Prudential PLC — Interim / Quarterly Report 2014

Aug 12, 2014

National Storage Mechanism | Additional information You don't have Javascript enabled. For full functionality this page requires javascript to be enabled. RNS Number : 8438O Prudential PLC 12 August 2014  International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED INCOME STATEMENT 2014 £m 2013 £m Note Half year Half year Full year Earned premiums, net of reinsurance 16,189 14,763 29,844 Investment return 13,379 6,528 20,347 Other income 1,059 1,100 2,184 Total revenue, net of reinsurance 30,627 22,391 52,375 Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (25,549) (18,143) (43,154) Acquisition costs and other expenditure B3 (3,336) (3,315) (6,861) Finance costs: interest on core structural borrowings of shareholder-financed operations (170) (152) (305) Remeasurement of carrying value of Japan Life business classified as held for sale D1 (11) (135) (120) Total charges, net of reinsurance (29,066) (21,745) (50,440) Share of profits from joint ventures and associates, net of related tax 147 74 147 Profit before tax (being tax attributable to shareholders' and policyholders' returns) 1,708 720 2,082 Less tax charge attributable to policyholders' returns (284) (214) (447) Profit before tax attributable to shareholders B1.1 1,424 506 1,635 Total tax charge attributable to policyholders and shareholders B5 (563) (355) (736) Adjustment to remove tax charge attributable to policyholders' returns 284 214 447 Tax charge attributable to shareholders' returns B5 (279) (141) (289) Profit for the period attributable to equity holders of the Company 1,145 365 1,346 2014 2013 Earnings per share (in pence) Half year Half year Full year Based on profit attributable to the equity holders of the Company: B6 Basic 45.0p 14.3p 52.8p Diluted 44.9p 14.3p 52.7p 2014 2013 Dividends per share (in pence) Note Half year Half year Full year Dividends relating to reporting period: B7 Interim dividend (2014 and 2013) 11.19p 9.73p 9.73p Final dividend (2013) - - 23.84p Total 11.19p 9.73p 33.57p Dividends declared and paid in reporting period: B7 Current year interim dividend - - 9.73p Final dividend for prior year 23.84p 20.79p 20.79p Total 23.84p 20.79p 30.52p * This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits fund after adjusting for taxes borne by policyholders) is not representative of pre-tax profits attributable to shareholders. International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2014 £m 2013 £m Note Half year Half year Full year Profit for the period 1,145 365 1,346 Other comprehensive income: Items that may be reclassified subsequently to profit or loss Exchange movements on foreign operations and net investment hedges: Gross (115) 227 (255) Related tax (2) 5 - (117) 232 (255) Net unrealised valuation movements on securities of US insurance operations classified as available-for-sale: Net unrealised holding gains (losses) arising during the period 1,060 (1,665) (2,025) Net gains included in the income statement on disposal and impairment (37) (42) (64) Total C3.3(b) 1,023 (1,707) (2,089) Related change in amortisation of deferred acquisition costs C5.1(b) (212) 419 498 Related tax (284) 451 557 527 (837) (1,034) Total 410 (605) (1,289) Items that will not be reclassified to profit or loss Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes: Gross 12 (28) (62) Related tax (2) 7 14 10 (21) (48) Other comprehensive income (loss) for the period, net of related tax 420 (626) (1,337) Total comprehensive income (loss) for the period attributable to the equity holders of the Company 1,565 (261) 9 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Period ended 30 June 2014 £m Share capital Share premium Retained earnings Translation reserve Available -for-sale securities reserves Shareholders' equity Non- controlling interests Total equity Note note C9 note C9 Reserves Profit for the period - - 1,145 - - 1,145 - 1,145 Other comprehensive income (loss) - - 10 (117) 527 420 420 Total comprehensive income (loss) for the period - - 1,155 (117) 527 1,565 - 1,565 Dividends B7 - - (610) - - (610) - (610) Reserve movements in respect of share-based payments - - 52 - - 52 - 52 Change in non-controlling interests - - - - - - - Share capital and share premium New share capital subscribed C9 - 8 - - - 8 - 8 Treasury shares Movement in own shares in respect of share-based payment plans - - (34) - - (34) - (34) Movement in own shares purchased by unit trusts consolidated under IFRS - - (6) - - (6) - (6) Net increase (decrease) in equity - 8 557 (117) 527 975 - 975 At beginning of period 128 1,895 7,425 (189) 391 9,650 1 9,651 At end of period 128 1,903 7,982 (306) 918 10,625 1 10,626 Period ended 30 June 2013 £m Share capital Share premium Retained earnings Translation reserve Available -for-sale securities reserves Shareholders' equity Non- controlling interests Total equity Note note C9 note C9 Reserves Profit for the period - - 365 - - 365 - 365 Other comprehensive (loss) income - - (21) 232 (837) (626) - (626) Total comprehensive income (loss) for the period - - 344 232 (837) (261) - (261) Dividends B7 - - (532) - (532) - (532) Reserve movements in respect of share-based payments - - 31 - - 31 - 31 Change in non-controlling interests - - - - - - 1 1 Share capital and share premium New share capital subscribed C9 - 1 - - - 1 - 1 Treasury shares Movement in own shares in respect of share-based payment plans - - 25 - - 25 - 25 Movement in own shares purchased by unit trusts consolidated under IFRS - - 2 - - 2 - 2 Net increase (decrease) in equity - 1 (130) 232 (837) (734) 1 (733) At beginning of period 128 1,889 6,851 66 1,425 10,359 5 10,364 At end of period 128 1,890 6,721 298 588 9,625 6 9,631 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED) Year ended 31 December 2013 £m Share capital Share premium Retained earnings Translation reserve Available -for-sale securities reserves Shareholders' equity Non- controlling interests Total equity Note note C9 note C9 Reserves Profit for the year - - 1,346 - - 1,346 - 1,346 Other comprehensive loss - - (48) (255) (1,034) (1,337) - (1,337) Total comprehensive income (loss) for the year - - 1,298 (255) (1,034) 9 - 9 Dividends B7 - - (781) - - (781) - (781) Reserve movements in respect of share-based payments - - 98 - - 98 - 98 Change in non-controlling interests - - - - - - (4) (4) Share capital and share premium New share capital subscribed C9 - 6 - - - 6 - 6 Treasury shares Movement in own shares in respect of share-based payment plans - - (10) - - (10) - (10) Movement in own shares purchased by unit trusts consolidated under IFRS - - (31) - - (31) - (31) Net increase (decrease) in equity - 6 574 (255) (1,034) (709) (4) (713) At beginning of year 128 1,889 6,851 66 1,425 10,359 5 10,364 At end of year 128 1,895 7,425 (189) 391 9,650 1 9,651 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2014 £m 2013 £m Note 30 Jun 30 Jun 31 Dec Assets Intangible assets attributable to shareholders: Goodwill C5.1(a) 1,458 1,474 1,461 Deferred acquisition costs and other intangible assets C5.1(b) 5,944 5,538 5,295 Total 7,402 7,012 6,756 Intangible assets attributable to with-profits funds: Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes 177 178 177 Deferred acquisition costs and other intangible assets 63 79 72 Total 240 257 249 Total intangible assets 7,642 7,269 7,005 Other non-investment and non-cash assets: Property, plant and equipment 910 868 920 Reinsurers' share of insurance contract liabilities 6,743 7,204 6,838 Deferred tax assets C7.1 2,173 2,637 2,412 Current tax recoverable 158 191 244 Accrued investment income 2,413 2,726 2,609 Other debtors 3,643 2,318 1,746 Total 16,040 15,944 14,769 Investments of long-term business and other operations: Investment properties 11,754 10,583 11,477 Investment in joint ventures and associates accounted for using the equity method 911 696 809 Financial investments: Loans C3.4 12,457 13,230 12,566 Equity securities and portfolio holdings in unit trusts 130,566 112,258 120,222 Debt securities C3.3 134,177 138,256 132,905 Other investments 5,908 6,140 6,265 Deposits 13,057 13,542 12,213 Total 308,830 294,705 296,457 Assets held for sale D1 875 1,079 916 Cash and cash equivalents 5,903 6,840 6,785 Total assets C1,C3.1 339,290 325,837 325,932 * Included within financial investments are £3,953 million of lent securities as at 30 June 2014 (30 June 2013: £5,076 million; 31 December 2013: £3,791 million). International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2014 £m 2013 £m Note 30 Jun 30 Jun 31 Dec Equity and liabilities Equity Shareholders' equity 10,625 9,625 9,650 Non-controlling interests 1 6 1 Total equity 10,626 9,631 9,651 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 283,704 272,728 273,953 Unallocated surplus of with-profits-funds 13,044 11,434 12,061 Total C4.1(a) 296,748 284,162 286,014 Core structural borrowings of shareholder-financed operations: Subordinated debt 3,597 3,161 3,662 Other 970 988 974 Total C6.1 4,567 4,149 4,636 Other borrowings: Operational borrowings attributable to shareholder-financed operations C6.2(a) 2,243 2,530 2,152 Borrowings attributable to with-profits operations C6.2(b) 864 924 895 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements 2,188 2,889 2,074 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 5,262 5,394 5,278 Deferred tax liabilities C7.1 3,855 4,102 3,778 Current tax liabilities 475 325 395 Accruals and deferred income 731 538 824 Other creditors 4,999 3,743 3,307 Provisions 534 537 635 Derivative liabilities 1,400 2,226 1,689 Other liabilities 3,970 3,661 3,736 Total 23,414 23,415 21,716 Liabilities held for sale D1 828 1,026 868 Total liabilities C1,C3.1 328,664 316,206 316,281 Total equity and liabilities 339,290 325,837 325,932 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 2014 £m 2013 £m Note Half year Half year Full year Cash flows from operating activities Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (i) 1,708 720 2,082 Non-cash movements in operating assets and liabilities reflected in profit before taxnote (ii) (1,162) 533 (775) Other itemsnote (iii) 38 70 17 Net cash flows from operating activities 584 1,323 1,324 Cash flows from investing activities Net cash outflows from purchases and disposals of property, plant and equipment (50) (140) (179) Acquisition of distribution rights and subsidiaries, net of cash balancenote (iv) (534) (376) (405) Net cash flows from investing activities (584) (516) (584) Cash flows from financing activities Structural borrowings of the Group: Shareholder-financed operations:note (v) C6.1 Issue of subordinated debt, net of costs - 429 1,124 Interest paid (169) (148) (291) With-profits operations:note (vi) C6.2 Interest paid (4) (4) (9) Equity capital: Issues of ordinary share capital 8 1 6 Dividends paid (610) (532) (781) Net cash flows from financing activities (775) (254) 49 Net (decrease) increase in cash and cash equivalents (775) 553 789 Cash and cash equivalents at beginning of period 6,785 6,126 6,126 Effect of exchange rate changes on cash and cash equivalents (107) 161 (130) Cash and cash equivalents at end of period 5,903 6,840 6,785 Notes (i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. (ii) The adjusting items to profit before tax included within non-cash movements in operating assets and liabilities reflected in profit before tax are as follows: 2014 £m 2013 £m Half year Half year Full year Other non-investment and non-cash assets (2,461) (1,140) (1,146) Investments (15,866) (8,074) (23,487) Policyholder liabilities (including unallocated surplus) 15,110 7,295 21,951 Other liabilities (including operational borrowings) 2,055 2,452 1,907 Non-cash movements in operating assets and liabilities reflected in profit before tax (1,162) 533 (775) (iii) 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. (iv) The agreement entered into by the Group in the first half of 2014 expanding the term and geographic scope of its strategic pan-Asian bancassurance partnership with Standard Chartered plc resulted in a net cash outflow during the reporting period of £503 million for acquisition of distribution rights. In addition, the acquisition of Express Life in Ghana, in the first half of 2014, resulted in a net cash outflow of £14 million. There was also a £12 million payment for a deferred consideration of the acquisition of Thanachart, and a further £5 million payment in respect of other distribution agreements. The acquisition of Thanachart Life and related distribution agreements in 2013 resulted in a net cash outflow of £396 million in full year 2013 (half year 2013: £376 million). A further £9 million cash payment was made in the second half of 2013 relating to the acquisition of REALIC in 2012. (v) Structural borrowings of shareholder-financed operations exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities. (vi) Interest paid on structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds, which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities. International Financial Reporting Standards (IFRS) Basis Results NOTES A BACKGROUND A1 Basis of preparation and audit status These condensed consolidated interim financial statements for the six months ended 30 June 2014 have been prepared in accordance with IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The Group's policy for preparing this interim financial information is to use the accounting policies adopted by the Group in its last consolidated financial statements, as updated by any changes in accounting policies it intends to make in its next consolidated financial statements as a result of new or amended IFRS that are applicable or available for early adoption for the next annual financial statements and other policy improvements. EU-endorsed IFRS may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 30 June 2014, there were no unendorsed standards effective for the period ended 30 June 2014 affecting the condensed consolidated financial statements of the Group, and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group. The IFRS basis results for the 2014 and 2013 half years are unaudited. The 2013 full year IFRS basis results have been derived from the 2013 statutory accounts. The auditors have reported on the 2013 statutory accounts which have been delivered to the Registrar of Companies. The auditors' report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The exchanges rates applied for balances and transactions in currencies other than the presentational currency of the Group, pounds sterling (GBP) were: Closing rate at 30 Jun 2014 Average for the 6 months to 30 Jun 2014 Closing rate at 30 Jun 2013 Average for the 6 months to 30 Jun 2013 Closing rate at 31 Dec 2013 Average for 2013 Local currency: £ Hong Kong 13.25 12.95 11.76 11.98 12.84 12.14 Indonesia 20,270.27 19,573.46 15,053.25 15,024.12 20,156.57 16,376.89 Malaysia 5.49 5.45 4.79 4.75 5.43 4.93 Singapore 2.13 2.10 1.92 1.92 2.09 1.96 India 102.84 101.45 90.13 84.94 102.45 91.75 Vietnam 36,471.11 35,266.15 32,161.63 32,305.17 34,938.60 32,904.71 US 1.71 1.67 1.52 1.54 1.66 1.56 Certain notes to the financial statements present half year 2013 comparative information at Constant Exchange Rates, in addition to the reporting at Actual Exchange Rates used throughout the condensed consolidated financial statements. Actual Exchange Rates (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 for the balance sheet at the balance sheet date. Constant Exchange Rates (CER) results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet. The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2013, except for the adoption of the new and amended accounting pronouncementsfor Group IFRS reporting as described below. A2 Adoption of new accounting pronouncements in 2014 The following accounting pronouncements issued and endorsed for use in the EU have been adopted for half year 2014. This is not intended to be a complete list as only those accounting pronouncements that could have an impact upon the Group's financial statements are discussed. Accounting standard Key requirements Impact on financial statements Amendments to IAS 32: Offsetting financial assets and financial liabilities These amendments, effective from 1 January 2014 provide clarification on the application of the offsetting rules and require offsetting of a financial asset and financial liability when there is both the legally-enforceable right to set-off and intention to either settle on a net basis or realise the asset and settle the liability simultaneously. The Group has adopted the standard from 1 January 2014 with no material impact on the presentation of the Group's financial assets and financial liabilities. IFRIC 21, 'Levies' This clarification, effective from 1 January 2014, provides guidance on recognition of the liability for a levy imposed by a government. The Group has adopted the clarification from 1 January 2014 and there is no material impact on the recognition of liabilities for the levies imposed on the Group. B EARNINGS PERFORMANCE B1 Analysis of performance by segment B1.1 Segment results - profit before tax For memorandum disclosure purposes, the table below presents the half year 2013 results on both actual exchange rates (AER) and constant exchange rates (CER) bases so as to eliminate the impact of exchange translation. 2014 £m 2013 £m % 2013 £m Note Half year AER Half year CER Half year AER vs Half year CER vs Half year Full year note (v) note (v) note (v) note (v) Asia operations Insurance operations B4(a) 484 476 408 2% 19% 1,003 Development expenses (1) (2) (2) 50% 50% (2) Total Asia insurance operations after development expenses 483 474 406 2% 19% 1,001 Eastspring Investments 42 38 34 11% 24% 74 Total Asia operations 525 512 440 3% 19% 1,075 US operations Jackson (US insurance operations) B4(b) 686 582 538 18% 28% 1,243 Broker-dealer and asset management (5) 34 31 (115)% (116)% 59 Total US operations 681 616 569 11% 20% 1,302 UK operations UK insurance operations: B4(c) Long-term business 374 341 341 10% 10% 706 General insurance commission note (i) 12 15 15 (20)% (20)% 29 Total UK insurance operations 386 356 356 8% 8% 735 M&G (including Prudential Capital) 249 225 225 11% 11% 441 Total UK operations 635 581 581 9% 9% 1,176 Total segment profit 1,841 1,709 1,590 8% 16% 3,553 Other income and expenditure Investment return and other income 3 10 10 (70)% (70)% 10 Interest payable on core structural borrowings (170) (152) (152) (12)% (12)% (305) Corporate expenditurenote (ii) (138) (128) (128) (8)% (8)% (263) Total (305) (270) (270) (13)% (13)% (558) Solvency II implementation costs (11) (13) (13) 15% 15% (29) Restructuring costs note (iii) (4) (11) (11) 64% 64% (12) Operating profit based on longer-term investment returns 1,521 1,415 1,296 7% 17% 2,954 Short-term fluctuations in investment returns on shareholder-backed business B1.2 (45) (755) (709) 94% 94% (1,110) Amortisation of acquisition accounting adjustments (44) (30) (28) (47)% (57)% (72) Loss attaching to held for sale Japan Life businessnote (iv) D1 - (124) (107) 100% 100% (102) Costs of domestication of Hong Kong branch D2 (8) - - n/a n/a (35) Profit before tax attributable to shareholders 1,424 506 452 181% 215% 1,635 2014 2013 % 2013 Half year AER half year CER half year AER vs half year CER vs half year Full year Basic earnings per share (in pence) B6 note (v) note (v) note (v) note (v) Based on operating profit based on longer-term investment returns 45.2p 42.2p 38.7p 7% 17% 90.9p Based on profit for the period 45.0p 14.3p 12.8p 215% 252% 52.8p Notes (i) The Group's UK insurance operations transferred its general insurance business to Churchill in 2002. General insurance commission represents the commission receivable net of expenses for Prudential-branded general insurance products as part of this arrangement. (ii) Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office. (iii) Restructuring costs are incurred in the UK and represent one-off expenses incurred in securing expense savings. (iv) To facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group's retained operations, the results attributable to the held for sale Japan Life business are included separately within the supplementary analysis of profit above. (v) For definitions of actual exchange rates (AER) and constant exchange rates (CER) refer to note A1. B1.2 Short-term fluctuations in investment returns on shareholder-backed business 2014 £m 2013 £m Half year Half year Full year Insurance operations: Asia note (ii) 119 (137) (204) US note (iii) (226) (441) (625) UK note (iv) 93 (147) (254) Other operationsnote (v) (31) (30) (27) Total (45) (755) (1,110) Notes (i) General overview of defaults The Group did not experience any defaults on its shareholder-backed debt securities portfolio in 2014 or 2013. (ii) Asia insurance operations In Asia, the positive short-term fluctuations of £119 million (half year 2013: negative £(137) million; full year 2013: negative £(204) million) primarily reflect net unrealised movements on bond holdings following modest falls in bond yields across the region during the first half of the year. (iii) US insurance operations The short-term fluctuations in investment returns for US insurance operations comprise the following items: 2014 £m 2013 £m Half year Half year Full year Short-term fluctuations relating to debt securities Credits (charges) in the period: Losses on sales of impaired and deteriorating bonds (1) (2) (5) Bond write downs (5) (5) (8) Recoveries / reversals 14 6 10 Total credits (charges) in the periodnote (a) 8 (1) (3) Add: Risk margin allowance deducted from operating profit based on longer-term investment returnsnote (b) 38 44 85 46 43 82 Interest-related realised gains: Arising in the period 20 34 64 Less: Amortisation of gains and losses arising in current and prior years to operating profit based on longer-term investment returns (43) (45) (89) (23) (11) (25) Related amortisation of deferred acquisition costs (7) (8) (15) Total short-term fluctuations related to debt securities 16 24 42 Derivatives (other than equity-related): market value movements (net of related amortisation of deferred acquisition costs)note (c) 208 (380) (531) Net equity hedge results (principally guarantees and derivatives, net of related amortisation of deferred acquisition costs)note (d) (478) (166) (255) Equity-type investments: actual less longer-term return (net of related amortisation of deferred acquisition costs) 21 63 89 Other items (net of related amortisation of deferred acquisition costs) 7 18 30 Total (226) (441) (625) The short-term fluctuations in investment returns shown in the table above are stated net of a credit for the related amortisation of deferred acquisition costs of £107 million (half year 2013: £242 million; full year 2013: £228 million). See note C5.1(b). Notes (a) The credits/charges on the debt securities of Jackson comprise the following: 2014 £m 2013 £m Half year Half year Full year Residential mortgage-backed securities: Prime (including agency) - 2 1 Alt-A 4 - (1) Sub-prime 3 (1) - Total residential mortgage-backed securities 7 1 - Corporate debt securities (1) (2) (1) Other 2 - (2) Total 8 (1) (3) (b) The risk margin reserve charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson for half year 2014 is based on an average annual risk margin reserve of 23 basis points (half year 2013: 25 basis points; full year 2013: 25 basis points) on average book values of US$54.7 billion (half year 2013: US$54.3 billion; full year 2013: US$54.4 billion) as shown below: Half year 2014 Half year 2013 Full year 2013 Moody's rating category (or equivalent under NAIC ratings of mortgage-backed securities) Average book value RMR Annual expected loss Average book value RMR Annual expected loss Average book value RMR Annual expected loss US$m % US$m £m US$m % US$m £m US$m % US$m £m A3 or higher 27,849 0.12 (32) (19) 27,411 0.11 (31) (20) 27,557 0.11 (32) (20) Baa1, 2 or 3 24,982 0.25 (62) (37) 24,187 0.25 (61) (40) 24,430 0.25 (62) (40) Ba1, 2 or 3 1,363 1.25 (17) (10) 1,633 1.14 (19) (12) 1,521 1.18 (18) (11) B1, 2 or 3 386 3.02 (12) (7) 608 2.73 (17) (11) 530 2.80 (15) (9) Below B3 108 3.71 (4) (2) 423 2.15 (9) (6) 317 2.32 (7) (5) Total 54,688 0.23 (127) (75) 54,262 0.25 (137) (89) 54,355 0.25 (134) (85) Related change to amortisation of deferred acquisition costs (see below) 22 13 26 17 25 16 Risk margin reserve charge to operating profit for longer-term credit related losses (105) (62) (111) (72) (109) (69) Consistent with the basis of measurement of insurance assets and liabilities for Jackson's IFRS results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs. (c) Derivatives (other than equity-related): positive fluctuation of £208 million (half year 2013: negative fluctuation of £(380) million; full year 2013: negative fluctuation of £(531) million) net of related amortisation of deferred acquisition costs. These gains and losses are in respect of interest rate swaps and swaptions and for the Guaranteed Minimum Income Benefit (GMIB) reinsurance. The swaps and swaptions are undertaken to manage interest rate exposures and durations within the general account, including the variable annuity and fixed index annuity guarantees (as described in note (d) below). The GMIB reinsurance is in place so as to insulate Jackson from the GMIB exposure. The amounts principally reflect the fair value movement on these instruments, net of related amortisation of deferred acquisition costs. Under the Group's IFRS reporting of Jackson's derivatives (other than equity-related) programme significant accounting mismatches arise. This is because: • The derivatives are required to be fair valued with the value movements booked in the income statement; • As noted above, part of the derivative value movements arises in respect of interest rate exposures within Jackson's guarantee liabilities for variable annuity and fixed index annuity business which are only partially fair valued under IFRS (see below); and • The GMIB liability is valued under the US GAAP insurance measurement basis applied for IFRS in a way that substantially does not recognise the effect of market movements. However, notwithstanding that the liability is reinsured, as the reinsurance asset is net settled it is deemed a derivative under IAS 39 which requires fair valuation. In half year 2014, the positive fluctuation of £208 million reflects principally the favourable mark-to-market impact of approximately 42 basis points decrease in swap rates on the valuation of the interest rate swaps, swaptions, and the GMIB reinsurance asset. (d) Net equity hedge result: negative fluctuation of £(478) million (half year 2013: negative fluctuation £(166) million; full year 2013: negative fluctuation £(255) million). These amounts are in respect of the equity-based derivatives and associated guarantee liabilities of Jackson's variable and fixed index annuity business. The equity based derivatives are undertaken to manage the equity risk exposure of the guarantee liabilities. The economic exposure of these guarantee liabilities also includes the effects of changes in interest rates which are managed through the swaps and swaptions programmes described in note (c) above. The amounts reflect the net effect of: • Fair value movements on free-standing equity derivatives; • The accounting value movements on the variable annuity and fixed index annuity guarantee liabilities; • Fee assessments and claim payments in respect of guarantee liabilities; and • Related DAC amortisation. Under the Group's IFRS reporting of Jackson's equity-based derivatives and associated guarantee liabilities significant accounting mismatches arise. This is because: • The free-standing equity-based derivatives and Guaranteed Minimum Withdrawal Benefit (GMWB) "not for life" embedded derivative liabilities are required to be fair valued. These fair value movements include the effects of changes to levels of equity markets, implied volatility and interest rates. The interest rate exposure is managed through the derivative programme explained above in note (c); • The Guaranteed Minimum Death Benefit (GMDB) and GMWB "for life" guarantees are valued under the US GAAP insurance measurement basis applied for IFRS in a way that substantially does not recognise the effect of equity market and interest rate changes. In half year 2014, the negative fluctuation of £(478) million reflects the net effect of mark-to-market reductions on the free-standing equity-based derivatives together with increases in the carrying amounts of those guarantees that are fair valued as embedded derivatives under IFRS. Both aspects reflect increased equity markets (the S&P 500 increased by 6 per cent) with the value movement on the embedded derivatives also being affected by decreases in average implied volatility levels and the decrease in swap rates. (iv) UK insurance operations The positive short-term fluctuations in investment returns for UK insurance operations of £93 million (half year 2013: negative £(147) million; full year 2013: negative £(254) million) include net unrealised movements on fixed income assets supporting the capital of the shareholder-backed annuity business, reflecting the fall in bond yields since the end of 2013. (v) Other Short-term fluctuations in investment returns of other operations, were negative £(31) million (half year 2013: negative £(30) million; full year 2013: negative £(27) million) representing principally unrealised value movements on investments and foreign exchange items. B1.3 Determining operating segments and performance measure of operating segments Operating segments The Group's operating segments, determined in accordance with IFRS 8, 'Operating Segments', are as follows: Insurance operations • Asia • US (Jackson) • UK Asset management operations • M&G (including Prudential Capital) • Eastspring Investments • US broker-dealer and asset management (including Curian) The Group's operating segments are also its reportable segments for the purposes of internal management reporting with the exception of Prudential Capital which has been incorporated into the M&G operating segment for the purposes of segment reporting. Performance measure The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer-term investment returns, as described below. This measurement basis distinguishes operating profit based on long-term investment returns from other constituents of the total profit as follows: • Short-term fluctuations in investment returns; • 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; • Loss attaching to the held for sale Japan Life business. See note D1 for further details; and • The costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014. Segment results that are reported to the Group Executive Committee include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asia Regional Head Office. Except in the case of assets backing the UK annuity, unit-linked and US variable annuity separate account liabilities, operating profit based on longer-term investment returns for shareholder-financed business is determined on the basis of expected longer-term investment returns. In the case of assets backing the UK annuity business, unit-linked and US variable annuity separate account liabilities, the basis of determining operating profit based on longer-term investment returns is as follows: • UK annuity business liabilities: For this business, policyholder liabilities are determined by reference to current interest rates. The value movements of the assets covering liabilities are closely correlated with the related change in liabilities. Accordingly, asset value movements are recorded within the 'operating results based on longer-term investment returns'. Policyholder liabilities include a margin for credit risk. Variations between actual and best estimate expected impairments are recorded as a component of short-term fluctuations in investment returns. • Unit-linked and US variable annuity business separate account liabilities: For such business, the policyholder unit liabilities are directly reflective of the asset value movements. Accordingly, the operating results based on longer-term investment returns reflect the current period value movements in unit liabilities and the backing assets. In the case of other shareholder-financed business, the measurement of operating profit based on longer-term investment returns reflects the particular features of long-term insurance business where assets and liabilities are held for the long-term and for which the accounting basis for insurance liabilities under current IFRS is not generally conducive to demonstrating trends in underlying performance of life businesses exclusive of the effects of short-term fluctuations in market conditions. In determining the profit on this basis, the following key elements are applied to the results of the Group's shareholder-financed operations. (a) Debt, equity-type securities and loans Longer-term investment returns comprise actual income receivable for the period (interest/dividend income) and for both debt and equity-type securities longer-term capital returns. In principle, for debt securities and loans, the longer-term capital returns comprise two elements: • Risk margin reserve based charge for the expected level of defaults for the period, which is determined by reference to the credit quality of the portfolio. The difference between impairment losses in the reporting period and the risk margin reserve charge to the operating result is reflected in short-term fluctuations in investment returns; and • The amortisation of interest-related realised gains and losses to operating results based on longer-term investment returns to the date when sold bonds would have otherwise matured. Jackson is the shareholder-backed operation for which the distinction between impairment losses and interest-related realised gains and losses is in practice relevant to a significant extent. Jackson has used the ratings by Nationally Recognised Statistical Ratings Organisations (NRSRO) or ratings resulting from the regulatory ratings detail issued by the National Association of Insurance Commissioners (NAIC) developed by external third parties such as PIMCO or BlackRock Solutions to determine the average annual risk margin reserve to apply to debt securities held to back general account business. Debt securities held to back separate account and reinsurance funds withheld are not subject to risk margin reserve charge. Further details of the risk margin reserve charge, as well as the amortisation of interest-related realised gains and losses, for Jackson are shown in note B1.2. For debt securities backing non-linked shareholder-financed business of the UK insurance operations (other than the annuity business) and of the Asia insurance operations, the realised gains and losses are principally interest related. Accordingly, all realised gains and losses to date for these operations are being amortised over the period to the date those securities would otherwise have matured, with no explicit risk margin reserve charge. At 30 June 2014, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the Group was a net gain of £427 million (half year 2013: net gain of £522 million; full year 2013: net gain of £461 million). For equity-type securities, the longer-term rates of return are estimates of the long-term trend investment return for income and capital having regard to past performance, current trends and future expectations. Equity-type securities held for shareholder-financed operations other than the UK annuity business, unit-linked and US variable annuity are of significance for the US and Asia insurance operations. Different rates apply to different categories of equity-type securities. As at 30 June 2014, the equity-type securities for US insurance non-separate account operations amounted to £1,071 million (half year 2013: £1,188 million; full year 2013: £1,118 million). For these operations, the longer-term rates of return for income and capital applied in 2014 and 2013, which reflect the combination of risk free rates and appropriate risk premiums are as follows: 2014 2013 Half year Half year Full year Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds 6.5% to 6.7% 5.7% to 6.5% 5.7% to 6.8% Other equity-type securities such as investments in limited partnerships and private equity funds 8.5% to 8.7% 7.7% to 8.5% 7.7% to 9.0% For Asia insurance operations, excluding assets of the Japan Life held for sale business, investments in equity securities held for non-linked shareholder-financed operations amounted to £664 million as at 30 June 2014 (half year 2013: £526 million; full year 2013: £571 million). The rates of return applied in the years 2014 and 2013 ranged from 2.02 per cent to 13.75 per cent with the rates applied varying by territory. These rates are determined after consideration by the Group's in-house economists of long-term expected real government bond returns, equity risk premium and long-term inflation. These rates are broadly stable from period to period but may be different between countries reflecting, for example, differing expectations of inflation in each territory. The assumptions are for returns expected to apply in equilibrium conditions. The assumed rates of return do not reflect any cyclical variability in economic performance and are not set by reference to prevailing asset valuations. The longer-term investment returns for the Asia insurance joint ventures accounted for on the equity method are determined on a similar basis as the other Asia insurance operations described above. (b) US variable and fixed index annuity business The following value movements for Jackson's variable and fixed index annuity business are excluded from operating profit based on longer-term investment returns: • Fair value movements for equity-based derivatives; • Fair value movements for embedded derivatives for Guaranteed Minimum Withdrawal Benefit 'not for life' and fixed index annuity business, and Guaranteed Minimum Income Benefit reinsurance (see note below); • Movements in accounts carrying value of Guaranteed Minimum Death Benefit and Guaranteed Minimum Withdrawal Benefit 'for life' and Guaranteed Minimum Income Benefit liabilities, for which, under the 'grandfathered' US GAAP applied under IFRS for Jackson's insurance assets and liabilities, the measurement basis gives rise to a muted impact of current period market movements; • Fee assessments and claim payments, in respect of guarantee liabilities; and • Related amortisation of deferred acquisition costs for each of the above items. Note US operations - Embedded derivatives for variable annuity guarantee features The Guaranteed Minimum Income Benefit liability, which is fully reinsured, subject to a deductible and annual claim limits, is accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 944-80 Financial Services - Insurance - Separate Accounts (formerly SOP 03-1) under IFRS using 'grandfathered' US GAAP. As the corresponding reinsurance asset is net settled, it is considered to be a derivative under IAS 39, 'Financial Instruments: Recognition and Measurement', and the asset is therefore recognised at fair value. As the Guaranteed Minimum Income Benefit is economically reinsured the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns. (c) Other derivative value movements Generally, derivative value movements are excluded from operating results based on longer-term investment returns (unless those derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in operating profit). The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are excluded from operating profit arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly-based hedging programme for features of Jackson's bond portfolio (for which value movements are booked in the statement of comprehensive income rather than the income statement), product liabilities (for which US GAAP accounting as 'grandfathered' under IFRS 4 does not fully reflect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives. (d) Other liabilities to policyholders and embedded derivatives for product guarantees Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies between territories depending upon the nature of the 'grandfathered' measurement basis. In general, in those instances where the liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market movements on the assets and liabilities is broadly equivalent in the income statement, and operating profit based on longer-term investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between the elements that relate to longer-term market conditions and short-term effects. However, some types of business movements in liabilities do require bifurcation to ensure that at the net level (ie after allocated investment return and change for policyholder benefits) the operating result reflects longer-term market returns. Examples where such bifurcation is necessary are: Asia - Hong Kong For certain non-participating business, the economic features are more akin to asset management products with policyholder liabilities reflecting asset shares over the contract term. For these products, the charge for policyholder benefits in the operating results should reflect the asset share feature rather than volatile movements that would otherwise be reflected if the local regulatory basis (also applied for IFRS basis) was used. For other Hong Kong non-participating business, longer-term interest rates are used to determine the movement in policyholder liabilities for determining operating results. Similar principles apply for other Asia operations. UK shareholder-backed annuity business The operating result based on longer-term investment returns reflects the impact of value movements on policyholder liabilities for annuity business in PRIL and the PAC non-profit sub-fund after adjustments to allocate the following elements of the movement to the category of 'short-term fluctuations in investment returns': • The impact on credit risk provisioning of actual upgrades and downgrades during the period; • Credit experience compared to assumptions; and • Short-term value movements on assets backing the capital of the business. Credit experience reflects the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring by issuers that include effectively an element of permanent impairment of the security held. Positive or negative experience compared to assumptions is included within short-term fluctuations in investment returns without further adjustment. The effects of other changes to credit risk provisioning are included in the operating result, as is the net effect of changes to the valuation rate of interest due to portfolio rebalancing to align more closely with management benchmark. (e) Fund management and other non-insurance businesses For these businesses, the particular features applicable for life assurance noted above do not apply. For these businesses it is inappropriate to include returns in the operating result on the basis described above. Instead, it is appropriate to generally include realised gains and losses (including impairments) in the operating result with unrealised gains and losses being included in short-term fluctuations. For this purpose impairments are calculated as the credit loss determined by comparing the projected cash flows discounted at the original effective interest rate to the carrying value. In some instances it may also be appropriate to amortise realised gains and losses on derivatives and other financial instruments to operating results over a time period that reflects the underlying economic substance of the arrangements. B1.4 Additional segmental analysis of revenue The additional segmental analyses of revenue from external customers excluding investment return and net of outward reinsurance premiums are as follows: Half year 2014 £m Asia US UK Intra-group Total Revenue from external customers: Insurance operations 4,336 8,321 3,629 - 16,286 Asset management 140 387 612 (194) 945 Unallocated corporate - - 17 - 17 Intra-group revenue eliminated on consolidation (67) (42) (85) 194 - Total revenue from external customers 4,409 8,666 4,173 - 17,248 Half year 2013 £m Asia US UK Intra-group Total Revenue from external customers: Insurance operations 4,276 7,858 2,786 - 14,920 Asset management 122 421 562 (172) 933 Unallocated corporate - - 10 - 10 Intra-group revenue eliminated on consolidation (49) (43) (80) 172 - Total revenue from external customers 4,349 8,236 3,278 - 15,863 Full year 2013 £m Asia US UK Intra-group Total Revenue from external customers: Insurance operations 8,919 15,381 5,816 - 30,116 Asset management 245 855 1,165 (379) 1,886 Unallocated corporate - - 26 - 26 Intra-group revenue eliminated on consolidation (98) (86) (195) 379 - Total revenue from external customers 9,066 16,150 6,812 - 32,028 Revenue from external customers comprises: 2014 £m 2013 £m Half year Half year Full year Earned premiums, net of reinsurance 16,189 14,763 29,844 Fee income and investment contract business and asset management (presented as 'Other income') 1,059 1,100 2,184 Total revenue from external customers 17,248 15,863 32,028 In their capacity as fund managers to fellow Prudential Group subsidiaries, M&G, Eastspring Investments and the US asset management businesses generate fees for investment management and related services. These services are charged at appropriate arm's length prices, typically priced as a percentage of funds under management. Intra-group fees included within asset management revenue were earned by the following asset management segment: 2014 £m 2013 £m Half year Half year Full year Intra-group revenue generated by: M&G 85 80 195 Eastspring investments 67 49 98 US broker-dealer and asset management (including Curian) 42 43 86 Total intra-group fees included within asset management segment 194 172 379 Revenue from external customers of Asia, US and UK insurance operations shown above are net of outwards reinsurance premiums of £134 million, £115 million and £103 million respectively (half year 2013: £96 million, £172 million and £92 million respectively; full year 2013: £190 million, £278 million and £190 million respectively). B2 Profit before tax - asset management operations The profit included in the income statement in respect of asset management operations for the year is as follows: 2014 £m 2013 £m M&G US Eastspring Investments Half year Total Half year Total Full year Total note (iv) Revenue (excluding NPH broker-dealer fees) 682 139 142 963 916 1,914 NPH broker-dealer feesnote (i) - 248 - 248 249 504 Gross revenue 682 387 142 1,211 1,165 2,418 Charges (excluding NPH broker-dealer fees) (433) (144) (114) (691) (644) (1,353) NPH broker-dealer feesnote (i) - (248) - (248) (249) (504) Gross charges (433) (392) (114) (939) (893) (1,857) Share of profits from joint ventures and associates, net of related tax 6 - 14 20 16 35 Profit before tax 255 (5) 42 292 288 596 Comprising: Operating profit based on longer-term investment returnsnote (ii) 249 (5) 42 286 297 574 Short-term fluctuations in investment returns note (iii) 6 - - 6 (9) 22 Profit before tax 255 (5) 42 292 288 596 Notes (i) NPH broker-dealer fees represent commissions received that are then paid on to the writing brokers on sales of investment products The segment revenue of the Group's asset management operations is required to include this item. However, reflecting their commercial nature, equivalent amounts are also reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from this item. The presentation in the table above shows the amounts attributable to this item so as to distinguish the underlying revenue and charges. (ii) M&G operating profit based on longer-term investment returns: 2014 £m 2013 £m Half year Half year Full year Asset management fee income 462 418 859 Other income 1 3 4 Staff costs (160) (149) (339) Other costs (89) (77) (166) Underlying profit before performance-related fees 214 195 358 Share of associate's results 6 5 12 Performance-related fees 7 4 25 Operating profit from asset management operations 227 204 395 Operating profit from Prudential Capital 22 21 46 Total M&G operating profit based on longer-term investment returns 249 225 441 The difference between the fees and other income shown above in respect of asset management operations, and the revenue figure for M&G noted in the main table primarily relates to the total revenue of Prudential Capital (including short-term fluctuations) of £72 million (half year 2013: £51 million; full year 2013: £144 million) and commissions which have been netted off in arriving at the fee income of £462 million (half year 2013: £418 million; full year 2013: £859 million) in the table above. The difference in the presentation of commission is aligned with how management reviews the business. (iii) Short-term fluctuations in investment returns for M&G are primarily in respect of unrealised fair value movements on Prudential Capital's bond portfolio. (iv) The US asset management result includes a provision of £(33) million related to the receipt and potential refund of certain fees by Curian. B3 Acquisition costs and other expenditure 2014 £m 2013 £m Half year Half year Full year Acquisition costs incurred for insurance policies (1,307) (1,185) (2,553) Acquisition costs deferred less amortisation of acquisition costs 272 419 566 Administration costs and other expenditure (2,097) (2,127) (4,303) Movements in amounts attributable to external unit holders of consolidated investment funds (204) (422) (571) Total acquisition costs and other expenditure (3,336) (3,315) (6,861) Included in total acquisition costs and other expenditure is depreciation of property, plant and equipment of £(45) million (half year 2013: £(45) million; full year 2013: £(87) million). B4 Effect of changes and other accounting features on insurance assets and liabilities The following features are of relevance to the determination of the half year 2014 results: (a) Asia insurance operations In half year 2014, the IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net credit of £19 million (half year 2013: £31 million; full year 2013: £44 million) representing a small number of non-recurring items. (b) US insurance operations Amortisation of deferred acquisition costs Jackson applies a mean reversion technique for amortisation of deferred acquisition costs on variable annuity business which dampens the effects of short-term market movements on expected gross profits against which deferred acquisition costs are amortised. To the extent that the mean reversion methodology does not fully dampen the effects of market returns, there is a charge or credit for accelerated or decelerated amortisation. For half year 2014, reflecting the positive market returns in the period, there was a credit for decelerated amortisation of £10 million (half year 2013: credit for decelerated amortisation of £20 million; full year 2013: credit for decelerated amortisation of £82 million) to the operating profit based on longer-term investment returns. See note C5.1(b) for further details. Other In the second half of 2013, Jackson revised its projected long-term separate account return from 8.4 per cent to 7.4 per cent net of external fund management fees. The effect of this change together with other assumption changes and recalibration of modelling of accounting values of guarantees gave rise to a net benefit of £6 million to profit before tax in full year 2013. (c) UK insurance operations Annuity business: allowance for credit risk For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments to policyholders that would have otherwise applied. Credit risk allowance comprises (i) an amount for long-term best estimate defaults, and (ii) additional provisions for credit risk premium, downgrade resilience and short-term defaults. The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for Prudential Retirement Income Limited (PRIL), the principal company which writes the UK's shareholder backed business, based on the asset mix at these dates are shown below. 30 June 2014 (bps) 30 June 2013 (bps) 31 December 2013 (bps) Pillar 1 regulatory basis Adjustment from regulatory to IFRS basis IFRS Pillar 1 regulatory basis Adjustment from regulatory to IFRS basis IFRS Pillar 1 regulatory basis Adjustment from regulatory to IFRS basis IFRS Bond spread over swap rates note (i) 119 - 119 157 - 157 133 - 133 Credit risk allowance Long-term expected defaults note (ii) 14 - 14 15 - 15 15 - 15 Additional provisionsnote (iii) 47 (19) 28 49 (22) 27 47 (19) 28 Total credit risk allowance 61 (19) 42 64 (22) 42 62 (19) 43 Liquidity premium 58 19 77 93 22 115 71 19 90 Notes (i) Bond spread over swap rates reflect market observed data. (ii) Long-term expected defaults are derived by applying Moody's data from 1970 to 2009 and the definition of the credit rating used is the second highest credit rating published by Moody's, Standard & Poor's and Fitch. (iii) Additional provisions comprise credit risk premium, which is derived from Moody's data from 1970 to 2009, an allowance for a one-notch downgrade of the portfolio subject to credit risk and an additional allowance for short-term defaults. The prudent Pillar 1 regulatory basis reflects the overriding objective of maintaining sufficient provisions and capital to ensure payments to policyholders can be made. The approach for IFRS aims to establish liabilities that are closer to 'best estimate'. Movement in the credit risk allowance The movement during the first half of 2014 of the average basis points allowance for PRIL on Pillar 1 regulatory and IFRS bases are as follows: Pillar 1 Regulatory basis IFRS (bps) (bps) Total allowance for credit risk at 31 December 2013 62 43 Credit rating changes 1 1 Asset trading (2) (1) New business and other - (1) Total allowance for credit risk at 30 June 2014 61 42 Overall the movement has led to the credit allowance for Pillar 1 purposes to be 51 per cent (half year 2013: 41 per cent; full year 2013: 47 per cent) of the bond spread over swap rates. For IFRS purposes it represents 35 per cent (half year 2013: 27 per cent; full year 2013: 32 per cent) of the bond spread over swap rates. The reserves for credit risk allowance at 30 June 2014 for the UK shareholder annuity fund were as follows: Pillar 1 Regulatory basis IFRS Total £bn Total £bn PRIL 1.7 1.2 PAC non-profit sub-fund 0.2 0.1 Total -30 June 2014 1.9 1.3 Total -30 June 2013 2.0 1.2 Total -31 December 2013 1.9 1.3 B5 Tax charge (a) Total tax charge by nature of expense The total tax charge in the income statement is as follows: 2014 £m 2013 £m Tax charge Current tax Deferred tax Half year Total Half year Total Full year Total UK tax (272) 10 (262) (159) (300) Overseas tax (260) (41) (301) (196) (436) Total tax charge (532) (31) (563) (355) (736) The current tax charge of £532 million includes £23 million (2013: half year £8 million; full year 2013: £18 million) in respect of the tax charge for the Hong Kong operation. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either (i) 5 per cent of the net insurance premium or (ii) the estimated assessable profits, depending on the nature of the business written. The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders as shown below. 2014 £m 2013 £m Tax charge Current tax Deferred tax Half year Total Half year Total Full year Total Tax charge to policyholders' returns (245) (39) (284) (214) (447) Tax charge attributable to shareholders (287) 8 (279) (141) (289) Total tax charge (532) (31) (563) (355) (736) The principal reason for the increase in the tax charge attributable to policyholders' returns compared to half year 2013 is an increase in current tax on net realised investment gains of the UK with-profits fund. An explanation of the tax charge attributable to shareholders is shown in note (b) below. (b) Reconciliation of effective tax rate Reconciliation of tax charge on profit attributable to shareholders Half year 2014 £m (Except for tax rates) Asia insurance operations US insurance operations UK insurance operations Other operations Total Operating profit (loss) based on longer-term investment returns 483 686 386 (34) 1,521 Non-operating profit (loss) 115 (266) 85 (31) (97) Profit (loss) before tax attributable to shareholders 598 420 471 (65) 1,424 Expected tax rate† 22% 35% 22% 21% 26% Tax charge (credit) at the expected tax rate 130 147 102 (13) 366 Effects of: Adjustment to tax charge in relation to prior years - - - 3 3 Movements in provisions for open tax matters 1 - - - 1 Income not taxable or taxable at concessionary rates (40) (27) (2) (4) (73) Deductions not allowable for tax purposes 15 - - 2 17 Deferred tax adjustments 1 - (4) - (3) Effect of results of joint ventures and associates (19) - - (5) (24) Irrecoverable withholding taxes - - - 15 15 Other (4) (13) - (6) (23) Total actual tax charge (credit) 84 107 96 (8) 279 Analysed into: Tax on operating profit (loss) based on longer-term investment returns 82 206 79 2 369 Tax charge (credit) on non-operating (loss) profit 2 (99) 17 (10) (90) Actual tax rate: Operating profit (loss) based on longer-term investment returns 17% 30% 20% (6%) 24% Total profit 14% 25% 20% 12% 20% * The expected and actual tax rates as shown includes the impact of the held for sale Japan Life business. For half year 2014 the tax rates for Asia insurance and Group excluding the impact of the held for sale Japan Life business are the same. Half year 2013 £m (Except for tax rates) Asia insurance operations US insurance operations UK insurance operations Other operations Total Operating profit based on longer-term investment returns 474 582 356 3 1,415 Non-operating loss (264) (468) (147) (30) (909) Profit (loss) before tax attributable to shareholders 210 114 209 (27) 506 Expected tax rate† 17% 35% 23% 23% 23% Tax charge (credit) at the expected tax rate 36 40 48 (6) 118 Effects of: Adjustment to tax charge in relation to prior years 4 - 1 6 11 Movements in provisions for open tax matters 1 - - (10) (9) Income not taxable or taxable at concessionary rates (26) (37) - - (63) Deductions not allowable for tax purposes 51 - - 3 54 Deferred tax adjustments (2) - - - (2) Effect of results of joint ventures and associates (14) - - (3) (17) Irrecoverable withholding taxes - - - 6 6 Other 8 24 11 - 43 Total actual tax charge (credit) 58 27 60 (4) 141 Analysed into: Tax charge on operating profit based on longer-term investment returns 79 166 92 3 340 Tax credit on non-operating loss (21) (139) (32) (7) (199) Actual tax rate: Operating profit based on longer-term investment returns 17% 29% 26% 100% 24% Total profit 28% 24% 29% 15% 28% * The expected and actual tax rates as shown includes the impact of the held for sale Japan Life business. The tax rates for Asia insurance and Group, excluding the impact of the held for sale Japan Life business are as follows: Asia insurance Total Group Expected tax rate on total profit 25% 26% Actual tax rate: Operating profit based on longer-term investment returns 17% 24% Total profit 17% 22% Full year 2013 £m (Except for tax rates) Asia insurance operations US insurance operations UK insurance operations Other operations Total Operating profit (loss) based on longer-term investment returns 1,001 1,243 735 (25) 2,954 Non-operating loss (313) (690) (289) (27) (1,319) Profit (loss) before tax attributable to shareholders 688 553 446 (52) 1,635 Expected tax rate† 21% 35% 23% 23% 26% Tax charge (credit) at the expected tax rate 144 194 103 (12) 429 Effects of: Adjustment to tax charge in relation to prior years (3) - 4 (7) (6) Movements in provisions for open tax matters 5 - - (12) (7) Income not taxable or taxable at concessionary rates (45) (88) - (10) (143) Deductions not allowable for tax purposes 61 - - 5 66 Impact of changes in local statutory tax rates (9) - (51) 5 (55) Deferred tax adjustments (4) - - (8) (12) Effect of results of joint ventures and associates (10) - - (8) (18) Irrecoverable withholding taxes - - - 20 20 Other 9 (5) 16 (5) 15 Total actual tax charge (credit) 148 101 72 (32) 289 Analysed into: Tax charge (credit) on operating profit (loss) based on longer-term investment returns 173 343 132 (10) 638 Tax credit on non-operating loss (25) (242) (60) (22) (349) Actual tax rate: Operating profit (loss) based on longer-term investment returns 17% 28% 18% 40% 22% Total profit 22% 18% 16% 62% 18% * The expected and actual tax rates as shown includes the impact of the held for sale Japan Life business. The tax rates for Asia insurance and Group, excluding the impact of the held for sale Japan Life business are as follows: Asia insurance Total Group Expected tax rate on total profit 23% 27% Actual tax rate: Operating profit based on longer-term investment returns 17% 22% Total profit 19% 17% † The expected tax rates (rounded to the nearest whole percentage) reflect the corporation tax rates generally applied to taxable profits of the relevant country jurisdictions. For Asia operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profits of operations contributing to the aggregate business result. The expected tax rate for other operations reflects the mix of business between UK and overseas non-insurance operations, which are taxed at a variety of rates. The rates will fluctuate from year to year dependent on the mix of profits. (c) Taxes paid During half year 2014 Prudential remitted £1.2 billion (half year 2013: £0.9 billion; full year 2013: £1.8 billion) of tax to revenue authorities, this includes £337 million (half year 2013: £182 million; full year 2013: £418 million) of corporation tax, £163 million (half year 2013: £96 million; full year 2013: £236 million) of other taxes and £651 million (half year 2013: £634 million; full year 2013: £1,143 million) collected on behalf of employees, customers and third parties. The geographical split of taxes remitted by Prudential is as follows: 2014 £m 2013 £m Corporation taxes Other taxes† Taxes collected‡ Half year Total Half year Total Full year Total Asia 90 26 41 157 101 319 US 85 20 183 288 103 292 UK 161 116 424 701 706 1,181 Other 1 1 3 5 2 5 Total tax paid 337 163 651 1,151 912 1,797 * In certain countries such as the UK, the corporation tax payments for the Group's life insurance businesses are based on taxable profits which include policyholder investment returns on certain life insurance products. † Other taxes paid includes property taxes, withholding taxes, customs duties, stamp duties, employer payroll taxes and irrecoverable indirect taxes. ‡ Taxes collected are other taxes that Prudential remits to tax authorities which it is obliged to collect from employees, customers and third parties which includes sales/value added tax/goods and services taxes, employee and annuitant payroll taxes. B6 Earnings per share Half year 2014 Before tax Tax Net of tax Basic earnings per share Diluted earnings per share £m £m £m Pence Pence Note B1.1 B5 Based on operating profit based on longer-term investment returns 1,521 (369) 1,152 45.2p 45.1p Short-term fluctuations in investment returns on shareholder-backed business B1.2 (45) 73 28 1.1p 1.1p Amortisation of acquisition accounting adjustments (44) 15 (29) (1.1)p (1.1)p Costs of domestication of Hong Kong branch D2 (8) 2 (6) (0.2)p (0.2)p Based on profit for the period 1,424 (279) 1,145 45.0p 44.9p Half year 2013 Before tax Tax Net of tax Basic earnings per share Diluted earnings per share £m £m £m Pence Pence Note B1.1 B5 Based on operating profit based on longer-term investment returns 1,415 (340) 1,075 42.2p 42.1p Short-term fluctuations in investment returns on shareholder-backed business B1.2 (755) 189 (566) (22.2)p (22.1)p Amortisation of acquisition accounting adjustments (30) 10 (20) (0.8)p (0.8)p Loss attaching to held for sale Japan Life business D1 (124) - (124) (4.9)p (4.9)p Based on profit for the period 506 (141) 365 14.3p 14.3p Full year 2013 Before tax Tax Net of tax Basic earnings per share Diluted earnings per share £m £m £m Pence Pence Note B1.1 B5 Based on operating profit based on longer-term investment returns 2,954 (638) 2,316 90.9p 90.7p Short-term fluctuations in investment returns on shareholder-backed business B1.2 (1,110) 318 (792) (31.1)p (31.0)p Amortisation of acquisition accounting adjustments (72) 24 (48) (1.9)p (1.9)p Loss attaching to held for sale Japan Life business D1 (102) - (102) (4.0)p (4.0)p Costs of domestication of Hong Kong branch D2 (35) 7 (28) (1.1)p (1.1)p Based on profit for the year 1,635 (289) 1,346 52.8p 52.7p 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: Half year 2014 Half year 2013 Full year 2013 (millions) (millions) (millions) Weighted average number of shares for calculation of: Basic earnings per share 2,547 2,548 2,548 Diluted earnings per share 2,551 2,553 2,552 B7 Dividends Half year 2014 Half year 2013 Full year 2013 Pence per share £m Pence per share £m Pence per share £m Dividends relating to reporting period: Interim dividend (2014 and 2013) 11.19p 287 9.73p 249 9.73p 249 Final dividend (2013) - - - - 23.84p 610 Total 11.19p 287 9.73p 249 33.57p 859 Dividends declared and paid in reporting period: Current year interim dividend - - - - 9.73p 249 Final dividend for prior year 23.84p 610 20.79p 532 20.79p 532 Total 23.84p 610 20.79p 532 30.52p 781 Dividend per share Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. The final dividend for the year ended 31 December 2013 of 23.84 pence per ordinary share was paid to eligible shareholders on 22 May 2014 and the 2013 interim dividend of 9.73 pence per ordinary share was paid to eligible shareholders on 26 September 2013. The 2014 interim dividend of 11.19 pence per ordinary share will be paid on 25 September 2014 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on 22 August 2014 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 3 October 2014. The interim dividend will be paid on or about 2 October 2014 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 11 August 2014. The exchange rate at which the dividend payable to the SG Shareholders will be translated into SG$, will be determined by CDP. Shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan. C BALANCE SHEET NOTES C1 Analysis of Group position by segment and business type To explain more comprehensively the assets, liabilities and capital of the Group's businesses, it is appropriate to provide analyses of the Group's statement of financial position by operating segment and type of business. C1.1 Group statement of financial position - analysis by segment 2014 £m 2013 £m Insurance operations Total insurance operations Asset management operations Unallocated to a segment (central operations) Intra -group eliminations 30 Jun Group Total 30 Jun Group Total 31 Dec Group Total Asia US UK By operating segment Note C2.1 C2.2 C2.3 C2.4 Assets Intangible assets attributable to shareholders: Goodwill C5.1(a) 228 - - 228 1,230 - - 1,458 1,474 1,461 Deferred acquisition costs and other intangible assets C5.1(b) 1,767 4,037 84 5,888 20 36 - 5,944 5,538 5,295 Total 1,995 4,037 84 6,116 1,250 36 - 7,402 7,012 6,756 Intangible assets attributable to with-profits funds: Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes - - 177 177 - - - 177 178 177 Deferred acquisition costs and other intangible assets 58 - 5 63 - - - 63 79 72 Total 58 - 182 240 - - - 240 257 249 Total 2,053 4,037 266 6,356 1,250 36 - 7,642 7,269 7,005 Deferred tax assets C7.1 68 1,819 132 2,019 115 39 - 2,173 2,637 2,412 Other non-investment and non-cash assets note (i) 2,667 6,440 8,001 17,108 1,256 4,435 (8,932) 13,867 13,307 12,357 Investments of long-term business and other operations: Investment properties 1 26 11,727 11,754 - - - 11,754 10,583 11,477 Investments in joint ventures and associates accounted for using the equity method 303 - 513 816 95 - - 911 696 809 Financial investments: Loans C3.4 916 6,130 4,389 11,435 1,022 - - 12,457 13,230 12,566 Equity securities and portfolio holdings in unit trusts 16,775 71,775 41,916 130,466 74 26 - 130,566 112,258 120,222 Debt securities C3.3 19,958 30,586 81,680 132,224 1,953 - - 134,177 138,256 132,905 Other investments 49 1,349 4,433 5,831 73 4 - 5,908 6,140 6,265 Deposits 693 - 12,319 13,012 45 - - 13,057 13,542 12,213 Total investments 38,695 109,866 156,977 305,538 3,262 30 - 308,830 294,705 296,457 Assets held for sale D1 875 - - 875 - - - 875 1,079 916 Cash and cash equivalents 1,487 677 2,121 4,285 751 867 - 5,903 6,840 6,785 Total assets C3.1 45,845 122,839 167,497 336,181 6,634 5,407 (8,932) 339,290 325,837 325,932 2014 £m 2013 £m Insurance operations By operating segment Note Asia US UK Total insurance operations Asset management operations Unallocated to a segment (central operations) Intra -group eliminations 30 Jun Group Total 30 Jun Group Total 31 Dec Group Total Equity and liabilities Equity Shareholders' equity 3,020 3,801 3,245 10,066 2,053 (1,494) - 10,625 9,625 9,650 Non-controlling interests 1 - - 1 - - - 1 6 1 Total equity 3,021 3,801 3,245 10,067 2,053 (1,494) - 10,626 9,631 9,651 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 35,372 112,009 137,619 285,000 - - (1,296) 283,704 272,728 273,953 Unallocated surplus of with-profits funds 1,985 - 11,059 13,044 - - - 13,044 11,434 12,061 Total policyholder liabilities and unallocated surplus of with-profits funds C4 37,357 112,009 148,678 298,044 - - (1,296) 296,748 284,162 286,014 Core structural borrowings of shareholder-financed operations: Subordinated debt - - - - - 3,597 - 3,597 3,161 3,662 Other - 146 - 146 275 549 - 970 988 974 Total C6.1 - 146 - 146 275 4,146 - 4,567 4,149 4,636 Operational borrowings attributable to shareholder-financed operations C6.2(a) - 222 71 293 - 1,950 - 2,243 2,530 2,152 Borrowings attributable to with-profits operations C6.2(b) - - 864 864 - - - 864 924 895 Deferred tax liabilities C7.1 645 1,997 1,184 3,826 18 11 3,855 4,102 3,778 Other non-insurance liabilitiesnote (ii) 3,994 4,664 13,455 22,113 4,288 794 (7,636) 19,559 19,313 17,938 Liabilities held for sale D1 828 - - 828 - - - 828 1,026 868 Total liabilities 42,824 119,038 164,252 326,114 4,581 6,901 (8,932) 328,664 316,206 316,281 Total equity and liabilities C3.1 45,845 122,839 167,497 336,181 6,634 5,407 (8,932) 339,290 325,837 325,932 Notes (i) The main component of the other non-investment and non-cash assets of £13,867 million (30 June 2013: £ 13,307 million; 31 December 2013: £12,357 million) is the reinsurers' share of contract liabilities of £6,743 million (30 June 2013 £7,204 million; 31 December 2013; £6,838 million). As set out in note C2.2 these amounts relate primarily to the REALIC business of the Group's US insurance operations. Within other non-investment and non-cash assets are premiums receivable of £317 million (30 June 2013: £310 million; 31 December 2013: £345 million) of which approximately two-thirds are due within one year. The remaining one-third, due after one year, relates to products where charges are levied against premiums in future years. Also included within other non-investment and non-cash assets are property, plant and equipment of £910 million (30 June 2013: £868 million; 31 December 2013: £920 million). The Group made additions to property, plant and equipment of £58 million in half year 2014 (half year 2013: £146 million; full year 2013: £221 million). (ii) Within other non-insurance liabilities are other creditors of £4,999 million (30 June 2013: £3,743 million; 31 December 2013: £3,307 million) of which £4,720 million (30 June 2013: £3,487 million; 31 December 2013: £3,046 million) are due within one year. C1.2 Group statement of financial position - analysis by business type 2014 £m 2013 £m Policyholder Shareholder-backed business Note Participating funds Unit-linked and variable annuity Non -linked business Asset management operations Unallocated to a segment (central operations) Intra-group eliminations 30 Jun Group Total 30 Jun Group Total 31 Dec Group Total Assets Intangible assets attributable to shareholders: Goodwill C5.1(a) - - 228 1,230 - - 1,458 1,474 1,461 Deferred acquisition costs and other intangible assets C5.1(b) - - 5,888 20 36 - 5,944 5,538 5,295 Total - - 6,116 1,250 36 - 7,402 7,012 6,756 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes 177 - - - - - 177 178 177 Deferred acquisition costs and other intangible assets 63 - - - - - 63 79 72 Total 240 - - - - - 240 257 249 Total 240 - 6,116 1,250 36 - 7,642 7,269 7,005 Deferred tax assets C7.1 74 - 1,945 115 39 - 2,173 2,637 2,412 Other non-investment and non-cash assets 4,427 693 9,287 1,256 4,435 (6,231) 13,867 13,307 12,357 Investments of long-term business and other operations: Investment properties 9,430 652 1,672 - - - 11,754 10,583 11,477 Investments in joint ventures and associates accounted for using the equity method 449 - 367 95 - - 911 696 809 Financial investments: Loans C3.4 3,417 - 8,018 1,022 - - 12,457 13,230 12,566 Equity securities and portfolio holdings in unit trusts 32,104 97,363 999 74 26 - 130,566 112,258 120,222 Debt securities C3.3 56,106 9,859 66,259 1,953 - - 134,177 138,256 132,905 Other investments 4,145 38 1,648 73 4 - 5,908 6,140 6,265 Deposits 10,896 926 1,190 45 - - 13,057 13,542 12,213 Total investments 116,547 108,838 80,153 3,262 30 - 308,830 294,705 296,457 Assets held for sale D1 - 303 572 - - - 875 1,079 916 Cash and cash equivalents 1,671 831 1,783 751 867 - 5,903 6,840 6,785 Total assets 122,959 110,665 99,856 6,634 5,407 (6,231) 339,290 325,837 325,932 Equity and liabilities Equity Shareholders' equity - - 10,066 2,053 (1,494) - 10,625 9,625 9,650 Non-controlling interests - - 1 - - - 1 6 1 Total equity - - 10,067 2,053 (1,494) - 10,626 9,631 9,651 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 99,100 107,781 76,823 - - - 283,704 272,728 273,953 Unallocated surplus of with-profits funds 13,044 - - - - - 13,044 11,434 12,061 Total policyholder liabilities and unallocated surplus of with-profits funds C4 112,144 107,781 76,823 - - - 296,748 284,162 286,014 Core structural borrowings of shareholder-financed operations: Subordinated debt - - - - 3,597 - 3,597 3,161 3,662 Other - - 146 275 549 - 970 988 974 Total C6.1 - - 146 275 4,146 - 4,567 4,149 4,636 Operational borrowings attributable to shareholder-financed operations C6.2(a) - 3 290 - 1,950 - 2,243 2,530 2,152 Borrowings attributable to with-profits operations C6.2(b) 864 - - - - - 864 924 895 Deferred tax liabilities C7.1 1,211 47 2,568 18 11 - 3,855 4,102 3,778 Other non-insurance liabilities 8,740 2,531 9,437 4,288 794 (6,231) 19,559 19,313 17,938 Liabilities held for sale D1 - 303 525 - - - 828 1,026 868 Total liabilities 122,959 110,665 89,789 4,581 6,901 (6,231) 328,664 316,206 316,281 Total equity and liabilities 122,959 110,665 99,856 6,634 5,407 (6,231) 339,290 325,837 325,932 * Participating funds business in the table above is presented after the elimination on consolidation of the balances relating to an intragroup reinsurance contract entered into during the period between the UK with-profits and Asia with-profits operations. In the segmental analysis presented in note C1.1, the balances are presented before elimination in the individual insurance operations segment, with the adjustment presented separately under "Intra-group eliminations". C2 Analysis of segment position by business type To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business, the analysis below is structured to show separately assets and liabilities of each segment by business type. C2.1 Asia insurance operations 2014 £m 2013 £m With-profits business Unit-linked assets and liabilities Other business 30 Jun Total 30 Jun Total 31 Dec Total Note note (i) Assets Intangible assets attributable to shareholders: Goodwill - - 228 228 244 231 Deferred acquisition costs and other intangible assets - - 1,767 1,767 1,103 1,026 Total - - 1,995 1,995 1,347 1,257 Intangible assets attributable to with-profits funds: Deferred acquisition costs and other intangible assets 58 - - 58 73 66 Deferred tax assets - - 68 68 68 55 Other non-investment and non-cash assets 1,795 141 731 2,667 1,164 1,073 Investments of long-term business and other operations: Investment properties - - 1 1 2 1 Investments in joint ventures and associates accounted for using the equity method - - 303 303 328 268 Financial investments: Loans C3.4 511 - 405 916 1,004 922 Equity securities and portfolio holdings in unit trusts 6,057 10,054 664 16,775 14,101 14,383 Debt securities C3.3 10,661 2,443 6,854 19,958 20,081 18,554 Other investments 17 22 10 49 76 41 Deposits 183 197 313 693 1,141 896 Total investments 17,429 12,716 8,550 38,695 36,733 35,065 Assets held for sale - 303 572 875 1,079 916 Cash and cash equivalents 335 371 781 1,487 1,644 1,522 Total assets 19,617 13,531 12,697 45,845 42,108 39,954 Equity and liabilities Equity Shareholders' equity - - 3,020 3,020 3,003 2,795 Non-controlling interests - - 1 1 4 1 Total equity - - 3,021 3,021 3,007 2,796 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 15,464 12,638 7,270 35,372 33,223 31,910 Unallocated surplus of with-profits funds note (ii) D2 1,985 - - 1,985 84 77 Total C4.1(b) 17,449 12,638 7,270 37,357 33,307 31,987 Operational borrowings attributable to shareholder-financed operations - - - - 5 - Deferred tax liabilities 424 47 174 645 641 594 Other non-insurance liabilities 1,744 543 1,707 3,994 4,122 3,709 Liabilities held for sale - 303 525 828 1,026 868 Total liabilities 19,617 13,531 9,676 42,824 39,101 37,158 Total equity and liabilities 19,617 13,531 12,697 45,845 42,108 39,954 Notes (i) The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. Assets and liabilities of other participating business are included in the column for 'Other business'. (ii) On 1 January 2014, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date, the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance segment. Up until 31 December 2013, for the purpose of the presentation of unallocated surplus of with-profits within the statement of financial position, the Hong Kong branch balance was reported within the unallocated surplus of the PAC with-profits sub-fund of the UK insurance operations. C2.2 US insurance operations 2014 £m 2013 £m Variable annuity separate account assets and liabilities Fixed annuity, GIC and other business 30 Jun Total 30 Jun Total 31 Dec Total Note note (i) Assets Intangible assets attributable to shareholders: Deferred acquisition costs and other intangibles - 4,037 4,037 4,300 4,140 Total - 4,037 4,037 4,300 4,140 Deferred tax assets - 1,819 1,819 2,232 2,042 Other non-investment and non-cash assetsnote (iv) - 6,440 6,440 7,255 6,710 Investments of long-term business and other operations: Investment properties - 26 26 30 28 Financial investments: Loans C3.4 - 6,130 6,130 6,691 6,375 Equity securities and portfolio holdings in unit trustsnote (iii) 71,453 322 71,775 60,385 66,008 Debt securities C3.3 - 30,586 30,586 33,368 30,292 Other investmentsnote (ii) - 1,349 1,349 1,867 1,557 Total investments 71,453 38,413 109,866 102,341 104,260 Cash and cash equivalents - 677 677 678 604 Total assets 71,453 51,386 122,839 116,806 117,756 Equity and liabilities Equity Shareholders' equitynote (v) - 3,801 3,801 3,598 3,446 Total equity - 3,801 3,801 3,598 3,446 Liabilities Policyholder liabilities: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 71,453 40,556 112,009 106,215 107,411 Total C4.1 (c) 71,453 40,556 112,009 106,215 107,411 Core structural borrowings of shareholder-financed operations - 146 146 164 150 Operational borrowings attributable to shareholder-financed operations - 222 222 23 142 Deferred tax liabilities - 1,997 1,997 2,155 1,948 Other non-insurance liabilities - 4,664 4,664 4,651 4,659 Total liabilities 71,453 47,585 119,038 113,208 114,310 Total equity and liabilities 71,453 51,386 122,839 116,806 117,756 Notes (i) These amounts are for separate account assets and liabilities for all variable annuity products comprising those with and without guarantees. Assets and liabilities attaching to variable annuity business that are not held in the separate account, for example in respect of guarantees, are shown within the statement of financial position of other business. (ii) Other investments comprise: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Derivative assets 600 1,010 766 Partnerships in investment pools and other 749 857 791 1,349 1,867 1,557 * After taking account of the derivative liabilities of £284 million (30 June 2013: £555 million; 31 December 2013: £515 million), which are also included in other non-insurance liabilities, the derivative position for US operations is a net asset of £316 million (30 June 2013: net asset of £455 million; 31 December 2013: net asset of £251 million). ** Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private Equity Fund and diversified investments in other partnerships by independent money managers that generally invest in various equities and fixed income loans and securities. (iii) Equity securities and portfolio holdings in unit trusts includes investments in mutual funds, the majority of which are equity-based. (iv) Included within other non-investment and non-cash assets of £6,440 million (30 June 2013: £7,255 million; 31 December 2013: £6,710 million) were balances of £5,842 million (30 June 2013: £6,360 million; 31 December 2013: £6,065 million) for reinsurers' share of insurance contract liabilities. Of the £5,842 million as at 30 June 2014, £5,179 million related to the reinsurance ceded by the REALIC business (30 June 2013: £5,550 million; 31 December 2013: £5,410 million). REALIC holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability. As of 30 June 2014, the funds withheld liability of £2,019 million (30 June 2013: £2,206 million; 31 December 2013: £2,051 million) was recorded within other non-insurance liabilities. (v) Changes in shareholders' equity 2014 £m 2013 £m Half year Half year Full year Operating profit based on longer-term investment returns B1.1 686 582 1,243 Short-term fluctuations in investment returns B1.2 (226) (441) (625) Amortisation of acquisition accounting adjustments arising on the purchase of REALIC (40) (27) (65) Profit before shareholder tax 420 114 553 Tax B5 (107) (27) (101) Profit for the period 313 87 452 Profit for the period (as above) 313 87 452 Items recognised in other comprehensive income: Exchange movements (122) 293 (32) Unrealised valuation movements on securities classified as available-for sale: Unrealised holding (losses) gains arising during the period 1,060 (1,665) (2,025) Deduct net gains included in the income statement (37) (42) (64) Total unrealised valuation movements 1,023 (1,707) (2,089) Related change in amortisation of deferred acquisition costs C5.1(b) (212) 419 498 Related tax (284) 451 557 Total other comprehensive income (loss) 405 (544) (1,066) Total comprehensive income (loss) for the period 718 (457) (614) Dividends, interest payments to central companies and other movements (363) (288) (283) Net increase (decrease) in equity 355 (745) (897) Shareholders' equity at beginning of period 3,446 4,343 4,343 Shareholders' equity at end of period 3,801 3,598 3,446 C2.3 UK insurance operations Of the total investments of £157 billion in UK insurance operations, £99 billion of investments are held by SAIF and the PAC WPSF. Shareholders are exposed only indirectly to value movements on these assets. 2014 £m 2013 £m Other funds and subsidiaries Scottish Amicable Insurance Fund PAC with- profits sub- fund Unit-linked assets and liabilities Annuity and other long-term business Total 30 Jun Total 30 Jun Total 31 Dec Total By operating segment Note note (ii) note (i) Assets Intangible assets attributable to shareholders: Deferred acquisition costs and other intangible assets - - - 84 84 84 98 90 Total - - - 84 84 84 98 90 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes - 177 - - - 177 178 177 Deferred acquisition costs - 5 - - - 5 6 6 Total - 182 - - - 182 184 183 Total - 182 - 84 84 266 282 273 Deferred tax assets - 74 - 58 58 132 181 142 Other non-investment and non-cash assets 390 4,943 552 2,116 2,668 8,001 5,641 5,808 Investments of long-term business and other operations: Investment properties 477 8,953 652 1,645 2,297 11,727 10,551 11,448 Investments in joint ventures and associates accounted for using the equity method - 449 - 64 64 513 274 449 Financial investments: Loans C3.4 81 2,825 - 1,483 1,483 4,389 4,313 4,173 Equity securities and portfolio holdings in unit trusts 2,399 23,648 15,856 13 15,869 41,916 37,713 39,745 Debt securities C3.3 2,818 42,627 7,416 28,819 36,235 81,680 82,854 82,014 Other investmentsnote (iii) 279 3,849 16 289 305 4,433 4,098 4,603 Deposits 809 9,904 729 877 1,606 12,319 12,365 11,252 Total investments 6,863 92,255 24,669 33,190 57,859 156,977 152,168 153,684 Cash and cash equivalents 171 1,165 460 325 785 2,121 2,755 2,586 Total assets 7,424 98,619 25,681 35,773 61,454 167,497 161,027 162,493 2014 £m 2013 £m Other funds and subsidiaries Scottish Amicable Insurance Fund PAC with-profits sub-fund Unit-linked assets and liabilities Annuity and other long-term business Total 30 Jun Total 30 Jun Total 31 Dec Total Note note (ii) note (i) Equity and liabilities Equity Shareholders' equity - - - 3,245 3,245 3,245 3,044 2,998 Non-controlling interests - - - - - - 2 - Total equity - - - 3,245 3,245 3,245 3,046 2,998 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 6,890 78,042 23,690 28,997 52,687 137,619 133,290 134,632 Unallocated surplus of with-profits funds (reflecting application of 'realistic' basis provisions for UK regulated with-profits funds) D2 - 11,059 - - - 11,059 11,350 11,984 Total C4.1(d) 6,890 89,101 23,690 28,997 52,687 148,678 144,640 146,616 Operational borrowings attributable to shareholder-financed operations - - 3 68 71 71 76 74 Borrowings attributable to with-profits funds 11 853 - - - 864 924 895 Deferred tax liabilities 46 741 - 397 397 1,184 1,289 1,213 Other non-insurance liabilities 477 7,924 1,988 3,066 5,054 13,455 11,052 10,697 Total liabilities 7,424 98,619 25,681 32,528 58,209 164,252 157,981 159,495 Total equity and liabilities 7,424 98,619 25,681 35,773 61,454 167,497 161,027 162,493 Notes (i) The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). Included in the PAC with-profits fund is £11.2 billion (30 June 2013: £13.5 billion; 31 December 2013: £12.2 billion) of liabilities for non-profits annuities. The WPSF's profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defined Charges Participating Sub-fund which comprises 3.6 per cent of the total assets of the WPSF. The unallocated surplus of with-profits funds and amounts is for PAC which at 30 June and 31 December 2013 included amounts attributable to the now domesticated Hong Kong branch. (ii) The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are entitled to asset management fees on this business. SAIF is a separate sub-fund within the PAC long-term business fund. (iii) Other investments comprise: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Derivative assets 1,262 894 1,472 Partnerships in investment pools and other 3,171 3,204 3,131 4,433 4,098 4,603 * After including derivative liabilities of £751 million (30 June 2013: £1,289 million; 31 December 2013: £804 million), which are also included in the statement of financial position, the overall derivative position was a net asset of £511 million (30 June 2013: net liability of £395 million; 31 December 2013: net asset of £668 million). ** Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily investments in limited partnerships and additionally, investments in property funds. C2.4 Asset management operations 2014 £m 2013 £m M&G US Eastspring Investments 30 Jun Total 30 Jun Total 31 Dec Total note (i) Assets Intangible assets: Goodwill 1,153 16 61 1,230 1,230 1,230 Deferred acquisition costs and other intangible assets 17 2 1 20 15 20 Total 1,170 18 62 1,250 1,245 1,250 Other non-investment and non-cash assets 1,111 200 60 1,371 2,113 1,475 Investments in joint ventures and associates accounted for using the equity method 34 - 61 95 94 92 Financial investments: Loans C3.4 1,022 - - 1,022 1,222 1,096 Equity securities and portfolio holdings in unit trusts 59 - 15 74 59 65 Debt securities C3.3 1,953 - - 1,953 1,953 2,045 Other investments 60 13 - 73 69 61 Deposits - 14 31 45 36 65 Total investments 3,128 27 107 3,262 3,433 3,424 Cash and cash equivalents 599 61 91 751 968 1,562 Total assets 6,008 306 320 6,634 7,759 7,711 Equity and liabilities Equity Shareholders' equity 1,659 141 253 2,053 2,085 1,991 Total equity 1,659 141 253 2,053 2,085 1,991 Liabilities Core structural borrowing of shareholder-financed operations 275 - - 275 275 275 Intra-group debt represented by operational borrowings at Group levelnote (ii) 1,950 - - 1,950 2,422 1,933 Other non-insurance liabilitiesnote (iii) 2,124 165 67 2,356 2,977 3,512 Total liabilities 4,349 165 67 4,581 5,674 5,720 Total equity and liabilities 6,008 306 320 6,634 7,759 7,711 Notes (i) The M&G statement of financial position includes the assets and liabilities in respect of Prudential Capital. (ii) Intra-group debt represented by operational borrowings at Group level. Operational borrowings for M&G are in respect of Prudential Capital's short-term fixed income security programme and comprise: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Commercial paper 1,650 2,123 1,634 Medium Term Notes 300 299 299 Total intra-group debt represented by operational borrowings at Group level 1,950 2,422 1,933 (iii) Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors. C3 Assets and Liabilities - Classification and Measurement C3.1 Group assets and liabilities - Classification The classification of the Group's assets and liabilities, and its corresponding accounting carrying values reflect the requirements of IFRS. For financial investments the basis of valuation reflects the Group's application of IAS 39 'Financial Instruments: Recognition and Measurement' as described further below. Where assets and liabilities have been valued at fair value or measured on a different basis but fair value is disclosed, the Group has followed the principles under IFRS 13 'Fair value measurement'. The basis applied is summarised below: 30 Jun 2014 £m At fair value Cost/ Amortised cost/ IFRS 4 basis value Total carrying value Fair value, where applicable note (i) Through profit and loss Available for sale Intangible assets attributable to shareholders: Goodwill 1,458 1,458 Deferred acquisition costs and other intangible assets 5,944 5,944 Total 7,402 7,402 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes - - 177 177 Deferred acquisition costs and other intangible assets - - 63 63 Total - - 240 240 Total intangible assets - - 7,642 7,642 Other non-investment and non-cash assets: Property, plant and equipment - - 910 910 Reinsurers' share of insurance contract liabilities - - 6,743 6,743 Deferred tax assets - - 2,173 2,173 Current tax recoverable - - 158 158 Accrued investment income - - 2,413 2,413 2,413 Other debtors - - 3,643 3,643 3,643 Total - - 16,040 16,040 Investments of long-term business and other operations:note (ii) Investment properties 11,754 - - 11,754 11,754 Investments accounted for using the equity method - - 911 911 Loans 2,123 - 10,334 12,457 12,987 Equity securities and portfolio holdings in unit trusts 130,566 - - 130,566 130,566 Debt securities 103,666 30,511 - 134,177 134,177 Other investments 5,908 - - 5,908 5,908 Deposits - - 13,057 13,057 13,057 Total investments 254,017 30,511 24,302 308,830 Assets held for sale 875 - 875 875 Cash and cash equivalents - - 5,903 5,903 5,903 Total assets 254,892 30,511 53,887 339,290 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities - - 227,779 227,779 Investment contract liabilities with discretionary participation features note (iii) - - 35,636 35,636 Investment contract liabilities without discretionary participation features 17,840 - 2,449 20,289 20,290 Unallocated surplus of with-profits funds - - 13,044 13,044 Total 17,840 - 278,908 296,748 Core structural borrowings of shareholder-financed operations - - 4,567 4,567 5,056 Other borrowings: Operational borrowings attributable to shareholder-financed operations - - 2,243 2,243 2,243 Borrowings attributable to with-profits operations - - 864 864 879 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements - - 2,188 2,188 2,200 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 5,262 - - 5,262 5,262 Deferred tax liabilities - - 3,855 3,855 Current tax liabilities - - 475 475 Accruals and deferred income - - 731 731 Other creditors 279 - 4,720 4,999 4,999 Provisions - - 534 534 Derivative liabilities 1,400 - - 1,400 1,400 Other liabilities 2,019 - 1,951 3,970 3,970 Total 8,960 - 14,454 23,414 Liabilities held for sale 828 - - 828 828 Total liabilities 27,628 - 301,036 328,664 30 Jun 2013 £m At fair value Cost/ Amortised cost/ IFRS 4 basis value Total carrying value Fair value, where applicable note (i) Through profit and loss Available for sale Intangible assets attributable to shareholders: Goodwill - - 1,474 1,474 Deferred acquisition costs and other intangible assets - - 5,538 5,538 Total - - 7,012 7,012 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes - - 178 178 Deferred acquisition costs and other intangible assets - - 79 79 Total - - 257 257 Total intangible assets - - 7,269 7,269 Other non-investment and non-cash assets: Property, plant and equipment - - 868 868 Reinsurers' share of insurance contract liabilities - - 7,204 7,204 Deferred tax assets - - 2,637 2,637 Current tax recoverable - - 191 191 Accrued investment income - - 2,726 2,726 2,726 Other debtors - - 2,318 2,318 2,318 Total - - 15,944 15,944 Investments of long-term business and other operations:note (ii) Investment properties 10,583 - - 10,583 10,583 Investments accounted for using the equity method - - 696 696 Loans 2,268 - 10,962 13,230 13,404 Equity securities and portfolio holdings in unit trusts 112,258 - - 112,258 112,258 Debt securities 105,043 33,213 - 138,256 138,256 Other investments 6,140 - - 6,140 6,140 Deposits - - 13,542 13,542 13,542 Total investments 236,292 33,213 25,200 294,705 Assets held for sale 1,079 - - 1,079 1,079 Cash and cash equivalents - - 6,840 6,840 6,840 Total assets 237,371 33,213 55,253 325,837 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities - - 219,461 219,461 Investment contract liabilities with discretionary participation features note (iii) - - 33,402 33,402 Investment contract liabilities without discretionary participation features 17,342 - 2,523 19,865 19,872 Unallocated surplus of with-profits funds - - 11,434 11,434 Total 17,342 - 266,820 284,162 Core structural borrowings of shareholder-financed operations - - 4,149 4,149 4,534 Other borrowings: Operational borrowings attributable to shareholder-financed operations - - 2,530 2,530 2,530 Borrowings attributable to with-profits operations 22 - 902 924 924 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements - - 2,889 2,889 2,899 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 5,394 - - 5,394 5,394 Deferred tax liabilities - - 4,102 4,102 Current tax liabilities - - 325 325 Accruals and deferred income - - 538 538 Other creditors 256 - 3,487 3,743 3,743 Provisions - - 537 537 Derivative liabilities 2,226 - - 2,226 2,226 Other liabilities 2,206 - 1,455 3,661 3,661 Total 10,082 - 13,333 23,415 Liabilities held for sale 1,026 - - 1,026 1,026 Total liabilities 28,472 - 287,734 316,206 31 Dec 2013 £m At fair value Cost/ Amortised cost/ IFRS 4 basis value Total carrying value Fair value, where applicable note (i) Through profit and loss Available for sale Intangible assets attributable to shareholders: Goodwill - - 1,461 1,461 Deferred acquisition costs and other intangible assets - - 5,295 5,295 Total - - 6,756 6,756 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes - - 177 177 Deferred acquisition costs and other intangible assets - - 72 72 Total - - 249 249 Total intangible assets - - 7,005 7,005 Other non-investment and non-cash assets: Property, plant and equipment - - 920 920 Reinsurers' share of insurance contract liabilities - - 6,838 6,838 Deferred tax assets - - 2,412 2,412 Current tax recoverable - - 244 244 Accrued investment income - - 2,609 2,609 2,609 Other debtors - - 1,746 1,746 1,746 Total - - 14,769 14,769 Investments of long-term business and other operations:note (ii) Investment properties 11,477 - - 11,477 11,477 Investments accounted for using the equity method - - 809 809 Loans 2,137 - 10,429 12,566 12,995 Equity securities and portfolio holdings in unit trusts 120,222 - - 120,222 120,222 Debt securities 102,700 30,205 - 132,905 132,905 Other investments 6,265 - - 6,265 6,265 Deposits - - 12,213 12,213 12,213 Total investments 242,801 30,205 23,451 296,457 Assets held for sale 916 - - 916 916 Cash and cash equivalents - - 6,785 6,785 6,785 Total assets 243,717 30,205 52,010 325,932 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities - - 218,185 218,185 Investment contract liabilities with discretionary participation features note (iii) - - 35,592 35,592 Investment contract liabilities without discretionary participation features 17,736 - 2,440 20,176 20,177 Unallocated surplus of with-profits funds - - 12,061 12,061 Total 17,736 - 268,278 286,014 Core structural borrowings of shareholder-financed operations - - 4,636 4,636 5,066 Other borrowings: Operational borrowings attributable to shareholder-financed operations - - 2,152 2,152 2,152 Borrowings attributable to with-profits operations 18 - 877 895 909 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements - - 2,074 2,074 2,085 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 5,278 - - 5,278 5,278 Deferred tax liabilities - - 3,778 3,778 Current tax liabilities - - 395 395 Accruals and deferred income - - 824 824 Other creditors 263 - 3,044 3,307 3,307 Provisions - - 635 635 Derivative liabilities 1,689 - - 1,689 1,689 Other liabilities 2,051 - 1,685 3,736 3,736 Total 9,281 - 12,435 21,716 Liabilities held for sale 868 - - 868 868 Total liabilities 27,903 - 288,378 316,281 Notes (i) Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements. This category also includes assets which are valued by reference to specific IFRS standards such as reinsurers' share of insurance contract liabilities, deferred tax assets and investments accounted for under the equity method. (ii) Realised gains and losses on the Group's investments for half year 2014 recognised in the income statement amounted to a net gain of £1.8 billion (30 June 2013: £0.8 billion; 31 December 2013: £2.5 billion). (iii) The carrying value of investment contracts with discretionary participation features is determined on an IFRS 4 basis. It is impractical to determine the fair value of these contracts due to the lack of a reliable basis to measure the participation features. C3.2 Group assets and liabilities - Measurement (a) Determination of fair value The fair values of the assets and liabilities of the Group have been determined on the following bases. 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. The loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from discounted cash flows expected to be received. The rate of discount used was the market rate of interest where applicable. The fair value of investment properties is based on market values as assessed by professionally qualified external valuers or by the Group's qualified surveyors. The fair value of the subordinated and senior debt issued by the parent company is determined using the quoted prices from independent third parties. The fair value of financial liabilities (other than derivative financial instruments) is determined using discounted cash flows of the amounts expected to be paid. (b) Fair value hierarchy of financial instruments measured at fair value on recurring basis The table below shows the financial instruments carried at fair value analysed by level of the IFRS 13 'Fair Value Measurement' defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement. 30 Jun 2014 £m Level 1 Level 2 Level 3 Total Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Analysis of financial investments, net of derivative liabilities by business type With-profits Equity securities and portfolio holdings in unit trusts 28,796 2,711 597 32,104 Debt securities 15,870 39,756 480 56,106 Other investments (including derivative assets) 64 1,037 3,044 4,145 Derivative liabilities (45) (394) - (439) Total financial investments, net of derivative liabilities 44,685 43,110 4,121 91,916 Percentage of total 49% 47% 4% 100% Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts 97,125 200 38 97,363 Debt securities 3,546 6,313 - 9,859 Other investments (including derivative assets) 5 33 - 38 Derivative liabilities - (1) - (1) Total financial investments, net of derivative liabilities 100,676 6,545 38 107,259 Percentage of total 94% 6% 0% 100% Non-linked shareholder-backed Loans - 259 1,864 2,123 Equity securities and portfolio holdings in unit trusts 986 79 34 1,099 Debt securities 14,271 53,853 88 68,212 Other investments (including derivative assets) - 959 766 1,725 Derivative liabilities - (750) (210) (960) Total financial investments, net of derivative liabilities 15,257 54,400 2,542 72,199 Percentage of total 21% 75% 4% 100% Group total analysis, including other financial liabilities held at fair value Group total Loans - 259 1,864 2,123 Equity securities and portfolio holdings in unit trusts 126,907 2,990 669 130,566 Debt securities 33,687 99,922 568 134,177 Other investments (including derivative assets) 69 2,029 3,810 5,908 Derivative liabilities (45) (1,145) (210) (1,400) Total financial investments, net of derivative liabilities 160,618 104,055 6,701 271,374 Investment contracts liabilities without discretionary participation features held at fair value - (17,840) - (17,840) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (3,902) (134) (1,226) (5,262) Other financial liabilities held at fair value - (279) (2,019) (2,298) Total financial instruments at fair value 156,716 85,802 3,456 245,974 Percentage of total 64% 35% 1% 100% * Loans in the table above are those classified as fair value through profit and loss in note C3.1. 30 Jun 2013 £m Level 1 Level 2 Level 3 Total Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Analysis of financial investments, net of derivative liabilities by business type With-profits Equity securities and portfolio holdings in unit trusts 23,525 1,807 625 25,957 Debt securities 15,241 44,609 522 60,372 Other investments (including derivative assets) 155 757 2,924 3,836 Derivative liabilities (156) (883) - (1,039) Total financial investments, net of derivative liabilities 38,765 46,290 4,071 89,126 Percentage of total 43% 52% 5% 100% Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts 85,014 265 63 85,342 Debt securities 3,683 5,932 2 9,617 Other investments (including derivative assets) 4 21 - 25 Derivative liabilities (2) (5) - (7) Total financial investments, net of derivative liabilities 88,699 6,213 65 94,977 Percentage of total 93% 7% 0% 100% Non-linked shareholder-backed Loans - 242 2,026 2,268 Equity securities and portfolio holdings in unit trusts 879 33 47 959 Debt securities 13,551 54,559 157 68,267 Other investments (including derivative assets) 72 1,331 876 2,279 Derivative liabilities - (974) (206) (1,180) Total financial investments, net of derivative liabilities 14,502 55,191 2,900 72,593 Percentage of total 20% 76% 4% 100% Group total analysis, including other financial liabilities held at fair value Group total Loans - 242 2,026 2,268 Equity securities and portfolio holdings in unit trusts 109,418 2,105 735 112,258 Debt securities 32,475 105,100 681 138,256 Other investments (including derivative assets) 231 2,109 3,800 6,140 Derivative liabilities (158) (1,862) (206) (2,226) Total financial investments, net of derivative liabilities 141,966 107,694 7,036 256,696 Investment contracts liabilities without discretionary participation features held at fair value - (17,342) - (17,342) Borrowings attributable to the with-profits funds held at fair value - (22) - (22) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (3,696) (357) (1,341) (5,394) Other financial liabilities held at fair value - (256) (2,206) (2,462) Total financial instruments at fair value 138,270 89,717 3,489 231,476 Percentage of total 59% 39% 2% 100% * Loans in the table above are those classified as fair value through profit and loss in note C3.1. 31 Dec 2013 £m Level 1 Level 2 Level 3 Total Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Analysis of financial investments, net of derivative liabilities by business type With-profits Equity securities and portfolio holdings in unit trusts 25,087 2,709 569 28,365 Debt securities 14,547 42,759 485 57,791 Other investments (including derivative assets) 169 1,191 2,949 4,309 Derivative liabilities (32) (517) - (549) Total financial investments, net of derivative liabilities 39,771 46,142 4,003 89,916 Percentage of total 44% 52% 4% 100% Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts 90,645 191 36 90,872 Debt securities 3,573 6,048 1 9,622 Other investments (including derivative assets) 6 30 - 36 Derivative liabilities (1) (3) - (4) Total financial investments, net of derivative liabilities 94,223 6,266 37 100,526 Percentage of total 94% 6% 0% 100% Non-linked shareholder-backed Loans - 250 1,887 2,137 Equity securities and portfolio holdings in unit trusts 841 100 44 985 Debt securities 13,428 51,880 184 65,492 Other investments (including derivative assets) - 1,111 809 1,920 Derivative liabilities - (935) (201) (1,136) Total financial investments, net of derivative liabilities 14,269 52,406 2,723 69,398 Percentage of total 21% 75% 4% 100% Group total analysis, including other financial liabilities held at fair value Group total Loans - 250 1,887 2,137 Equity securities and portfolio holdings in unit trusts 116,573 3,000 649 120,222 Debt securities 31,548 100,687 670 132,905 Other investments (including derivative assets) 175 2,332 3,758 6,265 Derivative liabilities (33) (1,455) (201) (1,689) Total financial investments, net of derivative liabilities 148,263 104,814 6,763 259,840 Investment contracts liabilities without discretionary participation features held at fair value - (17,736) - (17,736) Borrowings attributable to the with-profits funds held at fair value - (18) - (18) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (3,703) (248) (1,327) (5,278) Other financial liabilities held at fair value - (263) (2,051) (2,314) Total financial instruments at fair value 144,560 86,549 3,385 234,494 Percentage of total 61% 37% 2% 100% * Loans in the table above are those classified as fair value through profit and loss in note C3.1. In addition to the financial instruments shown above, the assets and liabilities held for sale on the consolidated statement of financial position at 30 June 2014 in respect of Japan Life business included a net financial instruments balance of £917 million, primarily for equity securities and debt securities (30 June 2013: £1,140 million; 31 December 2013: £934 million). Of this amount, £888 million has been classified as level 1 and £29 million as level 2 (30 June 2013: £1,038 million level 1, £74 million level 2 and £28 million level 3; 31 December: £905 million level 1, £29 million level 2). (c) Valuation approach for Level 2 fair valued financial instruments A significant proportion of the Group's level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades. Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are sourced directly from brokers. Prudential seeks to obtain a number of quotes from different brokers so as to obtain the most comprehensive information available on their executability. Where quotes are sourced directly from brokers, the price used in the valuation is normally selected from one of the quotes based on a number of factors, including the timeliness and regularity of the quotes and the accuracy of the quotes considering the spreads provided. The selected quote is the one which best represents an executable quote for the security at the measurement date. Generally, no adjustment is made to the prices obtained from independent third parties. Adjustment is made in only limited circumstances, where it is determined that the third party valuations obtained do not reflect fair value (e.g. either because the value is stale and/or the values are extremely diverse in range). These are usually securities which are distressed or that could be subject to a debt restructure or where reliable market prices are no longer available due to an inactive market or market dislocation. In these instances, prices are derived using internal valuation techniques including those as described above in this note with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The techniques used require a number of assumptions relating to variables such as credit risk and interest rates. Examples of such variables include an average credit spread based on the corporate bond universe and the relevant duration of the asset being valued. Prudential determines the input assumptions based on the best available information at the measurement dates. Securities valued in such manner are classified as level 3 where these significant inputs are not based on observable market data. Of the total level 2 debt securities of £99,922 million at 30 June 2014 (30 June 2013: £105,100 million; 31 December 2013: £100,687 million), £8,813 million are valued internally (30 June 2013: £8,645 million; 31 December 2013: £8,556 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to interpretation. (d) Fair value measurements for level 3 fair valued financial instruments Reconciliation of movements in level 3 financial instruments measured at fair value The following table reconciles the value of level 3 fair valued financial instruments at 1 January 2014 to that presented at 30 June 2014. Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses, unrealised gains and losses on the assets classified at fair value through profit and loss and foreign exchange movements on an individual entity's overseas investments. Total gains and losses recorded in other comprehensive income includes unrealised gains and losses on debt securities held as available-for-sale within Jackson and foreign exchange movements arising from the retranslation of the Group's overseas subsidiaries and branches. £m 2014 At 1 Jan Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into level 3 Transfers out of Level 3 At 30 Jun 2014 Loans 1,887 64 (60) - - (46) 19 - - 1,864 Equity securities and portfolio holdings in unit trusts 649 17 (2) 12 (9) - - 2 - 669 Debt securities 670 1 (1) 16 (123) - - 12 (7) 568 Other investments (including derivative assets) 3,758 158 (61) 209 (253) - - - (1) 3,810 Derivative liabilities (201) (9) - - - - - - - (210) Total financial investments, net of derivative liabilities 6,763 231 (124) 237 (385) (46) 19 14 (8) 6,701 Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,327) 11 1 (2) 2 116 (27) - - (1,226) Other financial liabilities (2,051) (71) 65 - - 71 (33) - - (2,019) Total financial instruments at fair value 3,385 171 (58) 235 (383) 141 (41) 14 (8) 3,456 2013 At 1 Jan Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Reclassi- fication of Japan Life as held for sale Transfers into level 3 Transfers out of Level 3 At 30 Jun 2013 Loans 1,842 67 36 - - (37) 118 - - - 2,026 Equity securities and portfolio holdings in unit trusts 568 52 4 13 (11) - 25 - 87 (3) 735 Debt securities 729 27 9 20 (77) - - (26) 29 (30) 681 Other investments (including derivative assets) 3,335 373 137 177 (272) - - - 50 - 3,800 Derivative liabilities (195) (14) - - 2 - - - - 1 (206) Total financial investments, net of derivative liabilities 6,279 505 186 210 (358) (37) 143 (26) 166 (32) 7,036 Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,224) (80) (2) 26 - - (61) - - - (1,341) Other financial liabilities (2,021) (54) (146) - - 50 (35) - - - (2,206) Total financial instruments at fair value 3,034 371 38 236 (358) 13 47 (26) 166 (32) 3,489 2013 At 1 Jan Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Reclassi- fication of Japan Life as held for sale Transfers into level 3 Transfers out of Level 3 At 31 Dec 2013 Loans 1,842 4 (37) - - (66) 144 - - - 1,887 Equity securities and portfolio holdings in unit trusts 568 50 (3) 26 (73) - - - 84 (3) 649 Debt securities 729 60 (4) 16 (146) (1) - (28) 92 (48) 670 Other investments (including derivative assets) 3,335 426 (1) 80 (215) - 81 - 52 - 3,758 Derivative liabilities (195) (6) - - - - - - - - (201) Total financial investments, net of derivative liabilities 6,279 534 (45) 122 (434) (67) 225 (28) 228 (51) 6,763 Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,224) (57) (1) - 2 94 (141) - - - (1,327) Other financial liabilities (2,021) 3 41 - - 144 (218) - - - (2,051) Total financial instruments at fair value 3,034 480 (5) 122 (432) 171 (134) (28) 228 (51) 3,385 Of the total net gains and losses in the income statement of £171 million (30 June 2013: £371 million; 31 December 2013: £480 million), £163 million (30 June 2013: £333 million; 31 December 2013: £415 million) relates to net unrealised gains relating to financial instruments still held at the end of the period, which can be analysed as follows: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Equity securities 14 50 46 Debt securities 1 10 30 Other investments 153 355 397 Derivative liabilities (9) (14) (8) Net asset value attributable to unit holders of consolidated unit trusts and similar funds 11 (80) (57) Other financial liabilities (7) 12 7 Total 163 333 415 Valuation approach for Level 3 fair valued financial instruments Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions e.g. 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. These techniques may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of these instruments. When determining the inputs into the valuation techniques used priority is given to publicly available prices from independent sources when available, but overall the source of pricing is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Group's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses from selling the financial instrument being fair valued. In some cases the disclosed value cannot be realised in immediate settlement of the financial instrument. In accordance with the Group's risk management framework, the estimated fair value of derivative financial instruments valued internally using standard market practices are subject to assessment against external counterparties' valuations. At 30 June 2014 the Group held £3,456 million (30 June 2013: £3,489 million; 31 December 2013: £3,385 million), 1 per cent of the total fair valued financial assets net of fair valued financial liabilities (30 June 2013: 2 per cent; 31 December 2013: 2 per cent), within level 3. Included within these amounts were loans of £1,864 million at 30 June2014 (30 June 2013: £2,026 million; 31 December 2013: £1,887 million), attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,019 million at 30 June 2014 (30 June 2013: £2,206 million; 31 December 2013: £2,051 million) was also classified within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets. Excluding the loans and funds withheld liability under REALIC's reinsurance arrangements as described above, which amounted to a net liability of £(155) million (30 June 2013: £(180) million; 31 December 2013: £(164) million), the level 3 fair valued financial assets net of financial liabilities were £3,611 million (30 June 2013: £3,669 million; 31 December 2013: £3,549 million). Of this amount, a net liability of £(228) million (30 June 2013: net liability of £(272) million; 31 December 2013:net liability of £(304) million) were internally valued, representing 0.1 per cent of the total fair valued financial assets net of financial liabilities (30 June 2013: 0.1 per cent; 31 December 2013: 0.1 per cent). Internal valuations are inherently more subjective than external valuations. Included within these internally valued net liabilities were: (a) Debt securities of £80 million (30 June 2013: £80 million; 31 December 2013: £118 million), which were either valued on a discounted cash flow method with an internally developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities (e.g. distressed securities or securities which were being restructured). (b) Private equity and venture investments of £897 million (30 June 2013: £955 million; 31 December 2013: £878 million) which were valued internally based on management information available for these investments. These investments were principally held by consolidated investment funds which are managed on behalf of third parties. (c) Liabilities of £(1,206) million (30 June 2013: £(1,311) million; 31 December 2013: £(1,301) million) for the net asset value attributable to external unit holders respect of the consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets. (d) Other sundry individual financial investments of £1 million (30 June 2013: £4 million; 31 December 2013: £1 million). Of the internally valued net liability referred to above of £(228) million (30 June 2013: £(272) million; 31 December 2013: £(304) million): (e) A net liability of £(267) million (30 June 2013: net liability of £(313) million; 31 December 2013: net liability of £(380) million) was held by the Group's participating funds and therefore shareholders' profit and equity are not impacted by movements in the valuation of these financial instruments. (g) A net asset of £39 million (30 June 2013: £41 million; 31 December 2013: £76 million) was held to support non-linked shareholder-backed business. If the value of all the level 3 instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the change in valuation would be £4 million (30 June 2013: £4 million; 31 December 2013: £8 million), which would reduce shareholders' equity by this amount before tax. Of this amount, a decrease of £3 million (30 June 2013: an increase of less than £1 million; 31 December 2013: a decrease of £6 million) would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit and a £1 million decrease (30 June 2013: a £4 million decrease; 31 December 2013: a decrease of £2 million) would be included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale. (e) Transfers into and transfers out of levels The Group's policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except for material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer. During half year 2014, the transfers between levels within the Group's portfolio were primarily transfers from level 1 to 2 of £44 million and transfers from level 2 to level 1 of £204 million. These transfers which relate to debt securities arose to reflect the change in the observability of the inputs used in valuing these securities. In addition, the transfers into and out of level 3 in half year 2014 were £14 million and £8 million, respectively. These transfers were primarily between levels 3 and 2 for debt securities. (f) Valuation processes applied by the Group The Group's valuation policies, procedures and analyses for instruments categorised as level 3 are overseen by Business Unit committees as part of the Group's wider financial reporting governance processes. The procedures undertaken include approval of valuation methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group makes use of the extensive expertise of its asset management functions. C3.3 Debt securities This note provides analysis of the Group's debt securities, including asset- backed securities and sovereign debt securities, by segment. Debt securities are carried at fair value. The amounts included in the statement of financial position are analysed as follows, with further information relating to the credit quality of the Group's debt securities at 30 June 2014 provided in the notes below. 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Insurance operations: Asia note (a) 19,958 20,081 18,554 US note (b) 30,586 33,368 30,292 UK note (c) 81,680 82,854 82,014 Asset management operationsnote (d) 1,953 1,953 2,045 Total 134,177 138,256 132,905 In the tables below, with the exception of some mortgage-backed securities, Standard & Poor's (S&P) ratings have been used where available. For securities where S&P ratings are not immediately available, those produced by Moody's and then Fitch have been used as an alternative. (a) Asia insurance operations 2014 £m 2013 £m With-profits business Unit-linked assets Other business 30 Jun Total 30 Jun Total 31 Dec Total S&P - AAA 640 10 84 734 720 724 S&P - AA+ to AA- 2,805 344 1,893 5,042 5,001 4,733 S&P - A+ to A- 1,772 252 1,234 3,258 3,647 2,896 S&P - BBB+ to BBB- 1,302 559 929 2,790 2,244 2,717 S&P - Other 378 219 866 1,463 1,956 1,433 6,897 1,384 5,006 13,287 13,568 12,503 Moody's - Aaa 1,713 235 442 2,390 1,474 1,728 Moody's - Aa1 to Aa3 56 31 17 104 174 176 Moody's - A1 to A3 73 21 53 147 176 177 Moody's - Baa1 to Baa3 127 246 104 477 633 572 Moody's - Other 30 13 31 74 118 76 1,999 546 647 3,192 2,575 2,729 Fitch 281 115 188 584 458 728 Other 1,484 398 1,013 2,895 3,480 2,594 Total debt securities 10,661 2,443 6,854 19,958 20,081 18,554 In addition to the debt securities shown above, the assets held for sale on the condensed consolidated statement of financial position at 30 June 2014 in respect of Japan Life business included a debt securities balance of £380 million (30 June 2013: £452 million; 31 December 2013: £387 million). Of this amount, £351 million (30 June 2013: £420 million; 31 December 2013: £356 million) were rated as AA+ to AA- and £29 million (30 June 2013: £32million; 31 December 2013: £29 million) were rated A+ to A-. The following table analyses debt securities of 'Other business' which are not externally rated by S&P, Moody's or Fitch. 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Government bonds 402 387 387 Corporate bonds 532 542 491 Other 79 185 81 1,013 1,114 959 * Rated as investment grade by local external ratings agencies. (b) US insurance operations (i) Overview 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Corporate and government security and commercial loans: Government 3,385 4,017 3,330 Publicly traded and SEC Rule 144A securities 19,530 20,376 18,875 Non-SEC Rule 144A securities 3,335 3,584 3,395 Total 26,250 27,977 25,600 Residential mortgage-backed securities (RMBS) 1,584 2,175 1,760 Commercial mortgage-backed securities (CMBS) 2,224 2,591 2,339 Other debt securities 528 625 593 Total US debt securities† 30,586 33,368 30,292 * A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors. The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities. † Debt securities for US operations included in the statement of financial position comprise: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Available-for-sale 30,511 33,213 30,205 Fair value through profit and loss: Securities held to back liabilities for funds withheld under reinsurance arrangement 75 155 87 30,586 33,368 30,292 (ii) Valuation basis, presentation of gains and losses and securities in an unrealised loss position Under IAS 39, unless categorised as 'held to maturity' or 'loans and receivables' debt securities are required to be fair valued. Where available, quoted market prices are used. However, where securities do not have an externally quoted price based on regular trades or where markets for the securities are no longer active as a result of market conditions, IAS 39 requires that valuation techniques be applied. IFRS 13 requires classification of the fair values applied by the Group into a three level hierarchy. At 30 June 2014, 0.1 per cent of Jackson's debt securities were classified as level 3 (30 June 2013: 0.1 per cent; 31 December 2013: 0.1 per cent) comprising of fair values where there are significant inputs which are not based on observable market data. Except for certain assets covering liabilities that are measured at fair value, the debt securities of the US insurance operations are classified as 'available-for-sale'. Unless impaired, fair value movements are recognised in other comprehensive income. Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report. Movements in unrealised gains and losses There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of £781 million to a net unrealised gain of £1,756 million as analysed in the table below. This increase reflects the effects of lower long-term interest rates. 30 Jun 2014 £m Changes in unrealised appreciation Foreign exchange translation 31 Dec 2013 £m Reflected as part of movement in other comprehensive income Assets fair valued at below book value Book value 5,566 10,825 Unrealised (loss) gain (299) 536 14 (849) Fair value (as included in statement of financial position) 5,267 9,976 Assets fair valued at or above book value Book value 23,189 18,599 Unrealised gain (loss) 2,055 487 (62) 1,630 Fair value (as included in statement of financial position) 25,244 20,229 Total Book value 28,755 29,424 Net unrealised gain (loss) 1,756 1,023 (48) 781 Fair value (as included in statement of financial position) 30,511 30,205 * Book value represents cost/amortised cost of the debt securities. ** Translated at the average rate of US$1.6693: £1.00 Debt securities classified as available-for-sale in an unrealised loss position (a) 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 2014 £m 30 Jun 2013 £m 31 Dec 2013 £m Fair value Unrealised loss Fair value Unrealised loss Fair value Unrealised loss Between 90% and 100% 4,069 (126) 7,510 (317) 7,624 (310) Between 80% and 90% 1,176 (162) 2,214 (369) 1,780 (331) Below 80% 22 (11) 124 (61) 572 (208) Total 5,267 (299) 9,848 (747) 9,976 (849) (b) Unrealised losses by maturity of security 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec 1 year to 5 years (2) (6) (5) 5 years to 10 years (48) (215) (224) More than 10 years (216) (440) (558) Mortgage-backed and other debt securities (33) (86) (62) Total (299) (747) (849) (c) Age analysis of unrealised losses for the periods indicated The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position: 30 Jun 2014 £m 30 Jun 2013 £m 31 Dec 2013 £m Non- investment grade Investment grade Total Non- investment grade Investment grade Total Non- investment grade Investment grade Total Less than 6 months (1) (2) (3) (16) (326) (342) (2) (52) (54) 6 months to 1 year (1) (1) (2) (1) (345) (346) (12) (329) (341) 1 year to 2 years (2) (271) (273) (3) - (3) (2) (423) (425) 2 years to 3 years - - - (2) - (2) (1) - (1) More than 3 years (10) (11) (21) (23) (31) (54) (13) (15) (28) Total (14) (285) (299) (45) (702) (747) (30) (819) (849) (d) Securities whose fair values were below 80 per cent of the book value £11 million of the £299 million of gross unrealised losses as shown in the table (a) above at 30 June 2014 (30 June 2013: £61 million of the £747 million of gross unrealised losses; 31 December 2013: £208 million of the £849 million of gross unrealised losses) related to securities whose fair values were below 80 per cent of the book value. The analysis of the £11 million (30 June 2013: £61 million; 31 December 2013: £208 million), by category of debt securities and by age analysis indicating the length of time for which their fair value was below 80 per cent of the book value, is as follows: 30 Jun 2014 £m 30 Jun 2013 £m 31 Dec 2013 £m Category analysis Fair value Unrealised loss Fair value Unrealised loss Fair value Unrealised loss Residential mortgage-backed securities Prime (including agency) - - 5 (2) - - Sub-prime 3 (1) 7 (2) 4 (1) 3 (1) 12 (4) 4 (1) Commercial mortgage-backed securities 8 (3) 13 (21) 16 (6) Other asset-backed securities 9 (6) 24 (13) 9 (6) Total structured securities 20 (10) 49 (38) 29 (13) Government bonds - - - - 521 (188) Corporates 2 (1) 75 (23) 22 (7) Total 22 (11) 124 (61) 572 (208) The following table shows the age analysis as at 30 June 2014, of the securities whose fair values were below 80 per cent of the book value: 30 Jun 2014 £m 30 Jun 2013 £m 31 Dec 2013 £m Age analysis Fair value Unrealised loss Fair value Unrealised loss Fair value Unrealised loss Less than 3 months - - 79 (25) 93 (24) 3 months to 6 months - - 2 (1) 418 (159) More than 6 months 22 (11) 43 (35) 61 (25) 22 (11) 124 (61) 572 (208) (iii) Ratings The following table summarises the ratings of securities detailed above by using S&P, Moody's, Fitch and implicit ratings of mortgage-backed securities based on National Association of Insurance Commissioners (NAIC) valuations: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec S&P - AAA 131 148 132 S&P - AA+ to AA- 5,352 6,162 5,252 S&P - A+ to A- 7,776 8,308 7,728 S&P - BBB+ to BBB- 10,065 10,195 9,762 S&P - Other 1,027 1,223 941 24,351 26,036 23,815 Moody's - Aaa 175 62 65 Moody's - Aa1 to Aa3 6 25 13 Moody's - A1 to A3 86 65 65 Moody's - Baa1 to Baa3 85 36 70 Moody's - Other 10 4 10 362 192 223 Implicit ratings of MBS based on NAIC valuations (see below) NAIC 1 2,558 2,873 2,774 NAIC 2 116 252 179 NAIC 3-6 75 268 87 2,749 3,393 3,040 Fitch 161 72 159 Other ** 2,963 3,675 3,055 Total debt securities 30,586 33,368 30,292 * The Securities Valuation Office of the NAIC classifies debt securities into six quality categories range from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6. ** The amounts within 'Other' which are not rated by S&P, Moody's nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following NAIC classifications: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec NAIC 1 1,140 1,506 1,165 NAIC 2 1,756 2,098 1,836 NAIC 3-6 67 71 54 2,963 3,675 3,055 For some mortgage-backed securities within Jackson, the table above includes these securities using the regulatory ratings detail issued by the NAIC. These regulatory ratings levels were established by external third parties (PIMCO for residential mortgage-backed securities and BlackRock Solutions for commercial mortgage-backed securities). (c) UK insurance operations Other funds and subsidiaries UK insurance operations Scottish Amicable Insurance Fund PAC with-profits fund Unit-linked assets PRIL Other annuity and long-term business 30 Jun 2014 Total 30 Jun 2013 Total 31 Dec 2013 Total £m £m £m £m £m £m £m £m S&P - AAA 244 3,971 777 3,288 350 8,630 8,725 8,837 S&P - AA+ to AA- 548 5,473 1,151 3,365 415 10,952 9,760 10,690 S&P - A+ to A- 715 10,349 1,886 7,053 877 20,880 21,535 20,891 S&P - BBB+ to BBB- 591 8,733 1,804 3,834 690 15,652 17,452 17,125 S&P - Other 164 2,191 57 284 48 2,744 3,600 3,255 2,262 30,717 5,675 17,824 2,380 58,858 61,072 60,798 Moody's - Aaa 74 1,434 225 366 46 2,145 2,338 2,333 Moody's - Aa1 to Aa3 111 2,509 1,088 2,800 537 7,045 6,359 6,420 Moody's - A1 to A3 49 1,004 74 1,116 157 2,400 2,068 2,077 Moody's - Baa1 to Baa3 37 844 109 400 53 1,443 1,318 1,214 Moody's - Other 6 160 - 7 - 173 280 140 277 5,951 1,496 4,689 793 13,206 12,363 12,184 Fitch 11 466 84 164 19 744 605 611 Other 268 5,493 161 2,729 221 8,872 8,814 8,421 Total debt securities 2,818 42,627 7,416 25,406 3,413 81,680 82,854 82,014 Where no external ratings are available, internal ratings produced by the Group's asset management operation, which are prepared on the Company's assessment of a comparable basis to external ratings, are used where possible. The £8,872 million total debt securities held at 30 June 2014 (30 June 2013: £8,814 million; 31 December 2013: £8,421 million) which are not externally rated are either internally rated or unrated. These are analysed as follows: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Internal ratings or unrated: AAA to A- 4,082 3,438 3,691 BBB to B- 3,403 3,778 3,456 Below B- or unrated 1,387 1,598 1,274 Total 8,872 8,814 8,421 The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. Of the £2,950 million for PRIL and other annuity and long-term business investments for non-linked shareholder-backed business which are not externally rated, £696 million were internally rated AA+ to AA-, £1,131 million A+ to A-, £926 million BBB+ to BBB-, £55 million BB+ to BB- and £142 million were internally rated B+ and below or unrated. (d) Asset management operations The debt securities are all held by M&G including Prudential Capital. 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec M&G AAA to A- by Standard & Poor's or Aaa to A3 rated by Moody's 1,604 1,597 1,690 Other 349 356 355 Total M&G (including Prudential Capital) 1,953 1,953 2,045 (e) Asset-backed securities The Group's holdings in asset-backed securities (ABS), which comprise residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed securities, at 30 June 2014 is as follows: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Shareholder-backed operations: Asia insurance operations note (i) 108 144 139 US insurance operations note (ii) 4,336 5,391 4,692 UK insurance operations (2014: 37% AAA, 25% AA)note (iii) 1,765 1,623 1,727 Other operations note (iv) 873 584 667 7,082 7,742 7,225 With-profits operations: Asia insurance operations note (i) 225 319 200 UK insurance operations (2014: 59% AAA, 14% AA)note (iii) 5,352 5,815 5,765 5,577 6,134 5,965 Total 12,659 13,876 13,190 Notes (i) Asia insurance operations The Asia insurance operations' exposure to asset-backed securities is primarily held by the with-profits operations. Of the £225 million, 98 per cent (30 June 2013: 91 per cent; 31 December 2013: 94 per cent) are investment graded. (ii) US insurance operations US insurance operations' exposure to asset-backed securities at 30 June 2014 comprises: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec RMBS Sub-prime (2014: 9% AAA, 11% AA, 7% A) 232 283 255 Alt-A (2014: 1% AA, 4% A) 244 325 270 Prime including agency (2014: 75% AA, 2% A) 1,108 1,567 1,235 CMBS (2014: 49% AAA, 20% AA, 22% A) 2,224 2,591 2,339 CDO funds (2014: 29% AA, 1% A), including £nil exposure to sub-prime 38 49 46 Other ABS (2014: 30% AAA, 18% AA, 43% A), including £65 million exposure to sub-prime 490 576 547 Total 4,336 5,391 4,692 (iii) UK insurance operations The holdings of the UK shareholder-backed operations include £626 million (30 June 2013: £534 million; 31 December 2013: £632 million) relating to asset-backed securities held in the unit-linked funds. The remaining amount relates to investments held by PRIL with a primary exposure to the UK market. Of the holdings of the with-profits operations, £1,266 million (30 June 2013: £1,615 million; 31 December 2013: £1,490 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market. (iv) Asset management operations Asset management operations' exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £873 million, 86 per cent (30 June 2013: 80 per cent; 31 December 2013: 85 per cent) are graded AAA. (f) Group sovereign debt and bank debt exposure The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2014: Exposure to sovereign debts 30 Jun 2014 £m 30 Jun 2013 £m 31 Dec 2013 £m Shareholder-backed business With- profits funds Shareholder-backed business With- profits funds Shareholder-backed business With- profits funds Italy 58 58 51 58 53 53 Spain 1 16 1 18 1 14 France 18 - 19 - 19 - Germany 356 380 427 427 413 389 Other Europe (principally Belgium and Isle of Man) 49 43 46 40 45 45 Total Continental Europe 482 497 544 543 531 501 United Kingdom 3,474 2,309 3,533 2,495 3,516 2,432 Total Europe 3,956 2,806 4,077 3,038 4,047 2,933 United States 3,125 4,805 3,598 3,117 3,045 4,026 Other, predominantly Asia 3,289 1,679 3,223 1,475 3,084 1,508 Total 10,370 9,290 10,898 7,630 10,176 8,467 * Including bonds guaranteed by the federal government. ** The exposure to the United States sovereign debt comprises holdings of Jackson, the UK and Asia insurance operations. The table above excludes assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the table above excludes the proportionate share of sovereign debt holdings of the Group's joint venture operations. Exposure to bank debt securities Bank debt securities £m Senior debt Subordinated debt Shareholder-backed business Covered Senior Total senior debt Tier 1 Tier 2 Total subordinated debt Total 30 Jun 2014 Total 30 Jun 2013 Total 31 Dec 2013 Portugal - 44 44 - - - 44 42 45 Ireland - 16 16 - - - 16 18 17 Italy - 31 31 - - - 31 41 30 Spain 116 12 128 - 23 23 151 137 135 Austria - - - - 12 12 12 12 12 France 17 104 121 18 74 92 213 178 175 Germany - - - - 63 63 63 22 66 Netherlands - 15 15 75 46 121 136 162 152 Total Continental Europe 133 222 355 93 218 311 666 612 632 United Kingdom 435 202 637 54 644 698 1,335 1,396 1,369 Total Europe 568 424 992 147 862 1,009 2,001 2,008 2,001 United States - 1,794 1,794 32 453 485 2,279 2,234 2,163 Other, predominantly Asia 17 337 354 80 290 370 724 760 698 Total 585 2,555 3,140 259 1,605 1,864 5,004 5,002 4,862 With-profits funds Portugal - - - - - - - 6 6 Ireland 6 - 6 - - - 6 6 10 Italy 16 58 74 - - - 74 82 82 Spain 165 37 202 - - - 202 172 149 France 12 162 174 - 59 59 233 156 237 Germany - 29 29 - - - 29 12 24 Netherlands - 223 223 - - - 223 164 215 Total Continental Europe 199 509 708 - 59 59 767 598 723 United Kingdom 564 436 1,000 36 520 556 1,556 1,805 1,695 Total Europe 763 945 1,708 36 579 615 2,323 2,403 2,418 United States - 1,619 1,619 83 120 203 1,822 2,001 2,214 Other, predominantly Asia 98 837 935 206 146 352 1,287 700 1,102 Total 861 3,401 4,262 325 845 1,170 5,432 5,104 5,734 The table above excludes assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the table above excludes the proportionate share of sovereign debt holdings of the Group's joint venture operations. C3.4 Loans portfolio Loans are accounted for at amortised cost net of impairment except for: - certain mortgage loans which have been designated at fair value through profit and loss of the UK insurance operations as this loan portfolio is managed and evaluated on a fair value basis; and - certain policy loans of the US insurance operations which are held to back liabilities for funds withheld under reinsurance arrangement and are also accounted on a fair value basis. The amounts included in the statement of financial position are analysed as follows: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Insurance operations: Asianote (a) 916 1,004 922 USnote (b) 6,130 6,691 6,375 UKnote (c) 4,389 4,313 4,173 Asset management operationsnote (d) 1,022 1,222 1,096 Total 12,457 13,230 12,566 (a) Asia insurance operations The loans of the Group's Asia insurance operations comprise: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Mortgage loans‡ 65 54 57 Policy loans‡ 615 640 611 Other loans‡‡ 236 310 254 Total Asia insurance operations loans 916 1,004 922 ‡ The mortgage and policy loans are secured by properties and life insurance policies respectively. ‡‡ The majority of the other loans are commercial loans held by the Malaysia operation and which are all rated as investment grade by two local rating agencies. (b) US insurance operations The loans of the Group's US insurance operations comprise: 30 Jun 2014 £m 30 Jun 2013 £m 31 Dec 2013 £m Loans backing liabilities for funds withheld Other loans Total Loans backing liabilities for funds withheld Other loans Total Loans backing liabilities for funds withheld Other loans Total Mortgage loans† - 3,490 3,490 - 3,905 3,905 - 3,671 3,671 Policy loans†† 1,864 776 2,640 2,026 760 2,786 1,887 817 2,704 Total US insurance operations loans 1,864 4,266 6,130 2,026 4,665 6,691 1,887 4,488 6,375 † All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family residential, suburban office, retail and hotel. The breakdown by property type is as follows: 2014 % 2013 % 30 Jun 30 Jun 31 Dec Industrial 29 28 28 Multi-family residential 29 28 30 Office 11 18 13 Retail 20 17 19 Hotels 9 9 9 Other 2 - 1 100 100 100 †† The policy loans are fully secured by individual life insurance policies or annuity policies. Included within the policy loans of REALIC are those accounted for at fair value through profit and loss to back liabilities for funds withheld under reinsurance. All other policy loans are accounted for at amortised cost, less any impairment. The US insurance operations' commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £6.5 million (30 June 2013: £6.6 million; 31 December 2013: £6.5 million). The portfolio has a current estimated average loan to value of 60 per cent (30 June 2013: 62 per cent; 31 December 2013: 61 per cent). At 30 June 2014, Jackson had mortgage loans with a carrying value of £34 million (30 June 2013: £49 million; 31 December 2013: £47 million) where the contractual terms of the agreements had been restructured. (c) UK insurance operations The loans of the Group's UK insurance operations comprise: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec SAIF and PAC WPSF Mortgage loans† 1,391 1,379 1,183 Policy loans 12 13 12 Other loans‡ 1,503 1,588 1,629 Total SAIF and PAC WPSF loans 2,906 2,980 2,824 Shareholder-backed operations Mortgage loans† 1,478 1,328 1,345 Other loans 5 5 4 Total loans of shareholder-backed operations 1,483 1,333 1,349 Total UK insurance operations loans 4,389 4,313 4,173 † The mortgage loans are collateralised by properties. By carrying value, 78 per cent of the £1,478 million held for shareholder-backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of 30 per cent. ‡ Other loans held by the PAC with-profits fund are all commercial loans and comprise mainly syndicated loans. (d) Asset management operations The M&G loans relate to loans and receivables managed by Prudential Capital. These assets are generally secured but most have no external credit ratings. Internal ratings prepared by the Group's asset management operations, as part of the risk management process, are: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Loans and receivables internal ratings: AAA 104 112 108 AA+ to AA- - - 28 A+ to A- 120 - - BBB+ to BBB- 488 667 516 BB+ to BB- 49 419 174 B+ to B- 250 24 250 Other 11 - 20 Total M&G (including Prudential Capital) loans 1,022 1,222 1,096 C4 Policyholder liabilities and unallocated surplus The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group's statement of financial position: C4.1 Movement of liabilities C4.1(a) Group overview (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds Insurance operations £m Asia US UK Total Half year 2014 movements note C4.1(b) note C4.1(c) note C4.1(d) At 1 January 2014 35,146 107,411 146,616 289,173 Comprising: - Policyholder liabilities on the consolidated statement of financial position 31,910 107,411 134,632 273,953 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 77 - 11,984 12,061 - Group's share of policyholder liabilities of joint ventures‡ 3,159 - - 3,159 Reallocation of unallocated surplus for the domestication of the Hong Kong branch 1,690 - (1,690) - Net flows: Premiums 3,195 8,435 3,969 15,599 Surrenders (1,133) (2,787) (2,240) (6,160) Maturities/Deaths (548) (671) (3,547) (4,766) Net flows 1,514 4,977 (1,818) 4,673 Shareholders' transfers post tax (14) - (106) (120) Investment-related items and other movements 2,073 3,181 5,907 11,161 Foreign exchange translation differences (837) (3,560) (231) (4,628) As at 30 June 2014 39,572 112,009 148,678 300,259 Comprising: - Policyholder liabilities on the consolidated statement of financial position§ 34,076 112,009 137,619 283,704 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 1,985 - 11,059 13,044 - Group's share of policyholder liabilities of joint ventures‡ 3,511 - - 3,511 Half year 2013 movements At 1 January 2013 34,664 92,261 144,438 271,363 Comprising: - Policyholder liabilities on the consolidated statement of financial position 31,501 92,261 133,912 257,674 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 63 - 10,526 10,589 - Group's share of policyholder liabilities of joint ventures‡ 3,100 - - 3,100 Net flows: Premiums 3,266 8,208 3,880 15,354 Surrenders (1,652) (2,420) (2,315) (6,387) Maturities/Deaths (430) (620) (3,883) (4,933) Net flows 1,184 5,168 (2,318) 4,034 Shareholders' transfers post tax (18) - (102) (120) Investment-related items and other movements 5 2,038 2,411 4,454 Foreign exchange translation differences 1,292 6,748 211 8,251 Reclassification of Japan Life business as held for sale (970) - - (970) Acquisition of Thanachart Life 487 - - 487 At 30 June 2013 35,674 106,215 144,640 286,529 Comprising: - Policyholder liabilities on the consolidated statement of financial position 33,223 106,215 133,290 272,728 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 84 - 11,350 11,434 - Group's share of policyholder liabilities of joint ventures‡ 3,337 - - 3,337 Average policyholder liability balances† Half year 2014 36,328 109,710 136,126 282,164 Half year 2013 35,993 99,238 133,601 268,832 * Up until 31 December 2013 for the purposes of the presentation of unallocated surplus of with-profits within the statement of financial position, the Hong Kong branch balance was reported within the unallocated surplus of the PAC with-profits sub-fund of the UK insurance operations. On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance operations segment. ** Liabilities of £970 million in respect of the Japan Life operation were removed from policyholder liabilities following its reclassification as held for sale at 30 June 2013. Outflows of £45 million on Actual Exchange Rate (AER) (£39 million on a Constant Exchange Rate (CER)) in respect of Japan have been included in net flows up to that date, and hence included in the table above. Excluding the Japan Life operation the average shareholder-backed policyholder liabilities for half year 2013 was £21,473 million. No amounts are shown within the 2014 analysis above in respect of Japan. † Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the period and exclude unallocated surplus of with-profits funds. ‡ The Group's investment in joint ventures are accounted for on the equity method in the Group's statement of financial position. The Group's share of the policyholder liabilities as shown above relate to the joint venture life business in China, India and of the Takaful business in Malaysia. § The policyholder liabilities of the Asia insurance operations of £34,076 million as shown in the table above is after deducting the intragroup reinsurance liabilities ceded by the UK insurance operations of £1,296 million to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities is £35,372 million. The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the period. The items above are shown gross of external reinsurance. The analysis includes the impact of premiums, claims and investment movements on policyholders' liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown above are after any deductions for fees/charges and claims represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder. (ii) Analysis of movements in policyholder liabilities for shareholder-backed business Half year 2014 £m Shareholder-backed business Asia US UK Total note (c) At 1 January 2014 21,931 107,411 50,779 180,121 Net flows: Premiums 2,195 8,435 2,094 12,724 Surrenders (1,028) (2,787) (1,033) (4,848) Maturities/Deaths (276) (671) (1,201) (2,148) Net flowsnote (a) 891 4,977 (140) 5,728 Investment-related items and other movements 1,030 3,181 2,048 6,259 Foreign exchange translation differences (433) (3,560) - (3,993) At 30 June 2014 23,419 112,009 52,687 188,115 Comprising: - Policyholder liabilities on the consolidated statement of financial position 19,908 112,009 52,687 184,604 - Group's share of policyholder liabilities relating to joint ventures 3,511 - - 3,511 Half year 2013 £m Shareholder-backed business Asia US UK Total At 1 January 2013 21,213 92,261 49,505 162,979 Net flows: Premiums 2,379 8,208 2,090 12,677 Surrenders (1,194) (2,420) (1,252) (4,866) Maturities/Deaths (146) (620) (1,174) (1,940) Net flowsnote (a) 1,039 5,168 (336) 5,871 Investment-related items and other movements 549 2,038 901 3,488 Acquisition of subsidiaries 487 - - 487 Reclassification of Japan Life business as held for salenote (b) (970) - - (970) Foreign exchange translation differences 585 6,748 - 7,333 At 30 June 2013 22,903 106,215 50,070 179,188 Comprising: - Policyholder liabilities on the consolidated statement of financial position 19,566 106,215 50,070 175,851 - Group's share of policyholder liabilities relating to joint ventures 3,337 - - 3,337 Notes (a) Including net flows of the Group's insurance joint ventures. (b) The £970 million liabilities of the Japan Life operation were removed from policyholder liabilities following its reclassification as held for sale at 30 June 2013, an outflow of £45 million on Actual Exchange Rate (AER) (£39 million on a Constant Exchange Rate (CER)) in respect of Japan were included in net flows up to that date, and hence included in the table above. Excluding the Japan Life operation the average shareholder-backed policyholder liabilities for half year 2013 was £21,473 million. No amounts are shown within the 2014 analysis above in respect of Japan. (c) Policyholder liabilities relating to shareholder-backed business grew by £8 billion from £180.1 billion at 31 December 2013 to £188.1 billion at 30 June 2014 demonstrating the on-going growth of our business. The increase reflects positive net flows (premiums net of upfront charges less surrenders, withdrawals, maturities and deaths) of £5.7 billion in the first half of 2014 (half year 2013: £5.9 billion), driven by strong inflows in the US £5.0 billion and Asia £0.9 billion. C4.1(b) Asia insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the movement in policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the beginning of the period to 30 June is as follows: With-profits business Unit-linked liabilities Other business Total Half year 2014 movements £m £m £m £m At 1 January 2014 13,215 13,765 8,166 35,146 Comprising: - Policyholder liabilities on the consolidated statement of financial position 13,138 11,918 6,854 31,910 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 77 - - 77 - Group's share of policyholder liabilities relating to joint ventures‡ - 1,847 1,312 3,159 Reallocation of unallocated surplus for the domestication of the Hong Kong branchnote (b) 1,690 - - 1,690 Premiums: New business 138 547 456 1,141 In-force 862 668 524 2,054 1,000 1,215 980 3,195 Surrendersnote (e) (105) (914) (114) (1,133) Maturities/Deaths (272) (29) (247) (548) Net flows note (d) 623 272 619 1,514 Shareholders' transfers post tax (14) - - (14) Investment-related items and other movements note (f) 1,043 798 232 2,073 Foreign exchange translation differences note (a) (404) (193) (240) (837) At 30 June 2014 16,153 14,642 8,777 39,572 Comprising: - Policyholder liabilities on the consolidated statement of financial positionnote (c) 14,168 12,638 7,270 34,076 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 1,985 - - 1,985 - Group's share of policyholder liabilities relating to joint ventures‡ - 2,004 1,507 3,511 Half year 2013 movements At 1 January 2013 13,451 14,028 7,185 34,664 Comprising: - Policyholder liabilities on the consolidated statement of financial position 13,388 11,969 6,144 31,501 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 63 - - 63 - Group's share of policyholder liabilities relating to joint ventures‡ - 2,059 1,041 3,100 Premiums: New business 144 883 334 1,361 In-force 743 664 498 1,905 887 1,547 832 3,266 Surrendersnote (e) (458) (1,043) (151) (1,652) Maturities/Deaths (284) (22) (124) (430) Net flows note (d) 145 482 557 1,184 Shareholders' transfers post tax (18) - - (18) Investment-related items and other movements note (f) (544) 341 208 5 Reclassification of Japan Life business as held for sale - (377) (593) (970) Acquisition of Thanachart lifenote (g) - - 487 487 Foreign exchange translation differences 707 370 215 1,292 At 30 June 2013 13,741 14,844 8,059 36,644 Comprising: - Policyholder liabilities on the consolidated statement of financial position 13,657 12,783 6,783 33,223 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 84 - - 84 - Group's share of policyholder liabilities relating to joint ventures‡ - 2,061 1,276 3,337 Average policyholder liability balances† Half year 2014 13,653 14,204 8,472 36,328 Half year 2013 13,522 14,625 7,846 35,993 * The £970 million liabilities of the Japan Life operation were removed from policyholder liabilities following its reclassification as held for sale at 30 June 2013, an outflow of £45 million on Actual Exchange Rate (AER) (£39 million on a Constant Exchange Rate (CER)) in respect of Japan were included in net flows up to that date, and hence included in the table above. Excluding the Japan Life operation the average shareholder-backed policyholder liabilities for half year 2013 was £21,473 million. No amounts are shown within the 2014 analysis above in respect of Japan. † Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the period and exclude unallocated surplus of with-profits funds. ‡ The Group's investment in joint ventures are accounted for on an equity method and the Group's share of the policyholder liabilities as shown above relate to the joint venture life business in China, India and of the Takaful business in Malaysia. Notes (a) Movements in the period have been translated at the average exchange rates for the period ended 30 June 2014. The closing balance has been translated at the closing spot rates as at 30 June 2014. Differences upon retranslation are included in foreign exchange translation differences. (b) Up until 31 December 2013 for the purposes of the presentation of unallocated surplus of with-profits within the statement of financial position, the Hong Kong branch balance was reported within the unallocated surplus of the PAC with-profits sub-fund of the UK insurance operations. On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance operations segment. (c) The policyholder liabilities of the Asia insurance operations of £34,076 million as shown in the table above is after deducting the intragroup reinsurance liabilities ceded by the UK insurance operations of £1,296 million to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities is £35,372 million. (d) Net flows increased 42 per cent on a constant exchange rate (actual exchange rate 28 per cent) from £1,069 million in half year 2013 to £1,514 million in half year 2014 predominantly reflecting higher premium income as the in-force book continues to grow together with improved surrender rates in the with-profits business (point e below). This has been offset by a higher level of maturities in our shareholder-backed business, which moved from £146 million in the first half of 2013 to £276 million in the first half of 2014, as products reach maturity dates in some markets. For definitions of constant exchange rate and actual exchange rate refer to note A1. (e) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 4.7 per cent in the first half of 2014, lower than the 5.6 per cent recorded in the first half of 2013. For with-profits business, surrenders, maturities and deaths have decreased from £742 million in half year 2013 to £377 million in half year 2014. The decrease was primarily as a result of an increased number of with-profits policies reaching their five year anniversary in the first half of 2013, the point at which some product features triggered, which was not repeated in 2014. The higher levels of maturities for shareholder-backed business, which increased from £146 million in the first half of 2013 to £276 million in the first half of 2014, reflects a greater number of contracts reaching maturity dates in some markets. (f) Investment-related items and other movements in the first half of 2014 primarily represents gains from equity markets in the unit-linked and other business portfolios in conjunction with unrealised profits on bonds within the with-profits funds following the fall in long-term bond yields. (g) The acquisition of Thanachart life reflects the liabilities acquired at the date of acquisition. C4.1(c) US insurance operations (i) Analysis of movements in policyholder liabilities A reconciliation of the movement in policyholder liabilities of US insurance operations from the beginning of the period to 30 June is as follows: US insurance operations Variable annuity separate account liabilities Fixed annuity, GIC and other business Total Half year 2014 movements £m £m £m At 1 January 2014 65,681 41,730 107,411 Premiums 6,591 1,844 8,435 Surrenders (1,720) (1,067) (2,787) Maturities/Deaths (276) (395) (671) Net flows note (b) 4,595 382 4,977 Transfers from general to separate account 708 (708) - Investment-related items and other movements note (c) 2,718 463 3,181 Foreign exchange translation differences note (a) (2,249) (1,311) (3,560) At 30 June 2014 71,453 40,556 112,009 Half year 2013 movements At 1 January 2013 49,298 42,963 92,261 Premiums 5,665 2,543 8,208 Surrenders (1,352) (1,068) (2,420) Maturities/Deaths (259) (361) (620) Net flows note (b) 4,054 1,114 5,168 Transfers from general to separate account 715 (715) - Investment-related items and other movements note (c) 2,323 (285) 2,038 Foreign exchange translation differences note (a) 3,664 3,084 6,748 At 30 June 2013 60,054 46,161 106,215 Average policyholder liability balances Half year 2014 68,567 41,143 109,710 Half year 2013 54,676 44,562 99,238 * Averages have been based on opening and closing balances, and adjusted for acquisitions, disposals and corporate transactions in the period. Notes (a) Movements in the period have been translated at an average rate of $1.67/£1.00 (30 June 2013: $1.54/£1.00). The closing balance has been translated at closing rate of $1.71/£1.00 (30 June 2013: $1.52/£1.00). Differences upon retranslation are included in foreign exchange translation differences. (b) Net flows in the first half of 2014 were £4,977 million compared with £5,168 million in the first half of 2013, with the decrease being driven by foreign exchange movements. On a constant exchange rate basis net flows increased by 4 per cent from £4,781 million in the first half of 2013 to £4,977 million in 2014, principally as a result of increased variable annuity new business volumes. For definitions of constant exchange rate and actual exchange rate refer to note A1. (c) Positive investment-related items and other movements in variable annuity separate account liabilities of £2,718 million for the first six months in 2014 represents positive separate account return mainly following the increase in the US equity market in the period. Fixed annuity, GIC and other business investment and other movements of £463 million primarily reflect the interest credited to the policyholders in the period. C4.1(d) UK insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the movement in policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the beginning of the period to 30 June is as follows: Shareholder-backed funds and subsidiaries SAIF and PAC with-profits sub-fund Unit-linked liabilities Annuity and other long-term business Total Half year 2014 movements £m £m £m £m At 1 January 2014 95,837 23,652 27,127 146,616 Comprising: - Policyholder liabilities 83,853 23,652 27,127 134,632 - Unallocated surplus of with-profits funds 11,984 - - 11,984 Reallocation of unallocated surplus for the domestication of the Hong Kong branchnote (a) (1,690) - - (1,690) Premiums 1,875 643 1,451 3,969 Surrenders (1,207) (1,010) (23) (2,240) Maturities/Deaths (2,346) (314) (887) (3,547) Net flows note (b) (1,678) (681) 541 (1,818) Shareholders' transfers post tax (106) - - (106) Switches (95) 95 - - Investment-related items and other movements note (c) 3,954 624 1,329 5,907 Foreign exchange translation differences (231) - - (231) At 30 June 2014 95,991 23,690 28,997 148,678 Comprising: - Policyholder liabilities 84,932 23,690 28,997 137,619 - Unallocated surplus of with-profits funds 11,059 - - 11,059 Half year 2013 movements At 1 January 2013 94,933 22,197 27,308 144,438 Comprising: - Policyholder liabilities 84,407 22,197 27,308 133,912 - Unallocated surplus of with-profits funds 10,526 - - 10,526 Premiums 1,790 1,428 662 3,880 Surrenders (1,063) (1,227) (25) (2,315) Maturities/Deaths (2,709) (326) (848) (3,883) Net flows note (b) (1,982) (125) (211) (2,318) Shareholders' transfers post tax (102) - - (102) Switches (104) 104 - - Investment-related items and other movements note (c) 1,614 1,067 (270) 2,411 Foreign exchange translation differences 211 - - 211 At 30 June 2013 94,570 23,243 26,827 144,640 Comprising: - Policyholder liabilities 83,220 23,243 26,827 133,290 - Unallocated surplus of with-profits funds 11,350 - - 11,350 Average policyholder liability balances Half year 2014 84,393 23,671 28,062 136,126 Half year 2013 83,814 22,720 27,067 133,601 * Averages have been based on opening and closing balances, and adjusted for acquisitions, disposals and corporate transactions in the period, and exclude unallocated surplus of with-profits funds. Notes (a) Up until 31 December 2013, for the purposes of the presentation of unallocated surplus of with-profits within the statement of financial position, the Hong Kong branch balance was reported within the unallocated surplus of the PAC with-profits sub-fund of the UK insurance operations. On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance operations segment. (b) Net outflows have improved from £2,318 million in the first half of 2013 to £1,818 million in the same period in 2014 primarily as a result of an increased number of bulk annuity transactions in the period leading to an improvement of £752 million in the net flows for annuity and other long term business. The levels of inflows/outflows for unit-linked business remains subject to annual variation as it is driven by corporate pension schemes with transfers in or out from only one or two schemes influencing the level of flows in the year. (c) Investment-related items and other movements of £5,907 million primarily reflect a fall in long-term bond yields and gains on investment properties in the first half of 2014. C5 Intangible assets C5.1 Intangible assets attributable to shareholders (a) Goodwill attributable to shareholders 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Cost At beginning of period 1,581 1,589 1,589 Exchange differences (3) 5 (8) At end of period 1,578 1,594 1,581 Aggregate impairment (120) (120) (120) Net book amount at end of period 1,458 1,474 1,461 Goodwill attributable to shareholders comprises: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec M&G 1,153 1,153 1,153 Other 305 321 308 1,458 1,474 1,461 Other goodwill represents amounts arising from the purchase of entities by the Asia and the US operations. These goodwill amounts by acquired operations are not individually material. The aggregate goodwill impairment of £120 million at 30 June 2014, 30 June 2013 and 31 December 2013 relates to the goodwill held in relation to the held for sale Japan Life business (see note D1), which was impaired in 2005. (b) Deferred acquisition costs and other intangible assets attributable to shareholders The deferred acquisition costs and other intangible assets attributable to shareholders comprise: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Deferred acquisition costs related to insurance contracts as classified under IFRS 4 4,612 4,851 4,684 Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 91 97 96 4,703 4,948 4,780 Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF) 62 85 67 Distribution rights and other intangibles 1,179 505 448 1,241 590 515 Total of deferred acquisition costs and other intangible assets 5,944 5,538 5,295 2014 £m 2013 £m Deferred acquisition costs Asia US UK Asset management PVIF and other intangibles† 30 Jun Total 30 Jun Total 31 Dec Total note Balance at beginning of period: 553 4,121 89 17 515 5,295 4,177 4,177 Reclassification of Japan Life as held for saleD1 - - - - - - (28) (28) Additions 93 374 - 2 745 1,214 757 1,230 Acquisition of subsidiaries - - - - 13 13 21 21 Amortisation to the income statement: Operating profit (55) (239) (6) (2) (20) (322) (311) (643) Non-operating profit - 107 - - (4) 103 239 228 (55) (132) (6) (2) (24) (219) (72) (415) Disposals - - - - - - - (1) Exchange differences and other movements (9) (130) - - (8) (147) 264 (187) Amortisation of DAC related to net unrealised valuation movements on Jackson's available-for-sale securities recognised within Other Comprehensive Income - (212) - - - (212) 419 498 Balance at end of period 582 4,021 83 17 1,241 5,944 5,538 5,295 † PVIF and other intangibles includes amounts in relation to software rights with additions of £10 million, amortisation of £10 million and exchange losses of £1 million and a balance at 30 June 2014 of £55 million. Note In March 2014 Prudential announced that the Group has entered into a new agreement expanding the term and geographic scope of our strategic pan-Asian bancassurance partnership with Standard Chartered PLC. The additions of £745 million for PVIF and other intangibles in half year 2014 includes £731 million representing the amount committed to secure this exclusive 15 year new bancassurance partnership agreement, commencing from 1 July 2014, which is not dependent on sales volume delivered through the renewed arrangements. This amount comprises payments already made during the period of US$850 million (£503 million) and a provision of £228 million for two equal committed payments due on 1 April 2015 and 1 April 2016, totalling US$400 million. The addition of £13 million for acquisition of subsidiaries for PVIF and other intangibles in half year 2014 is for the acquisition of Express Life of Ghana in April 2014. The addition of £21 million in 2013 is for the acquisition of Thanachart Life. US insurance operations Summary balances The DAC amount in respect of US insurance operations comprises amounts in respect of: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Variable annuity business 3,930 3,917 3,716 Other business 747 953 868 Cumulative shadow DAC (for unrealised gains/losses booked in Other Comprehensive Income) (656) (593) (463) Total DAC for US operations 4,021 4,277 4,121 * Consequent upon the positive unrealised valuation movement at half year 2014 of £1,023 million (30 June 2013: negative unrealised valuation movement of £1,707 million; 31 December 2013: negative unrealised valuation movement of £2,089 million), there is a debit of £212 million (30 June 2013: a credit of £419 million; 31 December 2013: a credit of £498 million) for altered 'shadow' DAC amortisation booked within other comprehensive income. These adjustments reflect movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 30 June 2014, the cumulative shadow DAC balance as shown in the table above was negative £656 million (30 June 2013: negative £593 million; 31 December 2013: negative £463 million). Overview of the deferral and amortisation of acquisition costs for Jackson Under IFRS 4, the Group applies 'grandfathered' US GAAP for measuring the insurance assets and liabilities of Jackson. In the case of Jackson term business, acquisition costs are deferred and amortised in line with expected profits. For annuity and interest-sensitive life business, acquisition costs are deferred and amortised in line with a combination of historical and future expected gross profits on the relevant contracts. For fixed and index annuity and interest-sensitive life business, the key assumption is the long-term spread between the earned rate on investments and the rate credited to policyholders, which is based on an annual spread analysis. Expected gross profits also depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges), all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis of actual mortality, lapse and expense experience is performed using internally developed experience studies. As with fixed and index annuity and interest-sensitive life business, acquisition costs for Jackson's variable annuity products are amortised in line with the emergence of profits. The measurement of the amortisation in part reflects current period fees (including those for guaranteed minimum death, income, or withdrawal benefits) earned on assets covering liabilities to policyholders, and the historical and expected level of future gross profits which depends on the assumed level of future fees, as well as components related to mortality, lapse, and expense. Mean reversion technique For variable annuity products, under US GAAP (as 'grandfathered' under IFRS 4) the projected gross profits, against which acquisition costs are amortised, reflect an assumed long-term level of returns on separate account investments which, for Jackson, is 7.4 per cent (half year 2013: 8.4 per cent; full year 2013: 7.4 per cent) after deduction of net external fund management fees. This is applied to the period end level of separate account assets after application of a mean reversion technique that removes a portion of the effect of levels of short-term variability in current market returns. Under the mean reversion technique applied by Jackson, the projected level of return for each of the next five years is adjusted from period to period so that in combination with the actual rates of return for the preceding two years and the current period, the 7.4 per cent (half year 2013: 8.4 per cent; full year 2013: 7.4 per cent) annual return is realised on average over the entire eight-year period. Projected returns after the mean reversion period revert back to the 7.4 per cent (half year 2013: 8.4 per cent; full year 2013: 7.4 per cent) assumption. However, to ensure that the methodology does not over anticipate a reversion to trend following adverse markets, the mean reversion technique has a cap and floor feature whereby the projected returns in each of the next five years can be no more than 15 per cent per annum and no less than 0 per cent per annum (both gross of asset management fees) in each year. Sensitivity of amortisation charge The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns. The amortisation charge to the operating profit in a reporting period comprises: i) A core amount that reflects a relatively stable proportion of underlying premiums or profit; and ii) An element of acceleration or deceleration arising from market movements differing from expectations. In periods where the cap and floor feature of the mean reversion technique are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect. Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result. In the first half of 2014, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of £10 million ( half year 2013: credit for decelerated amortisation of £20 million; full year 2013: credit for decelerated amortisation of £82 million). The first half of 2014 amount reflects the separate account performance of 6 per cent, which is higher than the assumed level for the year. As noted above, 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. It would take a significant movement in equity markets in 2014 (outside the range of negative 41 per cent to positive 21 per cent) for the mean reversion assumption to move outside the corridor. C6 Borrowings C6.1 Core structural borrowings of shareholder-financed operations 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Holding company operations: Perpetual subordinated capital securities (Innovative Tier 1)note (i) 2,067 2,327 2,133 Subordinated notes (Lower Tier 2)note (iv) 1,530 834 1,529 Subordinated debt total 3,597 3,161 3,662 Senior debt:note (ii) £300m 6.875% Bonds 2023 300 300 300 £250m 5.875% Bonds 2029 249 249 249 Holding company total 4,146 3,710 4,211 Prudential Capital bank loannote (iii) 275 275 275 Jackson US$250m 8.15% Surplus Notes 2027 (Lower Tier 2) 146 164 150 Total (per condensed consolidated statement of financial position)note (v) 4,567 4,149 4,636 Notes (i) These debt classifications are consistent with the treatment of capital for regulatory purposes, as defined in the Prudential Regulation Authority handbook. Tier 1 subordinated debt is entirely US$ denominated. The Group has designated all US$3.55 billion (30 Jun 2013: US$3.55 billion; 31 December: US$ 3.55 billion) of its Tier 1 subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the investment in Jackson. (ii) The senior debt ranks above subordinated debt in the event of liquidation. (iii) The Prudential Capital bank loan of £275 million has been made in two tranches: a £160 million loan maturing on 20 December 2017, currently drawn at a cost of 12 month £LIBOR plus 0.4 per cent and a £115 million loan also maturing on 20 December 2017 and currently drawn at a cost of 12 month £LIBOR plus 0.59 per cent. (iv) In December 2013, the Company issued core structural borrowings of £700 million Lower Tier 2 Subordinated notes primarily to UK institutional investors. The proceeds, net of costs, were £695 million. (v) The maturity profile, currency and interest rates applicable to the core structural borrowings of shareholder-financed operations of the Group are as detailed in note C6.1 of the Group's consolidated financial statements for the year ended 31 December 2013. C6.2 Other borrowings (a) Operational borrowings attributable to shareholder-financed operationsnote (i) 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Borrowings in respect of short-term fixed income securities programmes 1,950 2,422 1,933 Non-recourse borrowings of US operations 17 20 18 Other borrowings note (ii) 276 88 201 Total 2,243 2,530 2,152 Notes (i) In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in April 2014 which will mature in October 2014. These Notes have been wholly subscribed by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued in October 2008 and have been reissued upon their maturity. (ii) Other borrowings mainly include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson. In addition, other borrowings include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall. (b) Borrowings attributable to with-profits operations 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Non-recourse borrowings of consolidated investment funds 667 727 691 £100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc 100 100 100 Other borrowings (predominantly obligations under finance leases) 97 97 104 Total 864 924 895 C7 Tax assets and liabilities C7.1 Deferred tax The statement of financial position contains the following deferred tax assets and liabilities in relation to: 2014 £m 2013 £m 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec Deferred tax assets Deferred tax liabilities Unrealised losses or gains on investments 116 261 315 (1,611) (1,610) (1,450) Balances relating to investment and insurance contracts 5 10 8 (469) (466) (451) Short-term timing differences 2,001 2,283 2,050 (1,748) (2,019) (1,861) Capital allowances 9 16 10 (27) (7) (16) Unused deferred tax losses 42 67 29 - - - Total 2,173 2,637 2,412 (3,855) (4,102) (3,778) Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted. The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. Accordingly, for the 2014 half year results and financial position at 30 June 2014 the possible tax benefit of approximately £123 million (30 June 2013: £164 million; 31 December: £127 million), which may arise from capital losses valued at approximately £0.6 billion (30 June 2013: £0.8 billion; 31 December 2013: £0.6 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £47 million (30 June 2013: £82 million; 31 December 2013: £61 million), which may arise from trading tax losses and other potential temporary differences totalling £0.3 billion (30 June 2013: £0.4 billion; 31 December 2013: £0.4 billion) is sufficiently uncertain that it has not been recognised. Of these, losses of £39 million will expire within the next seven years. Of the remaining losses £0.6 million will expire within 20 years and the rest have no expiry date. The table that follows provides a breakdown of the recognised deferred tax assets set out in the table above for both the short-term timing differences and unused tax losses split by business unit. The table also shows the period of estimated recoverability for each respective business unit. For these and each category of deferred tax asset recognised their recoverability against forecast taxable profits is not significantly impacted by any current proposed changes to future accounting standards. Short-term timing differences Unused tax losses 30 Jun 2014 £m Expected period of recoverability 30 Jun 2014 £m Expected period of recoverability Asia 26 1 to 3 years 35 3 to 5 years Jackson 1,706 With run-off of in-force book - - UK long-term business 128 1 to 10 years - - Other 141 1 to 10 years 7 1 to 3 years Total 2,001 42 Under IAS 12, 'Income Taxes', deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on the tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting periods. The reduction in the UK corporation tax rate to 21 per cent from 1 April 2014 and a further reduction to 20 per cent from 1 April 2015 was substantively enacted on 2 July 2013 and therefore was reflected in the deferred tax balances as at 31 December 2013 and as at 30 June 2014. C8 Defined benefit pension schemes (a) Summary and background information The Group asset/liability in respect of defined benefit pension schemes is as follows: 2014 £m 2013 £m PSPS Other schemes 30 Jun Total 30 Jun Total 31 Dec Total Underlying economic surplus note (c) 745 (54) 691 894 646 Less: unrecognised surplus (623) - (623) (821) (602) Economic surplus (deficit) (including investment in Prudential insurance policies)note (c) 122 (54) 68 73 44 Attributable to: PAC with-profits fund 85 (52) 33 42 29 Shareholder-backed operations 37 (2) 35 31 15 Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies - (122) (122) (172) (114) IAS 19 pension asset (liability) on the Group statement of financial position 122 (176) (54) (99) (70) * At 30 June 2014, the PSPS pension asset of £122 million (30 June 2013: £118 million; 31 December 2013: £124 million) and the other schemes' pension liabilities of £176 million (30 June 2013: £217 million; 31 December 2013: £194 million) were included within 'Other debtors' and 'Provisions' respectively on the consolidated statement of financial position. The Group's businesses operate a number of pension schemes. The specific features of these plans vary in accordance with the regulations of the country in which the employees are located, although they are, in general, funded by the Group and based either on a cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defined benefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). PSPS accounts for 84 per cent (30 June 2013: 85 per cent; 31 December 2013: 84 per cent) of the underlying scheme liabilities of the Group's defined benefit schemes. The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable and M&G. In addition, there are two small defined benefit schemes in Taiwan which have negligible deficits. Triennial actuarial valuations Defined benefit schemes in the UK are generally required to be subject to full actuarial valuations every three years in order to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds. The last completed actuarial valuation of PSPS was as at 5 April 2011. This valuation was finalised in the first half of 2012 and demonstrated the scheme to be 111 per cent funded by reference to the Scheme Solvency Target that forms the basis of the scheme's funding objective. Based on this valuation, future contributions into the scheme were reduced to the minimum level of contributions required under the scheme rules effective from July 2012. Excluding expenses, the contributions are now payable at approximately £6 million per annum for ongoing service of active members of the scheme. No deficit or other funding is required. Deficit funding for PSPS, where applicable, as applied prior to 2012, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations following detailed consideration in 2005 of the sourcing of previous contributions. Employer contributions for ongoing service of current employees are apportioned in the ratio relevant to current activity. The last completed actuarial valuation of the Scottish Amicable Staff Pension Scheme (SASPS) was as at 31 March 2011. This valuation was finalised in the second half of 2012 and demonstrated the scheme to be 85 per cent funded. Based on this valuation, it was agreed with the Trustees that the existing level of deficit funding of £13.1 million per annum continues to be paid into the scheme until 31 December 2018, to eliminate the actuarial deficit. The deficit funding will be reviewed every three years at subsequent valuations. The last completed actuarial valuation of the M&G Group Pension Scheme (M&GGPS) was as at 31 December 2011. This valuation was finalised in the second half of 2012 and demonstrated the scheme to be 83 per cent funded. Based on this valuation, deficit funding amounts designed to eliminate the actuarial deficit over a three year period are being made from January 2013 of £18.6 million per annum for the first two years and £9.3 million in the third year. The next triennial valuation for the PSPS and SASPS as at 5 April 2014 and 31 March 2014 respectively are currently in progress. The next triennial valuation for the M&GGPS is as at 31 December 2014. Summary economic and IAS 19 financial positions Under the IAS 19 'Employee Benefits' valuation basis, the Group applies IFRIC 14, 'IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction'. Under IFRIC 14, a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service, which have been substantively enacted or contractually agreed. Further, the IFRS financial position recorded, reflects the higher of any underlying IAS 19 deficit and any obligation for committed deficit funding where applicable. For PSPS, the Group does not have an unconditional right of refund to any surplus of the scheme. The underlying IAS 19 surplus for PSPS at 30 June 2014 was £745 million (30 June 2013: £939 million; 31 December 2013: £726 million) of which reflecting the arrangements under the scheme rules only a portion of the surplus, being £122 million (30 June 2013: £118 million; 31 December 2013: £124 million), is recognised as recoverable. The £122 million represents the present value of the economic benefit to the Company from the difference between future ongoing contributions to the scheme and estimated accrued cost of service. Of this amount, £85 million has been allocated to the PAC with-profits fund and £37 million was allocated to the shareholders' fund (30 June 2013: £83 million; 31 December 2013: £37 million). The IAS 19 deficit of the Scottish Amicable Pension Scheme at 31 December 2013 was a deficit of £105 million (30 June 2013: £82 million; 31 December 2013: £115 million) and has been allocated approximately 50 per cent to the PAC with-profits fund and 50 per cent to the shareholders' fund. The IAS 19 surplus of the M&GGPS on an economic basis at 30 June 2014 was £51 million (30 June 2013: surplus of £37 million; 31 December 2013: surplus of £36 million) and is wholly attributable to shareholders. The underlying position on an economic basis reflects the assets (including investments in Prudential insurance policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. As at 30 June 2014, the M&GGPS has invested £122 million in Prudential insurance policies (30 June 2013: £172 million; 31 December 2013: £114 million). After excluding these investments that are offset against liabilities to policyholders, the IAS 19 basis position of the M&GGPS is a deficit of £71 million (30 June 2013: £135 million; 31 December 2013: £78 million). (b) Assumptions The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the periods ended 30 June 2014, 30 June 2013 and 31 December 2013 were as follows: 2014 % 2013 % 2013 % 30 Jun 30 Jun 31 Dec Discount rate 4.2 4.6 4.4 Rate of increase in salaries 3.2 3.2 3.3 Rate of inflation Retail prices index (RPI) 3.2 3.2 3.3 Consumer prices index (CPI) 2.2 2.2 2.3 Rate of increase of pensions in payment for inflation: PSPS: Guaranteed (maximum 5%) 2.5 2.5 2.5 Guaranteed (maximum 2.5%) 2.5 2.5 2.5 Discretionary 2.5 2.5 2.5 Other schemes 3.2 3.2 3.3 * The discount rate has been determined by reference to an 'AA' corporate bond index, adjusted where applicable, to allow for the difference in duration between the index and the pension liabilities. ** The rate of inflation reflects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes. The calculations are based on current actuarially calculated mortality estimates with a specific allowance made for future improvements in mortality. The specific allowance made is in line with a custom calibration and has been updated in half year 2014 to reflect the 2012 mortality model from the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries (CMI). The tables used for PSPS immediate annuities in payment at 30 June 2014 were: Male: 114.0 per cent PNMA00 with improvements in line with a custom calibration of the CMI's 2012 mortality model, with a long-term mortality improvement rate of 1.75 per cent per annum; and Female: 108.5 per cent PNFA00 with improvements in line with a custom calibration of the CMI's 2012 mortality model, with a long-term mortality improvement rate of 1.25 per cent per annum. The tables used for PSPS immediate annuities in payment at 30 June 2013 and 31 December 2013 were: Male: 112.0 per cent PNMA00 with improvements in line with a custom calibration of the CMI's 2011 mortality model, with a long-term mortality improvement rate of 1.75 per cent per annum; and Female: 108.5 per cent PNFA00 with improvements in line with a custom calibration of the CMI's 2011 mortality model, with a long-term mortality improvement rate of 1.25 per cent per annum. Using external actuarial advice provided by the scheme actuaries being Towers Watson for the valuation of PSPS, Xafinity Consulting for SASPS and Aon Hewitt Limited for the M&GGPS, the most recent full valuations have been updated to 30 June 2014, applying the principles prescribed by IAS 19. (c) Estimated pension scheme surpluses and deficits The underlying pension position on an economic basis reflects the assets (including investments in Prudential policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. The IAS 19 basis excludes the investments in Prudential policies. At 30 June 2014, the investments in Prudential insurance policies comprise £142 million (30 June 2013: £131 million; 31 December 2013: £143 million) for PSPS and £122 million (30 June 2013: £172 million; 31 December 2013: £114 million) for the M&GGPS. On consolidation as required under IFRS, the investments are eliminated against policyholder liabilities of UK insurance operations, so that the formal IAS 19 position for the scheme in isolation excludes these items. This treatment applies to the M&GGPS investments. However, as a substantial portion of the Company's interest in the underlying surplus of PSPS is not recognised, the adjustment is not necessary for the PSPS investments. Movements on the pension scheme surplus (deficit) determined on the economic basis are as follows, with the effect of the application of IFRIC 14 being shown separately: Half year 2014 £m (Charge) credit to income statement or other comprehensive income Surplus (deficit) in schemes at 1 January 2014 Operating results (based on longer-term investment returns) Actuarial and other gains and losses Contributions paid Surplus (deficit) in schemes at 30 June 2014 All schemes Underlying position (without the effect of IFRIC 14) Surplus 646 (4) 21 28 691 Less: amount attributable to PAC with-profits fund (457) (2) (10) (8) (477) Shareholders' share: Gross of tax surplus (deficit) 189 (6) 11 20 214 Related tax (38) 1 (2) (4) (43) Net of shareholders' tax 151 (5) 9 16 171 Application of IFRIC 14 for the derecognition of PSPS surplus Derecognition of surplus (602) (13) (8) - (623) Less: amount attributable to PAC with-profits fund 428 9 7 - 444 Shareholders' share: Gross of tax surplus (deficit) (174) (4) (1) - (179) Related tax 35 1 - - 36 Net of shareholders' tax (139) (3) (1) - (143) With the effect of IFRIC 14 Surplus (deficit) 44 (17) 13 28 68 Less: amount attributable to PAC with-profits fund (29) 7 (3) (8) (33) Shareholders' share: Gross of tax surplus (deficit) 15 (10) 10 20 35 Related tax (3) 2 (2) (4) (7) Net of shareholders' tax 12 (8) 8 16 28 Underlying investments and liabilities of the schemes On the 'economic basis', after including the underlying assets represented by the investments in Prudential insurance policies as scheme assets, the plans' net assets at 30 June 2014 comprise the following investments and liabilities: 2014 2013 PSPS Other schemes 30 Jun Total 30 Jun Total 31 Dec Total £m £m £m % £m £m Equities: UK 132 79 211 3 204 209 Overseas 10 312 322 5 280 329 Bonds: Government 4,420 339 4,759 67 4,854 4,599 Corporate 873 114 987 14 643 822 Asset-backed securities 71 23 94 1 65 62 Derivatives 127 4 131 2 208 97 Properties 44 53 97 1 129 115 Other assets 516 25 541 7 567 711 Total value of assets 6,193 949 7,142 100 6,950 6,944 * The 30 June 2013 comparatives have been reclassified to align to the 30 June 2014 and 31 December 2013's asset categorisation. (d) Sensitivity of the pension scheme liabilities to key variables The total underlying Group pension scheme liabilities of £6,451 million (30 June 2013: £6,056 million; 31 December 2013: £6,298 million) comprise £5,448 million (30 June 2013: £5,158 million; 31 December 2013: £5,316 million) for PSPS and £1,003 million (30 June 2013: £898 million; 31 December 2013: £982 million) for the other schemes. The table below shows the sensitivity of the underlying PSPS and the other scheme liabilities at 30 June 2014, 30 June 2013 and 31 December 2013 to changes in discount rate, inflation rates and mortality rates. The sensitivity information below is based on the core scheme liabilities and assumptions at the balance sheet date. The sensitivity is calculated based on a change in one assumption with all other assumptions being held constant. As such, interdependencies between the assumptions are excluded. The sensitivity of the underlying pension scheme liabilities to changes in discount, inflation and mortality rates as shown below does not directly equate to the impact on the profit or loss and equity attributable to shareholders due to the effect of the application of IFRIC 14 on PSPS and the allocation of a share of the interest in financial position of the PSPS and SASPS schemes to the PAC with-profits fund as described above. The sensitivity to the changes in the key variables as shown in the table below has no significant impact on the pension costs included in the Group's operating results. This is due to the pension costs charged in each of the periods presented being derived largely from market conditions at the beginning of the period. After applying IFRIC 14 and to the extent attributable to shareholders, any residual impact from the changes to these variables is reflected as actuarial gains and losses on defined benefit pension schemes within other comprehensive income. Assumption applied Sensitivity change in assumption Impact of sensitivity on scheme liabilities on IAS 19 basis 2014 2013 2014 2013 30 Jun 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec Discount rate 4.2% 4.6% 4.4% Decrease by 0.2% Increase in scheme liabilities by: PSPS 3.3% 3.4% 3.3% Other schemes 5.0% 5.0% 5.1% Discount rate 4.2% 4.6% 4.4% Increase by 0.2% Decrease in scheme liabilities by: PSPS 3.1% 3.2% 3.1% Other schemes 4.7% 4.7% 4.7% Rate of inflation RPI: 3.2% 3.2% 3.3% RPI: Decrease by 0.2% Decrease in scheme liabilities by: CPI: 2.2% 2.2% 2.3% CPI: Decrease by 0.2% PSPS 0.7% 0.7% 0.7% with consequent reduction Other schemes 4.1% 4.3% 4.6% in salary increases Mortality rate Increase life expectancy Increase in scheme by 1 year liabilities by: PSPS 3.0% 2.6% 2.7% Other schemes 3.0% 2.5% 2.7% C9 Share capital, share premium and own shares 30 Jun 2014 30 Jun 2013 31 Dec 2013 Number of ordinary shares Share capital Share premium Number of ordinary shares Share capital Share premium Number of ordinary shares Share capital Share premium £m £m £m £m £m £m Issued shares of 5p each fully paid: At 1 January 2,560,381,736 128 1,895 2,557,242,352 128 1,889 2,557,242,352 128 1,889 Shares issued under share-based schemes 5,845,737 - 8 2,036,258 - 1 3,139,384 - 6 At end of period 2,566,227,473 128 1,903 2,559,278,610 128 1,890 2,560,381,736 128 1,895 Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account. At 30 June 2014, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows: Number of shares to subscribe for Share price range Exercisable by year from to 30 June 2014 7,617,023 288p 901p 2019 30 June 2013 9,014,837 288p 629p 2018 31 December 2013 10,233,986 288p 901p 2019 Transactions by Prudential plc and its subsidiaries in Prudential plc shares The Group buys and sells Prudential plc shares ('own shares') either in relation to its employee share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of £180 million as at 30 June 2014 (30 June 2013: £71 million; 31 December 2013: £141 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2014, 9.5 million (30 June 2013: 4.2 million; 31 December 2013: 7.1 million) Prudential plc shares with a market value of £127.8 million (30 June 2013: £45 million; 31 December 2013: £94.5 million) were held in such trusts all of which are for employee incentive plans. The maximum number of shares held in half year 2014 was 9.5 million which was in May 2014. The Company purchased the following number of shares in respect of employee incentive plans. Number of shares purchased (in millions) Cost £m Half year 2014 6.2 81.9 Half year 2013 2.9 31.4 Full year 2013 4.4 53.8 The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 30 June 2014 was 7.5 million (30 June 2013: 4.2 million; 31 December 2013: 7.1 million) and the cost of acquiring these shares of £67 million (30 June 2013: £26 million; 31 December 2013: £60 million) is included in the cost of own shares. The market value of these shares as at 30 June 2014 was £100 million (30 June 2013: £46 million; 31 December 2013: £95 million). During 2014, these funds made net additions of 405,978 Prudential shares (30 June 2013: net disposals of 268,411; 31 December 2013: net additions of 2,629,816) for a net increase of £6.5 million to book cost (30 June 2013: net decrease of £2.6 million; 31 December 2013: net increase of £33.1 million). All share transactions were made on an exchange other than the Stock Exchange of Hong Kong. Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2014 or 2013. D OTHER NOTES D1 Held for sale Japan Life business The Group's closed book life insurance business in Japan, PCA Life Insurance Company Limited has been classified as held for sale in these condensed consolidated financial statements in accordance with IFRS 5, 'Non-current assets held for sale and discontinued operations'. This classification reflects the expected disposal of the business on which an agreement to sell was reached in July 2013. The sale has yet to be completed. The assets and liabilities of the Japan Life business classified as held for sale on the statement of financial position as at 30 June 2014 are as follows: 2014 £m 2013 £m 30 Jun 30 Jun 31 Dec Assets Investments 934 1,095 956 Other assets 72 119 80 1,006 1,214 1,036 Adjustment for remeasurement of the carrying value to fair value less costs to sell (131) (135) (120) Assets held for sale 875 1,079 916 Liabilities Policyholder liabilities 783 970 814 Other liabilities 45 56 54 Liabilities held for sale 828 1,026 868 Net assets 47 53 48 The remeasurement of the carrying value of the Japan Life business on classification as held for sale resulted in a charge of £(11) million (half year 2013: £(135) million; full year 2013: £(120) million) as shown in the income statement. In the supplementary analysis of profit of the Group as shown in note B1.1, those amounts are included within "Loss attaching to held for sale Japan Life business," together with the income, including short-term value movements on investments, of the business. D2 Domestication of the Hong Kong branch business On 1 January 2014, following consultation with policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. On an IFRS basis, approximately £12.6 billion of assets, £12.3 billion of liabilities (including policyholder liabilities of £10.2 billion and £1.7 billion of unallocated surplus) and £0.3 billion of shareholders' funds (for the excess assets of the transferred non-participating business) have been transferred. The costs of enabling the domestication in the first half of 2014 were £8 million (full year 2013: £35 million). Within the Group's supplementary analysis of profit, these costs have been presented as a separate category of items excluded from operating profit based on longer-term investment returns. D3 Contingencies and related obligations The Group is involved in various litigation and regulatory issues. Whilst the outcome of such matters cannot be predicted with certainty, Prudential believes that the ultimate outcome of such litigation and regulatory issues will not have a material adverse effect on the Group's financial condition, results of operations or cash flows. There have been no material changes to the Group's contingencies and related obligations in the six month period ended 30 June 2014. D4 Post balance sheet events Interim dividend The 2014 interim dividend approved by the Board of Directors after 30 June 2014 is as described in note B7. D5 Related party transactions There were no transactions with related parties during the six months ended 30 June 2014 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 2013. Statement of directors' responsibilities The directors 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 and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 2014, 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 and Transparency Rules, being related party transactions that have taken place during the six months ended 30 June 2014 and that have materially affected the financial position or the performance of the Group during the period and changes in the related party transactions described in the Group's consolidated financial statements for the year ended 31 December 2013. The directors of Prudential plc as at 11 August are as listed in the Group's 2013 Annual Report except for the addition of Pierre-Olivier Bouée and the stepping down of John Foley in the first six months of 2014. Independent review report to Prudential plc Introduction We have been engaged by the company to review the International Financial Reporting Standards (IFRS) basis financial information in the Half Year Financial Report for the six months ended 30 June 2014 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. 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 2014 which comprises the Post-tax Operating Profit Based on Longer-Term Investment Returns, the Post-tax Summarised Consolidated Income Statement, the Movement in Shareholders' Equity, the Summary Statement of Financial Position and the related explanatory notes and Total Insurance and Investment Products New Business information. We have read the other information contained in the Half Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the IFRS basis financial information or the EEV basis supplementary financial information. 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 Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA") and also to provide a review conclusion to the company on the EEV basis supplementary financial information. Our review of the IFRS basis financial information has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. Our review of the EEV basis supplementary financial information has been undertaken so that we might state to the company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The Half Year Financial Report, including the IFRS basis financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half Year Financial Report in accordance with the DTR of the UK FCA. The directors have accepted responsibility for preparing the EEV basis supplementary financial information in accordance with the European Embedded Value Principles issued in May 2004 by the European CFO Forum ('the EEV Principles') and for determining the methodology and assumptions used in the application of those principles. The annual IFRS basis financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union ('EU'). The IFRS basis financial information included in this Half Year Financial Report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. The EEV basis supplementary financial information has been prepared in accordance with the EEV principles using the methodology and assumptions set out in notes 1 and 15 to the EEV basis supplementary financial information. The EEV basis supplementary financial information should be read in conjunction with the IFRS basis financial information. Our responsibility Our responsibility is to express to the company a conclusion on the IFRS basis financial information in the Half Year Financial Report and the EEV basis supplementary financial information based on our reviews, as set out in our engagement letter with you dated 9 June 2014. 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. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) 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. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the IFRS basis financial information in the Half Year Financial Report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA. 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 2014 is not prepared, in all material respects, in accordance with the EEV Principles, using the methodology and assumptions set out in notes 1 and 15 to the EEV basis supplementary financial information. Rees Aronson For and on behalf of KPMG LLP Chartered Accountants London 11 August 2014 Additional Financial Information (IFRS) I Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver This schedule classifies the Group's pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profits, using the following categories: i Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new business) and amounts credited to certain policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets. ii Fee income represents profits driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses. iii With-profits business represents the gross of tax shareholders' transfer from the with-profits fund for the period. iv Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity. v Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses. vi Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance as well as items that are more appropriately included in other source of earnings lines (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate). vii DAC adjustments comprises DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business. Analysis of pre-tax IFRS operating profit by source Half year 2014 £m Asia US UK Unallocated Total note (ii) Spread income 62 364 131 - 557 Fee income 74 658 32 - 764 With-profits 15 - 135 - 150 Insurance margin 314 328 38 - 680 Margin on revenues 724 - 84 - 808 Expenses: Acquisition costs (473) (477) (50) - (1,000) Administration expenses (304) (333) (64) - (701) DAC adjustments 40 135 (6) - 169 Expected return on shareholder assets 31 11 74 - 116 Long-term business operating profit 483 686 374 - 1,543 Asset management operating profit 42 (5) 249 - 286 GI commission - - 12 - 12 Other income and expenditurenote (i) - - - (320) (320) Total operating profit based on longer-term investment returnsnote (ii) 525 681 635 (320) 1,521 Half year 2013 £m AER Asia US UK Unallocated Total note (ii) Spread income 56 377 102 - 535 Fee income 80 554 33 - 667 With-profits 22 - 133 - 155 Insurance margin 303 262 48 - 613 Margin on revenues 778 - 80 858 Expenses: Acquisition costs (502) (465) (54) - (1,021) Administration expenses (300) (323) (59) - (682) DAC adjustments 9 173 (7) - 175 Expected return on shareholder assets 28 4 65 - 97 Long-term business operating profit 474 582 341 - 1,397 Asset management operating profit 38 34 225 - 297 GI commission - - 15 - 15 Other income and expenditurenote (i) - - - (294) (294) Total operating profit based on longer-term investment returnsnote (ii) 512 616 581 (294) 1,415 * The additional financial information is not covered by the KPMG independent review opinion. Half year 2013 £m CER Asia US UK Unallocated Total note (ii) Spread income 49 348 102 - 499 Fee income 69 513 33 - 615 With-profits 20 - 133 - 153 Insurance margin 261 242 48 - 551 Margin on revenues 669 - 80 - 749 Expenses: Acquisition costs (433) (430) (54) - (917) Administration expenses (260) (299) (59) - (618) DAC adjustments 8 160 (7) - 161 Expected return on shareholder assets 23 4 65 - 92 Long-term business operating profit 406 538 341 - 1,285 Asset management operating profit 34 31 225 - 290 GI commission - - 15 - 15 Other income and expenditurenote (i) - - - (294) (294) Total operating profit based on longer-term investment returnsnote (ii) 440 569 581 (294) 1,296 Notes (i) Including restructuring and Solvency II implementation costs. (ii) The profit analysis above excludes the results of the life insurance business of Japan which is held for sale. Margin analysis of long-term insurance business - Group The following analysis expresses certain of the Group's sources of operating profit as a margin of policyholder liabilities or other suitable driver. Details on the calculation of the Group's average policyholder liability balances are given in note (iii). Total Half year 2014 Half year 2013 AER Half year 2013 CER note (iv) note (iv) notes (iv),(v) Average Average Average Profit Liability Margin Profit Liability Margin Profit Liability Margin note (iii) note (ii) note (iii) note (ii) note (iii) note (ii) Long-term business £m £m bps £m £m bps £m £m bps Spread income 557 64,741 172 535 65,424 164 499 62,492 160 Fee income 764 106,052 144 667 93,512 143 615 87,678 140 With-profits 150 98,046 31 155 97,336 32 153 96,352 32 Insurance margin 680 613 551 Margin on revenues 808 858 749 Expenses: Acquisition costsnote (i) (1,000) 2,300 (43)% (1,021) 2,162 (47)% (917) 1,974 (46)% Administration expenses (701) 178,649 (78) (682) 166,130 (82) (618) 156,839 (79) DAC adjustments 169 175 161 Expected return on shareholder assets 116 97 92 Operating profit 1,543 1,397 1,285 Notes (i) The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business. (ii) Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. The margin is on an annualised basis in which half year profits are annualised by multiplying by two. (iii) For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period. The calculation of average liabilities for Jackson is derived from month end balances throughout the period as opposed to opening and closing balances only. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. In addition, for REALIC (acquired in 2012), which are included in the average liability to calculate the administration expense margin, the calculation excludes the liabilities reinsured to third parties prior to the acquisition by Jackson. Average liabilities are adjusted for business acquisitions and disposals in the period. (iv) The half year 2014 and half year 2013 analyses exclude the results of the held for sale life insurance business of Japan in both the individual profit and average liability amounts shown in the table above. (v) The half year 2013 comparative information has been presented at Actual Exchange Rate (AER) and Constant Exchange Rates (CER) so as to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia CER average liability calculations the policyholder liabilities have been translated using current period opening and closing exchange rates. For the US CER average liability calculations the policyholder liabilities have been translated at the current period month end closing exchange rates. See also Note A1. Margin analysis of long-term insurance business - Asia Asia Half year 2014 Half year 2013 AER Half year 2013 CER note (ii) note (ii) notes (ii),(v) Average Average Average Profit Liability Margin Profit Liability Margin Profit Liability Margin note (iii) (v) note (iii) note (iii) Long-term business £m £m bps £m £m bps £m £m bps Spread income 62 8,472 146 56 7,220 155 49 6,653 147 Fee income 74 14,204 104 80 14,253 112 69 12,772 108 With-profits 15 13,653 22 22 13,522 33 20 12,538 32 Insurance margin 314 303 261 Margin on revenues 724 778 669 Expenses: Acquisition costsnote (i) (473) 996 (47)% (502) 1,010 (50)% (433) 882 (49)% Administration expenses (304) 22,676 (268) (300) 21,473 (279) (260) 19,425 (268) DAC adjustmentsnote (iv) 40 9 8 Expected return on shareholder assets 31 28 23 Operating profit 483 474 406 Notes (i) The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business. (ii) The analysis excludes the results of the life insurance business of Japan in both the individual profit and the average liability amounts for both 2013 and 2014. (iii) Opening and closing policyholder liabilities, adjusted for corporate transactions, have been used to derive an average balance for the year, as a proxy for average balances throughout the year. (iv) The DAC adjustment contains £2 million in respect of joint ventures in half year 2014. (v) Constant Exchange Rates (CER) results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at current period average rates and for the average liability calculations the policyholder liability balances have been translated at the current period opening and closing exchange rates. Analysis of Asia operating profit drivers • Spread income has increased by 27 per cent at constant exchange rates (AER 11 per cent) to £62 million in half year 2014, predominantly reflecting the growth of the Asian non-linked policyholder liabilities. • Fee income has increased by 7 per cent at constant exchange rates (AER 8 per cent decrease) to £74 million in half year 2014, broadly in line with the increase in movement in average unit-linked liabilities. • Insurance margin has increased by 20 per cent at constant exchange rates (AER 4 per cent) to £314 million in half year 2014 predominantly reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products and management action on claims controls and pricing. Half year 2014 insurance margin includes non-recurring items of £3 million (half year 2013: £23 million at actual exchange rates; £19 million at constant exchange rates). • Excluding the adverse impact of currency fluctuations, margin on revenues has increased by £55 million from £669 million in half year 2013 to £724 million in half year 2014 primarily reflecting higher premium income recognised in the period. • Acquisition costs have increased by 9 per cent at constant exchange rates (AER 6 per cent decrease) to £473 million in half year 2014, compared to the 13 per cent increase in sales (AER 1 per cent decrease), resulting in a modest decrease in the acquisition costs ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE. If with-profits sales were excluded from the denominator the acquisition cost ratio would become 68 per cent (half year 2013: 67 per cent at constant exchange rates). The small increase being the result of changes to product and country mix. • Administration expenseshave increased by 17 per cent at constant exchange rates (AER 1 per cent) to £304 million in half year 2014 as the business continues to invest in developing its infrastructure to keep pace with the growth in the business. On constant exchange rates the administration expense ratio remains in line with prior period at 268 basis points. • Expected return on shareholder assets has increased from £28 million in half year 2013 to £31 million in half year 2014 primarily due to higher income from increased shareholder assets offset by the adverse effects of currency translation. Margin analysis of long-term insurance business - US US Half year 2014 Half year 2013 AER Half year 2013 CER note (iii) Average Average Average Profit Liability Margin Profit Liability Margin Profit Liability Margin note (ii) note (ii) note (ii) Long-term business £m £m bps £m £m bps £m £m bps Spread income 364 28,207 258 377 31,137 242 348 28,772 242 Fee income 658 68,177 193 554 56,539 196 513 52,186 197 Insurance margin 328 262 242 Expenses Acquisition costsnote (i) (477) 871 (55)% (465) 797 (58)% (430) 737 (58)% Administration expenses (333) 104,240 (64) (323) 94,870 (68) (299) 87,627 (68) DAC adjustments 135 173 160 Expected return on shareholder assets 11 4 4 Operating profit 686 582 538 Notes (i) The ratio for acquisition costs is calculated as a percentage of APE sales. (ii) The calculation of average liabilities for Jackson is derived from month end balances throughout the period as opposed to opening and closing balances only. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average liabilities used to calculate the administrative expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson. (iii) Constant Exchange Rates (CER) results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at the current period average rate and for the average liability calculations the policyholder liability balances have been translated at the current period month end-closing exchange rates. Analysis of US operating profit drivers: • Spread income has increased by 5 per cent at constant exchange rates (AER reduced by 3 per cent) to £364 million in first half 2014. The reported spread margin increased to 258 basis points from 242 basis points in the first half of 2013, primarily as a result of lower crediting rates. In addition, spread income benefited from swap transactions previously entered into to more closely match the overall asset and liability duration. Excluding this effect, the spread margin would have been 185 basis points (half year 2013: 183 basis points on both AER and CER bases). • Fee income has increased by 28 per cent at constant exchange rates (AER 19 per cent) to £658 million during the first half of 2014, due to higher average separate account balances resulting from positive net cash flows from variable annuity business and market appreciation over the past 12 months. Fee income margin has remained broadly consistent with the prior period at 193 basis points (half year 2013 at 197 basis points at constant exchange rates; 196 basis points at actual exchange rates), with the decrease primarily attributable to a change in the mix of business. • Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Positive net flows from variable annuity business with life contingent and other guarantee fees, coupled with a benefit from re-pricing actions, have increased the insurance margin to £328 million in the first half of 2014. • Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, have increased to £477 million reflecting higher volumes. As a percentage of APE, acquisition costs have decreased to 55 per cent for half year 2014, compared to 58 per cent in half year 2013 due to the continued shift towards producers selecting asset-based commissions which are treated as an administrative expense in this analysis, rather than front end commissions. • Administration expenses increased to £333 million during the first half of 2014 compared to £299 million for the first half of 2013 at a constant exchange rate (AER £323 million) primarily as a result of higher asset based commissions paid on the larger 2014 separate account balance. These are paid on policy anniversary dates and are treated as an administration expense in this analysis. Excluding these trail commissions, the resulting administration expense ratio would be lower at 37 basis points from 45 basis points (on both constant and actual exchange rate bases) in the first half of 2013, reflecting the benefits of operational leverage. • DAC adjustments decreased to £135 million during the first half of 2014 compared to £160 million at a constant exchange rate (AER £173 million) during the first half of 2013. This reflects the interplay between higher DAC amortisation charges on costs previously deferred (reflecting business growth), which is outpacing the rate at which current period acquisition costs are being deferred. Certain acquisition costs are not fully deferrable, resulting in new business strain of £103 million for the first half of 2014 (half year 2013: £86 million on constant exchange rate basis; £93 million on actual exchange rate basis) mainly reflecting the increase in sales in the period. Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments Half year 2014 £m Half year 2013 £m AER Half year 2013 £m CER note Acquisition costs Acquisition costs Acquisition costs Other operating profits Incurred Deferred Total Other operating profits Incurred Deferred Total Other operating profits Incurred Deferred Total Total operating profit before acquisition costs and DAC adjustments 1,028 1,028 874 874 808 808 Less new business strain (477) 374 (103) (465) 372 (93) (430) 344 (86) Other DAC adjustments - amortisation of previously deferred acquisition costs: Normal (249) (249) (219) (219) (203) (203) Deceleration 10 10 20 20 19 19 Total 1,028 (477) 135 686 874 (465) 173 582 808 (430) 160 538 Note The half year 2013 comparative information has been presented at Actual Exchange Rate (AER) and Constant Exchange Rates (CER) so as to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current period foreign exchange rate. See also Note A1. Margin analysis of long-term insurance business - UK UK Half year 2014 Half year 2013 Average Average Profit Liability Margin Profit Liability Margin note (ii) note (ii) Long-term business £m £m bps £m £m bps Spread income 131 28,062 93 102 27,067 75 Fee income 32 23,671 27 33 22,720 29 With-profits 135 84,393 32 133 83,814 32 Insurance margin 38 48 Margin on revenues 84 80 Expenses: Acquisition costsnote (i) (50) 433 (12)% (54) 355 (15)% Administration expenses (64) 51,733 (25) (59) 49,787 (24) DAC adjustments (6) (7) Expected return on shareholders' assets 74 65 Operating profit 374 341 Notes (i) The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business. (ii) 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. Analysis of UK operating profit drivers: • Spread income has increased 28 per cent from £102 million in half year 2013 to £131 million in half year 2014 principally due to the increase in profit from bulk annuity transactions, partially offset by lower individual annuity sales in half year 2014. This has increased the margin from 75 basis points in half year 2013 to 93 basis points in half year 2014. • Insurance margin has decreased from £48 million in half year 2013 to £38 million in half year 2014. Improved profits from the UK protection business and favourable mortality experience on the UK annuity book are offset by the non-recurrence of the benefit in 2013 of a longevity swap on certain aspects of the UK's annuity back-book liabilities. • Acquisition costs as a percentage of new business sales in half year 2014 decreased to 12 per cent from 15 per cent at half year 2013, principally driven by the effect of higher bulk annuity sales in the year, which traditionally are less capital intensive. The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. It is therefore impacted by the level of with-profit sales in the year. Acquisition costs as a percentage of shareholder-backed new business sales, excluding the bulk annuity transactions, were 35 per cent in half year 2014 (half year 2013: 34 per cent). • Administration expenses at £64 million are £5 million higher than for half year 2013, reflecting an increase in the proposition development spend following the UK Budget announcement. The administration expense ratio remains broadly in line with the prior period at 25 basis points (half year 2013: 24 basis points). • Expected return on shareholder assets has increased from £65 million in half year 2013 to £74 million in half year 2014 principally due to higher IFRS shareholders' funds. II Asia operations - analysis of IFRS operating profit by territory Operating profit based on longer-term investment returns for Asia operations are analysed below. For memorandum disclosure purposes, the table below presents the half year 2013 results on both actual exchange rates (AER) and constant exchange rates (CER) bases so as to eliminate the impact of exchange translation. Half year 2014 £m AER Half year 2013 £m CER Half year 2013 £m AER vs Half year 2013 CER vs Half year 2013 Full year 2013 £m Hong Kong 51 51 47 0% 9% 101 Indonesia 139 137 105 1% 32% 291 Malaysia 61 73 66 (16)% (8)% 137 Philippines 11 9 8 22% 38% 18 Singapore 99 104 94 (5)% 5% 219 Thailand 25 11 10 127% 150% 53 Vietnam 27 16 14 69% 93% 54 SE Asia Operations inc. Hong Kong 413 401 344 3% 20% 873 China 8 6 6 33% 33% 10 India 24 26 21 (8)% 14% 51 Korea 17 8 7 113% 143% 17 Taiwan 7 4 4 75% 75% 12 Other (4) - (1) n/a n/a (4) Non-recurrent itemsnote (ii) 19 31 27 (39)% (30)% 44 Total insurance operationsnote (i) 484 476 408 2% 19% 1,003 Development expenses (1) (2) (2) 50% 50% (2) Total long-term business operating profitnote (iii) 483 474 406 2% 19% 1,001 Eastspring Investments 42 38 34 11% 24% 74 Total Asia operations 525 512 440 3% 19% 1,075 Notes (i) Analysis of operating profit between new and in-force business The result for insurance operations comprises amounts in respect of new business and business in-force as follows: 2014 £m 2013 £m Half year AER Half year CER Half year Full year New business strain† (19) (23) (22) (15) Business in force 484 468 403 974 Non-recurrent itemsnote (ii) 19 31 27 44 Total 484 476 408 1,003 † The IFRS new business strain corresponds to approximately 2 per cent of new business APE sales for 2014 (half year 2013: approximately 2 per cent; full year 2013 approximately 1 per cent). The strain represents the pre-tax regulatory basis strain to net worth after IFRS adjustments; for example the deferral of acquisition costs and deferred income where appropriate. (ii) Other non-recurrent items of £19 million in 2014 (half year 2013: £31 million; full year 2013: £44 million) represent a small number of items that are not anticipated to re-occur in subsequent years. (iii) To facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group's retained operations, the results attributable to the held for sale Japan Life business are not included within the long-term business operating profit for Asia. The Japan Life business contributed an operating profit of nil in 2014 (half year 2013: profit of £5 million; full year 2013: profit of £3 million). III Analysis of asset management operating profit based on longer-term investment returns Half year 2014 £m M&G Eastspring Investments Prudential Capital US Total note (ii) note (ii) Operating income before performance-related fees 463 111 64 139 777 Performance-related fees 7 - - - 7 Operating income(net of commission)note (i) 470 111 64 139 784 Operating expensenote (i) (249) (65) (42) (144) (500) Share of associate's results 6 - - - 6 Group's share of tax on joint ventures' operating profit - (4) - - (4) Operating profit based on longer-term investment returns 227 42 22 (5) 286 Average funds under management £242.9bn £62.4bn Margin based on operating income 38bps 36bps Cost / income ratio 54% 59% Half year 2013 £m M&G Eastspring Investments Prudential Capital US Total note (ii) note (ii) Operating income before performance-related fees 421 109 56 181 767 Performance-related fees 4 1 - - 5 Operating income(net of commission)note (i) 425 110 56 181 772 Operating expensenote (i) (226) (68) (35) (147) (476) Share of associate's results 5 - - - 5 Group's share of tax on joint ventures' operating profit - (4) - - (4) Operating profit based on longer-term investment returns 204 38 21 34 297 Average funds under management £230.9bn £62.7bn Margin based on operating income 36bps 35bps Cost / income ratio 54% 62% Full year 2013 £m M&G Eastspring Investments Prudential Capital US Total note (ii) note (ii) Operating income before performance-related fees 863 215 121 362 1,561 Performance-related fees 25 1 - - 26 Operating income(net of commission)note (i) 888 216 121 362 1,587 Operating expensenote (i) (505) (134) (75) (303) (1,017) Share of associate's results 12 - - - 12 Group's share of tax on joint ventures' operating profit - (8) - - (8) Operating profit based on longer-term investment returns 395 74 46 59 574 Average funds under management £233.8bn £61.9bn Margin based on operating income* 37bps 35bps Cost / income ratio 59% 62% Notes (i) Operating income and expense includes the Group's share of contribution from joint ventures (but excludes any contribution from associates). In the income statement as shown in note B2 of the IFRS financial statements, the net post-tax income of the joint ventures and associates is shown as a single item. (ii) M&G and Eastspring Investments can be further analysed as follows: M&G Eastspring Investments Operating income before performance related fees Operating income before performance related fees Retail Margin of FUM Institu- tional† Margin of FUM Total Margin of FUM Retail Margin of FUM Institu- tional† Margin of FUM Total Margin of FUM £m bps £m bps £m bps £m bps £m bps £m bps 30-Jun-14 291 86 172 20 463 38 30-Jun-14 65 62 46 22 111 36 30-Jun-13 265 89 156 18 421 36 30-Jun-13 64 60 45 22 109 35 31-Dec-13 550 89 313 18 863 37 31-Dec-13 127 60 88 22 215 35 * Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group's insurance operations which are managed by third parties outside of the Prudential Group are excluded from these amounts. ** Cost/income ratio represents cost as a percentage of operating income before performance related fees. † Institutional includes internal funds. IV Holding company cash flow 2014 £m 2013 £m Half year Half year Full year Net cash remitted by business units: UK net remittances to the Group UK Life fund paid to the Group 193 206 206 Shareholder-backed business: Other UK paid to the Group 53 20 149 Group invested in UK - - Total shareholder-backed business 53 20 149 Total UK net remittances to the Group 246 226 355 US remittances to the Group 352 294 294 Asia net remittances to the Group Asia paid to the Group: Long-term business 240 228 454 Other operations 32 33 56 272 261 510 Group invested in Asia: Long-term business (3) (3) (9) Other operations (including funding of Regional Head Office costs) (53) (68) (101) (56) (71) (110) Total Asia net remittances to the Group 216 190 400 M&G remittances to the Group 135 109 235 Prudential Capital remittances to the Group 25 25 57 Net remittances to the Group from Business Units 974 844 1,341 Net interest paid (161) (142) (300) Tax received 111 114 202 Corporate activities (93) (89) (185) Solvency II costs (12) (15) (32) Total central outflows (155) (132) (315) Net operating holding company cash flow before dividend 819 712 1,026 Dividend paid (610) (532) (781) Operating holding company cash flow after dividend 209 180 245 Issue of hybrid debt, net of costs - 429 1,124 Corporate transactions for distribution rights and acquired subsidiaries (520) (397) (428) Other net cash payments - (97) (83) Total holding company cash flow (311) 115 858 Cash and short-term investments at beginning of period 2,230 1,380 1,380 Foreign exchange movements (17) (5) (8) Cash and short-term investments at end of period 1,902 1,490 2,230 * Including central finance subsidiaries. V Funds under management (a) Summarynote (i) 2014 £bn 2013 £bn 30 Jun 30 Jun 31 Dec Business area: Asia operations 42.1 39.9 38.0 US operations 109.9 102.5 104.3 UK operations 160.4 155.7 157.3 Prudential Group funds under management 312.4 298.1 299.6 External funds note (ii) 144.8 129.3 143.3 Total funds under management 457.2 427.4 442.9 Notes (i) Including Group's share of assets managed by joint ventures. (ii) External funds shown above as at 30 June 2014 of £144.8 billion (30 June 2013: £129.3 billion; 31 December 2013: £143.3 billion) comprise £158.1 billion (30 June 2013: £141.7 billion; 31 December 2013: £148.2 billion) of funds managed by M&G and Eastspring Investments as shown in note (c) below less £13.3 billion (30 June 2013: £12.4 billion; 31 December 2013: £4.9 billion) that are classified within Prudential Group's funds. The £158.1 billion (30 June 2013: £141.7 billion; 31 December 2013: £148.2 billion) investment products comprise £153.8 billion (30 June 2013: £137.4 billion; 31 December 2013: £143.9 billion) as published in the New Business schedules plus Asia Money Market Funds of £4.3 billion (30 June 2013: £4.3 billion; 31 December 2013: £4.3 billion). (b) Prudential Group funds under management - analysis by business area Asia operations £bn US operations £bn UK operations £bn Total £bn 30 Jun 2014 30 Jun 2013 31 Dec 2013 30 Jun 2014 30 Jun 2013 31 Dec 2013 30 Jun 2014 30 Jun 2013 31 Dec 2013 30 Jun 2014 30 Jun 2013 31 Dec 2013 Investment properties† - - - 0.1 0.1 - 11.9 10.7 11.7 12.0 10.8 11.7 Equity securities 16.8 14.1 14.4 71.8 60.4 66.0 42.0 37.8 39.8 130.6 112.3 120.2 Debt securities 20.0 20.1 18.6 30.6 33.4 30.3 83.6 84.8 84.0 134.2 138.3 132.9 Loans and receivables 0.9 1.0 0.9 6.1 6.7 6.4 5.4 5.5 5.3 12.4 13.2 12.6 Other investments and deposits 0.7 1.2 0.9 1.3 1.9 1.6 17.0 16.6 16.0 19.0 19.7 18.5 Total included in statement of financial position 38.4 36.4 34.8 109.9 102.5 104.3 159.9 155.4 156.8 308.2 294.3 295.9 Internally managed funds held in insurance joint ventures 3.7 3.5 3.2 - - - 0.5 0.3 0.5 4.2 3.8 3.7 Total Prudential Group funds under management 42.1 39.9 38.0 109.9 102.5 104.3 160.4 155.7 157.3 312.4 298.1 299.6 † As included in the investments section of the consolidated statement of financial position at 30 June 2014, except for £0.3 billion (30 June 2013: £0.2 billion; 31 December 2013: £0.3 billion) investment properties which are held for sale or occupied by the Group and, accordingly under IFRS, are included in other statement of financial position captions. (c) Investment products - external funds under management Half year 2014 £m 1 Jan 2014 Market gross inflows Redemptions Market exchange translation and other movements 30 Jun 2014 Eastspring Investmentsnote 22,222 38,934 (36,504) 726 25,378 M&G 125,989 19,322 (15,111) 2,571 132,771 Group total 148,211 58,256 (51,615) 3,297 158,149 Half year 2013 £m 1 Jan 2013 Market gross inflows Redemptions Market exchange translation and other movements 30 Jun 2013 Eastspring Investmentsnote 21,634 38,146 (36,034) (211) 23,535 M&G 111,868 20,598 (16,758) 2,431 118,139 Group total 133,502 58,744 (52,792) 2,220 141,674 Full year 2013 £m 1 Jan 2013 Market gross inflows Redemptions Market exchange translation and other movements 31 Dec 2013 Eastspring Investmentsnote 21,634 74,206 (72,111) (1,507) 22,222 M&G 111,868 40,832 (31,342) 4,631 125,989 Group total 133,502 115,038 (103,453) 3,124 148,211 Note Including Asia Money Market Funds at 30 June 2014 of £4.3 billion (30 June 2013: £4.3 billion; 31 December 2013: £4.3 billion). (d) M&G and Eastspring Investments - total funds under management 2014 £bn 2013 £bn M&G 30 Jun 30 Jun 31 Dec External funds under management 132.8 118.1 126.0 Internal funds under management 120.9 116.2 118.0 Total funds under management 253.7 234.3 244.0 2014 £bn 2013 £bn Eastspring Investments 30 Jun 30 Jun 31 Dec External funds under managementnote 25.4 23.5 22.2 Internal funds under management 41.4 38.3 37.7 Total funds under management 66.8 61.8 59.9 Note Including Asia Money Market Funds at 30 June 2014 of £4.3 billion (30 June 2013: £4.3 billion; 31 December 2013: £4.3 billion). This information is provided by RNS The company news service from the London Stock Exchange END IR PBMLTMBMBBRI