions had a broadly neutral impact with the inorganic investment in Asia offsetting the benefit of the Athene reinsurance deal. The payment of the 2019 second interim reduced the surplus by $0.7 billion.

The 30 June 2020 Jackson local statutory results reflect a $0.8 billion benefit from the

reinsurance of the in-force portfolio of Jackson’s US fixed and fixed indexed annuity liabilities to Athene Life Re Ltd effective from 1 June 2020, which similarly benefits the Group’s LCSM surplus over Group minimum capital requirement.

The $500 million equity investment in Prudential’s US business from Athene Life Re Ltd in return for an 11.1 per cent economic interest completed in July 2020 and so will be reflected in the second half of 2020. The net impact of this transaction is a further $0.2 billion reduction in the Group LCSM shareholder surplus with the cover ratio increasing by a further 6 per cent assuming this transaction had completed as at 30 June 2020.

More information is set out in note I(i) of the Additional financial information. The Group’s LCSM position is resilient to external macro movements as demonstrated by the sensitivity disclosure contained in note I(i) of the Additional financial information, alongside further information on the basis of calculation of the LCSM measure.

Estimated Group LCSM capital position[7]

Estimated Group LCSM capital position7
	30 June 2020 31 December 2019
	Total Shareholder Total Shareholder**
Available capital ($ billion) Group minimum capital requirement (GMCR) ($ billion) LCSM surplus (over GMCR) ($ billion) LCSM ratio (over GMCR) (%)	37.0 17.7 33.1 14.0 11.5 5.3 9.5 4.5 25.5 12.4 23.6 9.5 323% 334% 348% 309%

*The shareholder LCSM amounts exclude the available capital and minimum capital requirements of the participating business in Hong Kong, Singapore and Malaysia.

Financing and liquidity

Net core structural borrowings of shareholder-financed businesses

	30 June 2020$m	30 June 2019$m	31 December 2019$m
	IFRS basis Mark-to- market value EEV basis	IFRS basis Mark-to- market value EEV basis	IFRS basis Mark-to- market value EEV basis
Subordinated debt substituted to M&G plc in 2019 Other core structural borrowings	– – –	3,931 266 4,197 5,539 512 6,051	– – – 5,594 633 6,227
	6,499 588 7,087
Total borrowings of shareholder-fnanced businesses Less: holding company cash and short-term investments	6,499 588 7,087	9,470 778 10,248 (3,010) – (3,010)	5,594 633 6,227 (2,207) – (2,207)
	(1,907) – (1,907)
Net core structural borrowings of shareholder-fnanced businesses	4,592 588 5,180	6,460 778 7,238	3,387 633 4,020
Gearingratio*	19%	21%	15%

• Net core structural borrowings as proportion of IFRS shareholders’ funds plus net debt, as set out in note II of the Additional financial information.

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GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2020 FIRST HALF FINANCIAL PERFORMANCE CONTINUED

The total borrowings of the shareholderfinanced businesses increased by $0.9 billion, from $5.6 billion to $6.5 billion in the first half of 2020. This reflected the issuance of $1,000 million 3.125 per cent notes in April 2020 raised for general corporate purposes including to support the growth of the business. The Group had central cash resources of $1.9 billion at 30 June 2020 (31 December 2019: $2.2 billion), resulting in net core structural borrowings of the shareholder-financed businesses of $4.6 billion at end of June 2020 (31 December 2019: $3.4 billion).

In addition to its net core structural borrowings of shareholder-financed businesses set out above, the Group has access to funding via the medium-term note programme, the US shelf programme (the platform for issuance of SEC registered bonds in the US market), a commercial paper programme and committed revolving credit facilities. All of these are available for general corporate purposes.

Prudential plc has maintained a consistent presence as an issuer in the commercial paper market for the past decade and had $506 million in issue at the end of the first half of 2020 (31 December 2019: $520 million).

As at 30 June 2020, the Group had a total of $2.6 billion of undrawn committed facilities, expiring in 2025. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 30 June 2020.

In addition to the Group’s traditional sources of liquidity and financing, Jackson also has access to funding via the Federal Home Loan Bank of Indianapolis with advances secured against collateral posted by Jackson. Given the wide range of Jackson’s product set and breadth of its customer base including retail, corporate and institutional clients, further sources of liquidity also include premiums and deposits.

Cash remittances Holding company cash flow[8]

Cash remittances Holding company cash fow 8
	Actual exchange rate
	Half year 2020$m Half year 2019$m Change**%
From continuing operations Asia excluding ICICI Prudential proceeds ICICI Prudential proceeds Total Asia Jackson Other operations	400 329 22 – 249 (100) 400 578 (31) – 509 (100) 32 6 433
Total net cash remitted from continuing operations From discontinued operations M&Gplc	432 1,093 (60) – 453 (100)
Net cash remitted bybusiness units	432 1,546 (72)
Central outfows Dividends paid Other movements	(172) (288) (674) (1,108) 203 (1,282) (211) (1,132) 2,207 4,121 (89) 21 1,907 3,010
Total holdingcompanycash fow
Cash and short-term investments at the beginning of the period Foreign exchange and other movements
Cash and short-term investments at the end of theperiod

*The holding company cash flow describes the movement in the cash and short-term investments of the centrally managed Group holding companies.

Cash remitted to the Group from continuing operations in the first half of 2020 amounted to $432 million, including $400 million from Asia. Asia remittances in the first half of 2019 included $249 million in respect of capital proceeds from the required sale of shares in the Group’s Indian JV, ICICI Prudential. Excluding this amount, Asia remittances were up 22 per cent compared with the same period last year.

Cash remittances were used to meet central costs of $(172) million and to pay dividends of $(674) million. Central costs include net interest paid of $(147) million

and a net tax benefit, which is not expected to recur going forward, of $94 million.

Other movements of $203 million includes the proceeds of the issuance of $1 billion of senior debt in April 2020 offset by central contributions to the funding of Asia strategic growth initiatives, principally payments for bancassurance distribution agreements, including TMB and UOB. Further information is contained in note I(iii) of the Additional financial information.

Cash and short-term investments totalled $1.9 billion at the end of June 2020 (30 June 2019: $3.0 billion[4] ; 31 December 2019: $2.2 billion[4] ).

The Group will seek to manage its financial condition such that it has sufficient resources available to provide a buffer to support the retained businesses in stress scenarios and to provide liquidity to service central outflows. As discussed in the Group Chief Executive’s report, Prudential plc does not currently expect Jackson to remit any regular dividends in 2020 or 2021 prior to the intended IPO.

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Shareholders’ funds

Shareholders’ funds
	IFRS	EEV
	Half year 2020$m Half year 2019$m Full year 2019$m	Half year 2020$m Half year 2019$m Full year 2019$m
Adjusted operating proft after tax and non-controlling interests from continuingoperations9	2,052 2,183 4,528	2,193 3,409 6,896
Proft (loss) after tax for the period9 Exchange movements, net of related tax Unrealised gains and losses on US fxed income securities classifed as available-for-sale (before the impact of Jackson’s reinsurance with Athene) Impact of Jackson’s reinsurance with Athene Demerger dividend in specie of M&G plc Other dividends Mark-to-market value movements on Jackson assets backing surplus and required capital Other	512 1,987 783 (200) 47 2,943 1,781 2,233 2,679 (1,803) – – – – (7,379) (674) (1,108) (1,634) – – – 17 (90) 117	(4,824) 5,509 (645) (513) 154 666 – – – – – – – – (7,379) (674) (1,108) (1,634) 317 177 206 (75) (151) 95
Net (decrease) increase in shareholders’ funds Shareholders’ funds at beginningof theperiod	(367) 3,069 (2,491) 19,477 21,968 21,968	(5,769) 4,581 (8,691) 54,711 63,402 63,402
Shareholders’ funds at end of theperiod	19,110 25,037 19,477	48,942 67,983 54,711
Shareholders’ valueper share10	732¢ 963¢ 749¢	1,876¢ 2,615¢ 2,103¢

Group IFRS shareholders’ funds in the six months to 30 June 2020 decreased by (2) per cent[4] to $19.1 billion (31 December 2019: $19.5 billion[4] ), largely reflecting profit after tax for the period being more than offset by dividends paid in the period of $(0.7) billion and foreign exchange movements of $(0.2) billion.

The Group’s EEV basis shareholders’ funds at 30 June 2020 were $48.9 billion. This compares with $54.7 billion[4] at 31 December 2019. The reduction over the period is primarily driven by EEV loss from continuing operations of $(4.8) billion, largely driven by the effect of lower interest rates and equity markets, and external dividends of $(0.7) billion. On a per share basis, the Group’s embedded value at 30 June 2020 equated to 1,876 cents. More information on the Group’s EEV results are included in the segmental detail that follows.

Free surplus generation from continuing operations[11]

Free surplus generation is the financial metric we use to measure the internal cash generation of our business operations and is based (with adjustments) on the capital regimes that apply locally in the various jurisdictions in which the Group operates. For life insurance operations, it represents amounts emerging from the in-force business during the period, net of amounts reinvested in writing new business. For asset management businesses, it equates to post-tax adjusted operating profit for the period.

Asia operating free surplus generation[12] increased by 13 per cent[4] to $988 million reflecting recent business growth, higher asset management earnings and lower levels of new business investment as Covid-19 containment measures introduced by the authorities across the region lowered sales in the period.

US operating free surplus generation[12 ] was $1,029 million (2019: $1,075 million) before reflecting the impact of the expected reduction from in-force business following EEV hedge modelling enhancements made in the second half of 2019. The 2019 result benefited from a $355 million reserve benefit related to the John Hancock portfolio which did not repeat in the current year. Half year 2020 also saw lower new business investment following a fall in sales volumes.

After allowing for restructuring costs, operating free surplus generated from continuing operations, before the adjustments to reflect US hedge modelling changes, increased by 3 per cent[1] to $1,979 million. The US EEV hedge modelling enhancements in full year 2019 reduced the value of in-force business at 31 December 2019, and the subsequent unwind of those cash flows over half year 2020 reduces the expected transfer to net worth and hence operating free surplus generation by $(535) million. After allowing for these costs operating free surplus fell by (25) per cent[1] to $1,444 million.

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Analysis of movement in free surplus for insurance and asset management operations[11]

	Actual exchange rate	Constant exchange rate
	Half year 2020$m Half year 2019$m Change%	Half year 2019$m Change%
Operating free surplus generated before restructuring costs and US EEV hedge modelling enhancements during the second half of 2019 Asia US	988 886 12 1,029 1,075 (4)	871 13 1,075 (4)
Total operating free surplus generated before restructuring costs and US EEV hedge modelling enhancements during the second half of 2019 Restructuringand IFRS 17 implementation costs	2,017 1,961 3 (38) (18) (111)	1,946 4 (17) (124)
Operating free surplus generated before US EEV hedge modelling enhancements during the second half of 2019 Impact of US EEV hedge modelling enhancements during the second half of 2019	1,979 1,943 2 (535) – n/a	1,929 3 – n/a
Operatingfree surplusgenerated	1,444 1,943 (26)	1,929 (25)
Gain (loss) on reinsurance of US in-force fxed and fxed indexed annuity portfolio Other non-operating (loss) proft Net cash fows paid to parent company Foreign exchange movements on foreign operations, timingdiferences and other items	851 – (665) 347 (400) (1,103) 467 118 1,697 1,305 5,997 5,351 7,694 6,656
Total movement in free surplus from continuing operations Free surplus at 1 Januaryfrom continuingoperations
Free surplus at 30 June from continuingoperations

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Asia

Operational and financial highlights

While the evolving impact of Covid-19 containment measures across the region impacted new business sales volumes and associated profitability in the first half of 2020, the strength of our franchise was

evident from the improvement in new business sales in markets where restrictions have eased, and a positive in-force performance which underpinned a 13 per cent increase[1] in operating free surplus generation[12] and a 14 per cent[1] increase in adjusted operating profit[2] .

This level of growth, in a disrupted and volatile period, reflects the benefit of our focus on high quality, recurring premium business, supported by a diverse portfolio of well-positioned, at scale, market operations supporting profit progression across market cycles.

	Actual exchange rate	Constant exchange rate
	Half year 2020$m Half year 2019$m Change%	Half year 2019$m Change%
New business proft Adjusted operating proft,2 EEV operating proft Operatingfree surplusgeneration*	912 1,675 (46) 1,733 1,550 12 2,036 2,868 (29) 988 886 12	1,673 (45) 1,526 14 2,853 (29) 871 13

*Before restructuring costs

New business performance

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

	Actual exchange rate	Constant exchange rate
	Half year 2020$m Half year 2019$m Change%	Half year 2019$m Change%
	APE sales New business proft APE sales New business proft APE sales New business proft	APE sales New business proft APE sales New business proft
Hong Kong China JV Indonesia Other life insurance markets	388 353 1,075 1,070 (64) (67) 319 127 350 126 (9) 1 123 68 156 85 (21) (20) 835 364 979 394 (15) (8)	1,086 1,081 (64) (67) 337 122 (5) 4 152 82 (19) (17) 965 388 (13) (6)
Total Asia	1,665 912 2,560 1,675 (35) (46)	2,540 1,673 (34) (45)
Total Asia excluding HongKong	1,277 559 1,485 605 (14) (8)	1,454 592 (12) (6)
Total new business margin	55% 65%	66%

Life insurance new business APE sales decreased by (34) per cent[1] to $1,665 million and related new business profit decreased by (45) per cent[1] .

The APE sales development reflects the widespread impact of Covid-19-related restrictions across the region during the second quarter of 2020, with new sales in the second quarter of 2020 down (45) per cent[1] compared with a reduction of (24) per cent[1] in the first quarter. More recently, as restrictions have eased in a number of countries, all 13 markets have seen improving sales trends in June compared with those in April and May.

We continue to benefit from our diversified distribution footprint and broad portfolio. Overall new sales through our bank partners were (13) per cent[1] lower, albeit three of our top six bank partners recorded double-digit growth, despite Covid-related restrictions. Outside Hong Kong, overall new sales through our bank partners were (6) per cent[1] lower, while agency sales (25) per cent[1] down reflecting Covidrelated disruption.

We continue to increase the weight of health and protection products which represent 28 per cent of new sales (2019: 27 per cent), with seven markets reporting an increase in the proportion of health and protection sales.

Three markets saw higher APE sales in the first half of 2020, led by Thailand, where bancassurance expansion underpinned the 45 per cent[1] APE growth. In Vietnam, APE increased by 8 per cent[1] , also driven by strong bancassurance growth, as easing of restrictions from May helped new sales return to positive growth in the second quarter. Similarly, in Taiwan, the return to positive sales growth in the second quarter supported marginally higher APE sales (up less than $1 million[1] ) in the first half.

In China, new sales were (5) per cent[1] lower, with first quarter sales impacted by Covid-related disruption. However, as restrictions eased, momentum increased and the second quarter produced APE sales 20 per cent[1] higher than the same period last year. The business recovery was broad-based, driven by double-digit growth[1] across agency and bancassurance channels, when compared with the second quarter last year.

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GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2020 FIRST HALF FINANCIAL PERFORMANCE CONTINUED

Sales in Indonesia declined by

(19) per cent[1] as increased sales through the bancassurance channel were offset by lower agency-related activity, following Covid-19 mitigation measures introduced at the end of March, but saw substantial month-on-month pick-up in June as these measures started to ease. In Singapore, sales fell by (21) per cent[1] reflecting Covid restrictions, but with strong sequential improvement in June as these restrictions eased. Similarly, in Malaysia, sales were (20) per cent[1] lower over the first half, but with improving momentum as restrictions eased from early in May.

In Hong Kong, new sales were (64) per cent[1] lower, with sales to mainland China customers down very sharply reflecting reduced visitor levels due to travel restrictions. These travel restrictions

resulted in minimal levels of mainland China visitors since the end of January, with a consequential impact on associated new sales. Easing of these travel restrictions will be dependent on how Covid-19 cases evolve over the second half of the year and their impact on the re-opening of the border with mainland China, which may not take place in 2020. The domestic business was supported by strong sales in the first quarter of our tax-efficient Qualifying Deferred Annuity Plan (QDAP), given the tax year end at the end of March. We saw higher domestic monthly sales in June compared with levels in April and May as Covid-19 restrictions were gradually eased. The move towards a virtual business model also saw good progress, as we were one of the first insurers in Hong Kong offering non-face-to-face sales across a wide range of products.

Regulatory permission to conduct virtual sales of our flagship Evergreen Growth Saver product via our bank partners and the agency channel was received towards the end of the second quarter.

The decline in new business profits by (45) per cent[1] mainly reflects the impact of lower sales volumes and interest rates in the period particularly in Hong Kong, where business disruption was more pronounced. Excluding Hong Kong, new business profits were (6) per cent[1] lower, driven by a (12) per cent[1] reduction in new sales, partly offset by increased proportion of protection sales, among other factors. In China, new business profits were 4 per cent[1] higher driven by favourable shift in product mix.

EEV basis results

EEV basis results
	Actual exchange rate	Constant exchange rate
	Half year 2020$m Half year 2019$m Change%	Half year 2019$m Change%
New business proft Business in force	912 1,675 (46) 998 1,076 (7)	1,673 (45) 1,065 (6)
Operating proft from long-term business Asset management	1,910 2,751 (31) 126 117 8	2,738 (30) 115 10
Operating proft from long-term business and asset management before restructuringcosts	2,036 2,868 (29)	2,853 (29)
Restructuring and IFRS 17 implementation costs Non-operating(loss)proft	(29) (17) (71) (3,161) 1,116 (383)	(16) (81) 1,113 (384)
(Loss)proft for theperiod	(1,154) 3,967 (129)	3,950 (129)
	(829) (468) (1,983) 3,499 39,235 32,008 37,252 35,507 5% 10% 11% 17%
Other movements
Net (decrease) increase in embedded value
Embedded value at 1 January Embedded value at 30 June
% New businessproft13/average embedded value
% Operating proft13/average embedded value

Asia EEV operating profit decreased compared with the prior period to $2,036 million (2019: $2,853 million[1] ), largely driven by a $(761) million[1] fall in life new business profit, given weaker sales volumes and the effect of lower interest rates in the period.

Operating profit generated by the in-force life business was $998 million (2019: $1,065 million[1] ), marginally lower than the prior period. This reflected a $(41) million[1] reduction in the expected return to $753 million, with the impact from lower interest rates and other economic assumption changes of $(165) million more than offsetting the effect of recent growth in the business. Operating experience variances and assumption changes were positive at $245 million (2019: $271 million[1] ) and are driven by favourable persistency and mortality/morbidity effects among

other factors, demonstrating the durability of the in-force business.

Asset management segment operating profit after tax was up 10 per cent[1] on the prior period at $126 million (2019: $115 million[1] ), which is discussed in more detail below.

The non-operating loss was $(3,161) million (2019: non-operating profit of $1,113 million[1] ), mainly as a result of lower interest rates reducing future assumed investment returns partly offset by higher than assumed returns on bonds in the period.

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Overall, Asia segment embedded value decreased by (5) per cent[4] to $37.3 billion in the six months to 30 June 2020 (31 December 2019: $39.2 billion[4] ). Of this, $35.9 billion (31 December 2019: $37.8 billion[4] ) relates to the value of the

long-term business and includes our share of our India associate valued using embedded value principles which is lower than its market capitalisation. The remainder represents Asia asset management and goodwill attributable to

shareholders which are carried at IFRS net asset value within the Group’s EEV. Overall Asia segment embedded value increased by 5 per cent[4] compared with 30 June 2019.

Asia analysis of movement in free surplus[11]

_Asia analysis of movement in free surplus_11
	Actual exchange rate	Constant exchange rate
	Half year 2020$m Half year 2019$m Change%	Half year 2019$m Change%
Operating free surplus generated from in-force life business and asset management before restructuring costs Investment in new business	1,286 1,209 6 (298) (323) 8	1,190 8 (319) 7
Operating free surplus generated before restructuringcosts	988 886 12	871 13
Restructuringand IFRS 17 implementation costs	(29) (17) (71)	(16) (81)
Operatingfree surplusgenerated	959 869 10	855 12
Non-operating (loss) proft Net cash fows paid to parent company Foreign exchange movements on foreign operations, timing diferences and other items	(508) 872 (400) (578) 26 (45) 77 1,118 4,220 2,591 4,297 3,709
Total movement in free surplus Free surplus at 1 January
Free surplus at 30 June

In-force operating free surplus generation[12] was $1,286 million, up 8 per cent[1] compared with the prior period. Excluding the effect of operating assumption changes and experience variances, in-force free surplus generation was 2 per cent[1] higher than 2019 with the growth of the in-force portfolio being dampened by the effect of lower interest rates compared with the prior period. Operating assumption changes and experience variances were positive, again illustrating the high quality nature of the in-force business.

Investment in new business was $(298) million, 7 per cent[1] below that in 2019. This reflects lower APE sales volumes, substantially offset by the effect of lower interest rates.

Overall higher in-force generation and lower investment in new business led to operating free surplus generated[12] increasing by 13 per cent[1] to $988 million.

The non-operating loss of $(508) million mainly relates to the impact of lower interest rates in the period and their impact on the discount rates that apply for local statutory reporting, only partially offset by favourable valuation movements on fixed income securities. 2019 non-operating profits included $282 million[4] of gains from

the reduction in the Group’s stake in ICICI Prudential Life Insurance Company and the disposal of Prudential Vietnam Finance Company together with equity and bond gains. Changes in interest rates over the first half of 2019 had a more muted impact on discount rates.

Local statutory capital

We maintained a strong balance sheet with a shareholder LCSM surplus over the regulatory minimum capital requirement of $6.5 billion and coverage ratio of 308 per cent at 30 June 2020 (31 December 2019: $4.7 billion and 253 per cent). This increase in surplus and ratio includes the adoption of the new RBC2 regime in Singapore at the end of March and is after allowing for revisions to the local Hong Kong solvency position from a change in the calculation of the Hong Kong valuation interest rate (VIR). If our with-profits funds in Hong Kong, Singapore and Malaysia are added the surplus increases to $19.6 billion (31 December 2019: $18.8 billion). We seek to safeguard our business from market volatility through our strong focus on protection products and our prudent asset and liability management strategy.

IFRS profit

Overall Asia adjusted operating profit[2] increased by 14 per cent[1] to $1,733 million, driven by a 14 per cent[1] increase in life insurance adjusted operating profit[2] , alongside a 10 per cent[1] increase at Eastspring.

This growth reflects the benefits of our focus on high quality recurring premium business and diversified portfolio of scale businesses, with over 87 per cent of our total life income[14] (excluding other income described below) driven by insurance margin and fee income (2019: 86 per cent[1] ), again supporting profit progression across market cycles.

Our Asia life insurance adjusted operating profit[2] growth is broad-based and at scale. Overall, nine insurance markets reported double-digit growth[1] , with all nine delivering growth of 15 per cent[1] or more. At a market level, highlights include Hong Kong up 21 per cent[1] to $412 million, Singapore up 20 per cent[1] to $262 million, Malaysia up 16 per cent[1] to $158 million and China up 17 per cent[1] to $101 million. Adjusted operating profit[2] in Indonesia was $249 million, marginally lower than the prior period.

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GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2020 FIRST HALF FINANCIAL PERFORMANCE CONTINUED

Profit margin analysis of Asia long-term insurance and asset management operations[15]

	Actual exchange rate	Constant exchange rate
	Half year 2020 Half year 2019	Half year 2019
	$m Margin bps $m Margin bps	$m Margin bps
Spread income Fee income With-profts Insurance margin Other income	146 79 154 111 135 97 144 109 58 17 53 19 1,287 1,103 1,440 1,544	150 107 140 106 52 19 1,086 1,528
Total life income Expenses: Acquisition costs Administration expenses DAC adjustments Share of related tax charges from joint ventures and associates	3,066 2,998 (864) (52)% (1,038) (41)% (711) (219) (708) (261) 117 170 (18) (5)	2,956 (1,029) (41)% (695) (256) 169 (5)
Long-term insurance business pre-tax adjusted operating proft	1,590 1,417	1,396
Eastspring	143 133	130
Adjusted operating proft from long-term business and asset management before restructuringcosts	1,733 1,550	1,526
Tax charge	(260) (217)	(214)
Adjusted operating proft after tax for theperiod before restructuringcosts	1,473 1,333	1,312
Non-operating(loss)proft after tax	(420) 784	792
Proft for the period after tax before restructuringcosts	1,053 2,117	2,104

Our adjusted operating profit[2] continues to be based on high-quality drivers. The overall 14 per cent[1] growth in Asia life insurance adjusted operating profit[2] to $1,590 million (2019: $1,396 million[1] ) was driven principally by 19 per cent[1] growth in insurance margin-related revenues and reflects our ongoing focus on recurring premium health and protection products and the associated continued growth of our in-force business. Renewal premiums[10] , reflecting the long-term nature of our insurance business, grew 6 per cent[4] .

Fee income decreased by (4) per cent[1] , reflecting the impact of weaker equity markets in the period, while spread income decreased by (3) per cent[1] driven by lower interest rates in the period.

With-profits earnings relate principally to the shareholders’ share in bonuses declared to policyholders. As these bonuses are typically weighted to the end of a contract, under IFRS, with-profit earnings consequently emerge only gradually over time. The 12 per cent[1] growth in with-profits earnings reflects the ongoing growth in these portfolios.

Other income primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses. As such, the (6) per cent[1] decrease from half year 2019 largely reflects lower new business volumes, whereas new business acquisition expense fell (16) per cent[1] to $(864) million. The ratio of shareholder acquisition cost to shareholder-related APE sales (excluding with-profits-related sales) increased to 69 per cent (2019: 66 per cent on an actual exchange rate basis), reflecting changes to product and geographical mix. Administration expenses, including renewal commissions, increased by 2 per cent[1] reflecting in-force business growth.

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Asset management

Asset management
	Actual exchange rate
	Half year 2020$m Half year 2019$m Change%
Total external net fows*,16	(8,362) 3,956 n/a
External funds under management*($bn) Funds managed on behalf of M&G plc ($bn) Internal funds under management ($bn)	82.4 85.2 (3) 15.7 24.9 (37) 121.6 105.6 15
Total funds under management ($bn)	219.7 215.7 2
Analysis of adjusted operating proft Retail operating income Institutional operatingincome	188 191 (2) 125 118 6
Operating income before performance-related fees Performance-related fees	313 309 1 2 1 100
Operating income (net of commission) Operating expense Group’s share of tax onjoint ventures’ adjusted operating proft	315 310 2 (157) (157) – (15) (20) 25
Adjusted operating proft	143 133 8
Adjusted operating proft after tax	126 117 8
Average funds managed by Eastspring Fee margin based on operating income Cost/income ratio10	$224.1bn $206.7bn 8 28bps 30bps (2)bps 50% 51% (1)ppts

• Excluding $15.7 billion of funds managed on behalf of M&G plc.

Eastspring’s total funds under management were $219.7 billion at 30 June (31 December 2019: $241.1 billion[4] ), reflecting third-party net outflows and lower equity markets in the period. Funds under management were 5 per cent higher than at the end of March ($209 billion) due to positive Asia life flows and equity market recovery.

Third-party outflows[16] of $(8.4) billion reflected the impact, following the Covid-19 pandemic, of higher market volatility on retail funds, notably in a number of retail bond funds in Thailand. In addition, there were $(7.3) billion net outflows from funds managed on behalf of M&G plc and further outflows are anticipated in the second half of 2020.

The strength of our combined asset management and insurance franchise was demonstrated through internal net flows remaining positive over the period at $2.9 billion. The structural benefit of this source of flows is evident in the 15 per cent[4] increase in internal funds under management from our Asia and US businesses over the last year.

Market movements for equity funds were negative (MSCI Asia fell 5.5 per cent since 31 December 2019), but were largely mitigated by strong market movements on bond funds.

Compared with the prior period, Eastspring’s average funds under management increased by 8 per cent[4] (12 per cent[20] on a constant exchange rate basis), reflecting the benefit of strong net inflows over the second half of 2019 and the acquisition of TFUND in December 2019.

Eastspring’s adjusted operating profit[2] of $143 million was 8 per cent above the prior period on an actual exchange rate basis (10 per cent on a constant exchange rate basis). Operating income (net of commission) increased by 2 per cent[4] with the benefit of higher average funds under management being partly offset by adverse client and asset mix effects that reduced the fee margin based on operating income to 28 basis points (2019: 30 basis points[4] ). Cost discipline remains robust, with operating costs in line with the prior period, with the resulting cost/income ratio[10] (1) per cent[4] lower at 50 per cent.

Return on segment equity

The benefit of our focus on profitable and capital efficient health and protection, with-profit and asset management businesses is evident in the attractive 26 per cent (2019: 30 per cent) operating return delivered on average segment equity[10,13] over the first half of 2020.

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GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2020 FIRST HALF FINANCIAL PERFORMANCE CONTINUED

United States previously announced equity investment Operational and financial highlights into the US business completed as The financial performance of the US expected in July 2020 and represents an business in the first half of 2020 reflects important step on Jackson’s path to the robust performance of Jackson’s risk independence. Assuming this transaction management processes, including its had completed at end-June, Jackson’s disciplined approach to product pricing, estimated RBC ratio would have been in a period of extreme macro volatility with above 425 per cent. lower equity markets and risk free rates. The reinsurance transaction has also acted This is evident from Jackson’s estimated to increase Jackson’s resilience to credit RBC ratio, which is above 400 per cent market stress. As at 30 June 2020, if at 30 June 2020 (31 December 2019: 20 per cent of the general account 366 per cent) and includes a 69 percentage credit assets were to be instantaneously point uplift from the reinsurance downgraded by 1 whole letter rating, the transaction with Athene announced in RBC ratio would fall by circa 12 percentage June. We estimate that the annual effect on points (31 March 2020: circa 16 statutory operating capital generation from percentage points). policies being reinsured to Athene will be a reduction of circa $150 million. While not The US started to see the effects of the reflected in the half year’s results, Athene’s Covid-19 outbreak in March, with

The reinsurance transaction has also acted to increase Jackson’s resilience to credit market stress. As at 30 June 2020, if 20 per cent of the general account credit assets were to be instantaneously downgraded by 1 whole letter rating, the RBC ratio would fall by circa 12 percentage points (31 March 2020: circa 16 percentage points).

stay-at-home orders in many states and increased market volatility. Total APE sales (including $1.3 billion of single premium institutional sales) were down (9) per cent from the first half of 2019 and down (15) per cent from the second half of 2019. In general, policyholders are remaining invested and not making significant shifts in their allocations. Even as close to 100 per cent of associates in the US are now working from home, industry-leading service levels are being maintained and our wholesaling teams are working closely with distributors to help them serve new and existing clients through virtual platforms.

All of the results below reflect the whole US segment, except for the discussion on local statutory capital which covers Jackson National Life only.

	Half year	Half year
	2020$m	2019$m	Change%
New business proft Adjusted operating proft,2 EEV operating proft	248 1,266 696	450 1,572 1,040	(45) (19) (33)

*Before restructuring costs

New business performance

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

New business performance Life EEV new business proft and APE new business sales (APE sales)
	Half year	Half year
	2020$m	2019$m	Change%
Variable annuities Elite Access (variable annuity)	643 88	628 96	2 (8)
Fixed annuities	31	23	35
Fixed indexed annuities	89	120	(26)
Total retail APE sales	851	867	(2)
Wholesale	128	208	(38)
Total APE sales	979	1,075	(9)
% APE variable annuities	75	67	8ppts
% APE otherproducts	25	33	(8)ppts
Total new businessproft	248	450	(45)
New business margin	25%	42%

Retail APE sales were down 2 per cent from the first half of 2019 and down 23 per cent from the second half of 2019. The retail sales decline in the first half of 2020 compared with the second half of 2019 reflected the impact of material pricing actions on fixed annuities and fixed indexed annuities, with APE sales of these products down 66 per cent compared with the second half of 2019. These pricing actions were in response to the evolving interest rate environment and our

disciplined capital management. Variable annuity APE sales were up 2 per cent from the first half of 2019 and in line with the second half of 2019, with Covid-19-related containment measures and higher equity market volatility both acting to dampen new sales activity.

Wholesale-related sales were 38 per cent below the prior period, and reflect opportunistic sales during the first quarter of the year.

New business profit was (45) per cent lower at $248 million (2019: $450 million), compared with a fall in APE sales volumes of (9) per cent. The lower margins achieved were largely as a result of the fall in interest rates over the first half of 2020, causing new business profit to fall $(119) million compared with the same period last year, and a $(47) million adverse effect of the hedge modelling enhancements that were effected in the second half of 2019.

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Movement in policyholder liabilities

Movement in policyholder liabilities
	Half year 2020$m Half year 2019$m
	Separate account liabilities General account and other liabilities Separate account liabilities General account and other liabilities
At 1 January Premiums Surrenders Maturities/deaths	195,070 74,479 163,301 73,079 6,544 2,321 6,032 3,104 (5,353) (2,102) (6,008) (2,271) (848) (945) (782) (962)
Net fows	343 (726) (758) (129)
Transfers from separate to general account Investment-related items and other movements	(1,042) 1,042 637 (637) (10,151) 6,640 21,737 49
At 30 June	184,220 81,435 184,917 72,362

Overall US net outflows in half year 2020 were $(0.4) billion compared with outflows of $(0.9) billion in the first half of 2019. Higher variable annuity sales in the period combined with lower surrenders resulted in positive separate account net flows of $0.3 billion compared with net outflows of $(0.8) billion in the prior period. Lower

institutional sales in the first half of 2020 led to increased net outflows from $(0.1) billion in half year 2019 to $(0.7) billion in half year 2020. Falling equity markets in the period contributed to lower period-end policyholder liabilities at 30 June 2020 of $265.7 billion as compared with $269.5 billion at 31 December 2019.

The general account liabilities of $81.4 billion at 30 June include $27.7 billion that were reinsured to Athene and for which a corresponding reinsurance asset is held. All the flows presented above are before the effects of that reinsurance.

IFRS profit

Profit margin analysis of US long-term insurance and asset management operations[15]

	Half year 2020 Half year 2019
	$m Margin bps $m Margin bps
Spread income Fee income Insurance margin Other income	273 96 298 106 1,596 176 1,601 181 708 711 26 18
Total life income Expenses: Acquisition costs Administration expenses DAC adjustments	2,603 2,628 (484) (49)% (494) (46)% (853) (69) (825) (70) (10) 247
Long-term insurance businesspre-tax adjusted operating proft	1,256 1,556
Asset management	10 16
Adjusted operating proft from long-term business and asset management before restructuringcosts	1,266 1,572
Tax charge	(195) (263)
Adjusted operating proft after tax for the period before restructuringcosts	1,071 1,309
Non-operatingloss after tax	(1,150) (1,581)
(Loss)proft for theperiod after tax before restructuringcosts	(79) (272)

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GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2020 FIRST HALF FINANCIAL PERFORMANCE CONTINUED

Adjusted operating profit

US adjusted operating profit[2] was

$1,266 million over the first half of 2020 down (19) per cent from the prior period. This mainly reflects the impact of unfavourable DAC adjustments in the current period as compared with favourable DAC adjustments in the prior period as discussed further below. Before allowing for the impact of DAC acceleration in the current period (2019: DAC deceleration), adjusted operating profit[2] decreased by 6 per cent.

Fee income was $1,596 million (2019: $1,601 million), marginally below the prior period, reflecting both marginally higher average separate account balances (given the performance of equity markets in the second half of 2019) and a modest decline in the average fee margin.

Spread income declined by (8) per cent to $273 million (2019: $298 million) reflecting lower asset yields in the period not being fully offset by falls in crediting rates. Spread income benefited from a higher contribution from swaps held for duration management purposes. If the income from these swaps was excluded the core spread margin would be 80 basis points (2019: 95 basis points). Following the reinsurance transaction effective 1 June and resulting reduction in spread generating liabilities, spread income is expected to reduce further in the future reflecting this and the ongoing impact of low interest rates.

Insurance margin primarily represents income from variable annuity guarantees and profits from legacy life businesses. This decreased marginally to $708 million (2019: $711 million).

Acquisition costs declined 2 per cent to $(484) million in line with the 2 per cent reduction in retail APE sales. Administrative expenses increased from $(825) million in half year 2019 to $(853) million in half year 2020. Excluding asset-based commissions, the resulting administration expense ratio would be broadly flat at 35 basis points (2019: 34 basis points).

DAC adjustments, being the cost deferred on sales in the period net of amortisation of amounts deferred previously, were $(10) million (2019: $247 million), reflecting lower costs deferred from lower sales but also higher DAC amortisation. Over the first half of 2020, weaker capital market returns resulted in a separate account investment performance below that assumed within the DAC mean reversion formula. In addition, the application of DAC mean reversion formula means that favourable returns from 2017 are no longer applied in 2020. The combination of these led to an unfavourable DAC acceleration effect of $(32) million. This compares with a favourable DAC deceleration effect of $191 million in the first half of 2019, resulting in a significant increase in DAC amortisation in half year 2020 as compared with the same period last year.

Non-operating items

The non-operating result was negative $(1,458) million pre-tax (2019: negative $(1,987) million pre-tax) and contributed to a net loss after tax of $(79) million (2019: $(272) million). The non-operating result over the first half of 2020 includes a loss of $(2,304) million from short-term investment fluctuations and amortisation of previous acquisition accounting adjustments offset by a $846 million pre-tax gain as a result of the Athene transaction.

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 as occurred in the first half of 2020. Jackson charges fees for these guarantees which are in turn used to purchase downside protection, in particular options and futures to mitigate the effect of equity market falls.

Jackson designs its hedge programme to protect the economics of the business from large movements in investment markets and does not seek to hedge the IFRS accounting basis. It therefore accepts a degree of variability in the accounting results.

Losses from short-term investment fluctuations of negative $(2,288) million (pre-tax) in the period mainly reflect the effect of lower interest rates and lower equity markets on guarantee liabilities which exceeded the gains on derivatives in the period.

In total, the US segment shareholders’ funds at 30 June were $9.0 billion (31 December 2019: $8.9 billion), with the adverse effects of the Athene transaction that are recorded directly within other comprehensive income broadly offset by unrealised gains on bonds in the period. At 30 June 2020, and post the Athene transaction, the cumulative net unrealised gains held in the available-for-sale reserve was $2.2 billion, excluding these amounts US segment equity was $6.8 billion.

Following the Athene reinsurance transaction, Jackson’s investment portfolio, as recorded in the general account and as measured on an IFRS basis, has been reduced in size from $76.1 billion as of 31 December 2019 to $56.0 billion as of 30 June 2020. After repositioning the portfolio following the transfer of assets, the mix remains conservative. The invested assets held at 30 June 2020 comprised 10 per cent in US Treasuries, 52 per cent in corporate bonds (of which 97 per cent[18] were investment grade), 15 per cent in commercial mortgage loans with an average loan-to-value of 55 per cent, and 23 per cent in other assets.

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EEV basis results

EEV basis results
Half year	Half year
2020$m	2019$m	Change%
New business proft 248	450	(45)
Business in force 440	576	(24)
Operating proft from long-term business 688	1,026	(33)
Asset management 8	14	(43)
Operating proft from long-term business and asset management before restructuringcosts 696	1,040	(33)
Restructuring and IFRS 17 implementation costs (9) Non-operating(loss)proft (3,927)	(1) 189	(800) n/a
(Loss)proft for theperiod (3,240)	1,228	(364)
Other movements 441	(364)
Net (decrease) increase in embedded value (2,799)	864
Embedded value at 1 January 16,342	18,709
Embedded value at 30 June 13,543	19,573
% New businessproft13/average embedded value 3%	5%
% Operating proft13/average embedded value 9%	11%

EEV operating profit from the long-term business reduced to $688 million (2019: $1,026 million) reflecting lower new business profit in the period and a reduction in the level of expected return on business in force.

The reduction in the level of expected return to $440 million (2019: $576 million) reflects the combined effect of a lower opening value for the expected return calculation, principally driven by the impact of EEV methodology changes implemented at the end of 2019, and a lower discount rate applied to this opening value compared with the prior period, reflecting the decline in the risk-free rate.

The EEV non-operating loss reflects the combined impact of investment return

variances and economic assumption changes resulting from the effect of macro developments in the period, notably lower equity market performance and lower interest rates, changes in the fair value of the surplus loan notes issued by Jackson of $(24) million, and the $(423) million loss as a result of the Athene reinsurance transaction in June. This largely represents the loss of future profits and unrealised investment gains as a result of the business being reinsured partly offset by reinsurance commission received after deducting tax.

The investment return variances in the period were negative $(380) million (2019: $1,254 million) and are determined by the effect of macro developments in the period, notably lower equity market

performance, and lower interest rates. Lower than assumed equity market performance was partially offset by positive gains on derivatives to manage these effects.

Economic assumption changes of $(3,100) million largely reflect the impact of lower interest rates in the period including the consequential impact on the projected future fund growth rates for the variable annuity business. These projected lower growth rates reduce the expected growth in fund values for policyholders and hence the expected profitability for shareholders.

Overall segment embedded value ended the period at $13.5 billion (31 December 2019: $16.3 billion).

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GROUP CHIEF FINANCIAL OFFICER AND CHIEF OPERATING OFFICER’S REPORT ON THE 2020 FIRST HALF FINANCIAL PERFORMANCE CONTINUED

US analysis of movement in free surplus[11]

_US analysis of movement in free surplus_11
	Half year	Half year
	2020$m	2019$m	Change%
Operating free surplus generated from in-force life business and asset management before restructuring costs and US EEV hedge modelling enhancements during the second half of 2019	1,248	1,419	(12)
Investment in new business	(219)	(344)	36
Operating free surplus generated before restructuring costs and US EEV hedge modelling enhancements during the second half of 2019	1,029	1,075	(4)
Restructuringand IFRS 17 implementation costs	(9)	(1)	(800)
Operating free surplus generated before US EEV hedge modelling enhancements during the second half of 2019	1,020	1,074	(5)
Impact of US EEV hedge modellingenhancements duringthe second half of 2019	(535)	–	n/a
Operatingfree surplusgenerated	485	1,074	(55)
Gain on reinsurance of US in-force fxed and fxed indexed annuity portfolio Other non-operating loss Net fows paid to parent company Timingdiferences and other items	851 (157) – 441	– (525) (525) 163
Total movement in free surplus	1,620	187
Free surplus at 1 January	1,777	2,760
Free surplus at 30 June	3,397	2,947

The US business generated in-force operating free surplus (before restructuring costs and modelling enhancements during the second half of 2019) of $1,248 million over the first half of 2020 (2019: $1,419 million). The reduction compared with the prior period largely reflects the absence of the $355 million reserve benefit recognised in the first half of 2019 related to the John Hancock portfolio.

Investment in new business reduced by 36 per cent to $(219) million (2019: $(344) million), largely reflecting the (9) per cent fall in sales volumes in the period and lower levels of institutional sales, which have higher capital requirements.

After allowing for the impact of restructuring costs and EEV hedge modelling enhancements made in the second half of 2019, US operating free surplus generation was $485 million (2019: $1,074 million).

The Athene transaction gave rise to a benefit to free surplus of $851 million, primarily from reinsurance commission received and reduced required capital. Other non-operating free surplus loss of $(157) million (2019: $(525) million) largely reflects the net impact of market, interest rate and credit spread movements in the period on Jackson’s hedging, statutory liability and capital positions. Overall free surplus increased from $1.8 billion

at the start of the period to $3.4 billion at 30 June 2020.

Local statutory capital – Jackson National Life (Jackson)

Jackson’s RBC ratio at 30 June 2020 was estimated to be above 400 per cent (31 December 2019: 366 per cent) reflecting the benefit of the reinsurance transaction with Athene from 1 June and surplus generated in the period, but before the benefit of the Athene investment which completed on 17 July. Surplus increased from $3.8 billion at the start of the period to $6.3 billion at 30 June 2020.

	Surplus
	$m
1 January2020	3,795
Capital generation from new business written during the frst half of 2020	(60)
Operatingcapitalgeneration from business in force at 1 January2020	587
Operating capital generation Other non-operating movements, including market efects and modelling changes	527 1,130
US reinsurance transaction	809
Dividendspaid	–
30 June 2020	6,261

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In-force available capital generation was broadly in line with expectations and added positively to the RBC ratio.

In the highly volatile market conditions seen over the first half of the year, Jackson’s risk management strategy performed as anticipated.

In addition to the effect of net operational capital generation and the reinsurance transaction, the increase in surplus over the period was also driven by the impact of market and interest rate movements. Jackson’s risk management strategy performed effectively and Total Adjusted Capital (TAC) increased over the period as a result of positive hedge pay-offs exceeding market-related increases in policyholder liabilities. This was partially offset by higher required capital reflecting the combination of equity market falls and lower interest rates increasing the cost of guarantees disproportionately in the modelling of tail scenarios over the first quarter of 2020, partly mitigated by the equity market recovery over the second quarter of 2020. This increase in required capital led to a reduction in the RBC ratio before allowing for the reinsurance transaction with Athene.

Over the first half of 2020, capital impacts from credit related losses, impairments, or ratings downgrades were minimal, reflecting the conservative positioning of Jackson’s investment portfolio.

Return on segment equity

The 24 per cent (2019: 33 per cent) operating return delivered on average segment equity[10,13] over the first half of 2020 largely reflects the impact of unfavourable DAC adjustments in the current period on adjusted operating profit, as compared with favourable DAC adjustments in the prior period.

Notes

• 1 On a constant exchange rate basis.

• 2 Adjusted IFRS operating profit based on longer-term investment returns 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 B1.1 of the IFRS financial statements.

• 3 Assuming transaction had been completed at 30 June 2020.

• 4 On an actual exchange rate basis.

• 5 As compared with head office expenditure of $(490) million in 2018 and before a planned $10 million increase in Africa costs as business grows.

• 6 Approximately half of the corporate expenditure is incurred in sterling and our assumptions forecast an exchange rate of £1=$1.2599.

• 7 Surplus over Group minimum capital requirement and estimated before allowing for second interim ordinary dividend. Shareholder business excludes the available capital and minimum requirement of participating business in Hong Kong, Singapore and Malaysia. Further information on the basis of calculation of the LCSM measure is contained in note I(i) of the Additional financial information.

• 8 Net cash amounts remitted by business units are included in the holding company cash flow, which is disclosed in detail in note I(iii) of the Additional financial information. This comprises dividends and other transfers from business units that are reflective of emerging earnings and capital generation.

• 9 Excluding profit for the period attributable to non-controlling interests.

• 10 See note II of the Additional financial information for definition and reconciliation to IFRS balances.

11 For insurance operations, operating free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax adjusted operating profit for the period. Restructuring costs are presented separately from the operating business unit amount. Further information is set out in note 10 of the EEV basis results.

• 12 Operating free surplus generated before restructuring costs.

• 13 Annualised profits have been calculated by multiplying half year profits by two. Further information can be found in note II of the Additional financial information.

• 14 Total insurance margin ($1,287 million) and fee income ($135 million) of $1,422 million divided by total life income excluding other income of $1,626 million (Comprised of total life income of $3,066 million less other income of $1,440 million).

• 15 For discussion on the basis of preparation of the sources of earnings in the table see note I(iv) of the Additional financial information.

• 16 Excludes Money Market Funds.

• 17 The 30 June 2020 Group LCSM position includes the impact of a change in the calculation of the valuation interest rate (VIR) used to value long-term insurance liabilities in Hong Kong. In line with the circular issued by the Hong Kong IA in March 2020, an application was made to update the basis of this calculation, which was formally granted by the Hong Kong IA.

• 18 Excluding assets in consolidated funds financed largely by external third-party (non-recourse) borrowings, for which the Group’s exposure is limited to the investment held by Jackson. Including these assets, the US corporate debt portfolio is 93 per cent investment grade.

• 19 The effects shown are based on the date of the Athene transaction which was effective at 1 June 2020. This differs to the announcement of the agreement in June which showed effects as of 31 March 2020.

• 20 On a constant exchange rates basis Eastspring average funds under management over the half year to 30 June 2019 were $200.2 billion (actual exchange rate basis: $206.7 billion). Average funds under management over the period to 30 June 2020 were $224.1 billion.

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GROUP CHIEF RISK AND COMPLIANCE OFFICER’S REPORT ON THE RISKS FACING OUR BUSINESS AND HOW THESE ARE MANAGED

Enabling business growth and change through risk management

James Turner Group Chief Risk and Compliance Officer

Our Group Risk Framework and risk appetite have allowed us to control our risk exposure throughout the first half of 2020. Our governance, processes and controls enable us to deal with uncertainty effectively, which is critical to the achievement of our strategy of capturing long-term structural opportunities and helping our customers achieve their long-term financial goals.

This section explains the main risks inherent in our business and how we manage those risks, with the aim of ensuring an appropriate risk profile is maintained.

1. Introduction The Group

2020 has already been an eventful year. Over Q1 and into Q2, the Covid-19 pandemic impact swept across the world, resulting in significant humanitarian suffering and material disruption to social and economic activity. The business had to consider and navigate the risks arising from the coronavirus on multiple fronts. These have included the capital and liquidity risks arising from the abrupt market dislocation as well as the risks associated with the disruption to the Group’s operations across Asia, the US and UK and its key partners. Concurrently, the business has aimed to maintain uninterrupted delivery of services for its policyholders, and has been committed to doing the right thing for both its customers and employees throughout the crisis. The Risk and Compliance function has been able to transition successfully into new ways of working across multiple time zones to provide strong stewardship and enhanced monitoring of these risks during the most acute phases of the pandemic.

Through these extraordinary circumstances, the function has also provided risk opinions, guidance and assurance on critical activity, including Athene’s reinsurance of $27.6 billion of Jackson’s fixed and fixed indexed annuity portfolio and $500 million equity investment into Prudential’s US business and the intended separation of Jackson from the Group. At the same time, the function retained its focus on managing the risks of the ongoing business, performing its defined role in providing risk management support and oversight, as well as objective challenge to ensure the Group remained within its risk appetite.

The Group continues to engage constructively with the Hong Kong Insurance Authority (IA) as its Group-wide supervisor and is transitioning to a new supervisory framework. The Group’s mature and well-embedded risk framework will enable the business to capture the opportunities in the growth markets in which it is now focused while continuing to operate with discipline.

The world economy

At the start of the year the prospects for global growth appeared to be improving. The ‘Phase One’ initial trade agreement was signed by the US and China in January and there were signs that macroeconomic data was stabilising throughout the Eurozone and parts of Asia. This positive momentum, however, was abruptly reversed by the Covid-19 pandemic, leading to the shutdown of much of the world’s economy and a sharp recession. The speed and severity of the impact was illustrated by the jump in US unemployment rate, from a low of 3.5 per cent in February to a high of 14.7 per cent in April (both numbers representing extremes not seen in the US for decades). In response to this unprecedented shock, governments and central banks have deployed massive fiscal and monetary stimulus measures to mitigate the impact on the labour force and restore confidence in financial markets. Many countries around the world are in the midst of easing lockdown measures and in some areas growth is expected to rebound from depressed levels in response. However, the economic landscape is evolving rapidly, and the full extent of the longer-term impacts are currently uncertain. A full economic recovery to pre-pandemic levels appears unlikely to be achieved within a short time frame. Any rebound in global growth is also expected to be fragile and extremely susceptible to the risks of renewed increases in coronavirus infection rates, uncertainties from the US election in November and escalations in geopolitical tensions, in particular those between the US and China.

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Financial markets

2020 began with risk assets performing well until concerns over the economic impact of the Covid-19 outbreak dented investor confidence, eventually leading to a global sell-off that unfolded at an extraordinary speed. The S&P 500 index plunged by 35 per cent from an all-time high on 19 February to its low point on 23 March. Interest rates in major markets declined significantly, falling to historical lows as investors fretted over the risks to the economic outlook. Credit spreads widened significantly, in line with the plunge in equity markets. The stress on financial markets was broadly eased by the central banks maintaining accommodative monetary policies and implementing various support programmes. For the US Federal Reserve this included the purchase of Treasury bonds, swap arrangements with foreign central banks to lessen the international shortage of dollars and a commercial paper purchase facility. The Fed also intervened directly in credit markets, setting up new facilities designed to purchase corporate bonds in the primary and secondary markets and going beyond even the measures taken during the 2008 financial crisis. Since their trough in late March, financial markets have rallied strongly, driven by broad reductions in infection rates in some countries, optimism with respect to the restart of the global economy, and, in the US, a small group of large-cap stocks that has buoyed the cap-weighted index. Despite this, global financial markets remain highly susceptible to downside risks, which remain elevated, particularly for equity markets where valuations appear disconnected from the real economy.

(Geo)political landscape

2019 was described as the ‘year of the street protestor’ with mass demonstrations on distinct issues in many countries across the world. While the coronavirus, and the restrictions put in place by governments, curtailed these protests and any related civil unrest at the start of the 2020, the drivers have not changed and their re-emergence as the world comes out of the crisis looks likely. Meanwhile, individual incidents and events have triggered fresh protests against long-standing social issues and inequalities. The pandemic has offered a glimpse into the delicate balancing act needed between a country’s economy and individual rights and liberties on the one hand and the health and lives of its people on the other, and this is providing another source of geopolitical risk.

The goal of suppressing the spread of Covid-19 within national borders has offered a common yardstick by which governments are being judged. A commonality between the current protests and movements, aided by social media, is the speed in which they can gather momentum and their increasingly leaderless nature. This, combined with the new focal point for popular discontent provided by the pandemic, may in future increase both the instability of governments and the unpredictability of their actions. The resilience of businesses and governments is therefore likely to continue to be tested. As a global organisation, the Group has well-established local and global plans to mitigate the business risks from disruption. These have operated well during the current crisis and will continue to be critically evaluated and enhanced as the longer-term lessons from the pandemic response become clearer.

It is unlikely that the longer-term political and geopolitical implications of the pandemic will become evident for some time. With borders closing during regional Covid-19 infection peaks and medical resources for a time scarce, geopolitical relationships were tested between even historically cooperative neighbours. Various governments have effected, or are considering effecting, the postponement of elections and other constitutional or legislative processes in response to the pandemic, and the longer-term impact from this increase in constitutional and political uncertainty remains to be seen. Being a global crisis, the pandemic has also somewhat distracted from more traditional geopolitical issues impacting on global trade. Nations continue to face the challenge of reconciling the inter-connectedness of the global economy with heightened nationalistic sentiment and the pandemic may provide a further drive towards deglobalisation. A key source of geopolitical risk in 2020 will continue to be China’s relationship with the US and its traditional allies, and in the second half of the year Hong Kong’s perceived level of autonomy will influence geopolitical tensions, with potential global trade and economic consequences. Responses by the US, UK and other governments to the recently enacted national security law in Hong Kong, the final form and full extent of which are still being determined, may impact Hong Kong’s economy.

Being a key market for the Group which also hosts regional and head office functions, this could potentially impact Prudential’s sales, operations and product distribution. For internationally active groups which operate across impacted jurisdictions such as Prudential, government measures and responses may also add to the complexity of legal and regulatory compliance. Compliance with Prudential’s legal or regulatory obligations in one jurisdiction may conflict with the law or policy objectives of another jurisdiction, or may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional legal, regulatory compliance and reputational risks for the Group.

Regulations

Prudential operates in highly regulated markets, and the nature and focus of regulation and laws remain fluid. A number of national and international regulatory developments are in progress, with a continuing focus on solvency and capital standards, conduct of business, systemic risk regulation and macroprudential policy. Some of these changes will have a significant impact on the way that the Group operates, conducts business and manages its risks. These regulatory developments will continue to be monitored at a national and global level and form part of Prudential’s engagement with government policy teams and regulators. The immediate regulatory and supervisory responses to Covid-19 have been broad and have included increased scrutiny of the operational resilience, liquidity and capital strength (including the impact of making dividend payments) of financial services companies as well as changes that have helped the Group to continue to support its customers through non-face-to-face contact. Against this evolving regulatory backdrop, constructive engagement continues with Prudential’s Group-wide supervisor, the Hong Kong IA, on the Group-wide Supervision Framework (GWS). The timing of finalisation and implementation of the GWS Framework remains uncertain, although it is expected to become effective in early 2021. The Legislative Council of the Hong Kong Special Administrative Region approved the enabling primary legislation in July.

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GROUP CHIEF RISK AND COMPLIANCE OFFICER’S REPORT ON THE RISKS FACING OUR BUSINESS AND HOW THESE ARE MANAGED CONTINUED

Societal developments

The experience of the pandemic has underlined the ability of evolving demographic, geographical and environmental factors to change the nature, likelihood and impact of extreme events, and drive public health trends such as tackling obesity, with consequential potential impacts to Prudential’s underwriting assumptions and product design. Given the unique set of variables associated with extreme events, whilst insights can be gleaned from the current

pandemic, the impact of extreme events on the functioning of society and the disruption to business operations, staff, customers and sales cannot be predicted or fully mitigated. The Group has been actively managing the impact of the current crisis, including assisting affected policyholders and staff in meeting their resulting needs.

In support of increased ease of access and social inclusion, and to meet evolving customer needs, the Group is increasing its use of digital services, technologies and

distribution methods for the products and services that it offers. The Covid-19 pandemic has accelerated these developments, with the Group’s businesses having implemented virtual face-to-face sales of select ranges of products in many of its markets, and adoption of Prudential’s Pulse application has continued to increase. Changes to the Group’s use of technology and distribution models have broad implications, touching on Prudential’s conduct of business, increasing the risks of technology and

2. Key internal, regulatory, economic and (geo)political events over the past 12 months

Q3 2019

Central bank monetary policy becomes increasingly accommodative, contributing to a reversal in the weakness in risk assets. In August, following a record high in July, the S&P 500 corrects amid recession fears and trade tensions. The index continues to struggle in September but rebounds strongly over Q4.

Government bond yields decline significantly, with the 10-year US Treasury yield falling by circa 50 basis points to 1.5 per cent over August (representing a circa 120 basis points drop over the year), its lowest rate since 2017. In Japan and Europe, the volume of negative-yielding debt surges significantly.

The Group submits its Insurance Capital Standards (ICS) field-testing results for 2019 to the IAIS on 31 July 2019. This is the last field-testing exercise prior to the finalisation of the ICS 2.0 specifications and the start of a five-year monitoring period in 2020.

Hong Kong enters technical recession in Q3, with its economy shrinking by 2.9 per cent overall over 2019, as protests in the territory, which peak in violence during November, impact the territory’s economy.

Q4 2019

On 21 October 2019, M&G plc’s shares begin trading on the London Stock Exchange, marking the successful completion of its demerger from Prudential plc. The Hong Kong IA formally assumes its role as Group-wide supervisor for Prudential plc.

Eastspring successfully completes the acquisition of 50.1 per cent of Thanachart Fund, which manages $7.5 billion of mutual funds in Thailand, for circa $142 million, with an option to increase its ownership to 100 per cent in the future. The acquisition makes Eastspring the fourth-largest asset manager in Thailand.

The broader economic cycle continues to deteriorate. US domestic data begins to show economic weakness in November. Despite this, equity markets reach new all-time highs over the quarter, supported by continued application of accommodative monetary policy by central banks.

The US Federal Reserve lowers its benchmark federal funds target rate for the third time in four months in October. This follows the ECB’s delivery of a package of easing measures, including a renewal of quantitative easing, in September. Central banks in China and other emerging markets turn more dovish amid continued weakness in economic data.

The 26th Annual Conference of the IAIS takes place in Abu Dhabi on 14 and 15 November, and it is agreed that the ICS project will move from Field Testing into the Monitoring Period phase and ICS v2.0 is released. The Holistic Framework (HF) for systemic risk is endorsed by the FSB at the conference for implementation by the IAIS in 2020. The FSB also confirms that G-SII designations will be suspended until its review in 2022, although a number of the previous G-SII requirements are included either into the Insurance Core Principles or the Common Framework (ComFrame).

US-China trade talks continue positively during Q4, following breakdowns in negotiations in May and August and a resumption in September, culminating in the signing of a ‘Phase One’ trade deal between the two countries in January 2020.

Following the East Asia Summit in Bangkok in November, 15 of the 16 negotiating participants agree to sign up to the Regional Comprehensive Economic Partnership (RCEP), most likely in Q1 2020, with India deciding not to participate.

On 27 November, the US president signs the Hong Kong Human Rights and Democracy Act into law, requiring annual reviews of Hong Kong’s special trade status under US law, as well as sanctions against any official deemed responsible for human rights abuses or for undermining the city’s autonomy.

Key

Prudential Regulatory (Geo)political Markets/economies

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data being compromised or misused and potentially leading to new and unforeseen regulatory issues.

A strong sense of purpose for an enterprise is a driver of long-term profitability, and this is making companies evaluate their place in, and contribution to, society. The ‘why and how’ a business acts has become arguably at least as important as what it produces or the services that it provides. Recent events have highlighted the structural inequalities in our societies and

are prompting organisations to question where they stand on these important issues. Understanding and managing the environmental, social and governance (ESG) implications of the Group’s business is fundamental to Prudential’s brand, reputation and ultimately its long-term success. Ensuring high levels of transparency and responsiveness to stakeholders is a key aspect of this.

Q1 2020

The National Association of Insurance Commissioners (NAIC) implements changes to the US statutory reserve and capital framework for variable annuities, effective from 1 January 2020. Jackson chooses to early adopt the changes as at 31 December 2019 for US statutory reporting.

In January 2020, the virus responsible for what initially appeared to be viral pneumonia is identified as a novel coronavirus (the resulting disease has since been named Covid-19) and over Q1 and Q2 the coronavirus begins its spread across the globe. Across its markets the Group rolls out initiatives to support customers and staff.

In January, Prudential Vietnam announces an exclusive bancassurance partnership with Southeast Asia Commercial Joint Stock Bank (SeABank), a fast-growing bank in Vietnam with around 1.2 million customers and almost 170 branches, for a 20-year term.

The Covid-19 pandemic shuts down much of the world’s economy and triggers a sharp recession. Equity markets sell off at an extraordinary speed, volatility spikes, credit spreads widen sharply and interest rates in major markets decrease to new historical lows. Central banks maintain accommodative monetary policies and implement various asset purchase and support programmes to restore confidence in financial markets. Governments deploy massive fiscal stimulus to mitigate the economic fallout and the unprecedented shock on the labour force.

On 20 March, the Hong Kong IA published the Insurance Ordinance (Amendment) (No 2) Bill as part of its submission to the Hong Kong Legislative Council, a key step towards GWS implementation.

In Singapore, a revised risk-based capital framework (RBC2) for insurers comes into force as at 31 March 2020.

The California Consumer Protection Act (CCPA) comes into force on 1 January 2020, creating data privacy rights to California consumers. Jackson ensures compliance with the Act in December 2019.

Q2 2020

In May, following its initial announcement in March, the Group confirms that it continues to prepare for a Jackson minority IPO alongside active evaluation of other options with respect to creating an independent Jackson.

On 18 June the Group announces the reinsurance of $27.6 billion of Jackson’s fixed and fixed indexed annuity portfolio by Athene, and a $500 million equity investment into Prudential’s US business in return for an 11.1 per cent economic interest.

Shriti Vadera joins the Board as a Non-executive Director and member of the Nomination & Governance Committee on 1 May 2020, and is expected to succeed Paul Manduca as Chair of the Board and of the Nomination & Governance Committee on 1 January 2021.

Since its launch, downloads of Pulse by Prudential exceed five million in June. The digital health platform is now one of the most popular health and wellness apps offered by an insurer in the Asia region.

Markets rally sharply during Q2 on the back of asset purchases, direct intervention by the US Federal Reserve in credit markets, stimulus programmes, the gradual rebound in economic activity enabled by the progressive easing of lockdown measures and a broad reduction in virus infection rates.

A broad easing of Covid-19 restrictions begins to take place across many countries in the latter half of Q2 and into Q3, including in some countries with high infection rates, with many countries taking steps to mitigate a second wave of infections. Other countries, such as the US and those in Central and South America and South Asia continue to see high daily case numbers.

The Insurance (Amendment) (No 2) Ordinance was enacted in Hong Kong on 24 July 2020. Timing remains uncertain, although the GWS Framework is expected to become effective in early 2021. The primary legislation will be supported by subsidiary legislation and guidance material which is subject to consultation with the industry and to the Hong Kong legislative process.

IAIS releases the requirements for a Covid-19 tailored Data Collection exercise for 2020. The original Data Collection exercise, released in March for the purpose of monitoring the build-up of systemic risk for insurers, is paused for 2020. In April 2020, the IAIS also releases the requirements for the 2020 ICS and Aggregation Method Data Collection exercises.

US-China tensions rise during Q2 over Beijing’s proposed national security law for Hong Kong, which is eventually implemented on 30 June 2020. In response, the US House of Representatives and Senate pass a bill imposing sanctions on banks which do business with Chinese officials involved in cracking down on pro-democracy protestors. The bill is signed into law by the US President on 14 July.

The Network for Greening the Financial System publishes its Guide for Supervisors in May 2020 which outlines recommendations for integrating climate-related and environmental risks into prudential supervision.

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GROUP CHIEF RISK AND COMPLIANCE OFFICER’S REPORT ON THE RISKS FACING OUR BUSINESS AND HOW THESE ARE MANAGED CONTINUED

3. Managing the risks in implementing our strategy

This section provides an overview of the Group’s strategy, the significant risks arising from the delivery of this strategy and current risk management focus. The risks outlined below, which are not exhaustive, are discussed in more detail in section 5.

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Our strategy Significant risks arising from the Risk management focus
delivery of the strategy
Group-wide Transformation risks around key Continuing the focus on, and ensuring consistency in
Our strategy is to capture the change programmes, including transformation risk management across the Group’s
long-term structural those related to the Group’s business units.
opportunities for our markets digital strategy Provision of independent risk assurance, challenge and
and geographies, while advice on first line programme risk identification and
operating with discipline and assessments.
seeking to enhance our
capabilities through innovation
Group-wide regulatory risks Engagement with national governments, regulators and
to deliver high-quality resilient
industry groups on macroprudential and systemic
outcomes for our customers.
risk-related regulatory initiatives, international capital
standards, and other initiatives with Group-wide
impacts.
Engagement with the Hong Kong IA on, and
implementation of, the Group-wide Supervision
Framework, which is expected to be enacted in 2020 and
with implementation likely to commence in Q1 2021.
Information security and data Operationalisation of the Group-wide governance model
privacy risks and strategy for cyber security management focusing on
automation, business enablement, efficiency, and
continuous improvement.
Continued focus on compliance with applicable privacy
laws across the Group and the appropriate use of
customer data.
Business disruption and Continued application of the Group’s global business
third-party risks continuity management, with an enhanced focus on
operational resilience as it relates to customer outcomes
and embedding of insights from the Covid-19 pandemic.
Applying the distinct oversight and risk management
required over the Group’s third parties, including its
strategic partnerships for product distribution, non-
traditional services and processing activities.
Conduct risk Continuing the enhancement of the Group-wide
customer conduct risk management framework building
on the Group’s existing customer commitments policy.
Model and data risks Focus on requirements for data and AI and complex
tooling ethics principles and framework.
People and culture Focusing on Group Culture as a key mechanism to
support sound risk management behaviours, practices
and awareness.
Embedding responses and insights from Group-wide
employee engagement surveys through enhancements
to the Group Risk Framework.
ESG – commitments Assessing the potential financial impacts from climate-
and disclosure related transition risk in the asset book and integration of
climate risk into the Group Risk Framework.
Supporting the Group ESG Committee in its
responsibility to coordinate ESG activities and develop
its disclosures.
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Our strategy	Signifcant risks arising from the delivery of the strategy	Risk management focus
Asia Serving the protection and investment needs of the growing middle class in Asia.	Financial risks	Maintaining, and enhancing where necessary, risk limits and implementing business initiatives to manage fnancial risks, including asset allocation, bonus revisions, product repricing and reinsurance where required.
	Persistency risk	Implementation of business initiatives to manage persistency risk, including additional payment methods, enhancing customer experience, revisions to product design and incentive structures. Ongoing experience monitoring.
	Morbidity risk	Implementation of business initiatives to manage morbidity risk, including product repricing where required. Ongoing experience monitoring.
United States Providing asset accumulation and retirement income products to US retirees.	Financial risks	Maintaining, and enhancing where necessary, risk limits, hedging strategies (including mitigating measures against basis risk), modelling tools and risk oversight appropriate to Jackson’s product mix.
	Policyholder behaviour risk	Continued monitoring of policyholder behaviour experience and review of assumptions.
Africa Ofering products to new customers in Africa, one of the fastest-growing regions in the world.	The Group continues to increase its focus on Prudential Africa’s most signifcant risks, being those related to physical and information security and fnancial crime, as its presence there expands and grows in materiality.

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4. Risk governance a System of governance

Prudential has in place a system of governance that promotes and embeds a clear ownership of risk, processes that link risk management to business objectives and a proactive Board and senior management providing oversight of risks. Mechanisms and methodologies to review, discuss and communicate risks are in place together with risk policies and standards to enable risks to the Group to be identified, measured and assessed, managed, monitored and reported.

Material risks will be retained selectively when it is considered that there is value in doing so, and where it is consistent with the Group’s risk appetite and philosophy towards risk-taking. The Group Risk Framework, which is owned by the Board, details Prudential’s risk governance, risk management processes and risk appetite. The Group’s risk governance arrangements are based on the ‘three lines of defence’ model, comprising risk taking and management, risk control and oversight, and independent assurance. The aggregate Group exposure to its key risk drivers is monitored and managed by the Risk and Compliance function which is responsible for reviewing, assessing, providing oversight and reporting on the Group’s risk exposure and solvency position from the Group economic, regulatory and ratings perspectives.

During 2019 and 2020, the Group has reviewed and updated its policies and processes for alignment with the requirements of its Group-wide supervisor. The frameworks relating to oversight of transformation risk and model risk were further embedded and the Group has focused on development of a Group-wide customer conduct risk framework, building on its existing customer commitments policy.

The following section provides more detail on our risk governance, risk culture and risk management process. Specific events may have impacts across some or all of major risk categories. The Covid-19 pandemic is one such example, and the various risks impacting the Group, and its responses to it, are summarised in section 5.

b Group Risk Framework

i. Risk governance and culture Prudential’s risk governance comprises the Board organisational structures, reporting relationships, delegation of authority, roles and responsibilities, and risk policies that have been established to make decisions and control activities on risk-related matters.

The risk governance structure is led by the Group Risk Committee, supported by independent non-executive directors on risk committees of the Group’s main subsidiaries. The Group Risk Committee reviews and approves changes made to the Group Risk Framework and to relevant policies. It also reviews and approves new risk policies and recommends to the Board any material policies which require Board approval. A number of core risk policies and standards support the Framework to enable risks to the Group to be identified, measured and assessed, managed, monitored and reported.

Culture is a strategic priority of the Board, which recognises its importance in the way that the Group does business. It shapes the organisation-wide values that are used to prioritise risk management awareness, behaviours and practices. The Group works to promote a responsible, risk aware culture through ensuring the right balance between risk, profitability and long-term growth in organisational decision-making. This is supported through inclusion of risk considerations in performance management for key individuals; by building appropriate skills and capabilities in risk management; and by ensuring that employees understand and care about their role in managing risk through open discussions. The Group Risk Committee has a key role in providing advice to the Remuneration Committee on risk management considerations to be applied in respect of executive remuneration.

Prudential’s Group Code of Business Conduct and Group Governance Manual include a series of guiding principles that govern the day-to-day conduct of all its people and any organisations acting on its behalf. This is supported by specific risk-related policies which require that the Group act in a responsible manner. These include, but are not limited to, policies related to financial crime covering anti-money laundering and sanctions and anti-bribery and corruption. The Group’s third-party supply policy requires that human rights and modern slavery considerations are embedded across all of its supplier and supply chain arrangements. Embedded procedures to allow individuals to speak out safely and anonymously against unethical behaviour and conduct are also in place.

ESG is owned by the Board, which is responsible for determining strategy and prioritisation of key focus areas. In order to provide greater senior executive involvement and holistic oversight of ESG matters material to the Group, in 2020, a Group ESG Committee was established. The Committee is chaired by the Group Chief Financial and Chief Operating Officer, supported by senior functional leaders and representatives from the Group’s business units, including the chief investment officers of the Group’s asset managers. The Group ESG Committee reports to the Board through the Group Nomination & Governance Committee which comprises the Group’s Chairman, the Senior Independent Director, and the chairs of the Audit, Remuneration and Risk committees and is regularly attended by the Group Chief Executive. The policies and procedures to support how the Group operates in relation to certain ESG topics are included in the Group Governance Manual. Prudential manages key ESG issues through a multi-disciplinary approach with functional ownership for specific ESG topics.

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ii. The risk management cycle Risk identification

In accordance with provision 28 of the UK Corporate Governance Code, a process is in place to support Group-wide identification of the Company’s emerging and principal risks and this combines both top-down and bottom-up views of risks at the level of the Group and its business units. The Board performs a robust assessment and analysis of these principal and emerging risks facing the Company through the risk identification process, the Group Own Risk and Solvency Assessment (ORSA) report and the risk assessments undertaken as part of the business planning review, including how they are managed and mitigated, which supports decision-making.

The ORSA is the ongoing process of identifying, assessing, controlling, monitoring and reporting the risks to which the business is exposed. It includes an assessment of capital adequacy to ensure that the Group’s solvency needs are met at all times. Stress and scenario testing, which includes reverse stress testing requiring the Group to ascertain the point of business model failure, is another tool that helps to identify the key risks and scenarios that may have a material impact on the Group. 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 Group’s annual set of principal risks is 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 economic capital requirements and is subject to independent validation and processes and controls around model changes and limitations.

Risk management and control

The Group’s control procedures and systems focus on aligning the levels of risk-taking with the Group’s strategy and can only provide reasonable, and not absolute, assurance against material misstatement or loss. Risk management and control requirements are set out in the Group’s risk policies and 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, which include the flows of management information required, are also set out in the Group’s risk policies. The methods and risk management tools that the Group employs to mitigate each of its major categories of risks are detailed in section 5 below.

Risk monitoring and reporting

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

iii. Risk appetite, limits and triggers

The Group recognises that interests of its customers and shareholders, and a managed acceptance of risk in pursuit of its strategy, lies at the heart of its business, and that effective risk management capabilities represent a key source of competitive advantage. Qualitative and quantitative expressions of risk appetite are defined and operationalised through risk limits, triggers and indicators. The Risk and Compliance function reviews the scope and operation of these measures at least annually. The Board approves changes to the Group’s aggregate risk appetite and the Group Risk Committee has delegated authority to approve changes to the system of limits, triggers and indicators.

Group risk appetite is defined and monitored in aggregate by the setting of objectives for its liquidity, capital requirements and non-financial risk exposure, covering risks to shareholders, including those from participating and third-party business. Group limits operate within these expressions of risk appetite to constrain material risks, while triggers and indicators provide additional defined points for escalation. 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 Risk and Compliance function, which uses submissions from local business units to calculate the Group’s aggregated position relative to Group risk appetite and limits.

— Capital requirements. Limits on capital requirements aim to ensure that the Group maintains sufficient capital in excess of internal economic capital requirements in business-as-usual and stressed conditions, achieves its desired target rating to meet its business objectives, and supervisory intervention is avoided. The two measures currently in use at the Group level are the regulatory local capital summation method (LCSM) capital requirements (both minimum and prescribed levels) and internal economic capital (ECap/GEICA) requirements. In addition, capital requirements are monitored on local statutory bases.

• Liquidity. The objective of the Group’s liquidity risk appetite is to ensure that sufficient cash resources are available to meet financial obligations as they fall due in business-as-usual and stressed scenarios. This is measured using a liquidity coverage ratio (LCR) which considers the sources of liquidity against liquidity requirements under stress scenarios.

• Non-financial risks. The Group is exposed to non-financial risks, including environmental, social and governance risks, as an outcome of its chosen business activities and strategy. It aims to manage these risks effectively to maintain its operational resilience and its commitments to customers and other external stakeholders, and to avoid material adverse impact on its reputation.

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5. The Group’s principal risks

Broadly, the risks assumed across the Group can be categorised as those relating to its financial situation; its business and industry; regulatory and legal compliance; and those relating to ESG. Principal risks, whether materialising within the Group or at third parties on which the Group relies, may have a financial impact and could also impact the performance of products or services provided to customers and distributors and the ability to fulfil commitments to customers, giving rise to potential risks to its brand and reputation. These risks, which are not exhaustive, are detailed below. The materiality of these risks, whether material at the level of the Group or its business units, is also indicated. The Group’s disclosures covering risk factors are aligned to the same categories and can be found at the end of this document.

In reading the sections below, it is useful to understand that there are some risks that

Prudential’s policyholders assume by virtue of the nature of their products, and some risks that the Group and its shareholders assume. Examples of the latter include those risks arising from assets held directly by and for the Group 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 policyholder exposures.

Covid-19 risks and responses

The Group has responded in a number of ways to the risks arising from the coronavirus pandemic; some responses were part of existing risk management processes and procedures, while others have been initiated specifically in response to the pandemic, in particular during the acute phases experienced in Q1 and Q2.

The Group Critical Incident Procedure (GCIP) defines specific governance to be invoked in the event of a critical incident,

such as a significant market, liquidity or credit-related event. This includes, where necessary, the convening of a Critical Incident Group (CIG) to oversee, coordinate, and where appropriate, direct any activity during a critical incident. In response to the economic and financial market shocks triggered by the Covid-19 pandemic the Group CRCO invoked the GCIP and convened a series of CIG meetings to provide high-cadence monitoring and management of potential threats to the capital or liquidity position of the Group. Local Incident Management teams were also activated to monitor and manage the tailored response required to support the operations, customers and employees of the Group’s businesses.

These risks arising from the Covid-19, and the Group’s responses to them, are summarised below, with further information provided, where relevant, within the descriptions of the Group’s principal risks.

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Risk areas Responses
Staff safety and well-being Proactive move to working from home arrangements across jurisdictions, with local
incident management teams monitoring country specific developments, undertaking
risk assessments and providing regular staff communications and support.
Customer outcomes are not met, Initiatives and campaigns rolled out across markets, including customer cash
increasing conduct risk benefits, goodwill payments, and extended grace periods for premium payments.
Disruption to the operations of the Application of the Group and local business continuity plans. Local Incident
Group, and its key partners Management teams activated to monitor, manage and lead a tailored response to
ensure continuity of service to existing customers.
Financial market and liquidity impacts, Invocation of the Group’s Critical Incident Procedures and convening of a Critical
including to Group and business unit Incident Group to monitor and manage threats to the Group’s solvency or liquidity
solvency position.
Heightened risk of phishing and social Group-wide phishing awareness campaigns. Heightened threat monitoring and
engineering tactics review of cyber hygiene controls. Active management of connections to the Group
network.
Sales impacts Roll-out of virtual face-to-face sales processes in most of the Group’s markets with at
least limited product offerings with appropriate regulatory engagement, oversight of
incremental operational risks and ongoing monitoring of the commercial impact to
existing sales channels.
Insurance risks, in particular increased Close monitoring by the Group’s businesses and targeted management actions
lapses and surrenders resulting from where necessary. Covid-19-related claims have not been material to date, but are
the broader economic effects being closely monitored.
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Risks to the Group’s financial situation (including those from the external macroeconomic and geopolitical environment) The global economic and geopolitical environment may impact on the Group directly by affecting trends in financial markets and asset values, as well as driving short-term volatility.

Risks in this category include the market risks to our investments and the credit quality of our investment portfolio as well as liquidity risk.

Global economic and

geopolitical conditions

Changes in global economic conditions can impact Prudential directly; for example, by leading to reduced investment returns and fund performance and liquidity, and increasing the cost of promises (guarantees) that have been made to the Group’s customers. Changes in economic conditions, such as the abrupt and uncertain longer-term impacts resulting from the Covid-19 crisis, can also have an indirect impact on the Group; for example, leading to a decrease in the propensity for people to save and buy Prudential’s products, as well as changing prevailing political attitudes towards regulation.

The geopolitical environment can also impact the Group in a wide range of ways, both directly and indirectly. Financial markets and economic sentiment have been highly susceptible to geopolitical developments in recent years, with implications for the Group’s financial situation. We have seen in recent times that geopolitical tensions can result in the imposition of protectionist or restrictive regulatory

and trading requirements by governments and regimes.

The Covid-19 pandemic has further prompted governments to rethink the current globalised nature of supply chains, and may have geopolitical and trading implications, the full extent of which may not be clear for a while. Various governments have effected, or are considering effecting, the postponement of elections and other constitutional or legislative processes in response to the pandemic, and the longer-term impact from this increase in constitutional and political uncertainty remains to be seen.

Responses by the US, UK and other governments to the recently enacted national security law in Hong Kong, the final form and full extent of which are still being determined, may impact Hong Kong’s economy. Being a key market for the Group which also hosts regional and head office functions, this could potentially impact Prudential’s sales, operations and product distribution. For internationally active groups which operate across impacted jurisdictions such as Prudential, government measures and responses

may also add to the complexity of legal and regulatory compliance. Compliance with Prudential’s legal or regulatory obligations in one jurisdiction may conflict with the law or policy objectives of another jurisdiction, or may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional legal, regulatory compliance and reputational risks for the Group. All these factors can increase the operational, business disruption, regulatory and financial market risks to the Group and can directly impact its sales and distribution networks. Developments in Hong Kong and the continuing impacts of the pandemic are being closely monitored by the Group and plans have been enacted to manage the disruption to the business, our employees and customers within our existing business resilience processes. Further information on the Group’s business disruption risks are included below.

Macroeconomic and geopolitical risks are considered material at the level of the Group.

Market risks to our investments

This is the potential for reduced value of Prudential’s investments resulting from the volatility of asset prices, driven by fluctuations in equity prices, interest rates, foreign exchange rates and property prices. Interest rates in the Group’s key markets decreased to historically low levels in Q1 2020, with the stance of central banks making it likely they will remain extremely low for a while. A persistently low interest rate environment poses challenges to both the capital position of life insurers as well as to new business profitability and this is a scenario that the Group is planning for.

The Group has appetite for market risk where it arises from profit-generating

insurance activities to the extent that it remains part of a balanced portfolio of sources of income for shareholders and is compatible with a strong solvency position.

The Group’s market risks are managed and mitigated by the following:

• The Group market risk policy;

• The Group Asset Liability Committee – a first-line risk management advisory committee to the Group Chief Executive Officer which supports the identification, assessment and management of key financial risks significant to the achievement of the Group’s business objectives;

• Risk appetite statements, limits and triggers;

• Asset and liability management programmes which include management actions such as asset allocation, bonus revisions, repricing and the use of reinsurance where appropriate;

• Hedging derivatives, including equity options and futures, interest rate swaps and swaptions and currency forwards;

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

• Regular deep dive assessments.

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Risks to the Group’s financial situation (including those from the external macroeconomic and geopolitical environment) continued

As noted above, in response to the economic and financial market shocks triggered by the Covid-19 pandemic, the Group CRCO invoked the GCIP and convened a series of CIG meetings to provide high-cadence monitoring and management of any potential threats to the capital or liquidity position of the Group.

Equity and property investment risk

In Asia, the shareholder exposure to equity price movements results from unit-linked products, where fee income is linked to the market value of the funds under management. Further exposure arises from with-profits businesses where bonuses declared are based broadly on historical and current rates of return from the Asia business’s investment portfolios, which include equities.

In Jackson, investment risk arises from the assets backing customer policies. Equity risk is driven by the variable annuity business, where the assets are invested in both equities and bonds and the main risk to the shareholder comes from providing the guaranteed benefits offered. The exposure to this is primarily controlled by using a derivative hedging programme, as well as through the use of reinsurance to pass on the risk to third-party reinsurers.

Basis risk is the inherent risk associated with imperfect hedging and is caused by variables or characteristics that drive differences between the value of an underlying position and the hedge instruments used to offset changes in its value. Within Jackson’s variable annuity business, basis risk can arise from

differences between the performance of the Separate Account funds in which policyholders choose to invest and that of the instruments used to replicate these funds for hedging and liability modelling purposes, which are primarily linked to the S&P 500 index. This risk exposure is proportionate to the magnitude of liability risk/hedge position which fluctuates with equity and interest rate levels. Therefore, while the market sell-off in Q1 increased this liability risk/hedge exposure, the rally in equity markets since March has had a corresponding opposite and positive impact. Jackson is actively evaluating ways to further mitigate basis risk, particularly in light of the market volatility seen as a result of the Covid-19 pandemic.

Interest rate risk

This is driven by the valuation of Prudential’s assets (particularly the bonds that it invests in) and liabilities, which are dependent on market interest rates and expose the Group to the risk of those moving in a way that is detrimental. Some products that Prudential offers are sensitive to movements in interest rates. As part of the ongoing management of this risk, a number of mitigating actions to the in-force business have been taken, as well as repricing and restructuring new business offerings in response to recent relatively low interest rates. Nevertheless, some sensitivity to interest rate movements is still retained. The impact of lower interest rates may also manifest through reduced solvency levels in some of the Group’s businesses, impairing their ability to make remittances, as well as reduced new business profitability.

The Group’s appetite for interest rate risk is limited to where assets and

liabilities can be tightly matched and where liquid assets or derivatives exist to cover interest rate exposures.

In Asia, our exposure to interest rate risk arises from the guarantees of some non-unit-linked investment savings products, including the Hong Kong with-profits and non-profit business. This exposure exists because of the potential for an asset and liability mismatch, where long-dated liabilities and guarantees are backed by short-dated assets, which cannot be eliminated but is monitored and managed through local risk and asset liability management committees against risk appetite aligned with the Group’s limit framework.

Interest rate risk results from the cost of guarantees in the variable annuity and fixed indexed annuity business, which may increase when interest rates fall. The level of sales of variable annuity products with guaranteed living benefits is actively monitored, and the risk limits we have in place help to ensure we are comfortable with the level of interest rate and market risks incurred as a result. Derivatives are also used to provide some protection. Jackson is also affected by interest rate movements to its fixed annuity book where the assets are primarily invested in bonds and shareholder exposure comes from the mismatch between these assets and the guaranteed rates that are offered to policyholders. As at 1 June 2020, this risk has been substantially transferred as part of the reinsurance transaction with Athene, leaving only a limited exposure from residual policies including those from the blocks acquired externally (ie from the REALIC and John Hancock businesses).

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Foreign exchange risk

The geographical diversity of Prudential’s businesses means that it has some exposure to the risk of foreign exchange rate fluctuations. Some entities within the Group that write policies, invest in assets or enter into other transactions in local currencies or currencies not linked to the US dollar. Although this limits the effect of exchange rate movements on local operating results, it can lead

Liquidity risk

Prudential’s liquidity risk arises from the need to have sufficient liquid assets to meet policyholder and third-party payments as they fall due, and the Group considers this under both normal and stressed conditions. It includes 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 impact on market conditions and valuation of assets in a more uncertain way than for other risks like interest rate or credit risk. It 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 where redemption requests are made against Prudential’s external funds. Liquidity risk is considered material at the level of the Group.

Prudential has no appetite for liquidity risk, ie for any business to have insufficient resources to cover its outgoing cash flows, or for the Group as a whole to not meet cash flow requirements from its debt obligations under any plausible scenario.

to fluctuations in the Group financial statements when results are reported in US dollars. This risk is accepted within our appetite for foreign exchange risk.

In cases where a non-US dollar denominated surplus arises in an operation which is to be used to support Group capital, or where a significant cash payment is due from a subsidiary to the Group, this currency exposure may be hedged where it is believed to be economically favourable to do so.

The Group has 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. The Group has a total of $2.6 billion of undrawn committed facilities that can be made use of, expiring in 2025. Access to further liquidity is available through the debt capital markets and an extensive commercial paper programme is in place, and Prudential has maintained a consistent presence as an issuer in the market for the past decade.

A number of risk management tools are used to manage and mitigate this liquidity risk, including the following:

• The Group’s liquidity risk policy;

• Risk appetite statements, limits and triggers;

• Regular assessment by the Group and business units of LCRs which are calculated under both base case and stressed scenarios and are reported to committees and the Board;

Further, the Group generally does not have appetite for significant direct shareholder exposure to foreign exchange risks in currencies outside the countries in which it operates, but it does have some appetite for this on fee income and on non-sterling investments within the with-profits fund. Where foreign exchange risk arises outside appetite, currency swaps and other derivatives are used to manage the exposure.

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

• Regular stress testing;

• Our contingency plans and identified sources of liquidity;

• The Group’s ability to access the money and debt capital markets;

• Regular deep dive assessments; and

• The Group’s access to external committed credit facilities.

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Risks to the Group’s financial situation (including those from the external macroeconomic and geopolitical environment) continued

Credit risk

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

Prudential invests in bonds that provide a regular, fixed amount of interest income (fixed income assets) in order to match the payments needed to policyholders. It also enters 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, it is exposed to credit risk and counterparty risk across its business. The assets backing the Jackson general account portfolio and the Asia shareholder business means credit risk is considered a material risk for the Group’s business units.

The Group has some appetite to take credit risk where it arises from profitgenerating insurance activities, to the extent that it remains part of a balanced portfolio of sources of income for shareholders and is compatible with a strong solvency position.

A number of risk management tools are used to manage and mitigate this credit risk, including the following:

• A credit risk policy and dealing and controls policy;

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

• Collateral arrangements for derivative, secured lending reverse repurchase and reinsurance transactions;

• The Group Credit Risk Committee’s oversight of credit and counterparty credit risk and sector and/or name-specific reviews;

• Regular assessments; and

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

The total debt securities[4] at 30 June 2020 were $121.5 billion (30 June 2019: $126.9 billion; 31 December 2019: $134.6 billion). Credit risk arises from the debt portfolio in the Asia business comprising the shareholder, with-profit and unit-linked funds, the value of which was $82.1 billion at 30 June 2020. The majority (71 per cent) of the portfolio is in unit-linked and with-profits funds. The remaining 29 per cent of the debt portfolio is held to back the shareholder business.

In the general account of the Group’s US business, $39.0 billion of debt securities are held to support shareholder liabilities including those from our fixed annuities, fixed indexed annuities and life insurance products. The shareholder-backed debt portfolio of the Group’s other operations was $0.3 billion as at 30 June 2020. 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

Prudential invests in bonds issued by national governments. This sovereign debt holding represented 27 per cent or $17.1 billion[1] of the shareholder debt portfolio of the Group as at 30 June 2020 (31 December 2019: 22 per cent or $18.8 billion of the shareholder debt portfolio). The particular risks associated with holding sovereign debt are detailed further in our disclosures on risk factors.

The exposures held by the shareholderbacked business and with-profits funds in sovereign debt securities at 30 June 2020 are given in note C1 of the Group’s IFRS financial statements.

Corporate debt and loan portfolio In the Asia shareholder business, corporate debt exposures totalled $11.3 billion of which $10.3 billion or 92 per cent were investment grade rated. In the US general account, corporate debt exposures amounted to $29.1 billion following the Athene transaction, and the portfolio remains of high credit quality with 97 per cent[5] remaining investment grade rated.

Bank debt exposure and counterparty credit risk

Prudential’s exposure to banks is a key part of its core investment business, as well as being important for the hedging and other activities undertaken to manage its various financial risks. Given the importance of its relationship with its banks, exposure to the sector is considered a material risk for the Group. The exposure to derivative counterparty and reinsurance counterparty credit risk, which includes the recently announced reinsurance agreement with Athene Life Re, is managed using an array of risk management tools, including a comprehensive system of limits. Where appropriate, Prudential reduces its exposure, buys credit protection or uses additional collateral arrangements to manage its levels of counterparty credit risk.

At 30 June 2020:

• 93 per cent of the Group’s shareholder portfolio (excluding all government and governmentrelated debt) is investment grade rated[2] . In particular, 53 per cent of the portfolio is rated[2] A- and above (or equivalent); and

• The Group’s shareholder portfolio is well diversified: no individual sector[3] makes up more than 10 per cent of the total portfolio (excluding the financial and sovereign sectors). The exposures held by the shareholder-backed business and with-profits funds in bank debt securities at 30 June 2020 are given in note C1 of the Group’s IFRS financial statements.

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Risks from the nature of our business and our industry

These include the Group’s non-financial risks (including operational and financial crime risk), transformation risks from significant change activity and the insurance risks assumed by the Group in providing its products.

Transformation risk

Prudential has a number of significant transformation and change programmes under way to deliver the Group’s strategy for growth, improve customer experiences, strengthen its operational resilience and control environment, and meet regulatory and industry requirements. If the Group does not deliver these programmes to defined timelines, scope and cost, this may negatively impact on its operational capability, ability to deliver its strategy and reputation.

In 2020, transformation risk remains a material risk for Prudential. The Group’s transformation and change programmes inherently give rise to design and execution risks, and may

introduce new, or increase existing, business risks and dependencies. These include, but are not limited to, an increased strain on operational capacity, newly-implemented controls being ineffective or a general weakening of the control environment of the Group. Implementing further strategic transformation initiatives may amplify these risks. In order to manage these risks, the Group’s Transformation Risk Framework aims to ensure that, for both transformation and strategic initiatives, strong programme governance is in place with embedded risk expertise to achieve ongoing and nimble risk oversight, and regular risk monitoring and reporting to risk committees is delivered.

The Group’s current portfolio of transformation and significant change programmes include the intended separation of Jackson from the Group; the expansion of the Group’s digital capabilities and use of technology, platforms and analytics; and improvement of business efficiencies through operating model changes (covering data, systems and people). Programmes related to regulatory/ industry change such as the transition to the Hong Kong IA’s GWS Framework, changes required to effect the discontinuation of inter-bank offered rates (IBORs) in their current form and the implementation of IFRS 17 are also ongoing. See below for further detail on these regulatory changes.

Non-financial risks

In the course of doing business, the Group is exposed to non-financial risks. A combination of the complexity of the Group, its activities and the extent of transformation in progress creates a challenging operating environment. The Group’s main non-financial risks are detailed below. These risks are considered to be material at the level of the Group.

Operational risk

Prudential defines operational risk as the risk of loss (or unintended gain or profit) arising from inadequate or failed internal processes, personnel or systems, or from external events. This may arise from employee error, model error, system failures, fraud or other events which disrupt business processes or has a detrimental impact to customers. Activities across the scope of our business, including operational activity, regulatory compliance, and those supporting ESG activities more broadly can expose us to operational risks. A large volume of complex transactions is processed by the Group across a number of diverse products and are subject to a high number of varying legal, regulatory and tax regimes. Prudential has no appetite

for material losses (direct or indirect) suffered as a result of failing to develop, implement or monitor appropriate controls to manage operational risks.

The Group’s outsourcing and thirdparty relationships require distinct oversight and risk management processes. A number of important third-party relationships exist which provide the distribution and processing of Prudential’s products, both as market counterparties and as outsourcing partners, including new IT and technology partners. In Asia, the Group continues to expand its strategic partnerships and renew bancassurance arrangements and in Africa Prudential is continuing its expansion through acquisitions. These third-party arrangements support Prudential in providing a high level and cost-effective service to our customers, but they also make us reliant on the operational resilience and performance of our outsourcing partners.

The Group’s requirements for the management of material outsourcing arrangements, which are in accordance with relevant applicable regulations, are included through its well-established Group-wide third-party supply policy. Third-party management is also

included and embedded in the Group-wide framework and risk management for operational risk (see below). Third-party management forms part of the Group’s operational risk categorisations and a defined qualitative risk appetite statement and supporting limits and triggers are in place.

The performance of the Group’s core business activities places reliance on the IT infrastructure, provided by our external IT and technology partners, that supports day-to-day transaction processing and administration. This IT environment must also be secure, and an increasing cyber risk threat needs to be addressed as the Group’s digital footprint increases and the sophistication of cyber threats continue to evolve – see separate information security risk sub-section below. Exposure to operational and other external events could impact operational resilience by significantly disrupting systems, operations and services to customers, which may result in financial loss, customer impacts and reputational damage. Operational challenges also exist in keeping pace with regulatory changes. This requires implementing processes to ensure we are, and remain, compliant on an ongoing basis, including regular monitoring and reporting.

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Risks from the nature of our

Standards documents, which set out the key principles and minimum standards for the management of operational risk across the Group. The Group Operational Risk Policy, standards and operational risk appetite framework sit alongside other risk policies and standards that individually engage with key operational risks, including outsourcing and third-party supply, business continuity, financial crime, technology and data, operations processes and extent of transformation. These policies and standards include subject matter expert-led processes that are designed to identify, assess, manage and control operational risks, including:

business and our industry continued

Group-wide framework and risk management for operational risk The risks detailed above form key elements of the Group’s operational risk profile. A Group-wide operational risk framework is in place to identify, assess, manage, control and report effectively on all operational risks across the business. The key components of the framework are:

• Application of a risk and control These policies and standards include self-assessment (RCSA) process, subject matter expert-led processes that where operational risk exposures are designed to identify, assess, manage are identified and assessed as part and control operational risks, including: of a periodical cycle. The RCSA process considers a range of internal — A transformation risk framework that and external factors, including an assesses, manages and reports on assessment of the control the end-to-end transformation life environment, to determine the cycle, project prioritisation and the business’s most significant risk risks, interdependencies and exposures on a prospective basis; possible conflicts arising from a large

• — portfolio of transformation activities; An internal incident management —

• process, which identifies, quantifies Internal and external review of cyber and monitors remediation security capability and defences; —

• conducted through root cause Regular updating and testing of analysis and application of action elements of disaster-recovery plans plans for risk events that have and the Critical Incident Procedure occurred across the business; process;

• — — A scenario analysis process for Group and business unit-level the quantification of extreme, compliance oversight and testing in yet plausible manifestations of key respect of adherence with in-force operational risks across the business regulations; on a forward-looking basis. This is — Regulatory change teams in place carried out at least annually and to assist the business in proactively supports external and internal adapting and complying with capital requirements as well as regulatory developments; informing risk oversight activity — On financial crime risks (see below),

• across the business; and screening and transaction

• — An operational risk appetite monitoring systems are in place and framework that articulates the level a programme of compliance control of operational risk exposure the monitoring reviews is undertaken, business is willing to tolerate, as well as regular risk assessments; covering all operational risk — A framework is in place for emerging

• categories, and sets out escalation risk identification and analysis in

• processes for breaches of appetite. order to capture, monitor and allow

• Outputs from these processes and us to prepare for operational risks activities performed by individual that may crystallise beyond the business units are monitored by the Risk short-term horizon;

Outputs from these processes and activities performed by individual business units are monitored by the Risk function, which provides an aggregated view of the risk profile across the business to the Group Risk Committee and Board.

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

• Reviews of key operational risks and challenges within Group and business unit business plans.

These core framework components are embedded across the Group via the Group Operational Risk Policy and

These activities are fundamental in maintaining an effective system of internal control, and as such outputs from these also inform core RCSA, incident management and scenario analysis processes and reporting on operational risk. Furthermore, they also ensure that operational risk considerations are embedded in key business decision-making, including material business approvals and in setting and challenging the Group’s strategy.

Business disruption risk

Events in 2020 have shown how material business disruption risk is to effective business operations and delivery of business services to policyholders, and the potential impact to our customers and the market more broadly. The Group continuously seeks to develop greater business resilience through planning, preparation, testing and adaption. Business continuity management (BCM) is one of a number of activities undertaken by the Group Security function that helps the Group to protect its key stakeholders and its systems, and business resilience is at the core of the Group’s embedded BCM programme. The BCM programme and framework are appropriately linked to all business activities, and includes business impact analyses, risk assessments, incident management plans, disaster recovery plans, and the exercising and execution of these plans. Based on industry standards, the BCM programme is designed to provide business continuity that matches the Group’s evolving business needs and is appropriate to the size, complexity and nature of the Group’s operations. Prudential is also taking a broader, multi-functional approach to building greater business resilience, working with our external third-party providers and our service delivery teams to improve our ability to withstand, absorb and recover from disruption to our business services, while minimising the impact on our customers. The Group continuously reviews and develops its contingency plans and its ability to respond effectively when disruptive incidents occur, such as those resulting from the Covid-19 pandemic and, prior to this, the Hong Kong protests.

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Business disruption risks are closely monitored by the Group Security function, with key operational effectiveness metrics and updates on specific activities being reported to the Group Risk Committee and discussed by cross-functional working groups.

Information security risk and data privacy

Information security and data privacy risks remain significant considerations for Prudential. This includes the risk of malicious attack on its systems, network disruption and risks relating to data security, integrity, privacy and misuse. The cyber security threat and criminal capability in this area continues to evolve globally in sophistication and potential significance with an increased level of understanding of complex financial transactions which increases the risks to the financial services industry. The systemic risk of sophisticated but untargeted attacks remains high, particularly so during times of heightened geopolitical tensions. The scale of the Group’s IT infrastructure and network (and the services required to monitor and manage it), stakeholder expectations and high-profile cyber security and data misuse incidents across industries mean that these risks are considered material at the level of the Group.

Prudential and the insurance industry are making increasing use of emerging technological tools and digital services, or forming partnerships with third parties that provide these capabilities. While this provides new opportunities, opening up markets, improving insights and increasing scalability, it also comes with additional risks which are managed within the Group’s existing governance and risk management processes, including additional operational risks and increased risks around data security and misuse. Automated digital distribution channels increase the criticality of system and process resilience in order to deliver uninterrupted service to customers.

Developments in data protection requirements, such as the California Consumer Protection Act which came into force on 1 January 2020, continue to evolve worldwide. This increases financial and reputational implications for Prudential in the event of a breach of its (or third-party suppliers’) IT systems. As well as protecting data, stakeholders expect companies and organisations to use personal information transparently and appropriately. Given this, both information security and data privacy are key risks for the Group. As well as having preventative risk management in place, it is fundamental that the Group has robust critical recovery systems in place in the event of a successful attack on its infrastructure, a breach of its information security or a failure of its systems in order to retain its customer relationships and trusted reputation.

During 2020, work to operationalise the revised organisational structure and governance model for cyber security management has continued. This change has resulted in a centralised Group-wide Information Security and Privacy function, leveraging skills, tools and resources across the business under a ‘centre of excellence’ model. This global function is led by the Group Chief Information Security Officer and falls within the scope of the responsibilities of the Group Chief Digital Officer, working closely with the Group Risk and Compliance Function and Group Chief Risk and Compliance Officer to ensure appropriate second line oversight. Cyber risk management is also conducted locally within business units with input from business information security officers and with oversight from local risk committees. The Prudential plc Board is briefed at least twice annually on cyber security by the Group CISO and executive training is provided to ensure that members understand the latest regulatory expectations and the threats facing the Group and that they have the means to enable appropriate oversight in this area.

A new Group-wide information security policy has been introduced that aligns to over 20 international standards such as ISO 27001/2, MAS, and NIST Cyber Security Framework to ensure full coverage and adoption of best practices. Local policies are also aligned to relevant local regulation or law. Our Group-wide privacy policy was developed in collaboration with industry experts to support a pragmatic approach to the evolving regulatory environment globally and ensure compliance with all applicable laws and regulations. This approach ensures that all our stakeholders have confidence in our approach to information security and risk management.

These developments have allowed the Group to progress on its cyber security strategy, which for 2020 has four key objectives:

• Automation of key processes to provide near real-time information on cyber security risks, allowing for increased response times scalability of defences to threat vectors across all security disciplines. This also enables improved, and more rapid, decision-making;

• Using technology for the rapid enablement of the Group’s businesses, which supports the Group Digital Transformation strategy while meeting the security requirements and expectations;

• Optimisations for efficiency in cyber security and data privacy management. This includes the delivery of centralised services across the Group in areas such as vulnerability management; and

• Continuous identification and implementation of improvements to the people, processes or technology deployed on cyber security and privacy management.

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Risks from the nature of our business and our industry continued

Financial crime risk

As with all financial services firms, Prudential is exposed to risks relating to money laundering (the risk that the products or services of the Group are used by customers or other third parties to transfer or conceal the proceeds of crime); fraud (the risk that fraudulent claims or transactions, or procurement of services, are made against or through the business); sanctions compliance (the risk that the Group undertakes business with individuals and entities on the lists of the main sanctions regimes); and bribery and corruption (the risk that employees or associated persons seek to influence the behaviour of others to obtain an unfair advantage or receive benefits from others for the same purpose).

Insurance risks

Insurance risk makes up a significant proportion of Prudential’s overall risk exposure. The profitability of its businesses depends on a mix of factors, including levels of, and trends in, mortality (policyholders dying), morbidity (policyholders becoming ill) and policyholder behaviour (variability in how customers interact with their policies, including utilisation of withdrawals, take-up of options and guarantees and persistency, ie lapsing of policies), and increases in the costs of claims, including the level of medical expenses increases over and above price inflation (claim inflation).

The principal drivers of the Group’s insurance risk vary across its business units. Across Asia, where a significant volume of health and protection business is written, the most significant insurance risks are persistency risk, morbidity risk and medical inflation risk. In Jackson, policyholder behaviour risk is particularly material, especially in the take up of options and guarantees on variable annuity business which impacts profitability and is influenced by market performance and the value of policy guarantees.

Prudential operates in some high-risk countries where, for example, the acceptance of cash premiums from customers may be common practice, large-scale agency networks may be in operation where sales are incentivised by commission and fees or where there is a higher concentration of exposure to politically-exposed persons.

The Group-wide policies we have in place on anti-money laundering, fraud, sanctions and anti-bribery and corruption reflect the values, behaviours and standards that are expected across the business. Across Asia, screening and transaction monitoring systems are in place and a series of improvements and upgrades are being implemented, while a programme of compliance control monitoring reviews is being

The Group has appetite for retaining insurance risks in order to create shareholder value in the areas where it believes it has expertise and controls to manage the risk and can support such risk with its capital and solvency position.

The impact of Covid-19 to economic activity and employment levels across the Group’s markets has the potential to elevate the incidence of claims, lapses, or surrenders of policies, and some policyholders may choose to defer or stop paying insurance premiums or reduce deposits into retirement plans. In particular extended travel restrictions could affect product persistency in the Group’s Asia business. While these impacts to the business have not been material to date, they are being closely monitored by the Group’s businesses with targeted management actions being implemented where necessary, which includes additional IBNR claims reserves in some markets where delays in non-acute medical treatments due to movement restrictions have been observed.

undertaken. Risk assessments are performed annually at higher risk locations. Due diligence reviews and assessments against Prudential’s financial crime policies are performed as part of the Group’s business acquisition process. The Group continues to undertake strategic activity to monitor and evaluate the evolving fraud risk landscape, mitigate the likelihood of fraud occurring and increase the rate of detection.

The Group has in place a mature confidential reporting system through which staff and other stakeholders can report concerns relating to potential misconduct. The process and results of this are overseen by the Group Audit Committee.

The Group’s persistency assumptions reflect similarly 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 assumptions. Persistency risk is managed by appropriate training and sales processes (including active customer engagement and service quality) and managed locally post-sale through regular experience monitoring and the identification of common characteristics of business with high lapse rates. Where appropriate, allowance is made for the relationship (either assumed or observed historically) between persistency and investment returns and any additional risk is accounted for. 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 the Group’s financial results can vary but depends mostly on product design and market conditions.

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In Asia, Prudential writes significant volumes of health and protection business and so a key assumption 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 expected, so the medical claim cost passed on to Prudential is higher than anticipated. Medical expense inflation risk is best mitigated by retaining the right to reprice our products each year and by having suitable overall claims limits within our policies, either limits per type of claim or in total across a policy, annually and/or over the policy lifetime. Prudential’s morbidity risk is mitigated by appropriate underwriting when policies are issued and claims are received. Our morbidity assumptions

Conduct risk

Prudential’s conduct of business, especially the design and distribution of its products, is crucial in ensuring that the Group’s commitment to meeting customers’ needs and expectations are met. The Group’s conduct risk framework is owned by the first line which reflects management focus on achieving good customer outcomes.

Conduct risk drivers can be found throughout the product life cycle, from the complexity of the Group’s products, to its diverse distribution channels (including virtual face-to-face sales processes implemented in response to Covid-19 restrictions) and the ongoing servicing of its customers. Prudential aims to mitigate conduct risk with robust controls, which are identified and

reflect our recent experience and expectation of future trends for each relevant line of business.

Prudential’s insurance risks are managed and mitigated using the following:

• The Group’s insurance, product and underwriting risk policies;

• The risk appetite statements, limits and triggers;

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

• Using reinsurance to mitigate mortality and morbidity risks;

assessed through the Group’s conduct risk assessment framework, and regularly tested within its monitoring programmes. Conduct risk is heightened in markets where financial sophistication among consumers may be lower. In alignment with the Group’s purpose of helping people get the most out of life, Prudential strives towards making health and protection coverage affordable and accessible to all. Management of Prudential’s conduct risk in its emerging markets is therefore high on the agenda.

Prudential’s conduct risks are managed and mitigated using the following:

• The Group’s code of business conduct and customer commitments, product and underwriting risk policies;

• Ensuring appropriate medical underwriting when policies are issued and appropriate claims management practices when claims are received in order to mitigate morbidity risk;

• Maintaining the quality of sales processes, training and using initiatives to increase customer retention in order to mitigate persistency risk;

• Using product repricing and other claims management initiatives in order to mitigate medical expense inflation risk; and

• Regular deep dive assessments.

• Maintaining the quality of sales processes, training and using other initiatives to improve customer outcomes;

• Ensuring proper sales practices via the use of welcome calls and mystery shopping;

• Proper claims management and complaint handling practices;

• Regular deep dive assessments on, and monitoring of, conduct risks;

• Conduct risk assessments; and

• Consideration of customer outcomes as part of any business change, including acquired, reinsured or divested business.

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Risks related to regulatory and legal compliance

These include risks associated with prospective regulatory and legal changes and compliance with existing regulations and laws – including their retrospective application – with which the Group must comply with in the conduct of its business.

Prudential operates under the

ever-evolving requirements set out by diverse regulatory, legal and tax regimes which may impact Prudential’s business or the way in which it is conducted. This covers a broad range of risks including changes in government policy and legislation, capital control measures, and new regulations at either national or international level. In addition to the risks arising from regulatory change, the breadth of local and Group-wide regulatory arrangements presents the risk that regulatory requirements are not fully met, resulting in specific regulator interventions or actions including retrospective interpretation of standards by regulators which may result in regulatory censure or significant additional costs to the business. Furthermore, as the industry’s use of emerging technological tools and digital services increases, this is likely to lead to new and unforeseen regulatory issues and the Group is monitoring the regulatory developments and standards emerging around the governance and ethical use of technology and data.

In certain jurisdictions in which Prudential operates there are also 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. Decisions taken by regulators, including those related to solvency requirements, corporate or governance structures, capital allocation, financial reporting and risk management may have an impact on our business.

The focus of some governments toward more protectionist or restrictive economic and trade policies could

impact on the degree and nature of regulatory changes and Prudential’s competitive position in some geographic markets. This could take effect, for example, through increased friction in cross-border trade, capital controls or measures favouring local enterprises such as changes to the maximum level of non-domestic ownership by foreign companies. These developments continue to be monitored by the Group at a national and global level and these considerations form part of the Group’s ongoing engagement with government policy teams and regulators.

Further information on specific areas of regulatory and supervisory requirements and changes are included below.

Group-wide supervision

From 21 October 2019, Prudential’s Group-wide supervisor changed to the Hong Kong IA. As a result, the Group currently applies the local capital summation method (LCSM) to determine Group regulatory capital requirements (both minimum and prescribed levels). The enabling legislation for the Hong Kong IA’s GWS Framework was enacted in July 2020. The timing of finalisation and implementation of the GWS Framework remains uncertain, although it is expected to become effective in early 2021.

Global regulatory developments and systemic risk regulation

Efforts to curb systemic risk and promote financial stability are also under way. At the international level, the Financial Stability Board (FSB) continues to develop recommendations for the asset management and

insurance sectors, including ongoing assessment of systemic risk measures. The International Association of Insurance Supervisors (IAIS) has continued its focus on the following key developments.

In November 2019 the IAIS adopted the Common Framework (ComFrame) which establishes supervisory standards and guidance focusing on the effective group-wide supervision of Internationally Active Insurance Groups (IAIGs). Prudential was included in the first register of IAIGs released by the IAIS on 1 July 2020 and was designated an IAIG by the Hong Kong IA following an assessment against the established criteria in ComFrame.

The IAIS has also been developing the ICS (Insurance Capital Standard) as part of ComFrame. The implementation of ICS will be conducted in two phases: a five-year monitoring phase followed by an implementation phase. The Aggregation Method is one of the alternatives being considered to the default approach undertaken for the ICS during the monitoring period and the related proposals are being led by the National Association of Insurance Commissioners (NAIC). Alongside the current ICS developments, the NAIC is also developing its Group Capital Calculation (GCC) for the supervision of insurance groups in the US. The GCC is intended to be a risk-based capital (RBC) aggregation methodology. In developing the GCC, the NAIC will also consider Group capital developments by the US Federal Reserve Board, which will inform the US regulatory association in its construction of a US group capital calculation.

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The FSB has endorsed a new holistic framework (HF) for systemic risk for implementation by the IAIS in 2020 and suspended G-SII designations until a review to be undertaken in 2022. Many of the previous G-SII measures have already been adopted into the insurance core principles (ICPs) and ComFrame. As an IAIG, Prudential continues to be subject to these measures. The HF also includes a monitoring element for the identification of a build-up of systemic risk and to enable supervisors to take action where appropriate. As a result of the Covid-19 pandemic, this monitoring requirement has been replaced with a Covid-19-focused exercise for 2020. In June 2020 the IAIS published an application paper on the liquidity risk elements introduced into the ICPs and ComFrame. A public consultation on the development of liquidity metrics to be used as an ancillary indicator for monitoring is planned for Q4 2020, with a further consultation focused on macroeconomic elements expected to follow in 2021.

In the US, various initiatives are under way to introduce fiduciary obligations for distributors of investment products, which may reshape the distribution of retirement products. Jackson has introduced fee-based variable annuity products in response to the potential introduction of such rules, and we anticipate that the business’s strong relationships with distributors, history

of product innovation and efficient operations should further mitigate any impacts.

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

IFRS 17

In May 2017, the International Accounting Standards Board (IASB) published its replacement standard on insurance accounting IFRS 17, ‘Insurance Contracts’. Some targeted amendments to this standard, including to the effective date, were issued in June 2020. IFRS 17, ‘Insurance Contracts’, as amended, will introduce fundamental changes to the IFRS-based reporting of insurance entities that prepare accounts according to IFRS from 2023. IFRS 17 is expected to, among other things, include altering the timing of IFRS profit recognition, and the implementation of the standard is likely to require changes to the Group’s IT, actuarial and finance systems. The Group is reviewing the complex requirements of this standard and considering its potential impact.

Inter-bank offered rate reforms

In July 2014, the Financial Stability Board (FSB) announced widespread reforms to address the integrity and reliability of IBORs. The discontinuation of IBORs in their current form and their replacement with alternative risk-free reference rates such as the Sterling Overnight Index Average benchmark (SONIA) in the UK and the Secured Overnight Financing Rate (SOFR) in the US could, among other things, impact the Group through an adverse effect on the value of Prudential’s assets and liabilities which are linked to, or which reference IBORs, a reduction in market liquidity during any period of transition and increased legal and conduct risks to the Group arising from changes required to documentation and its related obligations to its stakeholders.

Risk management and mitigation of regulatory risk at Prudential 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;

• The consideration of risk themes in strategic decisions; and

• Ongoing engagement with national regulators, government policy teams and international standard setters.

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The Group’s ESG-related risks These include environmental risks associated with climate change (including physical and transition risks), social risks that arise from the diverse people and communities that the Group interacts with and governance-related risks.

The business environment in which policy, technology and changes in Prudential operates is continually market or investor sentiment. This changing and responding effectively ‘transition risk’ may adversely impact to those material risks associated with the valuation of investments held by the ESG themes is crucial in maintaining Group. The Group expects the physical Prudential’s brand and reputation, impacts of climate change, driven by its ability to attract and retain customers both specific short-term climate-related and staff, and in turn its financial events such as natural disasters and performance and delivery of its longer-term changes in the natural long-term strategy. The Group environment, to increasingly influence maintains active engagement with the longevity, mortality and morbidity its key stakeholders as it responds risk assessments of the Group’s product to ESG-related matters, including offerings. Climate-driven change in investors, customers, employees, countries in which Prudential, or its key governments, policymakers and third parties, operate could impact on regulators in its key markets, as well its operational resilience, underwriting as with industry bodies and forums – assumptions and could change its all of whom have expectations in this claims profile. More information about area which may differ. the activities the Group is undertaking to increase its understanding and risk Further information on ESG governance management of these climate-related is detailed in section 4 and further risks can be found in the Prudential plc detail on how the Group addresses ESG Report 2019.

Further information on ESG governance is detailed in section 4 and further detail on how the Group addresses material risks associated with ESG themes is included in the Prudential plc ESG Report 2019.

Social risks

Social risks that could impact Prudential include the emerging population risks associated with public health trends (such as an increase in obesity) and demographic changes (such as population urbanisation) which may impact customer lifestyles and therefore may impact claims against the Group’s insurance product offerings. As a life and health insurer, we are committed to playing a greater role in preventing and postponing illness in order to protect our customers. Further information about how we are investing in artificial intelligence technology to enable access to an affordable and quality healthcare

Environmental risks

The environmental risk associated with climate change is one ESG area that poses significant risks to Prudential and its customers. The global transition to a lower carbon economy could potentially see the financial assets of carbon-intensive companies re-price as a result of facing significantly higher costs or decreasing demand for their products and services. The speed of this transition, including the extent to which it is orderly and managed, will be influenced by factors such as public

digital offering can be found within the Pulse case study included in the ESG Report 2019. Other social risks may arise from a failure to consider the rights, diversity, well-being, and interests of people and communities in which the Group, or its third parties, operates. These risks are increased as Prudential operates in multiple jurisdictions with distinct local cultures and considerations. The Group assumes responsibilities as a responsible employer and is exposed to the risk of being unable to attract, retain and develop highly-skilled staff, which can be increased where Prudential does not have responsible working practices.

Governance risks

A failure to maintain high standards of corporate governance may adversely impact the Group and its customers, staff and employees, through poor decision-making and a lack of oversight of its key risks, particularly in joint ventures or partnerships where Prudential does not have direct overall control. Poor governance may arise where key governance committees have insufficient independence, a lack of diversity, skills or experience in their members, or unclear (or insufficient) oversight responsibilities and mandates. Inadequate oversight over remuneration increases the risk of poor senior management behaviours. Prudential operates across multiple jurisdictions and has a group and subsidiary governance structure which may add further complexity to these considerations.

Notes

• 1 Excluding assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds.

• 2 Based on hierarchy of Standard & Poor’s, Moody’s and Fitch, where available and if unavailable, NAIC and other external ratings and the internal ratings have been used.

• 3 Source of segmentation: Bloomberg Sector, Bloomberg Group and Merrill Lynch. Anything that cannot be identified from the three sources noted is classified as other. Excludes debt securities from other operations.

• 4 In 2020, to align more closely with the internal risk management analysis, the Group altered the compilation of its credit ratings analysis to use the middle of the Standard & Poor’s, Moody’s and Fitch ratings, where available. Where ratings are not available from these rating agencies, NAIC ratings (for the US), local external rating agencies’ ratings and lastly internal

ratings have been used. Securities with none of the ratings listed above are classified as unrated and included under the ‘below BBB- and unrated’ category. The total securities (excluding sovereign debt) that were unrated at 30 June 2020 were $788 million (30 June 2019: $794 million; 31 December 2019: $648 million). Previously, Standard & Poor’s ratings were used where available and if not, Moody’s and then Fitch were used as alternatives. Additionally, government debt is shown separately from the rating breakdowns in order to provide a more focused view of the credit portfolio.

• 5 Excluding assets in consolidated funds financed largely by external third-party (non-recourse) borrowings, for which the Group’s exposure is limited to the investment held by Jackson. Including these assets, the US corporate debt portfolio is 93 per cent investment grade.

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03 International Financial Reporting Standards (IFRS) basis results

Standards is results
	Page
Index to Group IFRS fnancial results Statement of Directors’ responsibilities Independent review report to Prudential plc	50 102 103

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Index to Group IFRS financial results

Page Condensed consolidated income statement 51 Condensed consolidated statement of comprehensive income 53 Condensed consolidated statement of changes in equity 54 Condensed consolidated statement of financial position 57 Condensed consolidated statement of cash flows 58

Notes		Page
A	Basis of preparation
A1	Basis of preparation and exchange rates	59
A2 B B1 B1.1 B1.2 B1.3 B2	New accounting pronouncements in 2020 Earnings performance Analysis of performance by segment Segment results Short-term fuctuations in investment returns on shareholder-backed business Determining operating segments and performance measure of operating segments Acquisition costs and other expenditure	60 61 62 65 66
B3 B4	Additional segmental analysis of revenue Tax charge	66
B4.1	Total tax charge by nature	67
B4.2	Reconciliation of shareholder efective tax rate	68
B5	Earnings per share	69
B6 C	Dividends Financial position	71
C1	Group assets and liabilities by business type	72
C1.1	Additional analysis of debt securities	77
C1.2	Additional analysis of US mortgage loans	79
C2	Fair value measurement	80
C3	Policyholder liabilities and unallocated surplus
C3.1	Group overview	86
C3.2	Asia insurance operations	90
C3.3	US insurance operations	92

Notes		Page
C4	Intangible assets
C4.1	Goodwill	93
C4.2	Deferred acquisition costs and other	93
	intangible assets
C5	Borrowings
C5.1	Core structural borrowings of	95
	shareholder-fnanced businesses
C5.2	Operational borrowings	95
C6	Sensitivity analysis to key market risks	96
C6.1	Sensitivity to interest rate risk	96
C6.2	Sensitivity to equity and property price risk	98
C7	Deferred tax	99
C8	Share capital, share premium and own shares	99
D	Other information
D1	Gain (loss) attaching to corporate transactions	101
D2	Contingencies and related obligations	101
D3	Post balance sheet events	101
D4	Related party transactions	101

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Condensed consolidated income statement

Note	2020$m	2019$m
	Half year	Half year Full year*
Continuing operations: Gross premiums earned Outward reinsurancepremiums B3		21,081 45,064 (673) (1,583)
	19842
	, (30,149)
Earned premiums, net of reinsurance B3 Investment return Other income	(10307)	20,408 43,481 31,873 49,555 258 700
	, 3910
	, 333
Total revenue, net of reinsurance B3	(6,064)	52,539 93,736
Benefts and claims and movement in unallocated surplus of with-profts funds, net of reinsurance Acquisition costs and other expenditure B2 Finance costs: interest on core structural borrowings of shareholder-fnanced businesses Gain (loss) attachingto corporate transactions	9855	(47,448) (83,905) (3,508) (7,283) (293) (516) 17 (142)
	, (3032)
	, (163)
	–
Total charges net of reinsurance	6,660	(51,232) (91,846)
Share ofproft fromjoint ventures and associates, net of related tax	133	137 397
Proft before tax_(being tax attributable to shareholders’ and policyholders’_ _returns) _note (i) Remove tax charge attributable topolicyholders’ returns	729	1,444 2,287 (285) (365)
	(66)
Proft before tax attributable to shareholders’ returns B1.1 Total tax charge attributable to shareholders’ and policyholders’ returns B4 Remove tax charge attributable to policyholders’ returns Tax (charge) credit attributable to shareholders’ returns B4	663	1,159 1,922
	(195)	(286) (334) 285 365
	66
	(129)	(1) 31
Proft from continuing operations Discontinued UK and Europe operations’ proft after tax Re-measurement of discontinued operations on demerger Cumulative exchange loss recycled from other comprehensive income Proft (loss) from discontinued operationsnote (ii)	534	1,158 1,953
	–	835 1,319 – 188 – (2,668)
	–
	–
	–	835 (1,161)
Proft for theperiod	534	1,993 792
Attributable to: Equity holders of the Company: From continuing operations From discontinued operations Non-controllinginterests from continuingoperations		1,152 1,944 835 (1,161) 6 9
	512
	–
	22
Proft for theperiod	534	1,993 792
Earningsper share (in cents) Note	2020	2019
	Half year	Half year Full year*
Based on proft attributable to equity holders of the Company: B5 Basic Based on proft from continuing operations Based onproft (loss) from discontinued operations		44.6¢ 75.1¢ 32.3¢ (44.8)¢
	19.7¢
	–
Total	19.7¢	76.9¢ 30.3¢
Diluted Based on proft from continuing operations Based onproft (loss) from discontinued operations		44.6¢ 75.1¢ 32.3¢ (44.8)¢
	19.7¢
	–
Total	19.7¢	76.9¢ 30.3¢

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CONDENSED CONSOLIDATED INCOME STATEMENT CONTINUED

Dividendsper share (in cents) Note	2020	2019
	Half year	Half year Full year*
Dividends relating to reporting period: B6 First interim ordinary dividend Second interim ordinarydividend		20.29¢ 20.29¢ – 25.97¢
	5.37¢
	–
Total	5.37¢	20.29¢ 46.26¢
Dividends paid in reporting period: B6 Current year frst interim dividend Second interim ordinarydividend forprioryear		– 20.29¢ 42.89¢ 42.89¢
	–
	25.97¢
Total	25.97¢	42.89¢ 63.18¢

• The half year 2019 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars at 31 December 2019.

Notes

(i) This measure is the formal profit before tax measure under IFRS. It is not the result attributable to shareholders principally because total corporate tax of the Group includes 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 IFRS profit before tax measure is not representative of pre-tax profit attributable to shareholders as it is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for tax borne by policyholders.

(ii) Discontinued operations for half year and full year 2019 related to the UK and Europe operations (M&G plc) that were demerged from the Group in October 2019.

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Condensed consolidated statement of comprehensive income

of comprehensive income
Note	2020$m	2019$m
	Half year	Half year Full year*
Continuing operations Proft for the period Other comprehensive income (loss): Items that may be reclassifed subsequently to proft or loss Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the period Related tax		1,158 1,953 45 152 1 (15)
	534
	(201)
	–
	(201)	46 137
Valuation movements on available-for-sale debt securities: Unrealised gains arising in the period (before the impact of Jackson’s reinsurance transaction with Athene): Net unrealised gains on holdings arising in the period Deduct net gains included in the income statement on disposal and impairment Related change in amortisation of deferred acquisition costs C4.2 Related tax
	2737	3,411 4,208 (25) (185)
	, (197)
	2,540	3,386 4,023 (560) (631) (593) (713)
	(287)
	(472)
	1,781	2,233 2,679
Impact of Jackson’s reinsurance transaction with Athene: D1 Gains recycled to the income statement on transfer of debt securities to Athene Related change in amortisation of deferred acquisition costs C4.2 Related tax
	(2817)	– – – – – –
	, 535
	479
	(1,803)	– –
Total valuation movements on available-for-sale debt securities	(22)	2,233 2,679
Total items that maybe reclassifed subsequentlytoproft or loss	(223)	2,279 2,816
Items that will not be reclassifed to proft or loss Shareholders’ share of actuarial gains and losses on defned beneft pension schemes: Net actuarial losses on defned beneft pension schemes Related tax Total items that will not be reclassifed toproft or loss
	–	(112) (108) 18 19
	–
	–	(94) (89)
Other comprehensive (loss) income	(223)	2,185 2,727
Total comprehensive income for the period from continuingoperations	311	3,343 4,680
Proft (loss) for the period from discontinued operations Cumulative exchange loss recycled through proft or loss Other items, net of related tax Total comprehensive income for the period from discontinued operations†
	–	835 (1,161) – 2,668 4 203
	–
	–
	–	839 1,710
Total comprehensive income for theperiod	311	4,182 6,390
Attributable to: Equity holders of the Company: From continuing operations From discontinued operations Non-controllinginterests from continuingoperations		3,337 4,669 839 1,710 6 11
	290
	–
	21
Total comprehensive income for theperiod	311	4,182 6,390

• The half year 2019 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars at 31 December 2019.

† Discontinued operations for half year and full year 2019 related to the UK and Europe operations (M&G plc) that were demerged from the Group in October 2019.

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Condensed consolidated statement of changes in equity

Note	Period ended 30 June 2020$m
	Share capital Share premium Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity Non- controlling interests Total equity
Reserves Proft for the period Other comprehensive loss
	– – 512 – – 512 22 534
	– – – (200) (22) (222) (1) (223)
Total other comprehensive income (loss) for the period Dividends B6 Reserve movements in respect of share-based payments Efect of transactions relating to non-controlling interests Share capital and share premium New share capital subscribed C8 Treasury shares Movement in own shares in respect of share-basedpaymentplans	– – 512 (200) (22) 290 21 311
	– – (674) – – (674) (16) (690)
	– – 29 – – 29 – 29
	– – 32 – – 32 – 32
	– 10 – – – 10 – 10
	– – (54) – – (54) – (54)
Net increase (decrease) in equity Balance at beginningofperiod	– 10 (155) (200) (22) (367) 5 (362)
	172 2,625 13,575 893 2,212 19,477 192 19,669
Balance at end ofperiod	172 2,635 13,420 693 2,190 19,110 197 19,307

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Note	Period ended 30 June 2019*$m
	Share capital Share premium Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity Non- controlling interests Total equity
Reserves Proft from continuing operations for the period Other comprehensive income (loss) from continuingoperations	– – 1,152 – – 1,152 6 1,158 – – (94) 46 2,233 2,185 – 2,185
Total comprehensive income from continuing operations for the period Total comprehensive income from discontinued operations for theperiod	– – 1,058 46 2,233 3,337 6 3,343 – – 838 1 – 839 – 839
Total comprehensive income (loss) for the period Dividends B6 Reserve movements in respect of share-based payments Share capital and share premium New share capital subscribed C8 Foreign exchange translation diferences due to change in presentation currency C8 Treasury shares Movement in own shares in respect of share-based payment plans Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS	– – 1,896 47 2,233 4,176 6 4,182 – – (1,108) – – (1,108) – (1,108) – – 3 – – 3 – 3 – 13 – – – 13 – 13 (1) (3) – – – (4) – (4) – – (12) – – (12) – (12) – – 1 – – 1 – 1
Net increase (decrease) in equity Balance at beginningofperiod	(1) 10 780 47 2,233 3,069 6 3,075 166 2,502 21,817 (2,050) (467) 21,968 23 21,991
Balance at end ofperiod	165 2,512 22,597 (2,003) 1,766 25,037 29 25,066

• The half year 2019 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars at 31 December 2019.

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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONTINUED

Note	Year ended 31 December 2019$m
	Share capital Share premium Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity Non- controlling interests Total equity*
Reserves Proft from continuing operations Other comprehensive income (loss) from continuingoperations	– – 1,944 – – 1,944 9 1,953 – – (89) 135 2,679 2,725 2 2,727
Total comprehensive income from continuing operations Total comprehensive income (loss) from discontinued operations*	– – 1,855 135 2,679 4,669 11 4,680 – – (1,098) 2,808 – 1,710 – 1,710
Total comprehensive income for the year Demerger dividend in specie of M&G plc B6 Other dividends B6 Reserve movements in respect of share-based payments Efect of transactions relating to non-controlling interests Share capital and share premium New share capital subscribed C8 Impact of change in presentation currency in relation to share capital and share premium C8 Treasury shares Movement in own shares in respect of share-based payment plans Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS	– – 757 2,943 2,679 6,379 11 6,390 – – (7,379) – – (7,379) – (7,379) – – (1,634) – – (1,634) – (1,634) – – 64 – – 64 – 64 – – (143) – – (143) 158 15 – 22 – – – 22 – 22 6 101 – – – 107 – 107 – – 38 – – 38 – 38 – – 55 – – 55 – 55
Net increase (decrease) in equity Balance at beginningofyear	6 123 (8,242) 2,943 2,679 (2,491) 169 (2,322) 166 2,502 21,817 (2,050) (467) 21,968 23 21,991
Balance at end ofyear	172 2,625 13,575 893 2,212 19,477 192 19,669

• The $2,808 million movement in translation reserve from discontinued operations is recognised in other comprehensive income and represents an exchange gain of $140 million on translating the results from discontinued operations during the period of ownership in 2019 and the recycling of the cumulative exchange loss of $2,668 million through the profit or loss upon the demerger.

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Condensed consolidated statement of financial position

of fnancial position
Note	2020$m	2019$m
	30 Jun	30 Jun 31 Dec*
Assets Goodwill C4.1 Deferred acquisition costs and other intangible assets C4.2 Property, plant and equipment Reinsurers’ share of insurance contract liabilitiesnote (i) Deferred tax assets C7 Current tax recoverable Accrued investment income Other debtors Investment properties Investments in joint ventures and associates accounted for using the equity method Loans Equity securities and holdings in collective investment schemesnote (ii) Debt securitiesnote (ii) Derivative assets Other investmentsnote (ii) Deposits Assets held for distributionnote (iii) Cash and cash equivalents		649 969 16,111 17,476 999 1,065 12,919 13,856 3,515 4,075 472 492 1,695 1,641 2,560 2,054 14 25 1,311 1,500 15,925 16,583 233,757 247,281 126,856 134,570 1,555 1,745 1,220 1,302 1,898 2,615 277,861 – 6,628 6,965
	942
	18604
	, 964
	44918
	, 4259
	, 387
	1517
	, 3211
	, 23
	1507
	, 14910
	, 234698
	, 121462
	, 2459
	, 1569
	, 3351
	, –
	8,384
Total assets C1	463,165	705,945 454,214
Equity Shareholders’ equity Non-controllinginterests		25,037 19,477 29 192
	19,110
	197
Total equity C1	19,307	25,066 19,669
Liabilities Contract liabilities (including amounts in respect of contracts classifed as investment contracts under IFRS 4) C3.1 Unallocated surplus of with-profts funds C3.1 Core structural borrowings of shareholder-fnanced businesses C5.1 Operational borrowings Obligations under funding, securities lending and sale and repurchase agreements Net asset value attributable to unit holders of consolidated investment funds Deferred tax liabilities C7 Current tax liabilities Accruals, deferred income and other liabilities Provisions Derivative liabilities Liabilities held for distributionnote (iii)		362,933 385,678 3,747 4,750 9,470 5,594 2,421 2,645 8,598 8,901 4,432 5,998 4,710 5,237 406 396 13,487 14,488 323 466 1,320 392 269,032 –
	391924
	, 5512
	, 6499
	, 2245
	, 9085
	, 5967
	, 5278
	, 428
	16208
	, 245
	467
	–
Total liabilities C1	443,858	680,879 434,545
Total equityand liabilities C1	463,165	705,945 454,214

• The half year 2019 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars at 31 December 2019.

Notes

(i) At 30 June 2020, reinsurers’ share of insurance contract liabilities include $27.7 billion in respect of the reinsurance of substantially all of Jackson’s in-force fixed and fixed indexed annuity liabilities to Athene Life Re Ltd, as discussed in note D1.

(ii) Included within equity securities and holdings in collective investment schemes, debt securities and other investments are $265 million of lent securities as at 30 June 2020 (30 June 2019: $10 million; 31 December 2019: $90 million).

(iii) Assets and liabilities held for distribution at 30 June 2019 related to the Group’s UK and Europe operations (M&G plc) which were demerged in October 2019.

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Condensed consolidated statement of cash flows

Condensed consolidated statement of cash fows
Note	2020$m	2019$m
	Half year	Half year Full year*
Continuing operations: Cash fows from operating activities Proft before tax_(being tax attributable to shareholders’ _and policyholders’ returns) Adjustments to proft before tax for non-cash movements in operating assets and liabilities: Investments Other non-investment and non-cash assets Policyholder liabilities (including unallocated surplus) Other liabilities (including operational borrowings) Other itemsnote (i)		1,444 2,287 (38,673) (60,812) (2,685) (2,487) 34,702 56,067 4,072 5,097 102 (361)
	729
	24670
	, (32617)
	, 8188
	, 1466
	, (327)
Net cash fows from operatingactivities	2,109	(1,038) (209)
Cash fows from investing activities Net cash fows from purchases and disposals of property, plant and equipment Net cash fows from other investingactivitiesnote (ii)		(21) (64) (102) (260)
	(43)
	(733)
Net cash fows from investingactivities	(776)	(123) (324)
Cash fows from fnancing activities Structural borrowings of shareholder-fnanced operations:note (iii) C5.1 Issuance of debt, net of costs Redemption of subordinated debt Fees paid to modify terms and conditions of debt issued by the Group Interest paid Equity capital: Issues of ordinary share capital External dividends: Dividends paid to the Company’s shareholders B6 Dividendspaid to non-controllinginterests		– 367 (504) (504) (182) (182) (289) (526) 13 22 (1,108) (1,634) – –
	982
	–
	–
	(157)
	10
	(674)
	(16)
Net cash fows from fnancingactivities	145	(2,070) (2,457)
Net increase (decrease) in cash and cash equivalents from continuing operations Net cash fows from discontinued operationsnote (iv) Cash and cash equivalents at beginning of period Efect of exchange rate changes on cash and cash equivalents	1478	(3,231) (2,990) 292 (5,690) 15,442 15,442 10 203
	, –
	6965
	, (59)
Cash and cash equivalents at end ofperiod	8,384	12,513 6,965
Comprising: Cash and cash equivalents from continuing operations Cash and cash equivalents from discontinued operations		6,628 6,965 5,885 –
	8384
	, –

• The half year 2019 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars at 31 December 2019.

Notes

(i) 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.

(ii) Net cash flows from other investing activities include amounts paid for distribution rights and cash flows arising from the acquisitions and disposals of businesses. (iii) Structural borrowings of shareholder-financed businesses exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed businesses and other borrowings of shareholder-financed businesses. Cash flows in respect of these borrowings are included within cash flows from operating activities. The changes in the carrying value of the structural borrowings of shareholder-financed businesses for the Group (including both continuing and discontinued operations in 2019) are analysed below:

Balance at beginning of period	Cash movements$m	Non-cash movements$m Balance at end of period Foreign exchange movement Demerger of UK and Europe operations Other movements
	Issue of debt Redemption of debt
30 Jun 2020 5,594 30 Jun 2019 9,761 31 Dec 2019 9,761	982 –	(84) – 7 6,499
	– (504) 367 (504)	(6) 219 – 9,470 116 (4,161) 15 5,594

(iv) Discontinued operations for half year and full year 2019 related to the UK and Europe operations (M&G plc) that were demerged from the Group in October 2019. The half year and full year 2019 cash flows shown above are presented excluding any transactions between continuing and discontinued operations.

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A Basis of preparation

A1 Basis of preparation and exchange rates

These condensed consolidated interim financial statements for the six months ended 30 June 2020 have been prepared in accordance with IAS 34 ‘Interim Financial Reporting’ as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The Group’s policy for preparing this interim financial information is to use the accounting policies adopted by the Group in its last consolidated financial statements, as updated by any changes in accounting policies it intends to make in its next consolidated financial statements as a result of new or amended IFRS and other policy improvements. EU-endorsed IFRS may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 30 June 2020, there were no unendorsed standards effective for the period ended 30 June 2020 which impacted the condensed consolidated financial statements of the Group, and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.

The IFRS basis results for half year 2020 and half year 2019 are unaudited. The 2019 full year IFRS basis results have been derived from the 2019 statutory accounts. The auditors have reported on the 2019 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.

Going concern basis of accounting

Prudential aims to meet the savings and investment needs of its customers, which by their very nature can often be over a timeframe of many years. The Group as a whole and each of its life assurance operations are subject to extensive regulation and supervision, which are designed primarily to reinforce the Group’s management of its long-term solvency, liquidity and viability to ensure that it can continue to meet obligations to policyholders.

Risk management is core to the Group‘s activities. In assessing going concern, the Directors took account of the Group’s principal risks and the mitigations available to it which are described in the Group Chief Risk and Compliance Officer’s report. After making sufficient enquiries the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for a period of at least 12 months from the date that these interim financial statements are approved. No material uncertainties that may cast significant doubt on the ability of the Group to continue as a going concern have been identified.

In half year 2020, the Covid-19 pandemic has impacted the global economy and the Group’s individual markets to varying degrees and at different periods, and the full extent of the longer-term impacts are currently uncertain. The Directors have made the assessment of going concern taking into account both the Group’s current performance and the Group’s outlook. In particular, the Directors considered the adequacy of the Group’s solvency, liquidity and financial performance using revised projections from the previous business plan that reflected the shift in market conditions as a result of Covid-19 together with the impact of targeted related management actions.

In terms of liquidity, at 30 June 2020, the Group had central cash and short-term investment balances of $1.9 billion as set out in the Group Chief Financial Officer and Chief Operating Officer’s report. This amount has been subject to stress testing that assumes the closure of short-term debt markets, as well as additional calls on liquidity by the business units. This stress testing allows for the fact that the Group has undrawn liquidity facilities of $2.6 billion available to it.

To factor in the uncertainty of the longer-term impacts of Covid-19, a number of stress scenarios have been assessed, for example scenarios of different durations of lockdown and the associated recovery back to a normalised level of sales, with stress scenarios assuming a significant overall contraction in sales and worsened market conditions compared to 2019.

The Directors noted the effect of a number of stresses on the Group’s capital position, including those set out in note I(i) Group capital position within Additional Financial Information. The Group was considered to have sufficient regulatory capital to meet stressed changes in market conditions that are severe but plausible. For the Group’s US operations, the beneficial impact on the local RBC solvency position of the equity investment by Athene Life Re Ltd in July 2020 (as discussed in note D3) was also factored into the assessment.

The Directors therefore consider it appropriate to continue to adopt the going concern basis of accounting in preparing these interim financial statements for the period ended 30 June 2020.

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A BASIS OF PREPARATION CONTINUED

A1 Basis of preparation and exchange rates continued

Exchange rates

The exchange rates applied for balances and transactions in the presentation currency of the Group, US dollars ($), and other currencies were:

$: Local currency	Closing rate as at period end	Average rate for the period to date
	30 Jun 2020 30 Jun 2019 31 Dec 2019	Half year 2020 Half year 2019 Full year 2019
China Hong Kong Indonesia Malaysia Singapore Thailand UK Vietnam	7.07 6.87 6.97 7.75 7.81 7.79 14,285.00 14,127.50 13,882.50 4.29 4.13 4.09 1.40 1.35 1.34 30.87 30.69 29.75 0.81 0.79 0.75 23,206.00 23,305.00 23,172.50	7.03 6.78 6.91 7.76 7.84 7.84 14,574.24 14,192.79 14,140.84 4.25 4.12 4.14 1.40 1.36 1.36 31.62 31.61 31.05 0.79 0.77 0.78 23,303.21 23,253.04 23,227.64

Certain notes to the financial statements present half year 2019 comparative information at constant exchange rates (CER), in addition to the reporting at actual exchange rates (AER) used throughout the condensed consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the statement of financial position. CER results are calculated by translating prior period results using the current period foreign exchange rate, ie current period average rates for the income statement and current period closing rates for the statement of financial position.

The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group’s consolidated financial statements for the year ended 31 December 2019, as disclosed in the 2019 statutory accounts, aside from those discussed in note A2 below.

A2 New accounting pronouncements in 2020

The IASB has issued the following new accounting pronouncements to be effective from 1 January 2020:

• Amendments to IAS 1 and IAS 8 ‘Definition of Material’;

• Amendment to IFRS 3 ‘Business Combinations’; and

• Amendments to IFRS 9, IAS 39 and IFRS 7 ‘Interest Rate Benchmark Reform’.

The adoption of these pronouncements have had no significant impact on the Group financial statements.

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B Earnings performance

B1 Analysis of performance by segment

B1.1 Segment results

B1.1 Segment results
Note	2020$m	2019$m	2020 vs 2019%	2019$m
	Half year	AER Half year note (i) CER Half year note (i)	AER Half year note (i) CER Half year note (i)	AER Full year note (i)
Continuing operations: Asia Insurance operations Asset management		1,417 1,396 133 130	12% 14% 8% 10%	2,993 283
	1590
	, 143
Total Asia	1,733	1,550 1,526	12% 14%	3,276
US Insurance operations (Jackson) Asset management		1,556 1,556 16 16	(19)% (19)% (38)% (38)%	3,038 32
	1256
	, 10
Total US	1,266	1,572 1,572	(19)% (19)%	3,070
Total segmentproft	2,999	3,122 3,098	(4)% (3)%	6,346
Other income and expenditure: Investment return and other income Interest payable on core structural borrowings Corporate expenditurenote (ii)		32 31 (293) (286) (212) (211)	(44)% (42)% 44% 43% 3% 3%	50 (516) (460)
	18
	(163)
	(205)
Total other income and expenditure	(350)	(473) (466)	26% 25%	(926)
Restructuring and IFRS 17 implementation costs	(108)	(30) (28)	(260)% (286)%	(110)
Adjusted operating proft B1.3 Short-term fuctuations in investment returns on shareholder-backed business B1.2 Amortisation of acquisition accounting adjustmentsnote (iii) Gain (loss) attaching to corporate transactions D1	2541	2,619 2,604 (1,455) (1,445) (22) (21) 17 20	(3)% (2)% (86)% (87)% 18% 14% n/a n/a	5,310 (3,203) (43) (142)
	, (2706)
	, (18)
	846
Proft before tax attributable to shareholders Tax (charge) credit attributable to shareholders’ returns B4	663	1,159 1,158 (1) 1	(43)% (43)% n/a n/a	1,922 31
	(129)
Proft for the period from continuing operations Discontinued UK and Europe operations’ proft after tax Re-measurement of discontinued operations on demerger Cumulative exchange loss recycled from other comprehensive income Proft (loss) for the period from discontinued operations	534	1,158 1,159	(54)% (54)% n/a n/a n/a n/a n/a n/a n/a n/a	1,953
	–	835 813 – – – –		1,319 188 (2,668)
	–
	–
	–	835 813		(1,161)
Proft for theperiod	534	1,993 1,972	(73)% (73)%	792
Attributable to: Equity holders of the Company: From continuing operations From discontinued operations Non-controlling interests from continuingoperations		1,152 1,153 835 813 6 6	(56)% (56)% n/a n/a 267% 267%	1,944 (1,161) 9
	512
	–
	22
	534	1,993 1,972	(73)% (73)%	792

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B EARNINGS PERFORMANCE CONTINUED

B1 Analysis of performance by segment continued

B1.1 Segment results continued

Basic earnings per share (in cents) Note B5	2020	2019	2020 vs 2019%	2019
	AER Half year note (i)	AER Half year note (i) CER Half year note (i)	AER Half year note (i) CER Half year note (i)	AER Full year note (i)
Based on adjusted operating proft, net of tax, from continuing operationsnote (iv) Based on proft for the period from continuing operations Based on proft (loss) for the period from discontinued operations	79.0¢	84.5¢ 84.3¢ 44.6¢ 44.8¢ 32.3¢ 31.5¢	(7)% (6)% (56)% (56)% n/a n/a	175.0¢ 75.1¢ (44.8)¢
	19.7¢
	–

Notes

(i) For definitions of AER and CER refer to note A1.

(ii) Corporate expenditure as shown above is primarily for head office functions in London and Hong Kong.

(iii) Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson which was acquired in 2012.

(iv) Tax charges have been reflected as operating and non-operating in the same way as for the pre-tax items. Further details on tax charges are provided in note B4.

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

	2020$m	2019$m
	Half year	Half year Full year
Asia operationsnote (i) US operationsnote (ii) Other operations	(448)	544 657 (1,968) (3,757) (31) (103)
	(2288)
	, 30
Total	(2,706)	(1,455) (3,203)

Notes

(i) Asia operations

In Asia, the negative short-term fluctuations of $(448) million (half year 2019: positive $544 million; full year 2019: positive $657 million) reflect the net value movements on shareholders’ assets and policyholder liabilities arising from market movements in the period. In half year 2020 falling interest rates in certain parts of Asia led to lower discount rates on policyholder liabilities under the local reserving basis applied, which were not fully offset by unrealised bond gains in the period. This together with the effect of falling equity markets led to the overall negative short-term investment fluctuations in Asia.

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(ii) US operations

The short-term fluctuations in investment returns in the US are reported net of the related charge for amortisation of deferred acquisition costs (DAC) of $(50) million as shown in note C4.2 (half year 2019: credit of $616 million; full year 2019: credit of $1,248 million) and comprise amounts in respect of the following items:

	2020$m	2019$m
	Half year	Half year Full year
Net equity hedge resultnote (a) Other than equity-related derivativesnote (b) Debt securitiesnote (c) Equity-type investments: actual less longer-term return Other items	(4378)	(2,529) (4,582) 560 678 14 156 (9) 18 (4) (27)
	, 2114
	, 175
	(128)
	(71)
Total net of related DAC amortisation	(2,288)	(1,968) (3,757)

Notes

(a) The purpose of the inclusion of net equity hedge result in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to the accounting effect of market movements on both the value of guarantees in Jackson’s products including variable annuities and on the related derivatives used to manage the exposures inherent in these guarantees. The level of fees recognised in non-operating profit is determined by reference to that allowed for within the reserving basis. The variable annuity guarantees are valued in accordance with either Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures or ASC Topic 944, Financial Services – Insurance depending on the type of guarantee. Both approaches require an entity to determine the total fee (‘the fee assessment’) that is expected to fund future projected benefit payments arising using the assumptions applicable for that method. The method under ASC Topic 820 requires this fee assessment to be fixed at the time of issue. As the fees included within the initial fee assessment are earned, they are included in non-operating profit to match the corresponding movement in the guarantee liability. Other guarantee fees are included in operating profit, which in half year 2020 was $350 million (half year 2019: $341 million; full year 2019: $699 million), pre-tax and net of related DAC amortisation. As the Group applies US GAAP for the measured value of the product guarantees, the net equity hedge result also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ.

The net equity hedge result therefore includes significant accounting mismatches and other factors that do not represent the economic result. These other factors include:

– The variable annuity guarantees and fixed indexed annuity embedded options being only partially fair valued under ‘grandfathered’ US GAAP;

– The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and

– Jackson’s management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed volatility levels.

The net equity hedge result can be summarised as follows:

volatility levels. The net euit hede result can be summarised as follows:
qy g	2020$m	2019$m
	Half year	Half year Full year
Fair value movements on equity hedge instruments Accounting value movements on the variable and fxed indexed annuity guarantee liabilities* Fee assessments net of claim payments	(301)	(3,190) (5,314) 294 (22) 367 754
	(4503)
	, 426
Total net of related DAC amortisation	(4,378)	(2,529) (4,582)

• The value movement on the variable annuity guarantees and fixed indexed annuity options is discussed in the Group Chief Financial Officer and Chief Operating Officer’s report.

(b) The fluctuations for other than equity-related derivatives comprise the net effect of:

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

• Fair value movements on the Guaranteed Minimum Income Benefit (GMIB) reinsurance asset that are not matched by movements in the underlying GMIB liability, which is not fair valued; and

• Related amortisation of DAC.

The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the variable annuity guarantees and fixed indexed annuity embedded options described in note (a) above. Accounting mismatches arise because of differences between the measurement basis and presentation of the derivatives, which are fair valued with movements recorded in the income statement, and the exposures they are intended to manage.

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B EARNINGS PERFORMANCE CONTINUED

B1 Analysis of performance by segment continued

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

S	hort-term fuctuations in investment returns on shareholder-backed b	usinesscontin	ued
(c)	Short-term fuctuations related to debt securities is analysed below:	2020$m	2019$m
		Half year	Half year Full year
	Credits (charges) in the period: Losses on sales of impaired and deteriorating bonds Bond write-downs Recoveries/reversals		(24) (28) (1) (15) 1 1
		(148)
		(31)
		1
	Total credits (charges) in the period Risk margin allowance deducted from adjusted operating proft*	(178)	(24) (42) 54 109
		55
		(123)	30 67
	Interest-related realised gains (losses): Gains (losses) arising in the period† Amortisation of gains and losses arising in current and prior periods to adjusted operating proft		42 220 (59) (129)
		369
		(67)
		302	(17) 91
	Related amortisation of deferred acquisition costs	(4)	1 (2)
	Total short-term fuctuations related to debt securities net of related DAC amortisation	175	14 156

• The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in adjusted operating profit with variations from period to period included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in adjusted operating profit of Jackson for half year 2020 is based on an average annual risk margin reserve of 18 basis points (half year 2019: 18 basis points;

full year 2019: 17 basis points) on average book values of $62.3 billion (half year 2019: $60.0 billion; full year 2019: $62.6 billion) as shown below:

Moody’s rating category (or equivalent under NAIC ratings of mortgage-backed securities)	Half year 20	20	Half year 20	19	Full year 201	9
	Average book value $m RMR %	Annual expected loss $m	Average book value $m RMR %	Annual expected loss $m	Average book value $m RMR %	Annual expected loss $m
A3 or higher Baa1, 2 or 3 Ba1, 2 or 3 B1, 2 or 3 Below B3	39118 0.10	(40)	34,318 0.10 24,385 0.23 1,008 0.93 246 2.62 37 3.42	(36) (55) (10) (6) (1)	38,811 0.10 22,365 0.24 1,094 0.85 223 2.56 75 3.39	(38) (53) (9) (6) (3)
	, 21521 0.24	(51)
	, 1383 0.74	(10)
	, 200 2.39	(5)
	108 3.36	(4)
Total	62,330 0.18	(110)	59,994 0.18	(108) 18	62,568 0.17	(109) 19
Related amortisation of deferred acquisition costs Risk margin reserve charge to adjusted operating proft for longer-term credit-related losses
		20
		(90)		(90)		(90)

† Excluding the realised gains that are part of the gain arising in respect of the reinsured Jackson’s in-force fixed and fixed indexed annuity liabilities to Athene Life Re Ltd, as discussed in note D1.

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 gain of $2,253 million for net unrealised gains arising during the period on debt securities classified as available-for-sale net of related amortisation of deferred acquisition costs (half year 2019: gain of $2,826 million; full year 2019: gain of $3,392 million for net unrealised losses), together with a pre-tax loss of $(2,282) million for the recycling of the gains on transfer of debt securities to Athene (see note D1) to the income statement, net of related amortisation of deferred acquisition costs. 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 C1.1.

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

The Group’s operating segments for financial reporting purposes are defined and presented in accordance with IFRS 8 ‘Operating Segments’ on the basis of the management reporting structure and its financial management information.

Under the Group’s management and reporting structure, its chief operating decision maker is the Group Executive Committee (GEC). In the management structure, responsibility is delegated to the Chief Executive Officers of the Group’s Asia and US business units for the day-to-day management of their business units (within the framework set out in the Group Governance Manual). Financial management information used by the GEC aligns with these business segments. These operating segments derive revenue from both insurance and asset management activities.

Operations which do not form part of any business unit are reported as ‘Unallocated to a segment’. These include head office costs in London and Hong Kong. The Group’s Africa operations and treasury function do not form part of any operating segment under the structure, and their assets and liabilities and profit or loss before tax are not material to the overall financial position of the Group. The Group’s treasury function and Africa operations are therefore also reported as ‘Unallocated to a segment’.

Performance measure

The performance measure of operating segments utilised by the Company is adjusted IFRS operating profit based on longer-term investment returns (adjusted operating profit), as described below. This measurement basis distinguishes adjusted operating profit from other constituents of total profit or loss for the period as follows:

• Short-term fluctuations in investment returns on shareholder-backed business. This includes the impact of short-term market effects on the carrying value of Jackson’s guarantee liabilities and related derivatives as explained below;

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

• Gain or loss on corporate transactions, such as the effect of the Jackson’s reinsurance arrangement with Athene Life Re Ltd in half year 2020, disposals undertaken and costs connected to the demerger of M&G plc from Prudential plc in 2019.

The determination of adjusted operating profit 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 2019.

For Group debt securities at 30 June 2020 held by the insurance operations in Asia and the US, the level of unamortised interestrelated realised gains and losses related to previously sold bonds for the Group was a net gain of $1,301 million (30 June 2019: net gain of $738 million; 31 December 2019: net gain of $916 million).

For equity-type securities, the longer-term rates of return are estimates of the long-term trend investment returns for income and capital having regard to past performance, current trends and future expectations. Different rates apply to different categories of equity-type securities.

• For Asia insurance operations, investments in equity securities held for non-linked shareholder-backed business amounted to $5,712 million as at 30 June 2020 (30 June 2019: $2,904 million; 31 December 2019: $3,473 million). The longer-term rates of return applied in half year 2020 ranged from 4.6 per cent to 17.6 per cent (30 June 2019: 5.2 per cent to 17.6 per cent; 31 December 2019: 5.0 per cent to 17.6 per cent) with the rates applied varying by business unit.

— For US insurance operations, as at 30 June 2020, the equity-type securities for non-separate account operations amounted to $1,854 million (30 June 2019: $1,499 million; 31 December 2019: $1,481 million). For these operations, the longer-term rates of return for income and capital applied in 2020 and 2019, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums are as follows:

	2020	2019
	Half year	Half year Full year
Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds Other equity-type securities such as investments in limited partnerships and private equityfunds	4.9% to 5.8%	6.0% to 6.7% 5.5% to 6.7% 8.0% to 8.7% 7.5% to 8.7%
	6.9% to 7.8%

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B EARNINGS PERFORMANCE CONTINUED

B2 Acquisition costs and other expenditure

	2020$m	2019$m
	Half year	Half year Full year
Acquisition costs incurred for insurance policies Acquisition costs deferrednote C4.2 Amortisation of acquisition costsnote (i) Recoveries for expenses associated with Jackson’s business ceded to Athenenote (ii) Administration costs and other expenditurenote (iii) Movements in amounts attributable to external unit holders of consolidated investment funds	(1433)	(2,109) (4,177) 625 1,422 376 694 – – (2,291) (5,019) (109) (203)
	, 614
	(470)
	1231
	, (2584)
	, (390)
Total acquisition costs and other expenditure	(3,032)	(3,508) (7,283)

Notes

(i) The charge of $(470) million in half year 2020 includes $(313) million arising in the US which includes $(764) million for the write-off of the deferred acquisition costs held for the in-force fixed and fixed indexed annuity liabilities reinsured to Athene. Offsetting this amount is a credit of $814 million (half year 2019: $616 million; full year 2019: $1,248 million) recorded in non-operating profit largely as a result of the losses arising from market effects on variable annuity guarantee liabilities and associated hedging.

(ii) As part of the reinsurance transaction with Athene Life Re Ltd discussed in note D1, Jackson received $1,231 million of ceding commission as a recovery for past acquisition expenses associated with the business ceded.

(iii) Included in total administration costs and other expenditure is depreciation of property, plant and equipment of $(109) million (half year 2019: $(107) million; full year 2019: $(224) million), of which $(72) million (half year 2019: $(66) million; full year 2019: $(141) million) relates to the right-of-use assets recognised under IFRS 16.

B3 Additional segmental analysis of revenue

	Half year 2020$m
	Asia US Total segment Unallocated to a segment Group total
Gross premiums earned Outward reinsurancepremiumsnote (i)	10890 8892 19782 60 19842
	, , , , 50 (30,195) (30,145) (4) (30,149)
Earned premiums, net of reinsurance Other incomenote (ii)	10940 (21303) (10363) 56 (10307)
	, , , , 285 28 313 20 333
Total external revenue Intra-group revenue Interest income Other investment return	11225 (21275) (10050) 76 (9974)
	, , , , – 17 17 (17) –
	883 1283 2166 22 2188
	, , , 3,235 (1,575) 1,660 62 1,722
Total revenue, net of reinsurance	15,343 (21,550) (6,207) 143 (6,064)

	Half year 2019$m
	Asia US Total segment Unallocated to a segment Group total
Gross premiums earned Outward reinsurancepremiums	11,458 9,588 21,046 35 21,081 (499) (170) (669) (4) (673)
Earned premiums, net of reinsurance Other incomenote (ii)	10,959 9,418 20,377 31 20,408 228 14 242 16 258
Total external revenue Intra-group revenue Interest income Other investment return	11,187 9,432 20,619 47 20,666 21 31 52 (52) – 805 1,460 2,265 27 2,292 8,826 20,732 29,558 23 29,581
Total revenue, net of reinsurance	20,839 31,655 52,494 45 52,539

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	Full year 2019$m Asia US Total segment Unallocated to a segment Group total
Gross premiums earned Outward reinsurancepremiums	23,757 21,209 44,966 98 45,064 (1,108) (467) (1,575) (8) (1,583)
Earned premiums, net of reinsurance Other incomenote (ii)	22,649 20,742 43,391 90 43,481 548 61 609 91 700
Total external revenue Intra-group revenue Interest income Other investment return	23,197 20,803 44,000 181 44,181 – 34 34 (34) – 1,569 2,971 4,540 67 4,607 13,406 31,623 45,029 (81) 44,948
Total revenue, net of reinsurance	38,172 55,431 93,603 133 93,736

Notes

(i) In half year 2020, outward reinsurance premiums include $(30,150) million paid during the period in respect of the reinsurance of substantially all of Jackson’s in-force fixed and fixed indexed annuity liabilities to Athene Life Re Ltd. See note D1 for further details. Also included in outward reinsurance premiums for half year 2020 is a credit of $542 million for the recapture of previously reinsured business in Asia.

(ii) Other income comprises income from external customers and consists primarily of revenue from the Group’s asset management business of $261 million (half year 2019: $198 million; full year 2019: $453 million). The remaining other income consists primarily of policy fee revenue from external customers.

B4 Tax charge

B4.1 Total tax charge by nature

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

Tax charge	2020$m	2019$m
	Current tax Deferred tax Half year Total	Half year Total Full year Total
Attributable to shareholders: Asia operations US operations Other operations		(244) (468) 143 345 100 154
	(103) (127) (230)
	(70) 183 113
	(16) 4 (12)
Tax (charge) credit attributable to shareholders’ returns	(189) 60 (129)	(1) 31
Attributable to policyholders: Asia operations		(285) (365)
	(69) 3 (66)
Total tax (charge) credit	(258) 63 (195)	(286) (334)

The principal reason for the increase in the tax charge attributable to shareholders’ returns is the losses arising in Other operations where, following the demerger of M&G plc, it is unlikely that relief will be available in future periods.

The principal reason for the decrease in the tax charge attributable to policyholders’ returns reflects the reduction in deferred tax liabilities in Singapore following the clarification of tax filing requirements.

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B EARNINGS PERFORMANCE CONTINUED

B4 Tax charge continued

B4.2 Reconciliation of shareholder effective tax rate

In the reconciliation below, the expected tax rates reflect the corporation tax rates that are expected to apply to the taxable profit or loss of the relevant business. Where there are profits or losses of more than one jurisdiction, the expected tax rates reflect the corporation tax rates weighted by reference to the amount of profit or loss contributing to the aggregate business result.

	2020	2020	20	19
	Half year		Half year	Full year
	Asia operations $m US operations $m Other operations $m note (iv) Total attribut- able to share- holders $m Percentage impact on ETR %		Total attribut- able to share- holders $m Percentage impact on ETR %	Total attribut- able to share- holders $m Percentage impact on ETR %
Adjusted operating proft (loss) Non-operating(loss)proft	1733 1266 (458) 2541		2,619 (1,460) 1,159 232 20.0% (70) (6.0)% 26 2.2% (179) (15.4)% (12) (1.0)% – – (35) (3.0)% 27 2.3% 5 0.4%	5,310 (3,388) 1,922 393 20.4% (126) (6.6)% 55 2.9% (317) (16.5)% (33) (1.7)% 46 2.4% (100) (5.2)% 59 3.1% 13 0.7%
	, , , (450) (1,458) 30 (1,878)
Proft (loss) before tax	1,283 (192) (428) 663
Expected tax rate: Tax at the expected rate Efects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates Deductions not allowable for tax purposes Items related to taxation of life insurance businessesnote (i) Deferred tax adjustments Unrecognised tax lossesnote (ii) Efect of results of joint ventures and associates Irrecoverable withholding taxes Other	20% 21% 18% 21%
	257 (40) (77) 140 21.1%
	(31) (14) – (45) (6.8)%
	12 6 3 21 3.2%
	7 (62) – (55) (8.3)%
	3 – – 3 0.5%
	– – 72 72 10.9%
	(31) – (6) (37) (5.6)%
	– – 26 26 3.9%
	3 13 (6) 10 1.5%
Total Efects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years Movements in provisions for open tax mattersnote (iii) Demerger related activities Impact of carry back of US losses Impact of changes in local statutory tax rates Adjustments in relation to business disposals	(37) (57) 89 (5) (0.7)%		(238) (20.5)% 20 1.7% 8 0.7% 4 0.4% – – – – (25) (2.2)%	(403) (20.9)% (67) (3.5)% (1) 0.0% 76 4.1% – – – – (29) (1.4)%
	21 – – 21 3.1%
	(12) – – (12) (1.8)%
	– – – – –
	– (16) – (16) (2.4)%
	1 – – 1 0.2%
	– – – – –
Total	10 (16) – (6) (0.9)%		7 0.6%	(21) (1.1)%
Total actual tax charge (credit)	230 (113) 12 129 19.5%		1 0.1%	(31) (1.6)%
Analysed into: Tax on adjusted operating proft (loss) Tax on non-operating (loss) proft Actual tax rate on: Adjusted operating proft (loss): Including non-recurring tax reconciling items Excluding non-recurring tax reconciling items Totalproft (loss)			430 (429) 16% 16% 0%	773 (804) 15% 15% (2)%
	260 195 12 467
	(30) (308) – (338)
	15% 15% (3)% 18%
	14% 15% (3)% 18%
	18% 59% (3)% 19%

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Notes

(i) The $62 million reconciling item in US operations reflects the impact of the dividend received deduction on the taxation of profits from variable annuity business. The $7 million adverse reconciling item in Asia operations reflects non tax deductible investment related marked-to-market losses. (ii) The $72 million adverse reconciling item in unrecognised tax losses reflects losses arising where it is unlikely that relief for the losses will be available in future periods. (iii) The statement of financial position contains the following provisions in relation to open tax matters.

The statement of fnancial osition contains the followin rovisions in relation to oen tax matters
p g p p .	Half year 2020$m
At beginning of period Movements in the current period included in tax charge attributable to shareholders Provisions utilised in the period	198 (12) (34)
Other movements*	(3)
At end of period	149

• Other movements include interest arising on open tax matters and amounts included in the Group’s share of profits from joint ventures and associates, net of related tax.

(iv) Half year and full year 2019 actual tax rate of the relevant business operations are shown below:

	Half year 2019%	Full year 2019%
	Asia operations US operations Other operations Total attributable to share- holders	Asia operations US operations Other operations Total attributable to share- holders
Tax rate on adjusted operating proft (loss) Tax rate on proft (loss) before tax	14% 17% 10% 16% 10% 35% 13% 0%	13% 14% 10% 15% 11% 48% 10% (2)%

B5 Earnings per share

	Half year 2020
	Before tax $m Tax $m Non- controlling interests $m Net of tax and non- controlling interests $m Basic earnings per share cents Diluted earnings per share cents
Based on adjusted operating proft Short-term fuctuations in investment returns on shareholder-backed business Amortisation of acquisition accounting adjustments Gain (loss) attachingto corporate transactions	2541 (467) (22) 2052 79.0¢ 79.0¢
	, , (2706) 513 – (2193) (84.4)¢ (84.4)¢
	, , (18) 3 – (15) (0.6)¢ (0.6)¢
	846 (178) – 668 25.7¢ 25.7¢
Based onproft for theperiod	663 (129) (22) 512 19.7¢ 19.7¢

	Half year 2019	Half year 2019
	Before tax $m Tax $m Non- controlling interests $m Net of tax and non- controlling interests $m Basic earnings per share cents Diluted earnings per share cents
Based on adjusted operating proft Short-term fuctuations in investment returns on shareholder-backed business Amortisation of acquisition accounting adjustments Gain (loss) attachingto corporate transactions	2,619 (430) (6) 2,183 84.5¢ 84.5¢ (1,455) 407 – (1,048) (40.6)¢ (40.6)¢ (22) 4 – (18) (0.7)¢ (0.7)¢ 17 18 – 35 1.4¢ 1.4¢
Based on proft for the period from continuingoperations	1,159 (1) (6) 1,152 44.6¢ 44.6¢ 835 32.3¢ 32.3¢ 1,987 76.9¢ 76.9¢
Based on proft for the period from discontinued operations Based on proft for the period
		1,987 76.9¢ 76.9¢

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B EARNINGS PERFORMANCE CONTINUED

B5 Earnings per share continued

	Full year 2019
	Before tax $m Tax $m Non- controlling interests $m Net of tax and non- controlling interests $m Basic earnings per share cents Diluted earnings per share cents
Based on adjusted operating proft Short-term fuctuations in investment returns on shareholder-backed business Amortisation of acquisition accounting adjustments Gain (loss) attachingto corporate transactions	5,310 (773) (9) 4,528 175.0¢ 175.0¢ (3,203) 772 – (2,431) (94.0)¢ (94.0)¢ (43) 8 – (35) (1.3)¢ (1.3)¢ (142) 24 – (118) (4.6)¢ (4.6)¢
Based on proft for the year from continuing operations	1,922 31 (9) 1,944 75.1¢ 75.1¢ (1,161) (44.8)¢ (44.8)¢ 783 30.3¢ 30.3¢
Based on loss for the year from discontinued operations Based on proft for the year

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 investment funds, is set out as below:

Weighted average number of shares for calculation of:	Numb	er of shares (in millions)
	2020	2019
	Half year	Half year Full year
Basic earnings per share Shares under option at end of period Shares that would have been issued at fair value on assumed optionprice	2596	2,583 2,587 4 4 (3) (4)
	, 2
	(2)
Diluted earningsper share	2,596	2,584 2,587

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B6 Dividends

	Half year 2020	Half year 2019	Full year 2019
	Cents per share $m	Cents per share $m	Cents per share $m
Dividends relating to reporting period: First interim ordinary dividend Second interim ordinarydividend		20.29¢ 526 – –	20.29¢ 528 25.97¢ 675
	5.37¢ 140
	– –
Total	5.37¢ 140	20.29¢ 526	46.26¢ 1,203
Dividends paid in reporting period: Current year frst interim ordinary dividend Second interim ordinary dividend for prioryear		– – 42.89¢ 1,108	20.29¢ 526 42.89¢ 1,108
	– –
	25.97¢ 674
Total	25.97¢ 674	42.89¢ 1,108	63.18¢ 1,634

In addition to the dividends shown in the table above, on 21 October 2019, following approval by the Group’s shareholders, Prudential plc demerged its UK and Europe operations (M&G plc) via a dividend in specie of $7,379 million.

Dividend per share

The 2020 first interim dividend of 5.37 cents per ordinary share will be paid on 28 September 2020 to shareholders in the UK on the register at 6.00pm BST and to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on 21 August 2020 (Record Date). Shareholders holding shares on the UK or Hong Kong share registers will continue to receive their dividend payments in either pounds sterling or Hong Kong dollars respectively, unless they elect otherwise. Shareholders holding shares on the UK or Hong Kong registers may elect to receive dividend payments in US dollars. Elections must be made through the relevant UK or Hong Kong share registrar on or before 7 September and 11 September 2020 respectively. The corresponding amount per share in pounds sterling and Hong Kong dollars is expected to be announced on or about 17 September 2020. The US dollar to pound sterling and Hong Kong dollar conversion rates will be determined by the actual rates achieved by Prudential buying those currencies during the two working days preceding the subsequent announcement. Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 28 September 2020. The 2020 first interim dividend will be paid on or about 5 October 2020 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 US dollars into Singapore dollars, will be determined by CDP.

Shareholders on the UK register are eligible to participate in a Dividend Reinvestment Plan.

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C Financial position

C1 Group assets and liabilities by business type

The analysis below is structured to show the investments and other assets and liabilities of the Group by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business.

The Group has streamlined its disclosures relating to the investments, other assets and liabilities of the Group in these condensed consolidated financial statements, including combining various disclosures into a single section within this note and further analysis of the categories of debt securities. The 2019 comparative information, in particular that relating to investments, has been re-presented from previously published information to conform to the current period’s format and the altered approach to credit ratings analysis described below.

Debt securities are analysed below according to the issuing government for sovereign debt and to credit ratings for the rest of the securities.

In 2020, to align more closely with the internal risk management analysis, the Group altered the compilation of its credit ratings analysis to use the middle of the Standard & Poor’s, Moody’s and Fitch ratings, where available. Where ratings are not available from these rating agencies, NAIC ratings (for the US), local external rating agencies’ ratings and lastly internal ratings have been used. Securities with none of the ratings listed above are classified as unrated and included under the ‘below BBB- and unrated’ category. The total securities (excluding sovereign debt) that were unrated at 30 June 2020 were $788 million (30 June 2019: $794 million; 31 December 2019: $648 million). Previously, Standard & Poor’s ratings were used where available and if not, Moody’s and then Fitch were used as alternatives. Additionally, government debt is shown separately from the rating breakdowns in order to provide a more focused view of the credit portfolio.

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-.

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	30 Jun 2020$m
	Asia insurance Asia Asset manage- ment Elimina- tions Total Asia US note (ii) Unallo- cated to a segment Elimination of intra-group debtors and creditors Group total With- profts business note (i) Unit-linked assets and liabilities Other business
Debt securitiesnote (ix), note C1.1 Sovereign debt Indonesia Singapore Thailand United Kingdom United States Vietnam Other(predominantlyAsia)
	381 580 455 – – 1416 – – – 1416
	, , 2788 525 904 88 – 4305 – – – 4305
	, , , – – 1567 16 – 1583 – – – 1583
	, , , – 7 – – – 7 – 154 – 161
	24656 23 2356 – – 27035 5371 – – 32406
	, , , , , – 14 2789 – – 2803 – – – 2803
	, , , 1,816 687 3,216 13 – 5,732 19 140 – 5,891
Subtotal	29,641 1,836 11,287 117 – 42,881 5,390 294 – 48,565
Other government bonds AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated
	1464 103 479 – – 2046 447 – – 2493
	, , , 353 34 101 – – 488 519 – – 1007
	, 524 113 226 – – 863 191 – – 1054
	, 466 88 248 8 – 810 2 – – 812
	104 17 331 – – 452 – 1 – 453
Subtotal	2,911 355 1,385 8 – 4,659 1,159 1 – 5,819
Corporate bonds AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated
	1122 270 504 – – 1896 265 – – 2161
	, , , 1575 273 1712 2 – 3562 973 – – 4535
	, , , , 6670 808 4723 – – 12201 11792 – – 23993
	, , , , , 7806 1043 3389 – – 12238 14036 – – 26274
	, , , , , , 2,835 655 945 3 – 4,438 2,046 7 – 6,491
Subtotal	20,008 3,049 11,273 5 – 34,335 29,112 7 – 63,454
Asset-backed securities AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated
	108 16 23 – – 147 2227 – – 2374
	, , 36 6 8 – – 50 184 – – 234
	17 – 25 – – 42 575 – – 617
	15 – 10 – – 25 193 – – 218
	6 – – – – 6 175 – – 181
Subtotal	182 22 66 – – 270 3,354 – – 3,624
Total debt securities	52,742 5,262 24,011 130 – 82,145 39,015 302 – 121,462
Loans Mortgage loans note C1.2 Policy loans Other loans
	– – 158 – – 158 8119 – – 8277
	, , 1189 – 324 – – 1513 4705 8 – 6226
	, , , , 389 – 18 – – 407 – – – 407
Total loans	1,578 – 500 – – 2,078 12,824 8 – 14,910
Equity securities and holdings in collective investment schemes Direct equities Collective investment schemes US separate account assetsnote (iii)
	14493 10345 1537 56 – 26431 263 4 – 26698
	, , , , , 13455 6097 4175 10 – 23737 36 7 – 23780
	, , , , , – – – – – – 184,220 – – 184,220
Total equity securities and holdings in collective investment schemes	27,948 16,442 5,712 66 – 50,168 184,519 11 – 234,698
Other fnancial investmentsnote (iv)	991 572 1,817 97 – 3,477 3,827 75 – 7,379
Total fnancial investments	83,259 22,276 32,040 293 – 137,868 240,185 396 – 378,449
Investment properties Investments in joint ventures and associates accounted for using the equity method Cash and cash equivalents Reinsurers’ share of insurance contract liabilitiesnote (v) Other assetsnote (vi)	– – 7 – – 7 7 9 – 23
	– – 1268 239 – 1507 – – – 1507
	, , , 913 599 1242 132 – 2886 2493 3005 – 8384
	, , , , , 211 – 8709 – – 8920 35993 5 – 44918
	, , , , 1,954 482 8,051 799 (33) 11,253 17,942 3,828 (3,139) 29,884
Total assets	86,337 23,357 51,317 1,463 (33) 162,441 296,620 7,243 (3,139) 463,165
Shareholders’ equity Non-controllinginterests	– – 10535 994 – 11529 8955 (1374) – 19110
	, , , , , – – 2 159 – 161 – 36 – 197
Total equity	– – 10,537 1,153 – 11,690 8,955 (1,338) – 19,307
Contract liabilities and unallocated surplus of with-profts fundsnote (iii) Core structural borrowings Operational borrowings Other liabilitiesnote (vii)
	76647 21376 33541 – – 131564 265655 217 – 397436
	, , , , , , – – – – – – 250 6249 – 6499
	, , 243 15 111 25 – 394 1212 639 – 2245
	, , 9,447 1,966 7,128 285 (33) 18,793 20,548 1,476 (3,139) 37,678
Total liabilities	86,337 23,357 40,780 310 (33) 150,751 287,665 8,581 (3,139) 443,858
Total equityand liabilities	86,337 23,357 51,317 1,463 (33) 162,441 296,620 7,243 (3,139) 463,165

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C1 Group assets and liabilities by business type continued

	30 Jun 2019$m
	Asia insurance Asia Asset manage- ment Elimina- tions Total Asia US note(ii) Unallo- cated to a segment Discon- tinued opera- tions Elimina- tion of intra- group debtors and creditors Group total With- profts business note(i) Unit- linked assets and liabilities Other business
Debt securitiesnote (ix), note C1.1 Sovereign debt Indonesia Singapore Thailand United Kingdom United States Vietnam Other(predominantlyAsia)	184 516 445 – – 1,145 – – – – 1,145 2,188 376 649 47 – 3,260 – – – – 3,260 – – 1,407 – – 1,407 – – – – 1,407 – 6 – – – 6 – 1,248 – – 1,254 16,617 18 2,162 – – 18,797 6,022 – – – 24,819 1 13 2,479 – – 2,493 – – – – 2,493 2,314 638 2,488 15 – 5,455 9 74 – – 5,538
Subtotal	21,304 1,567 9,630 62 – 32,563 6,031 1,322 – – 39,916
Other government bonds AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated	1,658 44 440 – – 2,142 966 – – – 3,108 176 8 88 – – 272 493 – – – 765 826 136 319 – – 1,281 262 – – – 1,543 316 72 357 – – 745 4 – – – 749 22 4 341 – – 367 – – – – 367
Subtotal	2,998 264 1,545 – – 4,807 1,725 – – – 6,532
Corporate bonds AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated	700 179 550 – – 1,429 362 262 – – 2,053 1,769 527 1,735 – – 4,031 1,498 169 – – 5,698 5,464 536 4,480 – – 10,480 17,184 182 – – 27,846 5,577 893 2,898 – – 9,368 23,042 25 – – 32,435 2,669 595 454 – – 3,718 2,091 6 – – 5,815
Subtotal	16,179 2,730 10,117 – – 29,026 44,177 644 – – 73,847
Asset-backed securities AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated	231 22 91 – – 344 3,357 401 – – 4,102 53 3 16 – – 72 694 – – – 766 20 – 21 – – 41 1,024 – – – 1,065 – – – – – – 335 – – – 335 22 – 7 – – 29 264 – – – 293
Subtotal	326 25 135 – – 486 5,674 401 – – 6,561
Total debt securities	40,807 4,586 21,427 62 – 66,882 57,607 2,367 – – 126,856
Loans Mortgage loans note C1.2 Policy loans Other loans	– – 179 – – 179 9,655 – – – 9,834 996 – 296 – – 1,292 4,692 – – – 5,984 80 – 19 – – 99 – 8 – – 107
Total loans	1,076 – 494 – – 1,570 14,347 8 – – 15,925
Equity securities and holdings in collective investment schemes Direct equities Collective investment schemes US separate account assetsnote (iii)	15,316 13,100 1,386 – – 29,802 160 65 – – 30,027 11,890 5,223 1,518 52 – 18,683 128 2 – – 18,813 – – – – – – 184,917 – – – 184,917
Total equity securities and holdings in collective investment schemes	27,206 18,323 2,904 52 – 48,485 185,205 67 – – 233,757
Other fnancial investmentsnote (iv)	511 626 800 93 – 2,030 2,342 301 – – 4,673
Total fnancial investments	69,600 23,535 25,625 207 – 118,967 259,501 2,743 – – 381,211
Investment properties Investments in joint ventures and associates accounted for using the equity method Cash and cash equivalents Reinsurers’ share of insurance contract liabilitiesnote (v) Assets held for distributionnote (viii) Other assetsnote (vi)	– – 7 – – 7 7 – – – 14 – – 1,092 219 – 1,311 – – – – 1,311 680 509 1,500 139 – 2,828 1,506 2,294 – – 6,628 105 – 4,502 – – 4,607 8,308 4 – – 12,919 – – – – – – – – 281,427 (3,566) 277,861 3,288 401 6,572 542 (44) 10,759 16,416 3,269 – (4,443) 26,001
Total assets	73,673 24,445 39,298 1,107 (44) 138,479 285,738 8,310 281,427 (8,009) 705,945
Shareholders’ equity Non-controllinginterests	– – 9,005 722 – 9,727 8,594 (3,822) 10,538 – 25,037 – – 2 15 – 17 – 12 – – 29
Total equity	– – 9,007 737 – 9,744 8,594 (3,810) 10,538 – 25,066
Contract liabilities and unallocated surplus of with-profts fundsnote (iii) Core structural borrowings Operational borrowings Liabilities held for distributionnote (viii) Other liabilitiesnote (vii)	65,004 22,392 23,470 – – 110,866 257,279 61 – (1,526) 366,680 – – – – – – 250 9,220 – – 9,470 303 46 112 17 – 478 1,017 926 – – 2,421 – – – – – – – – 270,889 (1,857) 269,032 8,367 2,007 6,709 353 (45) 17,391 18,598 1,913 – (4,626) 33,276
Total liabilities	73,674 24,445 30,291 370 (45) 128,735 277,144 12,120 270,889 (8,009) 680,879
Total equityand liabilities	73,674 24,445 39,298 1,107 (45) 138,479 285,738 8,310 281,427 (8,009) 705,945

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	31 Dec 2019$m
	Asia insurance Asia Asset manage- ment Elimina- tions Total Asia US note(ii) Unallo- cated to a segment Elimina- tion of intra- group debtors and creditors Group total With- profts business note(i) Unit- linked assets and liabilities Other business
Debt securitiesnote (ix), note C1.1 Sovereign debt Indonesia Singapore Thailand United Kingdom United States Vietnam Other(predominantlyAsia)	222 610 488 – – 1,320 – – – 1,320 3,514 554 708 94 – 4,870 – – – 4,870 – – 1,398 19 – 1,417 – – – 1,417 – 7 – – – 7 – 615 – 622 20,479 113 2,827 – – 23,419 6,160 597 – 30,176 1 15 2,900 – – 2,916 – – – 2,916 1,745 665 2,809 13 – 5,232 9 116 – 5,357
Subtotal	25,961 1,964 11,130 126 – 39,181 6,169 1,328 – 46,678
Other government bonds AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated	1,752 81 538 – – 2,371 977 – – 3,348 135 8 78 – – 221 495 – – 716 890 159 389 – – 1,438 245 – – 1,683 356 88 201 – – 645 4 – – 649 31 9 381 – – 421 – 2 – 423
Subtotal	3,164 345 1,587 – – 5,096 1,721 2 – 6,819
Corporate bonds AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated	732 384 516 – – 1,632 341 – – 1,973 1,574 441 1,908 – – 3,923 1,566 – – 5,489 5,428 542 5,063 – – 11,033 17,784 – – 28,817 5,443 883 3,497 – – 9,823 22,775 – – 32,598 2,111 569 781 3 – 3,464 2,157 2 – 5,623
Subtotal	15,288 2,819 11,765 3 – 29,875 44,623 2 – 74,500
Asset-backed securities AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- and unrated	236 19 104 – – 359 3,658 – – 4,017 132 6 46 – – 184 780 – – 964 1 – 14 – – 15 1,006 – – 1,021 – – – – – – 359 – – 359 – – – – – – 212 – – 212
Subtotal	369 25 164 – – 558 6,015 – – 6,573
Total debt securities	44,782 5,153 24,646 129 – 74,710 58,528 1,332 – 134,570
Loans Mortgage loans note C1.2 Policy loans Other loans	– – 165 – – 165 9,904 – – 10,069 1,089 – 316 – – 1,405 4,707 9 – 6,121 374 – 19 – – 393 – – – 393
Total loans	1,463 – 500 – – 1,963 14,611 9 – 16,583
Equity securities and holdings in collective investment schemes Direct equities Collective investment schemes US separate account assetsnote (iii)	14,143 12,440 1,793 59 – 28,435 150 4 – 28,589 15,230 6,652 1,680 14 – 23,576 40 6 – 23,622 – – – – – – 195,070 – – 195,070
Total equity securities and holdings in collective investment schemes	29,373 19,092 3,473 73 – 52,011 195,260 10 – 247,281
Other fnancial investmentsnote (iv)	963 383 1,363 106 – 2,815 2,791 56 – 5,662
Total fnancial investments	76,581 24,628 29,982 308 – 131,499 271,190 1,407 – 404,096
Investment properties Investments in joint ventures and associates accounted for using the equity method Cash and cash equivalents Reinsurers’ share of insurance contract liabilitiesnote (v) Other assetsnote (vi)	– – 7 – – 7 7 11 – 25 – – 1,263 237 – 1,500 – – – 1,500 963 356 1,015 156 – 2,490 1,960 2,515 – 6,965 152 – 5,306 – – 5,458 8,394 4 – 13,856 1,277 237 6,983 826 (35) 9,288 17,696 3,440 (2,652) 27,772
Total assets	78,973 25,221 44,556 1,527 (35) 150,242 299,247 7,377 (2,652) 454,214
Shareholders’ equity Non-controllinginterests	– – 9,801 1,065 – 10,866 8,929 (318) – 19,477 – – 2 153 – 155 – 37 – 192
Total equity	– – 9,803 1,218 – 11,021 8,929 (281) – 19,669
Contract liabilities and unallocated surplus of with-profts fundsnote (iii) Core structural borrowings Operational borrowings Other liabilitiesnote (vii)	70,308 23,571 26,814 – – 120,693 269,549 186 – 390,428 – – – – – – 250 5,344 – 5,594 302 21 123 27 – 473 1,501 671 – 2,645 8,363 1,629 7,816 282 (35) 18,055 19,018 1,457 (2,652) 35,878
Total liabilities	78,973 25,221 34,753 309 (35) 139,221 290,318 7,658 (2,652) 434,545
Total equityand liabilities	78,973 25,221 44,556 1,527 (35) 150,242 299,247 7,377 (2,652) 454,214

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Notes

(i) The with-profits business of Asia comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. ‘Other business’ includes assets and liabilities of other participating businesses and other non-linked shareholder-backed business.

(ii) Further analysis of the shareholders’ equity by business type of the US operations is provided below:

	30 Jun 2020$m	2019$m
	Insurance Asset management Total	30 Jun Total 31 Dec Total
Shareholders’ equity	8,943 12 8,955	8,594 8,929

(iii) The US separate account assets comprise investments in mutual funds attaching to the variable annuity business that are held in the separate account. The related liabilities are reported in contract liabilities at an amount equal to the separate account assets.

(iv) Other financial investments comprise derivative assets, other investments and deposits.

(v) Reinsurers’ share of contract liabilities includes the reinsurance ceded in respect of the acquired REALIC business by the Group’s US insurance operations and at 30 June 2020 also includes amounts ceded in respect of the reinsurance of substantially all of Jackson’s in-force fixed and fixed indexed annuity liabilities to Athene Life Re Ltd, as discussed in note D1.

(vi) Of total ‘Other assets’ at 30 June 2020, there are:

– Property, plant and equipment (PPE) of $964 million (30 June 2019: $999 million; 31 December 2019: $1,065 million). During the period, the Group made additions of $51 million of PPE (half year 2019: $107 million; full year 2019: $160 million), of which $8 million relates to right-of-use assets (half year 2019: $86 million; full year 2019: $96 million).

• Premiums receivable of $778 million (30 June 2019: $718 million; 31 December 2019: $794 million), of which $734 million (30 June 2019: $652 million; 31 December 2019: $738 million) are due within one year.

(vii) Within ’Other liabilities’ at 30 June 2020 is accruals, deferred income and other liabilities of $16,208 million (30 June 2019: $13,487 million; 31 December 2019: $14,488 million), of which $11,213 million (30 June 2019: $8,555 million; 31 December 2019: $9,172 million) are due within one year.

• (viii) Assets and liabilities held for distribution at 30 June 2019 related to the Group’s UK and Europe operations (M&G plc) which were demerged in October 2019. (ix) The credit ratings, information or data contained in this report which are attributed and specifically provided by Standard & Poor’s, Moody’s and Fitch Solutions and their respective affiliates and suppliers (‘Content Providers’) is referred to here as the ‘Content’. Reproduction of any Content in any form is prohibited except with the prior written permission of the relevant party. The Content Providers do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. The Content Providers expressly disclaim liability for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold any such investment or security, nor does it address the suitability of an investment or security and should not be relied on as investment advice.

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C1.1 Additional analysis of debt securities

This note provides additional analysis of the Group’s debt securities. With the exception of certain debt securities classified as ‘available-for-sale’ under IAS 39, which primarily relate to US insurance operations as disclosed below, the Group’s debt securities are carried at fair value through profit or loss.

(a) Holdings by consolidated investment funds of the Group

Of the $121,462 million of Group’s debt securities at 30 June 2020 (30 June 2019: $126,856 million; 31 December 2019: $134,570 million), the following amounts were held by the consolidated investment funds of the Group:

	30 Jun 2020$m	2019$m
	Asia US Group total	30 Jun 31 Dec
Debt securities held byconsolidated investment funds	17,219 1,244 18,463	21,914 22,113

(b) Additional analysis of US debt securities

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

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Available-for-sale Fair value throughproft and loss	37597	56,225 57,091 1,382 1,437
	, 1,418
Total US debt securities	39,015	57,607 58,528

The corporate bonds held by the US insurance operations comprise:

The corporate bonds held by the US insurance operations comprise:	The corporate bonds held by the US insurance operations comprise:
		2020$m	2019$m
		30 Jun	30 Jun 31 Dec
Publicly traded and SEC Rule 144A securities* Non-SEC Rule 144A securities		21215	34,895 34,781 9,282 9,842
		, 7,897
Total US corporate bonds		29,112	44,177 44,623
A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualifed institutional investors. The rule was designed to develop a more liquid and efcient institutional resale market for unregistered securities. (c) Movements in unrealised gains and losses on Jackson available-for-sale debt securities The movement in the statement of fnancial position value for debt securities classifed as available-for-sale from a net unrealised gain of $3,496 million at 31 December 2019 to a net unrealised gain of $3,219 million at 30 June 2020 is analysed in the table below.
	Changes in unrealised appreciation refected in other comprehensive income
	30 Jun 2020 $m Gains recycled to income statement on transfer of debt securities to Athene note D1 Unrealised gains (losses) arising in the period 31 Dec 2019 $m
Assets fair valued at below book value Book value* Unrealisedgain (loss)	2,188 3,121 (109) (82) (27)
Fair value (as included in statement of fnancialposition)	2,079			3,094
Assets fair valued at or above book value Book value* Unrealisedgain (loss)				50,474 3,523
	32190
	, 3,328 (2,817) 2,622
Fair value (as included in statement of fnancialposition)	35,518			53,997
Total Book value* Net unrealisedgain (loss)				53,595 3,496
	34378
	, 3,219 (2,817) 2,540
Fair value (as included in the footnote above in the overview table and the statement of fnancialposition)	37,597			57,091

• 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.

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

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C1 Group assets and liabilities by business type continued

C1.1 Additional analysis of debt securities continued

Jackson debt securities classified as available-for-sale in an unrealised loss position

(i) Fair value of securities as a percentage of book value

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

	30 Jun 2020$m	30 Jun 2019$m	31 Dec 2019$m
	Fair value Unrealised loss	Fair value Unrealised loss	Fair value Unrealised loss
Between 90% and 100% Between 80% and 90% Below 80%	1871 (62)	2,827 (41) 48 (7) 40 (15)	3,083 (25) 11 (2) – –
	, 111 (17)
	97 (30)
Total	2,079 (109)	2,915 (63)	3,094 (27)

(ii) Unrealised losses by maturity of security

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
1 year to 5 years 5 years to 10 years More than 10 years Mortgage-backed and other debt securities	(30)	(3) (1) (13) (12) (24) (7) (23) (7)
	(39)
	(20)
	(20)
Total	(109)	(63) (27)

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

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

Age analysis	30 Jun 2020$m	30 Jun 2019$m	31 Dec 2019$m
	Non- investment grade Investment grade Total*	Non- investment grade Investment grade Total*	Non- investment grade Investment grade Total*
Less than 6 months 6 months to 1 year 1 year to 2 years 2 years to 3 years More than 3years	(24) (80) (104)	(1) (5) (6) (1) (18) (19) (1) (11) (12) – (13) (13) – (13) (13)	(1) (20) (21) (1) (1) (2) – (1) (1) – (1) (1) – (2) (2)
	(3) (1) (4)
	– – –
	(1) – (1)
	– – –
Total	(28) (81) (109)	(3) (60) (63)	(2) (25) (27)

• For Standard and Poor’s, Moody’s and Fitch rated debt securities, those with ratings range from AAA to BBB- are designated as investment grade. For NAIC rated debt securities, those with ratings 1 or 2 are designated as investment grade.

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

Age analysis	30 Jun 2020$m	30 Jun 2019$m	31 Dec 2019$m
	Fair value Unrealised loss	Fair value Unrealised loss	Fair value Unrealised loss
Less than 3 months 3 months to 6 months	60 (17)	33 (13) 7 (2)	– – – –
	37 (13)
Total below 80%	97 (30)	40 (15)	– –

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(d) Asset-backed securities

The Group’s holdings in asset-backed securities (ABS) comprise residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed securities. The US operations’ exposure to asset-backed securities comprises:

The US operations’ exposure to asset-backed securities comprises:
	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
RMBS Sub-prime (30 Jun 2020: 2% AAA) Alt-A (30 Jun 2020: 35% AAA, 39% A) Prime including agency (30 Jun 2020: 85% AAA, 6% AA, 5% A) CMBS (30 Jun 2020: 86% AAA, 5% AA, 3% A) CDO funds (30 Jun 2020: 81% AAA, 9% AA, 5% A), $nil exposure to sub-prime Other ABS (30 Jun 2020: 26% AAA, 5% AA, 48% A), $35 million exposure to sub-prime		112 93 129 116 736 862 2,884 3,080 449 696 1,364 1,168
	35
	14
	263
	1646
	, 397
	999
Total US asset-backed securities	3,354	5,674 6,015

(e) Group bank debt exposure

The Group exposures held by the shareholder-backed business and with-profits funds in bank debt securities are analysed below. The table excludes assets held to cover linked liabilities and those of the consolidated investment funds.

Exposure to bank debt securities

		30 Jun 2020$m		2019$m
	Senior debt	Subordinated debt	Group total	30 Jun 31 Dec
	Total	Tier 1 Tier 2 Total		Group total Group total
Shareholder-backed business Asia Eurozone United Kingdom United States Other				858 993 410 337 892 723 3,037 3,134 693 647
	549	572 329 901	1450
	223	– 26 26	, 249
	352	7 91 98	450
	1565	5 52 57	1622
	, 259	– 137 137	, 396
Total	2,948	584 635 1,219	4,167	5,890 5,834
With-profts funds Asia Eurozone United Kingdom United States Other				1,198 1,130 129 131 146 155 25 34 256 284
	534	87 572 659	1193
	77	– 101 101	, 178
	182	1 105 106	288
	670	2 15 17	687
	116	– 262 262	378
Total	1,579	90 1,055 1,145	2,724	1,754 1,734

C1.2 Additional analysis of US mortgage loans

In the US, mortgage loans of $8,119 million at 30 June 2020 (30 June 2019: $9,655 million; 31 December 2019: $9,904 million) are all commercial mortgage loans that are secured by the following property types: industrial, multi-family residential, suburban office, retail or hotel. The average loan size is $18.6 million (30 June 2019: $18.7 million; 31 December 2019: $19.3 million). The portfolio has a current estimated average loan to value of 55 per cent (30 June 2019: 53 per cent; 31 December 2019: 54 per cent).

At 30 June 2020, Jackson had mortgage loans with a carrying value of $947 million where the contractual terms of the agreements had been restructured to grant forbearance for a period of no longer than six months (30 June and 31 December 2019: nil). Under IAS 39, restructured loans are reviewed for impairment with an impairment recorded if the expected cash flows under the newly restructured terms discounted at the original yield (the pre-structured interest rate) are below the carrying value of the loan. No impairment is recorded for these loans in half year 2020 as the expected cash flows and interest rate did not materially change under the restructured terms.

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C2 Fair value 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 carrying value of loans and receivables is presented net of provisions for impairment. The fair value of loans is 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 the subordinated and senior debt issued by the parent company is determined using quoted prices from independent third parties.

The fair value of financial liabilities (other than subordinated debt, senior debt and derivative financial instruments) is determined using discounted cash flows of the amounts expected to be paid.

Valuation approach for level 2 fair valued assets and liabilities

A significant proportion of the Group’s level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using a designated independent pricing service or quote from third-party brokers. These valuations are subject to a number of monitoring controls, such as comparison to multiple pricing sources where available, monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades. For further detail on the valuation approach for level 2 fair valued assets and liabilities, refer to note C3.1 of the Group IFRS financial statement for the year ended 31 December 2019.

Valuation approach for level 3 fair valued assets and liabilities

Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions, eg market illiquidity. The valuation techniques used include comparison to recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation.

The Group’s valuation policies, procedures and analyses for instruments categorised as level 3 are overseen by business unit committees as part of the Group’s wider financial reporting governance processes. The procedures undertaken include approval of valuation methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group makes use of the extensive expertise of its asset management functions. In addition, the Group has minimum standards for independent price verification to ensure valuation accuracy is regularly independently verified. Adherence to this policy is monitored across the business units.

(b) Fair value measurement hierarchy of Group assets and liabilities

Assets and liabilities carried at fair value on the statement of financial position

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

All assets and liabilities held at fair value are classified as fair value through profit or loss, except for $37,752 million (30 June 2019: $56,225 million; 31 December 2019: $58,302 million) of debt securities classified as available-for-sale, principally in the US operations. All assets and liabilities held at fair value are measured on a recurring basis. As of 30 June 2020, the Group did not have any financial instruments that are measured at fair value on a non-recurring basis.

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Financial instruments at fair value

	30 Jun 2020$m
	Level 1 Level 2 Level 3 Total Quoted prices (unadjusted) in active markets Valuation based on signifcant observable market inputs Valuation based on signifcant unobservable market inputs
Loans Equity securities and holdings in collective investment schemes Debt securities Other investments (including derivative assets) Derivative liabilities	– – 3606 3606
	, , 230670 3554 474 234698
	, , , 64300 57091 71 121462
	, , , 109 2350 1569 4028
	, , , (65) (402) – (467)
Total fnancial investments, net of derivative liabilities Investment contract liabilities without discretionary participation features held at fair value Net asset value attributable to unit holders of consolidated investment funds Other fnancial liabilities held at fair value	295014 62593 5720 363327
	, , , , – (936) – (936)
	(5521) (8) (438) (5967)
	, , – – (3,743) (3,743)
Total fnancial instruments at fair value Percentage of total (%)	289493 61649 1539 352681
	, , , , 82% 18% 0% 100%
Analysed by business type: Financial investments, net of derivative liabilities at fair value: With-profts Unit-linked and variable annuity separate account Non-linked shareholder-backed business
	67290 12963 314 80567
	, , , 204723 1208 – 205931
	, , , 23,001 48,422 5,406 76,829
Total fnancial investments, net of derivative liabilities at fair value Other fnancial liabilities at fair value	295014 62593 5720 363327
	, , , , (5,521) (944) (4,181) (10,646)
Grouptotal fnancial instruments at fair value	289,493 61,649 1,539 352,681

	30 Jun 2019$m
	Level 1 Level 2 Level 3 Total Quoted prices (unadjusted) in active markets Valuation based on signifcant observable market inputs Valuation based on signifcant unobservable market inputs
Loans Equity securities and holdings in collective investment schemes Debt securities Other investments (including derivative assets) Derivative liabilities	– – 3,562 3,562 230,817 2,723 217 233,757 61,763 65,085 8 126,856 190 1,361 1,224 2,775 (66) (675) (579) (1,320)
Total fnancial investments, net of derivative liabilities Investment contract liabilities without discretionary participation features held at fair value Net asset value attributable to unit holders of consolidated investment funds Other fnancial liabilities held at fair value	292,704 68,494 4,432 365,630 – (847) – (847) (4,432) – – (4,432) – (6) (3,922) (3,928)
Total fnancial instruments at fair value Percentage of total (%)	288,272 67,641 510 356,423 81% 19% 0% 100%
Analysed by business type: Financial investments, net of derivative liabilities at fair value: With-profts Unit-linked and variable annuity separate account Non-linked shareholder-backed business	61,541 6,451 203 68,195 206,548 1,256 – 207,804 24,615 60,787 4,229 89,631
Total fnancial investments, net of derivative liabilities at fair value Other fnancial liabilities at fair value	292,704 68,494 4,432 365,630 (4,432) (853) (3,922) (9,207)
Grouptotal fnancial instruments at fair value	288,272 67,641 510 356,423

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C FINANCIAL POSITION CONTINUED

C2 Fair value measurement continued

(b) Fair value measurement hierarchy of Group assets and liabilities continued

	31 Dec 2019$m Level 1 Level 2 Level 3 Total Quoted prices (unadjusted) in active markets Valuation based on signifcant observable market inputs Valuation based on signifcant unobservable market inputs
Loans Equity securities and holdings in collective investment schemes Debt securities Other investments (including derivative assets) Derivative liabilities	– – 3,587 3,587 243,285 3,720 276 247,281 67,927 66,637 6 134,570 70 1,676 1,301 3,047 (185) (207) – (392)
Total fnancial investments, net of derivative liabilities Investment contract liabilities without discretionary participation features held at fair value Net asset value attributable to unit holders of consolidated investment funds Other fnancial liabilities held at fair value	311,097 71,826 5,170 388,093 – (1,011) – (1,011) (5,973) (23) (2) (5,998) – – (3,760) (3,760)
Total fnancial instruments at fair value Percentage of total (%)	305,124 70,792 1,408 377,324 81% 19% 0% 100%
Analysed by business type: Financial investments, net of derivative liabilities at fair value: With-profts Unit-linked and variable annuity separate account Non-linked shareholder-backed business	66,061 7,762 260 74,083 217,838 1,486 – 219,324 27,198 62,578 4,910 94,686
Total fnancial investments, net of derivative liabilities at fair value Other fnancial liabilities at fair value	311,097 71,826 5,170 388,093 (5,973) (1,034) (3,762) (10,769)
Grouptotal fnancial instruments at fair value	305,124 70,792 1,408 377,324

Assets and liabilities at amortised cost and their fair value

The table below shows the financial assets and liabilities carried at amortised cost on the statement of financial position and their fair value. Cash deposits, accrued income, other debtors, accruals, deferred income and other liabilities are excluded from the analysis below. These are carried at amortised cost, which approximates fair value.

	2020$m	201	9$m
	30 Jun	30 Jun	31 Dec
	Carrying value Fair value	Carrying value Fair value	Carrying value Fair value
Assets Loans Liabilities Investment contract liabilities without discretionary participation features Core structural borrowings of shareholder-fnanced businesses Operational borrowings (excluding lease liabilities) Obligations under funding, securities lending and sale and repurchase agreements		12,363 12,740 (3,986) (3,996) (9,470) (10,248) (1,858) (1,857) (8,598) (8,769)	12,996 13,511 (3,891) (3,957) (5,594) (6,227) (2,015) (2,015) (8,901) (9,135)
	11304 11435
	, ,
	(3730) (3793)
	, , (6499) (7087)
	, , (1703) (1703)
	, , (9,085) (9,442)
Total	(9,713) (10,590)	(11,549) (12,130)	(7,405) (7,823)

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(c) Fair value measurements for level 3 fair valued assets and liabilities

Reconciliation of movements in level 3 assets and liabilities measured at fair value

The following table reconciles the value of level 3 fair valued assets and liabilities at the beginning of the period to that presented at the end of the period.

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 principally within Jackson and foreign exchange movements arising from the retranslation of the Group’s overseas subsidiaries and branches.

subsidiaries and branches.
Reconciliation of movements in level 3 assets and liabilities measured at fair value	Half year 2020$m
	Loans Equity securities and holdings in collective investment schemes Debt securities Other investments (including derivative assets) Net asset value attributable to unit holders of consolidated investment funds Other fnancial liabilities Total
Balance at beginning of period Total gains (losses) in income statement* Total gains (losses) recorded in other comprehensive income Purchases and other additions Sales Issues Settlements Transfers into level 3	3587 276 6 1301 (2) (3760) 1408
	, , , , 120 (44) (6) (170) 134 (91) (57)
	– (4) – – – – (4)
	– 348 20 484 (583) – 269
	– (102) (2) (46) 13 – (137)
	52 – – – – (53) (1)
	(153) – – – – 161 8
	– – 53 – – – 53
Balance at end ofperiod	3,606 474 71 1,569 (438) (3,743) 1,539

Reconciliation of movements in level 3 assets and liabilities measured at fair value	Half year 2019$m
	Loans Equity securities and holdings in collective investment schemes Debt securities Other investments (including derivative assets) Derivative liabilities Borrowings attributable to with- profts businesses Net asset value attributable to unit holders of consolidated investment funds Other fnancial liabilities Total
Balance at beginning of period Reclassifcation to held for distribution Total gains (losses) in income statement* Total gains (losses) recorded in other comprehensive income Purchases Sales Issues Settlements	6,054 656 1,505 6,714 (539) (2,045) (1,258) (4,335) 6,752 (2,509) (440) (1,498) (5,513) – 2,045 1,258 451 (6,206) 118 (2) 6 19 (19) – – (140) (18) 1 – 1 (12) (21) – – (10) (41) – 3 – 164 – – – – 167 – – (6) (148) – – – – (154) 34 – – – – – – (46) (12) (136) – – – – – – 158 22
Balance at end ofperiod	3,562 217 8 1,224 (579) – – (3,922) 510

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C FINANCIAL POSITION CONTINUED

C2 Fair value measurement continued

• (c) Fair value measurements for level 3 fair valued assets and liabilities continued

Reconciliation of movements in level 3 assets and liabilities measured at fair value	Full year 2019$m
	Loans Equity securities and holdings in collective investment schemes Debt securities Other investments (including derivative assets) Derivative liabilities Borrowings attributable to with- profts businesses Net asset value attributable to unit holders of consolidated investment funds Other fnancial liabilities Total
Balance at beginning of year Demerger of UK and Europe operations Total gains (losses) in income statement* Total gains (losses) recorded in other comprehensive income Purchases Sales Issues Settlements	6,054 656 1,505 6,714 (539) (2,045) (1,258) (4,335) 6,752 (2,509) (440) (1,498) (5,513) – 2,045 1,258 451 (6,206) 1 (11) 6 30 539 – – (28) 537 – 3 – (6) – – – (11) (14) – 69 – 269 – – (2) – 336 – (1) (7) (193) – – – – (201) 275 – – – – – – (143) 132 (234) – – – – – – 306 72
Balance at end ofyear	3,587 276 6 1,301 – – (2) (3,760) 1,408

• Of the total net gains and (losses) in the income statement of $(57) million at half year 2020 (half year 2019: $(18) million for continuing operations; full year 2019: $537 million), $(103) million (half year 2019: $12 million; full year 2019: $19 million) relates to net unrealised gains and losses of financial instruments still held at the end of the period, which can be analysed as follows:

be analysed as follows:
	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Equity securities and holdings in collective investment schemes Debt securities Other investments Derivative liabilities Net asset value attributable to unit holders of consolidated investment funds Other fnancial liabilities	(72)	(2) (11) – – 51 34 (19) – – – (18) (4)
	(5)
	(157)
	–
	132
	(1)
Total	(103)	12 19

At 30 June 2020, the Group held $1,539 million (30 June 2019: $510 million; 31 December 2019: $1,408 million) of net financial instruments at fair value within level 3. This represents less than 0.5 per cent (30 June 2019: 0.5 per cent of continuing operations; 31 December 2019: 1 per cent) of the total fair valued financial assets net of financial liabilities.

Included within these net assets and liabilities are policy loans of $3,606 million at 30 June 2020 (30 June 2019: $3,562 million; 31 December 2019: $3,587 million) measured as the loan outstanding balance, plus accrued investment income, attached to acquired REALIC business and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of $3,743 million at 30 June 2020 (30 June 2019: $3,758 million; 31 December 2019: $3,760 million) is also classified within level 3. The fair value of the liabilities is equal to the fair value of the underlying assets held as collateral, which primarily consist of policy loans and debt securities. The assets and liabilities offset and therefore their movements have no impact on shareholders’ profit and equity. Excluding the loans and funds withheld liability under Jackson’s REALIC reinsurance arrangements as described above, which amounted to a net liability at 30 June 2020 of $(137) million (30 June 2019: $(196) million; 31 December 2019: $(173) million), the level 3 fair valued financial assets net of financial liabilities were a net asset of $1,676 million at 30 June 2020 (30 June 2019: $706 million; 31 December 2019: $1,581 million). Of this amount, equity securities of $2 million are internally valued, representing less than 0.1 per cent of the total fair valued financial assets net of financial liabilities (30 June and 31 December 2019: nil). Internal valuations are inherently more subjective than external valuations.

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Level 3 financial assets net of financial liabilities comprise the following:

• Private equity investments in both equity securities and limited partnerships within other financial investments of $1,687 million (30 June 2019: $1,224 million; 31 December 2019: $1,301 million) consisting of investments held by Jackson which are primarily externally valued in accordance with International Private Equity and Venture Capital Association guidelines using the proportion of the company’s investment in each fund as shown in external valuation reports;

• Equity securities and holdings in collective investment schemes of $356 million (30 June 2019: $217 million; 31 December 2019: $276 million) consisting primarily of property and infrastructure funds held by the Asia participating funds, which are externally valued using the net asset value of the invested entities;

• Liabilities of $(438) million (30 June 2019: nil; 31 December 2019: $(2) million) for the net asset value attributable to external unit holders in respect of consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets; and

• Other sundry individual financial instruments of a net asset of $71 million (30 June 2019: net liability of $(735) million of which $(574) million represent derivative liabilities; 31 December 2019: net asset of $6 million).

Of the net asset of $1,676 million at 30 June 2020 (30 June 2019: $706 million; 31 December 2019: $1,581 million) referred to above:

• A net asset of $314 million (30 June 2019: $202 million; 31 December 2019: $258 million) is held by the Group’s Asia participating funds and therefore shareholders’ profit and equity are not impacted by movements in the valuation of these financial instruments; and

• A net asset of $1,362 million (30 June 2019: $504 million; 31 December 2019: $1,323 million) is held to support non-linked shareholder-backed business. The majority of these instruments ($1,360 million out of the $1,362 million) are externally valued and are therefore inherently less subjective than internal valuations. These instruments consist primarily of private equity investments held by Jackson as described above. If the value of all these Level 3 financial instruments decreased by 10 per cent, the change in valuation would be $(136) million (30 June 2019: $(51) million; 31 December 2019: $(132) million), which would reduce shareholders’ equity by this amount before tax. All of this amount would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of adjusted operating profit.

(d) Transfers into and transfers out of levels

The Group’s policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except for material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer. Transfers are deemed to have occurred when there is a material change in the observed valuation inputs or a change in the level of trading activities of the securities.

During half year 2020, the transfers between levels within the Group’s portfolio, were primarily transfers from level 1 to level 2 of $4,232 million and transfers from level 2 to level 1 of $1,843 million. These transfers which relate to equity securities and debt securities arose to reflect the change in the observed valuation inputs and in certain cases, the change in the level of trading activities of the securities. There were transfers into level 3 of $53 million in the period.

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C FINANCIAL POSITION CONTINUED

C3 Policyholder liabilities and unallocated surplus

C3.1 Group overview

(i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds[ notes (a),(b)]

	Half year 2020$m
	Asia note C3.2 US note C3.3 Total
At 1 January2020	132,570 269,549 402,119
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position (excludes $186 million classifed as unallocated to a segment) – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities of joint ventures and associate note (d)	115943 269549 385492
	, , , 4750 – 4750
	, , 11,877 – 11,877
Net fows: Premiums Surrenders Maturities/deaths
	9746 8865 18611
	, , , (2083) (7455) (9538)
	, , , (1,153) (1,793) (2,946)
Net fowsnote (d) Shareholders’ transfers post-tax Investment-related items and other movements Foreign exchange translation diferences	6510 (383) 6127
	, , (54) – (54)
	6526 (3511) 3015
	, , , (1,580) – (1,580)
At 30 June 2020	143,972 265,655 409,627
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position (excludes $217 million classifed as unallocated to a segment) – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities of joint ventures and associate note (d)	126052 265655 391707
	, , , 5512 – 5512
	, , 12,408 – 12,408

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	Half year 2019$m
	Asia note C3.2 US note C3.3 Discontinued UK and Europe Total
At 1 January2019	105,408 236,380 210,002 551,790
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position (excludes $50 million classifed as unallocated to a segment) note (c) – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities of joint ventures and associate note (d)	91,836 236,380 193,020 521,236 3,198 – 16,982 20,180 10,374 – – 10,374
Reclassifcation of UK and Europe liabilities as held for distribution Net fows: Premiums Surrenders Maturities/deaths	– – (210,002) (210,002) 9,800 9,136 – 18,936 (1,982) (8,279) – (10,261) (1,278) (1,744) – (3,022)
Net fowsnote (d) Shareholders’ transfers post-tax Investment-related items and other movements Foreign exchange translation diferences	6,540 (887) – 5,653 (49) – – (49) 7,947 21,786 – 29,733 547 – – 547
At 30 June 2019	120,393 257,279 – 377,672
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position (excludes $61 million classifed as unallocated to a segment) note (c) – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities of joint ventures and associate note (d)	105,593 257,279 – 362,872 3,747 – – 3,747 11,053 – – 11,053
Average policyholder liability balancesnote (e) Half year 2020 Halfyear 2019
	133,141 267,602 – 400,743
	109,428 246,830 – 356,258

Notes

(a) 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 year but exclude liabilities that have not been allocated to a reporting segment. The items above are shown gross of external reinsurance.

(b) 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, premiums shown above exclude any deductions for fees/charges; claims (surrenders, maturities and deaths) shown above represent the policyholder liabilities provision released rather than the claims amount paid to the policyholder.

(c) The opening and closing policyholder liabilities of the Asia insurance operations for half year 2019 were after deducting the intra-group reinsurance liabilities ceded by the discontinued UK and Europe operations (M&G plc) to the Hong Kong with-profits business, which were recaptured in October 2019 upon demerger.

(d) Including net flows of the Group’s insurance joint ventures and associate. The Group’s investment in joint ventures and associate are accounted for on an equity method basis in the Group’s statement of financial position. The Group’s share of the policyholder liabilities as shown above relates to life businesses of the China JV, India and the Takaful business in Malaysia.

(e) Average policyholder liabilities have been based on opening and closing balances, adjusted for acquisitions, disposals and other corporate transactions arising in the year, and exclude unallocated surplus of with-profits funds.

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C FINANCIAL POSITION CONTINUED

C3 Policyholder liabilities and unallocated surplus continued

C3.1 Group overview continued

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

		Half year 2020$m
		Asia US Total
At 1 January 2020 Net fows: Premiums Surrenders Maturities/deaths		62262 269549 331811
		, , ,
		5155 8865 14020
		, , , (1702) (7455) (9157)
		, , , (477) (1,793) (2,270)
Net fowsnote Investment-related items and other movements Foreign exchange translation diferences		2976 (383) 2593
		, , 3139 (3511) (372)
		, , (1,052) – (1,052)
At 30 June 2020		67,325 265,655 332,980
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position (excludes $217 million classifed as unallocated to a segment) – Group’s share of policyholder liabilities relating to joint ventures and associate		54917 265655 320572
		, , , 12,408 – 12,408
		Half year 2019$m
	Asia	US Discontinued UK and Europe Total
At 1 January 2019 Reclassifcation of UK and Europe liabilities as held for distribution Net fows: Premiums Surrenders Maturities/deaths	51,705 236,380 51,911 339,996 – – (51,911) (51,911) 5,076 9,136 – 14,212 (1,714) (8,279) – (9,993) (567) (1,744) – (2,311)
Net fowsnote Investment-related items and other movements Foreign exchange translation diferences	2,795 (887) – 1,908 2,100 21,786 – 23,886 315 – – 315
At 30 June 2019	56,915 257,279 – 314,194
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position (excludes $61 million classifed as unallocated to a segment) – Group’s share of policyholder liabilities relating to joint ventures and associate	45,862 257,279 – 303,141 11,053 – – 11,053

Note Including net flows of the Group’s insurance joint ventures and associate.

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(iii) Movement in insurance contract liabilities and unallocated surplus of with-profits funds

Further analysis of the movement in the period of the Group’s gross contract liabilities, reinsurer’s share of insurance contract liabilities and unallocated surplus of with-profits funds (excluding those held by joint ventures and associate) is provided below:

		Reinsurers’ share of	Unallocated
	Contract	insurance contract	surplus of with-profts
	liabilities	liabilities	funds
	$m	$m	$m
At 1 January 2020	385,678	(13,856)	4,750
Income and expense included in the income statementnote (a)	7,555	(31,066)	742
Other movementsnote (b)	(110)	–	–
Foreign exchange translation diferences	(1,199)	4	20
At 30 June 2020	391,924	(44,918)	5,512
At 1 January 2019 Removal of opening balances relating to the discontinued UK and Europe operationsnote (c) Income and expense included in the income statement Other movementsnote (b) Foreign exchange translation diferences	521,286 (193,020) 33,996 53 618	(14,193) 2,169 (880) – (15)	20,180 (16,982) 655 (116) 10
At 30 June 2019	362,933	(12,919)	3,747

Notes

(a) The increase in reinsurers’ share of insurance contract liabilities in half year 2020 includes $27.7 billion in respect of the reinsurance of substantially all of Jackson’s in-force fixed and fixed indexed annuity liabilities to Athene Life Re Ltd, as discussed in note D1.

(b) Other movements include premiums received and claims paid on investment contracts without discretionary participating features, which are taken directly to the statement of financial position in accordance with IAS 39.

(c) The $2,169 million of reinsurer’s share of insurance contract liabilities excluded the intra-group reinsurance assets for the with-profits business ceded to the Asia insurance operations, which were eliminated on consolidation at 1 January 2019.

The total charge for benefit and claims in half year 2020 shown in the income statement comprises the amounts shown as ‘income and expense included in the income statement’ in the table above together with claims paid of $13,504 million in the period and claim amounts attributable to reinsurers of $(590) million.

The movement in the gross contract liabilities and the reinsurer’s share of insurance contract liabilities during the first half of 2020 includes the impact of a change to the calculation of the valuation interest rate (VIR) used to value long-term insurance liabilities in Hong Kong. The effect of the change to the VIR was such that the implicit duration of liabilities is reduced and closer to best estimate expectations. The change reduced policyholder liabilities (net of reinsurance) of the Hong Kong’s shareholder-backed business at 30 June 2020 by $1,039 million. The resulting benefit of $1,039 million in the income statement is included within short-term fluctuations in investment returns in the Group’s supplementary analysis of profit.

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C FINANCIAL POSITION CONTINUED

C3 Policyholder liabilities and unallocated surplus continued

C3.2 Asia insurance operations

C3.2 Asia insurance operations
		Half year 2020$m
	With-profts business	Shareholder-backed business Total Unit-linked liabilities Other business
At 1 January 2020 Comprising:	70308	28850 33412 132570
	,	, , ,
– Policyholder liabilities on the consolidated statement of fnancial position – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities relating to joint ventures and associate note (a)	65558	23571 26814 115943
	, 4750	, , , – – 4750
	, –	, 5,279 6,598 11,877
Premiums: New business In-force
	375	909 1009 2293
	4,216	, , 1,148 2,089 7,453
Surrendersnote (b) Maturities/deaths	4591	2057 3098 9746
	, , , , (381) (1209) (493) (2083)
	, , (676) (87) (390) (1,153)
Net fows Shareholders’ transfers post tax Investment-related items and other movementsnote (c) Foreign exchange translation diferencesnote (d)	3534 761 2215 6510
	, , , (54) – – (54)
	3387 (2243) 5382 6526
	, , , , (528) (794) (258) (1,580)
At 30 June 2020	76,647 26,574 40,751 143,972
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities relating to joint ventures and associate note (a)	71135 21376 33541 126052
	, , , , 5512 – – 5512
	, , – 5,198 7,210 12,408

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		Half year 2019$m
	With-profts business	Shareholder-backed business Total Unit-linked liabilities Other business
At 1 January 2019 Comprising:	53,703	25,704 26,001 105,408
– Policyholder liabilities on the consolidated statement of fnancial position – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities relating to joint ventures and associate note (a)	50,505 3,198 –	20,846 20,485 91,836 – – 3,198 4,858 5,516 10,374
Premiums: New business In-force	769 3,955	1,003 1,180 2,952 1,206 1,687 6,848
Surrendersnote (b) Maturities/deaths	4,724 2,209 2,867 9,800 (268) (1,385) (329) (1,982) (711) (89) (478) (1,278)
Net fows Shareholders’ transfers post-tax Investment-related items and other movementsnote (c) Foreign exchange translation diferencesnote (d)	3,745 735 2,060 6,540 (49) – – (49) 5,847 753 1,347 7,947 232 176 139 547
At 30 June 2019	63,478 27,368 29,547 120,393
Comprising:
– Policyholder liabilities on the consolidated statement of fnancial position – Unallocated surplus of with-profts funds on the consolidated statement of fnancial position – Group’s share of policyholder liabilities relating to joint ventures and associate note (a)	59,731 22,392 23,470 105,593 3,747 – – 3,747 – 4,976 6,077 11,053
Average policyholder liability balancesnote (e) Half year 2020 Halfyear 2019
	68,347 27,712 37,082 133,141
	55,118 26,536 27,774 109,428

Notes

(a) The Group’s investment in joint ventures and associate are accounted for on an equity method and the Group’s share of the policyholder liabilities as shown above relate to the life business of the China JV, India and the Takaful business in Malaysia.

(b) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening policyholder liabilities) was 2.7 per cent in the first half of 2020 (half year 2019: 3.3 per cent).

(c) Investment-related items and other movements in the first half of 2020 primarily represents fixed income asset gains and lower discount rates due to falling interest rates for with-profits and other businesses, partially offset by unfavourable equity market performance for unit-linked business.

(d) Movements in the period have been translated at the average exchange rates for the period ended 30 June 2020 and 2019. The closing balance has been translated at the closing spot rates as at 30 June 2020 and 2019. Differences upon retranslation are included in foreign exchange translation differences.

(e) Average policyholder liabilities have been based on opening and closing balances, adjusted for any acquisitions, disposals and other corporate transactions arising in the year, and exclude unallocated surplus of with-profits funds.

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C FINANCIAL POSITION CONTINUED

C3 Policyholder liabilities and unallocated surplus continued

C3.3 US insurance operations

C3.3 US insurance operations
	Half year 2020$m
	Variable annuity separate account liabilities General account and other business note (d) Total
At 1 January 2020 Premiums Surrenders Maturities/deaths	195070 74479 269549
	, , , 6544 2321 8865
	, , , (5353) (2102) (7455)
	, , , (848) (945) (1,793)
Net fowsnote (a) Transfers from separate to general account Investment-related items and other movementsnote (b)	343 (726) (383)
	(1042) 1042 –
	, , (10,151) 6,640 (3,511)
At 30 June 2020	184,220 81,435 265,655
	Half year 2019$m
	Variable annuity separate account liabilities General account and other business Total
At 1 January 2019 Premiums Surrenders Maturities/deaths	163,301 73,079 236,380 6,032 3,104 9,136 (6,008) (2,271) (8,279) (782) (962) (1,744)
Net fowsnote (a) Transfers from general to separate account Investment-related items and other movements	(758) (129) (887) 637 (637) – 21,737 49 21,786
At 30 June 2019	184,917 72,362 257,279
Average policyholder liability balancesnote (c) Half year 2020 Halfyear 2019
	189,645 77,957 267,602
	174,109 72,721 246,830

Notes

(a) Net outflows in the first half of 2020 were $383 million (first half of 2019 outflows: $887 million) with surrenders and withdrawals from general account exceeding new inflows on this business given lower volumes of institutional sales in the period, partially offset by net inflows into the variable annuity separate accounts.

(b) Negative investment-related items and other movements in variable annuity separate account liabilities of $(10,151) million for the first half of 2020 largely represent negative separate account return following the decrease in the US equity market in the period, partially offset by increased obligations for variable annuity guarantees, following falls in interest rates and equity markets.

(c) Average policyholder liabilities have been based on opening and closing balances, adjusted for any acquisitions, disposals and other corporate transactions arising in the period. (d) Included within the policyholder liabilities for the general account and other business of $81,435 million at 30 June 2020 are $27.7 billion in respect of the reinsured Jackson’s in-force fixed and fixed indexed annuity liabilities to Athene Life Re Ltd, as discussed in note D1.

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C4 Intangible assets

C4.1 Goodwill

Goodwill shown on the consolidated statement of financial position at 30 June 2020 represents amounts allocated to businesses in Asia and Africa in respect of both acquired asset management and life businesses.

and Africa in respect of both acquired asset management and life businesses.
	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Carrying value at beginning of period Reclassifcation/Demerger of UK and Europe operations Additions in the period Exchange diferences	969	2,365 2,365 (1,731) (1,731) – 299 15 36
	–
	–
	(27)
Carryingvalue at end ofperiod	942	649 969

C4.2 Deferred acquisition costs and other intangible assets

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Deferred acquisition costs and other intangible assets attributable to shareholders Other intangible assets, includingcomputer software, attributable to with-profts funds	18538	16,037 17,409 74 67
	, 66
Total of deferred acquisition costs and other intangible assets	18,604	16,111 17,476

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

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Deferred acquisition costs related to insurance contracts as classifed under IFRS 4 Deferred acquisition costs related to investment management contracts, including life assurance contracts classifed as fnancial instruments and investment management contracts under IFRS 4	14567	13,142 14,206 34 33
	, 34
Deferred acquisition costs related to insurance and investment contracts	14,601	13,176 14,239
Present value of acquired in-force policies for insurance contracts as classifed under IFRS 4 (PVIF) Distribution rights and other intangibles	34	39 38 2,822 3,132
	3,903
Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders	3,937	2,861 3,170
Total of deferred acquisition costs and other intangible assetsnote (a)	18,538	16,037 17,409

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C FINANCIAL POSITION CONTINUED

C4 Intangible assets continued

C4.2 Deferred acquisition costs and other intangible assets continued

Notes (a) Total deferred acquisition costs and other intangible assets attributable to shareholders can be further analysed by business operations as follows:

	202	0$m		201	9$m
	Deferred acquisition costs	PVIF and other intangibles†	30 Jun Total	30 Jun Total	31 Dec Total
	Asia US*
Balance at beginning of period: Removal of UK and Europe operations from opening balance Additions‡ Amortisation to the income statement:note (c) Adjusted operating proft Non-operating proft (loss) Disposals and transfers Exchange diferences and other movements Amortisation of DAC related to net unrealised valuation movements on the US insurance operation’s available-for-sale securities recognised within other comprehensive income	1999 12240	3170	17409	15,008 (143) 1,469	15,008 (143) 2,601
	, , – –	, –	, –
	261 353	904	1518
			,
	(157) (363)	(111)	(631)	(371) 616	(792) 1,243
	– 50	(2)	48
	(157) (313)	(113)	(583)	245 (6) 24 (560)	451 (11) 134 (631)
	– –	(13)	(13)
	(30) –	(11)	(41)
	– 248	–	248
Balance at end of period	2,073 12,528	3,937	18,538	16,037	17,409

• Under the Group’s application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of the US insurance operation’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits which are determined using an assumption for long-term investment returns for the separate account of 7.4 per cent (half year and full year 2019: 7.4 per cent) gross of asset management fees and other charges to policyholders, but net of external fund management fees. The other assumptions impacting expected gross profits include mortality assumptions, lapses, assumed unit costs and future hedge costs. 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. The charge of $(313) million in half year 2020 in the US operations includes $(764) million for the write-off of the deferred acquisition costs in respect of the reinsured Jackson’s in-force fixed and fixed indexed annuity liabilities to Athene Life Re Ltd.

† PVIF and other intangibles comprise present value of acquired in-force (PVIF), distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential’s insurance products for a fixed period of time. Software rights include additions of $21 million, amortisation of $(17) million, disposals of $(8) million, foreign exchange of $2 million and closing balance at 30 June 2020 of $83 million (30 June 2019: $70 million; 31 December 2019: $85 million).

‡ On 19 March 2020, the Group signed a new bancassurance agreement with TMB Bank for a period of 15 years. This extended exclusive partnership agreement required the novation of TMB Bank’s current bancassurance distribution agreement with another insurance group. The agreement cost Thai Baht 24.5 billion, which will be paid in two instalments with Thai Baht 12.0 billion paid in April 2020 and the remainder on 1 January 2021. The amount included in additions in the table above is $788 million.

(b) The DAC amount in respect of US arises in the insurance operations which comprises the following amounts:

The DAC amount in resect of US arises in the insurance oerations which comrises the followin amounts:
p p p g	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Variable annuity and other business Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)*	12975	12,038 12,935 (622) (695)
	, (447)
Total DAC for US operations	12,528	11,416 12,240

• A net gain of $248 million (half year 2019: a loss of $(560) million; full year 2019: a loss of $(631) million) for shadow DAC amortisation is booked within other comprehensive income to reflect a reduction in shadow DAC of $535 million as a result of the reinsurance of substantially all of Jackson’s fixed and fixed annuity business to Athene Life offset by the impact from the positive unrealised valuation movement for half year 2020 of $2,540 million (half year 2019: positive unrealised valuation movement of $3,386 million; full year 2019: positive unrealised valuation movement of $4,023 million). These adjustments reflect the movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market.

(c) Sensitivity of US DAC amortisation charge The amortisation charge to the income statement in respect of the US DAC asset is reflected in both adjusted operating profit and short-term fluctuations in investment returns. The amortisation charge to adjusted operating profit in a reporting period comprises:

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

• An element of acceleration or deceleration arising from market movements differing from expectations.

In periods where the cap and floor features of the mean reversion technique (which is used for moderating the effect of short-term volatility in investment returns) are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect. It is currently estimated that DAC amortisation will accelerate (decelerate) by $17 million for every 1 per cent under (over) the mean reversion rate (set using the calculation described below to give an average over an 8 year period of 7.4 per cent) the annualised actual separate account growth rate differs by.

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 half year 2020, the DAC amortisation charge for adjusted operating profit was determined after including a charge for accelerated amortisation of $(32) million (half year 2019: credit for deceleration: $191 million; full year 2019: credit for deceleration: $280 million). DAC amortisation for variable annuities is sensitive to separate account performance. The acceleration arising in the first half of 2020 reflects a mechanical increase in the projected separate account return for the next five years under the meanreversion technique. Under this technique, the projected level of return for each of the next five years is adjusted so that in combination with the actual rates of return for the preceding three years (including the current period) the assumed long-term annual separate account return of 7.4 per cent is realised on average over the entire eight-year period. The application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. At 30 June 2020, it would take approximate movements in separate account values of more than either negative 30 per cent or positive 42 per cent for the mean reversion assumption to move outside the corridor.

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C5 Borrowings

C5.1 Core structural borrowings of shareholder-financed businesses

C5.1 Core structural borrowings of shareholder-fnanced businesses
	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Central operations: Subordinated and other debt not substituted to M&G plc in 2019: Subordinated debt: US$250m 6.75% Notesnote (i) US$300m 6.5% Notesnote (i) US$700m 5.25% Notes US$1,000m 5.25% Notes US$725m 4.375% Notes US$750m 4.875% Notes €20m Medium Term Notes 2023 £435m 6.125% Notes 2031 Senior debt:note (ii) £300m 6.875% Notes 2023 £250m 5.875% Notes 2029 $1,000m 3.125% Notes 2030note (iii) Bank loansnote (iv) $350m Loan 2024 £275m Loan 2022		250 250 300 300 700 700 994 996 721 721 743 744 23 22 548 571 375 392 285 298 – – – 350 350 –
	250
	300
	700
	997
	723
	746
	22
	533
	366
	280
	982
	350
	–
Total debt not substituted to M&G plc in 2019 Subordinated debt substituted to M&Gplc in 2019	6249	5,289 5,344 3,931 –
	, –
Total central operations Jackson US$250m 8.15% Surplus Notes 2027note (v)	6249	9,220 5,344 250 250
	, 250
Total core structural borrowings of shareholder-fnanced businesses	6,499	9,470 5,594

Notes

(i) These borrowings can be converted, in whole or in part, at the Company’s option and subject to certain conditions, on any interest payment date, into one or more series of Prudential preference shares.

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

(iii) In April 2020, the Company issued $1,000 million 3.125 per cent senior debt maturing on 14 April 2030 with proceeds, net of costs of $982 million.

(iv) The bank loan of $350 million was drawn in November 2019 at a cost of LIBOR plus 0.2 per cent. The loan matures on 7 November 2024. The £275 million bank loan was repaid by the Group in October 2019.

(v) Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.

C5.2 Operational borrowings

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Borrowings in respect of short-term fxed income securities programmes – commercial paper Lease liabilities under IFRS 16 Non-recourse borrowings of consolidated investment fundsnote (a) Other borrowingsnote (b)	506	841 520 291 371 694 1,045 292 406
	318
	1081
	, 97
Operational borrowings attributable to shareholder-fnanced businesses	2,002	2,118 2,342
Lease liabilities under IFRS 16 Other borrowings		272 259 31 44
	224
	19
Operational borrowings attributable to with-profts businesses	243	303 303
Total operational borrowings	2,245	2,421 2,645

Notes

(a) In all instances, the holders of the debt instruments issued by consolidated investment funds do not have recourse beyond the assets of those funds. (b) 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.

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C FINANCIAL POSITION CONTINUED

C6 Sensitivity analysis to key market risks

The Group’s risk framework and the management of risk, including that attached to the Group’s financial statements, have been included in the ‘Group Chief Risk and Compliance Officer’s Report on the risks facing our business and how these are managed’. The following sections set out the sensitivity of the Group’s segmental profit or loss and shareholders’ equity to instantaneous changes in interest rates and equity levels, which are then assumed to remain unchanged for the long term. Further information of the Group’s sensitivity to key risks was set out in the Group’s financial statements for the year ended 31 December 2019.

The published sensitivities in notes C6.1 and C6.2 below only allow for limited management actions such as changes to policyholder bonuses, where applicable. If the economic conditions set out in the sensitivities persisted, the financial impacts may differ to the instantaneous impacts shown below. Given the continuous risk management processes in place, management could take additional actions to help mitigate the impact of these stresses, including (but not limited to) rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold. The sensitivities reflect all consequential impacts from market movements at the valuation date. In particular, where relevant the 30 June 2020 sensitivities reflect potential tax benefits that would arise under the relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the US for 2020.

C6.1 Sensitivity to interest rate risk

The sensitivities shown below are for movements in risk-free rates (based on local government bond yields at the valuation date) in isolation and are subject to a floor of zero. They do not include movements in credit risk that may affect credit spreads and hence the valuation of debt securities and policyholder liabilities. A one-letter credit downgrade in isolation (ie ignoring any consequential change in valuation) would not have a material impact on IFRS profit or shareholders’ equity.

Following the fall in interest rates during the first half of 2020, the estimated sensitivity to a decrease in interest rates at 30 June 2020 has been updated to a decrease of 0.5 per cent. This compares to a 1 per cent change at 31 December 2019. The estimated sensitivity to a decrease and increase in interest rates at 30 June 2020 is as follows:

30 June 2020	Asia insurance$m	US insurance$m
	Decrease of 0.5% Increase of 1%	Decrease of 0.5% Increase of 1%
Net efect on shareholders’ equity*	(1,203) 64	(90) (123)

• The effect from the instantaneous changes in interest rates above, if they arose, would impact profit after tax for Asia insurance operations and would mostly be recorded within short-term fluctuations in investment returns. The impact on profit after tax would be the same as the net effect on shareholders’ equity. For US insurance operations, the instantaneous changes in interest rates above, if they arose, would cause the net effect on equity shown above through two constituent movements. Firstly, profit after tax, net of related changes in the amortisation of DAC, would be impacted (decrease of 0.5 per cent: $(1,036) million; increase of 1 per cent: $1,577 million), and would mostly be recorded within short-term fluctuations in investment returns. Secondly, the effect would also impact other comprehensive income (decrease of 0.5 per cent: $946 million; increase of 1 per cent: $(1,700) million) in respect of the direct effect on the carrying value of the available-for-sale debt securities, net of related changes in the amortisation of DAC and related tax effects.

The estimated sensitivity to a decrease and increase in interest rates at 31 December 2019 is as follows:

31 December 2019	Asia insurance$m	US insurance$m
	Decrease of 1% Increase of 1%	Decrease of 1% Increase of 1%
Net efect on shareholders’ equity*	(702) (718)	20 (553)

• The effect from the instantaneous changes in interest rates above, if they arose, would impact profit after tax for Asia insurance operations and would mostly be recorded within short-term fluctuations in investment returns. The impact on profit after tax would be the same as the net effect on shareholders’ equity. For US insurance operations, the instantaneous changes in interest rates above, if they arose, would cause the net effect on equity shown above through two constituent movements. Firstly, profit after tax, net of related changes in the amortisation of DAC, would be impacted (decrease of 1 per cent: $(2,224) million; increase of 1 per cent: $1,691 million), and would mostly be recorded within short-term fluctuations in investment returns. Secondly, the effect would also impact other comprehensive income (decrease of 1 per cent: $2,244 million; increase of 1 per cent: $(2,244) million) in respect of the direct effect on the carrying value of the available-for-sale debt securities, net of related changes in the amortisation of DAC and related tax effects.

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Asia insurance operations

The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in interest rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4 measurement basis reflects market interest rates from year to year. This varies by local business unit. For example:

• certain Asia businesses apply US GAAP, for which the results can be more sensitive as the effect of interest rate movements on the backing investments may not be offset by liability movements;

• the level of options and guarantees in the products written in a particular business unit will affect the degree of sensitivity to interest rate movements; and

• the degree of sensitivity of the results is dependent on the interest rate level at that point of time.

The sensitivity of the Asia operations presented as a whole at a given point in time will also be affected by a change in the relative size of the individual businesses.

Following the substantial fall in interest rates over the first half of 2020, at 30 June 2020 the ‘decrease of 0.5 per cent’ sensitivity is dominated by the impact of interest rate movements on some local business units’ policyholder liabilities, which are expected to increase more than the offsetting increase in the value of government and corporate bond investments. This is similar to the effect described in note B1.2(i), with the impacts exacerbated if interest rates were to fall further from the historically low levels at 30 June 2020.

Liabilities become less sensitive to interest rates as interest rates rise. If interest rates were to increase by 1 per cent from 30 June 2020 levels, the change in the value of assets is expected to be of a similar magnitude to the change in the value of policyholder liabilities. At higher levels of interest rates, the change in the value of assets is expected to exceed the change in the value of liabilities, as evident in the ‘increase of 1 per cent’ sensitivity at 31 December 2019.

US insurance operations

The GMWB features attached to variable annuity business (other than ‘for life’ components) are accounted for under US GAAP at fair value and, therefore, will be sensitive to changes in interest rates. Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes to amortisation of DAC and deferred tax, are recorded within the income statement. Fair value movements on debt securities, net of related changes to amortisation of DAC and deferred tax, are recorded within other comprehensive income.

The sensitivity movements provided in the table above are at a point in time and reflect the hedging programme in place on the balance sheet date, while the actual impact on financial results would vary contingent upon a number of factors. Jackson’s hedging programme is primarily focused on managing the economic risks in the business and protecting statutory solvency under larger market movements, and does not explicitly aim to hedge the IFRS accounting results. The magnitude of the impact of the sensitivities on profit after tax at 30 June 2020 is broadly similar to the impact at 31 December 2019, reflecting largely offsetting effects with the impact of more sensitive guarantee liabilities at 30 June 2020 being broadly matched by the impact from a change in the position of Jackson’s interest rate hedging at that date. The reduction in the magnitude of the impact of the sensitivities on other comprehensive income, and hence shareholders’ equity, reflects the reduction in the volume of available-for-sale debt securities following the Athene reinsurance transaction described in note D1(i).

Asset management and other operations

The profit for the period of asset management operations is sensitive to the level of assets under management, as this significantly affects the value of management fees earned by the business in the current and future periods.

The Group’s asset management and other operations do not hold significant financial investments. At 30 June 2020, the financial investments of the other operations are principally short-term treasury bills held by the Group’s treasury function for liquidity purposes and so there is limited sensitivity to interest rate movements.

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C FINANCIAL POSITION CONTINUED

C6 Sensitivity analysis to key market risks continued

C6.2 Sensitivity to equity and property price risk

In the equity risk sensitivity analysis shown, the Group has considered the impact of an instantaneous 20 per cent fall in equity markets. If equity markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but rather would be expected to occur over a longer period of time, during which the hedge positions within Jackson, where the underlying equity risk is greatest, would be rebalanced. The equity risk sensitivity analysis provided assumes that all equity indices fall by the same percentage. The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices at 30 June 2020 is as follows:

30 June 2020	Asia insurance$m	US insurance$m
	Decrease of 20% Increase of 10%	Decrease of 20% Increase of 10%
Net efect on shareholders’ equity*	(559) 302	2,174 (484)

• The effect from the instantaneous changes in equity and property prices above, if they arose, would impact profit after tax for Asia and the US insurance operations, which would mostly be recorded within short-term fluctuations in investment returns.

The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices at 31 December 2019 is as follows:

31 December 2019	Asia insurance$m	US insurance$m
	Decrease of 20% Increase of 10%	Decrease of 20% Increase of 10%
Net efect on shareholders’ equity*	(816) 408	762 608

• The effect from the instantaneous changes in equity and property prices above, if they arose, would impact profit after tax for Asia and the US insurance operations, which would mostly be recorded within short-term fluctuations in investment returns.

Asia insurance operations

Generally, changes in equity and property investment values are not directly offset by movements in non-linked policyholder liabilities. Movements in equities backing with-profits and unit-linked business have been excluded as they are generally matched by an equal movement in insurance liabilities (including unallocated surplus of with-profits funds). The impact on changes to future profitability as a result of changes to the asset values within unit-linked or with-profits funds have not been included in the instantaneous sensitivity above. The estimated sensitivities shown above include equity and property investments held by the Group’s joint venture and associate businesses.

US insurance operations

The sensitivity movements shown above exclude the impact of the instantaneous equity movements on the separate account fees, and include the movements relating to the reinsurance of GMIB guarantees.

They assume instantaneous market movements, while the actual impact on financial results would vary contingent upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other factors including volatility, interest rates and elapsed time.

Jackson is exposed to equity risk through the options embedded in the fixed indexed annuity liabilities and guarantees included in certain variable annuity benefits. This risk is managed using an equity hedging programme to minimise the risk of a significant economic impact as a result of increases or decreases in equity market levels. Jackson purchases futures and options that hedge the risks inherent in these products. Due to the nature of the valuation of the free-standing derivatives and the variable annuity guarantee features under IFRS, this hedge, while effective on an economic basis, would not automatically offset within the financial statements as the impact of equity market movements resets the free-standing derivatives immediately while some of the hedged liabilities reset more slowly and fees are recognised prospectively in the period in which they are earned. Jackson’s hedging programme is primarily focused on managing the economic risks in the business and protecting statutory solvency in the circumstances of larger market movements. The hedging programme does not explicitly aim to hedge IFRS accounting results, which can lead to volatility in the IFRS results in a period of significant market movements, as was seen in the first half of 2020. In addition to the exposure explained above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships in investment pools and other financial derivatives.

The sensitivities reflect the actual hedging portfolio in place at 30 June 2020 and 31 December 2019. The nature of Jackson’s dynamic hedging programme means that the portfolio, and hence the results of these sensitivities, will change on an ongoing basis. The impacts shown under an increase or decrease in equity markets at 30 June 2020 reflect the factors discussed above. The changes from the values shown at 31 December 2019 largely arise from the additional equity protection in place at 30 June 2020 following the market volatility seen over the first half of the year.

Asset management and other operations

The profit for the period of asset management operations is sensitive to the level of assets under management, as this significantly affects the value of management fees earned by the business in the current and future periods. Assets under management will rise and fall as equities increase or decrease in value with a consequential impact on profitability.

With the exception of the above, there is limited sensitivity to equity price risk.

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C7 Deferred tax

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

	Half year 2020$m
	Balance at 1 Jan Movement in income statement Movement through other comprehensive income and equity Other movements including foreign currency movements Balance at 30 Jun
Deferred tax assets Unrealised losses or gains on investments Balances relating to investment and insurance contracts Short-term temporary diferences Unused tax losses
	– – – 1 1
	32 8 – (1) 39
	3889 238 – 1 4128
	, , 154 (64) – 1 91
Total	4,075 182 – 2 4,259
Deferred tax liabilities Unrealised losses or gains on investments Balances relating to investment and insurance contracts Short-term temporarydiferences
	(877) 19 7 3 (848)
	(1507) (110) – 68 (1549)
	, , (2,853) (28) – – (2,881)
Total	(5,237) (119) 7 71 (5,278)

C8 Share capital, share premium and own shares

Issued shares of 5p each fully paid:	30 Jun 2020	30 Jun 2019	31 Dec 2019
	Number of ordinary shares Share capital $m Share premium $m	Number of ordinary shares Share capital $m Share premium $m	Number of ordinary shares Share capital $m Share premium $m
Balance at beginning of period Shares issued under share-based schemes Impact of change in presentation currency	2601159949 172 2625	2,593,044,409 166 2,502 6,751,790 – 13 – (1) (3)	2,593,044,409 166 2,502 8,115,540 – 22 – 6 101
	,,, , 7700498 – 10
	,, – – –
Balance at end ofperiod	2,608,860,447 172 2,635	2,599,796,199 165 2,512	2,601,159,949 172 2,625

Options outstanding under save as you earn schemes to subscribe for shares at each period end shown below are as follows:

Number of shares to subscribe for	Share price range	Exercisable by year
	from to
30 Jun 2020 2,197,782 30 Jun 2019 3,808,687 31 Dec 2019 3,805,447	1,104p 1,455p	2025
	901p 1,455p 1,104p 1,455p	2024 2025

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C FINANCIAL POSITION CONTINUED

C8 Share capital, share premium and own shares continued

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, up until the demerger of its UK and Europe operations (M&G plc) in October 2019, via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of $237 million at 30 June 2020 (30 June 2019: $228 million; 31 December 2019: $183 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2020, 11.5 million (30 June 2019: 9.5 million; 31 December 2019: 8.4 million) Prudential plc shares with a market value of $173 million (30 June 2019: $207 million; 31 December 2019: $161 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 11.5 million which was in June 2020.

Within the trusts, shares are notionally allocated by business unit reflecting the employees to which the awards were made. The Company purchased the following number of shares in respect of employee incentive plans:

	Number of
	shares
	purchased	Cost*
	(in millions)	$m
Half year 2020	5.8	75.2
Half year 2019	3.1	64.2
Fullyear 2019	3.7	73.8

• The cost in US dollars shown has been calculated from the share prices in pounds sterling using the monthly average exchange rate for the month in which those shares were purchased.

The Group consolidated a number of authorised investment funds where it was deemed to control these funds under IFRS up until the demerger in October 2019. Some of these funds held shares in Prudential plc and the cost of acquiring these shares was included in the cost of own shares in 2019.

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 2020 or 2019.

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D Other information

D1 Gain (loss) attaching to corporate transactions

	2020$m	2019$m
	Half year	Half year Full year
Gain arising on reinsurance of Jackson’s in-force fxed and fxed indexed annuity businessnote (i) Gain on disposalsnote (ii) Other transactionsnote (iii)	846	– – 270 265 (253) (407)
	–
	–
Totalgain (loss) attachingto corporate transactions	846	17 (142)

Notes

(i) With effect from 1 June 2020, Jackson reinsured substantially all of its in-force portfolio of US fixed and fixed indexed annuities with Athene Life Re Ltd, which resulted in a pre-tax gain of $846 million, after allowing for the write-off of deferred acquisition costs associated with the business reinsured. The transaction excluded Jackson’s legacy life and institutional business as well as the REALIC portfolio and group pay-out annuity business reinsured from John Hancock and was collateralised to reduce the exposure to counterparty risk.

Under the reinsurance arrangement, Jackson reinsured $27.6 billion liabilities (valued at 1 June 2020) in return for a premium of $28.9 billion net of ceding commission, comprising principally of bonds. The pre-tax gain also includes the realised gains arising on the bonds net of the deferred acquisition costs written off as a result of the transaction. After allowing for tax and the reduction in unrealised gains recorded directly in other comprehensive income, the impact of the reinsurance transaction on IFRS shareholders’ equity is a reduction of $(1.1) billion.

(ii) In 2019, the gain on disposals principally related to profits arising from a 4 per cent reduction in the Group’s stake in its associate in India, ICICI Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly-owned subsidiary that provides consumer finance.

(iii) In 2019, other transactions primarily reflected costs related to the demerger of the Group’s UK and Europe operations (M&G plc).

D2 Contingencies and related obligations

The Group is involved in various litigation and regulatory proceedings. These may from time to time include class actions involving Jackson. While the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their ultimate outcome will not have a material adverse effect on the Group’s financial condition, results of operations or cash flows. There have been no material changes to the Group’s contingencies and related obligations in the six months ended 30 June 2020.

D3 Post balance sheet events

First interim ordinary dividend

The 2020 first interim ordinary dividend approved by the Board of Directors after 30 June 2020 is as described in note B6.

Completion of the equity investment by Athene into US business

On 17 July 2020, the Group completed the equity investment by Athene into the US business, which was announced in June 2020. Under the transaction, Athene Life Re Ltd invested $500 million in Prudential’s US business in return for an 11.1 per cent economic interest for which the voting interest is 9.9 per cent. Athene’s investment is in the form of a cash subscription for the issuance of new common equity in the holding company containing Prudential’s US businesses, including Jackson National Life Insurance Company and PPM America. If the transaction had completed at 30 June 2020, the effect on the IFRS shareholders’ equity would have been a reduction of $550 million. There would have been no impact on profit or loss for the period.

D4 Related party transactions

There were no transactions with related parties during the six months ended 30 June 2020 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 2019.

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Statement of Directors’ responsibilities

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

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

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

• 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 2020, 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 2020 and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the Group’s consolidated financial statements for the year ended 31 December 2019 that could do so.

Prudential plc Board of Directors:

Chairman Paul Manduca

Executive Directors Michael Wells Mark FitzPatrick CA James Turner FCA FCSI FRM

Independent Non-executive Directors

The Hon. Philip Remnant CBE FCA Jeremy Anderson CBE David Law ACA Kaikhushru Nargolwala FCA Anthony Nightingale CMG SBS JP Alice Schroeder Shriti Vadera Thomas Watjen Fields Wicker-Miurin OBE Amy Yip

11 August 2020

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Independent review report to Prudential plc

Conclusion

We have been engaged by the Company to review the International Financial Reporting Standards (IFRS) condensed set of financial statements in the Half Year Financial Report for the six months ended 30 June 2020 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the IFRS condensed set of financial statements in the Half Year Financial Report for the six months ended 30 June 2020 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 2020 which comprises the Summarised Consolidated Income Statement, the Movement in Shareholders’ Equity, the Summary Statement of Financial Position and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the EEV basis supplementary financial information for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with the European Embedded Value Principles issued by the European Insurance CFO Forum in 2016 (‘the EEV Principles’), using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information.

Scope of review

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

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

Directors’ responsibilities

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

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

Our responsibility

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

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

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

Philip Smart

For and on behalf of KPMG LLP Chartered Accountants 15 Canada Square London E14 5GL

11 August 2020

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

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04

European Embedded Value (EEV) basis results

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Page Index to EEV basis results 106

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Index to European Embedded Value (EEV) basis results

		Page
Summarised consolidated income statement		107
Movement in EEV basis shareholders’ equity		108
Summarystatement of EEV basis fnancialposition		109
Notes on the EEV basis results
1	Basis ofpreparation	110
2	Results analysis bybusiness area	111
3	Analysis of new businessproft	112
4	Operating proft from long-term business in force	113
5	Short-term fuctuations in investment returns	114
6	Efect of changes in economic assumptions	114
7	Net core structural borrowings of shareholder-fnanced businesses	115
8	Loss attachingto corporate transactions	115
9	Analysis of movement in total net worth and value of in-force for long-term business	116
10	Analysis of movement in free surplus	118
11	Sensitivityof results to alternative economic assumptions	122
12	Methodologyand accounting presentation	124
13	Assumptions	129
14	Insurance new business	132
15	Post balance sheet event	133

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 issued by the European Insurance CFO Forum in 2016. The EEV Principles provide consistent definitions, a framework for setting actuarial assumptions and an approach to the underlying methodology and disclosures. All results are stated net of tax and converted using actual exchange rates (AER) unless otherwise stated. AER are actual historical exchange rates for the specific accounting period.

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European Embedded Value (EEV) basis results

Summarised consolidated income statement

Note	Half year 2020$m	2019$m
	Asia US Group total	Half year Group total Full year Group total*
Continuing operations: New business 3 Business in force 4		2,125 4,405 1,652 3,240
	912 248 1160
	, 998 440 1,438
Long-term business Asset management	1910 688 2598	3,777 7,645 131 275
	, , 126 8 134
Operating proft from long-term and asset management businesses	2,036 696 2,732	3,908 7,920
Other income and expenditurenote (i) Restructuringand IFRS 17 implementation costs	(415)	(467) (923) (26) (92)
	(102)
Operating proft for the period Short-term fuctuations in investment returns 5 Efect of changes in economic assumptions 6 Impact of NAIC reform, hedge modelling and other related changes in the USnote (ii) Mark-to-market value movements on core structural borrowings 7 Loss attachingto corporate transactions 8	2215	3,415 6,905 2,884 3,254 (1,774) (1,868) – (3,457) (636) (466) (31) (207)
	, 415
	(7026)
	, –
	17
	(423)
Non-operating(loss)proft	(7,017)	443 (2,744)
(Loss) proft for the period from continuing operations Proft (loss) for theperiod from discontinued operations	(4802)	3,858 4,161 1,657 (4,797)
	, –
(Loss)proft for theperiod	(4,802)	5,515 (636)
Attributable to: Equity holders of the Company: From continuing operations From discontinued operations Non-controllinginterests from continuingoperations		3,852 4,152 1,657 (4,797) 6 9
	(4824)
	, –
	22
	(4,802)	5,515 (636)

• The half year 2019 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars at 31 December 2019.

EEV basis basic earnings per share

	2020	2019
	Half year	Half year Full year
Based on operating proft from continuing operations, after non-controlling interests (in cents) Based on (loss) proft for the period attributable to equity holders of the Company (in cents) From continuing operations From discontinued operations Weighted average number of shares in theperiod (millions)	84.5¢	132.0¢ 266.6¢
	(185.8)¢	149.1¢ 160.5¢ 64.2¢ (185.4)¢
	–
	(185.8)¢	213.3¢ (24.9)¢ 2,583 2,587
	2,596

Notes

(i) EEV basis other income and expenditure represents the post-tax IFRS basis results for other operations (including interest costs on core structural borrowings, corporate expenditure for head office functions in London and Hong Kong, the Group’s treasury function and Africa operations) less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 12(i)(g)).

(ii) The $(3,457) million impact of NAIC reform, hedge modelling and other related changes in the US in full year 2019 related to the implementation of the National Association of Insurance Commissioners’ (NAIC) changes to the US statutory reserve and capital framework for variable annuities, early-adopted by Jackson at 31 December 2019. As part of the implementation of these changes, enhancements were made to the model used to allow for hedging within US statutory reporting, which were subsequently utilised within EEV to update the allowance for the long-term cost of hedging under EEV economic assumptions, alongside a number of other changes following the NAIC reform with the objective of bringing the EEV free surplus more in line with the US statutory basis of reporting. No subsequent changes were made to the approach to the long-term cost of hedging allowance for EEV reporting in half year 2020.

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EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS CONTINUED

Movement in EEV basis shareholders’ equity

	Half year 2020$m	2019$m
	Asia US Other Group total	Half year Group total Full year Group total*
Continuing operations: Operating proft from long-term and asset management businesses Other income and expenditure Restructuringand IFRS 17 implementation costs		3,908 7,920 (467) (923) (26) (92)
	2036 696 – 2732
	, , – – (415) (415)
	(29) (9) (64) (102)
Operating proft (loss) for the period Non-operating(loss)proft	2007 687 (479) 2215	3,415 6,905 443 (2,744)
	, , (3,161) (3,927) 71 (7,017)
(Loss) proft for the period from continuing operations (Loss) proft for the period from discontinued operationsnote (iv)	(1154) (3240) (408) (4802)	3,858 4,161 1,657 (4,797)
	, , ,
(Loss)proft for theperiod	(1,154) (3,240) (408) (4,802)	5,515 (636)
Non-controlling interests Foreign exchange movements on operations Intra-group dividends and investment in operationsnote (i) External dividends Mark-to-market value movements on Jackson assets backing surplus and required capital Other movementsnote (ii) Demerger dividend in specie of M&Gplcnote (iv)	(22) – – (22)	(6) (9) 154 666 – – (1,108) (1,634) 177 206 (151) 95 – (7,379)
	(540) – 27 (513)
	(356) – 356 –
	– – (674) (674)
	– 317 – 317
	89 124 (288) (75)
	– – – –
Net (decrease) increase in shareholders’ equity Shareholders’ equityat beginningofperiod	(1983) (2799) (987) (5769)	4,581 (8,691) 63,402 63,402
	, , , 39,235 16,342 (866) 54,711
Shareholders’ equityat end ofperiod	37,252 13,543 (1,853) 48,942	67,983 54,711
Representing: Long-term business Asset management and other Goodwill attributable to shareholders		68,927 54,179 (3,061) (290) 2,117 822
	35940 13531 – 49471
	, , , 538 12 (1879) (1329)
	, , 774 – 26 800
Shareholders’ equityat end ofperiod	37,252 13,543 (1,853) 48,942	67,983 54,711
Shareholders’ equity per share at end ofperiodnote (iii)	1,428¢ 519¢ (71)¢ 1,876¢	2,615¢ 2,103¢
Long-term business Asset management and other Goodwill attributable to shareholders		64,174 64,174 (2,874) (2,874) 2,102 2,102
	37843 16336 – 54179
	, , , 596 6 (892) (290)
	796 – 26 822
Shareholders’ equityat beginningofperiod	39,235 16,342 (866) 54,711	63,402 63,402
Shareholders’ equity per share at beginningofperiodnote (iii)	1,508¢ 628¢ (33)¢ 2,103¢	2,445¢ 2,445¢

• The half year 2019 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars at 31 December 2019.

Notes

(i) Intra-group dividends represent dividends that have been declared in the period. Investment in operations reflects movements in share capital. The amounts included for these items in the analysis of movement in free surplus (note 10) for Asia 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.

(ii) Other movements include reserve movements in respect of share capital subscribed, share-based payments, treasury shares and intra-group transfers between operations that have no overall effect on the Group’s shareholders’ equity.

(iii) Based on the number of issued shares at 30 June 2020 of 2,609 million shares (30 June 2019: 2,600 million shares; 31 December 2019: 2,601 million shares).

(iv) Discontinued operations for half year and full year 2019 related to the UK and Europe operations (M&G plc) that were demerged from the Group in October 2019. The demerger dividend in specie of M&G plc was recorded at the fair value of M&G plc at the date of the demerger on 18 October 2019. The difference between the fair value and its carrying value, together with profit earned up to the date of the demerger were recorded as loss for the period from the discontinued UK and Europe operations in full year 2019.

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Summary statement of EEV basis financial position

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec*
Assets less liabilities before deduction of insurance funds Less insurance fundsnote Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with-profts funds Shareholders’ accrued interest in the long-term business Less non-controllinginterests	371825	599,294 396,241
	,
	(352518)	(574,228) (376,572) 42,946 35,234
	, 29,832
	(322686)	(531,282) (341,338) (29) (192)
	, (197)
Total net assets attributable to equityholders of the Company	48,942	67,983 54,711
Share capital Share premium IFRS basis shareholders’ reserves		165 172 2,512 2,625 22,360 16,680
	172
	2635
	, 16,303
IFRS basis shareholders’ equity Shareholders’ accrued interest in the long-term business	19110	25,037 19,477 42,946 35,234
	, 29,832
EEV basis shareholders’ equity	48,942	67,983 54,711
Representing: Continuing operations Discontinued UK and Europe operations		50,472 54,711 17,511 –
	48942
	, –
	48,942	67,983 54,711

• The half year 2019 comparative results have been re-presented from those previously published to reflect the change in the Group’s presentation currency from pounds sterling to US dollars at 31 December 2019.

Note

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

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Notes on the EEV basis results

1 Basis of preparation

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

Overview

Results prepared under the EEV Principles represent the present value of the shareholders’ interest in the post-tax future profits (on a local statutory basis) expected to arise from the current book of long-term 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 expected future shareholder cash flows from the in-force covered business (value of in-force business), less explicit allowance for the cost of locked-in required capital and the time value of financial options and guarantees across a range of economic scenarios;

• Locked-in required capital, based on the applicable local statutory regulations, including any amounts considered to be required above the local statutory minimum requirements to satisfy regulatory constraints (the application of this principle to each business unit is set out below); and

• The shareholders’ total net worth in excess of required capital (free surplus). Free surplus is defined in note 10.

Required capital

For shareholder-backed business, the following capital requirements apply for long-term business:

• Asia: the level of required capital has been set to an amount at least equal to local statutory notification requirements. For Singapore life operations, from 31 March 2020 the level of net worth and required capital is based on the Tier 1 Capital position under the new risk-based capital framework (RBC2), which removes certain negative reserves permitted to be recognised in the full RBC2 regulatory position applicable to the Group’s Local Capital Summation Method (LCSM), in order to better reflect free surplus and its generation. For China JV life operations, the level of required capital follows the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the China Risk Oriented Solvency System (C-ROSS) regime; and

• US: 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).

Key assumptions

The value of in-force business is determined by projecting post-tax future profits (on a local statutory basis) by product, using best estimate assumptions for operating factors such as persistency, mortality, morbidity and expenses. Explicit allowances are made for the cost of holding required capital under the applicable local statutory regimes and the time value of financial options and guarantees (TVOG). The TVOG is determined by weighting the probability of outcomes across a large number of different economic scenarios, and is less applicable to health and protection business that generally contains more limited financial options or guarantees.

As well as best estimate assumptions for operating factors, the projected cash flows assume a level of future investment return and are discounted using a risk discount rate. Both the risk discount rate and investment return are updated at each valuation date to reflect current market risk-free rates, with the effect that changes in the risk-free rates impact all projected future cash flows. During the first half of 2020, this has had an overall negative effect on new business and in-force profitability. Different products will be sensitive to different assumptions, for example, spread-based products or products with guarantees are likely to benefit from higher assumed investment returns.

Risk discount rates are set equal to the risk-free rate at the valuation date plus a product-specific allowance for market and non-market risks, excluding risks explicitly captured elsewhere such as via the TVOG. Products such as participating and unit-linked business will typically have a higher allowance for market risk as compared to health and protection products due to a higher proportion of equity-type assets within the investment portfolio. Other product design and business features also affect the risks attached to the emergence of shareholder cash flows, for example the construct of with-profits funds in some business units can reduce the sensitivity of both policyholder and shareholder cash flows for participating products. Risk discount rates in any one business unit will reflect a blend of the risks attaching to the products written in that business.

The value of future new business is excluded from the embedded value. For the purposes of preparing EEV basis results, insurance JVs and associates are included at the Group’s proportionate share of the embedded value. Non-insurance subsidiaries, JVs and associates are included at the Group’s proportionate share of IFRS net assets, which may differ from a fair value approach.

A description of the EEV methodology and accounting presentation is provided in note 12, including an explanation of the delineation of profit between operating and non-operating items. Further details of best estimate assumptions are provided in note 13.

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2 Results analysis by business area

The half year 2019 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The half year 2019 CER comparative results are translated at half year 2020 average exchange rates for US dollars following the change in the Group’s presentation currency.

Annual premium equivalents and new business profit from continuing operations

	Half year 2020$m	Actual exchange rate	Constant exchange rate
		Half year 2019$m Change%	Half year 2019$m Change%
	Annual premium equivalent New business proft	Annual premium equivalent New business proft Annual premium equivalent New business proft	Annual premium equivalent New business proft Annual premium equivalent New business proft
Asia US	1665 912	2,560 1,675 (35)% (46)% 1,075 450 (9)% (45)%	2,540 1,673 (34)% (45)% 1,075 450 (9)% (45)%
	, 979 248
Grouptotal	2,644 1,160	3,635 2,125 (27)% (45)%	3,615 2,123 (27)% (45)%

Profit for the period

Half year 2020$m	Actual exchange rate	Constant exchange rate
	Half year 2019$m Change%	Half year 2019$m Change%
Continuing operations: Asia Long-term business 1,910 Asset management 126	2,751 (31)% 117 8%	2,738 (30)% 115 10%
Total 2,036	2,868 (29)%	2,853 (29)%
US Long-term business (Jackson) 688 Asset management 8	1,026 (33)% 14 (43)%	1,026 (33)% 14 (43)%
Total 696	1,040 (33)%	1,040 (33)%
Operating proft from long-term and asset management businesses 2,732 Other income and expenditure (415) Restructuringand IFRS 17 implementation costs (102)	3,908 (30)% (467) 11% (26) (292)%	3,893 (30)% (458) 9% (25) (308)%
Operating proft for theperiod 2,215	3,415 (35)%	3,410 (35)%
Short-term fuctuations in investment returns 415 Efect of changes in economic assumptions (7,026) Mark-to-market value movements on core structural borrowings 17 Loss attachingto corporate transactions (423)	2,884 (1,774) (636) (31)	2,894 (1,782) (619) (30)
Total non-operating(loss)proft from continuingoperations (7,017)	443	463
(Loss) proft for the period from continuing operations (4,802) Proft for theperiod from discontinued operations –	3,858 (224)% 1,657 n/a	3,873 (224)% 1,613 n/a
(Loss)proft for theperiod (4,802)	5,515 (187)%	5,486 (188)%

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NOTES ON THE EEV BASIS RESULTS CONTINUED

2 Results analysis by business area continued

2 Results analysis by business areacontinued
EEV basis basic earnings per share
Half year 2020	Actual exchange rate	Constant exchange rate
	Half year 2019 Change%	Half year 2019 Change%
Based on operating proft from continuing operations after non-controlling interests (in cents) 84.5¢ Based on (loss) proft for the period attributable to equity holders of the Company (in cents): From continuing operations (185.8)¢ From discontinued operations – (185.8)¢	132.0¢ (36)% 149.1¢ (225)% 64.2¢ n/a 213.3¢ (187)%	132.0¢ (36)% 149.9¢ (224)% 62.4¢ n/a 212.3¢ (188)%

3 Analysis of new business profit

	Half year 2020
	Annual premium equivalents (APE) $m note 14 Present value of new business premiums (PVNBP) $m note 14 New business margin proft $m note (i)	New business margin
		APE % PVNBP %
Asianote (ii) US	1665 9173 912	55% 9.9%
	, , 979 9,789 248	25% 2.5%
Grouptotal	2,644 18,962 1,160	44% 6.1%
	Half year 2019
	Annual premium equivalents (APE) $m note 14 Present value of new business premiums (PVNBP) $m note 14 New business margin proft $m note (i)	New business margin
		APE % PVNBP %
Asianote (ii) US	2,560 14,218 1,675 1,075 10,752 450	65% 11.8% 42% 4.2% 58% 8.5%
Grouptotal	3,635 24,970 2,125
	Full year 2019
	Annual premium equivalents (APE) $m note 14 Present value of new business premiums (PVNBP) $m note 14 New business margin proft $m	New business margin
		APE % PVNBP %
Asianote (ii) US	5,161 29,244 3,522 2,223 22,231 883	68% 12.0% 40% 4.0% 60% 8.6%
Grouptotal	7,384 51,475 4,405

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Notes

(i) The movement in new business profit from $2,125 million for half year 2019 to $1,160 million for half year 2020 is analysed as follows:

Half year 2019 new business proft Foreign exchange movement Efect of changes in interest rates and other economic assumptions	Asia $m 1,675 (2) (78)	US $m 450 – (119)	Group total $m 2,125 (2) (197)
Impact of US EEV hedge modelling enhancements in full year 2019	–	(47)	(47)
Sales volume, business and product mix and other items	(683)	(36)	(719)
Half year 2020 new business proft	912	248	1,160

(ii) Asia new business profit is analysed as follows:

Asia new business proft is analysed as follows:
	2020$m	2019$m
	Half year	AER Half year CER Half year AER Full year
China JV Hong Kong Indonesia Taiwan Other	127	126 122 262 1,070 1,081 2,042 85 82 227 28 30 75 366 358 916
	353
	68
	35
	329
Total Asia insurance	912	1,675 1,673 3,522

4 Operating profit from long-term business in force

	Half year 2020$m	Half year 2019$m	Full year 2019$m
	Asia US Group total	Asia US Group total	Asia US Group total
Unwind of discount and other expected returnsnote (i) Efect of changes in operating assumptionsnote (ii) Experience variances and other itemsnote (iii)	753 299 1052	805 459 1,264 169 – 169 102 117 219	1,542 728 2,270 539 1 540 285 145 430
	, 118 – 118
	127 141 268
Total operating proft from long-term business in force	998 440 1,438	1,076 576 1,652	2,366 874 3,240

Notes

(i) The movement in unwind of discount and other expected returns from $1,264 million for half year 2019 to $1,052 million for half year 2020 is analysed as follows:

Half year 2019 unwind of discount and other expected returns Foreign exchange movement Efect of changes in interest rates and other economic assumptions	Asia $m 805 (11) (165)	US $m 459 – (76)	Group total $m 1,264 (11) (241)
Impact of US EEV hedge modelling enhancements in full year 2019	–	(86)	(86)
Growth in opening value of in-force business and other items	124	2	126
Half year 2020 unwind of discount and other expected returns	753	299	1,052

(ii) The half year 2020 effect of changes in operating assumptions of $118 million in Asia principally reflects the beneficial effect on the effective tax rate for Indonesia from changes to local tax legislation in the first half of 2020.

(iii) In Asia, the half year 2020 effect of experience variances and other items of $127 million is driven overall by positive mortality and morbidity experience in a number of local business units, together with overall positive persistency experience.

In the US, the effect of experience variances and other items is analysed as shown below. Other items for half year 2020 mainly includes the effect of positive persistency experience.

	2020$m	2019$m
	Half year	Half year Full year
Spread experience variance Amortisation of interest-related realised gains and losses Other items	(12)	16 38 47 102 54 5
	53
	100
Total US experience variances and other items	141	117 145

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NOTES ON THE EEV BASIS RESULTS CONTINUED

5 Short-term fluctuations in investment returns

	2020$m	2019$m
	Half year	Half year Full year
Asia Hong Kong Indonesia Malaysia Singapore Taiwan Thailand Other		1,161 1,526 6 (14) 10 (20) 198 338 120 147 117 319 44 155
	966
	(157)
	(30)
	(18)
	72
	(75)
	7
Total Asianote (i)	765	1,656 2,451
US Investment return related experience on fxed income securitiesnote (ii) Investment return related impact due to changed expectation of profts on in-force variable annuity business in future periods based on current period separate account return, net of related hedgingactivityand other itemsnote (iii)		(21) (243) 1,275 1,119
	(123)
	(257)
Total US	(380)	1,254 876
Other operations	30	(26) (73)
Grouptotal	415	2,884 3,254

Notes

(i) In half year 2020, the credit of $765 million includes higher than expected bond returns following generally lower interest rates across the region, partially offset by lower than expected equity returns.

(ii) 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;

• Credit experience versus the longer-term assumption (which was positive for all periods); and

– The difference between actual realised gains and losses and the amortisation of interest-related realised gains and losses that is recorded within operating profit. (iii) This item reflects the net impact of:

• Changes in projected future fees and future benefit costs arising from the difference between the actual return on separate account asset values in the period of negative 3.5 per cent and that assumed (geometric) of positive 1.7 per cent (half year 2019: actual growth of 15.2 per cent compared to assumed growth of 2.3 per cent; full year 2019: actual growth of 24.1 per cent compared to assumed growth of 4.8 per cent); and

– Related hedging activity arising from realised and unrealised gains and losses on equity and interest rate derivatives compared to the expected long-term allowance for hedging costs recorded in operating profit, and other items.

6 Effect of changes in economic assumptions

	2020$m	2019$m
	Half year	Half year Full year
Asia Hong Kong Indonesia Malaysia Singapore Taiwan Thailand Other		(618) (853) 43 141 44 127 (131) 18 (85) (142) (80) (220) 106 262
	(3470)
	, (42)
	10
	(179)
	(172)
	(2)
	(71)
Total Asianote (i)	(3,926)	(721) (667)
US Variable annuity businessnote (ii) General account businessnote (iii)		(1,461) (1,556) 408 355
	(3491)
	, 391
Total US	(3,100)	(1,053) (1,201)
Grouptotal	(7,026)	(1,774) (1,868)

Notes

(i) In half year 2020, the negative effect of $(3,926) million primarily arises from movements in long-term interest rates, resulting in lower assumed fund earned rates in Hong Kong, Singapore and Taiwan that impact all projected future cash flows, partially offset by lower risk discount rates. This impact includes a benefit of $170 million from a change to the calculation of the valuation interest rate used to value long-term insurance liabilities in Hong Kong, as discussed in note I(i) of the additional financial information.

• (ii) In half year 2020, the charge of $(3,491) million mainly reflects the effect of a decrease in the assumed separate account return following the 120 basis points decrease in the US 10-year treasury yield over the period, resulting in lower projected fee income and an increase in projected benefit costs for variable annuity business, partially offset by lower risk discount rates.

(iii) For general account business, the credit of $391 million mainly reflects the increase in the present value of future projected spread income from the combined effect of the decrease in interest rates and increase in credit spreads in the period, partially offset by the effect of an increase in the additional credit risk allowance as described in note 12(i)(h).

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7 Net core structural borrowings of shareholder-financed businesses

	2020$m	201	9$m
	30 Jun	30 Jun	31 Dec
	IFRS basis Mark-to- market value adjustment EEV basis at market value	IFRS basis Mark-to- market value adjustment EEV basis at market value	IFRS basis Mark-to- market value adjustment EEV basis at market value
Holding company cash and short-term investmentsnote (i)	(1,907) – (1,907)	(3,010) – (3,010)	(2,207) – (2,207)
Central borrowings: Subordinated and other debt not substituted to M&G plc in 2019: Subordinated debt Senior debtnote (ii) Bank loan Subordinated debt substituted to M&Gplc in 2019note (ii)
	4271 196 4467	4,279 207 4,486 660 226 886 350 – 350	4,304 327 4,631 690 221 911 350 – 350
	, , 1628 283 1911
	, , 350 – 350
	6249 479 6728	5,289 433 5,722 3,931 266 4,197	5,344 548 5,892 – – –
	, , – – –
Total central borrowings	6,249 479 6,728	9,220 699 9,919	5,344 548 5,892
Total net central funds Jackson Surplus Notes	4342 479 4821	6,210 699 6,909 250 79 329	3,137 548 3,685 250 85 335
	, , 250 109 359
Net core structural borrowings of shareholder-fnanced businessesnote (iii)	4,592 588 5,180	6,460 778 7,238	3,387 633 4,020

Notes

(i) Holding company includes central finance subsidiaries.

(ii) In April 2020, the Company issued $1,000 million 3.125 per cent senior debt maturing on 14 April 2030.

(iii) The movement in the value of core structural borrowings includes foreign exchange effects for pounds sterling denominated debts, which are included in ‘Exchange movements on foreign operations’. The movement in the mark-to-market value adjustment can be analysed as follows:

on foreign operations’. The movement in the mark-to-market value adjustment can be analysed as follows:
	2020$m	2019$m
	Half year	Half year Full year
Mark-to-market value adjustment at beginning of period Mark-to-market value adjustment on subordinated debt substituted to M&G plc at fair value in October 2019 at beginning of period Change in fair value of debt under IFRS as a result of consent process in preparation for the demerger (Credit) charge in the period included in the income statement* Efect of foreign exchange movements	633	233 233 – (82) (219) – 766 466 (2) 16
	–
	–
	(17)
	(28)
Mark-to-market value adjustment at end of period	588	778 633

• The total income statement charge of $766 million in half year 2019 related to $636 million from continuing operations and $130 million from discontinued operations.

8 Loss attaching to corporate transactions

	2020$m	2019$m
	Half year	Half year Full year
Loss on reinsurance of Jackson’s in-force fxed and fxed indexed annuity portfolionote (i) Gain on disposalsnote (ii) Other transactionsnote (iii)	(423)	– – 181 178 (212) (385)
	–
	–
Total	(423)	(31) (207)

Notes

(i) In June 2020, the Group announced the reinsurance of substantially all of Jackson’s in-force portfolio of fixed and fixed indexed annuity business to Athene Life Re Ltd. Further details are included in note D1 of the IFRS basis results. The effect on the EEV position largely reflects the loss of future profits recorded in the value of in-force business as a result of the reinsurance and the loss of unrealised gains on assets passed to Athene, partly offset by the reinsurance commission received after deducting tax. (ii) In 2019, the gain on disposals principally related to profits arising from a 4 per cent reduction in the Group’s stake in its associate in India, ICICI Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly-owned subsidiary that provides consumer finance.

(iii) In 2019, other transactions primarily reflected costs related to the demerger of the Group’s UK and Europe operations (M&G plc).

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NOTES ON THE EEV BASIS RESULTS CONTINUED

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

	Half year 2020$m
	Free surplus Required capital Total net worth Value of in-force business Total embedded value
Groupnote (i) Shareholders’ equity at beginning of period New business contributionnote 3 Existing business – transfer to net worth Expected return on existing businessnote 4 Changes in operating assumptions and experience variancesnote 4 Restructuringand IFRS 17 implementation costs
	5395 6891 12286 41893 54179
	, , , , , (517) 369 (148) 1308 1160
	, , 1665 (459) 1206 (1206) –
	, , , 70 103 173 879 1052
	, 130 121 251 135 386
	(17) – (17) – (17)
Operating proft Non-operating(loss)proft	1331 134 1465 1116 2581
	, , , , 186 1,586 1,772 (8,860) (7,088)
(Loss) proft for the period Foreign exchange movements Intra-group dividends and investment in operations Other movements	1517 1720 3237 (7744) (4507)
	, , , , , (72) (55) (127) (378) (505)
	(235) – (235) – (235)
	539 – 539 – 539
Shareholders’ equityat end ofperiodnote (ii)	7,144 8,556 15,700 33,771 49,471
Asia Shareholders’ equity at beginning of period New business contributionnote 3 Existing business – transfer to net worth Expected return on existing businessnote 4 Changes in operating assumptions and experience variancesnote 4 Restructuringand IFRS 17 implementation costs
	3624 3182 6806 31037 37843
	, , , , , (298) 104 (194) 1106 912
	, 1009 (205) 804 (804) –
	, 52 35 87 666 753
	99 101 200 45 245
	(10) – (10) – (10)
Operating proft Non-operating(loss)proft	852 35 887 1013 1900
	, , (508) 83 (425) (2,736) (3,161)
(Loss) proft for the period Foreign exchange movements Intra-group dividends and investment in operations Other movements	344 118 462 (1723) (1261)
	, , (72) (55) (127) (378) (505)
	(235) – (235) – (235)
	98 – 98 – 98
Shareholders’ equityat end ofperiod	3,759 3,245 7,004 28,936 35,940

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	Half year 2020$m Free surplus Required capital Total net worth Value of in-force business Total embedded value
US Shareholders’ equity at beginning of period New business contributionnote 3 Existing business – transfer to net worth Expected return on existing businessnote 4 Changes in operating assumptions and experience variancesnote 4 Restructuringand IFRS 17 implementation costs	1,771 3,709 5,480 10,856 16,336 (219) 265 46 202 248 656 (254) 402 (402) – 18 68 86 213 299 31 20 51 90 141 (7) – (7) – (7)
Operating proft Loss (gain) on reinsurance of in-force fxed and fxed indexed annuity portfolionote 8 Other non-operating(loss)proft	479 99 578 103 681 851 (627) 224 (647) (423) (157) 2,130 1,973 (5,477) (3,504)
(Loss) proft for the period Intra-group dividends and investment in operations Other movements	1,173 1,602 2,775 (6,021) (3,246) – – – – – 441 – 441 – 441
Shareholders’ equityat end ofperiod	3,385 5,311 8,696 4,835 13,531

Notes (i) Long-term business only. (ii) 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 for long-term business as shown below:

below:
	30 Jun 2020$m	31 Dec 2019$m
	Asia US Group total note (i)	Asia US Group total note (i)
Value of in-force business before deduction of cost of capital and time value of options and guarantees Cost of capital Time value of options and guaranteesnote (iii)	30383 6674 37057	32,396 11,417 43,813 (866) (370) (1,236) (493) (191) (684)
	, , , (998) (481) (1479)
	, (449) (1,358) (1,807)
Net value of in-force business Total net worth	28936 4835 33771	31,037 10,856 41,893 6,806 5,480 12,286
	, , , 7,004 8,696 15,700
Total embedded value	35,940 13,531 49,471	37,843 16,336 54,179

(iii) The time value of options and guarantees (TVOG) arises from the variability of economic outcomes in the future and is, where appropriate, calculated as the difference between an average outcome across a range of economic scenarios, calibrated around a central scenario, and the outcome from one central economic scenario, as described in note 12(i)(d). The TVOG and the outcome from the central economic scenario are linked; as the central economic scenario is updated for market conditions and the outcome reflects more or less of the guaranteed benefit payouts and associated product charges, there will be consequential changes to the TVOG.

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NOTES ON THE EEV BASIS RESULTS CONTINUED

10 Analysis of movement in free surplus

For EEV covered business, free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (total net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to total net worth so that backing assets are included at fair value, rather than at cost, to comply with the EEV Principles. In the Group’s Asia and US operations, assets deemed to be inadmissible on a local regulatory basis are included in net worth where considered recognisable on an EEV basis, with the exception of deferred tax assets in the US that are inadmissible under the local regulatory basis, which have been included in the value of in-force business (VIF) within the Group’s EEV results. Free surplus for asset management and other operations (including assets and liabilities of the Group’s central operations, the Group’s treasury function and Africa operations) is taken to be IFRS basis post-tax earnings and shareholders’ equity, net of goodwill attributable to shareholders, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under the Group’s capital regime. A reconciliation of EEV free surplus to the Group’s LCSM surplus over Group minimum capital requirements is set out in note I(i) of the additional financial information.

	Half year 2020$m
	Asia note (a) US note (b) Total insurance and asset management Other	Group total
Operating free surplus generated before impact of US EEV hedge modelling enhancements and restructuring and IFRS 17 implementation costsnote (d) Impact of US EEV hedge modelling enhancements in full year 2019note (d)	988 1029 2017 (415)	1602
	, , – (535) (535) –	, (535)
Operating free surplus generated before restructuring and IFRS 17 implementation costs Restructuringand IFRS 17 implementation costs	988 494 1482 (415)	1067
	, (29) (9) (38) (64)	, (102)
Operating free surplus generated Gain on reinsurance of Jackson’s in-force fxed and fxed indexed annuity portfolionote 8(i) Other non-operatinglossnote (e)	959 485 1444 (479)	965
	, – 851 851 –	851
	(508) (157) (665) (47)	(712)
Free surplus generated Net cash fows paid to parent companynote (f) External dividends Foreign exchange movements on foreign operations, timing diferences and other itemsnote (g)	451 1179 1630 (526)	1104
	, , (400) – (400) 400	, –
	– – – (674)	(674)
	26 441 467 (351)	116
Net movement in free surplus Balance at beginningofperiod	77 1620 1697 (1151)	546
	, , , 4,220 1,777 5,997 3,739	9,736
Balance at end ofperiodnote (h)	4,297 3,397 7,694 2,588	10,282
Representing: Free surplus excluding distribution rights and other intangibles Distribution rights and other intangibles
	3426 3377 6803 (424)	6379
	, , , 871 20 891 3,012	, 3,903
	4,297 3,397 7,694 2,588	10,282

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	Half year 2019$m
	Continuing operations	Discontinued UK and Europe operations	Group total
	Asia note (a) US note (b) Total insurance and asset management Other
Operating free surplus generated before restructuring and IFRS 17 implementation costsnote (d) Restructuring and IFRS 17 implementation costs	886 1,075 1,961 (467) (17) (1) (18) (8)	– –	1,494 (26)
Operating free surplus generated Non-operating proft (loss) from continuing operationsnote (e) Free surplus generated from discontinued operations	869 1,074 1,943 (475) 872 (525) 347 (239) – – – –	– – 1,260	1,468 108 1,260
Free surplusgenerated in theperiod	1,741 549 2,290 (714)	1,260	2,836
Net cash fows to parent companynote (f) External dividends Foreign exchange movements, timing diferences and other itemsnote (g)	(578) (525) (1,103) 1,562 – – – (1,108) (45) 163 118 377	(459) – (972)	– (1,108) (477)
Net movement in free surplus Balance at beginningofperiod	1,118 187 1,305 117 2,591 2,760 5,351 3,831	(171) 5,977	1,251 15,159
Balance at end ofperiodnote (h)	3,709 2,947 6,656 3,948	5,806	16,410
Representing: Free surplus excluding distribution rights and other intangibles Distribution rights and other intangibles	3,151 2,921 6,072 1,710 558 26 584 2,238	5,781 25	13,563 2,847
	3,709 2,947 6,656 3,948	5,806	16,410

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NOTES ON THE EEV BASIS RESULTS CONTINUED

10 Analysis of movement in free surplus continued

	Full year 2019$m
	Continuing operations	Discontinued UK and Europe operations	Group total
	Asia note (a) US note (b) Total insurance and asset management Other
Operating free surplus generated before impact of US EEV hedge modelling enhancements and restructuring costsnote (d) 1,772 2,028 3,800 (923) Impact of US EEV hedge modelling enhancements – (903) (903) –		– –	2,877 (903)
Operating free surplus generated before restructuring and IFRS 17 implementation costs 1,772 1,125 2,897 (923) Restructuring and IFRS 17 implementation costs (31) (5) (36) (56)		– –	1,974 (92)
Operating free surplus generated 1,741 1,120 2,861 (979) Non-operating (loss) proft from continuing operationsnote (e) 1,195 (1,763) (568) (448) Free surplus generated from discontinued operations – – – –		– – 2,512	1,882 (1,016) 2,512
Free surplus generated 2,936 (643) 2,293 (1,427) Net cash fows paid to parent companynote (f) (950) (525) (1,475) 2,159 Demerger dividend in specie of M&G plc – – – – External dividends – – – (1,634) Foreign exchange movements on foreign operations, timing diferences and other itemsnote (g) (357) 185 (172) 810		2,512 (684) (7,379) – (426)	3,378 – (7,379) (1,634) 212
Net movement in free surplus 1,629 (983) 646 (92) Balance at beginningofyear 2,591 2,760 5,351 3,831		(5,977) 5,977	(5,423) 15,159
Balance at end ofyearnote (h) 4,220 1,777 5,997 3,739		–	9,736
Representing: Free surplus excluding distribution rights and other intangibles 3,624 1,753 5,377 1,227 Distribution rights and other intangibles 596 24 620 2,512		– –	6,604 3,132
4,220 1,777 5,997 3,739		–	9,736

Notes

(a) Operating free surplus generated by Asia insurance and asset management operations before restructuring and IFRS 17 implementation costs can be analysed as follows:

	Half year 2020$m	Half year 2019$m	% change
		AER CER	AER CER
Operating free surplus generated from in-force life business Investment in new businessnote (c)	1160	1,092 1,075 (323) (319)	6% 8% 8% 7%
	, (298)
Long-term business Asset management	862	769 756 117 115	12% 14% 8% 10%
	126
Total Asia	988	886 871	12% 13%

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(b) Operating free surplus generated by US insurance and asset management operations before restructuring and IFRS 17 implementation costs can be analysed as follows:

Half year 2020$m	Half year 2019$m	% change
Operating free surplus generated from in-force life business before EEV hedge modelling enhancementsnote (d) 1,240 Impact of EEV hedge modelling enhancements in full year 2019note (d) (535)	1,405 –	(12)% n/a
Operating free surplus generated from in-force life business 705 Investment in new businessnote (c) (219)	1,405 (344)	(50)% 36%
Long-term business 486 Asset management 8	1,061 14	(54)% (43)%
Total US 494	1,075	(54)%

(c) Free surplus invested in new business primarily represents acquisition costs and amounts set aside for required capital.

(d) US in-force free surplus generation before EEV hedge modelling enhancements in 2019 included a $355 million benefit from the release of incremental reserves in the first half of 2019 following the integration of the John Hancock business. The EEV hedge modelling enhancements in full year 2019 reduced the value of in-force business at 31 December 2019, and the subsequent unwind of those cash flows over half year 2020 reduces the expected transfer to net worth and hence operating free surplus generation by $(535) million.

(e) Other non-operating items include short-term fluctuations in investment returns, the effect of changes in economic assumptions for long-term business and the effect of other corporate transactions. For half year 2020 these amounts include the benefit of a change to the valuation interest rate used to value long-term insurance liabilities in Hong Kong, as discussed in note I(i) of the additional financial information. In addition, for full year 2019 these amounts included the impact of the NAIC reform, hedge modelling and other related changes in the US.

(f) Net cash flows to parent company for Asia operations reflect the flows as included in the holding company cash flow. (g) Foreign exchange movements, timing differences and other items represent:

	Half year 2020$m
	Asia US Total insurance and asset management Other Group total
Foreign exchange movements Mark-to-market value movements on Jackson assets backing surplus and required capital Other items (including intra-group loans and other intra-group transfers between operations and other non-cash items)	(107) – (107) (19) (126)
	– 317 317 – 317
	133 124 257 (332) (75)
	26 441 467 (351) 116

	Half year 2019$m
	Continuing operations	Discontinued UK and Europe operations	Group total
	Asia US Total insurance and asset management Other
Foreign exchange movements Mark-to-market value movements on Jackson assets backing surplus and required capital Other items (including intra-group loans and other intra-group transfers between operations and other non-cash items)	44 – 44 (26) – 177 177 – (89) (14) (103) 403	(7) – (965)	11 177 (665)
	(45) 163 118 377	(972)	(477)

Full year 2019 $m

	Full year 2019$m
	Continuing operations	Discontinued UK and Europe operations	Group total
	Asia US Total insurance and asset management Other
Foreign exchange movements Mark-to-market value movements on Jackson assets backing surplus and required capital Other items (including intra-group loans and other intra-group transfers between operations and other non-cash items)*	99 – 99 91 – 206 206 – (456) (21) (477) 719	77 – (503)	267 206 (261)
	(357) 185 (172) 810	(426)	212

• The Group total for other items in full year 2019 included the effect of the redemption of $0.5 billion of subordinated debt.

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NOTES ON THE EEV BASIS RESULTS CONTINUED

10 Analysis of movement in free surplus continued

(h)	Free surplus from continuing operations can be analysed as:	30 Jun 2020$m
		Asia US Total insurance and asset management Other Group total
	Long-term business Asset management and other	3759 3385 7144 – 7144
		, , , , 538 12 550 2,588 3,138
	Total	4,297 3,397 7,694 2,588 10,282
		30 Jun 2019$m
		Asia US Total insurance and asset management Other Group total
	Long-term business Asset management and other	3,315 2,883 6,198 – 6,198 394 64 458 3,948 4,406
	Total	3,709 2,947 6,656 3,948 10,604
		31 Dec 2019$m
		Asia US Total insurance and asset management Other Group total
	Long-term business Asset management and other	3,624 1,771 5,395 – 5,395 596 6 602 3,739 4,341
	Total	4,220 1,777 5,997 3,739 9,736

11 Sensitivity of results to alternative economic assumptions

The tables below show the sensitivity of the embedded value as at 30 June 2020 and 31 December 2019 and the new business profit for half year 2020 and full year 2019 to:

• 1 per cent increase in interest rates, including consequential changes in assumed investment returns for all asset classes, market values of fixed interest assets and risk discount rates (but excluding changes in the allowance for market risk);

• 0.5 per cent decrease in interest rates, including consequential changes in assumed investment returns for all asset classes, market values of fixed interest assets and risk discount rates (but excluding changes in the allowance for market risk);

• 1 per cent rise in equity and property yields;

• 20 per cent fall (10 per cent fall for 2019) in the market value of equity and property assets (embedded value only);

• 1 per cent increase in the risk discount rates. The main driver for changes in the risk discount rates from period to period is changes in the risk-free rates, the impact of which is generally expected to be offset by a corresponding change in assumed investment returns. Both of these effects are factored into the interest rate sensitivities described above; and

• The Group minimum capital requirements under the LCSM in contrast to EEV basis required capital (embedded value only).

The sensitivities shown below are for the impact of instantaneous (and permanent) 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 (including derivatives) held at the valuation dates indicated. The sensitivities reflect the consequential impacts from market movements at the valuation date. In particular, where relevant the 30 June 2020 sensitivities reflect potential tax benefits that would arise under the relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the US for 2020. The results only allow for limited management actions such as changes to future policyholder bonuses where applicable. If such economic conditions persisted, the financial impacts may differ to the instantaneous impacts shown below. In this case management could also take additional actions to help mitigate the impact of these stresses. No change in the assets held at the valuation date is assumed when calculating sensitivities.

If the changes in assumptions shown in the sensitivities were to occur, the effects shown below would be recorded within two components of the profit analysis for the following period, namely the effect of changes in economic assumptions and short-term fluctuations in investment returns. In addition, for changes in interest rates, the effect shown below for the US (Jackson) would also be recorded within mark-to-market value movements on Jackson assets backing surplus and required capital, which are taken directly to shareholders’ equity. In addition to the sensitivity effects shown below, the other components of the profit for the following period would be calculated by reference to the altered assumptions, for example new business profit and unwind of discount and other expected returns, together with the effect of other changes such as altered corporate bond spreads.

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New business profit from long-term business

	Half year 2020$m	Full year 2019$m
	Asia US Group total	Asia US Group total
New businessproftnote 3	912 248 1,160	3,522 883 4,405
Interest rates and consequential efects – 1% increase Interest rates and consequential efects – 0.5% decrease Equity/property yields – 1% rise Risk discount rates – 1% increase	64 143 207	(46) 207 161 (121) (123) (244) 210 70 280 (715) (22) (737)
	(68) (85) (153)
	62 34 96
	(176) (3) (179)

Embedded value of long-term business

	30 Jun 2020$m	31 Dec 2019$m
	Asia US Group total	Asia US Group total
Shareholders’ equitynote 9	35,940 13,531 49,471	37,843 16,336 54,179
Interest rates and consequential efects – 1% increase Interest rates and consequential efects – 0.5% decrease Equity/property yields – 1% rise Equity/property market values – 10% fall Equity/property market values – 20% fall Risk discount rates – 1% increase Groupminimum capital requirements	(510) 1362 852	(1,408) 798 (610) (28) (686) (714) 1,758 556 2,314 (810) (1,205) (2,015) n/a n/a n/a (5,263) (509) (5,772) 175 221 396
	, (730) 92 (638)
	1413 542 1955
	, , n/a n/a n/a
	(1577) (764) (2341)
	, , (4621) (417) (5038)
	, , 246 287 533

Overall, the directional movements in the sensitivities from 31 December 2019 to 30 June 2020 reflect the generally lower government bond yields and lower equity markets at 30 June 2020, and, in the case of the US, the actual hedging portfolio in place at both valuation dates, which varies from period to period due to the nature of Jackson’s dynamic hedging programme.

Asia insurance operations

Interest rate sensitivities for the Asia long-term business embedded value have been impacted by the generally lower risk-free rates at 30 June 2020 as compared to 31 December 2019, and have become more sensitive to changes in assumed investment returns. For a 1 per cent increase in interest rates the effect of increasing the risk discount rates exceeds the benefit of higher assumed investment returns, but to a lesser extent than at 31 December 2019. For a 0.5 per cent decrease in interest rates the negative impact of lower assumed investment returns outweighs the benefit of lower risk discount rates to a great extent than at 31 December 2019.

US insurance operations

The interest rate and equity/property market values sensitivity movements provided in the table above are at a point in time and reflect the hedging programme in place on the valuation date, while the actual impact on financial results would vary contingent upon a number of factors.

The sensitivity of the US long-term business embedded value to interest rates is driven by the change in assumed investment returns, and the consequential impact on projected future fee income and benefit costs, offset by the impact of market value movements on derivatives and other assets. At the lower interest rates at 30 June 2020, the positive impact from higher assumed investment returns from a 1 per cent increase in risk-free rates is higher than at 31 December 2019. For a 0.5 per cent decrease in interest rates the increase in expected benefit costs has been more than offset by the hedging protection held to manage such a risk.

The equity/property market values sensitivity is driven by a negative effect from lower future fee income and increased projected benefit costs on variable annuity business, partially offset by market value movements on equity derivatives held at the valuation date. Following the substantial fall in interest rates over the first half of 2020, the larger impact from lower future fee income and increased projected benefit costs is more than offset by the additional equity protection in place at 30 June 2020.

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NOTES ON THE EEV BASIS RESULTS CONTINUED

12 Methodology and accounting presentation

(i) Methodology

(a) Covered business

The EEV basis 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 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 (including interest costs on core structural borrowings, corporate expenditure for head office functions in London and Hong Kong, the Group’s treasury function and Africa operations). Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note (g) below.

The definition of long-term insurance business 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 under the technical definition.

(b) Valuation of in-force and new business

The EEV basis results are prepared incorporating best estimate assumptions about all relevant factors including levels of future investment returns, persistency, mortality, morbidity and expenses, as described in note 13(iii)(a). These assumptions are used to project future cash flows. The present value of the projected future cash flows is then calculated using a discount rate, as shown in note 13(i), which reflects both the time value of money and all other non-diversifiable risks associated with the cash flows that are not otherwise allowed for.

The total profit that emerges over the lifetime of an individual contract as calculated under the EEV basis is the same as that calculated under the IFRS basis. Since the EEV basis reflects discounted future cash flows, under the EEV 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.

New business

In determining the EEV basis value of new business, premiums are included in projected cash flows on the same basis of distinguishing regular and single premium business as set out in the Group’s new business sales reporting.

New business premiums reflect those premiums attaching to the covered business, including premiums for contracts classified as investment contracts under IFRS. New business premiums for regular premium products are shown on an annualised basis.

New business profit represents profit determined by applying operating and economic assumptions as at the end of the period. New business profitability is a key metric for the Group’s management of the development of the business. In addition, 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 on new business written in the period and one-tenth of single premiums. PVNBP is calculated as the aggregate of single premiums and the present value of expected future premiums from regular premium new business, allowing for lapses and the other assumptions made in determining the EEV new business profit.

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 the covered business conceptually reflect the aggregate of the post-tax IFRS basis results and the movements in the additional shareholders’ interest recognised on an EEV basis. Therefore, the start point for the calculation of the EEV basis results for Jackson, as for other businesses, reflects the market value movements recognised on an IFRS basis.

In determining the movements in the additional shareholders’ interest, for Jackson’s debt securities backing liabilities, the aggregate EEV basis results reflect the fact that the value of in-force business incorporates the discounted value of expected future spread earnings. This value is generally not affected by short-term market movements in debt securities that, broadly speaking, are held for the longer term. Consequently, within EEV total net worth, Jackson’s debt securities backing liabilities are held on a statutory basis (largely at book value), while those backing surplus and required capital are accounted for at fair value. Consistent with the treatment applied under IFRS, for Jackson’s debt securities classified as available-for-sale, movements in unrealised appreciation and depreciation on these securities are accounted for directly in equity rather than in the income statement, as shown in ‘Mark-to-market value movements on Jackson assets backing surplus and required capital’ in the statement of movement in shareholders’ equity.

(c) 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 held and the discounted value of the projected releases of this capital, allowing for post-tax investment earnings on the capital.

The EEV results are affected by the movement in this cost from period to period, 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 within the fund is already adjusted to reflect its expected release over time and so no further adjustment to the shareholder position is necessary.

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(d) Financial options and guarantees

Nature of financial options and guarantees in Prudential’s long-term business

Asia

Participating products in Asia, principally written in Hong Kong, Singapore and Malaysia, have both guaranteed and non-guaranteed elements. These products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses: regular and final. Regular bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular products. Final bonuses are guaranteed only until the next bonus declaration.

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 typically accrue at rates set at inception and do not vary subsequently with market conditions.

US (Jackson)

Jackson issues variable annuity contracts for which it contractually guarantees to the contract holder, subject to specific conditions, either: a) 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 Benefits (GMWB)) or as death benefits (Guaranteed Minimum Death Benefits (GMDB)). These guarantees generally protect the policyholder’s contract 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, with an expected long-term future hedging cost allowed for within the EEV value of in-force business to reflect the equity options and futures expected to be held based on the Group’s current dynamic hedging programme and consideration of past practice. This allowance was re-estimated in 2019 following the NAIC reform for variable annuity business. Jackson also historically issued a small amount of income benefits (Guaranteed Minimum Income Benefits (GMIB)), which are now materially fully reinsured.

In June 2020 the Group announced the reinsurance of substantially all of Jackson’s in-force portfolio of fixed and fixed indexed annuity business to Athene Life Re Ltd. These contracts included some financial options and guarantees (as described in the Group’s 2019 Annual Report), and, as at 30 June 2020, are materially fully reinsured.

Time value

The value of financial options and guarantees comprises the intrinsic value (arising from a deterministic valuation on best estimate assumptions) and the time value (arising from the variability of economic outcomes in the future).

Where appropriate, a full stochastic valuation has been undertaken to determine the time value of 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, such as separate modelling of individual asset classes with an allowance for correlations between various asset classes. Details of the key characteristics of each model are given in note 13(ii).

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 regular and final 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 available to management.

The time value of financial options and guarantees reflects how the market value of the assets (including derivatives) held to manage the liability portfolios are expected to vary across the range of economic scenarios considered. In some economic scenarios the derivative portfolio may project gains in excess of the cost of the underlying guarantees on an EEV basis.

If the calculation of the time value of options and guarantees results in a positive outcome for a particular product then the figure is capped at zero, reflecting the strong interaction between the outcome of the central economic scenario and the time value of financial options and guarantees in these circumstances, and the reported value of in-force business before deduction of cost of capital and time value of options and guarantees will reflect the outcome from the full stochastic valuation.

(e) Level of required capital

In adopting the EEV Principles, Prudential has based required capital on the applicable local statutory regulations, including any amounts considered to be required above the local statutory minimum requirements to satisfy regulatory constraints.

For shareholder-backed businesses, the following capital requirements for long-term business apply:

• Asia: the level of required capital has been set to an amount at least equal to local statutory notification requirements. For Singapore life operations, from 31 March 2020 the level of net worth and required capital is based on the Tier 1 Capital position under the new risk-based capital framework (RBC2), which removes certain negative reserves permitted to be recognised in the full RBC2 regulatory position applicable to the Group’s LCSM position, in order to better reflect free surplus and its generation. For China JV life operations, the level of required capital follows the approach for embedded value reporting issued by the China Association of Actuaries (CAA) reflecting the C-ROSS regime; and

• US: 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).

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NOTES ON THE EEV BASIS RESULTS CONTINUED

12 Methodology and accounting presentation continued

(i) Methodology continued

(f) With-profits business and the treatment of the estate

For the Group’s relevant Asia operations, the proportion of surplus allocated to shareholders from the with-profits funds has been based on the applicable profit distribution between shareholders and policyholders. The EEV methodology includes the value attributed to the shareholders’ interest in the residual estate 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. As required, adjustments are also made to reflect any capital requirements for with-profits business in Asia in excess of the available capital of the with-profits funds.

(g) Internal asset management

The in-force and new business results from long-term business include the projected future profit or loss 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 profit 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 margins on the internal management of the assets of the life funds for the period as included in ‘Other’ operations. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Accordingly, Group operating profit includes the variance between the actual and expected profit margin in respect of the management of the assets for the covered business.

(h) Allowance for risk and risk discount rates

Overview

Under the EEV Principles, discount rates used to determine the present value of expected future cash flows are set by reference to risk-free rates plus a risk margin.

The risk-free rates are largely based on local government bond yields at the valuation date and are generally assumed to remain constant throughout the projection.

The risk margin reflects any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. In order to better reflect differences in relative market risk volatility inherent in each product group, Prudential sets the risk discount rates to reflect the expected volatility associated with the expected future cash flows for each product group in the embedded value model, rather than at a Group level.

Since financial options and guarantees are explicitly valued under the EEV methodology, risk discount rates exclude 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.

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-specific cash flows. These are determined by considering how the profit from each product is 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 product mix at the valuation date to produce appropriate betas and risk discount rates for each major product group.

Additional credit risk allowance

The Group’s methodology allows for credit risk. The total allowance for credit risk covers expected long-term defaults, a 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, the 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 on the type of business as described below:

Asia

For Asia, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance is considered to be 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 the long-term spread over the risk-free rate.

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US (Jackson)

For Jackson, the allowance for long-term defaults of 0.19 per cent at 30 June 2020 (30 June 2019: 0.17 per cent, 31 December 2019: 0.17 per cent) is reflected in the risk margin reserve charge that 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 the credit risk premium and short-term downgrades and defaults, as shown in note 13(i)(b). In determining this allowance, a number of factors have been considered, in particular including:

• How much of the credit spread on debt securities represents an increased short-term credit risk not reflected in the risk margin reserve 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 that cannot be easily converted into cash at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimate the liquidity premium by considering recent statistical data; and

• Policyholder benefits for certain lines of 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 returns 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. In the first half of 2020 the additional allowance for non-variable annuity business was increased by 50 basis points, primarily to reflect additional short-term credit risk arising from the Covid-19 crisis. The additional allowance for variable annuity business has been set at one-fifth of the additional allowance for non-variable annuity business to reflect the long-term proportion of variable annuity business invested in general account debt securities.

Allowance for non-diversifiable non-market risks

The majority of non-market and non-credit risks are considered to be diversifiable. An allowance for non-diversifiable non-market risks is estimated as set out below.

A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s covered business. For the Group’s businesses in less mature markets (such as the Philippines and Thailand), additional allowances are applied for emerging market risk ranging from 100 to 250 basis points. The level and application of these allowances are reviewed and updated based on an assessment of the Group’s exposure and experience in the markets. For the Group’s business in more mature markets, no additional allowance is necessary.

(i) Foreign currency translation

Foreign currency profits and losses have been translated at average exchange rates for the period. Foreign currency transactions are translated at the spot rate prevailing at the date of the transactions. This includes external dividends paid to shareholders in 2019. All subsequent dividends are declared in US dollars and no foreign currency translation is required. Foreign currency assets and liabilities have been translated at closing exchange rates. The principal exchange rates are shown in note A1 of the Group IFRS financial statements.

(j) 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 future cash flows to determine the value of in-force business are calculated using tax rates that have been announced and substantively enacted by the end of the reporting period.

(ii) Accounting presentation

(a) Analysis of post-tax profit

To the extent applicable, the presentation of the EEV basis profit or loss for the period is consistent with the classification between operating and non-operating results that the Group applies for the analysis of IFRS basis results. Operating results are determined as described in note (b) below and incorporate the following:

• New business profit, as defined in note (i)(b) above;

• Unwind of discount on the value of in-force business and other expected returns, as described in note (c) below;

• The impact of routine changes of estimates relating to operating assumptions, as described in note (d) below; and

• Operating experience variances, as described in note (e) below.

In addition, operating results include the effect of changes in tax legislation, unless these changes are one-off and structural in nature, such as a small impact from the corporate tax changes in the US as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in half year 2020, or primarily affect the level of projected investment returns, in which case they are reflected as a non-operating result.

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NOTES ON THE EEV BASIS RESULTS CONTINUED

12 Methodology and accounting presentation continued

• (ii) Accounting presentation continued Non-operating results comprise:

• Short-term fluctuations in investment returns;

• Mark-to-market value movements on core structural borrowings;

• Effect of changes in economic assumptions;

• Impact of NAIC reform, hedge modelling and other related changes in the US in full year 2019; and

• The impact of corporate transactions undertaken in the period, such as the effect of Jackson’s reinsurance arrangement with Athene Life Re Ltd in half year 2020, disposals undertaken and costs related to the demerger of M&G plc from Prudential plc in 2019.

Total profit or loss in the period 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.

(b) Investment returns included in operating profit

For the investment element of the assets covering the total net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rates of return. These expected returns are calculated by reference to the asset mix of the portfolio.

For the purpose of determining the long-term returns for debt securities of Jackson for general account business, a risk margin reserve 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; for equityrelated investments, a long-term rate of return is assumed (as disclosed in note 13(i)(b)), which reflects the aggregation of risk-free rates and the equity risk premium at the end of the reporting period. For variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in-force business adjusted to reflect projected rates of return at the end of the reporting period, with the excess or deficit of the actual return recognised within non-operating results, together with related hedging activity variances.

(c) 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 changes in economic and operating assumptions in the current period) and required capital and surplus assets.

(d) Effect of changes in operating assumptions

Operating profit includes the effect of changes to operating assumptions on the value of in-force business at the end of the reporting period. For presentational purposes the effect of changes is delineated to show the effect on the opening value of in-force business as operating assumption changes, with the experience variances subsequently being determined by reference to the assumptions at the end of the reporting period, as discussed below.

(e) Operating experience variances

Operating profit includes the effect of experience variances on operating assumptions, such as persistency, mortality, morbidity, expenses and other factors, which are calculated with reference to the assumptions at the end of the reporting period.

(f) Effect of changes in economic assumptions

Movements in the value of in-force business at the beginning of the year caused by changes in economic assumptions, net of the related changes in the time value of financial options and guarantees, are recorded in non-operating results.

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13 Assumptions

(i) Principal economic assumptions

The EEV basis results for the Group’s covered business have been determined using economic assumptions where both the long-term expected rates of return on investments and risk discount rates are set by reference to risk-free rates of return at the end of the reporting period. The risk-free rates of return are largely based on local government bond yields, which are generally assumed to remain constant throughout the projection, and are shown 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 to the risk-free rate based on the Group’s long-term view. Both the risk discount rate and expected rates of return are updated at each valuation date to reflect current market risk-free rates, with the effect that changes in the risk-free rates impact all projected future cash flows.

As described in note 12(i)(h), risk discount rates are set equal to the risk-free rate at the valuation date plus allowances for market risk, additional credit risk and non-diversifiable non-market risks appropriate to the features and risks of the underlying products and markets. Risks that are explicitly allowed for elsewhere in the EEV basis, such as via the cost of capital and the time value of the cost of options and guarantees, are not included in the risk discount rates.

Given the linkage to current risk-free rates, which are at historically low levels, risk discount rates at 30 June 2020 are generally lower than has historically been the case. Under our EEV methodology there is a corresponding reduction in assumed future investment returns, which will also be lower than historical norms, countering the impact of the lower risk discount rates.

(a) Asia[ notes (2)(3)]

		Risk disco	unt rate%
		New business	In	-force business
	2020	2019	2020	2019
	30 Jun	30 Jun 31 Dec	30 Jun	30 Jun 31 Dec
China JV Hong Kongnotes (2)(4) Indonesia Malaysianote (4) Philippines Singaporenote (4) Taiwan Thailand Vietnam Total weighted averagenote (1)	7.9	8.0 8.2 3.8 3.7 11.8 10.8 6.2 5.8 12.5 12.3 3.5 3.3 4.3 3.4 9.6 9.2 9.1 5.3 5.0 4.9	7.9	8.0 8.2 3.8 3.7 11.8 10.8 6.2 5.9 12.5 12.3 4.3 3.9 4.2 3.0 9.6 9.2 9.0 5.5 5.2 4.9
	1.8		2.7
	10.6		10.6
	5.5		5.6
	10.7		10.7
	2.5		3.0
	2.8		2.4
	9.1		9.1
	4.7		5.0
	4.4		4.1

	10-year government bond yield%	10-year government bond yield%	Expected long-term infation%	Expected long-term infation%
	2020	2019	2020	2019
	30 Jun	30 Jun 31 Dec	30 Jun	30 Jun 31 Dec
China JV Hong Kongnotes (2)(4) Indonesia Malaysianote (4) Philippines Singaporenote (4) Taiwan Thailand Vietnam	2.9	3.3 3.2 2.0 1.9 7.5 7.2 3.7 3.3 5.0 4.6 2.0 1.7 0.7 0.7 2.1 1.5 4.7 3.4	3.0	3.0 3.0 2.5 2.5 4.5 4.5 2.5 2.5 4.0 4.0 2.0 2.0 1.5 1.5 3.0 3.0 5.5 5.5
	0.7		2.5
	7.8		4.5
	3.0		2.5
	2.9		4.0
	1.0		2.0
	0.5		1.5
	1.4		3.0
	3.0		5.5

Notes

(1) Total weighted average risk discount rates for Asia shown above have been determined by weighting each business’s risk discount rates by reference to the EEV basis new business profit and the net closing value of in-force business. The changes in the risk discount rates for individual Asia businesses reflect the movements in the local government bond yields, changes in the allowance for risk and changes in product mix.

(2) For Hong Kong, the assumptions shown are for US dollar denominated business. For other businesses, the assumptions shown are for local currency denominated business. (3) Equity risk premiums (geometric) in Asia range from 2.9 per cent to 4.8 per cent (30 June 2019: 2.6 per cent to 4.5 per cent; 31 December 2019: 2.9 per cent to 4.8 per cent).

(4) The geometric equity return assumptions for the most significant equity holdings of the Asia businesses are:

	2020%	2019%
	30 Jun	30 Jun 31 Dec
Hong Kong (US dollar denominated business) Malaysia Singapore	3.6	4.6 4.8 7.4 7.3 5.8 5.7
	7.0
	5.0

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NOTES ON THE EEV BASIS RESULTS CONTINUED

13 Assumptions continued

(i) Principal economic assumptions continued

(b) US

	2020%	2019%
	30 Jun	30 Jun 31 Dec
Risk discount rate: Variable annuity: Risk discount rate Additional allowance for credit risk included in risk discount ratenote 12(i)(h) Non-variable annuity: Risk discount rate Additional allowance for credit risk included in risk discount ratenote 12(i)(h) Total weighted average: New business In-force business Allowance for long-term defaults included in projected spreadnote 12(i)(h) US 10-year treasury bond yield Equity risk premium (geometric) Pre-tax expected long-term nominal rate of return for US equities (geometric) Expected long-term rate of infation S&P 500 equityreturn volatilitynote (ii)(b)		6.4 6.5 0.2 0.2 3.7 3.7 1.0 1.0 6.1 6.1 6.1 6.2 0.17 0.17 2.0 1.9 2.6 2.9 4.6 4.8 2.8 2.9 17.5 17.5
	5.3
	0.3
	2.9
	1.5
	4.8
	4.9
	0.19
	0.7
	2.9
	3.6
	2.7
	17.5

Note

Assumed new business spread margins are as follows:

Note Assumed new business spread margins are as follows:
	2020%	2019%
	Jan to Jun issues	Jan to Jun issues Jul to Dec issues
Fixed annuity business* Fixed indexed annuity business† Institutional business	0.85	1.50 0.85 0.50 0.50 0.50 0.50
	0.50
	1.00

• Including the proportion of variable annuity business invested in the general account. The assumed spread margin grades up linearly by 25 basis points to a long-term assumption over five years.

† The assumed spread margin grades up linearly by 25 basis points over five years, increasing by a further 125 basis points to a long-term assumption at the end of the index option period (2019 issues: grades up linearly by 100 basis points over five years, increasing by a further 50 basis points to a long-term assumption at the end of the index option period).

(ii) Stochastic assumptions

Details are given below of the key characteristics of the models used to determine the time value of financial options and guarantees as referred to in note 12(i)(d).

(a) Asia

• The stochastic cost of guarantees is primarily of significance for the Hong Kong, Malaysia, Singapore, Taiwan and Vietnam businesses;

• The principal asset classes are government bonds, corporate bonds and equity;

• 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;

• The volatility of equity returns ranges from 18 per cent to 35 per cent for all periods; and

• The volatility of government bond yields ranges from 1.1 per cent to 2.0 per cent for all periods.

(b) US (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 17 per cent to 26 per cent for all periods; and

• The standard deviation of interest rates ranges from 2.7 per cent to 2.9 per cent (30 June 2019: 3.3 per cent to 3.5 per cent; 31 December 2019: from 3.1 per cent to 3.3 per cent).

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(iii) Operating assumptions

Best estimate assumptions are used for projecting future cash flows, 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 time value of financial 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, and 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. When projecting future cash flows for medical reimbursement business that is repriced annually, explicit allowance is made for expected future premium inflation and separately for future medical claims inflation.

Expense assumptions

Expense levels, including those of the service companies that support the Group’s long-term business, are based on internal expense analysis and are appropriately allocated to acquisition of new business and renewal of in-force business. For mature business, it is Prudential’s policy not to take credit for future cost reduction programmes until the actions to achieve the savings have been delivered. An allowance is made for short-term required expenses that are not representative of the longer-term expense loadings of the relevant businesses. At 30 June 2020 the allowance held for these costs across the Group was $222 million, arising in Asia. Expense overruns are reported where these are expected to be short-lived, including businesses that are growing rapidly or are sub-scale.

For Asia, expenses comprise costs borne directly and costs recharged from the Group head office function in Hong Kong that are attributable to the covered business. The assumed future expenses for these businesses also include projections of these future recharges. Development expenses are allocated to Asia covered business and are charged as incurred.

Corporate expenditure, which is included in other income and expenditure, comprises expenditure of the Group head office function in Hong Kong that is not allocated to the covered business or asset management, primarily for corporate related activities that are charged as incurred, and expenditure of the Group head office function in London, together with restructuring and IFRS 17 implementation costs incurred across the Group.

Tax rates

The assumed long-term effective tax rates for operations reflect the expected incidence of taxable profit and loss in the projected future cash flows as explained in note 12(i)(j). Except for a reduction in the Indonesia corporate tax rate from 25 per cent to 22 per cent for 2020 and 2021, with a further reduction to 20 per cent from 2022, there has been no material change in the effective tax rates applied for projecting future cash flows.

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NOTES ON THE EEV BASIS RESULTS CONTINUED

14 Insurance new business[ note (a)]

	Single premiums	Single premiums	Regular premiums	Regular premiums	Annual premium equivalents (APE)	Annual premium equivalents (APE)	Present value of new business premiums (PVNBP)	Present value of new business premiums (PVNBP)
	2020$m	2019$m	2020$m	2019$m	2020$m	2019$m	2020$m	2019$m
	Half year	Half year Full year	Half year	Half year Full year	Half year	Half year Full year	Half year	Half year Full year
Asia Cambodia China JVnote (b) Hong Kong Indianote (c) Indonesia Malaysia Philippines Singapore Taiwan Thailand Vietnam		– – 468 710 213 387 78 155 121 292 90 209 14 51 500 1,217 253 544 95 192 13 22		14 24 303 518 1,052 1,977 129 245 144 361 149 333 70 153 249 539 125 278 53 140 87 215		15 24 350 590 1,075 2,016 137 260 156 390 158 355 71 158 299 660 149 332 62 159 88 217		66 111 1,534 2,586 6,701 12,815 618 1,179 666 1,668 881 2,090 239 561 2,100 4,711 625 1,418 318 763 470 1,342
	–		4		4		20
	592		260		319		1479
	78		380		388		, 2671
	102		73		83		, 298
	112		112		123		494
	45		118		123		688
	15		54		56		205
	420		187		229		1695
	112		144		155		, 623
	65		84		90		389
	9		94		95		611
Total Asia	1,550	1,845 3,779	1,510	2,375 4,783	1,665	2,560 5,161	9,173	14,218 29,244
US Variable annuities Elite Access (variable annuities) Fixed annuities Fixed indexed annuities Institutional		6,283 12,692 961 2,002 229 1,194 1,201 3,821 2,078 2,522		– – – – – – – – – –		628 1,270 96 200 23 119 120 382 208 252		6,283 12,692 961 2,002 229 1,194 1,201 3,821 2,078 2,522
	6417		–		643		6417
	, 882		–		88		, 882
	314		–		31		314
	892		–		89		892
	1,284		–		128		1,284
Total US	9,789	10,752 22,231	–	– –	979	1,075 2,223	9,789	10,752 22,231
Group totalnote (d)	11,339	12,597 26,010	1,510	2,375 4,783	2,644	3,635 7,384	18,962	24,970 51,475

Notes

(a) The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profit for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the Group IFRS income statement.

(b) New business in China JV is included at Prudential’s 50 per cent interest in the joint venture.

(c) New business in India is included at Prudential’s 22 per cent interest in the associate. (d) In half year 2020, the Africa business sold new business APE of $54 million (half year 2019: $38 million on an actual exchange rate basis, $34 million on a constant exchange rate basis; full year 2019: $82 million on an actual exchange rate basis, $75 million on a constant exchange rate basis). Given the relative immaturity of the Africa business, it is incorporated into the Group’s EEV basis results on an IFRS basis and is excluded from new business sales and profit metrics.

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15 Post balance sheet event

Completion of the equity investment by Athene into US business

On 17 July 2020, the Group completed the equity investment by Athene into the US business, which was announced in June 2020. Under the transaction, Athene Life Re Ltd invested $500 million in Prudential’s US business in return for an 11.1 per cent economic interest, for which the voting interest is 9.9 per cent. If the transaction had completed at 30 June 2020, the effect on EEV shareholders’ equity would have been a reduction of around $1.1 billion. There would have been no impact on profit for the period. Further details are included in note D1 of the IFRS basis results.

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05 Additional information

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134

	Page
Additional fnancial information Risk factors Corporategovernance Disclosure of interests of Directors	136 156 167 168
Shareholder information	172
How to contact us	174

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Index to the additional financial information[*]

		Page
I	Additional fnancial information
(i)	Groupcapitalposition	137
(ii)	Funds under management	140
(iii)	Holdingcompanycash fow	141
(iv)	Analysis of adjusted operating proft bydriver	142
(v)	Asia operations – analysis of adjusted operating proft bybusiness unit	146
(vi)	Option schemes	148
II	Calculation of alternativeperformance measures
(i)	Reconciliation of adjusted operating proft toproft before tax	149
(ii)	Calculation of IFRSgearingratio	149
(iii)	Return on IFRS shareholders’ equity	150
(iv)	Calculation of IFRS shareholders’ fundsper share	151
(v)	Calculation of asset management cost/income ratio	152
(vi)	Reconciliation of Asia renewal insurancepremium togrosspremiums earned	152
(vii)	Reconciliation of APE new business sales togrosspremiums earned	153
(viii)	Reconciliation between IFRS and EEV shareholders’ equity	153
(ix)	Calculation of return on embedded value	154
(x)	Calculation of EEV shareholders’ fundsper share	155

• The additional financial information is not covered by the KPMG independent review opinion on page 103.

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136

Additional financial information

I Additional financial information

I(i) Group capital position

Overview

Prudential plc applies the local capital summation method (LCSM) that has been agreed with the Hong Kong Insurance Authority (IA) to determine group regulatory capital requirements (both minimum and prescribed levels). Ultimately, Prudential will become subject to the Group Wide Supervision (GWS) framework. The timing of finalisation and implementation of the GWS Framework remains uncertain, although it is expected to become effective in early 2021. The Legislative Council of the Hong Kong Special Administrative Region approved the enabling primary legislation in July and further implementation guidance is expected in the second half of the year. Subject to that guidance we currently expect the GWS methodology to be largely consistent to that applied under LCSM. Further detail on the LCSM is included in the basis of preparation section below.

For regulated insurance entities, the available and required capital included in the LCSM measure for Hong Kong IA Group regulatory purposes are based on the local solvency regime applicable in each jurisdiction. At 30 June 2020, the Prudential Group’s total surplus of available capital over the regulatory Group Minimum Capital Requirement (GMCR), calculated using this LCSM was $25.5 billion, before allowing for the payment of the 2020 first interim ordinary dividend.

The Group holds material participating business in Hong Kong, Singapore and Malaysia. If the available capital and minimum capital requirement attributed to this policyholder business are excluded, then the Prudential Group shareholder LCSM surplus of available capital over the regulatory GMCR at 30 June 2020 was $12.4 billion, before allowing for the payment of the 2020 first interim ordinary dividend.

Estimated Group LCSM capital position based on Group Minimum Capital Requirement (GMCR)

	30 Jun 2020	31 Dec 2019
	Total Less policyholder Shareholder	Total Less policyholder Shareholder
Available capital ($bn) Group Minimum Capital Requirement ($bn) LCSM surplus (over GMCR) ($bn) LCSM ratio (over GMCR) (%)	37.0 (19.3) 17.7	33.1 (19.1) 14.0 9.5 (5.0) 4.5 23.6 (14.1) 9.5 348% 309%
	11.5 (6.2) 5.3
	25.5 (13.1) 12.4
	323% 334%

The shareholder LCSM capital position by segment is presented below at 30 June 2020 and 31 December 2019 for comparison:

		30 Jun 2020($bn)
	Total Asia Less policyholder	Shareholder
		Asia US Unallocated to a segment Group total
Available capital Group Minimum Capital Requirement LCSM surplus (over GMCR)	29.0 (19.3)	9.7 8.2 (0.2) 17.7
	9.4 (6.2)	3.2 2.1 – 5.3
	19.6 (13.1)	6.5 6.1 (0.2) 12.4

		31 Dec 2019($bn)
	Total Asia Less policyholder	Shareholder
		Asia US Unallocated to a segment Group total
Available capital Group Minimum Capital Requirement LCSM surplus (over GMCR)	26.8 (19.1) 8.0 (5.0) 18.8 (14.1)	7.7 5.3 1.0 14.0 3.0 1.5 – 4.5 4.7 3.8 1.0 9.5

The 30 June 2020 Jackson local statutory results reflect the reinsurance of an in-force portfolio of Jackson’s US fixed and fixed indexed annuity liabilities to Athene Life Re Ltd the effect of which is shown in the table below. Athene’s $500 million equity investment in Prudential’s US business in return for an 11.1 per cent economic interest completed in July 2020 and is not reflected in the 30 June 2020 results above. If this transaction had been completed at 30 June 2020 the Group LCSM shareholder surplus (ie after allowing for the minority interest) would be $0.2 billion lower with the cover ratio increasing by 6 percentage points.

The 30 June 2020 Group LCSM position includes the impact of a change in the calculation of the valuation interest rate (VIR) used to value long-term insurance liabilities in Hong Kong, which has been formally granted by the regulator.

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

I Additional financial information continued

I(i) Group capital position continued

Sensitivity analysis

The estimated sensitivity of the Group shareholder LCSM capital position (based on GMCR) to significant changes in market conditions is as follows:

Impact of market sensitivities	30 Jun 2020	31 Dec 2019
	LCSM surplus ($bn) LCSM ratio (%)	LCSM surplus ($bn) LCSM ratio (%)
Base position Impact of: 10% instantaneous increase in equity markets 20% instantaneous fall in equity markets 40% fall in equity marketsnote (1) 50 basis points reduction in interest rates 100 basis points increase in interest rates 100 basispoints increase in credit spreadsnote (2)	12.4 334%	9.5 309% n/a n/a 1.5 (9)% (0.2) (39)% (0.2) (17)% (1.3) (19)% (1.6) (36)%
	(0.7) (3)%
	(0.2) (5)%
	(1.2) (19)%
	(0.2) (13)%
	(0.1) 24%
	0.2 12%

Notes

(1) Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period.

(2) At 31 December 2019 the US RBC solvency position was included using a stress of 10 times expected credit defaults rather than the 100 basis points increase in credit spreads applied at 30 June 2020.

The sensitivity results above assume instantaneous market movements and reflect all consequential impacts as at the valuation dates. In particular, where relevant, the 30 June 2020 sensitivities reflect potential tax benefits that would arise under the relief provided by the CARES Act in the US for 2020. An exception to the instantaneous market movements assumed is the -40 per cent equity sensitivity where for Jackson an instantaneous 20 per cent market fall is assumed to be followed by a further market fall of 20 per cent over a four-week period with dynamic hedges assumed to be rebalanced over the period. Aside from this assumed dynamic hedge rebalancing for Jackson in the -40 per cent equity sensitivity, the sensitivity results only allow for limited management actions such as changes to future policyholder bonuses. If such economic conditions persisted, the financial impacts may differ to the instantaneous impacts shown above. In this case management could also take additional actions to help mitigate the impact of these stresses. These actions include, but are not limited to, rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold.

Analysis of movement in Group shareholder LCSM surplus

A summary of the estimated movement in the Group shareholder LCSM surplus (based on GMCR) from $9.5 billion at 31 December 2019 to $12.4 billion at 30 June 2020 is set out in the table below.

	2020($bn)	2019($bn)
	Half year	Full year
Balance at beginning of period Operating: Operating capital generation from the in-force business	9.5 1.2	9.7 2.5
Investment in new business	(0.2)	(0.6)
Operatingcapitalgeneration	1.0	1.9
Non-operating and other capital movements: Non-operating experience (including market movements and modelling changes) Regulatory changes Reinsurance of US fxed and fxed indexed annuity in-force portfolio to Athene Other corporate activities (excluding demerger items)	0.4 2.2 0.8 (0.8)	(0.6) 0.1 – (0.8)
Demerger costs	–	(0.4)
Subordinated debt redemption	–	(0.5)
Demerger related impacts	–	1.0
Non-operatingresults	2.6	(1.2)
Remittances from discontinued operations (M&G plc)	–	0.7
External dividends	(0.7)	(1.6)
Net dividend impact	(0.7)	(0.9)
Net movement in LCSM surplus	2.9	(0.2)
Balance at end ofperiod	12.4	9.5

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The estimated movement in the Group shareholder LCSM surplus over first half of 2020 is driven by:

• Operating capital generation of $1.0 billion : generated by expected return on in-force business net of strain on new business written in 2020;

• Non-operating experience of $0.4 billion : this reflects the impact of falling interest rates and equity markets on the level of policyholder reserves and required capital net of the favourable impact of mitigating hedging measures together with other management actions, including a $1.1 billion benefit from the change to the Hong Kong valuation interest rate described earlier, and US modelling refinements;

• Regulatory changes of $2.2 billion : reflecting the benefit from the new Singapore risk-based capital framework (RBC2) effective at 31 March 2020;

• Reinsurance of US fixed and fixed indexed annuity in-force portfolio to Athene of $0.8 billion : the impact of the transaction, which was effective at 1 June 2020, was an increase to LCSM surplus comprising of the ceding commission received and required capital released less tax and adverse consequential effects on the US’s available capital. This corresponds to a 25 percentage point increase in the Group LCSM cover ratio and is before the effect of the $500 million equity investment by Athene discussed above;

• Other Corporate activities (excluding demerger items) of $(0.8) billion : this is the effect on LCSM surplus of corporate transactions in the period, which in 2020 comprised the strategic bancassurance partnership with TMB in Thailand, and;

• — Net dividend impact of $(0.7) billion : this is the payment of the 2019 second interim dividend paid in May 2020.

Reconciliation of Group shareholder LCSM surplus to EEV free surplus (excluding intangibles)

	30 Jun 2020 $bn	31 Dec 2019 $bn
	Asia US Unallocated to a segment Group total	Group total
Estimated Group shareholder LCSM surplus (over GMCR) 6.5 6.1 (0.2) 12.4 Increase required capital for EEV free surplusnote (1) (0.7) (3.2) – (3.9) Adjust surplus assets and core structural borrowings to market valuenote (2) 0.3 0.2 (0.3) 0.2 Add back inadmissible assetsnote (3) 0.2 0.1 – 0.3 Deductions applied to EEV free surplusnote (4) (2.8) – – (2.8) Other (0.1) 0.2 0.1 0.2		9.5 (2.8) 0.3 0.2 (0.9) 0.3
EEV free surplus excludingintangibles* 3.4 3.4 (0.4) 6.4		6.6

• As per the ‘Free surplus excluding distribution rights and other intangibles’ from note 10 of the Group’s EEV basis results.

Notes

(1) Required capital under EEV is set at least equal to local statutory notification requirements for Asia and so can differ from the minimum capital requirement. Jackson required capital is set at 250 per cent of the risk-based capital (RBC) required by the NAIC at the Company Action Level (CAL). This is higher than the solo legal entity statutory minimum capital requirement of 100 per cent CAL that is included in the LCSM surplus (over GMCR).

(2) The EEV Principles require surplus assets to be included at fair value and central core senior debt is held at market value. Within LCSM surplus, some local regulatory regimes value certain assets at cost and core senior debt is held at amortised cost.

• (3) LCSM restricts the valuation of certain sundry non-intangible assets. In most cases these assets are considered fully recognisable in free surplus. As an exception to this, both LCSM surplus and EEV free surplus restrict the deferred tax asset held by Jackson to the level allowed to be admitted by the local regulator in local statutory available capital.

• (4) Deductions applied to EEV free surplus primarily include: the impact of reporting EEV free surplus for Singapore based on the Tier 1 requirements under the RBC2 framework, which removes certain negative reserves permitted to be recognised in the full RBC2 regulatory position used for LCSM and applying the embedded value reporting approach issued by the China Association of Actuaries (CAA) within EEV free surplus as compared to the C-ROSS surplus reported for local regulatory purposes (predominantly arising from the requirement under the CAA embedded value methodology to establish a deferred profit liability within EEV net worth).

Reconciliation of Group IFRS shareholders’ equity to shareholder LCSM available capital position

	30 Jun 2020	31 Dec 2019
	$bn	$bn
Group IFRS shareholders’ equity Remove DAC, goodwill and intangibles recognised on the IFRS statement of fnancial position Add subordinated debt at IFRS book valuenote (1) Valuation diferencesnote (2)	19.1 (19.3) 4.5 13.5	19.5 (18.2) 4.6 8.6
Other	(0.1)	(0.5)
Estimated Groupshareholder LCSM available capital	17.7	14.0

Notes

(1) Subordinated debt is treated as available capital under LCSM but as a liability under IFRS.

• (2) Valuation differences reflect differences in the basis of valuing assets and liabilities between IFRS and local statutory valuation rules, including deductions for inadmissible assets. Material differences arise in Jackson where IFRS variable annuity guarantee reserves are valued on a fair value basis compared to local statutory reserves which reflect long term historic rates. Further, local US statutory reserves are reduced by an expense allowance linked to surrender charges, whereas IFRS makes no such allowance but instead defers acquisition costs on the balance sheet as a separate asset (which is not recognised on the statutory balance sheet). Other material differences include in Singapore where the local available capital position under RBC2 permits the recognition of certain negative reserves in the local statutory position that are not recognised under IFRS.

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

I Additional financial information continued

I(i) Group capital position continued

Basis of preparation

In advance of the GWS framework coming into force, Prudential applies the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). The summation of local statutory capital requirements across the Group is used to determine group regulatory capital requirements, with no allowance for diversification between business operations. The Group available capital is determined by the summation of available capital across local solvency regimes for regulated entities and IFRS net assets (with adjustments described below) for non-regulated entities.

In determining the LCSM available capital and required capital the following principles have been applied:

• For regulated insurance entities, available and required capital are based on the local solvency regime applicable in each jurisdiction, with minimum required capital set at the solo legal entity statutory minimum capital requirements. The treatment of participating funds is consistent with the local basis;

• For the US insurance entities, available and required capital are based on the local US RBC framework set by the NAIC, with minimum required capital set at 100 per cent of the CAL RBC;

• For asset management operations and other regulated entities, the shareholder capital position is derived based on the sectoral basis applicable in each jurisdiction, with minimum required capital based on the solo legal entity statutory minimum capital requirement;

• For non-regulated entities, the available capital is based on IFRS net assets after deducting intangible assets. No required capital is held in respect of unregulated entities;

• Investments in subsidiaries, joint ventures and associates (including, if any, loans that are recognised as capital on the receiving entity’s balance sheet) are eliminated from the relevant holding company to prevent the double counting of available capital; and

• The Hong Kong IA has agreed that specific bonds (being those subordinated debt instruments held by Prudential plc at the date of demerger) can be included as part of the Group’s capital resources for the purposes of satisfying group minimum and prescribed capital requirements. Senior debt instruments held by Prudential plc have not been included as part of the Group capital resources and are treated as a liability in the LCSM results presented above (this is equivalent to a 27 per cent reduction in the Group shareholder LCSM coverage ratio (over GMCR)). Grandfathering provisions under the GWS framework remain subject to further consultation and the Hong Kong legislative process in due course.

I(ii) Funds under management

For Prudential’s asset management businesses, funds managed on behalf of third parties are not recorded on the statement of financial position. They are, however, a driver of profitability. Prudential therefore analyses the movement in the funds under management each period, focusing on those which are external to the Group and those primarily held by the Group’s insurance businesses. The table below analyses, by segment, the funds of the Group held in the statement of financial position and the external funds that are managed by Prudential’s asset management businesses.

	2020$bn	2019$bn
	30 Jun	30 Jun 31 Dec*
Asia operations: Internal funds EastspringInvestments external funds, includingM&Gplc (as analysed in note I(v))		127.9 141.9 110.1 124.7
	149.7
	98.1
US operations – internal funds Other operations	247.8	238.0 266.6 261.3 273.4 5.0 3.9
	242.9
	3.4
Total Groupfunds under management	494.1	504.3 543.9

• The half year 2019 comparatives have been adjusted to include cash and cash equivalents and to exclude assets held that are attributable to external unit holders of consolidated collective investment schemes to align to the current period’s presentation since full year 2019. In addition, funds managed on behalf of M&G plc are presented as external rather than internal funds under management to align to the presentation since the demerger in October 2019.

Note

Total Group funds under management comprise:

oa roup uns uner managemen comprse:	2020$bn	2019$bn
	30 Jun	30 Jun 31 Dec
Total investments and cash and cash equivalents held by the continuing operations on the consolidated statement of fnancial position External funds of Eastspring Investments, including M&G plc Internally managed funds held in joint ventures and associate, excluding assets attributable to external unit holders of the consolidated collective investment schemes and other adjustments	388.4	389.2 412.6 110.1 124.7 5.0 6.6
	98.1
	7.6
Total Group funds under management	494.1	504.3 543.9

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I(iii) Holding company cash flow

The holding company cash flow describes the movement in the cash and short-term investments of the centrally managed group

holding companies and differs from the IFRS cash flow statement, which includes all cash flows in the year 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.

	2020$m	2019$m
	Half year	Half year note (f) Full year note (f)
Net cash remitted by business units:note (a) From continuing operations Asianote (b) Jacksonnote (b) Other operations Total continuing operations From discontinued UK and Europe operations
	400	578 950 509 509 6 6
	–
	32
	432	1,093 1,465 453 684
	–
Net cash remittances by business units Net interest paidnote (c) Tax received Corporate activities	432	1,546 2,149 (283) (527) 120 265 (125) (260)
	(147)
	94
	(119)
Total central outfows	(172)	(288) (522)
Holding company cash fow before dividends and other movements Dividendspaid	260	1,258 1,627 (1,108) (1,634)
	(674)
Operating holding company cash fow after dividends but before other movements Other movements Issuance and redemption of debt for continuing operations Other corporate activities relating to continuing operationsnote (d) Transactions to efect the demerger, including debt substitutionnote (e) Demerger costs Early settlement of UK-infation-linked derivative liability Total other movements	(414)	150 (7)
	982	(504) (504) (330) (338) (237) (146) (211) (424) – (587)
	(762)
	–
	(17)
	–
	203	(1,282) (1,999)
Total holding company cash fow Cash and short-term investments at beginning of period Foreign exchange movements	(211)	(1,132) (2,006) 4,121 4,121 21 92
	2207
	, (89)
Cash and short-term investments at end ofperiod	1,907	3,010 2,207

Notes

(a) Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation.

(b) Significant cash remittances from business units were hedged into sterling using forward contracts during 2019 and these contracts determine the amount of sterling recorded in the holding company cash flow for the relevant remittances. The implicit rates may therefore differ from that applied to present the holding company cash flow in US dollars (see note (f)). The dividend paid by Jackson in the US in US dollars in 2019 was $525 million.

(c) The net interest paid in half year 2019 included $115 million (full year 2019: $231 million) on debt substituted to M&G plc shortly prior to its demerger.

(d) Other corporate activities relating to continuing operations primarily reflect payments made for bancassurance arrangements including those with UOB and TMB Bank. (e) Transactions to effect the demerger represented the effects on holding company cash flow of steps taken in 2019 as part of the preparation for the demerger of the UK and Europe operations (M&G plc). These included the transfer of subsidiaries, settlement of intercompany loans, receipt of the pre-demerger dividend and the substitution of M&G plc as issuer of certain subordinated debt in place of Prudential plc. Further information is provided in note I(iii) in additional financial information for the year ended 31 December 2019. (f) At 31 December 2019, the Group changed its basis of managing central cash-holdings from sterling to US dollars. Accordingly, the half year 2020 holding company cash flow statement presented above has been prepared directly in US dollars and half year 2019 amounts are re-presented from those previously published to reflect the change. Half year and full year 2019 comparatives were prepared in sterling, reflecting the management of holding company cash at that time. Cash movements in the period have been converted from sterling into US dollars by using the month-end sterling to US dollar exchange rate for the month in which the transaction occurred. Cash balances at the start and end of the period were translated from sterling to US dollars using the spot rates at the beginning and end of the period respectively. As an exception to the above, external dividends paid during 2019 have been translated at the exchange rate relevant to the day they were paid to ensure consistency with the financial statements.

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

I Additional financial information continued

I(iv) Analysis of adjusted operating profit by driver

This schedule classifies the Group’s adjusted operating profit from continuing operations into the underlying drivers using the following categories:

• Spread income represents the difference between net investment income and amounts credited to certain policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets.

• Fee income represents profit driven by net investment performance, being fees that vary with the size of the underlying policyholder funds, net of investment management expenses.

• With-profits represents the pre-tax shareholders’ transfer from the with-profits business for the period.

• Insurance margin primarily represents profit derived from the insurance risks of mortality and morbidity.

• Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses (see below).

• Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. These exclude items such as restructuring and IFRS 17 implementation costs, which are not included in the segment profit, as well as items that are more appropriately included in other categories (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).

• DAC adjustments comprise DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business written in the period.

(a) Margin analysis

The following analysis expresses certain of the Group’s sources of adjusted operating profit as a margin of policyholder liabilities or other relevant drivers.

relevant drivers.
	Half year 2020
	Asia note (b) $m US note (c) $m Group total $m Average liability $m Margin bps
Spread income Fee income With-profts Insurance margin Margin on revenues Expenses: Acquisition costs Administration expenses DAC adjustments Expected return on shareholder assets	146 273 419 93964 89
	, 135 1596 1731 208714 166
	, , , 58 – 58 68347 17
	, 1287 708 1995
	, , 1345 1345
	, ,
	(864) (484) (1348) 2644 (51)%
	, , (711) (853) (1564) 310524 (101)
	, , 117 (10) 107
	95 26 121
Share of related tax charges fromjoint ventures and associate	1,608 1,256 2,864
	(18) – (18)
Adjusted operating proft – long-term business Adjusted operating proft – asset management	1,590 1,256 2,846
	143 10 153
Total segment adjusted operating proft	1,733 1,266 2,999

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	Half year 2019 AER
	Asia note (b) $m US note (c) $m Group total $m Average liability $m Margin bps
Spread income Fee income With-profts Insurance margin Margin on revenues Expenses: Acquisition costs Administration expenses DAC adjustments Expected return on shareholder assets	154 298 452 83,861 108 144 1,601 1,745 203,145 172 53 – 53 55,118 19 1,103 711 1,814 1,454 1,454 (1,038) (494) (1,532) 3,635 (42)% (708) (825) (1,533) 290,416 (106) 170 247 417 90 18 108
Share of related tax charges fromjoint ventures and associate	1,422 1,556 2,978 (5) – (5)
Adjusted operating proft – long-term business Adjusted operating proft – asset management	1,417 1,556 2,973 133 16 149
Total segment adjusted operating proft	1,550 1,572 3,122

	Half year 2019 CER
	Asia note (b) $m US note (c) $m Group total $m Average liability note (1) $m Margin note (2) bps
Spread income Fee income With-profts Insurance margin Margin on revenues Expenses: Acquisition costs Administration expenses DAC adjustments Expected return on shareholder assets	150 298 448 84,020 107 140 1,601 1,741 202,997 172 52 – 52 55,170 19 1,086 711 1,797 1,440 – 1,440 (1,029) (494) (1,523) 3,615 (42)% (695) (825) (1,520) 290,426 (105) 169 247 416 88 18 106
Share of related tax charges fromjoint ventures and associate	1,401 1,556 2,957 (5) – (5)
Adjusted operating proft – long-term business Adjusted operating proft – asset management	1,396 1,556 2,952 130 16 146
Total segment adjusted operating proft	1,526 1,572 3,098

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

I Additional financial information continued

I(iv) Analysis of adjusted operating profit by driver continued (b) Margin analysis – Asia

	Half year 2020	Half year 2019 AER	Half year 2019 CERnote (6)
	Proft $m Average liability note (1) $m Margin note (2) bps	Proft $m Average liability note (1) $m Margin note (2) bps	Proft $m Average liability note (1) $m Margin note (2) bps
Spread income Fee income With-profts Insurance margin Margin on revenues Expenses: Acquisition costsnote (3) Administration expenses DAC adjustmentsnote (4) Expected return on shareholder assets	146 37082 79	154 27,774 111 144 26,536 109 53 55,118 19 1,103 1,454 (1,038) 2,560 (41)% (708) 54,310 (261) 170 90	150 27,933 107 140 26,388 106 52 55,170 19 1,086 1,440 (1,029) 2,540 (41)% (695) 54,320 (256) 169 88
	, 135 27712 97
	, 58 68347 17
	, 1287
	, 1345
	,
	(864) 1665 (52)%
	, (711) 64794 (219)
	, 117
	95
Share of related tax charges from joint ventures and associatenote (5)	1608	1,422 (5)	1,401 (5)
	, (18)
Adjusted operating proft – long-term business Adjusted operating proft – asset management (EastspringInvestments)	1590	1,417 133	1,396 130
	, 143
Total Asia adjusted operating proft	1,733	1,550	1,526

Notes

(1) For Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period.

(2) Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus.

(3) The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.

(4) The DAC adjustments contain a credit of $13 million in respect of joint ventures and associate in half year 2020 (half year 2019: credit of $32 million on an AER basis). (5) Under IFRS, the Group’s share of results from its investments in joint ventures and associate accounted for using the equity method is included in the Group’s profit before tax on a net of related tax basis. These tax charges are shown separately in the analysis of Asia operating profit drivers in order for the contribution from the joint ventures and associate to be included in the margin analysis on a consistent basis as the rest of the Asia’s operations.

(6) The half year 2019 comparative information has been presented at both AER and CER to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current year foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia, CER average liabilities have been translated using current period opening and closing exchange rates.

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(c) Margin analysis – US

	Half year 2020	Half year 2019
	Proft $m Average liability note (1) $m Margin note (2) bps	Proft $m Average liability note (1) $m Margin note (2) bps
Spread income Fee income Insurance margin Expenses: Acquisition costsnote (3) Administration expenses DAC adjustments Expected return on shareholder assets	273 56882 96	298 56,087 106 1,601 176,609 181 711 – – (494) 1,075 (46)% (825) 236,106 (70) 247 18
	, 1596 181002 176
	, , 708 – –
	(484) 979 (49)%
	(853) 245730 (69)
	, (10)
	26
Adjusted operating proft – long-term business Adjusted operating proft – asset management	1256	1,556 16
	, 10
Total US adjusted operating proft	1,266	1,572

Notes

(1) The calculation of average liabilities for the US is generally derived from month-end balances throughout the period as opposed to opening and closing balances only. The average liabilities for fee income in the US have been calculated using daily balances instead of month-end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income is attached and exclude the liabilities reinsured to Athene in the June 2020 month-end balance. Average liabilities used to calculate the administration expenses margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson and the liabilities reinsured to Athene in the June 2020 month-end balance.

(2) Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities.

(3) The ratio of acquisition costs is calculated as a percentage of APE sales relating to shareholder-backed business.

Analysis of adjusted operating profit for US insurance operations before and after acquisition costs and DAC adjustments

		Half year 2020$m		Half year 2019$m
	Before acquisition costs and DAC adjustments	Acquisition costs After acquisition costs and DAC adjustments Incurred Deferred	Before acquisition costs and DAC adjustments	Acquisition costs After acquisition costs and DAC adjustments Incurred Deferred
Total adjusted operating proft before acquisition costs and DAC adjustments Less investment in new business Other DAC adjustments – amortisation of previously deferred acquisition costs: Normal Deceleration (acceleration)	1750	– – 1750	1,803 – – –	– – 1,803 (494) 369 (125) – (313) (313) – 191 191
	, –	, (484) 353 (131)
	–	– (331) (331)
	–	– (32) (32)
Total US adjusted operating proft – long-term business	1,750	(484) (10) 1,256	1,803	(494) 247 1,556

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

I Additional financial information continued

I(v) Asia operations – analysis of adjusted operating profit by business unit

(a) Analysis of adjusted operating profit by business unit

Adjusted operating profit for Asia operations are analysed below. The table below presents the half year 2019 results on both AER and CER bases to eliminate the impact of exchange translation.

	2020$m	2019$m	Half year 2020 vs half year 2019%	2019$m
	Half year	Half year AER Half year CER	AER CER	Full year AER
China JV Hong Kong Indonesia Malaysia Philippines Singapore Taiwan Thailand Vietnam Other Non-recurrent items*	101	89 86 337 340 258 251 141 136 34 34 228 219 31 32 62 63 108 108 38 39 96 93	13% 17% 22% 21% (3)% (1)% 12% 16% 18% 18% 15% 20% 19% 16% 21% 19% 16% 16% 18% 15% 8% 12%	219 734 540 276 73 493 74 170 237 70 138
	412
	249
	158
	40
	262
	37
	75
	125
	45
	104
Total insurance operations Share of related tax charges fromjoint ventures and associate	1608	1,422 1,401 (5) (5)	13% 15% 260% 260%	3,024 (31)
	, (18)
Total long-term business Asset management (EastspringInvestments)	1590	1,417 1,396 133 130	12% 14% 8% 10%	2,993 283
	, 143
Total Asia	1,733	1,550 1,526	12% 14%	3,276

• In half year 2020, the adjusted operating profit for Asia insurance operations included a net credit of $104 million (half year 2019: $96 million; full year 2019: $138 million) representing a small number of items that are not expected to reoccur.

(b) Analysis of Eastspring Investments adjusted operating profits

(b) Analysis of Eastspring Investments adjusted operating profts
	2020$m	2019$m
	Half year	Half year Full year
Operating income before performance-related feesnote (1) Performance-related fees	313	309 636 1 12
	2
Operating income (net of commission)note (2) Operating expensenote (2) Group’s share of tax onjoint ventures’ operating proft	315	310 648 (157) (329) (20) (36)
	(157)
	(15)
Adjusted operating proft Average funds managed by Eastspring Investments Margin based on operating income* Cost/income ratio†	143	133 283
	$224.1bn	$206.7bn $214.0bn 30bps 30bps 51% 52%
	28bps
	50%

Notes

(1) Operating income before performance-related fees for Eastspring Investments can be further analysed as follows:

		Retail	Margin*	Institutional‡	Margin*	Total	Margin*
		$m	bps	$m	bps	$m	bps
30	Jun 2020	188	50	125	17	313	28
30	Jun 2019	191	51	118	18	309	30
31	Dec 2019	392	52	244	18	636	30

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

† Cost/income ratio represents cost as a percentage of operating income before performance-related fees.

‡ Institutional includes internal funds.

(2) Operating income and expense include the Group’s share of contribution from joint ventures. In the condensed consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item.

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(c) Eastspring Investments total funds under management

Eastspring Investments, the Group’s asset management business in Asia, manages funds from external parties and also funds for the Group’s insurance operations. The table below analyses the total funds managed and Eastspring Investments.

	2020$bn	2019$bn
	30 Jun	30 Jun 31 Dec*
External funds under management, excluding funds managed on behalf of M&G plcnote (1) Retail Institutional Money market funds (MMF) Funds managed on behalf of M&Gplcnote (2)
	59.4	62.4 73.7 9.4 11.0 13.4 13.3
	10.0
	13.0
	82.4	85.2 98.0 24.9 26.7
	15.7
External funds under management including M&G plc Internal funds under management		110.1 124.7 105.6 116.4
	98.1
	121.6
Total funds under managementnote (3)	219.7	215.7 241.1

• The half year 2019 comparatives have been re-presented to show the $24.9 billion of funds managed on behalf of M&G plc as external rather than internal funds under management to align to the presentation since the demerger in October 2019.

Notes

(1) External funds under management, excluding those managed on behalf of M&G plc – analysis of movements

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
At beginning of period Market gross infows Redemptions Market and other movements	98005	77,762 77,762 154,998 282,699 (152,306) (276,215) 4,770 13,759
	, 69839
	, (78,172)
	(7,348)
At end of period*	82,324	85,224 98,005

• The analysis of movements above includes $13,021 million relating to Asia Money Market Funds at 30 June 2020 (30 June 2019: $13,352 million; 31 December 2019: $13,337 million). Investment flows for half year 2020 include Eastspring Money Market Funds gross inflows of $48,234 million (half year 2019: gross inflows of $133,709 million; full year 2019: $236,603 million) and net inflows of $29 million (half year 2019: net outflows of $(1,264) million; full year 2019: net outflows of $(1,856) million).

(2) Funds managed on behalf of M&G plc – analysis of movements

uns manage on ea o pc anayss o move	ens			2020$m
				30 Jun
At beginning of period Net fows Other				26717
				, (7258)
				, (3,717)
At end of period				15,742
Total funds under management – analysis by asset class	30 Jun 2020	30 Jun 2019	31 De	c 2019
	$bn % of total	$bn % of total	$bn	% of total
Equity Fixed income Alternatives Money Market Funds	86.3 39%	98.8 46% 99.3 46% 3.1 1% 14.5 7%	107.0 116.2 3.4 14.5	44% 48% 2% 6%
	115.7 53%
	2.9 1%
	14.8 7%
Total funds under management	219.7 100%	215.7 100%	241.1	100%

(3) Total funds under management – analysis by asset class

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

I Additional financial information continued

I(vi) Option schemes

The Group presently grants share options through two schemes with a potential to grant through a third. Exercises of the options are satisfied by the issue of new shares. Executive directors and eligible employees based in the UK may participate in the Prudential Savings-Related Share Option Scheme, while agents based in certain regions of Asia can participate in the Prudential International Savings-Related Share Option Scheme for Non-Employees. Further details of the schemes and accounting policies are detailed in note B2.2 of the IFRS basis consolidated financial statements in the 2019 annual report.

All options were granted at £nil consideration. No options have been granted to substantial shareholders, suppliers of goods or services (excluding options granted to agents under the Prudential Savings-Related Share Option Scheme for Non-Employees) or in excess of the individual limit for the relevant scheme. The maximum share entitlement of each participant under the relevant scheme for each option granted is limited to the total savings and any bonus or interest accumulated under that participant’s savings contract, divided by the exercise price.

The options are normally exercisable during the six months period following either the third or fifth anniversary of the start of the relevant savings contract. The price for determining the options is calculated on the average of the closing market prices of shares for three consecutive business days immediately prior to the date of invitation.

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

• Prudential Savings-Related Share Option Scheme: 16 May 2023;

• Prudential International Savings-Related Share Option Scheme: 19 May 2021; and

• Prudential International Savings-Related Share Option Scheme for Non-Employees 2012: 12 May 2022.

The weighted average share price of Prudential plc for the period ended 30 June 2020 was £11.45 (30 June 2019: £15.90). The following analyses show the movements in options for each of the option schemes for the period ended 30 June 2020.

Prudential Savings-Related Share Option Scheme

Date of grant Exercise price £	Exercise period	Number of shares under options
	Beginning End	Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
23 Sep 14 11.55 22 Sep 15 11.11 21 Sep 16 11.04 21 Sep 16 11.04 21 Sep 17 14.55 21 Sep 17 14.55 29 Nov 19 11.18 29 Nov 19 11.18	01 Dec 19 31 May 20 01 Dec 20 31 May 21 01 Dec 19 31 May 20 01 Dec 21 31 May 22 01 Dec 20 31 May 21 01 Dec 22 31 May 23 01 Jan 23 30 Jun 23 01 Jan 25 30 Jun 25	135963 – (80259) – – (53738) 1966
		, , , , 103140 – (14180) – – (80914) 8046
		, , , , 225802 – (137913) – (326) (87237) 326
		, , , 77244 – (8135) – – (63731) 5378
		, , , , 502136 – (3283) (5870) (2102) (454865) 36016
		, , , ,, , 92940 – – – – (85563) 7377
		, , , 92823 – – (4491) – (161) 88171
		, , , 21,464 – – (2,683) – – 18,781
		1,251,512 – (243,770) (13,044) (2,428) (826,209) 166,061

The total number of securities available for issue under the scheme is 166,061 which represents 0.006 per cent of the issued share capital at 30 June 2020.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £14.28.

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Prudential International Savings-Related Share Option Scheme for Non-Employees

Date of grant Exercise price £	Exercise period	Number of shares under options
	Beginning End	Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
23 Sep 14 10.00 22 Sep 15 9.62 22 Sep 15 9.62 21 Sep 16 9.56 21 Sep 16 9.56 21 Sep 17 12.59 21 Sep 17 12.59 18 Sep 18 12.07 18 Sep 18 12.07 02 Oct 19 9.62 02 Oct 19 9.62	01 Dec 19 31 May 20 01 Dec 18 31 May 19 01 Dec 20 31 May 21 01 Dec 19 31 May 20 01 Dec 21 31 May 22 01 Dec 20 31 May 21 01 Dec 22 31 May 23 01 Dec 21 31 May 22 01 Dec 23 31 May 24 01 Dec 22 31 May 23 01 Dec 24 31 May25	363751 – (316115) (15579) – (30559) 1498
		, , , , , 935 – – – – – 935
		408255 – – (1558) – – 406697
		, , , 159344 – (156872) – – (1531) 941
		, , , 218293 – – – – – 218293
		, , 290365 – – – – – 290365
		, , 194316 – – – – – 194316
		, , 199159 – – – – – 199159
		, , 130182 – – – – – 130182
		, , 355,276 – – – – – 355,276
		234,059 – – – – – 234,059
		2,553,935 – (472,987) (17,137) – (32,090) 2,031,721

The total number of securities available for issue under the scheme is 2,031,721 which represents 0.078 per cent of the issued share capital at 30 June 2020.

The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £12.05.

II Calculation of alternative performance measures

The half year 2020 report uses alternative performance measures (APMs) to provide more relevant explanations of the Group’s financial position and performance. This section sets out explanations for each APM and reconciliations to relevant IFRS balances.

II(i) Reconciliation of adjusted operating profit to profit before tax

Adjusted operating profit presents the operating performance of the business. This measurement basis adjusts for the following items within total IFRS profit before tax:

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

• Amortisation of acquisition accounting adjustments arising on the purchase of business; and

• Gain or loss on corporate transactions, such as the effect of the Jackson’s reinsurance arrangement with Athene Life Re Ltd in half year 2020, disposals undertaken and costs connected to the demerger of M&G plc from Prudential plc in 2019.

More details on how adjusted operating profit is determined are included in note B1.3 of the Group IFRS basis results. A full reconciliation to profit after tax is given in note B1.1.

II(ii) Calculation of IFRS gearing ratio

IFRS gearing ratio is calculated as net core structural borrowings of shareholder-financed businesses divided by closing IFRS shareholders’ equity plus net core structural borrowings.

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
Core structural borrowings of shareholder-fnanced businesses Less holdingcompanycash and short-term investments	6499	9,470 5,594 (3,010) (2,207)
	, (1,907)
Net core structural borrowings of shareholder-fnanced businesses Closingshareholders’ equity	4592	6,460 3,387 25,037 19,477
	, 19,110
Closingshareholders’ equity plus net core structural borrowings	23,702	31,497 22,864
IFRSgearingratio	19%	21% 15%

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

II Calculation of alternative performance measures continued

II(iii) Return on IFRS shareholders’ equity

As stated in the 2019 Annual Report, the Group has introduced a new return on equity performance measure for the Group’s 2020 Prudential Long-Term Incentive Plan (PLTIP) awards alongside other metrics. This measure is calculated as adjusted operating profit after tax, and net of non-controlling interests, divided by average shareholders’ equity. Accordingly, the calculation of the return on IFRS shareholders’ equity has been aligned at half year 2020 and is now based on average shareholders’ equity.

In terms of comparatives, the significant changes in Group’s shareholders’ equity as a result of the demerger of M&G plc in October 2019 results in Group half year 2019 comparatives that are not meaningful. Asia and US half year 2019 returns on shareholders’ equity have been re-presented on average shareholders’ equity basis. The full year 2019 returns disclosed in the table below are consistent with those previously published and use profit from continuing operations and closing shareholders’ equity. As supplementary information, full year 2019 Asia and US returns on shareholders’ equity have also been presented on an average shareholders’ equity basis.

Detailed reconciliation of adjusted operating profit to IFRS profit before tax for the Group is shown in note B1.1 to the Group IFRS basis results.

	Half year 2020*$m	Half year 2019*$m
	Asia US Other Group†	Asia US
Adjusted operating proft Tax on adjusted operating proft Operating proft attributable to non-controllinginterests	1733 1266 (458) 2541	1,550 1,572 (217) (263) (5) –
	, , , (260) (195) (12) (467)
	(22) – – (22)
Adjusted operating proft, net of tax and non-controlling interests Average shareholders’ equity	1451 1071 (470) 2052	1,328 1,309 8,951 7,879
	, , , 11,198 8,942 (846) 19,294
Operating return on average shareholders’ equity(%)	26% 24% n/a 21%	30% 33%

• Half year profits are annualised by multiplying by two.

† Given the significant changes of Group shareholders’ equity as a result of the demerger of the UK and Europe operations in October 2019, it is not meaningful to compare the half year 2020 and half year 2019 returns on shareholders’ equity at a Group level. The half year 2019 comparatives have therefore excluded the presentation of a Group return on shareholders’ equity. Additionally, the half year 2019 comparatives for Asia and US operations have been re-presented from those previously published to reflect the use of average rather than opening shareholders’ equity to be on a comparable basis with the half year 2020 calculation.

Continuingoperations	Full year 2019$m Asia US Other Group Add back demerger- related items Adjusted Group (excluding demerger- related items)*
Adjusted operating proft Tax on adjusted operating proft Operating proft attributable to non-controllinginterests	3,276 3,070 (1,036) 5,310 179 5,489 (436) (437) 100 (773) (34) (807) (6) – (3) (9) – (9)
Adjusted operating proft, net of tax and non-controlling interests Closingshareholders’ equity	2,834 2,633 (939) 4,528 145 4,673 10,866 8,929 (318) 19,477 – 19,477
Operating return on closing shareholders’ equity (%) Supplementary information: Average shareholders’ equity Operating return on average shareholders’ equity (%)	26% 29% n/a 23% – 24% 9,521 8,046 30% 33%

• Demerger-related items comprise interest on the subordinated debt that was substituted to M&G plc prior to the demerger ($179 million pre-tax) and one-off costs of the demerger ($407 million pre-tax).

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Average shareholders’ equity has been based on opening and closing balances as follows:

	Half year 2020$m	Half year 2019$m	Full year 2019$m
	Asia US Other Group	Asia US	Asia US
Balance at beginning of period Balance at end ofperiod	10866 8929 (318) 19477	8,175 7,163 9,727 8,594	8,175 7,163 10,866 8,929
	, , , 11,529 8,955 (1,374) 19,110
Average shareholders’ equity	11,198 8,942 (846) 19,294	8,951 7,879	9,521 8,046

II(iv) Calculation of IFRS shareholders’ funds per share

IFRS shareholders’ funds per share is calculated as closing IFRS shareholders’ equity divided by the number of issued shares at the end of the period (30 June 2020: 2,609 million shares; 30 June 2019: 2,600 million shares; 31 December 2019: 2,601 million shares).

	30 Jun 2020
	Asia US Other Total continuing operations Discontinued UK and Europe operations Group total
Closing IFRS shareholders’ equity ($ million) Shareholders’ fundsper share (cents)	11529 8955 (1374) 19110 – 19110
	, , , , , 442¢ 343¢ (53)¢ 732¢ – 732¢
	30 Jun 2019
	Asia US Other Total continuing operations Discontinued UK and Europe operations Group total
Closing IFRS shareholders’ equity ($ million) Shareholders’ fundsper share (cents)	9,727 8,594 (3,822) 14,499 10,538 25,037 374¢ 331¢ (147)¢ 558¢ 405¢ 963¢
	31 Dec 2019
	Asia US Other Total continuing operations Discontinued UK and Europe operations Group total
Closing IFRS shareholders’ equity ($ million) Shareholders’ fundsper share (cents)	10,866 8,929 (318) 19,477 – 19,477 418¢ 343¢ (12)¢ 749¢ – 749¢

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

II Calculation of alternative performance measures continued

II(v) Calculation of asset management cost/income ratio

The asset management cost/income ratio is calculated as asset management operating expenses, adjusted for commission and joint venture contribution, divided by asset management total IFRS revenue adjusted for commission, joint venture contribution, performance-related fees and non-operating items.

	Eastspring Investments	Eastspring Investments
	2020$m	2019$m
	Half year	Half year Full year
Operating income before performance-related feesnote Share of joint venture revenue Commission Performance-related fees	313	309 636 (120) (244) 88 165 1 12
	(111)
	85
	2
IFRS revenue	289	278 569
Operating expense Share of joint venture expense Commission		157 329 (52) (102) 88 165
	157
	(45)
	85
IFRS charges	197	193 392
Cost/income ratio: operating expense/operating income before performance-related fees	50%	51% 52%

Note

IFRS revenue and charges for Eastspring Investments are included within the IFRS Income statement in ‘other income’ and ‘acquisition costs and other expenditure’ respectively. Operating income and expense include the Group’s share of contribution from joint ventures. In the consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item.

II(vi) Reconciliation of Asia renewal insurance premium to gross premiums earned

Reconciliation of Asia renewal insurance premium to gross earned premiums and calculation of Asia Life weighted premium income.

	2020$m	2019$m
	Half year	AER Half year CER Half year Full year
Asia renewal insurance premium Add: General insurance premium Add: IFRS gross earned premium from new regular and single premium business Less: Renewalpremiums fromjoint ventures	9702	9,177 9,123 19,007 65 65 135 3,113 3,101 6,386 (897) (858) (1,771)
	, 66
	2054
	, (932)
Asia segment IFRSgrosspremiums earned	10,890	11,458 11,431 23,757
Asia renewal insurance premium (as above) Asia APE		9,177 9,123 19,007 2,560 2,540 5,161
	9702
	, 1,665
Asia life weightedpremium income	11,367	11,737 11,663 24,168

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

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

	2020$m	2019$m
	Half year	Half year Full year
Annual premium equivalents (APE) Adjustment to include 100% of single premiums on new business sold in the periodnote (a) Premiums from in-force business and other adjustmentsnote (b)	2644	3,635 7,384 11,337 23,409 6,109 14,271
	, 10205
	, 6,993
Grosspremiums earned	19,842	21,081 45,064

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. These are excluded from gross premiums earned and recorded as deposits;

• APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and

• For the purpose of reporting APE new business sales, the Group’s share of amounts sold by the Group’s insurance joint ventures and associates are included. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned.

II(viii) Reconciliation between IFRS and EEV shareholders’ equity

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

	2020$m	2019$m
	30 Jun	30 Jun 31 Dec
EEV shareholders’ equity Less: Value of in-force business of long-term businessnote (a) Deferred acquisition costs assigned zero value for EEV purposes Othernote (b)	48942	67,983 54,711 (45,267) (41,893) 13,291 14,239 (10,970) (7,580)
	, (33771)
	, 14601
	, (10,662)
IFRS shareholders’ equity	19,110	25,037 19,477

Notes

• (a) The EEV shareholders’ equity comprises the present value of the shareholders’ interest in the value of in-force business, total net worth of long-term business operations and IFRS shareholders’ equity of asset management and other operations. The value of in-force business reflects the present value of expected future shareholder cash flows from long-term in-force business which are not captured as shareholders’ interest on an IFRS basis. Total net worth represents the net assets for EEV reporting that reflect the regulatory basis position, with adjustments to achieve consistency with the IFRS treatment of certain items as appropriate.

• (b) Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value total net worth for long-term insurance operations. These also include the mark-to-market value movements of the Group’s core structural borrowings which are fair valued under EEV but are held at amortised cost under IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson, IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset), whereas the local regulatory basis used for EEV reporting is based on expected future cash flows due to the policyholder on a prudent basis, with the consideration of an expense allowance, as applicable, but with no separate deferred acquisition cost asset.

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ADDITIONAL FINANCIAL INFORMATION CONTINUED

II Calculation of alternative performance measures continued

II(ix) Calculation of return on embedded value

Operating return on embedded value is calculated as the annualised post-tax EEV operating profit for the period as a percentage of average EEV basis shareholders’ equity.

	Half year 2020 Asia US Other Group*
EEV basis operating proft for the period from continuing operations, net of tax ($ million) Average EEV basis shareholders’ equity($ million)	2,036 696 (517) 2,215 38,244 14,943 (1,360) 51,827
Operatingreturn on average shareholders’ equity(%)	11% 9% n/a 9%

• Half year profits are annualised by multiplying by two.

	Half year 2019*†	Full year 2019†
	Asia US	Asia US
EEV basis operating proft for the period from continuing operations, net of tax ($ million) Average EEV basis shareholders’ equity($ million)	2,868 1,040 33,758 19,141	6,138 1,782 35,622 17,526
Operatingreturn on average shareholders’ equity(%)	17% 11%	17% 10%

• Half year profits are annualised by multiplying by two.

• Given the significant changes in Group shareholders’ equity as a result of the demerger of the UK and Europe operations in October 2019, the 2019 comparatives excluded the presentation of a Group return on shareholders’ funds. Additionally, the half year and full year 2019 comparatives for Asia and US operations have been re-presented from those previously published to reflect the use of average rather than opening or closing shareholders’ equity to be on a comparable basis with the half year 2020 calculation.

New business profit over embedded value is calculated as the annualised post-tax EEV new business profit for the period as a percentage of average EEV basis shareholders’ equity.

	Half year 2020*	Half year 2019*†	Full year 2019†
	Asia US	Asia US	Asia US
New business proft ($ million) Average EEV basis shareholders’ equity ($ million)	912 248	1,675 450 33,758 19,141	3,522 883 35,622 17,526
	38,244 14,943
New business proft over embedded value (%)	5% 3%	10% 5%	10% 5%

• Half year new business profits are annualised by multiplying by two.

• The half year and full year 2019 comparatives for Asia and US operations have been re-presented from those previously published to reflect the use of average rather than opening or closing shareholders’ equity to be on a comparable basis with the half year 2020 calculation.

Average EEV basis shareholders’ equity has been based on opening and closing balances as follows:

	Half year 2020$m	Half year 2019$m	Full year 2019$m
	Asia US Other Group	Asia US	Asia US
Balance at beginning of period Balance at end ofperiod	39235 16342 (866) 54711	32,008 18,709 35,507 19,573	32,008 18,709 39,235 16,342
	, , , 37,252 13,543 (1,853) 48,942
Average EEV basis shareholders’ equity	38,244 14,943 (1,360) 51,827	33,758 19,141	35,622 17,526

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II(x) Calculation of EEV shareholders’ funds per share

EEV shareholders’ funds per share is calculated as closing EEV shareholders’ equity divided by the number of issued shares at 30 June 2020 of 2,609 million (30 June 2019: 2,600 million; 31 December 2019: 2,601 million). EEV shareholders’ funds per share excluding goodwill attributable to shareholders is calculated in the same manner, except goodwill attributable to shareholders is deducted from closing EEV shareholders’ equity.

	30 Jun 2020
	Asia US Other Group total
Closing EEV shareholders’ equity ($ million) Less: Goodwill attributable to shareholders ($ million)	37252 13543 (1853) 48942
	, , , , (774) – (26) (800)
Closing EEV shareholders’ equity excluding goodwill attributable to shareholders ($ million)	36,478 13,543 (1,879) 48,142
Shareholders’ funds per share (in cents) Shareholders’ funds per share excluding goodwill attributable to shareholders (in cents)	1428¢ 519¢ (71)¢ 1876¢
	, , 1,398¢ 519¢ (72)¢ 1,845¢
	30 Jun 2019
	Asia US Other Group total
Closing EEV shareholders’ equity ($ million) Less: Goodwill attributable to shareholders ($ million)	35,507 19,573 (4,608) 50,472 (649) – – (649)
Closing EEV shareholders’ equity excluding goodwill attributable to shareholders ($ million)	34,858 19,573 (4,608) 49,823
Shareholders’ funds per share (in cents) Shareholders’ funds per share excluding goodwill attributable to shareholders (in cents)	1,366¢ 753¢ (177)¢ 1,941¢ 1,341¢ 753¢ (177)¢ 1,916¢
	31 Dec 2019
	Asia US Other Group total
Closing EEV shareholders’ equity ($ million) Less: Goodwill attributable to shareholders ($ million)	39,235 16,342 (866) 54,711 (796) – (26) (822)
Closing EEV shareholders’ equity excluding goodwill attributable to shareholders ($ million)	38,439 16,342 (892) 53,889
Shareholders’ funds per share (in cents) Shareholders’ funds per share excluding goodwill attributable to shareholders (in cents)	1,508¢ 628¢ (33)¢ 2,103¢ 1,478¢ 628¢ (34)¢ 2,072¢

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155

Risk factors

A number of risk factors may affect Prudential’s business, financial condition, results of operations and/or prospects 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 under ‘Forward-looking statements’.

Prudential’s approaches to managing risks are explained in the section of this document headed ‘Group Chief Risk and Compliance Officer’s Report on the risks facing our business and how these are managed’.

1. Risks relating to Prudential’s financial situation

1.1 The Covid-19 pandemic has had a significant impact on financial market volatility and global economic activity, increased operational disruption risks to the Group and has adversely impacted Prudential’s sales in affected markets and its financial condition, results of operations and prospects. The full extent of the longer-term impacts from the pandemic remains uncertain

The Covid-19 pandemic has significantly increased the volatility of equity markets, interest rates and credit spreads, reduced market liquidity and reduced global economic activity. The potential adverse impacts to the Group of these effects are detailed in the ‘Financial Market and Economic Conditions’ risk factor detailed in section 1.2 below. However, the full extent of the impact of the pandemic on financial markets and economic growth is highly uncertain and unpredictable and will be influenced by the actions, including the duration and effectiveness of mitigating measures of governments, policymakers and the public. Where these impacts are prolonged, this may impact the solvency position of Prudential’s subsidiaries and prevent or limit their ability to make remittances, adversely impacting the financial condition and prospects of the Group.

The immediate regulatory and supervisory responses to the Covid-19 pandemic have been broad and have included increased scrutiny of the operational resilience, liquidity and capital strength (including the impact of making dividend payments) of financial services companies. Various governments have effected, or are

considering effecting, the postponement of elections and other constitutional or legislative processes in response to the pandemic, and this may result in an increase in constitutional and political uncertainty in the markets in which the Group operates. The longer term political, regulatory and supervisory developments resulting from the Covid-19 pandemic remain highly uncertain. These may include changes to government fiscal policies, laws or regulations aimed at increasing financial stability and/or measures on businesses or specific industries to contribute to, lessen or otherwise support, the financial cost to governments in addressing the pandemic.

The Covid-19 pandemic, and measures to contain it, have slowed economic and social activity in the Group’s geographical markets. While these conditions persist, the level of sales activity in affected markets has been, and will continue to be, adversely impacted through a reduction in travel and agency and bancassurance activity. The impact to economic activity and employment levels may result in an elevated incidence of claims, lapses, or surrenders of policies, and some policyholders may choose to defer or stop paying insurance premiums or reduce deposits into retirement plans. Extended travel restrictions in particular may adversely impact product persistency in the Group’s Asia business. While these impacts to the Group have not been material to date, the full extent of the impact of the Covid-19 pandemic is currently highly uncertain and the Group’s claims experience to date and its current insurance assumptions cannot be taken as an indicator of future potential experience from the Covid-19 pandemic which may deteriorate significantly and have a material adverse effect on Prudential’s business, financial condition, results of operations and prospects.

Disruption to Prudential’s operations may result where its employees, or those of its service partners and counterparties, contract the coronavirus or are affected by travel restrictions; where office closures and other measures impacting working practices are effected, such as the imposition of remote working arrangements; and where quarantine requirements and isolation measures under local laws apply, and as a result of social distancing and/or other psychosocial impacts. While such measures are in place, there may be an increase in attempts to compromise IT systems through phishing and social engineering tactics.

In some markets Prudential has implemented changes to its sales and distribution processes. These include virtual face-to-face sales of its products and the online recruitment, training and, where possible, licensing of agents. Such changes may increase or introduce new operational and regulatory risks in particular those focused on customer outcomes and conduct. A failure to implement appropriate governance and management of these new or incremental risks may adversely impact Prudential’s reputation and brand and the results of its operations. In markets where the level of sales under these new processes is material or where such processes become permanent distribution channels, the commercial value of the Group’s existing sale and distribution arrangements, such as bancassurance arrangements, may be adversely impacted.

1.2 Prudential’s businesses are inherently subject to market fluctuations and general economic conditions, each of which may adversely affect the Group’s business, financial condition,

results of operations and prospects Uncertainty, fluctuations or negative trends in international economic and investment climates could have a material adverse effect on Prudential’s business and profitability. Prudential operates in a macroeconomic and global financial market environment that presents significant uncertainties and potential challenges. For example, interest rates in the United States (‘US’) and some Asian countries in which Prudential operates have decreased to historic lows driven by the responses of central banks to mitigate the impact of the Covid-19 pandemic, and the transition to a lower carbon economy may impact long-term asset valuations.

Global financial markets are subject to uncertainty and volatility created by a variety of factors. These factors include slowdowns or reversals in world economic growth (particularly where this is abrupt, as has been the case with the impact of the Covid-19 pandemic), fluctuations in global energy prices, changes in monetary policy in China, the US and other jurisdictions together with their impact on the valuation of all asset classes and effect on interest rates and inflation expectations, and concerns over sovereign debt. Other factors include the increased level of (geo)political risk and policy-related uncertainty (including the broader market impacts resulting from the trade negotiations between the US and China)

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and socio-political, climate-driven and pandemic events. The extent of financial market and economic impact of these factors may be highly uncertain and unpredictable and influenced by the actions, including the duration and effectiveness of mitigating measures of governments, policymakers and the public.

The adverse effects of such factors could be felt principally through the following items:

— Lower interest rates and reduced investment returns arising on the Group’s portfolios including impairment of debt securities and loans, 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 included in Jackson’s variable annuities and non-unit-linked savings products in Asia, increase reinvestment risk for some of the Group’s investments from accelerated prepayments and increased redemptions and/or have a negative impact on its assets under management and profit.

— A reduction in the financial strength and flexibility of corporate entities which may result in a deterioration of the credit rating profile and valuation of the Group’s invested credit portfolio (which may result in an increase in regulatory capital requirements for the Group or its businesses), as well as higher credit defaults and wider credit and liquidity spreads resulting in realised and unrealised credit losses. Similarly, mortgages and mortgagebacked securities in the Group’s investment portfolio are subject to default risk and may be adversely impacted by delays or failures of borrowers to make payments of principal and interest when due.

• Failure of counterparties who have transactions with Prudential (such as banks, reinsurers and counterparties to derivative transactions) 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. Concentrations of counterparty credit risk could exacerbate the impact of these events where they materialise.

• Estimates of the value of financial instruments becoming more 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). Where the Group is required to sell its investments within a defined timeframe, such market conditions may result in the sale of these investments at below expected or recorded prices.

— The Group holds certain investments that may lack liquidity, such as privately placed fixed maturity securities, mortgage loans, mortgage-backed securities and alternative investments. If these investments were required to be liquidated on short notice, the Group may experience difficulty in doing so and may be forced to sell them at a lower price than it otherwise would have been able to realise.

— A reduction in revenue from the Group’s products where fee income is linked to account values or the market value of the funds under management. In particular, equity price falls impact the amount of revenue derived from fees from the unit-linked products in the Group’s Asia business and from annuity contracts at Jackson, where fees are charged on account and asset values.

— Increased illiquidity, which includes the risk that expected cash inflows from investments and operations will not be adequate to meet the Group’s anticipated short-term and long-term policyholder benefits and expense payment obligations. Increased illiquidity also adds to uncertainty over the accessibility of financial resources which in extreme conditions can impact the functioning of markets and may reduce capital resources as valuations decline. 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. The potential impact of increased illiquidity is more uncertain than for other risks such as interest rate or credit risk.

In general, 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 or reduce deposits into retirement plans. 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 savings products, in particular those written in some of the Group’s Asia 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 less 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 and the solvency of its business units. In addition, part of the profit from the Group’s Asia operations is related to bonuses for policyholders declared on with-profits products, which are impacted by the difference between actual investment returns of the with-profits fund (which are broadly based on historical and current rates of return on equity, real estate and fixed income securities) and minimum guarantee rates offered to policyholders. This profit could be lower in particular in a sustained low interest rate environment.

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RISK FACTORS CONTINUED

Jackson 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. Changes in markets, or deviations in policyholder behaviour experience from assumptions, may result in the need to hold additional reserves for these products, which may impact Jackson’s liquidity, require it to raise additional capital and/or adversely impact its net income. Jackson uses a derivative hedging programme to reduce its exposure to market risks arising on these guarantees. There may be circumstances where the derivatives that Jackson enters into to hedge its market risks may not sufficiently or effectively offset its exposures under the guarantees, or where its exposures may be over-hedged. This includes circumstances where:

• The derivative markets for the instruments which most appropriately reflect the equity funds in which policyholders have invested may not be of sufficient size or liquidity to effectively hedge these risks;

• Operational errors occur in the execution of Jackson’s hedging strategy; or

• Actual experience materially deviates from the assumptions used in the models which inform Jackson’s hedging strategy. These assumptions include, amongst others, mortality, lapse, surrender and withdrawal rates and amounts of withdrawals, election rates, fund performance, equity market returns and volatility, interest rate levels and correlation among various market movements.

If the results from Jackson’s hedging programs do not correlate with the economic effect of changes in benefit exposures to customers, it could experience economic losses and increased volatility in its earnings which could adversely impact the Group’s business, financial condition and results of operations. The cost of any guarantees that remain unhedged will also affect Jackson’s results.

Periods of significant and sustained downturns in securities markets, increased equity volatility, reduced interest rates, or deviations in expected policyholder behaviour could also increase the cost of hedging beyond that anticipated in the pricing of the products being hedged and could produce losses not addressed by the risk management techniques employed.

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 International Financial Reporting Standards (‘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.

Also, Jackson has a mix of spread-based and mortality business with assets invested in fixed-income securities and its results are therefore affected by fluctuations in prevailing interest rates. In particular, 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.

Any of the foregoing factors and events, individually or together, could have a material adverse effect on Prudential’s business, financial condition, results of operations and prospects.

1.3 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 subject to applicable insurance, foreign exchange and tax laws, rules and regulations (including in relation to distributable profits) that can limit their ability to make remittances. In some circumstances, including where there are changes to general market conditions, 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.

A material change in the financial condition of any of Prudential’s subsidiaries may have a material effect on its business, financial condition, results of operations and prospects.

1.4 (Geo)political risks and political uncertainty may adversely impact economic conditions, increase market volatility, cause operational disruption to the Group and impact its strategic plans, which could have adverse effects on Prudential’s business, financial condition, results of operations and prospects The Group is exposed to (geo)political risks and political uncertainty in the markets in which it operates. Recent shifts in the focus of some national governments toward more protectionist or restrictive economic and trade policies with specific markets, and international trade disputes, could impact on the macroeconomic outlook and the environment for global financial markets. This could take effect, for example, through increased friction in cross-border trade, such as implementation of trade tariffs or the withdrawal from existing trading blocs or agreements and the exercise of executive powers to restrict overseas trade, financial transactions, capital movements and/or investment. The degree and nature of regulatory changes and Prudential’s competitive position in some geographic markets may also be impacted, for example, through measures favouring local enterprises, such as changes to the maximum level of non-domestic ownership by foreign companies or differing treatment under regulations and tax rules.

(Geo)political risks and political uncertainty may also adversely impact the Group’s operations and its operational resilience. Increased (geo)political tensions may increase cross-border cyber activity and

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therefore increase cyber security risks. (Geo)political tensions may also lead to civil unrest and/or acts of civil disobedience. This includes the unrest in Hong Kong, where mass anti-government demonstrations have given rise to increased disruption throughout the region. Such events could impact operational resilience by disrupting Prudential’s systems, operations, new business sales and renewals, distribution channels and services to customers, which may result in a reduction in contributions from business units to the central cash balances and profit of the Group, decreased profitability, financial loss, adverse customer impacts and reputational damage and may impact Prudential’s business, financial condition, results of operations and prospects.

Responses by the US, UK and other governments to the recently enacted national security law in Hong Kong, the final form and full extent of which currently remain uncertain, may adversely impact Hong Kong’s economy with potential adverse sales, operational and product distribution impacts to the Group due to the territory being a key market which also hosts regional and head office functions. For internationally active groups such as Prudential, operating across these jurisdictions, government measures and responses may also add to the complexity of legal and regulatory compliance. Compliance with Prudential’s legal or regulatory obligations in one jurisdiction may conflict with the law or policy objectives of another jurisdiction, or may be seen as supporting the law or policy objectives of that jurisdiction over another, creating additional legal, regulatory compliance and reputational risks for the Group.

1.5 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 of such debt are located and to 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 as has happened on occasion in the past, other financial institutions may also suffer losses or experience solvency or other concerns, which may result in Prudential facing additional risks relating to investments in such financial institutions that are held in the Group’s investment portfolio. There is also risk that public perceptions about the stability and creditworthiness of financial institutions and the financial sector generally might be adversely affected, as might counterparty relationships between financial institutions.

If a sovereign were to default on its obligations, or adopt policies that devalued or otherwise altered the currencies in which its obligations were denominated this could have a material adverse effect on Prudential’s business, financial condition, results of operations and prospects.

1.6 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 the Group’s ability to compete for acquisition and strategic opportunities. Downgrades may also impact the Group’s financial flexibility, including its ability to issue commercial paper at current levels and pricing. The interest rates at which Prudential is able to borrow funds are affected by its credit ratings, which are in place to measure the Group’s ability to meet its contractual obligations.

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.

Any such downgrades could have a material adverse effect on Prudential’s business, financial condition, results of operations and prospects. Prudential cannot predict what actions rating agencies may take, or what actions Prudential may therefore take in response to the actions of rating agencies, which could adversely affect its business.

1.7 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 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 fluctuations in Prudential’s consolidated financial statements upon the translation of results into the Group’s presentation currency. This exposure is not currently separately managed. The Group now presents its consolidated financial statements in US dollars, which is the currency in which a large proportion of the

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Group’s earnings and assets and liabilities are denominated or linked to (such as the Hong Kong dollar, which is pegged to the US dollar). There remain some entities within the Group the results of which are not denominated in or linked to the US dollar and transactions which are conducted in non-US dollar currencies. Prudential is subject to the risk of exchange rate fluctuations from the translation of the results these entities and transactions and the risks from the maintenance of the Hong Kong dollar peg to the US dollar.

2. Risks relating to Prudential’s business activities and industry

2.1 The implementation of largescale transformation, including complex strategic initiatives, gives rise to significant design and execution risks, may affect Prudential’s operational capability and capacity, and may adversely impact the Group and the delivery of its strategy if these initiatives fail to meet their objectives

In order to implement its business strategies for growth, improve customer experiences, strengthen operational resilience, meet regulatory and industry requirements and maintain market competitiveness, Prudential undertakes Group restructuring, large-scale transformation and acquisitions and disposals across its business. Many of these change initiatives are complex, interconnected and/or of large scale, including a current focus on preparations for a potential minority initial public offering and evaluation of other strategic options in relation to Jackson and its related companies, advancing the Group’s digital capability, expanding strategic partnerships and industry and regulatorydriven change. There may be a material adverse effect on Prudential’s business, financial condition, results of operations and prospects if these initiatives incur unplanned costs, are subject to implementation delays, or fail to fully meet their objectives. Additionally, there may be adverse non-financial (including operational, regulatory, conduct and reputational) implications for the Group. These initiatives inherently give rise to design and execution risks, and may increase existing business risks, such as placing additional strain on the operational capacity, or weakening the control environment, of the Group.

Implementing further initiatives related to significant regulatory changes, such as IFRS 17 and the transition to a legislative framework in Hong Kong for the groupwide supervision of insurance groups, may amplify these risks. Risks relating to these regulatory changes are explained in the ‘Legal and Regulatory Risk’ risk factor detailed in section 3.1.

2.2 Adverse experience in the operational risks inherent in Prudential’s business, and those of its material outsourcing partners, could disrupt its business functions and have a negative impact on its business, financial condition, results of operations and prospects

Operational risks are present in all of Prudential’s businesses, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems or human error, fraud, the effects of natural or man-made catastrophic events (such as natural disasters, pandemics, cyber-attacks, acts of terrorism, civil unrest and other catastrophes) or from other external events. These risks may also adversely impact Prudential through its partners which provide bancassurance and product distribution, outsourcing, external technology, data hosting and other services.

Exposure to such events could impact Prudential’s operational resilience and ability to perform necessary business functions by disrupting its systems, operations, new business sales and renewals, distribution channels and services to customers, or result in the loss of confidential or proprietary data. Such events, as well as any weaknesses in administration systems (such as those relating to policyholder records) or actuarial reserving processes, may also result in increased expenses, as well as legal and regulatory sanctions, decreased profitability, financial loss, customer conduct risk impacts and may damage Prudential’s reputation and relationship with its customers and business partners.

Prudential’s business is dependent on processing a large number of transactions for numerous and diverse products. It also employs a large number of complex and interconnected IT and finance systems and models, and user developed applications in its processes. The long-term nature of much of the Group’s business also means

that accurate records have to be maintained securely for significant time periods. Further, Prudential operates in an extensive and evolving legal and regulatory environment (including in relation to tax) which adds to the complexity of the governance and operation of its business processes and controls.

The performance of the Group’s core business activities and the uninterrupted availability of services to customers rely significantly on, and require significant investment in, IT infrastructure and security, system development, data governance and management, compliance and other operational systems, personnel, controls and processes. During times of significant change, the resilience and operational effectiveness of these systems and processes at Prudential and/or its third party providers may be adversely impacted. In particular, Prudential and its business partners are making increasing use of emerging technological tools and digital services, or forming strategic partnerships with third parties to provide these capabilities. Automated distribution channels to customers increase the criticality of providing uninterrupted services. A failure to implement appropriate governance and management of the incremental operational risks from emerging technologies may adversely impact on Prudential’s reputation and brand, the results of its operations, its ability to attract and retain customers and its ability to deliver on its long-term strategy and therefore its competitiveness and long-term financial success.

Although Prudential’s IT, compliance and other operational systems, models and processes incorporate governance and controls designed to manage and mitigate the operational and model risks associated with its activities, there can be no assurance as to the resilience of these systems and processes to disruption or that governance and controls will always be effective. Due to human error, among other reasons, operational and model risk incidents do occur from time to time and no system or process can entirely prevent them, although Prudential has not, to date, identified any such incidents that have had a material impact. Prudential’s legacy and other IT systems, data and processes, as with operational systems and processes generally, may also be susceptible to failure or security/data breaches.

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In addition, Prudential relies on the performance and operations of a number of bancassurance, outsourcing (including external technology and data hosting) and service partners. These include back office support functions, such as those relating to IT infrastructure, development and support and customer facing operations and services, such as product distribution and services (including through digital channels) and investment operations. This creates reliance upon the resilient operational performance of these partners, and failure to adequately oversee the partner, or the failure of a partner (or of its IT and operational systems and processes) could result in significant disruption to business operations and customers, may have reputational or conduct risk implications and which could have a material adverse effect on its business, financial condition, results of operations

and prospects.

2.3 Attempts to access or disrupt Prudential’s IT systems, and loss or misuse of personal data, could result in loss of trust from Prudential’s customers and employees, reputational damage and have material adverse effects on the Group’s business, financial condition, results of operations and prospects

Prudential and its business partners are increasingly exposed to the risk that individuals (which includes connected persons such as employees, contractors or representatives of Prudential or its third-party service providers, and unconnected persons) or groups may intentionally or unintentionally disrupt the availability, confidentiality and integrity of its IT systems or compromise the integrity and security of data (both corporate and customer), which could result in disruption to key operations, make it difficult to recover critical services or damage assets, any of which could result in loss of trust from Prudential’s customers and employees, reputational damage and direct or indirect financial loss. The cyber security threat continues to evolve globally in sophistication and potential significance. Prudential’s increasing profile in its current markets and those in which it is entering, growing customer interest in interacting with their insurance providers and asset managers through the internet and social media, improved brand awareness and the 2016 designation

of Prudential as a G-SII could also increase the likelihood of Prudential being considered a target by cyber criminals. Further, there have been changes to the threat landscape in recent years and the risk from untargeted but sophisticated and automated attacks has increased.

There is an increasing requirement and expectation on Prudential and its business partners to not only hold customer, shareholder and employee data securely, but use it in a transparent and appropriate way, including ensuring appropriate decision-making where automated processes are employed, and to ensure its ongoing accuracy. The risk of not meeting these requirements and expectations may be increased by the use of emerging technological tools which could increase the volume of data that Prudential collects and processes. Developments in data protection worldwide (such as the implementation of EU General Data Protection Regulation that came into force in 2018 and the California Consumer Protection Act that came into force on 1 January 2020) may also increase the financial and reputational implications for Prudential following a significant breach of its (or its third-party suppliers’) IT systems or data. New and currently unforeseeable regulatory issues may also arise from the increased use of emerging technology, data and digital services. Although Prudential has experienced or has been affected by cyber and data breaches, to date, it has not identified a failure or breach, or an incident of data misuse in relation to its legacy and other IT systems and processes which has had a material impact. However, Prudential has been, and likely will continue to be, subject to potential damage from computer viruses, unauthorised access and cybersecurity 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, financial condition, results of operations and prospects.

2.4 Prudential operates in certain markets with joint venture partners, minority shareholders and other third parties, resulting in certain risks that Prudential does not face with respect to its whollyowned subsidiaries

Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures and other joint ownership or third-party arrangements. For such Group operations the level of control exercisable by the Group depends on the terms of the contractual agreements, in particular, those terms providing for the allocation of control among, and continued cooperation between, the participants. In addition, the level of control exercisable by the Group could be subject to changes in the maximum level of non-domestic ownership imposed on foreign companies in certain jurisdictions.

Prudential may face financial, reputational and other exposure (including regulatory censure) in the event that any of its partners fails or is unable 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 such as bancassurance and agency arrangements in Asia and broker-dealer networks in the US 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, material failure in controls (such as those pertaining to the third-party system failure or the prevention of financial crime) or failure to meet any regulatory requirements could adversely affect Prudential’s reputation and its business, financial condition, results of operations and prospects.

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2.5 Adverse experience relative to the assumptions used in pricing products and reporting business results could significantly affect Prudential’s business, financial condition, results of operations and prospects

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. The Group’s businesses are subject to inflation risk. In particular, the Group’s medical insurance businesses in Asia are also exposed to medical inflation risk.

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.

Assumptions about future expected levels of mortality are of relevance to the Guaranteed Minimum Withdrawal Benefit (‘GMWB’) of Jackson’s variable annuity business.

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 and across product lines in Asian markets. 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.

In addition, Prudential’s business may be adversely affected by epidemics, pandemics and other effects that give rise to a large number of deaths or additional sickness claims, as well as increases to the cost of medical claims. Pandemics, significant influenza and other epidemics have occurred a number of times historically but the likelihood, timing, or the severity of future events 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 claims experience. The risks to the Group resulting from the Covid-19 pandemic are included in the ‘Covid-19’ risk factor detailed in section 1.1.

Prudential uses reinsurance to selectively transfer mortality, morbidity and other risks. This exposes the Group to the counterparty risk of a reinsurer being unable to pay reinsurance claims or otherwise meet their commitments; the risk that a reinsurer changes reinsurance terms and conditions of coverage, or increases the price of reinsurance which Prudential is unable to pass on to its customers; and the risk of ambiguity in the reinsurance terms and conditions leading to uncertainty whether an event is covered under a reinsurance contract.

Any of the foregoing, individually or together, could have a material adverse effect on Prudential’s business, financial condition, results of operations and prospects.

2.6 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 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 and fund management trends, historical bonus levels, the ability to respond to developing demographic trends, customer appetite for certain savings products and technological advances. 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, agents and independent financial advisers may limit Prudential’s potential to grow its business as quickly as planned. Technological advances may result in increased competition to the Group (including from outside the insurance industry) and a failure to be able to attract sufficient numbers of skilled staff.

In Asia, the Group’s principal competitors include global life insurers together with regional insurers and multinational asset managers. In most Asia markets, there are also local companies that have a material market presence.

Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies.

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Prudential believes that competition will intensify across all regions in response to consumer demand, digital and other technological advances (including the emergence of new distribution channels), the need for economies of scale and the consequential 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. This includes managing the potential adverse impacts to the commercial value of the Group’s existing sale and distribution arrangements, such as bancassurance arrangements, in markets where new distribution channels develop.

Failure to do so may negatively impact Prudential’s ability to attract and retain customers and, importantly, may limit Prudential’s ability to take advantage of new business arising in the markets in which it operates, which may have an adverse interest on the Group’s business, financial condition, results of operations and prospects.

2.7 Prudential is exposed to ongoing risks as a result of the demerger of M&G plc (the ‘Demerger’)

On 21 October 2019, Prudential completed the Demerger and, in connection with this, Prudential entered into a demerger agreement with M&G plc. Among other provisions, the demerger agreement contains a customary indemnity under which Prudential has agreed to indemnify M&G plc against liabilities incurred by the M&G plc group that relate to the business of the Group. Although it is not anticipated that Prudential will be required to pay any substantial amount pursuant to such indemnity obligations, if any amount payable thereunder is substantial this could have a material adverse effect on Prudential’s business, financial condition, results of operations and prospects.

3. Legal and regulatory risk

3.1 Prudential conducts its businesses subject to regulation and associated regulatory risks, including a change to the basis in the regulatory supervision of the Group, 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), capital control measures on companies and individuals, regulation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which Prudential operates (including those related to the conduct of business by Prudential or its third-party distributors), or 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. The impact from any regulatory changes may be material to Prudential, for example changes may be required to its product range, distribution channels, handling and usage of data, 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 also change solvency requirements, methodologies for determining components of the regulatory or statutory balance sheet including the reserves and the level of capital required to be held by individual businesses (with implications to the Group capital position), the regulation of selling practices, and could introduce changes that impact products sold or that may be sold. Furthermore, as a result of interventions by governments in light of financial and global economic conditions, there may continue to be changes in government regulation and supervision of the financial services industry, including the possibility of higher capital requirements, restrictions on certain types of transactions and enhancement of supervisory powers.

Further information on specific areas of regulatory and supervisory requirements and changes are included in the subsections below.

(a) Group-wide supervision

With effect from 21 October 2019, the group-wide supervisor of Prudential plc changed to the Hong Kong Insurance Authority (the ‘Hong Kong IA’). On 24 July 2020 the Insurance (Amendment) (No 2) Ordinance, being the enabling primary legislation providing for the framework for the group-wide supervision of insurance groups by the Hong Kong IA (the ‘GWS Framework’), was enacted. The primary legislation (once effective) will be supported by subsidiary legislation and guidance material, which is subject to consultation with the industry and to the Hong Kong legislative process. As such, the timing of finalisation and implementation of the GWS Framework remains uncertain, although it is expected to become effective in early 2021. Until then the Group is being supervised on an interim basis in line with principles agreed with the Hong Kong IA. Until the GWS Framework is finalised, the Group cannot be certain of the nature and extent of differences between the interim principles agreed with the Hong Kong IA and the specific regulatory requirements of the GWS Framework. With the agreement of the Hong Kong IA, Prudential is applying the Local Capital Summation Method (the ‘LCSM’) to determine Group regulatory capital requirements. Whilst Prudential currently expects the capital requirements under the GWS Framework to be largely consistent with these interim supervisory requirements, any differences in the final requirements adopted under the GWS Framework may lead to changes to the way in which capital requirements are calculated and to the eligibility of the capital instruments issued by Prudential to satisfy such capital requirements. The Group’s existing processes and resources may also need to change to comply with the final GWS Framework or any other requirements of the Hong Kong IA. The need to adapt to any such changes or to respond to any such requirements may lead to increased costs or otherwise impact the business, financial condition, results, profitability and/or prospects of the Group.

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While the Hong Kong IA has agreed that the subordinated debt instruments Prudential has in issue can be included as part of the Group’s capital resources for the purposes of satisfying the capital requirements imposed under the LCSM under the interim principles agreed with the Hong Kong IA, the grandfathering provisions under the GWS Framework remain subject to the Hong Kong legislative process. Although Prudential currently expects to be able to include the subordinated debt instruments it has in issue as part of the Group’s capital resources for the purposes of satisfying the capital requirements imposed under the GWS Framework, if Prudential is ultimately not able to do so it may need to raise additional capital, which may in turn lead to increased costs for the Group.

(b) Global regulatory requirements and systematic risk regulation

Currently there are also a number of other global regulatory developments which could impact Prudential’s businesses in the many jurisdictions in which they operate. These include the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank Act’) and its subsequent amendments in the US which provided for a comprehensive overhaul of the financial services industry within the US including reforms to financial services entities, products and markets, the work of the Financial Stability Board (the ‘FSB’) in the area of systemic risk including the reassessment of the designation of Global Systemically Important Insurers (‘G-SIIs’), and the Insurance Capital Standard (the ‘ICS’) being developed by the International Association of Insurance Supervisors (the ‘IAIS’). In addition, regulators in a number of jurisdictions in which the Group operates are further developing their local capital regimes. Across Asia this includes China, Hong Kong, Singapore, Thailand and India. There remains a high degree of uncertainty over the potential impact of such changes on the Group.

In November 2019 the International Association of Insurance Supervisors (IAIS) adopted the Common Framework (‘ComFrame’) which establishes supervisory standards and guidance focusing on the effective group-wide supervision of Internationally Active Insurance Groups (‘IAIGs’). The ComFrame proposals, which include the ICS, could result in enhanced capital and regulatory measures for IAIGs. Prudential was included in the first register of IAIGs released by the IAIS on 1 July 2020 and was designated an IAIG by the Hong Kong IA following an assessment against the established criteria in ComFrame.

In November 2019 the FSB endorsed a new Holistic Framework (‘HF’), intended for the assessment and mitigation of systemic risk in the insurance sector, for implementation by the IAIS in 2020 and has suspended G-SII designations until completion of a review to be undertaken in 2022. Many of the previous G-SII measures have already been adopted into the Insurance Core Principles (‘ICPs’) and ComFrame. As an IAIG, Prudential is expected to be subject to these measures. The HF also includes a monitoring element for the identification of a build-up of systemic risk and to enable supervisors to take action where appropriate. As a result of the Covid-19 pandemic, this monitoring requirement has been replaced with a Covid-19-focused exercise for 2020. In June 2020 the IAIS published an application paper on the liquidity risk elements introduced into the ICPs and ComFrame. A public consultation on the development of liquidity metrics to be used as an ancillary indicator for monitoring is planned for Q4 2020, with a further consultation focused on macroeconomic elements expected to follow in 2021.

The IAIS continues to develop the ICS as part of ComFrame. The implementation of ICS will be conducted in two phases – a five-year monitoring phase followed by an implementation phase.

(c) IFRS 17

The Group’s accounts are prepared in accordance with current IFRS applicable to the insurance industry. The International Accounting Standards Board (the ‘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’). Some targeted amendments to this standard, including to the effective date, were issued in June 2020. IFRS 17, ‘Insurance Contracts’, as amended, will have the effect of introducing fundamental changes to the statutory reporting of insurance entities that prepare accounts according to IFRS from 2023. The UK Endorsement Board, once established, will apply a process for assessing whether IFRS 17 meets the necessary criteria for endorsement into the UK-adopted International Accounting Standards (IAS). The UK-adopted IAS will apply to the Group’s financial results reporting after the Brexit transition period, replacing the EU-endorsed IFRS. The Group is reviewing 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. Given the implementation of this standard is likely to require significant enhancements to IT, actuarial and finance systems of the Group, it will also have an impact on the Group’s expenses.

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.

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(d) Inter-bank offered rate (‘IBOR’) reforms

In July 2014, the FSB announced widespread reforms to address the integrity and reliability of IBORs. The discontinuation of IBORs in their current form and their replacement with alternative risk-free reference rates such as the Sterling Overnight Index Average benchmark (‘SONIA’) in the UK and the Secured Overnight Financing Rate (‘SOFR’) in the US could, among other things, impact the Group through an adverse effect on the value of Prudential’s assets and liabilities which are linked to or which reference IBORs, a reduction in market liquidity during any period of transition and increased legal and conduct risks to the Group arising from changes required to documentation and its related obligations to its stakeholders.

(e) Investor contribution schemes 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 in which Prudential, along with other companies, may be required to make such contributions.

3.2 The resolution of several issues affecting the financial services industry could have a negative impact on Prudential’s business, financial condition, results of operations and prospects or on its relations with current and potential customers

Prudential is, and in the future may continue to be, subject to legal and regulatory actions in the ordinary course of its business on matters relevant to the delivery of customer outcomes. Such actions relate, and could in the future relate, to the application of current regulations or the failure to implement new regulations (including those relating to the conduct of business), regulatory reviews

of broader industry practices and products sold (including in relation to lines of business already closed) in the past under acceptable industry or market practices at the time and changes to the tax regime affecting products. Regulators may also focus on 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. 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.

Any regulatory action arising out of the Group’s position as a product provider could have an adverse impact on the Group’s business, financial condition, results of operations and prospects, or otherwise harm its reputation.

3.3 Litigation, disputes and regulatory investigations may adversely affect Prudential’s business, financial condition, cash flows, results of operations and prospects

Prudential is, and may in the future be, 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 respects 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 imposed and the inherent unpredictability of litigation and disputes, it is possible that an adverse outcome could have an adverse effect on Prudential’s business, financial condition, cash flows, results of operations and prospects.

3.4 Changes in tax legislation may result in adverse tax consequences for the Group’s business, financial condition, results of operations and prospects

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 business, financial condition, results of operations and prospects.

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RISK FACTORS CONTINUED

4. Environmental, social and governance risks

4.1 The failure to understand and respond effectively to the risks associated with environmental, social or governance (‘ESG’) factors could adversely affect Prudential’s achievement of its long-term strategy

The business environment in which Prudential operates is continually changing. A failure to manage those material risks associated with the ESG themes detailed below may adversely impact the reputation and brand of the Group, the results of its operations, its ability to attract and retain customers and staff, its ability to deliver on its long-term strategy and therefore its long-term financial success. Ensuring high levels of transparency and responsiveness to stakeholders is a key aspect of this. ESG-related issues may also directly or indirectly impact key stakeholders, ranging from customers to institutional investors, employees, suppliers and regulators, all of whom have expectations in this area, which may differ.

The environmental risks associated with climate change is one ESG area that poses significant risks to Prudential and its customers. These risks include transition risks and physical risks. The global transition to a lower carbon economy could have an adverse impact on investment valuations as the financial assets of carbon-intensive companies re-price and could result in some asset sectors facing significantly higher costs and a disorderly adjustment to their asset values. The speed of this transition will be influenced by factors such as public policy, technology and changes in market or investor sentiment. This may adversely impact the valuation of investments held by the Group. The potential broader economic impact from this may adversely affect customer demand for the Group’s products. The physical impacts of climate change, driven by both specific short-term climaterelated events such as natural disasters and longer-term changes to the natural environment, will increasingly influence the longevity, mortality and morbidity risk

assessments of the Group’s underwriting product offerings. Climate-driven changes in countries in which Prudential, or its key third parties, operate could impact its operational resilience and could change its claims profile. There is an increasing expectation from stakeholders for Prudential to understand, manage and provide increased transparency of its exposure to climate-related risks. Given that Prudential’s investment horizons are long term, it is potentially more exposed to the long-term impact of climate change risks. Additionally, Prudential’s stakeholders increasingly expect an approach to responsible investment that demonstrates how ESG considerations are effectively integrated into investment and engagement decisions, and fiduciary and stewardship duties.

Social risks that could impact Prudential may arise from a failure to consider the rights, diversity, well-being, and interests of people and communities in which the Group, or its third parties, operates. These risks are increased as Prudential operates in multiple jurisdictions with distinct local cultures and considerations. Emerging population risks associated with public health trends (such as an increase in obesity) and demographic changes (such as population urbanisation and ageing) may affect customer lifestyles and therefore may impact claims against the Group’s insurance product offerings. As a provider of insurance and investment services, Prudential has access to extensive amounts of customer personal data, including data related to personal health, and is therefore exposed to the regulatory and reputational risks associated with customer data misuse or security breaches. These risks are explained in section 2.3. The potential for reputational risks extends to the Group’s supply chains, which may be adversely impacted by factors such as poor labour standards and abuses of human rights by third parties. As an employer, the Group is also exposed to the risk of being unable to attract, retain and develop highly-skilled staff, which can be increased where Prudential does not have responsible working practices.

A failure to maintain high standards of corporate governance may adversely impact the Group and its customers, staff and employees, through poor decisionmaking and a lack of oversight of its key risks. Poor governance may arise where key governance committees have insufficient independence, a lack of diversity, skills or experience in their members, or unclear (or insufficient) oversight responsibilities and mandates. Inadequate oversight over remuneration increases the risk of poor senior management behaviours. Prudential operates across multiple jurisdictions and has a group and subsidiary governance structure which may add further complexity to these considerations. Participation in joint ventures or partnerships where Prudential does not have direct overall control increases the potential for reputational risks arising from poor governance.

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Corporate governance

Hong Kong listing obligations

The Directors confirm that the Company has complied with all the provisions of the Corporate Governance Code issued by the Hong Kong Stock Exchange Limited (HK Code) throughout the accounting period, except as described below.

The Company does not comply with provision B.1.2(d) of the HK Code which requires companies, on a comply or explain basis, to have a remuneration committee which makes recommendations to the board on the remuneration of nonexecutive directors. This provision is not compatible with provision 34 of the UK Corporate Governance Code which recommends the board determines the remuneration of non-executive directors. Prudential has chosen to adopt a practice in line with the recommendations of the UK Corporate Governance Code.

Following the introduction by the UK government of measures to limit the spread of Covid-19 by prohibiting non-essential travel and public gatherings of more than two people, and following the issuance of the Company’s 2020 AGM Notice, the Company provided an update to shareholders in late April 2020 on its revised arrangements for the 2020 Annual General Meeting (AGM). In light of those restrictions and to protect the health of Prudential’s shareholders and employees, the Board decided, with regret, that shareholders, external advisors (including the auditor) and Directors (other than the Chairman) would not be able to attend the AGM in person (and thus provision E.1.2 of the HK Code could not be complied with). The AGM on 14 May 2020 was therefore held as a ‘closed meeting’ with just two shareholders to provide the requisite quorum to enable the formal business of passing resolutions to be conducted. In recognising the continuing importance of the Annual General Meeting as an opportunity to engage with shareholders, the Board encouraged participation from shareholders. The revised meeting arrangements included an option for shareholders to submit questions to the Board in advance of the meeting, the answers to which were posted on the Company’s website, and shareholders were also asked to vote their shares by proxy ahead of the meeting. Prudential is keeping shareholders informed through its website and released a number of updates during the period of the Covid-19 pandemic, including a Q1 business update and other presentations.

Notwithstanding the pandemic and related unprecedented measures and circumstances, the Board continues to receive regular updates on shareholder engagement activities.

The Directors also confirm that the financial results contained in this document have been reviewed by the Group Audit Committee.

The Company has adopted securities dealing rules relating to transactions in Prudential securities by Directors on terms no less exacting than those set out in Appendix 10 to the Hong Kong Listing Rules except that a waiver in respect of certain requirements of Appendix 10 to the Hong Kong Listing Rules was granted by the Hong Kong Stock Exchange Limited, originally on 28 February 2011, to take into account accepted practices in the UK. Having made specific enquiry of all Directors, the Directors of the Company have complied with these rules throughout the accounting period.

Pursuant to the disclosure requirements set out in Rule 13.51(2) and Rule 13.51B(1) of the Hong Kong Listing Rules, the Company confirms the following changes in Directors’ details since the publication of the 2019 Annual Report and Accounts.

Anthony Nightingale

Stepped down as a director of Schindler Holding Limited with effect from 19 March 2020.

James Turner

Stepped down as a director of West Bromwich Building Society with effect from 23 July 2020.

Shriti Vadera

Appointed as an independent Nonexecutive Director of the Company and member of the Nomination & Governance Committee with effect from 1 May 2020.

Amy Yip

Stepped down as a director of Temenos Group AG with effect from 20 May 2020.

Appointed as a director of EFG International AG with effect from 31 May 2020.

Stepped down as a director of Fidelity Funds SICAV with effect from 1 July 2020.

Biographies for each of the Directors can be found on Prudential’s website www.prudentialplc.com

As previously announced by the Company on 9 April 2020, the Board’s Remuneration Committee accepted a proposal from Prudential’s Executive Directors as to changes to their remuneration in 2020. The recommendations included a reduction in executive salaries to the level on 31 December 2019 effective from 1 April 2020, a reduction in the pension contribution for incumbent Executive Directors from 25 per cent to 13 per cent of salary effective from 14 May 2020 and maintaining the Chief Financial Officer and Chief Operating Officer’s 2020 Prudential Long Term Incentive Plan award at 250 per cent of salary. The Remuneration Committee continues to operate these changes within the Directors’ Remuneration Policy as approved by shareholders at the AGM held on 14 May 2020.

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Disclosure of interests of Directors

Outstanding share options

The following table sets out the share options held by the Executive Directors in the UK Savings-Related Share Option Scheme (SAYE) as at the end of the period. No other directors participated in any other option scheme.

Market price at 30 June 2020 (pence) Date of grant Exercise price (pence)	Exercise period	Number of options
	Beginning End	Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period
Mark FitzPatrick 21 Sep 17 1455 1218.5 James Turner 21 Sep17 1455 1218.5	01 Dec 22 31 May 23 01 Jan 21 30 Jun 21	2061 – – – – – 2061
		, , 1,237 – – – – – 1,237

Directors’ shareholdings and substantial shareholdings

The Company and its directors, Chief Executives and shareholders have been granted a partial exemption from the disclosure requirements under Part XV of the Securities and Futures Ordinance (SFO). As a result of this exemption, directors, Chief Executives and shareholders do not have an obligation under the SFO to notify the Company of shareholding interests, and the Company is not required to maintain a register of directors’ and Chief Executives’ interests under section 352 of the SFO, nor a register of interests of substantial shareholders under section 336 of the SFO. The Company is, however, required to file with the Stock Exchange of Hong Kong Limited any disclosure of interests notified to it in the United Kingdom.

The following table sets out the interests of directors, including the interests of persons connected with directors as at the end of the period. This includes shares acquired under the Share Incentive Plan and deferred annual bonus awards as detailed in the table on ‘Other share awards’ on page 170.

	1 January 2020 (or on date of appointment)	30 June 2020 (or on date of retirement)
	Total benefcial interest (number of shares)	Total benefcial interest (number of shares) Number of shares subject to performance conditions Total interest in shares
Chairman Paul Manduca Executive Directors Mark FitzPatrick James Turner Mike Wells1 Non-executive Directors Jeremy Anderson2 Howard Davies3 David Law Kai Nargolwala Anthony Nightingale Philip Remnant Alice Schroeder4 Shriti Vadera5 Thomas Watjen6 Fields Wicker-Miurin AmyYip
	42500	42500 – 42500
	,	, ,
	72301	123498 617742 741240
	, 80624	, , , 137747 400443 538190
	, 976272	, , , 1143191 1065936 2209127
	,	,, ,, ,,
	–	9157 – 9157
	9813	, , 9813 – 9813
	, 9066	, , 9066 – 9066
	, 70000	, , 70000 – 70000
	, 50000	, , 50000 – 50000
	, 6916	, , 6916 – 6916
	, 14500	, , 14500 – 14500
	, –	, , 67500 – 67500
	10340	, , 10340 – 10340
	, 4500	, , 4500 – 4500
	, –	, , – – –

Notes

1 For the 1 January 2020 figure, Mike Wells’s beneficial interest in shares is made up of 297,320 ADRs (representing 594,640 ordinary shares) and 381,632 ordinary shares. For the 30 June 2020 figure, his beneficial interest in shares is made up of 297,320 ADRs (representing 594,640 ordinary shares) and 548,551 ordinary shares.

2 Jeremy Anderson was appointed to the Board on 1 January 2020.

3 Howard Davies stepped down from the Board on 14 May 2020. Total interest in shares is shown at this date. 4 For the 1 January 2020 figure, Alice Schroeder’s beneficial interest in shares is made up of 7,250 ADRs (representing 14,500 ordinary shares). For the 30 June 2020 figure, the beneficial interest in shares is made up of 7,250 ADRs (representing 14,500 ordinary shares).

5 Shriti Vadera was appointed to the Board on 1 May 2020. 6 For the 1 January 2020 figure, Thomas Watjen’s beneficial interest in shares is made up of 5,170 ADRs (representing 10,340 ordinary shares). For the 30 June 2020 figure, the beneficial interest in shares is made up of 5,170 ADRs (representing 10,340 ordinary shares).

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Directors’ outstanding long-term incentive awards Share-based long-term incentive awards

			Conditional share awards		Market	Dividend			Conditional share awards	Date of
			outstanding	Conditional	price at	equivalents	Rights	Rights	outstanding	end of
	Plan	Year of	at 1 Jan	awards in	date of	on vested	exercised	lapsed	at 30 June	performance
	name	award	2020	2020	award	sharesnote	in 2020	in 2020	2020	period
			(Number of	(Number of		(Number of			(Number of
			shares)	shares)	(pence)	shares released)			shares)
Mark FitzPatrick	PLTIP	2017	117,047		1828				117,047	31 Dec 19
	PLTIP	2018	123,110		1750				123,110	31 Dec 20
	PLTIP	2019	142,470		1605.5				142,470	31 Dec 21
	PLTIP	2020		175,115	1049.5				175,115	31 Dec 22
James Turner	PLTIP PLTIP PLTIP PLTIP	2017 2018 2019 2020	382,627 32,264 103,281 119,600 255,145	175,115 177,562 177,562	1672 1750 1605.5 1049.5	– 1,738 1,738	– 20,165 20,165	– 12,099 12,099	557,742 – 103,281 119,600 177,562 400,443	31 Dec 19 31 Dec 20 31 Dec 21 31 Dec 22
Mike Wells	PLTIP	2017	304,166		1672	16,414	190,103	114,063	–	31 Dec 19
	PLTIP	2018	297,713		1750				297,713	31 Dec 20
	PLTIP	2019	344,629		1605.5				344,629	31 Dec 21
	PLTIP	2020		423,594	1049.5				423,594	31 Dec 22
			946,508	423,594		16,414	190,103	114,063	1,065,936

Note A dividend equivalent was accumulated on these awards.

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DISCLOSURE OF INTERESTS OF DIRECTORS CONTINUED

Other share awards

The table below sets out Executive Directors’ deferred bonus share awards.

						Conditional				Market
		Conditional				share awards	Date of		Market	price at
		share awards	Conditionally	Dividends	Shares	outstanding	end of		price at	date of
	Year of	outstanding	awarded	accumulated	released	at 30 Jun	restricted	Date of	date of	vesting or
	grant	at 1 Jan 2020	in 2020	in 2020note	in 2020	2020	period	release	award	release
		(Number of	(Number of	(Number of	(Number of	(Number of
		shares)	shares)	shares)	shares)	shares)			(pence)	(pence)
Mark FitzPatrick
Deferred 2017 annual
incentive award	2018	33,518		643		34,161	31 Dec 20		1750
Deferred 2018 annual
incentive award	2019	38,411		737		39,148	31 Dec 21		1605.5
Deferred 2019 annual
incentive award	2020		48,780	936		49,716	31 Dec 22		1047
		71,929	48,780	2,316	–	123,025
James Turner
Deferred 2018 annual
incentive award	2019	24,560		471		25,031	31 Dec 21		1605.5
Deferred 2019 annual
incentive award	2020		42,125	809		42,934	31 Dec 22		1047
		24,560	42,125	1,280	–	67,965
Mike Wells
Deferred 2016 annual
incentive award	2017	64,440			64,440	–	31 Dec 19 06 Apr 20		1672	1021
Deferred 2017 annual
incentive award	2018	58,008		1,114		59,122	31 Dec 20		1750
Deferred 2018 annual
incentive award	2019	66,030		1,268		67,298	31 Dec 21		1605.5
Deferred 2019 annual
incentive award	2020		83,782	1,609		85,391	31 Dec 22		1047
		188,478	83,782	3,991	64,440	211,811

Note

A dividend equivalent was accumulated on these awards.

All-employee share plans

It is important that all employees are offered the opportunity to own shares in Prudential, connecting them both to the success of the Company and to the interests of other shareholders. Executive Directors are invited to participate in these plans on the same basis as other staff in their location.

Save As You Earn (SAYE) schemes

UK-based Executive Directors are normally eligible to participate in the HM Revenue and Customs (HMRC) approved Prudential SavingsRelated Share Option Scheme. This scheme allows all eligible employees to save towards the exercise of options over Prudential plc shares with the option price set at the beginning of the savings period at a discount of up to 20 per cent of the market price.

Since 2014 participants have been able to elect to enter into savings contracts of up to £500 per month for a period of three or five years. At the end of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months, participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.

Details of Executive Directors’ rights under the SAYE scheme are set out in the ‘Outstanding share options’ table.

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Share Incentive Plan (SIP)

UK-based Executive Directors are also eligible to participate in the Company’s Share Incentive Plan (SIP). Since April 2014, all UK-based employees have been able to purchase Prudential plc shares up to a value of £150 per month from their gross salary (partnership shares) through the SIP. For every four partnership shares bought, an additional matching share is awarded which is purchased by Prudential plc on the open market. Dividend shares accumulate while the employee participates in the plan. If the employee withdraws from the plan, or leaves the Group, matching shares may be forfeited.

The table below provides information about shares purchased under the SIP together with matching shares (awarded on a 1:4 basis) and dividend shares.

		Share				Share
		Incentive	Partnership	Matching	Dividend	Incentive
		Plan awards	shares	shares	shares	Plan awards
	Year of	held in Trust	accumulated	accumulated	accumulated	held in Trust
	initial grant	at 1 Jan 2020	in 2020	in 2020	in 2020	at 30 June 2020
		(Number of	(Number of	(Number of	(Number of	(Number of
		shares)	shares)	shares)	shares)	shares)
Mark FitzPatrick James Turner Mike Wells	2017 2011 2015	372 829 719	74 – 74	18 – 19	9 17 15	473 846 827

Cash-settled long-term incentive awards

This information has been prepared in line with the reporting requirements of the Hong Kong Stock Exchange Limited and sets out Executive Directors’ outstanding share awards and share options.

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Shareholder information

Dividends

				Shareholders with ordinary
		Shareholders registered		shares standing to the
2020 frst interim dividend	Shareholders registered on the UK register	on the Hong Kong branch register	Holders of US American Depositary Receipts	credit of their Singapore CDP securities accounts
Ex-dividend date Record date Payment of 2020 frst	20 August 2020 21 August 2020	20 August 2020 21 August 2020	– 21 August 2020	20 August 2020 21 August 2020 On or about
interim dividend	28 September 2020	28 September 2020	28 September 2020	5 October 2020

Shareholders on the UK or Hong Kong share registers have the option to elect to receive their dividend in US dollars instead of pounds sterling or Hong Kong dollars respectively. More information may be found on our website www.prudentialplc.com/investors/ shareholder-information/dividend/dividend-currency-election

Shareholder enquiries

For enquiries about shareholdings, including dividends and lost share certificates, please contact the Company’s registrars:

By post

Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA

By telephone

Tel 0371 384 2035 Textel 0371 384 2255 (for hard of hearing) Lines are open from 8.30am to 5.30pm, Monday to Friday.

International shareholders tel +44 121 415 7026

Dividend mandates

Shareholders may have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility, please call Equiniti Limited (Equiniti) and request a Cash Dividend Mandate form. Alternatively, you can download the form here www.shareview.co.uk/4/Info/Portfolio/ Default/en/Home/Shareholders/ Documents/MandateForm.pdf

More information about dividend mandates can be found at www.shareview.co.uk/4/Info/Portfolio/ default/en/home/shareholders/Pages/ Mandate.aspx

Cash dividend alternative

The Company has a Dividend Re-investment Plan (DRIP).

Shareholders who have elected for the DRIP will automatically receive shares for all future dividends in respect of which a DRIP alternative is offered. The election may be cancelled at any time by the shareholder. Further details of the DRIP and the timetable are available on the Shareview website at www.shareview.co.uk/4/Info/Portfolio/ default/en/home/shareholders/Pages/ ReinvestDividends.aspx

Electronic communications

Shareholders are encouraged to elect to receive shareholder documents electronically by registering with Shareview at www.shareview.co.uk. This will save on printing and distribution costs, and create environmental benefits. Shareholders who have registered, will be sent an email notification whenever shareholder documents are available on the Company’s website and a link will be provided to that information. When registering, you will need your shareholder reference number which can be found on your share certificate or proxy form. The option to receive shareholder documents electronically is not available to shareholders holding shares through The Central Depository (Pte) Limited (CDP) in Singapore. Please contact Equiniti if you require any assistance or further information.

Equiniti Shareview service

Information on how to manage shareholdings can be found at https://help.shareview.co.uk

The pages at this web address provide the following:

• answers to commonly asked questions regarding shareholder registration;

• links to downloadable forms, guidance notes and Company history factsheets; and

• a choice of contact methods – via email, telephone or post.

Share dealing services

The Company’s Registrars, Equiniti, offer a postal dealing facility for buying and selling Prudential plc ordinary shares; please see the Equiniti address above or telephone 0371 384 2248. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential plc shares. For telephone sales call 0345 603 7037 between 8.30am and 4.30pm, Monday to Friday excluding UK bank holidays, and for internet sales log on to www.shareview.co.uk/dealing

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ShareGift

Shareholders who have only a small number of shares, the value of which makes them uneconomic to sell, may wish to consider donating them to ShareGift (Registered Charity 1052686). The relevant share transfer form may be obtained from our website or from Equiniti. Further information about ShareGift may be obtained on +44 (0)20 7930 3737 or from www.ShareGift.org

There are no implications for capital gains tax purposes (no gain or loss) on gifts of shares to charity and it is also possible to obtain income tax relief.

Hong Kong register

The Company operates a branch register for shareholders in Hong Kong. All enquiries regarding Hong Kong branch register accounts should be directed to Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong. Telephone: +852 2862 8555

Singapore branch register

Shareholders who have shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) in Singapore may refer queries to the CDP at 11 North Buona Vista Drive, #01-19/20, The Metropolis Tower 2, Singapore 138589. Telephone +65 6535 7511. Enquiries regarding shares held in Depository Agent Sub-accounts should be directed to your Depository Agent or broker.

American Depositary Receipts (ADRs)

The Company’s ordinary shares are listed on the New York Stock Exchange in the form of American Depositary Shares, evidenced by ADRs and traded under the symbol PUK. Each American Depositary Share represents two ordinary shares. All enquiries regarding ADR holder accounts should be directed to JP Morgan, the authorised depositary bank, at JP Morgan Chase Bank, N.A., PO Box 64504, St. Paul, MN 55164-0504, USA. Telephone General: +1 800 990 1135 or from outside the US +1 651 453 2128 or log on to www.adr.com

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How to contact us

Prudential plc

1 Angel Court London EC2R 7AG

Media enquiries

Tel +44 (0)20 3977 9760 Email: media.relations@prudentialplc.com

Tel +44 (0)20 7220 7588 www.prudentialplc.com

Board

Paul Manduca Chairman

Non-executive Directors

Philip Remnant Senior Independent Director Jeremy Anderson

David Law

Kai Nargolwala

Anthony Nightingale Alice Schroeder Shriti Vadera Tom Watjen Fields Wicker-Miurin Amy Yip

Group Executive Committee

Mike Wells Group Chief Executive

Mark FitzPatrick Group Chief Financial Officer and Chief Operating Officer

James Turner Group Chief Risk and Compliance Officer

Jolene Chen Group Human Resources Director

Michael Falcon Chief Executive Officer, Jackson Holdings LLC

Nic Nicandrou Chief Executive, Prudential Corporation Asia

Al-Noor Ramji Group Chief Digital Officer

Business units

Prudential Corporation Asia

13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong Tel +852 2918 6300 www.prudentialcorporation-asia.com

Nic Nicandrou Chief Executive, Prudential Corporation Asia

Jackson Holdings LLC

1 Corporate Way Lansing Michigan 48951 USA

Tel +1 517 381 5500 www.jackson.com

Michael Falcon

Chief Executive Officer, Jackson Holdings LLC

Shareholder contacts Institutional analyst and investor enquiries Tel +44 (0)20 3977 9720 Email: investor.relations@prudentialplc.com

UK Register private shareholder enquiries Tel 0371 384 2035 International shareholders: Tel +44 (0)121 415 7026

Hong Kong Branch Register private shareholder enquiries Tel +852 2862 8555

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US American Depositary Receipts holder enquiries Tel +1 800 990 1135

From outside the US: Tel +1 651 453 2128

The Central Depository (Pte) Limited shareholder enquiries Tel +65 6535 7511

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Prudential public limited company

Incorporated and registered in England and Wales

Registered office

1 Angel Court London EC2R 7AG Registered number 1397169 www.prudentialplc.com

Principal place of business in Hong Kong

13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong

Prudential plc is a holding company, some of whose subsidiaries are authorised and regulated, as applicable, by the Hong Kong Insurance Authority and other regulatory authorities.

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Prudential’s office at Ludgate Hill, London; from The Building News, 1863.

HISTORY

Providing financial security since 1848

Successive generations have looked to Prudential to safeguard their financial security – from industrial workers and their families in Victorian Britain to 20 million customers worldwide today. Our financial strength, heritage, prudence and focus on our customers’ long-term needs ensure that people continue to turn to our trusted brands to help them plan for today and tomorrow.

1848 Prudential is established as Prudential Mutual Assurance, Investment and Loan Association in Hatton Garden, London, offering loans and life assurance to professional people. From the beginning the figure of Prudence was adopted as the symbol to be used on the Company seal to represent the values of the business.

To this day she still carries her arrow (signifying strength of purpose), serpent (the ancient symbol of wisdom) and mirror (representing self awareness).

1854 Prudential opens the Industrial Department to sell a new type of insurance, Industrial Insurance, to the working classes, for premiums of a penny and upwards.

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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 of the entity referred to in any forward-looking statement to differ materially from those indicated in such forward-looking statement. Such factors include, but are not limited to, the impact of the current Covid-19 pandemic, including adverse financial market and liquidity impacts, responses and actions taken by regulators and supervisors, the impact to sales, claims and assumptions and increased product lapses, disruption to Prudential’s operations (and those of its suppliers and partners), risks associated with new sales processes and information security risks; future market conditions, including fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the impact of economic uncertainty, asset valuation impacts from the transition to a lower carbon economy, derivative instruments not effectively hedging exposures arising from product guarantees, inflation and deflation and the performance of financial markets generally; global political uncertainties, including the potential for increased friction in cross-border trade and the exercise of executive powers to restrict trade, financial transactions, capital movements and/or investment; the policies and actions of regulatory authorities, including, in particular, the policies and actions of the Hong Kong Insurance Authority, as Prudential’s Group-wide supervisor, as well as new government initiatives generally; given its designation as an Internationally Active Insurance Group (‘IAIG’), the impact on Prudential of systemic risk and other group supervision policy standards adopted by the International Association of Insurance Supervisors; the impact of competition and fast-paced technological

1871 The Company becomes one of the first in the City to employ women. Calculating machines are also introduced, bringing efficiencies to the processing of an increasing volume of business.

1923 Prudential’s first overseas life branch is established in India, with the first policy being sold to a tea planter in Assam.

1924 Prudential shares are floated on the London Stock Exchange.

1879 Prudential moves into Holborn Bars, a purpose-built office complex designed by Alfred Waterhouse. The building becomes a London landmark.

1949 The ‘Man from the Pru’ advertising campaign is launched.

1912 Following the National Insurance Act, Prudential works with the government to run Approved Societies, providing sickness and unemployment benefits to five million people.

1986 Prudential acquires Jackson National Life Insurance in the United States.

change; the effect on Prudential’s business and results from, in particular, mortality and morbidity trends, lapse rates and policy renewal rates; the physical impacts of climate change and global health crises on Prudential’s business and operations; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of internal transformation projects and other strategic actions failing to meet their objectives; the ability to complete a potential minority initial public offering of Jackson, or one of its related companies, or other strategic options in relation to Jackson, or one of its related companies; the effectiveness of reinsurance for Prudential’s businesses; the risk that Prudential’s operational resilience (or that of its suppliers and partners) may prove to be inadequate, including in relation to operational disruption due to external events; disruption to the availability, confidentiality or integrity of Prudential’s information technology, digital systems and data (or those of its suppliers and partners); any ongoing impact on Prudential of the demerger of M&G plc; 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; the impact of legal and regulatory actions, investigations and disputes; and the impact of not adequately responding to environmental, social and governance issues. 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 of the entity referred to in any forward-looking statements to differ, possibly materially, from those anticipated in Prudential’s forward-looking statements can be found under the ‘Risk factors’ heading of 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.

1994 Prudential

2010 Prudential plc is listed on stock exchanges in Hong Kong and Singapore.

Corporation Asia is formed in Hong Kong as a regional head office to expand operations beyond an existing presence in Malaysia, Singapore and Hong Kong.

2014 Prudential acquires businesses in Ghana and Kenya, marking its entry into the fast-growing African life insurance industry.

2019 Prudential demerges its UK and Europe business, M&G plc, in order to focus on its international business.

1999 Prudential acquires M&G, pioneer of unit trusts in the UK and a leading provider of investment products.

2000 Prudential plc is listed on the New York Stock Exchange. Prudential becomes the first UK life insurer to enter the Mainland China market through its joint venture with CITIC Group.

2020 Prudential announces it intends to pursue the full separation and divestment of Jackson to enable the Group to focus exclusively on its high-growth Asia and Africa businesses.

Prudential public limited company Principal place of business Incorporated and registered in Hong Kong in England and Wales 13th Floor One International Finance Centre Registered office 1 Harbour View Street 1 Angel Court Central London Hong Kong EC2R 7AG Registered number 1397169 www.prudentialplc.com Prudential plc is a holding company, some of whose subsidiaries are authorised and regulated, as applicable, by the Hong Kong Insurance Authority and other regulatory authorities.

Designed by FleishmanHillard Fishburn

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, or with The Prudential Assurance Company Limited, a subsidiary of M&G plc, a company incorporated in the United Kingdom.

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