Prudential PLC — Interim / Quarterly Report 2016

Aug 10, 2016

National Storage Mechanism | Additional information You don't have Javascript enabled. For full functionality this page requires javascript to be enabled. RNS Number : 7326G Prudential PLC 10 August 2016 IFRS Disclosure and Additional Financial Information Prudential plc Half Year 2016 results International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED INCOME STATEMENT 2016 £m 2015 £m Note Half year Half year Full year Earned premiums, net of reinsurance 17,394 17,884 35,506 Investment return 17,062 6,110 3,304 Other income 1,085 1,285 2,495 Total revenue, net of reinsurance 35,541 25,279 41,305 Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (30,939) (18,618) (29,656) Acquisition costs and other expenditure B3 (3,563) (4,505) (8,208) Finance costs: interest on core structural borrowings of shareholder-financed operations (169) (148) (312) Disposal of Japan life business: Cumulative exchange loss recycled from other comprehensive income - (46) (46) Total charges, net of reinsurance (34,671) (23,317) (38,222) Share of profits from joint ventures and associates, net of related tax 86 122 238 Profit before tax (being tax attributable to shareholders' and policyholders' returns) 956 2,084 3,321 Less tax charge attributable to policyholders' returns (292) (202) (173) Profit before tax attributable to shareholders B1.1 664 1,882 3,148 Total tax charge attributable to policyholders and shareholders B5 (269) (646) (742) Adjustment to remove tax charge attributable to policyholders' returns 292 202 173 Tax credit (charge) attributable to shareholders' returns B5 23 (444) (569) Profit for the period attributable to equity holders of the Company 687 1,438 2,579 2016 2015 Earnings per share (in pence) Half year Half year Full year Based on profit attributable to the equity holders of the Company: B6 Basic 26.9p 56.3p 101.0p Diluted 26.8p 56.2p 100.9p 2016 2015 Dividends per share (in pence) Note Half year Half year Full year Dividends relating to reporting period: B7 First interim dividend / Interim dividend for prior year 12.93p 12.31p 12.31p Second interim dividend - - 26.47p Special dividend - - 10.00p Total 12.93p 12.31p 48.78p Dividends declared and paid in reporting period: B7 Current year interim dividend - - 12.31p Second interim dividend / Final dividend for prior year 26.47p 25.74p 25.74p Special dividend 10.00p - - Total 36.47p 25.74p 38.05p * This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits fund after adjusting for taxes borne by policyholders) is not representative of pre-tax profits attributable to shareholders. International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 2016 £m 2015 £m Note Half year Half year Full year Profit for the period 687 1,438 2,579 Other comprehensive income (loss): Items that may be reclassified subsequently to profit or loss Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the period 798 (165) 68 Cumulative exchange loss of Japan life business recycled through profit or loss - 46 46 Related tax 8 (1) 4 806 (120) 118 Net unrealised valuation movements on securities of US insurance operations classified as available-for-sale: Net unrealised holding gains (losses) arising during the period 2,023 (661) (1,256) Add back net losses / deduct net gains included in the income statement on disposal and impairment 95 (101) (49) Total C3.3(b) 2,118 (762) (1,305) Related change in amortisation of deferred acquisition costs C5.1(b) (435) 165 337 Related tax (589) 209 339 1,094 (388) (629) Total 1,900 (508) (511) Items that will not be reclassified to profit or loss Shareholders' share of actuarial gains and losses on defined benefit pension schemes: Gross 11 (21) 27 Related tax (2) 4 (5) 9 (17) 22 Other comprehensive income (loss) for the period, net of related tax 1,909 (525) (489) Total comprehensive income for the period attributable to the equity holders of the Company 2,596 913 2,090 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Period ended 30 June 2016 £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 - - 687 - - 687 - 687 Other comprehensive income - - 9 806 1,094 1,909 - 1,909 Total comprehensive income for the period - - 696 806 1,094 2,596 - 2,596 Dividends B7 - - (935) - - (935) - (935) Reserve movements in respect of share-based payments - - (54) - - (54) - (54) New share capital subscribed C9 - 6 - - - 6 - 6 Movement in own shares in respect of share-based payment plans - - 22 - - 22 - 22 Movement in own shares purchased by funds consolidated under IFRS - - 15 - - 15 - 15 Net increase (decrease) in equity - 6 (256) 806 1,094 1,650 - 1,650 At beginning of period 128 1,915 10,436 149 327 12,955 1 12,956 At end of period 128 1,921 10,180 955 1,421 14,605 1 14,606 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued) Period ended 30 June 2015 £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 - - 1,438 - - 1,438 - 1,438 Other comprehensive loss - - (17) (120) (388) (525) - (525) Total comprehensive income (loss) for the period - - 1,421 (120) (388) 913 - 913 Dividends B7 - - (659) - - (659) - (659) Reserve movements in respect of share-based payments - - 66 - - 66 - 66 Share capital and share premium New share capital subscribed C9 - 2 - - - 2 - 2 Treasury shares Movement in own shares in respect of share-based payment plans - - (40) - - (40) - (40) Movement in own shares purchased by funds consolidated under IFRS - - 11 - - 11 - 11 Net increase (decrease) in equity - 2 799 (120) (388) 293 - 293 At beginning of period 128 1,908 8,788 31 956 11,811 1 11,812 At end of period 128 1,910 9,587 (89) 568 12,104 1 12,105 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued) Year ended 31 December 2015 £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 - - 2,579 - - 2,579 - 2,579 Other comprehensive income (loss) - - 22 118 (629) (489) - (489) Total comprehensive income (loss) for the year - - 2,601 118 (629) 2,090 - 2,090 Dividends B7 - - (974) - - (974) - (974) Reserve movements in respect of share-based payments - - 39 - - 39 - 39 Share capital and share premium New share capital subscribed C9 - 7 - - - 7 - 7 Treasury shares Movement in own shares in respect of share-based payment plans - - (38) - - (38) - (38) Movement in own shares purchased by funds consolidated under IFRS - - 20 - - 20 - 20 Net increase (decrease) in equity - 7 1,648 118 (629) 1,144 - 1,144 At beginning of year 128 1,908 8,788 31 956 11,811 1 11,812 At end of year 128 1,915 10,436 149 327 12,955 1 12,956 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2016 £m 2015 £m Note 30 Jun 30 Jun 31 Dec Assets Intangible assets attributable to shareholders: Goodwill C5.1(a) 1,488 1,461 1,463 Deferred acquisition costs and other intangible assets C5.1(b) 9,549 7,310 8,422 Total 11,037 8,771 9,885 Intangible assets attributable to with-profits funds: Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes 189 184 185 Deferred acquisition costs and other intangible assets 45 49 50 Total 234 233 235 Total intangible assets 11,271 9,004 10,120 Other non-investment and non-cash assets: Property, plant and equipment C1.1 1,214 984 1,197 Reinsurers' share of insurance contract liabilities 9,470 7,259 7,903 Deferred tax assets C7 3,771 2,820 2,819 Current tax recoverable 554 220 477 Accrued investment income 2,764 2,575 2,751 Other debtors 3,505 3,626 1,955 Total 21,278 17,484 17,102 Investments of long-term business and other operations: Investment properties 13,940 13,259 13,422 Investment in joint ventures and associates accounted for using the equity method 1,135 962 1,034 Financial investments: Loans C3.4 14,215 12,578 12,958 Equity securities and portfolio holdings in unit trusts 176,037 155,253 157,453 Debt securities C3.3 168,367 142,307 147,671 Other investments 10,340 7,713 7,353 Deposits 14,181 11,043 12,088 Total 398,215 343,115 351,979 Assets held for sale 30 - 2 Cash and cash equivalents 8,530 8,298 7,782 Total assets C1,C3.1 439,324 377,901 386,985 * Included within financial investments are £8,162 million of lent securities as at 30 June 2016 (30 June 2015: £3,599 million; 31 December 2015: £5,995 million). International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2016 £m 2015 £m Note 30 Jun 30 Jun 31 Dec Equity and liabilities Equity Shareholders' equity 14,605 12,104 12,955 Non-controlling interests 1 1 1 Total equity 14,606 12,105 12,956 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) 362,510 313,620 322,518 Unallocated surplus of with-profits funds 13,597 12,768 13,096 Total C4.1(a) 376,107 326,388 335,614 Core structural borrowings of shareholder-financed operations: Subordinated debt 4,956 3,897 4,018 Other 1,010 983 993 Total C6.1 5,966 4,880 5,011 Other borrowings: Operational borrowings attributable to shareholder-financed operations C6.2(a) 2,798 2,504 1,960 Borrowings attributable to with-profits operations C6.2(b) 1,427 1,089 1,332 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements 4,963 3,296 3,765 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 8,770 10,007 7,873 Deferred tax liabilities C7 5,397 4,325 4,010 Current tax liabilities 566 393 325 Accruals and deferred income 912 750 952 Other creditors 6,520 5,515 4,876 Provisions 467 546 604 Derivative liabilities 5,342 1,758 3,119 Other liabilities 5,483 4,345 4,588 Total 38,420 30,935 30,112 Total liabilities C1,C3.1 424,718 365,796 374,029 Total equity and liabilities 439,324 377,901 386,985 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 2016 £m 2015 £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) 956 2,084 3,321 Non-cash movements in operating assets and liabilities reflected in profit before taxnote (ii) (556) 704 (49) Other itemsnote (iii) 403 (389) (739) Net cash flows from operating activities 803 2,399 2,533 Cash flows from investing activities Net cash outflows from purchases and disposals of property, plant and equipment (32) (90) (226) Net cash (outflows) inflows from corporate transactionsnote (iv) (302) 34 (243) Net cash flows from investing activities (334) (56) (469) Cash flows from financing activities Structural borrowings of the Group: Shareholder-financed operations:note (v) C6.1 Issue of subordinated debt, net of costs 681 590 590 Interest paid (160) (144) (288) With-profits operations:note (vi) C6.2 Interest paid (4) (4) (9) Equity capital: Issues of ordinary share capital 6 2 7 Dividends paid (935) (659) (974) Net cash flows from financing activities (412) (215) (674) Net increase in cash and cash equivalents 57 2,128 1,390 Cash and cash equivalents at beginning of period 7,782 6,409 6,409 Effect of exchange rate changes on cash and cash equivalents 691 (239) (17) Cash and cash equivalents at end of period 8,530 8,298 7,782 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: 2016 £m 2015 £m Half year Half year Full year Other non-investment and non-cash assets (2,660) (2,004) (1,063) Investments (21,280) (8,431) (6,814) Policyholder liabilities (including unallocated surplus) 19,548 6,795 6,067 Other liabilities (including operational borrowings) 3,836 4,344 1,761 Non-cash movements in operating assets and liabilities reflected in profit before tax (556) 704 (49) (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) Net cash flows for corporate transactions are for distribution rights and the acquisition and disposal of businesses. (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, audit status and exchange rates These condensed consolidated interim financial statements for the six months ended 30 June 2016 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 2016, there were no unendorsed standards effective for the period ended 30 June 2016 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 2016 and 2015 half years are unaudited. The 2015 full year IFRS basis results have been derived from the 2015 statutory accounts. The auditors have reported on the 2015 statutory accounts which have been delivered to the Registrar of Companies. The auditors' report was: (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The exchange rates applied for balances and transactions in currencies other than the presentational currency of the Group, pounds sterling (GBP), were: Closing rate at 30 Jun 2016 Average for the 6 months to 30 Jun 2016 Closing rate at 30 Jun 2015 Average for the 6 months to 30 Jun 2015 Closing rate at 31 Dec 2015 Average for 12 months to 31 Dec 2015 Local currency: £ Hong Kong 10.37 11.13 12.19 11.81 11.42 11.85 Indonesia 17,662.47 19,222.95 20,968.02 19,760.02 20,317.71 20,476.93 Malaysia 5.39 5.87 5.93 5.55 6.33 5.97 Singapore 1.80 1.98 2.12 2.06 2.09 2.1 China 8.88 9.37 9.75 9.48 9.57 9.61 India 90.23 96.30 100.15 95.76 97.51 98.08 Vietnam 29,815.99 31,996.45 34,345.42 32,832.81 33,140.64 33,509.21 Thailand 46.98 50.81 53.12 50.21 53.04 52.38 US 1.34 1.43 1.57 1.52 1.47 1.53 Certain notes to the financial statements present half year 2015 comparative information at Constant Exchange Rates (CER), in addition to the reporting at Actual Exchange Rates (AER) used throughout the condensed consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the balance sheet. CER results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet. The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2015, except for the adoption of the new and amended accounting pronouncements for Group IFRS reporting as described below. A2 Adoption of new accounting pronouncements in 2016 The Group has adopted the following new accounting pronouncements which were effective in 2016: - Annual improvements to IFRSs 2012 - 2014 cycle; - Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) and; - Disclosure Initiative (Amendments to IAS 1). The adoption of these pronouncements has had no impact on these financial statements. B EARNINGS PERFORMANCE B1 Analysis of performance by segment B1.1 Segment results - profit before tax 2016 £m 2015 £m % 2015 £m Note Half year AER Half year CER Half year Half year 2016 vs half year 2015 AER Half year 2016 vs half year 2015 CER AER Full year note (iv) note (iv) note (iv) note (iv) Asia operations Asia insurance operations B4(a) 682 574 584 19% 17% 1,209 Eastspring Investments 61 58 60 5% 2% 115 Total Asia operations 743 632 644 18% 15% 1,324 US operations Jackson (US insurance operations) 888 834 887 6% 0% 1,691 Broker-dealer and asset management (12) 12 12 (200)% (200)% 11 Total US operations 876 846 899 4% (3)% 1,702 UK operations UK insurance operations: B4(b) Long-term business 473 436 436 8% 8% 1,167 General insurance commission note (i) 19 17 17 12% 12% 28 Total UK insurance operations 492 453 453 9% 9% 1,195 M&G 225 251 251 (10)% (10)% 442 Prudential Capital 13 7 7 86% 86% 19 Total UK operations 730 711 711 3% 3% 1,656 Total segment profit 2,349 2,189 2,254 7% 4% 4,682 Other income and expenditure Investment return and other income 6 11 11 (45)% (45)% 14 Interest payable on core structural borrowings (165) (148) (148) (11)% (11)% (312) Corporate expenditurenote (ii) (156) (146) (146) (7)% (7)% (319) Total (315) (283) (283) (11)% (11)% (617) Solvency II implementation costs (11) (17) (17) 35% 35% (43) Restructuring costs note (iii) (7) (8) (8) 13% 13% (15) Interest received from tax settlement 43 - - n/a n/a - Operating profit based on longer-term investment returns 2,059 1,881 1,946 9% 6% 4,007 Short-term fluctuations in investment returns on shareholder-backed business B1.2 (1,360) 86 97 (1,681)% (1,502)% (737) Amortisation of acquisition accounting adjustmentsnote (v) (35) (39) (42) 10% 17% (76) Cumulative exchange loss on the sold Japan life business recycled from other comprehensive incomenote (vi) - (46) (54) n/a n/a (46) Profit before tax attributable to shareholders 664 1,882 1,947 (65)% (66)% 3,148 Tax charge attributable to shareholders' returns 23 (444) (461) 105% 105% (569) Profit for the period attributable to shareholders 687 1,438 1,486 (52)% (54)% 2,579 2016 2015 % 2015 Half year AER Half year CER Half year Half year 2016 vs half year 2015 AER Half year 2016 vs half year 2015 CER AER Full year Basic earnings per share (in pence) B6 note (iv) note (iv) note (iv) note (iv) Based on operating profit based on longer-term investment returns 61.8p 57.0p 59.0p 8% 5% 125.8p Based on profit for the period 26.9p 56.3p 58.2p (52)% (54)% 101.0p 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 which terminates at the end of 2016. (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 business development expenses. (iv) For definitions of AER and CER refer to note A1. (v) Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson. (vi) On 5 February 2015, the Group completed the sale of its closed book life insurance business in Japan. B1.2 Short-term fluctuations in investment returns on shareholder-backed business 2016 £m 2015 £m Half year Half year Full year Insurance operations: Asia note (i) 26 (57) (119) US note (ii) (1,440) 228 (424) UK note (iii) 246 (96) (120) Other operationsnote (iv) (192) 11 (74) Total (1,360) 86 (737) Notes (i) Asia insurance operations In Asia, the positive short-term fluctuations of £26 million principally reflect net value movements on shareholders' assets and related liabilities following falls in bond yields across the region during the period (half year 2015: negative £(57) million; full year 2015: negative £(119) million). (ii) US insurance operations The short-term fluctuations in investment returns for US insurance operations are reported net of related credit for amortisation of deferred acquisition costs, of £616 million as shown in note C5.1(b) (half year 2015: charge of £188 million; full year 2015: credit of £93 million) and comprise amounts in respect of the following items: 2016 £m 2015 £m Half year Half year Full year Net equity hedge resultnote (a) (1,692) 214 (504) Other than equity-related derivativesnote (b) 335 (71) 29 Debt securities note (c) (105) 66 1 Equity-type investments: actual less longer-term return 13 7 19 Other items 9 12 31 Total (1,440) 228 (424) Notes (a) Net equity hedge result The purpose of the inclusion of this item in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to the accounting effect of market movements on both the measured value of guarantees in Jackson's variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ as described below. The result comprises the net effect of: - The accounting value movements on the variable and fixed index annuity guarantee liabilities; - Adjustments in respect of fee assessments and claim payments; - Fair value movements on free standing equity derivatives; and - Related changes to DAC amortisation in accordance with the policy that DAC is amortised in line with emergence of margins. Movements in the accounting values of the variable annuity guarantee liabilities include those for: - The Guaranteed Minimum Death Benefit (GMDB), and the 'for life' portion of Guaranteed Minimum Withdrawal Benefit (GMWB) guarantees which are measured under the US GAAP basis applied for IFRS in a way that is substantially insensitive to the effect of current period equity market and interest rate changes. - The 'not for life' portion of GMWB embedded derivative liabilities which are required to be measured under IAS 39 using a basis under which the projected future growth rate of the account balance is based on current swap rates (rather than expected rates of return) with only a portion of the expected future guarantee fees included. Reserve value movements on these liabilities are sensitive to changes to levels of equity markets, implied volatility and interest rates. The free-standing equity derivatives are held to manage equity exposures of the variable annuity guarantees and fixed index annuity embedded options. The net equity hedge result therefore includes significant accounting mismatches and other factors that detract from the presentation of an economic result. These other factors include: - The variable annuity guarantees and fixed index annuity embedded options being only partially fair valued under 'grandfathered' GAAP; - The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and - Jackson's management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed volatility levels. (b) Other than equity-related derivatives The fluctuations for this item comprise the net effect of: - Fair value movements on free-standing, other than equity-related derivatives; - Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) reinsurance; and - Related amortisation of DAC. The free-standing, other than equity-related derivatives are held to manage interest rate exposures and durations within the general account and the variable annuity guarantees and fixed index annuity embedded options described in note (a) above. The direct GMIB liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way that substantially does not recognise the effects of market movements. Reinsurance arrangements are in place so as to essentially fully insulate Jackson from the GMIB exposure. Notwithstanding that the liability is essentially fully reinsured, as the reinsurance asset is net settled, it is deemed a derivative under IAS 39 which requires fair valuation. The fluctuations for this item therefore include significant accounting mismatches caused by: - The fair value movements booked in the income statement on the derivative programme being in respect of the management of interest rate exposures of the variable and fixed index annuity business, as well as the fixed annuity business guarantees and durations within the general account; - Fair value movements on Jackson's debt securities of the general account which are recorded in other comprehensive income rather than the income statement; and - The mixed measurement model that applies for the GMIB and its reinsurance. (c) Short-term fluctuations related to debt securities 2016 £m 2015 £m Half year Half year Full year Short-term fluctuations relating to debt securities (Charges) credits in the period: Losses on sales of impaired and deteriorating bonds (87) (13) (54) Defaults (6) - - Bond write downs (32) (3) (37) Recoveries/reversals 4 15 18 Total credits (charges) in the period (121) (1) (73) Less: Risk margin allowance deducted from operating profit based on longer-term investment returns 42 41 83 (79) 40 10 Interest-related realised gains: Arising in the period 20 95 102 Less: Amortisation of gains and losses arising in current and prior periods to operating profit based on longer-term investment returns (59) (61) (108) (39) 34 (6) Related amortisation of deferred acquisition costs 13 (8) (3) Total short-term fluctuations related to debt securities (105) 66 1 The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in operating profit and variations from year to year are included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson for half year 2016 is based on an average annual risk margin reserve of 21 basis points (half year 2015: 23 basis points; full year 2015: 23 basis points) on average book values of US$56.4 billion (half year 2015: US$54.3 billion; full year 2015: US$54.6 billion) as shown below: Half year 2016 Half year 2015 Full year 2015 Moody's rating category (or equivalent under NAIC ratings of mortgage-backed securities) Average book value RMR Annual expected loss Average book value RMR Annual expected loss Average book value RMR Annual expected loss US$m % US$m £m US$m % US$m £m US$m % US$m £m A3 or higher 29,172 0.12 (36) (25) 28,211 0.13 (37) (24) 28,185 0.13 (37) (24) Baa1, 2 or 3 25,771 0.24 (63) (44) 24,317 0.25 (60) (40) 24,768 0.25 (62) (40) Ba1, 2 or 3 1,065 1.08 (11) (8) 1,333 1.18 (16) (10) 1,257 1.17 (15) (10) B1, 2 or 3 319 3.02 (10) (7) 396 3.07 (12) (8) 388 3.08 (12) (8) Below B3 41 3.81 (2) (1) 43 3.69 (2) (1) 35 3.70 (1) (1) Total 56,368 0.21 (122) (85) 54,300 0.23 (127) (83) 54,633 0.23 (127) (83) Related amortisation of deferred acquisition costs (see below) 22 15 24 16 24 16 Risk margin reserve charge to operating profit for longer-term credit-related losses (100) (70) (103) (67) (103) (67) Consistent with the basis of measurement of insurance assets and liabilities for Jackson's IFRS results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs. In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax credit for net unrealised gains on debt securities classified as available-for-sale net of related amortisation of deferred acquisition costs of £1,683 million (half year 2015: charge for net unrealised loss of £(597) million; full year 2015: charge for net unrealised loss of £(968) million). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.3(b). (iii) UK insurance operations The positive short-term fluctuations in investment returns for UK insurance operations of £246 million (half year 2015: negative £(96) million; full year 2015: negative £(120) million) include net unrealised movements on fixed income assets supporting the capital of the shareholder-backed annuity business. (iv) Other The negative short-term fluctuations in investment returns for other operations of £(192) million (half year 2015: positive £11 million; full year 2015: negative £(74) million) include unrealised value movements on financial instruments and foreign exchange items. (v) Default losses The Group incurred default losses of £6 million on its shareholder-backed debt securities portfolio for half year 2016 wholly in respect of Jackson's portfolio (half year 2015 and full year 2015: £nil). B1.3 Determining operating segments and performance measure of operating segments Operating segments The Group's operating segments, determined in accordance with IFRS 8 'Operating Segments', are as follows: Insurance operations: Asset management operations: - Asia - Eastspring Investments - US (Jackson) - US broker-dealer and asset management - UK - M&G - Prudential Capital The Group's operating segments are also its reportable segments for the purposes of internal management reporting. Performance measure The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer-term investment returns. This measurement basis distinguishes operating profit based on longer-term investment returns from other constituents of the total profit as follows: - Short-term fluctuations in investment returns on shareholder-backed business; - Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012; - The recycling of the cumulative exchange translation loss on the sold Japan life business from other comprehensive income to the income statement in 2015. 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. The determination of operating profit based on longer-term investment returns for investment and liability movements is as described in note B1.3 of the Group's consolidated financial statements for the year ended 31 December 2015. For Group debt securities at 30 June 2016, the level of unamortised interest-related realised gains and losses related to previously sold bonds and have yet to be amortised to operating profit was a net gain of £605 million (30 June 2015: net gain of £478 million; 31 December 2015: net gain of £567 million). For equity-type securities, the longer-term rates of return applied by the non-linked shareholder-financed insurance operations of Asia and the US to determine the amount of investment return included in operating profit are as follows: - For Asia insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to £1,035 million as at 30 June 2016 (30 June 2015: £831 million; 31 December 2015: £840 million). The rates of return applied for 2016 ranged from 3.2 per cent to 13.0 per cent (30 June 2015: 3.8 per cent to 13.0 percent, 31 December 2015: 3.5 percent to 13.0 per cent) with the rates applied varying by territory. - For US insurance operations, at 30 June 2016, the equity-type securities for non-separate account operations amounted to £1,115 million. (30 June 2015: £1,087 million; 31 December 2015: £1,004 million). The longer-term rates of return for income and capital applied in 2016 and 2015, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums, are as follows: 2016 2015 Half year Half year Full year Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds 5.5% to 5.9% 5.7% to 6.4% 5.7% to 6.4% Other equity-type securities such as investments in limited partnerships and private equity funds 7.5% to 7.9% 7.7% to 8.4% 7.7% to 8.4% 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 2016 £m Asia US UK Intra-group Total Revenue from external customers: Insurance operations 5,747 6,817 4,985 - 17,549 Asset management 179 369 561 (246) 863 Unallocated corporate - - 67 - 67 Intra-group revenue eliminated on consolidation (95) (47) (104) 246 - Total revenue from external customers 5,831 7,139 5,509 - 18,479 Half year 2015 £m Asia US UK Intra-group Total Revenue from external customers: Insurance operations 5,154 8,426 4,518 - 18,098 Asset management 179 451 641 (241) 1,030 Unallocated corporate - - 41 - 41 Intra-group revenue eliminated on consolidation (94) (45) (102) 241 - Total revenue from external customers 5,239 8,832 5,098 - 19,169 Full year 2015 £m Asia US UK Intra-group Total Revenue from external customers: Insurance operations 10,514 16,567 8,863 - 35,944 Asset management 349 850 1,246 (487) 1,958 Unallocated corporate - - 99 - 99 Intra-group revenue eliminated on consolidation (178) (90) (219) 487 - Total revenue from external customers 10,685 17,327 9,989 - 38,001 Revenue from external customers comprises: 2016 £m 2015 £m Half year Half year Full year Earned premiums, net of reinsurance 17,394 17,884 35,506 Fee income and investment contract business and asset management (presented as 'Other income') 1,085 1,285 2,495 Total revenue from external customers 18,479 19,169 38,001 The asset management operations of M&G, Prudential Capital, Eastspring Investments and the US asset management businesses provide services to the Group insurance operations. Intra-group fees included within asset management revenue were earned by the following asset management segments: 2016 £m 2015 £m Half year Half year Full year Intra-group revenue generated by: M&G 88 93 194 Prudential Capital 16 9 25 Eastspring Investments 95 94 178 US broker-dealer and asset management 47 45 90 Total intra-group fees included within asset management segment 246 241 487 Revenue from external customers of Asia, US and UK insurance operations shown above are net of outwards reinsurance premiums of £401 million, £162 million and £381 million respectively (half year 2015: £228 million, £142 million and £152 million respectively; full year 2015: £364 million, £320 million and £473 million respectively). Gross premiums earned in Asia including those attributable to joint ventures (that are accounted for on an equity method) were £6,814 million (half year 2015: £6,086 million; full year 2015: £12,136 million). 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: 2016 £m 2015 £m M&G Prudential Capital US Eastspring Investments Half year Total Half year Total Full year Total Revenue (excluding NPH broker-dealer fees) 557 (13) 109 181 834 1,029 1,964 NPH broker-dealer feesnote (i) - - 259 - 259 272 522 Gross revenue 557 (13) 368 181 1,093 1,301 2,486 Charges (excluding NPH broker-dealer fees) (339) (48) (121) (141) (649) (734) (1,497) NPH broker-dealer feesnote (i) - - (259) - (259) (272) (522) Gross charges (339) (48) (380) (141) (908) (1,006) (2,019) Share of profits from joint ventures and associates, net of related tax 5 - - 21 26 27 55 Profit before tax 223 (61) (12) 61 211 322 522 Comprising: Operating profit based on longer-term investment returnsnote (ii) 225 13 (12) 61 287 328 587 Short-term fluctuations in investment returns (2) (74) - - (76) (6) (65) Profit before tax 223 (61) (12) 61 211 322 522 Notes (i) NPH broker-dealer fees represent commissions received that are then paid on to the writing brokers on sales of investment products. To reflect their commercial nature, the amounts are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from this item. The presentation in the table above shows the amounts attributable to this item so that the underlying revenue and charges can be seen. (ii) M&G operating profit based on longer-term investment returns: 2016 £m 2015 £m Half year Half year Full year Asset management fee income 431 489 934 Other income 9 2 5 Staff costs (133) (154) (293) Other costs (96) (94) (240) Underlying profit before performance-related fees 211 243 406 Share of associate's results 5 7 14 Performance-related fees 9 1 22 M&G operating profit based on longer-term investment returns 225 251 442 The revenue for M&G of £449 million (half year 2015: £492 million; full year 2015: £961 million), comprises the amounts for asset management fee income, other income and performance-related fees shown above, is different to the amount of £557 million shown in the main table of this note. This is because the £449 million (half year 2015: £492 million; full year 2015: £961 million) is after deducting commissions which would have been included as charges in the main table. The difference in the presentation of commission is aligned with how management reviews the business. B3 Acquisition costs and other expenditure 2016 £m 2015 £m Half year Half year Full year Acquisition costs incurred for insurance policies (1,700) (1,580) (3,275) Acquisition costs deferred less amortisation of acquisition costs 740 (15) 431 Administration costs and other expenditure (2,451) (2,314) (4,746) Movements in amounts attributable to external unit holders of consolidated investment funds (152) (596) (618) Total acquisition costs and other expenditure (3,563) (4,505) (8,208) Included in total acquisition costs and other expenditure is depreciation of property, plant and equipment of £(75) million (half year 2015: £(55) million; full year 2015 £(129) 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 2016 results: (a) Asia insurance operations In half year 2016, the IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net credit of £42 million (half year 2015: £29 million; full year 2015: £62 million) representing a small number of non-recurring items, including a gain resulting from entering into a reinsurance contract in the period. (b) UK insurance operations Annuity business: allowance for credit risk For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest used for discounting projected future annuity payments to policyholders that would have otherwise applied. The credit risk allowance comprises an amount for long-term best estimate defaults and additional provisions for credit risk premium, the cost of downgrades and short-term defaults. The IFRS credit risk allowance made for shareholder-backed fixed and linked annuity business for PRIL, the principal company which writes the UK's shareholder-backed business, equated to 43 basis points at 30 June 2016 (30 June 2015: 46 basis points; 31 December 2015: 43 basis points). The allowance represented 23 per cent of the bond spread over swap rates (30 June 2015: 31 per cent; 31 December 2015: 25 per cent). The reserves for credit risk allowance at 30 June 2016 for the UK shareholder-backed business were as follows: 2016 £bn 2015 £bn 30 Jun 30 Jun 31 Dec PRIL 1.6 1.5 1.5 PAC shareholder annuity business 0.2 0.2 0.1 Total 1.8 1.7 1.6 Annuity business: Longevity reinsurance and other management actions A number of management actions were taken in the first half of 2016 to improve the solvency position of the UK insurance operations and further mitigate market risk, which have generated combined profits of £140 million. Similar actions were also taken in 2015. Of this amount £66 million related to profit from additional longevity reinsurance transactions covering £1.5 billion of annuity liabilities on an IFRS basis, with the balance of £74 million reflecting the effect of repositioning the fixed income portfolio and other actions. The contribution to profit from similar longevity reinsurance transactions in 2015 was £61 million for half-year covering £1.6 billion of annuity liabilities (on a Pillar 1 basis) and £231 million for full year covering £6.4 billion of annuity liabilities (on a Pillar 1 basis). Other asset-related management actions generated a further £169 million at full year 2015. At 30 June 2016, longevity reinsurance covered £10.7 billion of IFRS annuity liabilities equivalent to 32 per cent of total annuity liabilities. B5 Tax charge (a) Total tax charge by nature of expense The total tax charge in the income statement is as follows: 2016 £m 2015 £m Tax charge Current tax Deferred tax Half year Total Half year Total Full year Total UK tax (162) (67) (229) (159) (149) Overseas tax (340) 300 (40) (487) (593) Total tax charge (502) 233 (269) (646) (742) The current tax charge of £502 million includes £27 million (half year 2015: £16 million; full year 2015: £35 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: 2016 £m 2015 £m Tax charge Current tax Deferred tax Half year Total Half year Total Full year Total Tax charge to policyholders' returns (153) (139) (292) (202) (173) Tax (charge) credit attributable to shareholders (349) 372 23 (444) (569) Total tax (charge) credit (502) 233 (269) (646) (742) The principal reason for the increase in the tax charge attributable to policyholders' returns compared to half year 2015 is an increase on investment return in the with-profits fund in the UK insurance operations. 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 2016 £m Asia insurance operations US insurance operations UK insurance operations Other operations Total Operating profit (loss) based on longer-term investment returns 682 888 492 (3) 2,059 Non-operating profit (loss) 22 (1,471) 246 (192) (1,395) Profit (loss) before tax attributable to shareholders 704 (583) 738 (195) 664 Expected tax rate 21% 35% 20% 20% 8% Tax at the expected rate 148 (204) 148 (39) 53 Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates (14) (5) (16) (3) (38) Deductions not allowable for tax purposes 8 2 6 2 18 Items related to taxation of life insurance businesses (10) (60) (1) - (71) Deferred tax adjustments (1) - 3 (3) (1) Effect of results of joint ventures and associates (10) - - (7) (17) Irrecoverable withholding taxes - - - 20 20 Other 3 - (2) 16 17 Total (24) (63) (10) 25 (72) Effects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years 1 (3) - (2) (4) Total 1 (3) - (2) (4) Total actual tax charge (credit) 125 (270) 138 (16) (23) Analysed into: Tax on operating profit based on longer-term investment returns 120 245 101 13 479 Tax on non-operating profit 5 (515) 37 (29) (502) Actual tax rate: Operating profit based on longer-term investment returns Including non-recurring tax reconciling items 18% 28% 21% (433)% 23% Excluding non-recurring tax reconciling items 17% 28% 21% (500)% 23% Total profit 18% 46% 19% 8% (3)% Half year 2015 £m Asia insurance operations US insurance operations UK insurance operations Other operations Total Operating profit based on longer-term investment returns 574 834 453 20 1,881 Non-operating (loss) profit (107) 193 (96) 11 1 Profit before tax attributable to shareholders 467 1,027 357 31 1,882 Expected tax rate 26% 35% 20% 19% 30% Tax at the expected rate 121 359 71 6 557 Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates (13) (3) (2) (5) (23) Deductions not allowable for tax purposes 4 2 2 11 19 Items related to taxation of life insurance businesses (2) (64) - - (66) Deferred tax adjustments 1 - (1) (4) (4) Effect of results of joint ventures and associates (16) - - (6) (22) Irrecoverable withholding taxes - - - 14 14 Other 2 - 5 (3) 4 Total (24) (65) 4 7 (78) Effects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years 5 (28) - 4 (19) Movements in provisions for open tax matters (9) - - (2) (11) Impact of changes in local statutory tax rates (5) - - - (5) Total (9) (28) - 2 (35) Total actual tax charge 88 266 75 15 444 Analysed into: Tax on operating profit based on longer-term investment returns 91 222 94 19 426 Tax on non-operating profit (3) 44 (19) (4) 18 Actual tax rate: Operating profit based on longer-term investment returns Including non-recurring tax reconciling items 16% 27% 21% 95% 23% Excluding non-recurring tax reconciling items 17% 30% 21% 85% 25% Total profit 19% 26% 21% 48% 24% Full year 2015 £m Asia insurance operations US insurance operations UK insurance operations Other operations Total Operating profit (loss) based on longer-term investment returns 1,209 1,691 1,195 (88) 4,007 Non-operating loss (173) (492) (120) (74) (859) Profit (loss) before tax attributable to shareholders 1,036 1,199 1,075 (162) 3,148 Expected tax rate 24% 35% 20% 20% 27% Tax at the expected rate 249 420 215 (32) 852 Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates (42) (10) (2) (9) (63) Deductions not allowable for tax purposes 15 5 7 6 33 Items related to taxation of life insurance businesses (20) (113) - - (133) Deferred tax adjustments 10 - - (11) (1) Effect of results of joint ventures and associates (37) - - (13) (50) Irrecoverable withholding taxes - - - 28 28 Other (4) (1) 6 2 3 Total (78) (119) 11 3 (183) Effects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years 5 (65) (7) - (67) Movements in provisions for open tax matters (6) - - (5) (11) Impact of changes in local statutory tax rates (5) - (16) (1) (22) Total (6) (65) (23) (6) (100) Total actual tax charge (credit) 165 236 203 (35) 569 Analysed into: Tax on operating profit based on longer-term investment returns 180 408 227 (19) 796 Tax on non-operating profit (15) (172) (24) (16) (227) Actual tax rate: Operating profit based on longer-term investment returns Including non-recurring tax reconciling items 15% 24% 19% 22% 20% Excluding non-recurring tax reconciling items 15% 28% 21% 15% 22% Total profit 16% 20% 19% 22% 18% * The expected tax rates (rounded to the nearest whole percentage) reflect the corporation tax rates generally applied to taxable profit of the relevant country jurisdictions. For Asia operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profit 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 profit. B6 Earnings per share Half year 2016 Before tax Tax Net of tax Basic earnings per share Diluted earnings per share note B1.1 note B5 Note £m £m £m pence pence Based on operating profit based on longer-term investment returns 2,059 (479) 1,580 61.8p 61.7p Short-term fluctuations in investment returns on shareholder-backed business B1.2 (1,360) 491 (869) (34.0)p (34.0)p Amortisation of acquisition accounting adjustments (35) 11 (24) (0.9)p (0.9)p Based on profit for the period 664 23 687 26.9p 26.8p Half year 2015 Before tax Tax Net of tax Basic earnings per share Diluted earnings per share note B1.1 note B5 Note £m £m £m pence pence Based on operating profit based on longer-term investment returns 1,881 (426) 1,455 57.0p 56.9p Short-term fluctuations in investment returns on shareholder-backed business B1.2 86 (31) 55 2.1p 2.1p Cumulative exchange loss on the sold Japan life business recycled from other comprehensive income (46) - (46) (1.8)p (1.8)p Amortisation of acquisition accounting adjustments (39) 13 (26) (1.0)p (1.0)p Based on profit for the period 1,882 (444) 1,438 56.3p 56.2p Full year 2015 Before tax Tax Net of tax Basic earnings per share Diluted earnings per share note B1.1 note B5 Note £m £m £m pence pence Based on operating profit based on longer-term investment returns 4,007 (796) 3,211 125.8p 125.6p Short-term fluctuations in investment returns on shareholder-backed business B1.2 (737) 202 (535) (21.0)p (20.9)p Cumulative exchange loss on the sold Japan life business recycled from other comprehensive income (46) - (46) (1.8)p (1.8)p Amortisation of acquisition accounting adjustments (76) 25 (51) (2.0)p (2.0)p Based on profit for the year 3,148 (569) 2,579 101.0p 100.9p Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests. The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated unit trusts and OEICs, is set out as below: Half year 2016 Half year 2015 Full year 2015 Weighted average number of shares for calculation of: (millions) (millions) (millions) Basic earnings per share 2,558 2,552 2,553 Diluted earnings per share 2,559 2,555 2,556 B7 Dividends Half year 2016 Half year 2015 Full year 2015 Pence per share £m Pence per share £m Pence per share £m Dividends relating to reporting period: First interim dividend / Interim dividend for prior year 12.93p 333 12.31p 315 12.31p 315 Second interim dividend - - - - 26.47p 681 Special dividend - - - - 10.00p 257 Total 12.93p 333 12.31p 315 48.78p 1,253 Dividends declared and paid in reporting period: Current year interim dividend - - - - 12.31p 315 Second interim dividend / Final dividend for prior year 26.47p 679 25.74p 659 25.74p 659 Special dividend 10.00p 256 - - - - Total 36.47p 935 25.74p 659 38.05p 974 Dividend per share Prudential makes twice-yearly interim dividend payments to replace interim / final dividends that were paid in 2015. The second interim dividend of 26.47 pence per ordinary share and the special dividend of 10.00 pence per ordinary share for the year ended 31 December 2015 were paid to eligible shareholders on 20 May 2016. The 2016 first interim dividend of 12.93 pence per ordinary share will be paid on 29 September 2016 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on 26 August 2016 (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 6 October 2016. The first interim dividend will be paid on or about 6 October 2016 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 9 August 2016. The exchange rate at which the dividend payable to the SG Shareholders will be translated into Singapore Dollars, 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 the assets, liabilities and capital of the Group's businesses more comprehensively, it is appropriate to provide analyses of the Group's statement of financial position by operating segment and type of business. C1.1 Group statement of financial position - analysis by segment 2016 £m 2015 £m Insurance operations Total insurance operations Asset management operations Unallocated to a segment (central operations) Elimination of intra-group debtors and creditors 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) 258 - - 258 1,230 - - 1,488 1,461 1,463 Deferred acquisition costs and other intangible assets C5.1(b) 2,319 7,081 81 9,481 19 49 - 9,549 7,310 8,422 Total 2,577 7,081 81 9,739 1,249 49 - 11,037 8,771 9,885 Intangible assets attributable to with-profits funds: Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes - - 189 189 - - - 189 184 185 Deferred acquisition costs and other intangible assets 37 - 8 45 - - - 45 49 50 Total 37 - 197 234 - - - 234 233 235 Total 2,614 7,081 278 9,973 1,249 49 - 11,271 9,004 10,120 Deferred tax assets C7 92 3,369 139 3,600 145 26 - 3,771 2,820 2,819 Other non-investment and non-cash assets note (i) 5,489 7,864 7,780 21,133 1,635 5,603 (10,864) 17,507 14,664 14,283 Investments of long-term business and other operations: Investment properties 5 5 13,930 13,940 - - - 13,940 13,259 13,422 Investments in joint ventures and associates accounted for using the equity method 525 - 462 987 148 - - 1,135 962 1,034 Financial investments: Loans C3.4 1,278 8,504 3,616 13,398 817 - - 14,215 12,578 12,958 Equity securities and portfolio holdings in unit trusts 22,631 104,124 49,150 175,905 106 26 - 176,037 155,253 157,453 Debt securities C3.3 35,519 41,143 89,114 165,776 2,587 4 - 168,367 142,307 147,671 Other investments 79 2,503 7,489 10,071 265 4 - 10,340 7,713 7,353 Deposits 912 - 13,184 14,096 85 - - 14,181 11,043 12,088 Total investments 60,949 156,279 176,945 394,173 4,008 34 - 398,215 343,115 351,979 Assets held for sale - - 30 30 - - - 30 - 2 Cash and cash equivalents 2,010 1,056 3,445 6,511 1,693 326 - 8,530 8,298 7,782 Total assets C3.1 71,154 175,649 188,617 435,420 8,730 6,038 (10,864) 439,324 377,901 386,985 2016 £m 2015 £m Insurance operations By operating segment Note Asia US UK Total insurance operations Asset management operations Unallocated to a segment (central operations) Elimination of intra- group debtors and creditors 30 Jun Group Total 30 Jun Group Total 31 Dec Group Total Equity and liabilities Equity Shareholders' equity 4,873 5,056 6,163 16,092 2,422 (3,909) - 14,605 12,104 12,955 Non-controlling interests 1 - - 1 - - - 1 1 1 Total equity 4,874 5,056 6,163 16,093 2,422 (3,909) - 14,606 12,105 12,956 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) 53,437 159,155 151,233 363,825 - - (1,315) 362,510 313,620 322,518 Unallocated surplus of with-profits funds 2,351 - 11,246 13,597 - - - 13,597 12,768 13,096 Total policyholder liabilities and unallocated surplus of with-profits funds C4 55,788 159,155 162,479 377,422 - - (1,315) 376,107 326,388 335,614 Core structural borrowings of shareholder-financed operations: Subordinated debt - - - - - 4,956 - 4,956 3,897 4,018 Other - 186 - 186 275 549 - 1,010 983 993 Total C6.1 - 186 - 186 275 5,505 - 5,966 4,880 5,011 Operational borrowings attributable to shareholder-financed operations C6.2(a) 11 70 163 244 - 2,554 - 2,798 2,504 1,960 Borrowings attributable to with-profits operations C6.2(b) 6 - 1,421 1,427 - - - 1,427 1,089 1,332 Deferred tax liabilities C7 905 3,204 1,253 5,362 23 12 - 5,397 4,325 4,010 Other non-insurance liabilitiesnote (ii) 9,570 7,978 17,138 34,686 6,010 1,876 (9,549) 33,023 26,610 26,102 Total liabilities C3.1 66,280 170,593 182,454 419,327 6,308 9,947 (10,864) 424,718 365,796 374,029 Total equity and liabilities 71,154 175,649 188,617 435,420 8,730 6,038 (10,864) 439,324 377,901 386,985 Notes (i) The largest component of the other non-investment and non-cash assets of £17,507 million (30 June 2015: £14,664 million; 31 December 2015: £14,283 million) is the reinsurers' share of contract liabilities of £9,470 million (30 June 2015: £7,259 million; 31 December 2015; £7,903 million). As set out in note C2.2 these amounts relate primarily to the reinsurance ceded in respect of the acquired REALIC business by the Group's US insurance operations. Within other non-investment and non-cash assets are premiums receivable of £467 million (30 June 2015: £884 million; 31 December 2015: £428 million) of which 73 per cent are due within one year. The remaining 27 per cent is due after one year. Also included within other non-investment and non-cash assets are property, plant and equipment of £1,214 million (30 June 2015: £984 million; 31 December 2015: £1,197 million) of which £910 million (30 June 2015: £659 million; 31 December 2015: £833 million) was held by the Group's with-profits operations, primarily by the consolidated subsidiaries for venture funds and other investment purposes of the PAC with-profits fund. The Group made additions to property, plant and equipment of £128 million (30 June 2015: £105 million; 31 December 2015: £256 million). (ii) Within other non-insurance liabilities are other creditors of £6,520 million (30 June 2015: £5,515 million; 31 December 2015: £4,876 million) of which £6,147 million (30 June 2015: £5,193 million; 31 December 2015: £4,554 million) is due within one year. C1.2 Group statement of financial position - analysis by business type 2016 £m 2015 £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) Elimination of intra-group debtors and creditors 30 Jun Group Total 30 Jun Group Total 31 Dec Group Total Assets Intangible assets attributable to shareholders: Goodwill C5.1(a) - - 258 1,230 - - 1,488 1,461 1,463 Deferred acquisition costs and other intangible assets C5.1(b) - - 9,481 19 49 - 9,549 7,310 8,422 Total - - 9,739 1,249 49 - 11,037 8,771 9,885 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes 189 - - - - - 189 184 185 Deferred acquisition costs and other intangible assets 45 - - - - - 45 49 50 Total 234 - - - - - 234 233 235 Total 234 - 9,739 1,249 49 - 11,271 9,004 10,120 Deferred tax assets C7 88 - 3,512 145 26 - 3,771 2,820 2,819 Other non-investment and non-cash assets 4,947 892 12,546 1,635 5,603 (8,116) 17,507 14,664 14,283 Investments of long-term business and other operations: Investment properties 11,655 694 1,591 - - - 13,940 13,259 13,422 Investments in joint ventures and associates accounted for using the equity method 462 - 525 148 - - 1,135 962 1,034 Financial investments: Loans C3.4 2,716 - 10,682 817 - - 14,215 12,578 12,958 Equity securities and portfolio holdings in unit trusts 43,195 131,405 1,305 106 26 - 176,037 155,253 157,453 Debt securities C3.3 67,833 10,015 87,928 2,587 4 - 168,367 142,307 147,671 Other investments 6,934 54 3,083 265 4 - 10,340 7,713 7,353 Deposits 11,289 1,078 1,729 85 - - 14,181 11,043 12,088 Total investments 144,084 143,246 106,843 4,008 34 - 398,215 343,115 351,979 Assets held for sale 30 - - - - - 30 - 2 Cash and cash equivalents 2,499 1,082 2,930 1,693 326 - 8,530 8,298 7,782 Total assets C3.1 151,882 145,220 135,570 8,730 6,038 (8,116) 439,324 377,901 386,985 Equity and liabilities Equity Shareholders' equity - - 16,092 2,422 (3,909) - 14,605 12,104 12,955 Non-controlling interests - - 1 - - - 1 1 1 Total equity - - 16,093 2,422 (3,909) - 14,606 12,105 12,956 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) 120,311 141,157 101,042 - - - 362,510 313,620 322,518 Unallocated surplus of with-profits funds 13,597 - - - - - 13,597 12,768 13,096 Total policyholder liabilities and unallocated surplus of with-profits funds C4 133,908 141,157 101,042 - - - 376,107 326,388 335,614 Core structural borrowings of shareholder-financed operations: Subordinated debt - - - - 4,956 - 4,956 3,897 4,018 Other - - 186 275 549 - 1,010 983 993 Total C6.1 - - 186 275 5,505 - 5,966 4,880 5,011 Operational borrowings attributable to shareholder-financed operations C6.2(a) - 11 233 - 2,554 - 2,798 2,504 1,960 Borrowings attributable to with-profits operations C6.2(b) 1,427 - - - - - 1,427 1,089 1,332 Deferred tax liabilities C7 1,559 30 3,773 23 12 - 5,397 4,325 4,010 Other non-insurance liabilities 14,988 4,022 14,243 6,010 1,876 (8,116) 33,023 26,610 26,102 Total liabilities C3.1 151,882 145,220 119,477 6,308 9,947 (8,116) 424,718 365,796 374,029 Total equity and liabilities 151,882 145,220 135,570 8,730 6,038 (8,116) 439,324 377,901 386,985 * Participating funds business in the table above is presented after the elimination on consolidation of the balances relating to an intra-group 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 the assets and liabilities of each segment by business type. C2.1 Asia insurance operations 2016 £m 2015 £m With-profits business Unit-linked assets and liabilities Other business 30 Jun Total 30 Jun Total 31 Dec Total Note note Assets Intangible assets attributable to shareholders: Goodwill - - 258 258 231 233 Deferred acquisition costs and other intangible assets - - 2,319 2,319 1,918 2,103 Total - - 2,577 2,577 2,149 2,336 Intangible assets attributable to with-profits funds: Deferred acquisition costs and other intangible assets 37 - - 37 44 42 Deferred tax assets - - 92 92 95 66 Other non-investment and non-cash assets 2,756 325 2,408 5,489 3,367 3,621 Investments of long-term business and other operations: Investment properties - - 5 5 5 5 Investments in joint ventures and associates accounted for using the equity method - - 525 525 415 475 Financial investments: Loans C3.4 652 - 626 1,278 1,009 1,084 Equity securities and portfolio holdings in unit trusts 8,898 12,698 1,035 22,631 20,190 18,532 Debt securities C3.3 20,578 3,427 11,514 35,519 24,366 28,292 Other investments 41 20 18 79 71 57 Deposits 169 284 459 912 696 773 Total investments 30,338 16,429 14,182 60,949 46,752 49,218 Cash and cash equivalents 785 360 865 2,010 1,672 2,064 Total assets 33,916 17,114 20,124 71,154 54,079 57,347 Equity and liabilities Equity Shareholders' equity - - 4,873 4,873 3,620 3,956 Non-controlling interests - - 1 1 1 1 Total equity - - 4,874 4,874 3,621 3,957 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) 25,804 15,705 11,928 53,437 40,832 42,516 Unallocated surplus of with-profits funds 2,351 - - 2,351 2,127 2,553 Total C4.1(b) 28,155 15,705 11,928 55,788 42,959 45,069 Operational borrowings attributable to shareholder-financed operations - 7 4 11 - - Borrowings attributable to with-profits operations 6 - - 6 - - Deferred tax liabilities 584 30 291 905 760 734 Other non-insurance liabilities 5,171 1,372 3,027 9,570 6,739 7,587 Total liabilities 33,916 17,114 15,250 66,280 50,458 53,390 Total equity and liabilities 33,916 17,114 20,124 71,154 54,079 57,347 Note The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. Assets and liabilities of other participating businesses are included in the column for 'Other business'. C2.2 US insurance operations 2016 £m 2015 £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) note (i) Assets Intangible assets attributable to shareholders: Deferred acquisition costs and other intangibles - 7,081 7,081 5,240 6,168 Total - 7,081 7,081 5,240 6,168 Deferred tax assets - 3,369 3,369 2,389 2,448 Other non-investment and non-cash assetsnote (iv) - 7,864 7,864 6,562 7,205 Investments of long-term business and other operations: Investment properties - 5 5 19 5 Financial investments: Loans C3.4 - 8,504 8,504 6,798 7,418 Equity securities and portfolio holdings in unit trustsnote (iii) 103,904 220 104,124 86,283 91,216 Debt securities C3.3 - 41,143 41,143 32,117 34,071 Other investmentsnote (ii) - 2,503 2,503 1,515 1,715 Total investments 103,904 52,375 156,279 126,732 134,425 Cash and cash equivalents - 1,056 1,056 713 1,405 Total assets 103,904 71,745 175,649 141,636 151,651 Equity and liabilities Equity Shareholders' equitynote (v) - 5,056 5,056 4,004 4,154 Total equity - 5,056 5,056 4,004 4,154 Liabilities Policyholder liabilities: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 103,904 55,251 159,155 129,667 138,913 Total C4.1 (c) 103,904 55,251 159,155 129,667 138,913 Core structural borrowings of shareholder-financed operations - 186 186 159 169 Operational borrowings attributable to shareholder-financed operations - 70 70 221 66 Deferred tax liabilities - 3,204 3,204 2,309 2,086 Other non-insurance liabilities - 7,978 7,978 5,276 6,263 Total liabilities 103,904 66,689 170,593 137,632 147,497 Total equity and liabilities 103,904 71,745 175,649 141,636 151,651 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, eg in respect of guarantees, are shown within other business. (ii) Other investments comprise: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Derivative assets 1,608 765 905 Partnerships in investment pools and other 895 750 810 2,503 1,515 1,715 * After taking account of the derivative liabilities of £421 million (30 June 2015: £258 million; 31 December 2015: £249 million), which are included in other non-insurance liabilities, the derivative position for US operations is a net asset of £1,187 million (30 June 2015: net asset of £507 million; 31 December 2015: net asset of £656 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 include investments in mutual funds, the majority of which are equity-based. (iv) Included within other non-investment and non-cash assets of £7,864 million (30 June 2015: £6,562 million; 31 December 2015: £7,205 million) were balances of £6,859 million (30 June 2015: £5,817 million; 31 December 2015: £6,211 million) for reinsurers' share of insurance contract liabilities. Of the £6,859 million as at 30 June 2016, £5,870 million (30 June 2015: £5,057 million; 31 December 2015: £5,388 million) related to the reinsurance ceded in respect of the acquired REALIC business. Jackson holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability. As of 30 June 2016, the funds withheld liability of £2,616 million (30 June 2015: £2,204 million; 31 December 2015: £2,347 million) was recorded within other non-insurance liabilities. (v) Changes in shareholders' equity 2016 £m 2015 £m Half year Half year Full year Operating profit based on longer-term investment returns B1.1 888 834 1,691 Short-term fluctuations in investment returns B1.2 (1,440) 228 (424) Amortisation of acquisition accounting adjustments arising on the purchase of REALIC (31) (35) (68) Profit before shareholder tax (583) 1027 1,199 Tax B5 270 (266) (236) Profit for the period (313) 761 963 Profit for the period (as above) (313) 761 963 Items recognised in other comprehensive income: Exchange movements 445 (34) 230 Unrealised valuation movements on securities classified as available-for-sale: Unrealised holding gains (losses) arising during the period 2,023 (661) (1,256) Add back net losses / deduct net gains included in the income statement on disposal and impairment 95 (101) (49) Total unrealised valuation movements 2,118 (762) (1,305) Related amortisation of deferred acquisition costs C5.1(b) (435) 165 337 Related tax (589) 209 339 Total other comprehensive income (loss) 1,539 (422) (399) Total comprehensive income for the period 1,226 339 564 Dividends, interest payments to central companies and other movements (324) (402) (477) Net increase (decrease) in equity 902 (63) 87 Shareholders' equity at beginning of period 4,154 4,067 4,067 Shareholders' equity at end of period 5,056 4,004 4,154 C2.3 UK insurance operations Of the total investments of £177 billion in UK insurance operations, £114 billion of investments are held by Scottish Amicable Insurance Fund and the PAC with-profits sub-fund. Shareholders are exposed only indirectly to value movements on these assets. 2016 £m 2015 £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 - - - 81 81 81 85 83 Total - - - 81 81 81 85 83 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes - 189 - - - 189 184 185 Deferred acquisition costs - 8 - - - 8 5 8 Total - 197 - - - 197 189 193 Total - 197 - 81 81 278 274 276 Deferred tax assets - 88 - 51 51 139 140 132 Other non-investment and non-cash assets 179 4,760 567 2,274 2,841 7,780 8,161 7,209 Investments of long-term business and other operations: Investment properties 346 11,309 694 1,581 2,275 13,930 13,235 13,412 Investments in joint ventures and associates accounted for using the equity method (principally property fund joint ventures) - 462 - - - 462 433 434 Financial investments: Loans C3.4 55 2,009 - 1,552 1,552 3,616 3,845 3,571 Equity securities and portfolio holdings in unit trusts 2,614 31,683 14,803 50 14,853 49,150 48,662 47,593 Debt securities C3.3 2,127 45,128 6,588 35,271 41,859 89,114 83,876 83,101 Other investmentsnote (iii) 300 6,593 34 562 596 7,489 6,006 5,486 Deposits 517 10,603 794 1,270 2,064 13,184 10,295 11,226 Total investments 5,959 107,787 22,913 40,286 63,199 176,945 166,352 164,823 Properties held for sale - 30 - - - 30 - 2 Cash and cash equivalents 144 1,570 722 1,009 1,731 3,445 3,673 2,880 Total assets 6,282 114,432 24,202 43,701 67,903 188,617 178,600 175,322 2016 £m 2015 £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 - - - 6,163 6,163 6,163 3,972 5,140 Total equity - - - 6,163 6,163 6,163 3,972 5,140 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) 5,906 89,916 21,548 33,863 55,411 151,233 144,431 142,350 Unallocated surplus of with-profits funds (reflecting application of 'realistic' basis provisions for UK regulated with-profits funds) - 11,246 - - - 11,246 10,641 10,543 Total C4.1(d) 5,906 101,162 21,548 33,863 55,411 162,479 155,072 152,893 Operational borrowings attributable to shareholder-financed operations - - 4 159 163 163 96 179 Borrowings attributable to with-profits funds 12 1,409 - - - 1,421 1,089 1,332 Deferred tax liabilities 25 950 - 278 278 1,253 1,226 1,162 Other non-insurance liabilities 339 10,911 2,650 3,238 5,888 17,138 17,145 14,616 Total liabilities 6,282 114,432 24,202 37,538 61,740 182,454 174,628 170,182 Total equity and liabilities 6,282 114,432 24,202 43,701 67,903 188,617 178,600 175,322 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 £11.3 billion (30 June 2015: £11.3 billion; 31 December 2015: £10.8 billion) of non-profit annuities liabilities. 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 4 per cent of the total assets of the WPSF and includes the with-profits annuity business transferred to Prudential from the Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profits to shareholders on this with-profits annuity business emerge on a 'charges less expenses' basis and policyholders are entitled to 100 per cent of the investment earnings. (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: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Derivative assets 3,563 2,555 1,930 Partnerships in investment pools and other 3,926 3,451 3,556 7,489 6,006 5,486 * After including derivative liabilities of £3,736 million (30 June 2015: £841 million; 31 December 2015: £2,125 million), which are also included in the statement of financial position, the overall derivative position was a net liability of £173 million (30 June 2015: net asset of £1,714 million; 31 December 2015: net liability of £195 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 2016 £m 2015 £m Note M&G Prudential Capital US Eastspring Investments 30 Jun Total 30 Jun Total 31 Dec Total Assets Intangible assets: Goodwill 1,153 - 16 61 1,230 1,230 1,230 Deferred acquisition costs and other intangible assets 13 - 4 2 19 19 21 Total 1,166 - 20 63 1,249 1,249 1,251 Other non-investment and non-cash assets 905 536 263 76 1,780 2,292 1,644 Investments in joint ventures and associates accounted for using the equity method 33 - - 115 148 114 125 Financial investments: Loans C3.4 - 817 - - 817 926 885 Equity securities and portfolio holdings in unit trusts 89 - - 17 106 89 85 Debt securities C3.3 - 2,587 - - 2,587 1,948 2,204 Other investments 19 242 4 - 265 118 94 Deposits - - 36 49 85 52 89 Total investments 141 3,646 40 181 4,008 3,247 3,482 Cash and cash equivalents 330 1,145 84 134 1,693 1,390 1,054 Total assets 2,542 5,327 407 454 8,730 8,178 7,431 Equity and liabilities Equity Shareholders' equity 1,838 31 201 352 2,422 2,172 2,332 Total equity 1,838 31 201 352 2,422 2,172 2,332 Liabilities Core structural borrowing of shareholder-financed operations - 275 - - 275 275 275 Operational borrowing attributable to shareholder-financed operations - - - - - 11 10 Intra-group debt represented by operational borrowings at Group levelnote (i) - 2,554 - - 2,554 2,176 1,705 Other non-insurance liabilitiesnote (ii) 704 2,467 206 102 3,479 3,544 3,109 Total liabilities 704 5,296 206 102 6,308 6,006 5,099 Total equity and liabilities 2,542 5,327 407 454 8,730 8,178 7,431 Notes (i) Intra-group debt represented by operational borrowings at Group level, which are in respect of Prudential Capital's short-term fixed income security programme and comprise: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Commercial paper 1,956 1,577 1,107 Medium Term Notes 598 599 598 Total intra-group debt represented by operational borrowings at Group level 2,554 2,176 1,705 (ii) 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 2016 £m At fair value Cost/ amortised cost/ IFRS 4 basis value Total carrying value Fair value, where applicable note (i) Through profit or loss Available- for-sale Assets Intangible assets attributable to shareholders: Goodwill - - 1,488 1,488 Deferred acquisition costs and other intangible assets - - 9,549 9,549 Total - - 11,037 11,037 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes - - 189 189 Deferred acquisition costs and other intangible assets - - 45 45 Total - - 234 234 Total intangible assets - - 11,271 11,271 Other non-investment and non-cash assets: Property, plant and equipment - - 1,214 1,214 Reinsurers' share of insurance contract liabilities - - 9,470 9,470 Deferred tax assets - - 3,771 3,771 Current tax recoverable - - 554 554 Accrued investment income - - 2,764 2,764 2,764 Other debtors - - 3,505 3,505 3,505 Total - - 21,278 21,278 Investments of long-term business and other operations:note (ii) Investment properties 13,940 - - 13,940 13,940 Investments accounted for using the equity method - - 1,135 1,135 Loans 2,707 - 11,508 14,215 15,018 Equity securities and portfolio holdings in unit trusts 176,037 - - 176,037 176,037 Debt securities 127,322 41,045 - 168,367 168,367 Other investments 10,340 - - 10,340 10,340 Deposits - - 14,181 14,181 14,181 Total investments 330,346 41,045 26,824 398,215 Assets held for sale 30 - - 30 30 Cash and cash equivalents - - 8,530 8,530 8,530 Total assets 330,376 41,045 67,903 439,324 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities - - 296,873 296,873 Investment contract liabilities with discretionary participation features note (iii) - - 46,286 46,286 Investment contract liabilities without discretionary participation features 16,178 - 3,173 19,351 19,421 Unallocated surplus of with-profits funds - - 13,597 13,597 Total 16,178 - 359,929 376,107 Core structural borrowings of shareholder-financed operations - - 5,966 5,966 6,392 Other borrowings: Operational borrowings attributable to shareholder-financed operations - - 2,798 2,798 2,798 Borrowings attributable to with-profits operations - - 1,427 1,427 1,430 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements - - 4,963 4,963 5,006 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 8,770 - - 8,770 8,770 Deferred tax liabilities - - 5,397 5,397 Current tax liabilities - - 566 566 Accruals and deferred income - - 912 912 Other creditors 375 - 6,145 6,520 6,520 Provisions - - 467 467 Derivative liabilities 5,342 - - 5,342 5,342 Other liabilities 2,616 - 2,867 5,483 5,483 Total 17,103 - 21,317 38,420 Total liabilities 33,281 - 391,437 424,718 30 Jun 2015 £m At fair value Cost/ amortised cost/ IFRS 4 basis value Total carrying value Fair value, where applicable note (i) Through profit or loss Available- for-sale Assets Intangible assets attributable to shareholders: Goodwill - - 1,461 1,461 Deferred acquisition costs and other intangible assets - - 7,310 7,310 Total - - 8,771 8,771 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes - - 184 184 Deferred acquisition costs and other intangible assets - - 49 49 Total - - 233 233 Total intangible assets - - 9,004 9,004 Other non-investment and non-cash assets: Property, plant and equipment - - 984 984 Reinsurers' share of insurance contract liabilities - - 7,259 7,259 Deferred tax assets - - 2,820 2,820 Current tax recoverable - - 220 220 Accrued investment income - - 2,575 2,575 2,575 Other debtors - - 3,626 3,626 3,626 Total - - 17,484 17,484 Investments of long-term business and other operations:note (ii) Investment properties 13,259 - - 13,259 13,259 Investments accounted for using the equity method - 962 962 Loans 2,306 - 10,272 12,578 13,189 Equity securities and portfolio holdings in unit trusts 155,253 - - 155,253 155,253 Debt securities 110,273 32,034 - 142,307 142,307 Other investments 7,713 - - 7,713 7,713 Deposits - - 11,043 11,043 11,043 Total investments 288,804 32,034 22,277 343,115 Cash and cash equivalents - 8,298 8,298 8,298 Total assets 288,804 32,034 57,063 377,901 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities - - 254,417 254,417 Investment contract liabilities with discretionary participation features note (iii) - - 39,795 39,795 Investment contract liabilities without discretionary participation features 16,741 - 2,667 19,408 19,426 Unallocated surplus of with-profits funds - - 12,768 12,768 Total 16,741 - 309,647 326,388 Core structural borrowings of shareholder-financed operations - - 4,880 4,880 5,373 Other borrowings: Operational borrowings attributable to shareholder-financed operations - - 2,504 2,504 2,504 Borrowings attributable to with-profits operations - - 1,089 1,089 1,102 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements - - 3,296 3,296 3,305 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 10,007 - - 10,007 10,007 Deferred tax liabilities - - 4,325 4,325 Current tax liabilities - - 393 393 Accruals and deferred income - - 750 750 Other creditors 322 - 5,193 5,515 5,515 Provisions - - 546 546 Derivative liabilities 1,758 - - 1,758 1,758 Other liabilities 2,204 - 2,141 4,345 4,345 Total 14,291 - 16,644 30,935 Total liabilities 31,032 - 334,764 365,796 31 Dec 2015 £m At fair value Cost/ amortised cost/ IFRS 4 basis value Total carrying value Fair value, where applicable note (i) Through profit or loss Available- for-sale Assets Intangible assets attributable to shareholders: Goodwill - - 1,463 1,463 Deferred acquisition costs and other intangible assets - - 8,422 8,422 Total - - 9,885 9,885 Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes - - 185 185 Deferred acquisition costs and other intangible assets - - 50 50 Total - - 235 235 Total intangible assets - - 10,120 10,120 Other non-investment and non-cash assets: Property, plant and equipment - - 1,197 1,197 Reinsurers' share of insurance contract liabilities - - 7,903 7,903 Deferred tax assets - - 2,819 2,819 Current tax recoverable - - 477 477 Accrued investment income - - 2,751 2,751 2,751 Other debtors - - 1,955 1,955 1,955 Total - - 17,102 17,102 Investments of long-term business and other operations:note (ii) Investment properties 13,422 - - 13,422 13,422 Investments accounted for using the equity method - - 1,034 1,034 Loans 2,438 - 10,520 12,958 13,482 Equity securities and portfolio holdings in unit trusts 157,453 - - 157,453 157,453 Debt securities 113,687 33,984 - 147,671 147,671 Other investments 7,353 - - 7,353 7,353 Deposits - - 12,088 12,088 12,088 Total investments 294,353 33,984 23,642 351,979 Assets held for sale 2 - - 2 2 Cash and cash equivalents - - 7,782 7,782 7,782 Total assets 294,355 33,984 58,646 386,985 Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities - - 260,622 260,622 Investment contract liabilities with discretionary participation features note (iii) - - 42,959 42,959 Investment contract liabilities without discretionary participation features 16,022 - 2,784 18,806 18,842 Unallocated surplus of with-profits funds - - 13,227 13,227 Total 16,022 - 319,592 335,614 Core structural borrowings of shareholder-financed operations - - 5,011 5,011 5,419 Other borrowings: Operational borrowings attributable to shareholder-financed operations - - 1,960 1,960 1,960 Borrowings attributable to with-profits operations - - 1,332 1,332 1,344 Other non-insurance liabilities: Obligations under funding, securities lending and sale and repurchase agreements - - 3,765 3,765 3,775 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 7,873 - - 7,873 7,873 Deferred tax liabilities - - 4,010 4,010 Current tax liabilities - - 325 325 Accruals and deferred income - - 952 952 Other creditors 322 - 4,554 4,876 4,876 Provisions - - 604 604 Derivative liabilities 3,119 - - 3,119 3,119 Other liabilities 2,347 - 2,241 4,588 4,588 Total 13,661 - 16,451 30,112 Total liabilities 29,683 - 344,346 374,029 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 2016 recognised in the income statement amounted to a net loss of £1.2 billion (30 June 2015: net gain of £1.8 billion; 31 December 2015: net gain of £3.0 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 on which 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 2016 £m Level 1 Level 2 Level 3 Analysis of financial investments, net of derivative liabilities by business type Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Total With-profits Equity securities and portfolio holdings in unit trusts 38,596 3,969 630 43,195 Debt securities 24,430 42,741 662 67,833 Other investments (including derivative assets) 103 3,157 3,674 6,934 Derivative liabilities (192) (2,536) - (2,728) Total financial investments, net of derivative liabilities 62,937 47,331 4,966 115,234 Percentage of total 55% 41% 4% 100% Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts 130,977 401 27 131,405 Debt securities 4,956 5,059 - 10,015 Other investments (including derivative assets) 11 38 5 54 Derivative liabilities (19) (51) - (70) Total financial investments, net of derivative liabilities 135,925 5,447 32 141,404 Percentage of total 96% 4% 0% 100% Non-linked shareholder-backed Loans - 259 2,448 2,707 Equity securities and portfolio holdings in unit trusts 1,402 1 34 1,437 Debt securities 23,379 66,823 317 90,519 Other investments (including derivative assets) - 2,369 983 3,352 Derivative liabilities - (2,064) (480) (2,544) Total financial investments, net of derivative liabilities 24,781 67,388 3,302 95,471 Percentage of total 26% 71% 3% 100% Group total analysis, including other financial liabilities held at fair value Group total Loans - 259 2,448 2,707 Equity securities and portfolio holdings in unit trusts 170,975 4,371 691 176,037 Debt securities 52,765 114,623 979 168,367 Other investments (including derivative assets) 114 5,564 4,662 10,340 Derivative liabilities (211) (4,651) (480) (5,342) Total financial investments, net of derivative liabilities 223,643 120,166 8,300 352,109 Investment contracts liabilities without discretionary participation features held at fair value - (16,178) - (16,178) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (5,275) (2,427) (1,068) (8,770) Other financial liabilities held at fair value - (375) (2,616) (2,991) Total financial instruments at fair value 218,368 101,186 4,616 324,170 Percentage of total 67% 31% 2% 100% * Loans in the table above are those classified as fair value through profit and loss in note C3.1. 30 Jun 2015 £m Level 1 Level 2 Level 3 Analysis of financial investments, net of derivative liabilities by business type Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Total With-profits Equity securities and portfolio holdings in unit trusts 36,488 2,650 623 39,761 Debt securities 16,988 41,635 361 58,984 Other investments (including derivative assets) 26 2,255 3,269 5,550 Derivative liabilities (29) (565) - (594) Total financial investments, net of derivative liabilities 53,473 45,975 4,253 103,701 Percentage of total 52% 44% 4% 100% Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts 113,797 344 9 114,150 Debt securities 4,300 5,558 - 9,858 Other investments (including derivative assets) 1 70 4 75 Derivative liabilities - (18) - (18) Total financial investments, net of derivative liabilities 118,098 5,954 13 124,065 Percentage of total 95% 5% 0% 100% Non-linked shareholder-backed Loans - 267 2,039 2,306 Equity securities and portfolio holdings in unit trusts 1,182 125 35 1,342 Debt securities 15,170 58,099 196 73,465 Other investments (including derivative assets) - 1,310 778 2,088 Derivative liabilities - (810) (336) (1,146) Total financial investments, net of derivative liabilities 16,352 58,991 2,712 78,055 Percentage of total 21% 76% 3% 100% Group total analysis, including other financial liabilities held at fair value Group total Loans - 267 2,039 2,306 Equity securities and portfolio holdings in unit trusts 151,467 3,119 667 155,253 Debt securities 36,458 105,292 557 142,307 Other investments (including derivative assets) 27 3,635 4,051 7,713 Derivative liabilities (29) (1,393) (336) (1,758) Total financial investments, net of derivative liabilities 187,923 110,920 6,978 305,821 Investment contracts liabilities without discretionary participation features held at fair value (22) (16,719) - (16,741) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (8,559) (45) (1,403) (10,007) Other financial liabilities held at fair value - (322) (2,204) (2,526) Total financial instruments at fair value 179,342 93,834 3,371 276,547 Percentage of total 65% 34% 1% 100% * Loans in the table above are those classified as fair value through profit and loss in note C3.1. 31 Dec 2015 £m Level 1 Level 2 Level 3 Analysis of financial investments, net of derivative liabilities by business type Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Total With-profits Equity securities and portfolio holdings in unit trusts 35,441 3,200 554 39,195 Debt securities 20,312 40,033 525 60,870 Other investments (including derivative assets) 85 1,589 3,371 5,045 Derivative liabilities (110) (1,526) - (1,636) Total financial investments, net of derivative liabilities 55,728 43,296 4,450 103,474 Percentage of total 54% 42% 4% 100% Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts 116,691 354 22 117,067 Debt securities 4,350 4,940 - 9,290 Other investments (including derivative assets) 5 20 4 29 Derivative liabilities (2) (16) - (18) Total financial investments, net of derivative liabilities 121,044 5,298 26 126,368 Percentage of total 96% 4% 0% 100% Non-linked shareholder-backed Loans - 255 2,183 2,438 Equity securities and portfolio holdings in unit trusts 1,150 10 31 1,191 Debt securities 17,767 59,491 253 77,511 Other investments (including derivative assets) - 1,378 901 2,279 Derivative liabilities - (1,112) (353) (1,465) Total financial investments, net of derivative liabilities 18,917 60,022 3,015 81,954 Percentage of total 23% 73% 4% 100% Group total analysis, including other financial liabilities held at fair value Group total Loans - 255 2,183 2,438 Equity securities and portfolio holdings in unit trusts 153,282 3,564 607 157,453 Debt securities 42,429 104,464 778 147,671 Other investments (including derivative assets) 90 2,987 4,276 7,353 Derivative liabilities (112) (2,654) (353) (3,119) Total financial investments, net of derivative liabilities 195,689 108,616 7,491 311,796 Investment contracts liabilities without discretionary participation features held at fair value - (16,022) - (16,022) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (5,782) (1,055) (1,036) (7,873) Other financial liabilities held at fair value - (322) (2,347) (2,669) Total financial instruments at fair value 189,907 91,217 4,108 285,232 Percentage of total 67% 32% 1% 100% * Loans in the table above are those classified as fair value through profit and loss in note C3.1. (c) Valuation approach for level 2 fair valued financial instruments A significant proportion of the Group's level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades. For further detail on the valuation approach for level 2 fair valued financial instruments please refer to note C3.2 of the Group's consolidated financial statements for the year ended 31 December 2015. Of the total level 2 debt securities of £114,623 million at 30 June 2016 (30 June 2015: £105,292 million; 31 December 2015: £104,464 million), £11,867 million are valued internally (30 June 2015: £10,190 million; 31 December 2015: £10,331 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 2016 to that presented at 30 June 2016. 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 Half year 2016 At 1 Jan 2016 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into level 3 Transfers out of level 3 At 30 Jun 2016 Loans 2,183 79 227 - - (64) 23 - - 2,448 Equity securities and portfolio holdings in unit trusts 607 (13) 11 81 (4) - - 9 - 691 Debt securities 778 66 7 120 (17) - - 30 (5) 979 Other investments (including derivative assets) 4,276 184 265 377 (473) - - 33 - 4,662 Derivative liabilities (353) (127) - - - - - - - (480) Total financial investments, net of derivative liabilities 7,491 189 510 578 (494) (64) 23 72 (5) 8,300 Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,036) 24 (2) - 1 62 (117) - - (1,068) Other financial liabilities (2,347) (84) (243) - - 99 (41) - - (2,616) Total financial instruments at fair value 4,108 129 265 578 (493) 97 (135) 72 (5) 4,616 Half year 2015 At 1 Jan 2015 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 2015 Loans 2,025 72 (18) - - (64) 24 - - 2,039 Equity securities and portfolio holdings in unit trusts 747 45 (1) 23 (148) - - 1 - 667 Debt securities 790 (66) - 33 (245) - - 46 (1) 557 Other investments (including derivative assets) 4,028 114 (77) 271 (285) - - - - 4,051 Derivative liabilities (338) 2 - - - - - - - (336) Total financial investments, net of derivative liabilities 7,252 167 (96) 327 (678) (64) 24 47 (1) 6,978 Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,291) (32) - (4) 22 24 (122) - - (1,403) Other financial liabilities (2,201) (85) 19 - - 113 (50) - - (2,204) Total financial instruments at fair value 3,760 50 (77) 323 (656) 73 (148) 47 (1) 3,371 Full year 2015 At 1 Jan 2015 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into level 3 Transfers out of level 3 At 31 Dec 2015 Loans 2,025 2 119 - - (168) 205 - - 2,183 Equity securities and portfolio holdings in unit trusts 747 52 3 32 (143) - - 4 (88) 607 Debt securities 790 (75) 1 243 (259) - - 82 (4) 778 Other investments (including derivative assets) 4,028 213 68 547 (700) - - 120 - 4,276 Derivative liabilities (338) (15) - - - - - - - (353) Total financial investments, net of derivative liabilities 7,252 177 191 822 (1,102) (168) 205 206 (92) 7,491 Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,291) (160) (1) (5) 9 412 - - - (1,036) Other financial liabilities (2,201) (3) (128) - - 218 (233) - - (2,347) Total financial instruments at fair value 3,760 14 62 817 (1,093) 462 (28) 206 (92) 4,108 Of the total net gains and losses in the income statement of £129 million (30 June 2015: £50 million; 31 December 2015: £14 million), £92 million (30 June 2015: £131 million; 31 December 2015: £67 million) relates to net unrealised gains relating to financial instruments still held at the end of the period, which can be analysed as follows: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Equity securities (14) 38 94 Debt securities 65 (2) (12) Other investments 149 125 160 Derivative liabilities (127) 2 (15) Net asset value attributable to unit holders of consolidated unit trusts and similar funds 23 (32) (160) Other financial liabilities (4) - - Total 92 131 67 Valuation approach for level 3 fair valued financial instruments Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions eg market illiquidity. The valuation techniques used include comparison to recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation. For further detail on the valuation approach for level 3 fair valued financial instruments, please refer to note C3.2 of the Group's consolidated financial statements for the year ended 31 December 2015. At 30 June 2016 the Group held £4,616 million (30 June 2015: £3,371 million; 31 December 2015: £4,108 million) of net financial instruments at fair value within level 3. This represents 1 per cent (30 June 2015: 1 per cent; 31 December 2015: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities. Included within these amounts were loans of £2,448 million at 30 June 2016 (30 June 2015: £2,039 million; 31 December 2015: £2,183 million), measured as the loan outstanding balance attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,616 million at 30 June 2016 (30 June 2015: £2,204 million; 31 December 2015: £2,347 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 £(168) million (30 June 2015: £(165) million; 31 December 2015: £(164) million), the level 3 fair valued financial assets net of financial liabilities were £4,784 million (30 June 2015: £3,536 million; 31 December 2015: £4,272 million). Of this amount, a net asset of £47 million (30 June 2015: net liability of £(378) million; 31 December 2015: net liability of £(77) million) was internally valued, representing 0.0 per cent of the total fair valued financial assets net of financial liabilities (30 June 2015: 0.1 per cent; 31 December 2015: 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 £463 million (30 June 2015: £251 million; 31 December 2015: £381 million), which were either valued on a discounted cash flow method with an internally developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities (eg distressed securities or securities which were being restructured). (b) Private equity and venture investments of £1,038 million (30 June 2015: £715 million; 31 December 2015: £852 million) which were valued internally based on management information available for these investments. These investments, in the form of debt and equity securities, were principally held by consolidated investment funds which are managed on behalf of third parties. (c) Liabilities of £(1,045) million (30 June 2015: £(1,379) million; 31 December 2015: £(1,013) million) for the net asset value attributable to external unit holders in respect of the consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets. (d) Derivative liabilities of £(480) million (30 June 2015: £(28) million; 31 December 2015: £(353) million) which are valued internally using standard market practices but are subject to independent assessment against counterparties' valuations. (e) Other sundry individual financial investments of £71 million (30 June 2015: £63 million; 31 December 2015: £56 million). Of the internally valued net asset referred to above of £47 million (30 June 2015: net liability of £(378) million; 31 December 2015: net liability of £(77) million): (a) A net asset of £303 million (30 June 2015: net liability of £(525) million; 31 December 2015: net asset of £29 million) was held by the Group's participating funds and therefore shareholders' profit and equity are not impacted by movements in the valuation of these financial instruments. (b) A net liability of £(256) million (30 June 2015: net asset of £147 million; 31 December 2015: net liability of £(106) 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 £26 million (30 June 2015: £(15) million; 31 December 2015: £(11) million), which would increase / (reduce) shareholders' equity by this amount before tax. Of this amount, an increase of £26 million (30 June 2015: a decrease of £14 million; 31 December 2015: a decrease of £10 million) would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit and a £nil (30 June 2015: a decrease of £1 million; 31 December 2015: a decrease of £1 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 2016, the transfers between levels within the Group's portfolio were primarily transfers from level 1 to 2 of £425 million and transfers from level 2 to level 1 of £155 million. These transfers, which primarily relate to debt securities, arose to reflect the change in the observability of the inputs used in valuing these securities. In addition, the transfers into and out of level 3 in half year 2016 were £72 million and £5 million, respectively. These transfers were primarily between levels 3 and 2 for debt securities and other investments. (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 2016 provided in the notes below. 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Insurance operations: Asia note (a) 35,519 24,366 28,292 US note (b) 41,143 32,117 34,071 UK note (c) 89,114 83,876 83,101 Other operationsnote (d) 2,591 1,948 2,207 Total 168,367 142,307 147,671 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 2016 £m 2015 £m With-profits business Unit-linked assets Other business 30 Jun Total 30 Jun Total 31 Dec Total S&P - AAA 1,472 38 307 1,817 1,060 1,039 S&P - AA+ to AA- 7,586 449 1,517 9,552 6,111 7,620 S&P - A+ to A- 2,601 418 2,731 5,750 4,308 3,914 S&P - BBB+ to BBB- 2,649 656 1,595 4,900 3,881 4,133 S&P - Other 1,848 241 1,447 3,536 1,926 3,183 16,156 1,802 7,597 25,555 17,286 19,889 Moody's - Aaa 839 238 436 1,513 1,367 1,032 Moody's - Aa1 to Aa3 150 18 1,483 1,651 1,224 1,492 Moody's - A1 to A3 461 83 179 723 414 743 Moody's - Baa1 to Baa3 295 595 330 1,220 560 790 Moody's - Other 63 5 3 71 85 98 1,808 939 2,431 5,178 3,650 4,155 Fitch 725 186 466 1,377 836 1,412 Other 1,889 500 1,020 3,409 2,594 2,836 Total debt securities 20,578 3,427 11,514 35,519 24,366 28,292 The following table analyses other debt securities within other business which are not externally rated by S&P, Moody's or Fitch. 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Government bonds 207 208 162 Corporate bonds 582 578 481 Other 231 155 301 1,020 941 944 * Rated as investment grade by local external ratings agencies. (b) US insurance operations (i) Overview 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Corporate and government security and commercial loans: Government 7,151 3,885 4,242 Publicly traded and SEC Rule 144A securities 24,894 20,511 21,776 Non-SEC Rule 144A securities 4,302 3,548 3,733 Total 36,347 27,944 29,751 Residential mortgage-backed securities (RMBS) 1,267 1,370 1,284 Commercial mortgage-backed securities (CMBS) 2,635 2,212 2,403 Other debt securities 894 591 633 Total US debt securities 41,143 32,117 34,071 * 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: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Available-for-sale 41,045 32,034 33,984 Fair value through profit and loss: Securities held to back liabilities for funds withheld under reinsurance arrangement 98 83 87 41,143 32,117 34,071 (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 2016, less than 0.1 per cent of Jackson's debt securities were classified as level 3 (30 June 2015: 0.1 per cent; 31 December 2015: 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 £592 million to a net unrealised gain of £2,923 million as analysed in the table below. This increase reflects the effects of lower market interest rates. 30 Jun 2016 £m Changes in unrealised appreciation Foreign exchange translation 31 Dec 2015 £m Reflected as part of movement in other comprehensive income Assets fair valued at below book value Book value 2,307 13,163 Unrealised (loss) gain (119) 581 (27) (673) Fair value (as included in statement of financial position) 2,188 12,490 Assets fair valued at or above book value Book value 35,815 20,229 Unrealised gain 3,042 1,537 240 1,265 Fair value (as included in statement of financial position) 38,857 21,494 Total Book value 38,122 33,392 Net unrealised gain 2,923 2,118 213 592 Fair value (as included in statement of financial position) 41,045 33,984 The available-for-sale debt securities of Jackson are analysed into US Treasuries and other debt securities as follows: US Treasuries Book value 5,562 3,477 Net unrealised gain 732 627 51 54 Fair value 6,294 3,531 Other debt securities Book value 32,560 29,915 Net unrealised gain 2,191 1,491 162 538 Fair value 34,751 30,453 Total debt securities Book value 38,122 33,392 Net unrealised gain 2,923 2,118 213 592 Fair value 41,045 33,984 * Book value represents cost/amortised cost of the debt securities. ** Translated at the average rate of US$1.4329: £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 2016 £m 30 Jun 2015 £m 31 Dec 2015 £m Fair value Unrealised loss Fair value Unrealised loss Fair value Unrealised loss Between 90% and 100% 1,848 (51) 8,998 (294) 11,058 (320) Between 80% and 90% 304 (52) 796 (109) 902 (144) Below 80%: Residential mortgage-backed securities (sub-prime) - - 4 (1) 4 (1) Commercial mortgage-backed securities 8 (3) 10 (3) - - Other asset-backed securities 9 (7) 9 (6) 9 (7) Corporates 19 (6) 38 (11) 517 (201) 36 (16) 61 (21) 530 (209) Total 2,188 (119) 9,855 (424) 12,490 (673) (b) Unrealised losses by maturity of security 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec 1 year to 5 years (10) (8) (51) 5 years to 10 years (38) (139) (334) More than 10 years (42) (245) (247) Mortgage-backed and other debt securities (29) (32) (41) Total (119) (424) (673) (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 2016 £m 30 Jun 2015 £m 31 Dec 2015 £m Non- investment grade Investment grade Total Non- investment grade Investment grade Total Non- investment grade Investment grade Total Less than 6 months (2) (5) (7) (9) (314) (323) (13) (148) (161) 6 months to 1 year (4) (8) (12) (14) (25) (39) (17) (332) (349) 1 year to 2 years (14) (46) (60) (2) (1) (3) (16) (63) (79) 2 years to 3 years - - - (2) (39) (41) (3) (38) (41) More than 3 years (3) (37) (40) (7) (11) (18) (3) (40) (43) Total (23) (96) (119) (34) (390) (424) (52) (621) (673) The following table shows the age analysis as at 30 June 2016 of the securities whose fair values were below 80 per cent of the book value: 30 Jun 2016 £m 30 Jun 2015 £m 31 Dec 2015 £m Age analysis Fair value Unrealised loss Fair value Unrealised loss Fair value Unrealised loss Less than 3 months 2 - 35 (9) 450 (165) 3 months to 6 months 19 (6) 4 (2) 64 (34) More than 6 months 15 (10) 22 (10) 16 (10) 36 (16) 61 (21) 530 (209) (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: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec S&P - AAA 251 145 196 S&P - AA+ to AA- 6,124 5,216 5,512 S&P - A+ to A- 9,958 8,462 8,592 S&P - BBB+ to BBB- 13,067 10,345 11,378 S&P - Other 877 876 817 30,277 25,044 26,495 Moody's - Aaa 3,455 218 963 Moody's - Aa1 to Aa3 54 30 41 Moody's - A1 to A3 51 35 49 Moody's - Baa1 to Baa3 83 72 88 Moody's - Other 9 7 13 3,652 362 1,154 Implicit ratings of MBS based on NAIC* valuations (see below) NAIC 1 2,851 2,416 2,746 NAIC 2 39 57 45 NAIC 3-6 10 46 17 2,900 2,519 2,808 Fitch 426 300 345 Other ** 3,888 3,892 3,269 Total debt securities 41,143 32,117 34,071 * 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 neither rated by S&P, Moody's nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following NAIC classifications: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec NAIC 1 1,925 2,177 1,588 NAIC 2 1,829 1,601 1,549 NAIC 3-6 134 114 132 3,888 3,892 3,269 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 £m 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 2016 Total 30 Jun 2015 Total 31 Dec 2015 Total S&P - AAA 141 3,343 308 3,160 493 7,445 9,302 9,577 S&P - AA+ to AA- 406 6,139 1,478 5,619 710 14,352 10,686 11,442 S&P - A+ to A- 496 8,705 1,117 7,003 807 18,128 19,428 16,439 S&P - BBB+ to BBB- 582 11,794 1,927 3,488 684 18,475 17,059 18,088 S&P - Other 137 2,615 324 333 60 3,469 2,905 2,990 1,762 32,596 5,154 19,603 2,754 61,869 59,380 58,536 Moody's - Aaa 33 1,382 96 477 60 2,048 2,169 1,817 Moody's - Aa1 to Aa3 58 2,805 1,008 4,070 998 8,939 6,589 7,727 Moody's - A1 to A3 50 934 101 1,590 198 2,873 2,698 2,738 Moody's - Baa1 to Baa3 28 606 108 329 40 1,111 1,356 1,031 Moody's - Other 2 213 - 23 1 239 650 318 171 5,940 1,313 6,489 1,297 15,210 13,462 13,631 Fitch 13 294 24 160 14 505 744 552 Other 181 6,298 97 4,520 434 11,530 10,290 10,382 Total debt securities 2,127 45,128 6,588 30,772 4,499 89,114 83,876 83,101 * In the table above, Moody's ratings have been used for the UK sovereign debt securities. 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 £11,530 million total debt securities held at 30 June 2016 (30 June 2015: £10,290 million; 31 December 2015: £10,382 million) which are not externally rated are either internally rated or unrated. These are analysed as follows: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Internal ratings or unrated: AAA to A- 6,584 5,306 5,570 BBB to B- 3,284 3,592 3,234 Below B- or unrated 1,662 1,392 1,578 Total 11,530 10,290 10,382 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 £4,954 million for PRIL and other annuity and long-term business investments for non-linked shareholder-backed business which are not externally rated, £1,571 million were internally rated AA+ to AA-, £2,152 million A+ to A-, £1,077 million BBB+ to BBB-, £44 million BB+ to BB- and £110 million were internally rated B+ and below or unrated. (d) Other operations The total debt securities shown in the table below are principally held by Prudential Capital. 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec AAA to A- by S&P or equivalent ratings 2,475 1,821 2,090 Other 116 127 117 Total 2,591 1,948 2,207 (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 2016 are as follows: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Shareholder-backed operations: Asia insurance operations note (i) 151 115 111 US insurance operations note (ii) 4,796 4,173 4,320 UK insurance operations (2016: 25% AAA, 39% AA)note (iii) 1,445 1,938 1,531 Asset management operations note (iv) 963 712 911 7,355 6,938 6,873 With-profits operations: Asia insurance operations note (i) 310 286 262 UK insurance operations (2016: 50% AAA, 19% AA)note (iii) 4,558 5,019 4,600 4,868 5,305 4,862 Total 12,223 12,243 11,735 Notes (i) Asia insurance operations The Asia insurance operations' exposure to asset-backed securities is primarily held by the with-profits operations. Of the £310 million, 99 per cent (30 June 2015: 100 per cent; 31 December 2015: 84 per cent) are investment grade. (ii) US insurance operations US insurance operations' exposure to asset-backed securities at 30 June 2016 comprises: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec RMBS Sub-prime (2016: 3% AAA, 14% AA, 4% A) 185 201 191 Alt-A (2016: 0% AA, 3% A) 178 216 191 Prime including agency (2016: 78% AA, 2% A) 904 953 902 CMBS (2016: 63% AAA, 30% AA, 6% A) 2,635 2,212 2,403 CDO funds (2016: 44% AAA, 4% AA, 20% A), including £nil exposure to sub-prime 55 45 52 Other ABS (2016: 20% AAA, 16% AA, 55% A), including £116 million exposure to sub-prime 839 546 581 Total 4,796 4,173 4,320 (iii) UK insurance operations The majority of holdings of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL. Of the holdings of the with-profits operations, £1,332 million (30 June 2015: £1,358 million; 31 December 2015: £1,140 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 £963 million, 95 per cent (30 June 2015: 90 per cent; 31 December 2015: 95 per cent) are graded AAA. (f) Group sovereign debt and bank debt exposure The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2016: Exposure to sovereign debts £m 30 Jun 2016 30 Jun 2015 31 Dec 2015 Shareholder-backed business With- profits funds Shareholder-backed business With- profits funds Shareholder-backed business With- profits funds Italy 58 63 55 60 55 60 Spain 35 18 1 17 1 17 France 22 - 18 - 19 - Germany 546 348 347 330 409 358 Other Europe (principally Belgium) 84 32 5 28 62 44 Total Eurozone 745 461 426 435 546 479 United Kingdom 5,720 2,431 3,735 1,963 4,997 1,802 United States 6,881 8,354 3,522 5,429 3,911 6,893 Other, predominantly Asia 4,081 2,073 2,890 1,682 3,368 1,737 Total 17,427 13,319 10,573 9,509 12,822 10,911 * 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. Jackson accounts for £6,294 million of this total (30 June 2015: £3,227 million, 31 December 2015: £3,531 million) Exposure to bank debt securities 2016 £m 2015 £m Senior debt Subordinated debt Shareholder-backed business Covered Senior Total senior debt Tier 1 Tier 2 Total subordinated debt 30 Jun Total 30 Jun Total 31 Dec Total Italy - 31 31 - - - 31 29 30 Spain 148 11 159 - - - 159 155 154 France 28 122 150 - 74 74 224 245 226 Germany 46 4 50 - 74 74 124 124 130 Netherlands - 28 28 - 11 11 39 108 31 Other Eurozone - 20 20 - 12 12 32 35 31 Total Eurozone 222 216 438 - 171 171 609 696 602 United Kingdom 518 280 798 9 311 320 1,118 1,131 957 United States - 2,420 2,420 5 226 231 2,651 2,423 2,457 Other, predominantly Asia 17 481 498 78 465 543 1,041 712 718 Total 757 3,397 4,154 92 1,173 1,265 5,419 4,962 4,734 With-profits funds Italy - 64 64 - - - 64 62 57 Spain 154 65 219 - - - 219 203 182 France 7 161 168 41 65 106 274 242 250 Germany 96 16 112 - - - 112 128 111 Netherlands - 187 187 6 7 13 200 217 205 Other Eurozone - 30 30 - - - 30 35 35 Total Eurozone 257 523 780 47 72 119 899 887 840 United Kingdom 528 464 992 65 475 540 1,532 1,575 1,351 United States - 1,582 1,582 124 272 396 1,978 1,963 1,796 Other, predominantly Asia 282 845 1,127 235 413 648 1,775 1,545 1,656 Total 1,067 3,414 4,481 471 1,232 1,703 6,184 5,970 5,643 The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the tables above exclude the proportionate share of sovereign debt holdings of the Group's joint venture operations. C3.4 Loans portfolio Loans are principally accounted for at amortised cost, net of impairment. The exceptions include: - Certain mortgage loans which have been designated at fair value through profit or loss of the UK insurance operations as this loan portfolio is managed and evaluated on a fair value basis; and - Certain policy loans of the US insurance operations which are held to back liabilities for funds withheld under a reinsurance arrangement and are also accounted on a fair value basis. The amounts included in the statement of financial position are analysed as follows: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Insurance operations: Asianote (a) 1,278 1,009 1,084 USnote (b) 8,504 6,798 7,418 UKnote (c) 3,616 3,845 3,571 Asset management operationsnote (d) 817 926 885 Total 14,215 12,578 12,958 (a) Asia insurance operations The loans of the Group's Asia insurance operations comprise: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Mortgage loans‡ 156 105 130 Policy loans‡ 833 676 721 Other loans‡‡ 289 228 233 Total 1,278 1,009 1,084 ‡ The mortgage and policy loans are secured by properties and life insurance policies respectively. ‡‡ Other loans include 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 2016 £m 30 Jun 2015 £m 31 Dec 2015 £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† - 5,109 5,109 - 3,933 3,933 - 4,367 4,367 Policy loans†† 2,448 947 3,395 2,039 826 2,865 2,183 868 3,051 Total 2,448 6,056 8,504 2,039 4,759 6,798 2,183 5,235 7,418 † 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 policy loans are secured by individual life insurance policies or annuity policies. Included within the policy loans 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 £10.2 million (30 June 2015: £7.7 million; 31 December 2015: £8.6 million). The portfolio has a current estimated average loan to value of 59 per cent (30 June 2015: 57 per cent; 31 December 2015: 59 per cent). At 30 June 2016, Jackson had no mortgage loans where the contractual terms of the agreements had been restructured (30 June 2015 and 31 December 2015: none). (c) UK insurance operations The loans of the Group's UK insurance operations comprise: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec SAIF and PAC WPSF Mortgage loans† 719 807 727 Policy loans 6 9 8 Other loans‡ 1,339 1,467 1,324 Total SAIF and PAC WPSF loans 2,064 2,283 2,059 Shareholder-backed operations Mortgage loans† 1,548 1,558 1,508 Other loans 4 4 4 Total loans of shareholder-backed operations 1,552 1,562 1,512 Total 3,616 3,845 3,571 † The mortgage loans are collateralised by properties. By carrying value, 76 per cent of the £1,548 million (30 June 2015: 76 per cent of £1,558 million; 31 December 2015: 78 per cent of £1,508 million) held for shareholder-backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of 29 per cent (30 June 2015: 30 per cent; 31 December 2015: 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 loans of the asset management operations 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: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Loans and receivables internal ratings: AAA - 92 - AA+ to AA- 31 32 - A+ to A- 120 222 157 BBB+ to BBB- 442 224 607 BB+ to BB- 223 83 119 B and other 1 273 2 Total 817 926 885 C4 Policyholder liabilities and unallocated surplus of with-profits funds The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group's statement of financial position: C4.1 Movement of liabilities C4.1(a) Group overview (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds Insurance operations £m Asia US UK Total Half year 2016 movements note C4.1(b) note C4.1(c) note C4.1(d) At 1 January 2016 48,778 138,913 152,893 340,584 Comprising: - Policyholder liabilities on the consolidated statement of financial position‡ 41,255 138,913 142,350 322,518 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,553 - 10,543 13,096 - Group's share of policyholder liabilities of joint ventures† 4,970 - - 4,970 Net flows: Premiums 4,428 7,101 5,561 17,090 Surrenders (1,200) (3,437) (3,208) (7,845) Maturities/Deaths (676) (809) (3,470) (4,955) Net flows 2,552 2,855 (1,117) 4,290 Shareholders' transfers post tax (22) - (110) (132) Investment-related items and other movements 2,251 2,737 10,092 15,080 Foreign exchange translation differences 6,629 14,650 721 22,000 As at 30 June 2016 60,188 159,155 162,479 381,822 Comprising: - Policyholder liabilities on the consolidated statement of financial position‡ 52,122 159,155 151,233 362,510 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,351 - 11,246 13,597 - Group's share of policyholder liabilities of joint ventures† 5,715 - - 5,715 Half year 2015 movements At 1 January 2015 45,022 126,746 154,436 326,204 Comprising: - Policyholder liabilities on the consolidated statement of financial position‡ 38,705 126,746 144,088 309,539 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,102 - 10,348 12,450 - Group's share of policyholder liabilities of joint ventures† 4,215 - - 4,215 Net flows: Premiums 3,910 8,493 4,895 17,298 Surrenders (1,437) (3,406) (3,012) (7,855) Maturities/Deaths (625) (736) (3,248) (4,609) Net flows 1,848 4,351 (1,365) 4,834 Shareholders' transfers post tax (36) - (106) (142) Investment-related items and other movements 837 (221) 2,316 2,932 Foreign exchange translation differences (1,197) (1,209) (209) (2,615) At 30 June 2015 46,474 129,667 155,072 331,213 Comprising: - Policyholder liabilities on the consolidated statement of financial position‡ 39,522 129,667 144,431 313,620 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,127 - 10,641 12,768 - Group's share of policyholder liabilities of joint ventures† 4,825 - - 4,825 Average policyholder liability balances Half year 2016 52,031 149,034 146,792 347,857 Half year 2015 43,634 128,207 144,260 316,101 * 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 relates to the joint venture life businesses in China, India and of the Takaful business in Malaysia. ‡ The policyholder liabilities of the Asia insurance operations of £52,122 million as shown in the table above is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,315 million to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities are £53,437 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 2016 £m Asia US UK Total note (b) At 1 January 2016 27,844 138,913 52,824 219,581 Net flows: Premiums 2,327 7,101 869 10,297 Surrenders (1,037) (3,437) (1,311) (5,785) Maturities/Deaths (289) (809) (1,257) (2,355) Net flowsnote 1,001 2,855 (1,699) 2,157 Investment-related items and other movements 860 2,737 4,285 7,882 Foreign exchange translation differences 3,643 14,650 1 18,294 At 30 June 2016 33,348 159,155 55,411 247,914 Comprising: - Policyholder liabilities on the consolidated statement of financial position 27,633 159,155 55,411 242,199 - Group's share of policyholder liabilities relating to joint ventures 5,715 - - 5,715 Half year 2015 £m Asia US UK Total At 1 January 2015 26,410 126,746 55,009 208,165 Net flows: Premiums 2,456 8,493 2,016 12,965 Surrenders (1,317) (3,406) (1,623) (6,346) Maturities/Deaths (305) (736) (1,249) (2,290) Net flowsnote 834 4,351 (856) 4,329 Investment-related items and other movements 860 (221) 503 1,142 Foreign exchange translation differences (803) (1,209) - (2,012) At 30 June 2015 27,301 129,667 54,656 211,624 Comprising: - Policyholder liabilities on the consolidated statement of financial position 22,476 129,667 54,656 206,799 - Group's share of policyholder liabilities relating to joint ventures 4,825 - - 4,825 Note Including net flows of the Group's insurance joint ventures. C4.1(b) Asia insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the beginning of the period to 30 June is as follows: £m Half year 2016 movements With-profits business Unit-linked liabilities Other business Total At 1 January 2016 20,934 15,966 11,878 48,778 Comprising: - Policyholder liabilities on the consolidated statement of financial position 18,381 13,355 9,519 41,255 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,553 - - 2,553 - Group's share of policyholder liabilities relating to joint ventures‡ - 2,611 2,359 4,970 Premiums: New business 706 413 337 1,456 In-force 1,395 851 726 2,972 2,101 1,264 1,063 4,428 Surrendersnote (c) (163) (870) (167) (1,200) Maturities/Deaths (387) (28) (261) (676) Net flows note (b) 1,551 366 635 2,552 Shareholders' transfers post tax (22) - - (22) Investment-related items and other movements note (d) 1,391 101 759 2,251 Foreign exchange translation differences note (a) 2,986 2,172 1,471 6,629 At 30 June 2016 26,840 18,605 14,743 60,188 Comprising: - Policyholder liabilities on the consolidated statement of financial position 24,489 15,705 11,928 52,122 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,351 - - 2,351 - Group's share of policyholder liabilities relating to joint ventures‡ - 2,900 2,815 5,715 Half year 2015 movements At 1 January 2015 18,612 16,209 10,201 45,022 Comprising: - Policyholder liabilities on the consolidated statement of financial position 16,510 13,874 8,321 38,705 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,102 - - 2,102 - Group's share of policyholder liabilities relating to joint ventures‡ - 2,335 1,880 4,215 Premiums: New business 385 692 474 1,551 In-force 1,069 761 529 2,359 1,454 1,453 1,003 3,910 Surrendersnote (c) (120) (1,158) (159) (1,437) Maturities/Deaths (320) (44) (261) (625) Net flows note (b) 1,014 251 583 1,848 Shareholders' transfers post tax (36) - - (36) Investment-related items and other movements note (d) (23) 637 223 837 Foreign exchange translation differencesnote (a) (394) (623) (180) (1,197) At 30 June 2015 19,173 16,474 10,827 46,474 Comprising: - Policyholder liabilities on the consolidated statement of financial position 17,046 13,845 8,631 39,522 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,127 - - 2,127 - Group's share of policyholder liabilities relating to joint ventures‡ - 2,629 2,196 4,825 Average policyholder liability balances† Half year 2016 21,435 17,286 13,310 52,031 Half year 2015 16,778 16,342 10,514 43,634 * The policyholder liabilities of the with-profits business of £24,489 million, shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,315 million to the Hong Kong with-profits business. Including this amount the Asia with-profits policyholder liabilities are £25,804 million. † 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 2016. The closing balance has been translated at the closing spot rates as at 30 June 2016. Differences upon retranslation are included in foreign exchange translation differences. (b) Net flows increased by 38 per cent from £1,848 million in half year 2015 to £2,552 million in half year 2016 predominantly reflecting continued growth of the in-force book. (c) Surrenders and maturities/deaths have decreased from £2,062 million in the first half of 2015 to £1,876 million in the first half of 2016. The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 3.7 per cent in the first half of 2016 (half year 2015: 5.0 per cent). (d) Investment-related items and other movements in the first half of 2016 primarily represent gains from bonds following falls in yields in the period. C4.1(c) US insurance operations (i) Analysis of movements in policyholder liabilities A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the period to 30 June is as follows: US insurance operations £m Half year 2016 movements Variable annuity separate account liabilities Fixed annuity, GIC and other business Total At 1 January 2016 91,022 47,891 138,913 Premiums 4,848 2,253 7,101 Surrenders (2,168) (1,269) (3,437) Maturities/Deaths (384) (425) (809) Net flows note (b) 2,296 559 2,855 Transfers from general to separate account 169 (169) - Investment-related items and other movements note (c) 843 1,894 2,737 Foreign exchange translation differences note (a) 9,574 5,076 14,650 At 30 June 2016 103,904 55,251 159,155 Half year 2015 movements At 1 January 2015 81,741 45,005 126,746 Premiums 6,697 1,796 8,493 Surrenders (2,237) (1,169) (3,406) Maturities/Deaths (344) (392) (736) Net flows note (b) 4,116 235 4,351 Transfers from general to separate account 560 (560) - Investment-related items and other movements 383 (604) (221) Foreign exchange translation differences note (a) (854) (355) (1,209) At 30 June 2015 85,946 43,721 129,667 Average policyholder liability balances Half year 2016 97,463 51,571 149,034 Half year 2015 83,844 44,363 128,207 * Averages have been based on opening and closing balances, and adjusted for any acquisitions, disposals and corporate transactions in the period. Notes (a) Movements in the period have been translated at an average rate of US$1.43:£1.00 (30 June 2015: US$1.52:£1.00). The closing balance has been translated at closing rate of US$1.34:£1.00 (30 June 2015: US$1.57:£1.00). Differences upon retranslation are included in foreign exchange translation differences. (b) Net flows in the first half of 2016 were £2,855 million compared with £4,351 million in the first half of 2015. (c) Positive investment-related items and other movements in variable annuity separate account liabilities of £843 million for the first six months in 2016 represents positive separate account return mainly following the increase in the US equity market in the period. The positive movement of £1,894 million in fixed annuity, GIC and other business primarily reflect the increase in guarantee reserves, following the fall in interest rates, and the interest credited to the policyholder accounts in the period. C4.1(d) UK insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the beginning of the period to 30 June is as follows: £m Shareholder-backed funds and subsidiaries Half year 2016 movements SAIF and PAC with-profits sub-fund Unit-linked liabilities Annuity and other long-term business Total At 1 January 2016 100,069 21,442 31,382 152,893 Comprising: - Policyholder liabilities 89,526 21,442 31,382 142,350 - Unallocated surplus of with-profits funds 10,543 - - 10,543 Premiums 4,692 527 342 5,561 Surrenders (1,897) (1,285) (26) (3,208) Maturities/Deaths (2,213) (271) (986) (3,470) Net flows note (a) 582 (1,029) (670) (1,117) Shareholders' transfers post tax (110) - - (110) Switches (84) 84 - - Investment-related items and other movements note (b) 5,891 1,050 3,151 10,092 Foreign exchange translation differences 720 1 - 721 At 30 June 2016 107,068 21,548 33,863 162,479 Comprising: - Policyholder liabilities 95,822 21,548 33,863 151,233 - Unallocated surplus of with-profits funds 11,246 - - 11,246 Half year 2015 movements At 1 January 2015 99,427 23,300 31,709 154,436 Comprising: - Policyholder liabilities 89,079 23,300 31,709 144,088 - Unallocated surplus of with-profits funds 10,348 - - 10,348 Premiums 2,879 618 1,398 4,895 Surrenders (1,389) (1,601) (22) (3,012) Maturities/Deaths (1,999) (329) (920) (3,248) Net flows note (a) (509) (1,312) 456 (1,365) Shareholders' transfers post tax (106) - - (106) Switches (103) 103 - - Investment-related items and other movements note (b) 1,916 552 (152) 2,316 Foreign exchange translation differences (209) - - (209) At 30 June 2015 100,416 22,643 32,013 155,072 Comprising: - Policyholder liabilities 89,775 22,643 32,013 144,431 - Unallocated surplus of with-profits funds 10,641 - - 10,641 Average policyholder liability balances Half year 2016 92,674 21,495 32,623 146,792 Half year 2015 89,427 22,972 31,861 144,260 * Averages have been based on opening and closing balances, and adjusted for any acquisitions, disposals and corporate transactions in the period, and exclude unallocated surplus of with-profits funds. Notes (a) Net outflows have decreased from £1,365 million in the first half of 2015 to £1,117 million in the same period of 2016 due primarily to higher premium flows, up by £666 million to £5,561 million, following increased sales of with-profits savings and retirement products. This has been partially offset by lower premiums into our annuity business due to our reduced appetite for annuities post-Solvency II which meant that no bulk annuities transactions were undertaken in the first half of 2016. The level of inflows/outflows for unit-linked business remains subject to annual variation as it is driven by corporate pension schemes with transfers in or out from a small number of schemes influencing the level of flows in the period. (b) Investment-related items and other movements of £10,092 million includes investment return and realised gains attributable to policyholders in the period. C5 Intangible assets C5.1 Intangible assets attributable to shareholders (a) Goodwill attributable to shareholders 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Cost At beginning of period 1,463 1,583 1,583 Disposal of Japan life business - (120) (120) Additional consideration paid on previously acquired business - 2 2 Exchange differences 25 (4) (2) Cost / Net book amount at end of period 1,488 1,461 1,463 Goodwill attributable to shareholders comprises: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec M&G 1,153 1,153 1,153 Other 335 308 310 1,488 1,461 1,463 Other goodwill represents amounts arising from the purchase of entities by the Asia and US operations. These goodwill amounts relating to acquired operations are not individually material. (b) Deferred acquisition costs and other intangible assets attributable to shareholders The deferred acquisition costs and other intangible assets attributable to shareholders comprise: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Deferred acquisition costs related to insurance contracts as classified under IFRS 4 8,010 5,937 6,948 Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 68 80 74 8,078 6,017 7,022 Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF) 48 51 45 Distribution rights and other intangibles 1,423 1,242 1,355 1,471 1,293 1,400 Total of deferred acquisition costs and other intangible assets 9,549 7,310 8,422 2016 £m 2015 £m Deferred acquisition costs Asia US UK Asset management Other intangibles† 30 Jun Total 30 Jun Total 31 Dec Total note Balance at beginning of period: 781 6,148 81 12 1,400 8,422 7,261 7,261 Additions and acquisition of subsidiaries 125 320 5 - 66 516 532 1,190 Amortisation to the income statement: Operating profit (80) (237) (7) (2) (43) (369) (381) (762) Non-operating profit - 616 - - - 616 (192) 93 (80) 379 (7) (2) (43) 247 (573) (669) Disposals and transfers - - - - (2) (2) - (8) Exchange differences and other movements 102 649 - - 50 801 (75) 311 Amortisation of DAC related to net unrealised valuation movements on Jackson's available-for-sale securities recognised within other comprehensive income - (435) - - - (435) 165 337 Balance at end of period 928 7,061 79 10 1,471 9,549 7,310 8,422 * Under the Group's application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of Jackson's products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits. The amounts included in the income statements and Other Comprehensive Income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the Group's supplementary analysis of profit and other comprehensive income by reference to the underlying items. † Other intangibles includes amounts in relation to software rights with additions of £21 million, amortisation of £15 million, disposals of £2 million and exchange gains of £6 million and a balance at 30 June 2016 of £81 million. Note Other intangibles comprise PVIF, distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential's insurance products for a fixed period of time. US insurance operations The DAC amount in respect of US insurance operations comprises amounts in respect of: 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Variable annuity business 7,782 4,931 5,713 Other business 42 710 703 Cumulative shadow DAC (for unrealised gains/losses booked in Other Comprehensive Income) (763) (420) (268) Total DAC for US operations 7,061 5,221 6,148 * Consequent upon the positive unrealised valuation movement for half year 2016 of £2,118 million (30 June 2015: negative unrealised valuation movement of £762 million; 31 December 2015: negative unrealised valuation movement of £1,305 million), there is a charge of £435 million (30 June 2015: a gain of £165 million; 31 December 2015: a gain of £337 million) for altered 'shadow' DAC amortisation booked within other comprehensive income. These adjustments reflect the movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. For further detail on the deferral and amortisation of acquisition costs for Jackson, including the mean reversion technique, please refer to note C5.1 of the Group's consolidated financial statements for the year ended 31 December 2015. 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 2016, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of £29 million (half year 2015: credit for decelerated amortisation of £20 million; full year 2015: charge for accelerated amortisation of £2 million). The first half of 2016 amount reflects the separate account performance of 3 per cent, which is higher than the assumed level for the year (under the 8 year mean reversion technique applied). 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 separate account values for the mean reversion assumption to move outside the corridor. Based on a pro-forma instantaneous movement at 1 July 2016, it would need to be outside the approximate range of negative 25 per cent to positive 50 per cent for this to apply. C6 Borrowings C6.1 Core structural borrowings of shareholder-financed operations 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Holding company operations: Perpetual subordinated notes (Tier 1)note (i) 823 698 746 Perpetual subordinated notes (Tier 2)notes (i),(iv) 2,007 1,077 1,149 Subordinated notes (Tier 2)note (i) 2,126 2,122 2,123 Subordinated debt total 4,956 3,897 4,018 Senior debt:note (ii) £300m 6.875% Bonds 2023 300 300 300 £250m 5.875% Bonds 2029 249 249 249 Holding company total 5,505 4,446 4,567 Prudential Capital bank loannote (iii) 275 275 275 Jackson US$250m 8.15% Surplus Notes 2027 186 159 169 Total (per condensed consolidated statement of financial position)note (v) 5,966 4,880 5,011 Notes (i) These debt tier classifications (including those noted for the comparative balances) are consistent with the treatment of capital for regulatory purposes under the Solvency II regime. The perpetual subordinated capital securities are entirely US$ denominated. The Group has designated US$2.80 billion (30 Jun 2015: US$2.80 billion; 31 December 2015: US$2.80 billion) of its perpetual subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the investment in Jackson. (ii) The senior debt ranks above subordinated debt in the event of liquidation. (iii) The Prudential Capital bank loan of £275 million has been made in two tranches: a £160 million loan and a £115 million loan both drawn at a cost of 12 month GBP LIBOR plus 0.4 per cent and maturing on 20 December 2017. (iv) In June 2016, the Company issued core structural borrowings of US$1,000 million 5.25 per cent Tier 2 perpetual subordinated notes. The proceeds net of costs, were £681 million. (v) The maturity profile, currency and interest rates applicable to all other core structural borrowings of shareholder-financed operations of the Group are as detailed in note C6.1 of the Group's consolidated financial statements for the year ended 31 December 2015. C6.2 Other borrowings (a) Operational borrowings attributable to shareholder-financed operations 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Borrowings in respect of short-term fixed income securities programmes 2,554 2,176 1,705 Non-recourse borrowings of US operations note (ii) - 10 - Other borrowings note (iii) 244 318 255 Totalnote (i) 2,798 2,504 1,960 Notes (i) In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in October 2015 which will mature in October 2016. 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) In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds. (iii) Other borrowings mainly 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. In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson. (b) Borrowings attributable to with-profits operations 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec Non-recourse borrowings of consolidated investment funds 1,248 911 1,158 £100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc 100 100 100 Other borrowings (predominantly obligations under finance leases) 79 78 74 Total 1,427 1,089 1,332 * In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds. ** The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinated to the entitlements of the policyholders of that fund. C7 Deferred tax The statement of financial position contains the following deferred tax assets and liabilities in relation to: Deferred tax assets Deferred tax liabilities 2016 £m 2015 £m 2016 £m 2015 £m 30 Jun 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec Unrealised losses or gains on investments 22 331 21 (1,815) (1,673) (1,036) Balances relating to investment and insurance contracts 1 8 1 (655) (544) (543) Short-term temporary differences 3,690 2,407 2,752 (2,893) (2,076) (2,400) Capital allowances 12 9 10 (34) (32) (31) Unused tax losses 46 65 35 - - Total 3,771 2,820 2,819 (5,397) (4,325) (4,010) 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 2016 half year results and financial position at 30 June 2016, the possible tax benefit of approximately £94 million (30 June 2015: £106 million; 31 December 2015: £98 million), which may arise from capital losses valued at approximately £0.5 billion (30 June 2015: £0.5 billion; 31 December 2015: £0.5 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £60 million (30 June 2015: £42 million; 31 December 2015: £52 million), which may arise from trading tax losses and other potential temporary differences totalling £0.3 billion (30 June 2015: £0.2 billion; 31 December 2015 £0.3 billion) is sufficiently uncertain that it has not been recognised. Of the deferred tax asset recognised for unused tax losses, £39 million will expire if not utilised within the next seven years, £1 million if not utilised within 20 years and the rest has no expiry date. The table that follows provides a breakdown of the recognised deferred tax assets set out in the table above for the short-term temporary differences. 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 temporary differences 30 Jun 2016 £m Expected period of recoverability Asia insurance operations 49 1 to 3 years US insurance operations 3,353 With run-off of in-force book UK insurance operations 136 1 to 10 years Other operations 152 1 to 10 years Total 3,690 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. For UK companies the UK corporation tax rate is currently 20 per cent, reducing to 19 per cent from 1 April 2017 and further to 18 per cent from 1 April 2020. As part of the Finance Bill 2016, the UK government proposed a reduction in the UK corporation tax rate to 17 per cent effective 1 April 2020. As these changes have not been substantively enacted as at 30 June 2016 they have not been reflected in the balances at that date. The changes, once substantively enacted, are expected to have the effect of reducing the UK with-profits and shareholder-backed business element of the overall net deferred tax liabilities by £9 million. C8 Defined benefit pension schemes (a) IAS 19 financial positions The Group operates a number of pension schemes. The largest defined benefit scheme is the Prudential Staff Pension Scheme (PSPS), which is the principal scheme in the UK. The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS). In addition, there are two small defined benefit schemes in Taiwan which have negligible deficits. The Group asset/liability in respect of defined benefit pension schemes is as follows: 2016 £m 2015 £m 2015 £m 30 Jun 30 Jun 31 Dec PSPS SASPS M&GGPS Other schemes Total PSPS SASPS M&GGPS Other schemes Total PSPS SASPS M&GGPS Other schemes Total Underlying economic surplus (deficit) 1,270 (123) 115 (1) 1,261 915 (140) 53 (1) 827 969 (82) 75 (1) 961 Less: unrecognised surplus (1,100) - - - (1,100) (790) - - - (790) (800) - - - (800) Economic surplus (deficit) (including investment in Prudential insurance policies) 170 (123) 115 (1) 161 125 (140) 53 (1) 37 169 (82) 75 (1) 161 Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies - - (81) - (81) - - (85) - (85) - - (77) - (77) Attributable to: PAC with-profits fund 119 (49) - - 70 88 (70) - - 18 118 (33) - - 85 Shareholder-backed operations 51 (74) 34 (1) 10 37 (70) (32) (1) (66) 51 (49) (2) (1) (1) IAS 19 pension asset (liability) on the Group statement of financial position 170 (123) 34 (1) 80 125 (140) (32) (1) (48) 169 (82) (2) (1) 84 * At 30 June 2016, the PSPS pension asset of £170 million (30 June 2015: £125 million; 31 December 2015: £169 million) and the other schemes' pension liabilities of £90 million (30 June 2015: £173 million; 31 December 2015: £85 million) are included within 'Other debtors' and 'Provisions' respectively in the consolidated statement of financial position. (b) Estimated pension scheme surpluses and deficits (on an economic basis) The underlying pension position on an economic basis reflects the assets (including investments in Prudential policies that are offset against liabilities to policyholders on consolidation in the Group financial statements) and the liabilities of the schemes. The IAS 19 basis excludes the investments in Prudential policies. In principle, on consolidation the investments are eliminated against policyholder liabilities of UK insurance operations, so that the formal IAS 19 position for the scheme in isolation excludes these items. This treatment applies to the M&GGPS investments. However, as a substantial portion of the Company's interest in the underlying surplus of PSPS is not recognised, the adjustment is not necessary for the PSPS investments. Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14 being shown separately: Half year 2016 £m Surplus (deficit) in schemes at 1 Jan 2016 (Charge) credit to income statement Actuarial gains and losses in other comprehensive income Contributions paid Surplus (deficit) in schemes at 30 Jun 2016 All schemes Underlying position (without the effect of IFRIC 14) Surplus 961 - 277 23 1,261 Less: amount attributable to PAC with-profits fund (658) (6) (178) (9) (851) Shareholders' share: Gross of tax surplus (deficit) 303 (6) 99 14 410 Related tax (60) 1 (17) (3) (79) Net of shareholders' tax 243 (5) 82 11 331 Application of IFRIC 14 for the derecognition of PSPS surplus Derecognition of surplus (800) (18) (282) - (1,100) Less: amount attributable to PAC with-profits fund 573 12 195 1 781 Shareholders' share: Gross of tax (227) (6) (87) 1 (319) Related tax 45 1 15 - 61 Net of shareholders' tax (182) (5) (72) 1 (258) With the effect of IFRIC 14 Surplus (deficit) 161 (18) (5) 23 161 Less: amount attributable to PAC with-profits fund (85) 6 17 (8) (70) Shareholders' share: Gross of tax surplus (deficit) 76 (12) 12 15 91 Related tax (15) 2 (2) (3) (18) Net of shareholders' tax 61 (10) 10 12 73 C9 Share capital, share premium and own shares 30 Jun 2016 30 Jun 2015 31 Dec 2015 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 2,572,454,958 128 1,915 2,567,779,950 128 1,908 2,567,779,950 128 1,908 Shares issued under share-based schemes 6,579,190 - 6 3,284,119 - 2 4,675,008 - 7 At end of period 2,579,034,148 128 1,921 2,571,064,069 128 1,910 2,572,454,958 128 1,915 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 2016, 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 2016 7,128,449 288p 1,155p 2021 30 June 2015 8,007,928 288p 1,155p 2020 31 December 2015 8,795,617 288p 1,155p 2021 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 £185 million at 30 June 2016 (30 June 2015: £227 million; 31 December 2015: £219 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2016, 11.2 million (30 June 2015: 10.8 million; 31 December 2015: 10.5 million) Prudential plc shares with a market value of £141 million (30 June 2015: £165 million; 31 December 2015: £161 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 11.2 million which was in June 2016. The Company purchased the following number of shares in respect of employee incentive plans: Number of shares purchased (in millions) Cost £m Half year 2016 3.8 49.5 Half year 2015 5.1 86.3 Full year 2015 5.6 92.9 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 2016 was 4.8 million (30 June 2015: 6.8 million; 31 December 2015: 6.1 million) and the cost of acquiring these shares of £39 million (30 June 2015: £59 million; 31 December 2015: £54 million) is included in the cost of own shares. The market value of these shares as at 30 June 2016 was £61 million (30 June 2015: £105 million; 31 December 2015: £94 million). During 2016, these funds made a net disposal of 1,280,258 Prudential shares (30 June 2015: net disposal of 724,186; 31 December 2015: net disposal of 1,402,697) for a net decrease of £14.1 million to book cost (30 June 2015: net decrease of £8.0 million; 31 December 2015: net decrease of £13 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 2016 or 2015. D Other notes D1 Contingencies and related obligations The Group is involved in various litigation and regulatory issues. While the outcome of such matters cannot be predicted with certainty, Prudential believes that the ultimate outcome of such litigation and regulatory issues will not have a material adverse effect on the Group's financial condition, results of operations or cash flows. There have been no material changes to the Group's contingencies and related obligations in the six month period ended 30 June 2016. D2 Post balance sheet events First interim dividend The 2016 first interim dividend approved by the Board of Directors after 30 June 2016 is as described in note B7. D3 Related party transactions There were no transactions with related parties during the six months ended 30 June 2016 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 2015. Statement of directors' responsibilities The directors (who are listed below) are responsible for preparing the Half Year Financial Report in accordance with applicable law and regulations. Accordingly, the directors confirm that to the best of their knowledge: - the condensed consolidated financial statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting', as adopted by the European Union; - the Half Year Financial Report includes a fair review of information required by: (a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 2016, 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 2016 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 2015. Prudential plc Board of Directors: Chairman Paul Manduca Executive Directors Michael Wells Nicolaos Nicandrou ACA Penelope James ACA John Foley Anne Richards Barry Stowe Tony Wilkey Independent Non-executive Directors The Hon. Philip Remnant CBE FCA Sir Howard Davies Ann Godbehere FCPA FCGA David Law ACA Kaikhushru Nargolwala FCA Anthony Nightingale CMG SBS JP Alice Schroeder Lord Turner 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 2016 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 2016 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 dated April 2016 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 the Notes to the EEV basis supplementary financial information. The EEV basis supplementary financial information should be read in conjunction with the IFRS basis financial information. Our responsibility Our responsibility is to express to the company a conclusion on the IFRS basis financial information in the Half Year Financial Report and the EEV basis supplementary financial information based on our reviews, as set out in our engagement letter with you dated 10 June 2016. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information and supplementary information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. 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 2016 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 2016 is not prepared, in all material respects, in accordance with the EEV Principles, using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information. Rees Aronson For and on behalf of KPMG LLP Chartered Accountants London 9 August 2016 Additional IFRS financial information I IFRS profit and loss information I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver This schedule classifies the Group's pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profits, using the following categories: i Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new business) and amounts credited to certain policyholder accounts. It excludes the operating investment returns on shareholder net assets, which has been separately disclosed as expected return on shareholder assets. ii Fee income represents profits driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses. iii With-profits business represents the gross of tax shareholders' transfer from the with-profits fund for the period. iv Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity. v Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses. vi Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance as well as items that are more appropriately included in other source of earnings lines (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate). vii DAC adjustments comprises DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business. Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business The following analysis expresses certain of the Group's sources of operating profit as a margin of policyholder liabilities or other suitable driver. Details on the calculation of the Group's average policyholder liability balances are given in note (iv) at the end of this section. Half year 2016 Asia US UK Total Average liability Margin bps £m £m £m £m £m note (iv) note(ii) Spread income 82 379 96 557 80,819 138 Fee income 86 878 29 993 131,389 151 With-profits 24 - 138 162 114,109 28 Insurance margin 488 401 25 914 Margin on revenues 904 - 86 990 Expenses: Acquisition costsnote (i) (613) (412) (42) (1,067) 3,030 (35)% Administration expenses (388) (452) (58) (898) 219,083 (82) DAC adjustmentsnote (v) 59 83 (2) 140 Expected return on shareholder assets 40 11 61 112 682 888 333 1,903 Longevity reinsurance and other management actions to improve solvency - - 140 140 Long-term business operating profit 682 888 473 2,043 See notes at the end of this section. Half year 2015 AER Asia US UK Total Average liability Margin bps £m £m £m £m £m note (iv) note (ii) Spread income 65 372 137 574 72,890 157 Fee income 86 832 33 951 125,581 151 With-profits 21 - 133 154 106,205 29 Insurance margin 387 383 26 796 Margin on revenues 832 - 88 920 Expenses: Acquisition costsnote (i) (573) (479) (43) (1,095) 2,733 (40)% Administration expenses (355) (408) (66) (829) 206,167 (80) DAC adjustmentsnote (v) 78 114 - 192 Expected return on shareholder assets 33 20 67 120 574 834 375 1,783 Longevity reinsurance and other management actions to improve solvency - - 61 61 Long-term business operating profit 574 834 436 1,844 See notes at the end of this section. * The additional financial information is not covered by the KPMG independent review opinion. Half year 2015 CER note (iii) Asia US UK Total Average liability Margin bps £m £m £m £m £m note (v) note (iv) note (ii) Spread income 66 400 137 603 75,983 159 Fee income 87 884 33 1,004 133,147 151 With-profits 21 - 133 154 107,797 29 Insurance margin 393 408 26 827 Margin on revenues 845 - 88 933 Expenses: Acquisition costsnote (i) (582) (509) (43) (1,134) 2,826 (40)% Administration expenses (359) (434) (66) (859) 217,404 (79) DAC adjustmentsnote (v) 79 121 - 200 Expected return on shareholder assets 34 17 67 118 584 887 375 1,846 Longevity reinsurance and other management actions to improve solvency - - 61 61 Long-term business operating profit 584 887 436 1,907 See notes at the end of this section. Margin analysis of long-term insurance business - Asia Asia Half year 2016 Half year 2015 AER Half year 2015 CER note (iii) Average Average Average Profit liability Margin Profit liability Margin Profit liability Margin note (iv) note (ii) note (iv) note (ii) note (iv) note (ii) Long-term business £m £m bps £m £m bps £m £m bps Spread income 82 13,310 123 65 10,514 124 66 11,302 117 Fee income 86 17,286 100 86 16,342 105 87 17,373 100 With-profits 24 21,435 22 21 16,778 25 21 18,370 23 Insurance margin 488 387 393 Margin on revenues 904 832 845 Expenses: Acquisition costsnote (i) (613) 1,655 (37)% (573) 1,366 (42)% (582) 1,404 (41)% Administration expenses (388) 30,596 (254) (355) 26,856 (264) (359) 28,675 (250) DAC adjustmentsnote (v) 59 78 79 Expected return on shareholder assets 40 33 34 Operating profit 682 574 584 See notes at the end of this section. Analysis of Asia operating profit drivers - Spread income has increased on a constant exchange rate basis by 24 per cent (AER: 26 per cent) to £82 million in half year 2016, predominantly reflecting the growth of the Asia non-linked policyholder liabilities. - The half year 2016 fee income of £86 million is in line with the prior period. - On a constant exchange rate basis, insurance margin has increased by 24 per cent to £488 million in half year 2016 (AER: 26 per cent), primarily reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products. Insurance margin includes non-recurring items of £42 million (half year 2015: £29 million at AER and CER) - Margin on revenue has increased by £59 million on a constant exchange rate basis from £845 million in half year 2015 to £904 million in half year 2016, primarily reflecting higher regular premium income recognised in the period. - Acquisition costs have increased by 5 per cent on a constant exchange rate basis (AER: 7 per cent) in half year 2016 to £613 million, compared to the 18 per cent increase in APE sales (AER 21 per cent), resulting in a 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 73 per cent (2015: 66 per cent at CER), the increase being the result of changes in country and product mix. - Administration expenses have increased by 8 per cent at a constant exchange rate basis (AER: 9 per cent increase) in half year 2016 as the business continues to expand. On a constant exchange rate basis, the administration expense ratio has increased from 250 basis points in half year 2015 to 254 basis points in half year 2016, the result of changes in country and product mix. Margin analysis of long-term insurance business - US US Half year 2016 Half year 2015 AER Half year 2015 CER note (iii) Average Average Average Profit liability Margin Profit liability Margin Profit liability Margin note (iv) note (ii) note (iv) note (ii) note (iv) note (ii) Long-term business £m £m bps £m £m bps £m £m bps Spread income 379 34,886 217 372 30,515 244 400 32,820 244 Fee income 878 92,608 190 832 86,267 193 884 92,802 191 Insurance margin 401 383 408 Expenses Acquisition costsnote (i) (412) 782 (53)% (479) 857 (56)% (509) 912 (56)% Administration expenses (452) 134,369 (67) (408) 124,478 (66) (434) 133,896 (65) DAC adjustments 83 114 121 Expected return on shareholder assets 11 20 17 Operating profit 888 834 887 See notes at the end of this section. Analysis of US operating profit drivers: - Spread income has decreased by 5 per cent on a constant exchange rate basis (AER increased by 2 per cent) to £379 million in half year 2016. The reported spread margin decreased to 217 basis points from 244 basis points in half year 2015, primarily due to lower investment yields. Spread income benefited from swap transactions previously entered into to more closely match the asset and liability duration. Excluding this effect, the spread margin would have been 151 basis points (half year 2015 CER: 168 basis points and AER: 167 basis points). - Fee income has decreased by 1 per cent on a constant exchange rate basis (AER increased by 6 per cent) to £878 million in half year 2016. Weak equity market performance in the first quarter curbed the growth of average separate account values in the first six months of 2016 and dampened overall fee income level. Fee income margin has remained broadly in line with the prior year at 190 basis points (half year 2015 CER: 191 basis points and AER: 193 basis points). - Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin of £401 million in half year 2016 was in line with last year on a constant exchange rate basis, with higher income from the variable annuity guarantees offset by a decline in the contribution from the closed books of term business acquired. - Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, have decreased by 19 per cent at a constant exchange rate basis, largely due to the decline in sales in half year 2016. - Administration expenses increased to £452 million in half year 2016, compared to £434 million for half year 2015 on a constant exchange rate basis (AER £408 million), primarily as a result of higher asset-based commissions. 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 remain relatively flat at 36 basis points (half year 2015: 35 basis points at CER and 36 basis points at AER). - DAC adjustments decreased to £83 million in half year 2016, compared to £121 million on a constant exchange rate basis (AER £114 million) in half year 2015, primarily due to a decline in DAC deferrals due to reduced sales in half year 2016, offset by lower amortisation. Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments Half year 2016 £m Half year 2015 AER £m Half year 2015 CER £m note (iii) 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 1,217 1,217 1,199 1,199 1,275 1,275 Less new business strain (412) 320 (92) (479) 369 (110) (509) 392 (117) Other DAC adjustments - amortisation of previously deferred acquisition costs: Normal (266) (266) (275) (275) (292) (292) Deceleration 29 29 20 20 21 21 Total 1,217 (412) 83 888 1,199 (479) 114 834 1,275 (509) 121 887 Analysis of operating profit based on longer-term investment returns for US operations by product 2016 £m 2015 £m % Half year AER Half year CER Half year Half year 2016 vs half year 2015 AER Half year 2016 vs half year 2015 CER Spread businessnote (a) 154 180 191 (14)% (19)% Fee businessnote (b) 642 552 587 16% 9% Life and other businessnote (c) 92 102 109 (9)% (16)% Total insurance operations 888 834 887 6% 0% US asset management and broker-dealer (12) 12 12 n/a n/a Total US operations 876 846 899 4% (2)% The analysis of operating profit based on longer-term investment returns for US operations by product represents the net profit generated by each line of business after allocation of costs. Broadly: a) Spread business is the net operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs. b) Fee business represents profits from variable annuity products. As well as fee income revenue for this product line includes spread income from investments directed to the general account and other variable annuity fees included in insurance margin. c) Life and other business includes the profits from the REALIC business and other closed life books. Revenue allocated to this product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after claim costs. Insurance margin forms the vast majority of revenue. Margin analysis of long-term insurance business - UK UK Half year 2016 Half year 2015 note (v) Average Average Profit liability Margin Profit liability Margin note (iv) note (ii) note (iv) note (ii) Long-term business £m £m bps £m £m bps Spread income 96 32,623 59 137 31,861 86 Fee income 29 21,495 27 33 22,972 29 With-profits 138 92,674 30 133 89,427 30 Insurance margin 25 26 Margin on revenues 86 88 Expenses: Acquisition costsnote (i) (42) 593 (7)% (43) 510 (8)% Administration expenses (58) 54,118 (21) (66) 54,833 (24) DAC adjustments (2) - Expected return on shareholders' assets 61 67 333 375 Longevity reinsurance and other management actions to improve solvency 140 61 Operating profit 473 436 Analysis of UK operating profit drivers - Spread income has decreased from £137 million in half year 2015 to £96 million in half year 2016 mainly due to lower annuity sales. Spread income has two components: • A contribution from new annuity business which was lower at £27 million in half year 2016 compared to £66 million in half year 2015, as we withdrew our participation from this business. IFRS accounting (based on grandfathered GAAP) permits upfront recognition of a considerable proportion of the spread to be earned over the entire term of the new contracts. • A contribution from in-force annuity and other business, which was broadly in line with last year at £69 million (2015: £71 million), equivalent to 42 basis points of average reserves (2015: 45 basis points). - Fee income principally represents asset management fees from unit-linked business, including direct investment only business to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income mostly arise within our UK asset management business. Excluding these schemes, the fee margin on the remaining balance was 40 basis points (2015: 43 basis points). - Margin on revenues represents premium charges for expenses of shareholder-backed business and other sundry net income. The half year 2016 margin is broadly consistent with half year 2015. - Acquisition costs incurred were £42 million, equivalent to 7 per cent of total APE sales in half year 2016 (2015: 8 per cent). The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. It is therefore impacted by the level of with-profit sales in the year. The ratio is also distorted by bulk annuities transactions as acquisition costs are comparatively lower. Acquisition costs as a percentage of shareholder-backed new business sales, excluding the bulk annuities transactions, were 33 per cent in half year 2016 (2015: 37 per cent). - Expected return on shareholders' assets includes the longer-term return on assets held to back capital and surplus. - The contribution from longevity reinsurance and other management actions to improve solvency during half year 2016 was £140 million (2015: £61 million). Further explanation and analysis is provided in Additional IFRS Financial Information section I(d). Notes (i) The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business. (ii) Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. The margin is on an annualised basis in which half year profits are annualised by multiplying by two. (iii) The half year 2015 comparative information has been presented at Actual Exchange Rates (AER) and Constant Exchange Rates (CER) so as to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia CER average liability calculations the policyholder liabilities have been translated using current period opening and closing exchange rates. For the US CER average liability calculations the policyholder liabilities have been translated at the current period month end closing exchange rates. See also note A1. (iv) For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period. The calculation of average liabilities for Jackson is generally derived from month end balances throughout the period as opposed to opening and closing balances only. In half year 2016, given the significant equity market fluctuations in certain months during the period, average liabilities for fee income in Jackson have been calculated using daily balances instead of month end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. The half year 2015 average liabilities for fee income in Jackson have been calculated based on average of month end balances. The alternative use of the daily balances to calculate the average would have resulted in no change to the margin on the CER basis. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average liabilities used to calculate the administration expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson. Average liabilities are adjusted for business acquisitions and disposals in the period. (v) The DAC adjustment contains £14 million in respect of joint ventures in half year 2016 (half year 2015: £16 million). I(b) Asia operations - analysis of IFRS operating profit by territory Operating profit based on longer-term investment returns for Asia operations are analysed below. The table below presents the half year 2015 results on both actual exchange rates (AER) and constant exchange rates (CER) bases so as to eliminate the impact of exchange translation. 2016 £m 2015 £m % 2015 £m Half year AER Half year CER Half year Half year 2016 vs half year 2015 AER Half year 2016 vs half year 2015 CER AER Full year Hong Kong 96 69 73 39% 32% 150 Indonesia 193 167 172 16% 12% 356 Malaysia 71 61 58 16% 22% 120 Philippines 17 14 14 21% 21% 32 Singapore 111 105 109 6% 2% 204 Thailand 39 39 39 0% 0% 70 Vietnam 44 34 35 29% 26% 86 South-east Asia Operations inc. Hong Kong 571 489 500 17% 14% 1,018 China 20 12 12 67% 67% 32 India 22 22 21 0% 5% 42 Korea 15 19 18 (21)% (17)% 38 Taiwan 13 8 8 63% 63% 25 Other 1 (3) (2) 133% 150% (4) Non-recurrent itemsnote (ii) 42 29 29 45% 45% 62 Total insurance operationsnote (i) 684 576 586 19% 17% 1,213 Development expenses (2) (2) (2) 0% 0% (4) Total long-term business operating profit 682 574 584 19% 17% 1,209 Eastspring Investments 61 58 60 5% 2% 115 Total Asia operations 743 632 644 18% 15% 1,324 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: 2016 £m 2015 £m Half year AER Half year CER Half year AER Full year New business strain† (24) (33) (34) (4) Business in force 666 580 591 1,155 Non-recurrent itemsnote (ii) 42 29 29 62 Total 684 576 586 1,213 † The IFRS new business strain corresponds to approximately 1 per cent of new business APE sales for half year 2016 (half year 2015: approximately 2 per cent; full year 2015: approximately 0.1 per cent). The strain represents the pre-tax regulatory basis strain to net worth after IFRS adjustments; for deferral of acquisition costs and deferred income where appropriate. (ii) Other non-recurrent items of £42 million in 2016 (half year 2015: £29 million; full year 2015: £62 million) represent a small number of items, including a gain from entering into a reinsurance contract in the period. I(c) Analysis of asset management operating profit based on longer-term investment returns Half year 2016 £m M&G Eastspring Investments Prudential Capital US Total note (ii) note (ii) Operating income before performance-related fees 440 155 61 109 765 Performance-related fees 9 1 - - 10 Operating income(net of commission)note (i) 449 156 61 109 775 Operating expensenote (i) (229) (87) (48) (121) (485) Share of associate's results 5 - - - 5 Group's share of tax on joint ventures' operating profit - (8) - - (8) Operating profit/(loss) based on longer-term investment returns 225 61 13 (12) 287 Average funds under management £243.2bn £102.2bn Margin based on operating income 36bps 30bps Cost / income ratio 52% 56% Half year 2015 £m M&G Eastspring Investments Prudential Capital US Total note (ii) note (ii) Operating income before performance-related fees 491 149 47 175 862 Performance-related fees 1 2 - - 3 Operating income(net of commission)note (i) 492 151 47 175 865 Operating expensenote (i) (248) (86) (40) (163) (537) Share of associate's results 7 - - - 7 Group's share of tax on joint ventures' operating profit - (7) - - (7) Operating profit based on longer-term investment returns 251 58 7 12 328 Average funds under management £260.1bn £81.6bn Margin based on operating income 38bps 37bps Cost / income ratio 51% 58% Full year 2015 £m M&G Eastspring Investments Prudential Capital US Total note (ii) note (ii) Operating income before performance-related fees 939 304 118 321 1,682 Performance-related fees 22 3 - - 25 Operating income(net of commission)note (i) 961 307 118 321 1,707 Operating expensenote (i) (533) (176) (99) (310) (1,118) Share of associate's results 14 - - - 14 Group's share of tax on joint ventures' operating profit - (16) - - (16) Operating profit based on longer-term investment returns 442 115 19 11 587 Average funds under management £252.5bn £85.1bn Margin based on operating income* 37bps 36bps Cost / income ratio 57% 58% Notes (i) Operating income and expense include the Group's share of contribution from joint ventures (but excludes any contribution from associates). In the income statement as shown in note B2 of the IFRS financial statements, the net post-tax income of the joint ventures and associates is shown as a single item. (ii) M&G and Eastspring Investments can be further analysed as follows: M&G Eastspring Investments Operating income 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 2016 247 87 193 21 440 36 30 Jun 2016 91 53 64 19 155 30 30 Jun 2015 309 86 182 19 491 38 30 Jun 2015 93 63 56 23 149 37 31 Dec 2015 582 87 357 19 939 37 31 Dec 2015 188 61 116 21 304 36 * Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group's insurance operations which are managed by third parties outside of the Prudential Group are excluded from these amounts. ** Cost/income ratio represents cost as a percentage of operating income before performance related fees. † Institutional includes internal funds. I(d) Contribution to UK life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the new Solvency II regime In the first half of 2016 management actions were taken to improve the solvency of UK insurance operations and to mitigate market risks. These actions included extending the reinsurance of longevity risk to cover a further £1.5 billion of IFRS annuity liabilities. As at 30 June 2016 the total IFRS annuity liabilities subject to longevity reinsurance were £10.7 billion. Management actions also repositioned the fixed income asset portfolio to improve the trade-off between yield and credit risk and to increase the proportion of the annuity business that benefits from the matching adjustment under Solvency II. During 2015, the longevity risk of £6.4 billion on a Pillar 1 basis was reinsured, of which £1.6 billion was carried out in the first half. Further, a number of other management actions were also taken to reposition the fixed income portfolio and improve matching adjustment efficiency. The effect of these actions on the UK's long term IFRS operating profit, underlying free surplus generation and EEV operating profit is shown in the tables below. IFRS operating profit of UK long-term business Half year 2016 Half year 2015 Full year 2015 Shareholder-backed annuity new business: Retail 27 17 34 Bulks - 49 89 27 66 123 In-force business: Longevity reinsurance transactions 66 61 231 Impact of specific management actions to improve solvency 74 - 169 140 61 400 With-profits and other in-force 306 309 644 Total Life IFRS operating profit 473 436 1,167 Underlying free surplus generation of UK long-term business Half year 2016 Half year 2015 Full year 2015 Expected in-force and return on net worth 334 310 620 Longevity reinsurance transactions 53 52 200 Impact of specific management actions to improve solvency 137 - 75 190 52 275 Changes in operating assumptions, experience variances and solvency II and other restructuring costs 31 (10) (17) Underlying free surplus generated from in-force business 555 352 878 New business strain: Shareholder-backed annuity (69) (39) (25) Other products 13 (18) (40) (56) (57) (65) Total underlying free surplus generation 499 295 813 EEV post-tax operating profit of UK long-term business Half year 2016 Half year 2015 Full year 2015 Unwind of discount and other expected return 205 245 488 Longevity reinsurance transactions (10) (46) (134) Impact of specific management actions to improve solvency 41 - 75 31 (46) (59) Changes in operating assumptions and experience variances 23 57 116 Operating profit from in-force business 259 256 545 New business profit: Shareholder-backed annuity 17 89 148 Other products 108 66 170 125 155 318 Total post-tax Life EEV operating profit 384 411 863 * The half year 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016. The half year 2015 and full year 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for those periods. II Other information II(a) Holding company cash flow 2016 £m 2015 £m Half year Half year Full year Net cash remitted by business units: UK life net remittances to the Group With-profits remittance 215 201 201 Shareholder-backed business remittance - - 100 215 201 301 Other UK paid to Group 131 30 30 Total UK net remittances to the Group 346 231 331 US remittances to the Group 339 403 470 Asia net remittances to the Group Asia paid to the Group: Long-term business 285 280 494 Other operations 36 40 74 321 320 568 Group invested in Asia: Long-term business (9) (4) (5) Other operations (including funding of Regional Head Office costs) (54) (58) (96) (63) (62) (101) Total Asia net remittances to the Group 258 258 467 M&G remittances to the Group 150 151 302 Prudential Capital remittances to the Group 25 25 55 Net remittances to the Group from Business Units* 1,118 1,068 1,625 Net interest paid (157) (137) (290) Tax received 67 72 145 Corporate activities (103) (93) (193) Solvency II costs (6) (10) (16) Total central outflows (199) (168) (354) Net operating holding company cash flow before dividend 919 900 1,271 Dividend paid (935) (659) (974) Operating holding company cash flow after dividend (16) 241 297 Non-operating net cash flow† 382 380 376 Total holding company cash flow 366 621 673 Cash and short-term investments at beginning of period 2,173 1,480 1,480 Foreign exchange movements 7 (7) 20 Cash and short-term investments at end of period 2,546 2,094 2,173 * The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group's central liquidity. ** Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation. † Non-operating net cash flow is principally for corporate transactions for distribution rights and acquired subsidiaries, and issue or repayment of subordinated debt. II(b) Funds under management For our asset management businesses the level of funds managed on behalf of third parties, which are not therefore recorded on the balance sheet, is a driver of profitability. We therefore analyse the movement in the funds under management each period, focusing on those which are external to the Group and those held by the insurance businesses and included on the Group balance sheet. This is analysed below. (a) Summary 2016 £bn 2015 £bn 30 Jun 30 Jun 31 Dec Business area: Asia operations 66.3 51.4 54.0 US operations 156.5 126.9 134.6 UK operations 180.9 169.6 168.4 Prudential Group funds under managementnote (i) 403.7 347.9 357.0 External funds note (ii) 158.6 157.0 151.6 Total funds under management 562.3 504.9 508.6 Notes (i) Prudential Group funds under management of £403.7 billion (30 June 2015: £347.9 billion; 31 December 2015: £357.0 billion) comprise: 2016 £bn 2015 £bn 30 Jun 30 Jun 31 Dec Total investments per the consolidated statement of financial position 398.2 343.1 352.0 Less: investments in joint ventures and associates accounted for using the equity method (1.1) (1.0) (1.0) Internally managed funds held in joint ventures 6.2 5.4 5.6 Investment properties which are held for sale or occupied by the Group (included in other IFRS captions) 0.4 0.4 0.4 Prudential Group funds under management 403.7 347.9 357.0 (ii) External funds shown above as at 30 June 2016 of £158.6 billion (30 June 2015: £157.0 billion; 31 December 2015: £151.6 billion) comprise £169.8 billion (30 June 2015: £168.9 billion; 31 December 2015: £162.7 billion) of funds managed by M&G and Eastspring Investments as shown in note (b) below less £11.2 billion (30 June 2015: £11.9 billion; 31 December 2015: £11.1 billion) that are classified within Prudential Group's funds. (b) Investment products - external funds under management Half year 2016 £m Half year 2015 £m Full year 2015 £m Eastspring Investments M&G Group total Eastspring Investments M&G Group total Eastspring Investments M&G Group total note note note note note note At beginning of period 36,287 126,405 162,692 30,133 137,047 167,180 30,133 137,047 167,180 Market gross inflows 68,465 9,731 78,196 56,725 20,425 77,150 110,396 33,626 144,022 Redemptions (68,221) (16,697) (84,918) (51,555) (22,800) (74,355) (103,360) (40,634) (143,994) Market exchange translation and other movements 3,618 10,217 13,835 212 (1,272) (1,060) (882) (3,634) (4,516) At end of period 40,149 129,656 169,805 35,515 133,400 168,915 36,287 126,405 162,692 Note The £169.8 billion (30 June 2015: £168.9 billion; 31 December 2015: £162.7 billion) investment products comprise £162.4 billion (30 June 2015: £163.5 billion; 31 December 2015: £156.7 billion) plus Asia Money Market Funds of £7.4 billion (30 June 2015: £5.4 billion; 31 December 2015: £6.0 billion). (c) M&G and Eastspring Investments - total funds under management Eastspring Investments M&G note 2016 £bn 2015 £bn 2015 £bn 2016 £bn 2015 £bn 2015 £bn 30 Jun 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec External funds under management 40.1 35.5 36.3 129.7 133.4 126.4 Internal funds under management 64.8 49.8 52.8 125.7 123.1 119.7 Total funds under management 104.9 85.3 89.1 255.4 256.5 246.1 Note The external funds under management for Eastspring Investments include Asia Money Market Funds at 30 June 2016 of £7.4 billion (30 June 2015: £5.4 billion; 31 December 2015: £6.0 billion). II(c) Solvency II capital position at 30 June 2016 The estimated Group shareholder Solvency II surplus at 30 June 2016 was £9.1billion, before allowing for payment of the 2016 first interim dividend and after allowing for recalculation of transitional measures as at 30 June 2016. 30 Jun 30 Jun 31 Dec Estimated Group shareholder Solvency II capital position1 2016 £bn 2015 £bn 2015 £bn Own funds 21.1 19.4 20.1 Solvency capital requirement 12.0 10.2 10.4 Surplus 9.1 9.2 9.7 Solvency ratio 175% 190% 193% 1 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced With-Profit Funds and staff pension schemes in surplus In accordance with Solvency II requirements, these results allow for: - Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital requirement. As agreed with the Prudential Regulation Authority, this is incorporated in the result above as follows: - Own funds: represents Jackson's local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement (Company Action Level); - Solvency Capital Requirement: represents 150 per cent of Jackson's local US Risk Based Capital requirement (Company Action Level); and - no diversification benefits are taken into account between Jackson and the rest of the Group. - Matching adjustment for UK annuities, based on the calibrations published by the European Insurance and Occupational Pensions Authority; and - UK transitional measures, which have been recalculated at the valuation date in line with our regulatory approvals. The Group shareholder Solvency II capital position excludes: - A portion of Solvency II surplus capital (£1.6 billion at 30 June 2016) relating to the Group's Asian life operations, including due to "contract boundaries"; - The contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds in surplus (representing £3.5 billion of surplus capital from UK with-profits funds at 30 June 2016) and from the shareholders' share of the estate of with-profits funds; and - The contribution to Own Funds and the Solvency Capital Requirement from pension funds in surplus. It also excludes unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates. At Jackson's request, the Department of Insurance Financial Services renewed its approval to carry these instruments at book value in the local statutory returns for the period 31 December 2015 to 30 September 2016. At 30 June 2016, this approval had the effect of decreasing local statutory capital and surplus (and by extension Solvency II Own Funds and Solvency II surplus) by £0.7 billion, net of tax. This arrangement reflects an elective longstanding practice first put in place in 2009, which can be unwound at Jackson's discretion. Analysis of movement in Group capital position A summary of the estimated movement in Group Solvency II surplus from £9.7 billion at year end 2015 to £9.1 billion at half year 2016 is set out in the table below. We previously reported our economic capital results at year end 2014 before there was certainty in the final outcome of Solvency II and before we received internal model approval. The Solvency II results for 30 June 2016 and 31 December 2015 reflect the output from our approved internal model under the final Solvency II rules. The movement from the previously reported economic capital basis solvency surplus at 31 December 2014 to the Solvency II surplus at 30 June 2015 and 31 December 2015 is included for comparison. Analysis of movement in Group shareholder surplus Half year 2016 £bn Half year 2015 £bn Full year 2015 £bn Surplus Surplus Surplus Estimated Solvency II surplus at 1 January 2016 / economic capital surplus at 1 January 2015 9.7 9.7 9.7 Underlying operating experience 1.0 0.8 2.0 Management actions 0.2 - 0.4 Operating experience 1.2 0.8 2.4 Non-operating experience (including market movements) (2.4) 0.5 (0.6) Other capital movements Subordinated debt issuance 0.7 0.6 0.6 Foreign currency translation impacts 0.9 (0.1) 0.2 Dividends paid (0.9) (0.7) (1.0) Methodology and calibration changes Changes to Own Funds (net of transitionals) and SCR calibration strengthening (0.1) (0.2) (0.2) Effect of partial derecognition of Asia Solvency II surplus - (1.4) (1.4) Estimated Solvency II surplus at end period 9.1 9.2 9.7 The estimated movement in Group Solvency II surplus in the first half of 2016 is driven by: - Operating experience of £1.2 billion: generated by in-force business and new business written in 2016 and also the impact of one-off management optimisations implemented in the first half of 2016; - Non-operating experience of (£2.4) billion: mainly arising from negative market experience during the first half of 2016, after allowing for the recalculation of UK transitional measures; - Other capital movements: comprising a gain from foreign currency translation effects and the issuance of debt in the first half of 2016 offset by a reduction in surplus from payment of dividends. The methodology and calibration changes in the first half of 2016 reduce the Group surplus by £0.1 billion, which relates to finalisation of the full-year 2015 regulatory templates in May 2016. In addition, the methodology and calibration changes arising from Solvency II in 2015 relate to: - A £0.2 billion reduction in surplus due to an increase in the Solvency Capital Requirement from strengthening of internal model calibrations, mainly relating to longevity risk, operational risk, credit risk and correlations, and a corresponding increase in the risk margin, which is partially offset by UK transitionals; and - A £1.4 billion reduction in surplus due to the negative impact of Solvency II rules for "contract boundaries" and a reduction in the capital surplus of the Group's Asian life operations, as agreed with the Prudential Regulation Authority. Analysis of Group Solvency Capital Requirements The split of the Group's estimated Solvency Capital Requirement by risk type including the capital requirements in respect of Jackson's risk exposures based on 150 per cent of US Risk Based Capital requirements (Company Action Level) but with no diversification between Jackson and the rest of the Group, is as follows: 30 Jun 2016 31 Dec 2015 % of undiversified % of diversified % of undiversified % of diversified Split of the Group's estimated Solvency Capital Requirements Solvency Capital Requirements Solvency Capital Requirements Solvency Capital Requirements Solvency Capital Requirements Market 55% 72% 55% 72% Equity 11% 16% 11% 16% Credit 27% 45% 28% 47% Yields (interest rates) 13% 8% 13% 6% Other 4% 3% 3% 3% Insurance 28% 20% 27% 20% Mortality/morbidity 5% 2% 5% 2% Lapse 15% 14% 14% 14% Longevity 8% 4% 8% 4% Operational/expense 12% 7% 11% 7% FX translation 5% 1% 7% 1% Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds 30 Jun 2016 £bn 30 Jun 2015 £bn 31 Dec 2015 £bn IFRS shareholders' equity 14.6 12.1 13.0 Restate US insurance entities from IFRS onto local US statutory basis (3.1) (1.8) (1.5) Remove DAC, goodwill & intangibles (3.9) (3.6) (3.7) Add subordinated-debt 5.7 4.3 4.4 Impact of risk margin (net of transitionals) (3.3) (2.8) (2.5) Add value of shareholder-transfers 3.1 3.4 3.1 Liability valuation differences 9.7 9.0 8.6 Increase in value of net deferred tax liabilities (resulting from valuation differences above) (1.2) (1.1) (0.9) Other (0.5) (0.1) (0.4) Estimated Solvency II Shareholder Own Funds 21.1 19.4 20.1 The key items of the reconciliation as at 30 June 2016 are: - £3.1 billion represents the adjustment required to the Group's shareholders' funds in order to convert Jackson's contribution from an IFRS basis to the local statutory valuation basis. This item also reflects a derecognition of Own Funds of £0.8 billion, equivalent to the value of 100 per cent of Risk Based Capital requirements (Company Action Level), as agreed with the Prudential Regulation Authority; - £3.9 billion due to the removal of DAC, goodwill and intangibles from the IFRS balance sheet; - £5.7 billion due to the addition of subordinated debt which is treated as available capital under Solvency II but as a liability under IFRS; - £3.3 billion due to the inclusion of a risk margin for UK and Asia non-hedgeable risks, net of transitionals, all of which are not applicable under IFRS; - £3.1 billion due to the inclusion of the value of future shareholder transfers from with-profits business (excluding the shareholder's share of the with-profits estate, for which no credit is given under Solvency II), which is excluded from the determination of the Group's IFRS shareholders' funds; - £9.7 billion due to differences in insurance valuation requirements between Solvency II and IFRS, with Solvency II Own Funds partially capturing the value of in-force business which is excluded from IFRS; - £1.2 billion due to the impact on the valuation of deferred tax assets and liabilities resulting from the other valuation differences noted above; and - £0.5 billion due to other items, including the impact of revaluing loans, borrowings and debt from IFRS to Solvency II. Sensitivity analysis The estimated sensitivity of the Group shareholder Solvency II capital position to significant changes in market conditions is as follows: Impact of market sensitivities1 30 Jun 2016 31 Dec 2015 Surplus £bn Ratio Surplus £bn Ratio Base position 9.1 175% 9.7 193% Impact of: 20% instantaneous fall in equity markets (0.9) (6)% (1.0) (7)% 40% fall in equity markets(1) (1.1) (7)% (1.8) (14)% 50 basis points reduction in interest rates(2),(3) (0.8) (7)% (1.1) (14)% 100 basis points increase in interest rates(3) 2.4 27% 1.1 17% 100 basis points increase in credit spreads (1.4) (7)% (1.2) (6)% (1) where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period (2) subject to a floor of zero (3) allowing for further transitional recalculation after the interest rate stress The Group's risk strategy is positioned to withstand significant deteriorations in market conditions and we continue to use market hedges to manage some of this exposure across the Group, where we believe the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future. UK Solvency II capital position1, 2 On the same basis as above, the estimated UK shareholder Solvency II surplus at 30 June 2016 was £2.9 billion, after allowing for recalculation of transitional measures as at 30 June 2016. This relates to shareholder-backed business including future with-profits shareholder transfers, but excludes the shareholders' share of the estate in line with Solvency II requirements. Estimated UK shareholder Solvency II capital position1 30 Jun 2016 £bn 30 Jun 2015 £bn 31 Dec 2015 £bn Own funds 10.6 10.1 10.5 Solvency capital requirement 7.7 6.7 7.2 Surplus 2.9 3.4 3.3 Solvency ratio 138% 152% 146% 1 The UK shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced With-Profit Funds and staff pension schemes in surplus While the surplus position of the UK with-profits funds remains strong on a Solvency II basis, it is ring-fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK shareholder Solvency II surplus results. The estimated UK with-profits funds Solvency II surplus at 30 June 2016 was £3.5 billion, after allowing for recalculation of transitional measures as at 30 June 2016. Estimated UK with-profits Solvency II capital position 30 Jun 2016 £bn 30 Jun 2015 £bn 31 Dec 2015 £bn Own funds 8.2 7.2 7.6 Solvency capital requirement 4.7 3.5 4.4 Surplus 3.5 3.7 3.2 Solvency ratio 176% 210% 175% Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds 2 Reconciliation of UK with-profits funds 30 Jun 2016 £bn 30 Jun 2015 £bn 31 Dec 2015 £bn IFRS unallocated surplus of UK with-profits funds 11.2 10.6 10.5 Adjustments from IFRS basis to Solvency II : Value of shareholder transfers (1.9) (2.3) (2.1) Risk margin (net of transitional) (0.7) (0.4) (0.7) Other valuation differences (0.4) (0.7) (0.1) Estimated Solvency II Own Funds 8.2 7.2 7.6 A reconciliation from IFRS to Solvency I was previously disclosed in the Group IFRS financial statements at full year 2015. At 30 June 2016 the reconciling items from IFRS to Solvency II mainly reflect valuation differences relating to non-profit annuity liabilities within the with-profits funds. Statement of independent review The methodology, assumptions and overall result have been subject to examination by KPMG LLP. Notes: 1 The UK shareholder capital position represents the consolidated capital position of the shareholder funds of Prudential Assurance Company Ltd and all its subsidiaries. 2 The UK with-profits capital position includes the Prudential Assurance Company with-profits sub-fund, the Scottish Amicable Insurance Fund and the Defined Charge Participating Sub-Fund. This information is provided by RNS The company news service from the London Stock Exchange END IR PLMPTMBIMBJF