Prudential PLC — Interim / Quarterly Report 2017

Aug 10, 2017

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RNS Number : 5883N Prudential PLC 10 August 2017 IFRS Disclosure and Additional Financial Information Prudential plc Half Year 2017 results International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED INCOME STATEMENT 2017 £m 2016 £m Note Half year Half year Full year Earned premiums, net of reinsurance 21,158 17,394 36,961 Investment return 20,629 17,062 32,511 Other income 1,222 1,085 2,370 Total revenue, net of reinsurance B1.4 43,009 35,541 71,842 Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (35,442) (30,939) (59,366) Acquisition costs and other expenditure B3 (5,330) (3,563) (8,848) Finance costs: interest on core structural borrowings of shareholder-financed operations (216) (169) (360) Disposal of Korea life business: Cumulative exchange gain recycled from other comprehensive income D1 61 - - Remeasurement adjustments D1 5 - (238) Total charges, net of reinsurance (40,922) (34,671) (68,812) Share of profits from joint ventures and associates, net of related tax 120 86 182 Profit before tax (being tax attributable to shareholders' and policyholders' returns) 2,207 956 3,212 Less tax charge attributable to policyholders' returns (393) (292) (937) Profit before tax attributable to shareholders B1.1 1,814 664 2,275 Total tax charge attributable to policyholders and shareholders B5 (702) (269) (1,291) Adjustment to remove tax charge attributable to policyholders' returns 393 292 937 Tax (charge) credit attributable to shareholders' returns B5 (309) 23 (354) Profit for the period attributable to equity holders of the Company 1,505 687 1,921 2017 2016 Earnings per share (in pence) Half year Half year Full year Based on profit attributable to the equity holders of the Company: B6 Basic 58.7p 26.9p 75.0p Diluted 58.6p 26.8p 75.0p 2017 2016 Dividends per share (in pence) Note Half year Half year Full year Dividends relating to reporting period: B7 First interim ordinary dividend 14.50p 12.93p 12.93p Second interim ordinary dividend - - 30.57p Total 14.50p 12.93p 43.50p Dividends paid in reporting period: B7 Current year first interim ordinary dividend - - 12.93p Second interim ordinary dividend for prior year 30.57p 26.47p 26.47p Special dividend for prior year - 10.00p 10.00p Total 30.57p 36.47p 49.40p * This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC 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 2017 £m 2016 £m Note Half year Half year Full year Profit for the period 1,505 687 1,921 Other comprehensive income (loss): Items that may be reclassified subsequently to profit or loss Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the period (220) 798 1,148 Cumulative exchange gain of Korea life business recycled through profit and loss D1 (61) - - Related tax (4) 8 13 (285) 806 1,161 Net unrealised valuation movements on securities of US insurance operations classified as available-for-sale: Net unrealised holding gains arising during the period 565 2,023 241 Add back net losses (deduct net gains) included in the income statement on disposal and impairment (34) 95 (269) Total C3.2(c) 531 2,118 (28) Related change in amortisation of deferred acquisition costs C5(b) (69) (435) 76 Related tax (162) (589) (17) 300 1,094 31 Total 15 1,900 1,192 Items that will not be reclassified to profit or loss Shareholders' share of actuarial gains and losses on defined benefit pension schemes: Gross 53 11 (107) Related tax (7) (2) 14 46 9 (93) Other comprehensive income for the period, net of related tax 61 1,909 1,099 Total comprehensive income for the period attributable to the equity holders of the Company 1,566 2,596 3,020 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Period ended 30 June 2017 £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 - - 1,505 - - 1,505 - 1,505 Other comprehensive income (loss) - - 46 (285) 300 61 - 61 Total comprehensive income (loss) for the period - - 1,551 (285) 300 1,566 - 1,566 Dividends B7 - - (786) - - (786) - (786) Reserve movements in respect of share-based payments - - 22 - - 22 - 22 Share capital and share premium New share capital subscribed C9 - 10 - - - 10 - 10 Treasury shares Movement in own shares in respect of share-based payment plans - - (12) - - (12) - (12) Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS - - (17) - - (17) - (17) Net increase (decrease) in equity - 10 758 (285) 300 783 - 783 At beginning of period 129 1,927 10,942 1,310 358 14,666 1 14,667 At end of period 129 1,937 11,700 1,025 658 15,449 1 15,450 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued) 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) Share capital and share premium New share capital subscribed C9 - 6 - - - 6 - 6 Treasury shares Movement in own shares in respect of share-based payment plans - - 22 - - 22 - 22 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS - - 15 - - 15 - 15 Net increase (decrease) in equity - 6 (256) 806 1,094 1,650 - 1,650 At beginning 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) Year ended 31 December 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 year - - 1,921 - - 1,921 - 1,921 Other comprehensive income (loss) - - (93) 1,161 31 1,099 - 1,099 Total comprehensive income for the year - - 1,828 1,161 31 3,020 - 3,020 Dividends B7 - - (1,267) - - (1,267) - (1,267) Reserve movements in respect of share-based payments - - (51) - - (51) - (51) Share capital and share premium New share capital subscribed C9 1 12 - - - 13 - 13 Treasury shares Movement in own shares in respect of share-based payment plans - - 2 - - 2 - 2 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS - - (6) - - (6) - (6) Net increase in equity 1 12 506 1,161 31 1,711 - 1,711 At beginning of year 128 1,915 10,436 149 327 12,955 1 12,956 At end of year 129 1,927 10,942 1,310 358 14,666 1 14,667 International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 2017 £m 2016 £m Note 30 Jun 30 Jun 31 Dec Assets Goodwill C5(a) 1,501 1,677 1,628 Deferred acquisition costs and other intangible assets C5(b) 10,757 9,594 10,807 Property, plant and equipment 727 1,214 743 Reinsurers' share of insurance contract liabilities 9,709 9,470 10,051 Deferred tax assets C7 4,105 3,771 4,315 Current tax recoverable 700 554 440 Accrued investment income 2,887 2,764 3,153 Other debtors 3,417 3,505 3,019 Investment properties 15,218 13,940 14,646 Investment in joint ventures and associates accounted for using the equity method 1,293 1,135 1,273 Loans C3.3 16,952 14,215 15,173 Equity securities and portfolio holdings in unit trusts 210,437 176,037 198,552 Debt securities C3.2 170,793 168,367 170,458 Derivative assets 3,789 5,495 3,936 Other investments 5,566 4,845 5,465 Deposits 13,353 14,181 12,185 Assets held for sale 33 30 4,589 Cash and cash equivalents 9,893 8,530 10,065 Total assets C1 481,130 439,324 470,498 Equity Shareholders' equity 15,449 14,605 14,666 Non-controlling interests 1 1 1 Total equity 15,450 14,606 14,667 Liabilities Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 398,980 362,510 388,996 Unallocated surplus of with-profits funds 15,090 13,597 14,317 Core structural borrowings of shareholder-financed operations C6.1 6,614 5,966 6,798 Operational borrowings attributable to shareholder-financed operations C6.2(a) 2,096 2,798 2,317 Borrowings attributable to with-profits operations C6.2(b) 3,336 1,427 1,349 Obligations under funding, securities lending and sale and repurchase agreements 6,408 4,963 5,031 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 8,577 8,770 8,687 Deferred tax liabilities C7 5,683 5,397 5,370 Current tax liabilities 743 566 649 Accruals, deferred income and other liabilities 14,524 12,915 13,825 Provisions 759 467 947 Derivative liabilities 2,870 5,342 3,252 Liabilities held for sale - - 4,293 Total liabilities C1 465,680 424,718 455,831 Total equity and liabilities 481,130 439,324 470,498 Included within equity securities and portfolio holdings in unit trusts, debt securities and other investments are £9,182 million of lent securities as at 30 June 2017 (30 June 2016: £8,162 million; 31 December 2016: £8,545 million). International Financial Reporting Standards (IFRS) Basis Results CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS 2017 £m 2016 £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) 2,207 956 3,212 Non-cash movements in operating assets and liabilities reflected in profit before tax: Other non-investment and non-cash assets (550) (2,660) (2,490) Investments (26,539) (21,280) (37,824) Policyholder liabilities (including unallocated surplus) 21,597 19,548 31,135 Other liabilities (including operational borrowings) 3,390 3,836 7,861 Other itemsnote (ii) (15) 403 307 Net cash flows from operating activities 90 803 2,201 Cash flows from investing activities Net cash outflows from purchases and disposals of property, plant and equipment (56) (32) (246) Net cash inflows (outflows) from corporate transactionsnote (iii) 813 (302) (303) Net cash flows from investing activities 757 (334) (549) Cash flows from financing activities Structural borrowings of the Group: Shareholder-financed operations:note (iv) C6.1 Issue of subordinated debt, net of costs - 681 1,227 Interest paid (207) (160) (335) With-profits operations:note (v) C6.2 Interest paid (4) (4) (9) Equity capital: Issues of ordinary share capital 10 6 13 Dividends paid (786) (935) (1,267) Net cash flows from financing activities (987) (412) (371) Net (decrease) / increase in cash and cash equivalents (140) 57 1,281 Cash and cash equivalents at beginning of period 10,065 7,782 7,782 Effect of exchange rate changes on cash and cash equivalents (32) 691 1,002 Cash and cash equivalents at end of period 9,893 8,530 10,065 Notes (i) This measure as explained in the footnote to the income statement is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. (ii) The adjusting items to profit before tax included within other items are adjustments in respect of non-cash items together with operational interest receipts and payments, dividend receipts and tax paid. (iii) Net cash flows for corporate transactions are for distribution rights and the acquisition and disposal of businesses (including private equity and other subsidiaries acquired by with-profits funds for investment purposes). (iv) Structural borrowings of shareholder-financed operations exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities. The changes in the carrying value of the structural borrowings of shareholder-financed operations during half year 2017 are analysed as follows: Non-cash movements £m Balance at 1 Jan 2017 Amortisation of issue costs Foreign exchange movement Balance at 30 Jun 2017 Structural borrowings of shareholder-financed operations 6,798 7 (191) 6,614 (v) Interest paid on structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds, which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. There is no change in respect of the carrying value of the £100 million structural borrowings of the with-profits operations during half year 2017. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities. International Financial Reporting Standards (IFRS) Basis Results NOTES A BACKGROUND A1 Basis of preparation, audit status and exchange rates These condensed consolidated interim financial statements for the six months ended 30 June 2017 have been prepared in accordance with IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The Group's policy for preparing this interim financial information is to use the accounting policies adopted by the Group in its last consolidated financial statements, as updated by any changes in accounting policies it intends to make in its next consolidated financial statements as a result of new or amended IFRS that are applicable or available for early adoption for the next annual financial statements and other policy improvements. EU-endorsed IFRS may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 30 June 2017, there were no unendorsed standards effective for the period ended 30 June 2017 which impact the condensed consolidated financial statements of the Group, and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group. The IFRS basis results for the 2017 and 2016 half years are unaudited. The 2016 full year IFRS basis results have been derived from the 2016 statutory accounts. The auditors have reported on the 2016 statutory accounts which have been delivered to the Registrar of Companies. The auditors' report was: (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The exchange rates applied for balances and transactions in currencies other than the presentational currency of the Group, pounds sterling (GBP), were: Closing rate at 30 Jun 2017 Average for the 6 months to 30 Jun 2017 Closing rate at 30 Jun 2016 Average for the 6 months to 30 Jun 2016 Closing rate at 31 Dec 2016 Average for 12 months to 31 Dec 2016 Local currency: £ Hong Kong 10.14 9.80 10.37 11.13 9.58 10.52 Indonesia 17,311.76 16,793.63 17,662.47 19,222.95 16,647.30 18,026.11 Malaysia 5.58 5.53 5.39 5.87 5.54 5.61 Singapore 1.79 1.77 1.80 1.98 1.79 1.87 China 8.81 8.66 8.88 9.37 8.59 8.99 India 83.96 82.77 90.23 96.30 83.86 91.02 Vietnam 29,526.43 28,612.70 29,815.99 31,996.45 28,136.99 30,292.79 Thailand 44.13 43.72 46.98 50.81 44.25 47.80 US 1.30 1.26 1.34 1.43 1.24 1.35 Certain notes to the financial statements present half year 2016 comparative information at Constant Exchange Rates (CER), in addition to the reporting at Actual Exchange Rates (AER) used throughout the condensed consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the balance sheet. CER results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet. The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2016, as disclosed in the 2016 statutory accounts. A2 New accounting pronouncements in 2017 The IASB has issued the following new accounting pronouncements to be effective for 1 January 2017: - Disclosure Initiative (Amendments to IAS 7, 'Statement of Cash Flows'); - Recognition of deferred tax assets for unrealised losses (Amendments to IAS 12, 'Income Taxes'); and - Annual Improvements to IFRSs 2014-2016 Cycle. The pronouncements have yet to be endorsed by the EU and will have no effect on the Group financial statements other than minor changes to disclosures. B EARNINGS PERFORMANCE B1 Analysis of performance by segment B1.1 Segment results - profit before tax 2017 £m 2016 £m % 2016 £m Note Half year AER Half year CER Half year Half year 2017 vs half year 2016 AER Half year 2017 vs half year 2016 CER AER Full year note (iv) note (iv) note (iv) note (iv) Asia operations Asia insurance operations B4(a) 870 667 752 30% 16% 1,503 Eastspring Investments 83 61 69 36% 20% 141 Total Asia operations 953 728 821 31% 16% 1,644 US operations Jackson (US insurance operations) 1,079 888 1,010 22% 7% 2,052 Broker-dealer and asset management (6) (12) (13) 50% 54% (4) Total US operations 1,073 876 997 22% 8% 2,048 UK operations UK insurance operations: B4(b) Long-term business 480 473 473 1% 1% 799 General insurance commission note (i) 17 19 19 (11)% (11)% 29 Total UK insurance operations 497 492 492 1% 1% 828 M&G 248 225 225 10% 10% 425 Prudential Capital 6 13 13 (54)% (54)% 27 Total UK operations 751 730 730 3% 3% 1,280 Total segment profit 2,777 2,334 2,548 19% 9% 4,972 Other income and expenditure Investment return and other income - 6 6 (100)% (100)% 1 Interest payable on core structural borrowings (216) (165) (165) (31)% (31)% (360) Corporate expenditurenote (ii) (172) (156) (165) (10)% (4)% (334) Total (388) (315) (324) (23)% (20)% (693) Solvency II implementation costs - (11) (11) n/a n/a (28) Restructuring costs note (iii) (31) (7) (7) (343)% (343)% (38) Operating profit based on longer-term investment returns before interest received from tax settlement 2,358 2,001 2,206 18% 7% 4,213 Interest received from tax settlement - 43 43 n/a n/a 43 Operating profit based on longer-term investment returns B1.3 2,358 2,044 2,249 15% 5% 4,256 Short-term fluctuations in investment returns on shareholder-backed business B1.2 (573) (1,385) (1,580) 59% 64% (1,678) Amortisation of acquisition accounting adjustmentsnote (v) (32) (35) (39) 9% 18% (76) Cumulative exchange gain on the sold Korea life business recycled from other comprehensive income D1 61 - - n/a n/a - Profit (loss) attaching to the held for sale Korea life business D1 - 40 47 n/a n/a (227) Profit before tax attributable to shareholders 1,814 664 677 173% 168% 2,275 Tax charge attributable to shareholders' returns B5 (309) 23 43 n/a n/a (354) Profit for the period attributable to shareholders 1,505 687 720 119% 109% 1,921 2017 2016 % 2016 Half year AER Half year CER Half year Half year 2017 vs half year 2016 AER Half year 2017 vs half year 2016 CER AER Full year 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 70.0p 61.3p 67.6p 14% 4% 131.3p Based on profit for the period 58.7p 26.9p 28.2p 118% 108% 75.0p * The Group completed the sale of its life business in Korea in May 2017.Operating profit based on longer term investment returns for half year 2017 excludes the results attributable to the sold Korea life business, as described in note D1. This approach is consistent with the presentation of operating profit for full year 2016 reported in the Group 2016 Annual Report. Comparative operating profit for half year 2016 has been represented in order to show the results of the retained operations on a comparable basis, resulting in a reclassification in half year 2016 of £15 million of operating profit attributable to the Korea life business to non-operating profit. Notes (i) General insurance commission represents the commission receivable net of expenses for Prudential-branded general insurance products in connection with the arrangement to transfer the UK general insurance business to Churchill in 2002. (ii) Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office. (iii) Restructuring costs are incurred in the UK and Asia and represent one-off business development expenses. (iv) For definitions of AER and CER refer to note A1. (v) Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson. B1.2 Short-term fluctuations in investment returns on shareholder-backed business 2017 £m 2016 £m Half year Half year Full year Insurance operations: Asia note (i) 41 1 (225) US note (ii) (754) (1,440) (1,455) UK note (iii) 9 246 198 Other operationsnote (iv) 131 (192) (196) Total (573) (1,385) (1,678) * Following its sale in May 2017, the half year 2016 comparative short-term fluctuations in investment returns has been adjusted to exclude the result attributable to the sold Korea life business. This approach is consistent with that applied at full year 2016. Notes (i) Asia insurance operations In Asia, the positive short-term fluctuations of £41 million principally reflect net value movements on shareholders' assets and related liabilities following falls in bond yields across the region during the period (half year 2016: positive £1 million; full year 2016: negative £(225) million). (ii) US insurance operations The short-term fluctuations in investment returns for US insurance operations are reported net of related credit for amortisation of deferred acquisition costs, of £231 million as shown in note C5 (half year 2016: credit of £616 million; full year 2016: credit of £565 million) and comprise amounts in respect of the following items: 2017 £m 2016 £m Half year Half year Full year Net equity hedge resultnote (a) (782) (1,692) (1,587) Other than equity-related derivativesnote (b) 12 335 (126) Debt securities note (c) 5 (105) 201 Equity-type investments: actual less longer-term return 1 13 35 Other items 10 9 22 Total (754) (1,440) (1,455) Notes (a) Net equity hedge result The purpose of the inclusion of this item in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to the accounting effect of market movements on both the measured value of guarantees in Jackson's variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ as described below. The result comprises the net effect of: 1 The accounting value movements on the variable and fixed index annuity guarantee liabilities. This includes: - The Guaranteed Minimum Death Benefit (GMDB), and the 'for life' portion of Guaranteed Minimum Withdrawal Benefit (GMWB) guarantees which are measured under the US GAAP basis applied for IFRS in a way that is substantially insensitive to the effect of current period equity market and interest rate changes; and - The 'not for life' portion of GMWB embedded derivative liabilities which are required to be measured under IAS 39 using a basis under which the projected future growth rate of the account balance is based on current swap rates (rather than expected rates of return) with only a portion of the expected future guarantee fees included. Reserve value movements on these liabilities are sensitive to changes to levels of equity markets, implied volatility and interest rates. 2 Adjustments in respect of fee assessments and claim payments; 3 Fair value movements on free-standing equity derivatives held to manage equity exposures of the variable annuity guarantees and fixed index annuity embedded options; and 4 Related changes to DAC amortisation in accordance with the policy that DAC is amortised in line with emergence of margins. The net equity hedge result therefore includes significant accounting mismatches and other factors that detract from the presentation of an economic result. These other factors include: - The variable annuity guarantees and fixed index annuity embedded options being only partially fair valued under 'grandfathered' US GAAP; - The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and - Jackson's management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed volatility levels. (b) Other than equity-related derivatives The fluctuations for this item comprise the net effect of: - Fair value movements on free-standing, other than equity-related derivatives; - Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) reinsurance; and - Related amortisation of DAC. The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the variable annuity guarantees and fixed index annuity embedded options described in note (a) above. The direct GMIB liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way that substantially does not recognise the effects of market movements. Reinsurance arrangements are in place so as to essentially fully insulate Jackson from the GMIB exposure. Notwithstanding that the liability is essentially fully reinsured, as the reinsurance asset is net settled, it is deemed a derivative under IAS 39 which requires fair valuation. The fluctuations for this item therefore include significant accounting mismatches caused by: - The fair value movements booked in the income statement on the derivative programme being in respect of the management of interest rate exposures of the variable and fixed index annuity business, as well as the fixed annuity business guarantees and durations within the general account; - Fair value movements on Jackson's debt securities of the general account which are recorded in other comprehensive income rather than the income statement; and - The mixed measurement model that applies for the GMIB and its reinsurance. (c) Short-term fluctuations related to debt securities 2017 £m 2016 £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 (2) (87) (94) Defaultsnote (v) - (6) (4) Bond write downs (1) (32) (35) Recoveries/reversals 7 4 15 Total credits (charges) in the period 4 (121) (118) Less: Risk margin allowance deducted from operating profit based on longer-term investment returns 46 42 89 50 (79) (29) Interest-related realised gains: Arising in the period 23 20 376 Less: Amortisation of gains and losses arising in current and prior periods to operating profit based on longer-term investment returns (72) (59) (135) (49) (39) 241 Related amortisation of deferred acquisition costs 4 13 (11) Total short-term fluctuations related to debt securities 5 (105) 201 The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in operating profit and variations from year to year are included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson for half year 2017 is based on an average annual risk margin reserve of 21 basis points (half year 2016: 21 basis points; full year 2016: 21 basis points) on average book values of US$55.8 billion (half year 2016: US$56.4 billion; full year 2016: US$56.4 billion) as shown below: Half year 2017 Half year 2016 Full year 2016 Moody's rating category (or equivalent under NAIC ratings of mortgage-backed securities) Average book value RMR Annual expected loss Average book value RMR Annual expected loss Average book value RMR Annual expected loss US$m % US$m £m US$m % US$m £m US$m % US$m £m A3 or higher 27,848 0.13 (35) (28) 29,172 0.12 (36) (25) 29,051 0.12 (36) (27) Baa1, 2 or 3 26,601 0.23 (60) (47) 25,771 0.24 (63) (44) 25,964 0.24 (62) (46) Ba1, 2 or 3 1,052 1.03 (11) (9) 1,065 1.08 (11) (8) 1,051 1.07 (11) (8) B1, 2 or 3 311 2.75 (9) (7) 319 3.02 (10) (7) 312 2.95 (9) (7) Below B3 27 3.80 (1) (1) 41 3.81 (2) (1) 40 3.81 (2) (1) Total 55,839 0.21 (116) (92) 56,368 0.21 (122) (85) 56,418 0.21 (120) (89) Related amortisation of deferred acquisition costs (see below) 22 17 22 15 23 17 Risk margin reserve charge to operating profit for longer-term credit-related losses (94) (75) (100) (70) (97) (72) Consistent with the basis of measurement of insurance assets and liabilities for Jackson's IFRS results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs. In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax credit of £462 million for net unrealised gains on debt securities classified as available-for-sale net of related amortisation of deferred acquisition costs (half year 2016: credit of £1,683 million for net unrealised gains; full year 2016: credit of £48 million for net unrealised losses). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.2(b). (iii) UK insurance operations The positive short-term fluctuations in investment returns for UK insurance operations of £9 million (half year 2016: £246 million; full year 2016: £198 million) include net unrealised movements on fixed income assets supporting the capital of the shareholder-backed annuity business. (iv) Other The positive short-term fluctuations in investment returns for other operations of £131 million (half year 2016: negative £(192) million; full year 2016: negative £(196) million) include unrealised value movements on financial instruments and foreign exchange items. (v) Default losses The Group incurred no default losses on its shareholder-backed debt securities portfolio for half year 2017 (half year 2016: £(6) million; full year 2016: £(4) million). 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; and - Profit (loss) attaching to the sold Korea life business including the recycling of the cumulative exchange translation gain on the sold Korea life business from other comprehensive income to the income statement in 2017. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asia Regional Head Office. The determination of operating profit based on longer-term investment returns for investment and liability movements is as described in note B1.3 of the Group's consolidated financial statements for the year ended 31 December 2016. For Group debt securities at 30 June 2017, the level of unamortised interest-related realised gains and losses related to previously sold bonds and have yet to be amortised to operating profit was a net gain of £876 million (30 June 2016: net gain of £605 million; 31 December 2016: net gain of £969 million). For equity-type securities, the longer-term rates of return applied by the non-linked shareholder-financed insurance operations of Asia and the US to determine the amount of investment return included in operating profit are as follows: - For Asia insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to £1,535 million as at 30 June 2017 (30 June 2016: £1,035 million; 31 December 2016: £1,405 million). The rates of return applied for 2017 ranged from 4.7 per cent to 17.2 per cent (30 June 2016: 3.2 per cent to 13.0 per cent; 31 December 2016: 3.2 per cent to 13.9 per cent) with the rates applied varying by business unit. - For US insurance operations, at 30 June 2017, the equity-type securities for non-separate account operations amounted to £1,256 million (30 June 2016: £1,115 million; 31 December 2016: £1,323 million). The longer-term rates of return for income and capital applied in 2017 and 2016, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums, are as follows: 2017 2016 Half year Half year Full year Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds 6.2% to 6.5% 5.5% to 5.9% 5.5% to 6.5% Other equity-type securities such as investments in limited partnerships and private equity funds 8.2% to 8.5% 7.5% to 7.9% 7.5% to 8.5% B1.4 Additional segmental analysis of revenue The additional segmental analysis of revenue including those from external customers excluding investment return and net of outward reinsurance premiums are as follows: Half year 2017 £m Insurance operations Asset management Asia US UK M&G Prudential Capital US Eastspring Investments Total segment Unallo- cated to a segment (central operations) Group total Gross premium earned 7,697 7,997 6,411 - - - - 22,105 - 22,105 Outward reinsurance (243) (168) (536) - - - - (947) - (947) Earned premiums, net of reinsurance 7,454 7,829 5,875 - - - - 21,158 - 21,158 Other income from external customers 56 3 89 576 10 371 103 1,208 14 1,222 Total revenue from external customers 7,510 7,832 5,964 576 10 371 103 22,366 14 22,380 Intra-group revenue - - - 88 20 57 128 293 (293) - Interest income 485 1,082 1,754 - 30 - 1 3,352 3 3,355 Other investment return 4,315 7,253 5,605 4 47 1 2 17,227 47 17,274 Total revenue, net of reinsurance 12,310 16,167 13,323 668 107 429 234 43,238 (229) 43,009 Half year 2016 £m Insurance operations Asset management Asia US UK M&G Prudential Capital US Eastspring Investments Total segment Unallo- cated to a segment (central operations) Group total Gross premium earned 6,116 6,980 5,242 - - - - 18,338 - 18,338 Outward reinsurance (401) (162) (381) - - - - (944) - (944) Earned premiums, net of reinsurance 5,715 6,818 4,861 - - - - 17,394 - 17,394 Other income from external customers 32 1 124 463 2 322 85 1,029 56 1,085 Total revenue from external customers 5,747 6,819 4,985 463 2 322 85 18,423 56 18,479 Intra-group revenue - - - 88 16 47 95 246 (246) - Interest income 441 992 2,186 2 36 - 1 3,658 - 3,658 Other investment return 2,241 1,537 9,789 4 (67) (1) - 13,503 (99) 13,404 Total revenue, net of reinsurance 8,429 9,348 16,960 557 (13) 368 181 35,830 (289) 35,541 Full year 2016 £m Insurance operations Asset management Asia US UK M&G Prudential Capital US Eastspring Investments Total segment Unallo- cated to a segment (central operations) Group total Gross premium earned 14,006 14,685 10,290 - - - - 38,981 - 38,981 Outward reinsurance (648) (367) (1,005) - - - - (2,020) - (2,020) Earned premiums, net of reinsurance 13,358 14,318 9,285 - - - - 36,961 - 36,961 Other income from external customers 77 4 374 972 19 680 176 2,302 68 2,370 Total revenue from external customers 13,435 14,322 9,659 972 19 680 176 39,263 68 39,331 Intra-group revenue - - - 200 37 103 211 551 (551) - Interest income 873 2,149 4,502 15 47 2 2 7,590 57 7,647 Other investment return 2,040 5,461 17,577 1 (41) - 2 25,040 (176) 24,864 Total revenue, net of reinsurance 16,348 21,932 31,738 1,188 62 785 391 72,444 (602) 71,842 B2 Profit before tax - asset management operations The profit included in the income statement in respect of asset management operations for the year is as follows: 2017 £m 2016 £m M&G Prudential Capital US Eastspring Investments Half year Total Half year Total Full year Total Revenue (excluding NPH broker-dealer fees) 668 107 124 234 1,133 834 1,876 NPH broker-dealer feesnote (i) - - 305 - 305 259 550 Gross revenue 668 107 429 234 1,438 1,093 2,426 Charges (excluding NPH broker-dealer fees) (395) (50) (130) (180) (755) (649) (1,402) NPH broker-dealer feesnote (i) - - (305) - (305) (259) (550) Gross charges (395) (50) (435) (180) (1,060) (908) (1,952) Share of profits from joint ventures and associates, net of related tax 8 - - 29 37 26 67 Profit before tax 281 57 (6) 83 415 211 541 Comprising: Operating profit based on longer-term investment returnsnote (ii) 248 6 (6) 83 331 287 589 Short-term fluctuations in investment returns 33 51 - - 84 (76) (48) Profit before tax 281 57 (6) 83 415 211 541 Notes (i) NPH broker-dealer fees represent commissions received that are then paid on to the writing brokers on sales of investment products. To reflect their commercial nature, the amounts are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from this item. The presentation in the table above shows the amounts attributable to this item so that the underlying revenue and charges can be seen. (ii) M&G operating profit based on longer-term investment returns: 2017 £m 2016 £m Half year Half year Full year Asset management fee income 491 431 900 Other income 4 9 23 Staff costs (166) (133) (332) Other costs (95) (96) (212) Underlying profit before performance-related fees 234 211 379 Share of associate's results 8 5 13 Performance-related fees 6 9 33 M&G operating profit based on longer-term investment returns 248 225 425 The revenue for M&G of £501 million (half year 2016: £449 million; full year 2016: £956 million), comprising the amounts for asset management fee income, other income and performance-related fees shown above, is different to the amount of £668 million shown in the main table of this note. This is because the £501 million (half year 2016: £449 million; full year 2016: £956 million) is after deducting commissions which would have been included as charges in the main table. The difference in the presentation of commission is aligned with how management reviews the business. B3 Acquisition costs and other expenditure 2017 £m 2016 £m Half year Half year Full year Acquisition costs incurred for insurance policies (1,920) (1,700) (3,687) Acquisition costs deferred less amortisation of acquisition costs 399 740 923 Administration costs and other expenditure (3,055) (2,451) (5,522) Movements in amounts attributable to external unit holders of consolidated investment funds (754) (152) (562) Total acquisition costs and other expenditure (5,330) (3,563) (8,848) Included in total acquisition costs and other expenditure is depreciation of property, plant and equipment of £(60) million (half year 2016: £(75) million; full year 2016 £(158) million). B4 Effect of changes and other accounting features on insurance assets and liabilities The following features are of relevance to the determination of the half year 2017 results: (a) Asia insurance operations In half year 2017, the IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net credit of £54 million (half year 2016: £42 million; full year 2016: £67 million) representing a small number of non-recurring items. (b) UK insurance operations Annuity business Allowance for credit risk For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest used for discounting projected future annuity payments to policyholders that would have otherwise applied. The credit risk allowance comprises an amount for long-term best estimate defaults and additional provisions for credit risk premium, the cost of downgrades and short-term defaults. Prudential Retirement Income Limited (PRIL) was the principal company writing the UK's shareholder-backed annuity business. In the second half of 2016, the business of PRIL was transferred into PAC following a Part VII transfer under the Financial Services and Markets Act 2000 The IFRS credit risk allowance made for the ex-PRIL UK shareholder-backed fixed and linked annuity business equated to 43 basis points at 30 June 2017 (30 June 2016 and 31 December 2016: 43 basis points). The allowance represented 28 per cent of the bond spread over swap rates (30 June 2016: 23 per cent; 31 December 2016: 26 per cent). The reserves for credit risk allowance at 30 June 2017 for the UK shareholder-backed business (both for ex-PRIL and the legacy PAC shareholder annuity business) were £1.7 billion (30 June 2016: £ 1.8 billion; 31 December 2016: £1.7 billion). Longevity reinsurance and other management actions A number of management actions were taken in the first half of 2017 to improve the solvency position of the UK insurance operations and further mitigate market risk, which have generated combined profits of £188 million. Similar actions were also taken in 2016. Of this amount £31 million related to profit from additional longevity reinsurance transactions covering £0.6 billion of annuity liabilities on an IFRS basis, with the balance of £157 million reflecting the effect of repositioning the fixed income portfolio and other actions. The contribution to profit from similar longevity reinsurance and other management actions in 2016 was £140 million for the first half of the year (of which £66 million related to longevity reinsurance transactions covering £1.5 billion of IFRS annuity liabilities)and £332 million for the full year (of which £197 million related to longevity reinsurance transactions covering £5.4 billion of IFRS annuity liabilities). At 30 June 2017, longevity reinsurance covered £14.8 billion of IFRS annuity liabilities equivalent to 44 per cent of total annuity liabilities (30 June 2016: £10.7 billion, 32 per cent; 31 December 2016: £14.4 billion, 42 per cent). Review of past annuity sales Prudential has agreed with the Financial Conduct Authority (FCA) to review annuities sold without advice after 1 July 2008 to its contract-based defined contribution pension customers. The review will examine whether customers were given sufficient information about their potential eligibility to purchase an enhanced annuity, either from Prudential or another pension provider. The review commenced in 2017 and is expected to last a period of three years. A provision of £175 million was established at 31 December 2016 to cover the costs of undertaking the review and any potential redress. Other than to cover the small amount of costs incurred in the period, no change has been made to this provision as at 30 June 2017. The ultimate amount that will be expended by the Group on the review remains uncertain. Although the Group's professional indemnity insurance may mitigate the overall financial impact of this review, with potential insurance recoveries of up to £175 million, no such recovery has been factored in the provision, in accordance with the requirements of IAS 37 'Provisions, Contingent Liabilities and Contingent Assets'. B5 Tax charge (a) Total tax charge by nature of expense The total tax charge in the income statement is as follows: 2017 £m 2016 £m Tax charge Current tax Deferred tax Half year Total Half year Total Full year Total UK tax (240) (66) (306) (229) (764) Overseas tax (187) (209) (396) (40) (527) Total tax charge (427) (275) (702) (269) (1,291) The current tax charge of £427 million includes £37 million (half year 2016: £27 million; full year 2016: £53 million) in respect of the tax charge for the Hong Kong operation. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either: (i) 5 per cent of the net insurance premium; or (ii) the estimated assessable profits, depending on the nature of the business written. The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders as shown below: 2017 £m 2016 £m Tax charge Current tax Deferred tax Half year Total Half year Total Full year Total Tax (charge) to policyholders' returns (247) (146) (393) (292) (937) Tax (charge) credit attributable to shareholders (180) (129) (309) 23 (354) Total tax (charge) (427) (275) (702) (269) (1,291) The principal reason for the increase in the tax charge attributable to policyholders' returns compared to half year 2016 is an increase on investment return in the with-profits fund in the UK insurance operations. The principal reason for the increase in the tax charge attributable to shareholders' returns compared to half year 2016 is a reduction in the deferred tax credit on derivative fair value movements in the US insurance operations. (b) Reconciliation of effective tax rate In the reconciliation below, the expected tax rates reflect the corporate income tax rates that are expected to apply to the taxable profit of the relevant business. Where there are profits of more than one jurisdiction the expected tax rates reflect the corporation tax rates weighted by reference to the amount of profit contributing to the aggregate business result. In the column 'Attributable to policyholders', the 100 per cent expected tax rate is the result of accounting for policyholder income after the deduction of expenses and movement on unallocated surpluses and on an after tax basis, the effect of which leaves the profit equal to the tax charge. Half year 2017 £m Asia insurance operations US insurance operations UK insurance operations Other operations Attributable to shareholders Attributable to policyholders Total Operating profit (loss) based on longer-term investment returns 870 1,079 497 (88) 2,358 n/a n/a Non-operating profit (loss) 98 (782) 9 131 (544) n/a n/a Profit before tax 968 297 506 43 1,814 393 2,207 Expected tax rate 20% 35% 19% 19% 22% 100% 36% Tax at the expected rate 194 104 96 8 402 393 795 Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates (18) (10) (3) (31) (31) Deductions not allowable for tax purposes 8 5 5 18 18 Items related to taxation of life insurance businesses (43) (85) (2) (130) (130) Deferred tax adjustments 4 (1) 3 3 Effect of results of joint ventures and associates (11) (9) (20) (20) Irrecoverable withholding taxes 29 29 29 Other 4 2 4 10 10 Total (60) (91) 4 26 (121) - (121) Effects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years 10 (5) (1) 4 4 Movements in provisions for open tax matters 7 25 32 32 Cumulative exchange gains on the sold Korea life business recycled from other comprehensive income (8) (8) (8) Total (1) 35 (5) (1) 28 - 28 Total actual tax charge 133 48 95 33 309 393 702 Analysed into: Tax on operating profit based on longer-term investment returns 141 322 92 8 563 n/a n/a Tax on non-operating profit (8) (274) 3 25 (254) n/a n/a Actual tax rate: Operating profit based on longer-term investment returns Including non-recurring tax reconciling items 16% 30% 19% (9)% 24% n/a n/a Excluding non-recurring tax reconciling items 15% 27% 20% (10)% 22% n/a n/a Total profit 14% 16% 19% 77% 17% 100% 32% The more significant reconciling items are explained below: Asia insurance operations The £18 million reconciling item 'income not taxable or taxable at concessionary rates' primarily reflects income not subject to the full rate of corporate tax in Malaysia, Singapore and Taiwan. The £43 million reconciling item 'items related to taxation of life insurance businesses' reflects where the basis of tax is not the accounting profits, primarily in: - Hong Kong where the taxable profit is based on the net insurance premiums; and - Indonesia and Philippines where investment income is subject to withholding tax at source and no further corporation tax. The £11 million reconciling item 'effect of results of the joint ventures and associates' arises from the accounting requirement for inclusion in the profit before tax of Prudential's share of the profits after tax from the joint ventures and associates, with no equivalent item included in Prudential's tax charge. The £8 million reconciling item 'cumulative exchange gain on the sold Korea life business recycled from other comprehensive income' reflects the non-taxable exchange gain arising on the Korea life business previously taken through other comprehensive income on a period-by-period basis recycled through the income statement following the sale of the business. US insurance operations The £85 million reconciling item 'items related to taxation of life insurance businesses' reflects the impact of the dividend received deduction on the taxation of profits from the variable annuity business. UK insurance operations There are no significant reconciling items or significant movements from half year 2016. Other operations The £29 million reconciling item 'irrecoverable withholding taxes' relates to withholding tax suffered on distributions from group companies which cannot be recovered against other taxes paid. Other operations comprise the Group's asset management businesses and central operations. Half year 2016 £m Asia insurance operations US insurance operations UK insurance operations Other operations Attributable to shareholders Attributable to policyholders Total Operating profit (loss) based on longer-term investment returns 667 888 492 (3) 2,044 n/a n/a Non-operating profit (loss) 37 (1,471) 246 (192) (1,380) n/a n/a Profit (loss) before tax 704 (583) 738 (195) 664 292 956 Expected tax rate 21% 35% 20% 20% 8% 100% 36% Tax at the expected rate 148 (204) 148 (39) 53 292 345 Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates (14) (5) (16) (3) (38) (38) Deductions not allowable for tax purposes 8 2 6 2 18 18 Items related to taxation of life insurance businesses (10) (60) (1) - (71) (71) Deferred tax adjustments (1) - 3 (3) (1) (1) Effect of results of joint ventures and associates (10) - - (7) (17) (17) Irrecoverable withholding taxes - - - 20 20 20 Other 3 - (2) 16 17 17 Total (24) (63) (10) 25 (72) - (72) Effects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years 1 (3) - (2) (4) (4) Total 1 (3) - (2) (4) - (4) Total actual tax charge (credit) 125 (270) 138 (16) (23) 292 269 Analysed into: Tax on operating profit based on longer-term investment returns 116 245 101 13 475 n/a n/a Tax on non-operating profit 9 (515) 37 (29) (498) n/a n/a Actual tax rate: Operating profit based on longer-term investment returns Including non-recurring tax reconciling items 17% 28% 21% (433)% 23% n/a n/a Excluding non-recurring tax reconciling items 17% 28% 21% (500)% 23% n/a n/a Total profit 18% 46% 19% 8% (3)% 100% 28% * Following its sale in May 2017, the half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business. This approach is consistent with that applied at full year 2016. Full year 2016 £m Asia insurance operations US insurance operations UK insurance operations Other operations Attributable to shareholders Attributable to policyholders Total Operating profit (loss) based on longer-term investment returns 1,503 2,052 828 (127) 4,256 n/a n/a Non-operating (loss) profit (460) (1,523) 198 (196) (1,981) n/a n/a Profit (loss) before tax 1,043 529 1,026 (323) 2,275 937 3,212 Expected tax rate 22% 35% 20% 19% 25% 100% 47% Tax at the expected rate 229 185 205 (61) 558 937 1,495 Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates (28) (18) (12) (9) (67) (67) Deductions not allowable for tax purposes 19 8 7 26 60 60 Items related to taxation of life insurance businesses (20) (159) (1) - (180) (180) Deferred tax adjustments (11) - 2 (14) (23) (23) Effect of results of joint ventures and associates (29) - - (17) (46) (46) Irrecoverable withholding taxes - - - 36 36 36 Other - - 1 (6) (5) (5) Total (69) (169) (3) 16 (225) - (225) Effects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years 1 (81) (7) 5 (82) (82) Movements in provisions for open tax matters 20 - - 31 51 51 Impact of changes in local statutory tax rates - - (5) (1) (6) (6) Write down of Korea life business 58 - - - 58 58 Total 79 (81) (12) 35 21 - 21 Total actual tax charge (credit) 239 (65) 190 (10) 354 937 1,291 Analysed into: Tax on operating profit based on longer-term investment returns 254 468 160 12 894 n/a n/a Tax on non-operating profit (15) (533) 30 (22) (540) n/a n/a Actual tax rate: Operating profit based on longer-term investment returns Including non-recurring tax reconciling items 17% 23% 19% (9)% 21% n/a n/a Excluding non-recurring tax reconciling items 16% 27% 21% 18% 22% n/a n/a Total profit 23% (12)% 19% 3% 16% 100% 40% The full year 2016 expected and actual tax rates as shown includes the impact of the re-measurement loss on the held for sale Korea life business. The full year 2016 tax rates for Asia insurance operations and attributable to shareholders, excluding the impact of the held for sale Korea life business, are as follows: Asia insurance Attributable to shareholders Expected tax rate on total profit 22% 24% Actual tax rate Operating profit based on longer-term investment returns 17% 21% Total profit 19% 14% B6 Earnings per share Half year 2017 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 2,358 (563) 1,795 70.0p 69.9p Short-term fluctuations in investment returns on shareholder-backed business B1.2 (573) 248 (325) (12.7)p (12.7)p Amortisation of acquisition accounting adjustments (32) 6 (26) (1.0)p (1.0)p Cumulative exchange gain on the sold Korea life business recycled from other comprehensive income 61 - 61 2.4p 2.4p Based on profit for the period 1,814 (309) 1,505 58.7p 58.6p 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 2,044 (475) 1,569 61.3p 61.2p Short-term fluctuations in investment returns on shareholder-backed business B1.2 (1,385) 496 (889) (34.7)p (34.7)p Amortisation of acquisition accounting adjustments (35) 11 (24) (0.9)p (0.9)p Profit attaching to held for sale Korea life business D1 40 (9) 31 1.2p 1.2p Based on profit for the period 664 23 687 26.9p 26.8p * Following its sale in May 2017, the half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business. This approach is consistent with that applied at full year 2016. Full 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 4,256 (894) 3,362 131.3p 131.2p Short-term fluctuations in investment returns on shareholder-backed business B1.2 (1,678) 519 (1,159) (45.3)p (45.2)p Amortisation of acquisition accounting adjustments (76) 25 (51) (2.0)p (2.0)p Loss attaching to held for sale Korea life business D1 (227) (4) (231) (9.0)p (9.0)p Based on profit for the year 2,275 (354) 1,921 75.0p 75.0p Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests. The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated unit trusts and OEICs, is set out as below: Half year 2017 Half year 2016 Full year 2016 Weighted average number of shares for calculation of: (millions) (millions) (millions) Basic earnings per share 2,565 2,558 2,560 Diluted earnings per share 2,567 2,559 2,562 B7 Dividends Half year 2017 Half year 2016 Full year 2016 Pence per share £m Pence per share £m Pence per share £m Dividends relating to reporting period: First interim ordinary dividend 14.50p 375 12.93p 333 12.93p 333 Second interim ordinary dividend - - - - 30.57p 789 Total 14.50p 375 12.93p 333 43.50p 1,122 Dividends paid in reporting period: Current year first interim ordinary dividend - - - - 12.93p 332 Second interim ordinary dividend for prior year 30.57p 786 26.47p 679 26.47p 679 Special dividend for prior year - - 10.00p 256 10.00p 256 Total 30.57p 786 36.47p 935 49.40p 1,267 Dividend per share The second interim dividend of 30.57 pence per ordinary share for the year ended 31 December 2016 was paid to eligible shareholders on 19 May 2017. The 2017 first interim dividend of 14.50 pence per ordinary share will be paid on 28 September 2017 in sterling to shareholders on the principal (UK) register and the Irish branch register at 6.00pm BST on 25 August 2017 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 9 August 2017. Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 5 October 2017. The exchange rate at which the dividend payable to the US Shareholders will be translated into US dollars will be determined by the depositary agent. The first interim dividend will be paid on or about 5 October 2017 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The exchange rate at which the dividend payable to the SG Shareholders will be translated from Hong Kong dollars into Singapore dollars, will be determined by CDP. Shareholders on the principal (UK) register and Irish branch register will be able to participate in a Dividend Reinvestment Plan. C BALANCE SHEET NOTES C1 Analysis of Group statement of financial position by segment To explain the assets, liabilities and capital of the Group's businesses more comprehensively, it is appropriate to provide analyses of the Group's statement of financial position by operating segment and type of business. 30 Jun 2017 £m 30 Jun 2016 £m 31 Dec 2016 £m Insurance operations Asset management Unallo- cated to a segment (central opera- tions) Elimin- ation of intra- group debtors and creditors Group Total Group Total Group Total Asia US UK M&G Prudential Capital US Eastspring Investments By operating segment C2.1 C2.2 C2.3 Assets GoodwillC5(a) 245 - 26 1,153 - 16 61 - - 1,501 1,677 1,628 Deferred acquisition costs and other intangible assets C5(b) 2,340 8,187 168 6 - 5 4 47 - 10,757 9,594 10,807 Property, plant and equipment 119 224 344 4 - 8 3 25 - 727 1,214 743 Reinsurers' share of insurance contract liabilities 1,680 6,740 2,560 - - - - - (1,271) 9,709 9,470 10,051 Deferred tax assetsC7 85 3,678 127 20 7 130 8 50 - 4,105 3,771 4,315 Current tax recoverable 30 348 311 - 5 6 - 70 (70) 700 554 440 Accrued investment income 565 493 1,650 7 23 76 32 41 - 2,887 2,764 3,153 Other debtors 2,598 260 2,796 1,000 758 73 62 5,418 (9,548) 3,417 3,505 3,019 Investment properties 5 6 15,207 - - - - - - 15,218 13,940 14,646 Investment in joint ventures and associates accounted for using the equity method 714 - 405 39 - - 135 - - 1,293 1,135 1,273 LoansC3.3 1,307 9,497 5,784 - 364 - - - - 16,952 14,215 15,173 Equity securities and portfolio holdings in unit trusts 26,753 125,059 58,398 111 - - 19 97 - 210,437 176,037 198,552 Debt securitiesC3.2 39,061 38,029 91,302 - 2,381 - - 20 - 170,793 168,367 170,458 Derivative assets 102 906 2,676 - 101 - - 4 - 3,789 5,495 3,936 Other investments - 932 4,614 16 - 4 - - - 5,566 4,845 5,465 Deposits 1,243 - 11,843 - - 18 44 205 - 13,353 14,181 12,185 Assets held for sale - - 33 - - - - - - 33 30 4,589 Cash and cash equivalents 1,786 1,194 4,565 350 1,451 276 156 115 - 9,893 8,530 10,065 Total assets 78,633 195,553 202,809 2,706 5,090 612 524 6,092 (10,889) 481,130 439,324 470,498 Total equity 5,181 5,011 6,227 1,868 61 202 382 (3,482) - 15,450 14,606 14,667 Liabilities Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)C4.1 59,619 177,779 162,853 - - - - - (1,271) 398,980 362,510 388,996 Unallocated surplus of with-profits fundsC4.1 3,003 - 12,087 - - - - - - 15,090 13,597 14,317 Core structural borrowings of shareholder-financed operationsC6.1 - 192 - - 275 - - 6,147 - 6,614 5,966 6,798 Operational borrowings attributable to shareholder-financed operations C6.2(a) 20 453 147 52 - - - 1,424 - 2,096 2,798 2,317 Borrowings attributable to with-profits operationsC6.2(b) 20 - 3,316 - - - - - - 3,336 1,427 1,349 Obligations under funding, securities lending and sale and repurchase agreements - 4,518 1,890 - - - - - - 6,408 4,963 5,031 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 3,541 - 5,036 - - - - - - 8,577 8,770 8,687 Deferred tax liabilitiesC7 1,021 2,981 1,646 21 - 2 1 11 - 5,683 5,397 5,370 Current tax liabilities 162 58 451 37 20 2 13 70 (70) 743 566 649 Accruals, deferred income and other liabilities 5,804 4,517 7,035 547 4,208 406 75 1,480 (9,548) 14,524 12,915 13,825 Provisions 138 1 350 181 - - 53 36 - 759 467 947 Derivative liabilities 124 43 1,771 - 526 - - 406 - 2,870 5,342 3,252 Liabilities held for sale - - - - - - - - - - - 4,293 Total liabilities 73,452 190,542 196,582 838 5,029 410 142 9,574 (10,889) 465,680 424,718 455,831 Total equity and liabilities 78,633 195,553 202,809 2,706 5,090 612 524 6,092 (10,889) 481,130 439,324 470,498 Notes (i) £409 million (30 June 2016: £910 million; 31 December 2016: £413 million) of the property, plant and equipment of £727 million (30 June 2016: £1,214 million; 31 December 2016: £743 million) was held by the Group's with-profits operations, primarily by the consolidated subsidiaries for venture funds and other investment purposes of the PAC with-profits fund. The Group made additions to property, plant and equipment of £120 million during the period (30 June 2016: £128 million; 31 December 2016: £348 million). (ii) Reinsurers' share of contract liabilities relate primarily to the reinsurance ceded in respect of the acquired REALIC business by the Group's US insurance operations. (iii) Within other debtors are premiums receivable of £432 million (30 June 2016: £467 million; 31 December 2016: £498 million) of which 77 per cent are due within one year. The remaining 23 per cent is due after one year. (iv) Within 'Accruals, deferred income and other liabilities' of £14,524 million (30 June 2016: £12,915 million; 31 December 2016: £13,825 million) is an amount of £8,575 million (30 June 2016: £7,506 million; 31 December 2016: £9,873 million) that is due within one year. C2 Analysis of segment statement of financial position by business type To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business, the analysis below is structured to show the assets and liabilities of each segment by business type. C2.1 Asia insurance operations 2017 £m 2016 £m With-profits business Unit-linked assets and liabilities Other business 30 Jun Total 30 Jun Total 31 Dec Total Note Assets Goodwill - - 245 245 258 245 Deferred acquisition costs and other intangible assets 31 - 2,309 2,340 2,356 2,316 Property, plant and equipment 82 - 37 119 88 121 Reinsurers' share of insurance contract liabilities 50 - 1,630 1,680 1,564 1,539 Deferred tax assets - - 85 85 92 98 Current tax recoverable - - 30 30 38 29 Accrued investment income 253 60 252 565 570 521 Other debtors 1,847 189 562 2,598 3,229 2,633 Investment properties - - 5 5 5 5 Investment in joint ventures and associates accounted for using the equity method - - 714 714 525 688 Loans C3.3 702 - 605 1,307 1,278 1,303 Equity securities and portfolio holdings in unit trusts 12,821 12,397 1,535 26,753 22,631 23,581 Debt securities C3.2 23,398 3,442 12,221 39,061 35,519 36,546 Derivative assets 58 3 41 102 79 47 Deposits 307 393 543 1,243 912 1,379 Assets held for sale - - - - - 3,863 Cash and cash equivalents 733 234 819 1,786 2,010 1,995 Total assets 40,282 16,718 21,633 78,633 71,154 76,909 Total equity - - 5,181 5,181 4,874 4,993 Liabilities Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) C4.1(b) 31,549 15,326 12,744 59,619 53,437 55,018 Unallocated surplus of with-profits funds C4.1(b) 3,003 - - 3,003 2,351 2,667 Operational borrowings attributable to shareholder-financed operations - 13 7 20 11 19 Borrowings attributable to with-profits operations 20 - - 20 6 4 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 2,114 1,201 226 3,541 3,379 3,093 Deferred tax liabilities 705 38 278 1,021 905 935 Current tax liabilities 64 - 98 162 109 113 Accruals, deferred income and other liabilities 2,667 138 2,999 5,804 5,838 5,887 Provisions 48 - 90 138 115 157 Derivative liabilities 112 2 10 124 129 265 Liabilities held for sale - - - - - 3,758 Total liabilities 40,282 16,718 16,452 73,452 66,280 71,916 Total equity and liabilities 40,282 16,718 21,633 78,633 71,154 76,909 Note The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. Assets and liabilities of other participating businesses are included in the column for 'Other business'. C2.2 US insurance operations 2017 £m 2016 £m Variable annuity separate account assets and liabilities Fixed annuity, GIC and other business 30 Jun Total 30 Jun Total 31 Dec Total Note Assets Deferred acquisition costs and other intangible assets - 8,187 8,187 7,081 8,323 Property, plant and equipment - 224 224 213 237 Reinsurers' share of insurance contract liabilities - 6,740 6,740 6,859 7,224 Deferred tax assets - 3,678 3,678 3,369 3,861 Current tax recoverable - 348 348 254 95 Accrued investment income - 493 493 520 549 Other debtors - 260 260 18 295 Investment properties - 6 6 5 6 Loans C3.3 - 9,497 9,497 8,504 9,735 Equity securities and portfolio holdings in unit trusts 124,735 324 125,059 104,124 120,747 Debt securities C3.2 - 38,029 38,029 41,143 40,745 Derivative assets - 906 906 1,608 834 Other investments - 932 932 895 987 Cash and cash equivalents - 1,194 1,194 1,056 1,054 Total assets 124,735 70,818 195,553 175,649 194,692 Total equity - 5,011 5,011 5,056 5,204 Liabilities Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) C4.1(c) 124,735 53,044 177,779 159,155 177,626 Core structural borrowings of shareholder-financed operations - 192 192 186 202 Operational borrowings attributable to shareholder-financed operations - 453 453 70 480 Obligations under funding, securities lending and sale and repurchase agreements - 4,518 4,518 3,144 3,534 Net asset value attributable to unit holders of consolidated unit trusts and similar funds - - - 23 - Deferred tax liabilities - 2,981 2,981 3,204 2,831 Current tax liabilities - 58 58 - - Accruals, deferred income and other liabilities - 4,517 4,517 4,385 4,749 Provisions - 1 1 5 2 Derivative liabilities - 43 43 421 64 Total liabilities 124,735 65,807 190,542 170,593 189,488 Total equity and liabilities 124,735 70,818 195,553 175,649 194,692 C2.3 UK insurance operations 2017 £m 2016 £m Other funds and subsidiaries With-profits sub-funds 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 (i) Assets Goodwill 26 - - - 26 189 153 Deferred acquisition costs and other intangible assets 82 - 86 86 168 89 107 Property, plant and equipment 327 - 17 17 344 866 343 Reinsurers' share of insurance contract liabilities 1,308 135 1,117 1,252 2,560 2,362 2,590 Deferred tax assets 73 - 54 54 127 139 146 Current tax recoverable 179 - 132 132 311 256 283 Accrued investment income 1,040 93 517 610 1,650 1,518 1,915 Other debtors 1,895 224 677 901 2,796 2,778 2,447 Investment properties 12,962 650 1,595 2,245 15,207 13,930 14,635 Investment in joint ventures and associates accounted for using the equity method 405 - - - 405 462 409 Loans C3.3 4,036 - 1,748 1,748 5,784 3,616 3,572 Equity securities and portfolio holdings in unit trusts 43,023 15,339 36 15,375 58,398 49,150 54,037 Debt securities C3.2 49,165 6,743 35,394 42,137 91,302 89,114 90,796 Derivative assets 2,183 3 490 493 2,676 3,563 2,927 Other investments 4,608 5 1 6 4,614 3,926 4,449 Deposits 9,542 968 1,333 2,301 11,843 13,184 10,705 Assets held for salenote (ii) 33 - - - 33 30 726 Cash and cash equivalents 3,230 762 573 1,335 4,565 3,445 4,703 Total assets 134,117 24,922 43,770 68,692 202,809 188,617 194,943 Total equity - - 6,227 6,227 6,227 6,163 5,999 Liabilities Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) C4.1(d) 106,362 22,917 33,574 56,491 162,853 151,233 157,654 Unallocated surplus of with-profits funds C4.1(d) 12,087 - - - 12,087 11,246 11,650 Operational borrowings attributable to shareholder-financed operations - 4 143 147 147 163 167 Borrowings attributable to with-profits operations 3,316 - - - 3,316 1,421 1,345 Obligations under funding, securities lending and sale and repurchase agreements 1,216 - 674 674 1,890 1,619 1,497 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 3,152 1,856 28 1,884 5,036 5,368 5,594 Deferred tax liabilities 1,354 - 292 292 1,646 1,253 1,577 Current tax liabilities 246 68 137 205 451 363 447 Accruals, deferred income and other liabilities 5,604 76 1,355 1,431 7,035 5,896 6,176 Provisions 62 - 288 288 350 156 442 Derivative liabilities 718 1 1,052 1,053 1,771 3,736 1,860 Liabilities held for salenote (ii) - - - - - - 535 Total liabilities 134,117 24,922 37,543 62,465 196,582 182,454 188,944 Total equity and liabilities 134,117 24,922 43,770 68,692 202,809 188,617 194,943 Notes (i) Includes the Scottish Amicable Insurance Fund which, at 30 June 2017, has total assets and liabilities of £5,943 million (30 June 2016: £6,282 million; 31 December 2016: £6,101 million). The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). The PAC with-profits fund includes £10.9 billion (30 June 2016: £11.3 billion; 31 December 2016: £11.2 billion) of non-profits annuities liabilities. (ii) The assets and liabilities held for sale for the UK insurance operations comprise the investment properties and consolidated private equity investments of the PAC with-profits fund, for which the sales had been agreed but not yet completed at the period end. C3 Assets and liabilities - classification and measurement C3.1 Group assets and liabilities - measurement (a) Determination of fair value The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments, or by using quotations from independent third parties, such as brokers and pricing services or by using appropriate valuation techniques. The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an arm's length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties or valued internally using standard market practices. Other than the loans which have been designated at fair value through profit or loss, the loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from discounted cash flows expected to be received. The discount rate used is updated for the market rate of interest where applicable. The fair value of investment properties is based on market values as assessed by professionally qualified external valuers or by the Group's qualified surveyors. The fair value of financial liabilities (other than derivative financial instruments) and borrowings that are carried at fair value through profit or loss is determined using discounted cash flows of the amounts expected to be paid. (b) Fair value hierarchy of financial instruments measured at fair value on recurring basis Assets and liabilities carried at fair value on the statement of financial position The table below shows the financial instruments carried at fair value analysed by level of the IFRS 13 'Fair Value Measurement' defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement. Financial instruments at fair value 30 Jun 2017 £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 Loans - - 1,906 1,906 Equity securities and portfolio holdings in unit trusts 51,136 4,282 426 55,844 Debt securities 28,122 44,145 296 72,563 Other investments (including derivative assets) 73 3,310 3,464 6,847 Derivative liabilities (79) (752) - (831) Total financial investments, net of derivative liabilities 79,252 50,985 6,092 136,329 Percentage of total 58% 38% 4% 100% Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts 152,050 399 23 152,472 Debt securities 5,243 4,943 - 10,186 Other investments (including derivative assets) 4 3 4 11 Derivative liabilities (2) - - (2) Total financial investments, net of derivative liabilities 157,295 5,345 27 162,667 Percentage of total 97% 3% 0% 100% Non-linked shareholder-backed Loans - 309 2,594 2,903 Equity securities and portfolio holdings in unit trusts 2,104 7 10 2,121 Debt securities 21,525 66,233 286 88,044 Other investments (including derivative assets) (25) 1,526 996 2,497 Derivative liabilities (1) (1,576) (460) (2,037) Total financial investments, net of derivative liabilities 23,603 66,499 3,426 93,528 Percentage of total 25% 71% 4% 100% Group total analysis, including other financial liabilities held at fair value Group total Loans - 309 4,500 4,809 Equity securities and portfolio holdings in unit trusts 205,290 4,688 459 210,437 Debt securities 54,890 115,321 582 170,793 Other investments (including derivative assets) 52 4,839 4,464 9,355 Derivative liabilities (82) (2,328) (460) (2,870) Total financial investments, net of derivative liabilities 260,150 122,829 9,545 392,524 Investment contract liabilities without discretionary participation features held at fair value - (17,166) - (17,166) Borrowings attributable to with-profits operations - - (1,816) (1,816) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (5,719) (2,421) (437) (8,577) Other financial liabilities held at fair value - (394) (2,766) (3,160) Total financial instruments at fair value 254,431 102,848 4,526 361,805 Percentage of total 70% 29% 1% 100% 30 Jun 2016 £m Level 1 Level 2 Level 3 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 contract liabilities without discretionary participation features held at fair value - (16,178) - (16,178) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (5,275) (2,427) (1,068) (8,770) Other financial 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% 31 Dec 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 Loans - - 27 27 Equity securities and portfolio holdings in unit trusts 45,181 3,669 690 49,540 Debt securities 26,227 43,880 690 70,797 Other investments (including derivative assets) 58 3,357 3,443 6,858 Derivative liabilities (51) (1,025) - (1,076) Total financial investments, net of derivative liabilities 71,415 49,881 4,850 126,146 Percentage of total 56% 40% 4% 100% Unit-linked and variable annuity separate account Equity securities and portfolio holdings in unit trusts 146,637 374 22 147,033 Debt securities 5,136 4,462 - 9,598 Other investments (including derivative assets) 6 8 5 19 Derivative liabilities (4) (24) - (28) Total financial investments, net of derivative liabilities 151,775 4,820 27 156,622 Percentage of total 97% 3% 0% 100% Non-linked shareholder-backed Loans - 276 2,672 2,948 Equity securities and portfolio holdings in unit trusts 1,966 3 10 1,979 Debt securities 21,896 67,915 252 90,063 Other investments (including derivative assets) - 1,492 1,032 2,524 Derivative liabilities (9) (1,623) (516) (2,148) Total financial investments, net of derivative liabilities 23,853 68,063 3,450 95,366 Percentage of total 25% 71% 4% 100% Group total analysis, including other financial liabilities held at fair value Group total Loans - 276 2,699 2,975 Equity securities and portfolio holdings in unit trusts 193,784 4,046 722 198,552 Debt securities 53,259 116,257 942 170,458 Other investments (including derivative assets) 64 4,857 4,480 9,401 Derivative liabilities (64) (2,672) (516) (3,252) Total financial investments, net of derivative liabilities 247,043 122,764 8,327 378,134 Investment contract liabilities without discretionary participation features held at fair value - (16,425) - (16,425) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (4,217) (3,587) (883) (8,687) Other financial liabilities held at fair value - (385) (2,851) (3,236) Total financial instruments at fair value 242,826 102,367 4,593 349,786 Percentage of total 70% 29% 1% 100% All assets and liabilities held at fair value are classified as fair value through profit or loss, except for £37,936 million (30 June 2016: £41,045 million; 31 December 2016: £40,645 million) of debt securities classified as available-for-sale. The Korea life business was classified as held for sale in the second half of 2016, with the sale completed in May 2017. Accordingly, the financial instruments shown above only included the assets and liabilities of Korea life business as at 30 June 2016 (prior to its classification as held for sale). The assets and liabilities held for sale on the consolidated statement of financial position at 31 December 2016 in respect of Korea life business included a net financial instruments balance of £3,200 million, primarily for equity securities and debt securities. Of this amount, £2,763 million was classified as level 1 and £437 million as level 2. (c) Valuation approach for level 2 fair valued financial instruments A significant proportion of the Group's level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades. For further detail on the valuation approach for level 2 fair valued financial instruments please refer to note C3.1 of the Group's consolidated financial statements for the year ended 31 December 2016. Of the total level 2 debt securities of £115,321 million at 30 June 2017 (30 June 2016: £114,623 million; 31 December 2016: £116,257 million), £13,596 million are valued internally (30 June 2016: £11,867 million; 31 December 2016: £12,708 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to interpretation. (d) Fair value measurements for level 3 fair valued financial instruments Reconciliation of movements in level 3 financial instruments measured at fair value The following table reconciles the value of level 3 fair valued financial instruments at 1 January 2017 to that presented at 30 June 2017. Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses, unrealised gains and losses on the assets classified at fair value through profit and loss and foreign exchange movements on an individual entity's overseas investments. Total gains and losses recorded in other comprehensive income includes unrealised gains and losses on debt securities held as available-for-sale within Jackson and foreign exchange movements arising from the retranslation of the Group's overseas subsidiaries and branches. £m Half year 2017 At 1 Jan 2017 Total gains (losses) in income statement Total gains (losses) recorded in other compre- hensive income Purchases Sales Settled Issued Transfers into level 3 Transfers out of level 3 At 30 Jun 2017 Loans 2,699 96 (132) 1,879 - (70) 28 - - 4,500 Equity securities and portfolio holdings in unit trusts 722 (17) (2) 175 (418) - - - (1) 459 Debt securities 942 2 (11) 142 (471) - - - (22) 582 Other investments (including derivative assets) 4,480 84 (64) 191 (227) - - - - 4,464 Derivative liabilities (516) 56 - - - - - - - (460) Total financial investments, net of derivative liabilities 8,327 221 (209) 2,387 (1,116) (70) 28 - (23) 9,545 Borrowings attributable to with-profits operations - 2 - - - - (1,818) - - (1,816) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (883) (357) - - (167) 1,017 (47) - - (437) Other financial liabilities (2,851) (96) 141 - (1) 73 (32) - - (2,766) Total financial instruments at fair value 4,593 (230) (68) 2,387 (1,284) 1,020 (1,869) - (23) 4,526 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 Full 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 31 Dec 2016 Loans 2,183 2 427 - - (123) 210 - - 2,699 Equity securities and portfolio holdings in unit trusts 607 59 (20) 153 (133) (9) - 65 - 722 Debt securities 778 85 11 185 (75) (37) - - (5) 942 Other investments (including derivative assets) 4,276 359 443 720 (1,002) - - 73 (389) 4,480 Derivative liabilities (353) (163) - - - - - - - (516) Total financial investments, net of derivative liabilities 7,491 342 861 1,058 (1,210) (169) 210 138 (394) 8,327 Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,036) (18) (2) - 24 271 (122) - - (883) Other financial liabilities (2,347) (4) (457) - - 259 (302) - - (2,851) Total financial instruments at fair value 4,108 320 402 1,058 (1,186) 361 (214) 138 (394) 4,593 * Includes distributions to third party investors by subsidiaries held by the UK with-profits funds for investment purposes. These distributions vary period to period depending on the maturity of the subsidiaries and the gains realised by those entities in the period. Of the total net gains and losses in the income statement of £(230) million (30 June 2016: £129 million; 31 December 2016: £320 million), £(234) million (30 June 2016: £92 million; 31 December 2016: £242 million) relates to net unrealised (losses) gains relating to financial instruments still held at the end of the period, which can be analysed as follows: 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Equity securities 21 (14) 8 Debt securities 2 65 71 Other investments 42 149 182 Derivative liabilities 56 (127) - Net asset value attributable to unit holders of consolidated unit trusts and similar funds 2 23 (18) Other financial liabilities (357) (4) (1) Total (234) 92 242 Valuation approach for level 3 fair valued financial instruments Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions, eg market illiquidity. The valuation techniques used include comparison to recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation. For further detail on the valuation approach for level 3 fair valued financial instruments, please refer to note C3.1 of the Group's consolidated financial statements for the year ended 31 December 2016. At 30 June 2017, the Group held £4,526 million (30 June 2016: £4,616 million; 31 December 2016: £4,593 million) of net financial instruments at fair value within level 3. This represents 1 per cent (30 June 2016: 2 per cent; 31 December 2016: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities. The net financial instruments at fair value within level 3 at 30 June 2017 include £1,906 million of loans and a corresponding £1,816 million of borrowings held by a subsidiary of the Group's UK with-profits fund, attaching to the acquisition of a portfolio of buy-to-let mortgage loans in half year 2017 financed largely by external third party (non-recourse) borrowings (see note C3.3(c) for further details). The fair value of these loans and the related borrowings is determined by an external valuer using the income approach with the most significant inputs into the valuation being non-observable assumptions on the future level of defaults and prepayments and their effect on cash flows. The discount rate applied is updated to reflect changes in the LIBOR swap rate. The Group's exposure is limited to the investment held by the UK with-profits fund rather than to the individual loans and borrowings themselves. The fair value movements of these loans and borrowings have no effect on shareholders' profit and equity. Included within these amounts were loans of £2,594 million at 30 June 2017 (30 June 2016: £2,448 million; 31 December 2016: £2,672 million), measured as the loan outstanding balance attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,766 million at 30 June 2017 (30 June 2016: £2,616 million; 31 December 2016: £2,851 million) was also classified within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets. Excluding the loans and funds withheld liability under REALIC's reinsurance arrangements as described above, which amounted to a net liability of £(172) million (30 June 2016: £(168) million; 31 December 2016: £(179) million), the level 3 fair valued financial assets net of financial liabilities were £4,698 million (30 June 2016: £4,784 million; 31 December 2016: £4,772 million). Of this amount, a net liability of £(218) million (30 June 2016: net asset of £47 million; 31 December 2016: net asset of £72 million) was internally valued, representing 0.1 per cent of the total fair valued financial assets net of financial liabilities (30 June 2016: 0.0 per cent; 31 December 2016: 0.1 per cent). Internal valuations are inherently more subjective than external valuations. Included within these internally valued net liabilities were: (a) Debt securities of £446 million (30 June 2016: £463 million; 31 December 2016: £422 million), which were either valued on a discounted cash flow method with an internally developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities (eg distressed securities or securities which were being restructured). (b) Private equity and venture investments of £176 million (30 June 2016: £1,038 million; 31 December 2016: £956 million) which were valued internally based on management information available for these investments. These investments, in the form of debt and equity securities, were principally held by consolidated investment funds which are managed on behalf of third parties. (c) Liabilities of £(437) million (30 June 2016: £(1,045) million; 31 December 2016: £(883) million) for the net asset value attributable to external unit holders in respect of the consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets. (d) Derivative liabilities of £(460) million (30 June 2016: £(480) million; 31 December 2016: £(516) million) which are valued internally using standard market practices but are subject to independent assessment against counterparties' valuations. (e) Other sundry individual financial investments of £57 million (30 June 2016: £71 million; 31 December 2016: £93 million). Of the internally valued net liability referred to above of £(218) million (30 June 2016: net asset of £47 million; 31 December 2016: net asset of £72 million): (a) A net liability of £(97) million (30 June 2016: net asset of £303 million; 31 December 2016: net asset of £315 million) was held by the Group's participating funds and therefore shareholders' profit and equity are not impacted by movements in the valuation of these financial instruments. (b) A net liability of £(121) million (30 June 2016: net liability of £(256) million; 31 December 2016: net liability of £(243) million) was held to support non-linked shareholder-backed business. If the value of all the level 3 instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the change in valuation would be £12 million (30 June 2016: £26 million; 31 December 2016: £24 million), which would increase (reduce) shareholders' equity by this amount before tax. All this amount passes through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit. (e) Transfers into and transfers out of levels The Group's policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except for material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer. During half year 2017, the transfers between levels within the Group's portfolio were primarily transfers from level 1 to 2 of £119 million and transfers from level 2 to level 1 of £400 million. These transfers, which primarily relate to debt securities, arose to reflect the change in the observability of the inputs used in valuing these securities. In addition, the transfers out of level 3 in half year 2017 were £23 million. These transfers were primarily between levels 3 and 2 for debt securities and other investments. There were no transfers into level 3 in the period. (f) Valuation processes applied by the Group The Group's valuation policies, procedures and analyses for instruments categorised as level 3 are overseen by business unit committees as part of the Group's wider financial reporting governance processes. The procedures undertaken include approval of valuation methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group makes use of the extensive expertise of its asset management functions. C3.2 Debt securities This note provides analysis of the Group's debt securities, including asset-backed securities and sovereign debt securities. (a) Credit rating Debt securities are analysed below according to external credit ratings issued, with equivalent ratings issued by different ratings agencies grouped together. Standard and Poor's ratings have been used where available, if this isn't the case Moody's and then Fitch have been used as alternatives. In the table below, AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB- ratings. Financial assets which fall outside this range are classified as below BBB-. Debt securities with no external credit rating are classified as 'other'. 30 Jun 2017 £m AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- Other Total Asia With-profits 3,168 9,722 3,540 3,201 1,789 1,978 23,398 Unit-linked 501 129 526 1,502 323 461 3,442 Non-linked shareholder-backed 1,138 2,758 3,035 2,699 1,645 946 12,221 US Non-linked shareholder-backed 455 6,739 10,318 13,526 1,046 5,945 38,029 UK With-profits 5,965 9,872 10,827 12,577 3,481 6,443 49,165 Unit-linked 597 2,871 1,131 1,856 176 112 6,743 Non-linked shareholder-backed 4,481 10,313 10,396 4,036 388 5,780 35,394 Other operations 819 1,275 192 95 14 6 2,401 Total debt securities 17,124 43,679 39,965 39,492 8,862 21,671 170,793 30 Jun 2016 £m AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- Other Total Asia With-profits 2,894 7,756 3,132 2,982 1,925 1,889 20,578 Unit-linked 420 467 508 1,285 247 500 3,427 Non-linked shareholder-backed 1,013 3,126 2,944 1,961 1,450 1,020 11,514 US Non-linked shareholder-backed 3,761 6,190 10,137 13,379 888 6,788 41,143 UK With-profits 4,979 9,416 10,318 13,091 2,972 6,479 47,255 Unit-linked 404 2,488 1,218 2,042 339 97 6,588 Non-linked shareholder-backed 4,190 11,399 9,741 4,571 416 4,954 35,271 Other operations 1,024 1,165 286 112 2 2 2,591 Total debt securities 18,685 42,007 38,284 39,423 8,239 21,729 168,367 31 Dec 2016 £m AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- Other Total Asia With-profits 3,183 8,522 3,560 2,996 1,887 1,713 21,861 Unit-linked 448 112 525 1,321 494 421 3,321 Non-linked shareholder-backed 1,082 2,435 2,864 2,388 1,680 915 11,364 US Non-linked shareholder-backed 445 7,932 10,609 13,950 1,009 6,800 40,745 UK With-profits 5,740 9,746 10,679 12,798 3,289 6,684 48,936 Unit-linked 461 2,660 1,158 1,699 212 87 6,277 Non-linked shareholder-backed 4,238 10,371 10,558 4,515 397 5,504 35,583 Other operations 830 1,190 242 97 10 2 2,371 Total debt securities 16,427 42,968 40,195 39,764 8,978 22,126 170,458 The credit ratings, information or data contained in this report which are attributed and specifically provided by S&P, Moody's and Fitch Solutions and their respective affiliates and suppliers ('Content Providers') is referred to here as the 'Content'. Reproduction of any Content in any form is prohibited except with the prior written permission of the relevant party. The Content Providers do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. The Content Providers expressly disclaim liability for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold any such investment or security, nor does it address the suitability an investment or security and should not be relied on as investment advice. Securities with credit ratings classified as 'Other' can be further analysed as follows: 2017 £m 2016 £m Asia 30 Jun 30 Jun 31 Dec Non-linked shareholder-backed Internally rated Government bonds 40 207 63 Corporate bonds - rated as investment grade by local external ratings agencies 821 582 757 Other 85 231 95 Total Asia non-linked shareholder-backed 946 1,020 915 2017 £m 2016 £m US Mortgage -backed securities Other securities 30 Jun Total 30 Jun Total 31 Dec Total Implicit ratings of other US debt securities based on NAIC valuations (see below) NAIC 1 1,926 2,018 3,944 4,776 4,759 NAIC 2 10 1,893 1,903 1,868 1,909 NAIC 3-6 7 91 98 144 132 Total US 1,943 4,002 5,945 6,788 6,800 * The Securities Valuation Office of the NAIC classifies debt securities into six quality categories ranging from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6. 2017 £m 2016 £m UK 30 Jun 30 Jun 31 Dec Internal ratings or unrated AAA to A- 7,494 6,584 6,939 BBB to B- 3,180 3,284 3,257 Below B- or unrated 1,661 1,662 2,079 Total UK 12,335 11,530 12,275 In addition to the debt securities shown above, the assets held for sale on the consolidated statement of financial position at 31 December 2016 in respect of Korea life business included a debt securities balance of £652 million. (b) Additional analysis of US insurance operations debt securities 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Corporate and government security and commercial loans: Government 4,884 7,151 5,856 Publicly traded and SEC Rule 144A securities 24,971 24,894 25,992 Non-SEC Rule 144A securities 4,543 4,302 4,576 Asset backed securities (see note (e)) 3,631 4,796 4,321 Total US debt securities 38,029 41,143 40,745 * A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors. The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities. ** Debt securities for US operations included in the statement of financial position comprise: 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Available-for-sale 37,936 41,045 40,645 Fair value through profit and loss: Securities held to back liabilities for funds withheld under reinsurance arrangement 93 98 100 38,029 41,143 40,745 Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report. (c) Movements in unrealised gains and losses on Jackson available-for-sale securities There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of £676 million to a net unrealised gain of £1,157 million as analysed in the table below. 30 Jun 2017 £m Foreign exchange translation Changes in unrealised appreciation 31 Dec 2016 £m Reflected as part of movement in other comprehensive income Assets fair valued at below book value Book value 8,760 14,617 Unrealised gain (loss) (306) 22 347 (675) Fair value (as included in statement of financial position) 8,454 13,942 Assets fair valued at or above book value Book value 28,019 25,352 Unrealised gain (loss) 1,463 (72) 184 1,351 Fair value (as included in statement of financial position) 29,482 26,703 Total Book value 36,779 39,969 Net unrealised gain (loss) 1,157 (50) 531 676 Fair value (as included in the footnote above in the overview table and the statement of financial position) 37,936 40,645 The available-for-sale debt securities of Jackson are analysed into US Treasuries and other debt securities as follows: US Treasuries Book value 4,415 5,486 Unrealised gain (loss) (186) 13 213 (412) Fair value 4,229 5,074 Other debt securities Book value 32,364 34,483 Unrealised gain (loss) 1,343 (63) 318 1,088 Fair value 33,707 35,571 Total debt securities Book value 36,779 39,969 Net unrealised gain (loss) 1,157 (50) 531 676 Fair value 37,936 40,645 * Book value represents cost/amortised cost of the debt securities. ** Translated at the average rate of US$1.2599: £1.00. (d) US debt securities classified as available-for-sale in an unrealised loss position (i) Fair value of securities as a percentage of book value The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value: 30 Jun 2017 £m 30 Jun 2016 £m 31 Dec 2016 £m Fair value Unrealised loss Fair value Unrealised loss Fair value Unrealised loss Between 90% and 100% 7,962 (236) 1,848 (51) 12,326 (405) Between 80% and 90% 482 (64) 304 (52) 1,598 (259) Below 80%: Residential mortgage-backed securities - sub-prime - - - - - - Commercial mortgage-backed securities - - 8 (3) 8 (3) Other asset-backed securities 10 (6) 9 (7) 9 (8) Government bonds - - - - - - Corporates - - 19 (6) 1 - 10 (6) 36 (16) 18 (11) Total 8,454 (306) 2,188 (119) 13,942 (675) (ii) Unrealised loss by maturity of security 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec 1 year to 5 years (5) (10) (7) 5 year to 10 years (48) (38) (118) More than 10 years (231) (42) (510) Mortgage-backed and other debt securities (22) (29) (40) Total (306) (119) (675) (iii) Age analysis of unrealised losses for the periods indicated The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position: 30 Jun 2017 £m 30 Jun 2016 £m 31 Dec 2016 £m Age analysis Non- investment grade Investment grade Total Non- investment grade Investment grade Total Non- investment grade Investment grade Total Less than 6 months (1) (15) (16) (2) (5) (7) (3) (599) (602) 6 months to 1 year - (251) (251) (4) (8) (12) - (2) (2) 1 year to 2 years (2) (1) (3) (14) (46) (60) (4) (27) (31) 2 year to 3 years (3) (12) (15) - - - (2) (1) (3) More than 3 years (1) (20) (21) (3) (37) (40) (2) (35) (37) (7) (299) (306) (23) (96) (119) (11) (664) (675) Further, the following table shows the age analysis as at 30 June 2017 of the securities whose fair values were below 80 per cent of the book value: 30 Jun 2017 £m 30 Jun 2016 £m 31 Dec 2016 £m Age analysis Fair value Unrealised loss Fair value Unrealised loss Fair value Unrealised loss Less than 3 months - - 2 - 1 - 3 months to 6 months - - 19 (6) - - More than 6 months 10 (6) 15 (10) 17 (11) 10 (6) 36 (16) 18 (11) (e) Asset-backed securities The Group's holdings in asset-backed securities (ABS), which comprise residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed securities, at 30 June 2017 are as follows: 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Shareholder-backed operations: Asia insurance operations note (i) 104 151 130 US insurance operations note (ii) 3,631 4,796 4,321 UK insurance operations (2017: 35% AAA, 19% AA)note (iii) 1,045 1,445 1,464 Asset management operations note (iv) 665 963 771 5,445 7,355 6,686 With-profits operations: Asia insurance operations note (i) 233 310 357 UK insurance operations (2017: 56% AAA, 13% AA)note (iii) 5,091 4,558 5,177 5,324 4,868 5,534 Total 10,769 12,223 12,220 Notes (i) Asia insurance operations The Asia insurance operations' exposure to asset-backed securities is primarily held by the with-profits operations. Of the £233 million, 99 per cent (30 June 2016: 99 per cent; 31 December 2016: 99 per cent) are investment grade. (ii) US insurance operations US insurance operations' exposure to asset-backed securities at 30 June 2017 comprises: 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec RMBS Sub-prime (2017: 2% AAA, 11% AA, 3% A) 150 185 180 Alt-A (2017: 3% AAA, 5% A) 151 178 177 Prime including agency (2017: 70% AA, 5% A) 515 904 675 CMBS (2017: 80% AAA, 14% AA, 1% A) 1,768 2,635 2,234 CDO funds (2017: 23% AAA, 8% AA, 43% A), including £nil exposure to sub-prime 33 55 50 Other ABS (2017: 17% AAA, 17% AA, 51% A), including £108 million exposure to sub-prime 1,014 839 1,005 Total 3,631 4,796 4,321 (iii) UK insurance operations The majority of holdings of the shareholder-backed business are UK securities and relate to PAC's annuity business. Of the holdings of the with-profits operations, £1,473 million (30 June 2016: £1,332 million; 31 December 2016: £1,623 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market. (iv) Asset management operations Asset management operations' exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £665 million, 96 per cent (30 June 2016: 95 per cent; 31 December 2016: 95 per cent) are graded AAA. (f) Group sovereign debt and bank debt exposure The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2017: Exposure to sovereign debts 30 Jun 2017 £m 30 Jun 2016 £m 31 Dec 2016 £m Shareholder-backed business With- profits funds Shareholder-backed business With- profits funds Shareholder-backed business With- profits funds Italy 57 62 58 63 56 61 Spain 33 18 35 18 33 18 France 23 23 22 - 22 - Germany 649 317 546 348 573 329 Other Europe (principally Belgium) 82 32 84 32 83 33 Total Eurozone 844 452 745 461 767 441 United Kingdom 4,904 3,049 5,720 2,431 5,510 2,868 United States 4,959 9,913 6,881 8,354 6,861 9,008 Other, predominantly Asia 4,174 2,221 4,081 2,073 3,979 2,079 Total 14,881 15,635 17,427 13,319 17,117 14,396 * Including bonds guaranteed by the federal government. ** The exposure to the United States sovereign debt comprises holdings of Jackson, the UK and Asia insurance operations. Exposure to bank debt securities 2017 £m 2016 £m Senior debt Subordinated debt 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 - 32 32 - - - 32 31 32 Spain 43 16 59 - - - 59 159 170 France 28 52 80 10 73 83 163 224 166 Germany 76 4 80 - 87 87 167 124 124 Netherlands - 67 67 - 6 6 73 39 50 Other Eurozone - 23 23 - - - 23 32 19 Total Eurozone 147 194 341 10 166 176 517 609 561 United Kingdom 698 387 1,085 6 310 316 1,401 1,118 1,174 United States - 2,580 2,580 3 174 177 2,757 2,651 2,684 Other, predominantly Asia 33 600 633 85 420 505 1,138 1,041 1,018 Total 878 3,761 4,639 104 1,070 1,174 5,813 5,419 5,437 With-profits funds Italy - 65 65 - - - 65 64 62 Spain 44 41 85 - - - 85 219 213 France 9 200 209 - 64 64 273 274 213 Germany 112 20 132 - 35 35 167 112 114 Netherlands - 192 192 5 7 12 204 200 202 Other Eurozone - 30 30 - - - 30 30 31 Total Eurozone 165 548 713 5 106 111 824 899 835 United Kingdom 790 515 1,305 2 485 487 1,792 1,532 1,396 United States - 1,985 1,985 16 333 349 2,334 1,978 2,229 Other, predominantly Asia 400 1,012 1,412 258 463 721 2,133 1,775 1,992 Total 1,355 4,060 5,415 281 1,387 1,668 7,083 6,184 6,452 The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the tables above exclude the proportionate share of sovereign debt holdings of the Group's joint venture and associate operations. C3.3 Loans portfolio (a) Overview of loans portfolio Loans are principally accounted for at amortised cost, net of impairment except for: - Certain mortgage loans which have been designated at fair value through profit or loss of the UK insurance operations as this loan portfolio is managed and evaluated on a fair value basis; and - Certain policy loans of the US insurance operations which are held to back liabilities for funds withheld under a reinsurance arrangement and are also accounted for on a fair value basis. The amounts included in the statement of financial position are analysed as follows: 30 Jun 2017 £m 30 Jun 2016 £m 31 Dec 2016 £m Mortgage loans* Policy loans Other loans† Total Mortgage loans Policy loans Other loans† Total Mortgage loans Policy loans Other loans† Total Asia With-profits - 589 113 702 - 539 113 652 - 577 113 690 Non-linked shareholder-backed 188 219 198 605 156 294 176 626 179 226 208 613 US Non-linked shareholder-backed 5,964 3,533 - 9,497 5,109 3,395 - 8,504 6,055 3,680 - 9,735 UK With-profits 2,576 5 1,455 4,036 719 6 1,339 2,064 668 6 1,218 1,892 Non-linked shareholder-backed 1,711 - 37 1,748 1,548 - 4 1,552 1,642 - 38 1,680 Asset management operations - - 364 364 - - 817 817 - - 563 563 Total loans securities 10,439 4,346 2,167 16,952 7,532 4,234 2,449 14,215 8,544 4,489 2,140 15,173 * All mortgage loans are secured by properties. ** In the US £2,594 million (30 June 2016: £2,448 million; 31 December 2016: £2,672 million) policy loans are backing liabilities for funds withheld under reinsurance arrangements and are accounted for at fair value through profit or loss. All other policy loans are accounted for at amortised cost, less any impairment. † Other loans held in UK with-profits funds are commercial loans and comprise mainly syndicated loans. The majority of other loans in shareholder-backed business in Asia are commercial loans held by the Malaysia operation and which are all investment graded by two local rating agencies. (b) Additional information on US mortgage loans In the US, mortgage loans are all commercial mortgage loans that are secured on the following property types: industrial, multi-family residential, suburban office, retail or hotel. The US insurance operations' commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £12.5 million (30 June 2016: £10.2 million; 31 December 2016: £12.4 million). The portfolio has a current estimated average loan to value of 59 per cent (30 June 2016 and 31 December 2016: 59 per cent). At 30 June 2017, Jackson had no mortgage loans where the contractual terms of the agreements had been restructured (30 June 2016 and 31 December 2016: none). (c) Additional information on UK mortgage loans During the first half of 2017, the UK with-profits fund invested in an entity established to acquire a portfolio of buy-to-let mortgage loans. The vehicle financed the acquisition through the issue of debt instruments, largely to external parties, securitised upon the mortgages acquired. These third party borrowings have no recourse to any other assets of the Group and the Group's exposure is limited to the amount invested by the UK with-profits fund. The securitisation entity is consolidated under IFRS with the mortgage loans and the related third party non-recourse borrowings (see note C6.2 (b)) carried at fair value through profit or loss as they are managed and evaluated by the Group on a fair value basis. By carrying value, 100 per cent of the £1,711 million (30 June 2016: 76 per cent of £1,548 million; 31 December 2016: 96 per cent of £1,642 million) mortgage loans held by the UK shareholder-backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of 30 per cent (30 June 2016: 29 per cent; 2016: 30 per cent). (d) Loans held by asset management operations These relate to loans and receivables managed by Prudential Capital. These assets are generally secured but most have no external credit ratings. Internal ratings prepared by the Group's asset management operations, as part of the risk management process, are: 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Loans and receivables internal ratings: AA+ to AA- 21 31 29 A+ to A- 97 120 100 BBB+ to BBB- 146 442 248 BB+ to BB- 100 223 185 B and other - 1 1 Total 364 817 563 C4 Policyholder liabilities and unallocated surplus of with-profits funds The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group's statement of financial position: C4.1 Movement of liabilities C4.1(a) Group overview (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds Insurance operations £m Asia US UK Total Half year 2017 movements note C4.1(b) note C4.1(c) note C4.1(d) At 1 January 2017 62,784 177,626 169,304 409,714 Comprising: - Policyholder liabilities on the consolidated statement of financial position‡ 53,716 177,626 157,654 388,996 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,667 - 11,650 14,317 - Group's share of policyholder liabilities of joint ventures and associate† 6,401 - - 6,401 Net flows: Premiums 5,699 8,148 7,756 21,603 Surrenders (1,508) (5,071) (3,816) (10,395) Maturities/deaths (880) (1,119) (3,533) (5,532) Net flows 3,311 1,958 407 5,676 Shareholders' transfers post tax (27) - (115) (142) Investment-related items and other movements 4,288 7,124 5,214 16,626 Foreign exchange translation differences (2,035) (8,929) 130 (10,834) As at 30 June 2017 68,321 177,779 174,940 421,040 Comprising: - Policyholder liabilities on the consolidated statement of financial position‡ 58,348 177,779 162,853 398,980 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 3,003 - 12,087 15,090 - Group's share of policyholder liabilities of joint ventures and associate† 6,970 - - 6,970 Half year 2016 movements At 1 January 2016 45,966 138,913 152,893 337,772 Comprising: - Policyholder liabilities excluding Korea life 38,443 138,913 142,350 319,706 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,553 - 10,543 13,096 - Group's share of policyholder liabilities of joint ventures and associate† 4,970 - - 4,970 Net flows: Premiums 4,191 7,101 5,561 16,853 Surrenders (992) (3,437) (3,208) (7,637) Maturities/deaths (671) (809) (3,470) (4,950) Net flows 2,528 2,855 (1,117) 4,266 Shareholders' transfers post tax (22) - (110) (132) Investment-related items and other movements 2,232 2,737 10,092 15,061 Foreign exchange translation differences 6,280 14,650 721 21,651 At 30 June 2016 56,984 159,155 162,479 378,618 Comprising: - Policyholder liabilities excluding Korea life 48,918 159,155 151,233 359,306 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,351 - 11,246 13,597 - Group's share of policyholder liabilities of joint ventures and associate† 5,715 - - 5,715 Average policyholder liability balances Half year 2017 62,718 177,702 160,254 400,674 Half year 2016 49,023 149,034 146,792 344,849 * Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the period and exclude unallocated surplus of with-profits funds. ** The sale of the Group's Korea life business was completed in May 2017. Accordingly, no amounts are shown in the half year 2017 analysis above for Korea. The half year 2016 comparatives have been correspondingly adjusted. The amounts excluded from policyholder liabilities as presented in the balance sheet are £2,812 million at 1 January 2016 and £3,204 million at 30 June 2016. † The Group's investment in joint ventures and associates are accounted for on the equity method in the Group's statement of financial position. The Group's share of the policyholder liabilities as shown above relates to life businesses in China, India and of the Takaful business in Malaysia. ‡ The policyholder liabilities of the Asia insurance operations of £58,348 million as shown in the table above is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,271 million to the Hong Kong with-profits business. The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the period. The items above are shown gross of external reinsurance. The analysis includes the impact of premiums, claims and investment movements on policyholders' liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown above are after any deductions for fees/charges and claims, represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder. (ii) Analysis of movements in policyholder liabilities for shareholder-backed business Half year 2017 £m Asia US UK Total note (b) At 1 January 2017 32,851 177,626 56,158 266,635 Net flows: Premiums 2,801 8,148 1,658 12,607 Surrenders (1,335) (5,071) (1,500) (7,906) Maturities/deaths (450) (1,119) (1,325) (2,894) Net flowsnote (a) 1,016 1,958 (1,167) 1,807 Investment-related items and other movements 1,912 7,124 1,500 10,536 Foreign exchange translation differences (739) (8,929) - (9,668) At 30 June 2017 35,040 177,779 56,491 269,310 Comprising: - Policyholder liabilities on the consolidated statement of financial position 28,070 177,779 56,491 262,340 - Group's share of policyholder liabilities relating to joint ventures and associate 6,970 - - 6,970 Half year 2016 £m Asia US UK Total note (b) At 1 January 2016 25,032 138,913 52,824 216,769 Net flows: Premiums 2,090 7,101 869 10,060 Surrenders (829) (3,437) (1,311) (5,577) Maturities/deaths (284) (809) (1,257) (2,350) Net flowsnotes (a)(b) 977 2,855 (1,699) 2,133 Investment-related items and other movements 841 2,737 4,285 7,863 Foreign exchange translation differences 3,294 14,650 1 17,945 At 30 June 2016 30,144 159,155 55,411 244,710 Comprising: - Policyholder liabilities excluding Korea lifenote (b) 24,429 159,155 55,411 238,995 - Group's share of policyholder liabilities relating to joint ventures and associate 5,715 - - 5,715 Note (a) Including net flows of the Group's insurance joint ventures and associate. (b) The sale of the Group's Korea life business was completed in May 2017. Accordingly, no amounts are shown in the half year 2017 analysis above for Korea. The half year 2016 comparatives have been correspondingly adjusted. The amounts excluded from policyholder liabilities as presented in the balance sheet are £2,812 million at 1 January 2016 and £3,204 million at 30 June 2016. C4.1(b) Asia insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the beginning of the period to 30 June is as follows: £m Half year 2017 movements With-profits business Unit-linked liabilities Other business Total At 1 January 2017 29,933 17,507 15,344 62,784 Comprising: - Policyholder liabilities on the consolidated statement of financial position 27,266 14,289 12,161 53,716 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,667 - - 2,667 - Group's share of policyholder liabilities relating to joint ventures and associate‡ - 3,218 3,183 6,401 Premiums: New business 676 527 528 1,731 In-force 2,222 805 941 3,968 2,898 1,332 1,469 5,699 Surrendersnote (c) (173) (1,102) (233) (1,508) Maturities/deaths (430) (82) (368) (880) Net flowsnote (b) 2,295 148 868 3,311 Shareholders' transfers post tax (27) - - (27) Investment-related items and other movements note (d) 2,376 1,551 361 4,288 Foreign exchange translation differencesnote (a) (1,296) (373) (366) (2,035) At 30 June 2017 33,281 18,833 16,207 68,321 Comprising: - Policyholder liabilities on the consolidated statement of financial position 30,278 15,326 12,744 58,348 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 3,003 - - 3,003 - Group's share of policyholder liabilities relating to joint ventures and associate‡ - 3,507 3,463 6,970 Half year 2016 movements At 1 January 2016 20,934 13,779 11,253 45,966 Comprising: - Policyholder liabilities excluding Korea life 18,381 11,168 8,894 38,443 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,553 - - 2,553 - Group's share of policyholder liabilities relating to joint ventures and associate‡ - 2,611 2,359 4,970 Premiums: New business 706 366 335 1,407 In-force 1,395 686 703 2,784 2,101 1,052 1,038 4,191 Surrendersnote (c) (163) (679) (150) (992) Maturities/deaths (387) (27) (257) (671) Net flows note (b) 1,551 346 631 2,528 Shareholders' transfers post tax (22) - - (22) Investment-related items and other movementsnote (d) 1,391 97 744 2,232 Foreign exchange translation differencesnote (a) 2,986 1,902 1,392 6,280 At 30 June 2016 26,840 16,124 14,020 56,984 Comprising: - Policyholder liabilities excluding Korea life 24,489 13,224 11,205 48,918 - Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,351 - - 2,351 - Group's share of policyholder liabilities relating to joint ventures and associate‡ - 2,900 2,815 5,715 Average policyholder liability balances† Half year 2017 28,772 18,170 15,776 62,718 Half year 2016 21,435 14,951 12,637 49,023 * The policyholder liabilities of the with-profits business of £30,278 million, shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,271 million to the Hong Kong with-profits business. ** The sale of the Group's Korea life business was completed in May 2017. Accordingly, no amounts are shown in the half year 2017 analysis above for Korea. The half year 2016 comparatives have been correspondingly adjusted. The amounts excluded from policyholder liabilities as presented in the balance sheet are £2,812 million at 1 January 2016 and £3,204 million at 30 June 2016. † Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the period and exclude unallocated surplus of with-profits funds. ‡ The Group's investment in joint ventures are accounted for on an equity method and the Group's share of the policyholder liabilities as shown above relate to the life business in China, India and of the Takaful business in Malaysia. Notes (a) Movements in the period have been translated at the average exchange rates for the period ended 30 June 2017. The closing balance has been translated at the closing spot rates as at 30 June 2017. Differences upon retranslation are included in foreign exchange translation differences. (b) Net flows increased by 31 per cent from £2,528 million in half year 2016 to £3,311 million in half year 2017 predominantly reflecting continued growth of the in-force book and increased flows from new business. (c) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 4.1 per cent in the first half of 2017 (half year 2016: 3.3 per cent). (d) Investment-related items and other movements in the first half of 2017 primarily represent gains on equities and bonds during the period. C4.1(c) US insurance operations (i) Analysis of movements in policyholder liabilities A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the period to 30 June is as follows: US insurance operations £m Half year 2017 movements Variable annuity separate account liabilities Fixed annuity, GIC and other business Total At 1 January 2017 120,411 57,215 177,626 Premiums 5,981 2,167 8,148 Surrenders (3,409) (1,662) (5,071) Maturities/deaths (541) (578) (1,119) Net flows note (b) 2,031 (73) 1,958 Transfers from general to separate account 1,240 (1,240) - Investment-related items and other movementsnote (c) 7,236 (112) 7,124 Foreign exchange translation differencesnote (a) (6,183) (2,746) (8,929) At 30 June 2017 124,735 53,044 177,779 Half year 2016 movements At 1 January 2016 91,022 47,891 138,913 Premiums 4,848 2,253 7,101 Surrenders (2,168) (1,269) (3,437) Maturities/deaths (384) (425) (809) Net flowsnote (b) 2,296 559 2,855 Transfers from general to separate account 169 (169) - Investment-related items and other movements 843 1,894 2,737 Foreign exchange translation differences note (a) 9,574 5,076 14,650 At 30 June 2016 103,904 55,251 159,155 Average policyholder liability balances Half year 2017 122,573 55,129 177,702 Half year 2016 97,463 51,571 149,034 * Averages have been based on opening and closing balances, and adjusted for any acquisitions, disposals and corporate transactions in the period. Notes (a) Movements in the period have been translated at an average rate of US$1.26:£1.00 (30 June 2016: US$1.43:£1.00). The closing balance has been translated at closing rate of US$1.30:£1.00 (30 June 2016: US$1.34:£1.00). Differences upon retranslation are included in foreign exchange translation differences. (b) Net flows in the first half of 2017 were £1,958 million (2016: £2,855 million) as we continue to grow the business with gross inflows of £8.148 million, principally into variable annuities, more than exceeding surrenders and maturities in the period. (c) Positive investment-related items and other movements in variable annuity separate account liabilities of £7,236 million for the first six months in 2017 represents positive separate account return mainly following the increase in the US equity market in the period. C4.1(d) UK insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the beginning of the period to 30 June is as follows: £m Shareholder-backed funds and subsidiaries Half year 2017 movements SAIF and PAC with-profits sub-fund Unit-linked liabilities Annuity and other long-term business Total At 1 January 2017 113,146 22,119 34,039 169,304 Comprising: - Policyholder liabilities 101,496 22,119 34,039 157,654 - Unallocated surplus of with-profits funds 11,650 - - 11,650 Premiums 6,098 1,484 174 7,756 Surrenders (2,316) (1,472) (28) (3,816) Maturities/deaths (2,208) (323) (1,002) (3,533) Net flowsnote (a) 1,574 (311) (856) 407 Shareholders' transfers post tax (115) - - (115) Switches (91) 91 - - Investment-related items and other movementsnote (b) 3,805 1,018 391 5,214 Foreign exchange translation differences 130 - - 130 At 30 June 2017 118,449 22,917 33,574 174,940 Comprising: - Policyholder liabilities 106,362 22,917 33,574 162,853 - Unallocated surplus of with-profits funds 12,087 - - 12,087 Half year 2016 movements At 1 January 2016 100,069 21,442 31,382 152,893 Comprising: - Policyholder liabilities 89,526 21,442 31,382 142,350 - Unallocated surplus of with-profits funds 10,543 - - 10,543 Premiums 4,692 527 342 5,561 Surrenders (1,897) (1,285) (26) (3,208) Maturities/deaths (2,213) (271) (986) (3,470) Net flowsnote (a) 582 (1,029) (670) (1,117) Shareholders' transfers post tax (110) - - (110) Switches (84) 84 - - Investment-related items and other movementsnote (b) 5,891 1,050 3,151 10,092 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 Average policyholder liability balances Half year 2017 103,929 22,518 33,807 160,254 Half year 2016 92,674 21,495 32,623 146,792 * Averages have been based on opening and closing balances, and adjusted for any acquisitions, disposals and corporate transactions in the period, and exclude unallocated surplus of with-profits funds. Notes (a) Net flows have improved from a net outflow £1,117 million in the first half of 2016 to net inflows of £407 million in the same period of 2017 due primarily to higher premium flows, up by £2,195 million to £7,756 million, following increased sales of with-profits savings and retirement products. This has been partially offset by lower premiums into our annuity business due to our withdrawal from selling new annuity business. The level of inflows/outflows for unit-linked business remains subject to annual variation as it is driven by corporate pension schemes with transfers in or out from a small number of schemes influencing the level of flows in the period. (b) Investment-related items and other movements of £5,214 million principally comprise investment return attributable to policyholders earned in the period reflecting favourable equity market movements. C5 Intangible assets (a) Goodwill Attributable to: Shareholders With-profits 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Cost At beginning of year 1,475 153 1,628 1,648 1,648 Disposals - (127) (127) - - Charge for reclassification as held for sale - - - - (56) Additional consideration paid on previously acquired business - - - 1 7 Exchange differences - - - 28 29 Net book amount at end of year 1,475 26 1,501 1,677 1,628 Goodwill comprises: 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec M&G - attributable to shareholders 1,153 1,153 1,153 Other - attributable to shareholders 322 335 322 Goodwill - attributable to shareholders 1,475 1,488 1,475 Venture fund investments - attributable to with-profits funds 26 189 153 1,501 1,677 1,628 Other goodwill represents amounts arising from the purchase of entities by the Asia and US operations. These goodwill amounts relating to acquired operations are not individually material. (b) Deferred acquisition costs and other intangible assets 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Deferred acquisition costs and other intangible assets attributable to shareholder 10,643 9,549 10,755 Deferred acquisition costs and other intangible assets attributable to with-profits funds 114 45 52 Total of deferred acquisition costs and other intangible assets 10,757 9,594 10,807 The deferred acquisition costs and other intangible assets attributable to shareholders comprise: 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Deferred acquisition costs related to insurance contracts as classified under IFRS 4 9,022 8,010 9,114 Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 60 68 64 9,082 8,078 9,178 Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF) 39 48 43 Distribution rights and other intangibles 1,522 1,423 1,534 1,561 1,471 1,577 Total of deferred acquisition costs and other intangible assets 10,643 9,549 10,755 2017 £m 2016 £m Deferred acquisition costs Asia US UK Asset management PVIF and other intangibles 30 Jun Total 30 Jun Total 31 Dec Total note Balance at beginning of period: 788 8,303 79 8 1,577 10,755 8,422 8,422 Additions and acquisition of subsidiaries 122 353 8 - 58 541 516 1,179 Amortisation to the income statement:† Operating profit (66) (236) (5) (2) (66) (375) (369) (686) Non-operating profit - 231 - - (4) 227 616 557 (66) (5) (5) (2) (70) (148) 247 (129) Disposals and transfers ǂ - - - - - - (2) (268) Exchange differences and other movements (21) (411) - - (4) (436) 801 1,475 Amortisation of DAC related to net unrealised valuation movements on Jackson's available-for-sale securities recognised within other comprehensive income† - (69) - - - (69) (435) 76 Balance at end of period 823 8,171 82 6 1,561 10,643 9,549 10,755 * PVIF and other intangibles includes amounts in relation to software rights with additions of £17 million, amortisation of £16 million, foreign exchange gains of £2 million and a balance at 30 June 2017 of £66 million. † Under the Group's application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of the US insurance operation's products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits which are determined using an assumption for long-term investment returns for the separate account of 7.4 per cent (half year 2016: 7.4 per cent) (gross of asset management fees and other charges to policyholders, but net of external fund management fees). The amounts included in the income statement and other comprehensive income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the Group's supplementary analysis of profit and other comprehensive income by reference to the underlying items. ǂ Of the £268 million of disposals and transfers at 31 December 2016, £265 million related to the reclassification of the Korea life business as held for sale. Note PVIF and other intangibles comprise PVIF, distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential's insurance products for a fixed period of time. US insurance operations The DAC amount in respect of US insurance operations comprises amounts in respect of: 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Variable annuity business 8,133 7,266 7,844 Other business 330 558 696 Cumulative shadow DAC (for unrealised gains/losses booked in Other Comprehensive Income) (292) (763) (237) Total DAC for US operations 8,171 7,061 8,303 * Consequent upon the positive unrealised valuation movement for half year 2017 of £531 million (30 June 2016: positive unrealised valuation movement of £2,118 million; 31 December 2016: negative unrealised valuation movement of £28 million), there is a charge of £69 million (30 June 2016: a charge of £435 million; 31 December 2016: a gain of £76 million) for altered 'shadow' DAC amortisation booked within other comprehensive income. These adjustments reflect the movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 30 June 2017, the cumulative shadow DAC balance as shown in the table above was negative £292 million (30 June 2016: negative £763 million; 31 December 2016: negative £237 million). Sensitivity of amortisation charge The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns. The amortisation charge to the operating profit in a reporting period comprises: (i) A core amount that reflects a relatively stable proportion of underlying premiums or profit; and (ii) An element of acceleration or deceleration arising from market movements differing from expectations. In periods where the cap and floor feature of the mean reversion technique (which is used for moderating the effect of short-term volatility in investment returns) are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect. Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result. In the first half of 2017, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of £36 million (half year 2016: £29 million; full year 2016: £93 million). The first half of 2017 amount reflects the impact of the positive separate account performance, which is higher than the assumed level for the period. The application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. At 1 July 2017, it would take an instantaneous movement in separate account values of approximately more than either negative 25 per cent or positive 41 per cent for mean reversion assumption to move outside the corridor. C6 Borrowings C6.1 Core structural borrowings of shareholder-financed operations 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Holding company operations: Perpetual subordinated notes (Tier 1)note (i) 847 823 890 Perpetual subordinated notes (Tier 2)note (i) 2,620 2,007 2,754 Subordinated notes (Tier 2)note (i) 2,131 2,126 2,128 Subordinated debt total 5,598 4,956 5,772 Senior debt:note (ii) £300m 6.875% Bonds 2023 300 300 300 £250m 5.875% Bonds 2029 249 249 249 Holding company total 6,147 5,505 6,321 Prudential Capital bank loannote (iii) 275 275 275 Jackson US$250m 8.15% Surplus Notes 2027 192 186 202 Total (per condensed consolidated statement of financial position)note (iv) 6,614 5,966 6,798 Notes (i) These debt tier classifications (including those noted for the comparative balances) are consistent with the treatment of capital for regulatory purposes under the Solvency II regime. The Group has designated US$4.5 billion (30 June 2016: US$2.80 billion; 31 December 2016: US$4.5 billion) of its perpetual subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the investment in Jackson. (ii) The senior debt ranks above subordinated debt in the event of liquidation. (iii) The Prudential Capital bank loan of £275 million is drawn at a cost of 12 month GBP LIBOR plus 0.4 per cent and matures on 20 December 2017. (iv) The maturity profile, currency and interest rates applicable to all other core structural borrowings of shareholder-financed operations of the Group are as detailed in note C6.1 of the Group's consolidated financial statements for the year ended 31 December 2016. Prudential plc has debt ratings from Standard & Poor's, Moody's and Fitch. The long-term senior debt of Prudential plc is rated A+, A2 and A from Standard & Poor's, Moody's and Fitch, while short-term ratings are A-1, P-1 and F1 respectively. The financial strength of The Prudential Assurance Company Limited is rated AA by Standard & Poor's, Aa3 by Moody's and AA by Fitch. Jackson National Life Insurance Company's financial strength is rated AA by Standard & Poor's, A1 by Moody's, AA by Fitch and A+ by AM Best. The financial strength of Prudential Assurance Co. Singapore (Pte) Ltd. (Prudential Singapore) is rated AA by Standard & Poor's. All ratings on Prudential and its subsidiaries have been reaffirmed on stable outlook. C6.2 Other borrowings (a) Operational borrowings attributable to shareholder-financed operations 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Borrowings in respect of short-term fixed income securities programmes 1,424 2,554 1,651 Other borrowingsnote 672 244 666 Total 2,096 2,798 2,317 Note Other borrowings mainly include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson. In addition, other borrowings include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall. (b) Borrowings attributable to with-profits operations 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec Non-recourse borrowings of consolidated investment funds 3,178 1,248 1,189 £100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc 100 100 100 Other borrowings (predominantly obligations under finance leases) 58 79 60 Total 3,336 1,427 1,349 * In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds. The increase since 31 December 2016 primarily relates to the debt instruments issued by a new consolidated securitisation entity backed by a portfolio of mortgage loans (see note C3.3(c) for further details). ** The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are subordinated to the entitlements of the policyholders of that fund. C7 Deferred tax The statement of financial position contains the following deferred tax assets and liabilities in relation to: Deferred tax assets Deferred tax liabilities 2017 £m 2016 £m 2017 £m 2016 £m 30 Jun 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec Unrealised losses or gains on investments 21 22 23 (1,774) (1,815) (1,534) Balances relating to investment and insurance contracts - 1 1 (796) (655) (730) Short-term temporary differences 4,002 3,690 4,196 (3,059) (2,893) (3,071) Capital allowances 16 12 16 (54) (34) (35) Unused tax losses 66 46 79 - - Total 4,105 3,771 4,315 (5,683) (5,397) (5,370) Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted. The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. For the 2017 half year results and financial position at 30 June 2017 the tax benefits on the following losses have not been recognised: 2017 2016 30 Jun 30 Jun 31 Dec Tax benefit £m Losses £bn Tax benefit £m Losses £bn Tax benefit £m Losses £bn Capital losses 90 0.4 94 0.5 89 0.4 Trading losses 48 0.2 60 0.3 41 0.2 Of the unrecognised trading losses, £33 million will expire within the next seven years, the rest have no expiry date. Under IAS 12, 'Income Taxes', deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on the tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting period. C8 Defined benefit pension schemes (a) IAS 19 financial positions The Group operates a number of pension schemes. The largest defined benefit scheme is the Prudential Staff Pension Scheme (PSPS), which is the principal scheme in the UK. The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS). In addition, there are two small defined benefit schemes in Taiwan which have negligible deficits. The Group asset/liability in respect of defined benefit pension schemes is as follows: 2017 £m 2016 £m 2016 £m 30 Jun 30 Jun 31 Dec 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) 753 (154) 85 (1) 683 1,270 (123) 115 (1) 1,261 717 (237) 84 (1) 563 Less: unrecognised surplus (598) - - - (598) (1,100) - - - (1,100) (558) - - - (558) Economic surplus (deficit) (including investment in Prudential insurance policies) 155 (154) 85 (1) 85 170 (123) 115 (1) 161 159 (237) 84 (1) 5 Attributable to: PAC with-profits fund 109 (62) - - 47 119 (49) - - 70 111 (95) - - 16 Shareholder-backed operations 46 (92) 85 (1) 38 51 (74) 34 (1) 10 48 (142) 84 (1) (11) Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies - - (145) - (145) - - (81) - (81) - - (134) - (134) IAS 19 pension asset (liability) on the Group statement of financial position 155 (154) (60) (1) (60) 170 (123) 34 (1) 80 159 (237) (50) (1) (129) * At 30 June 2017, the PSPS pension asset of £155 million (30 June 2016: £170 million; 31 December 2016: £159 million) and the other schemes' pension liabilities of £215 million (30 June 2016: £90 million; 31 December 2016: £288 million) are included within 'Other debtors' and 'Provisions' respectively in the consolidated statement of financial position. Triennial actuarial valuations Defined benefit schemes in the UK are generally required to be subject to full actuarial valuations every three years in order to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds. The next triennial valuation for the PSPS and SASPS are at 5 April 2017 and 31 March 2017 respectively are currently in progress. The next triennial valuation for the M&GGPS is at 31 December 2017. (b) Estimated pension scheme surpluses and deficits (on an economic basis) The underlying pension position on an economic basis reflects the assets (including investments in Prudential policies that are offset against liabilities to policyholders on consolidation in the Group financial statements) and the liabilities of the schemes. The IAS 19 basis excludes the investments in Prudential policies. In principle, on consolidation the investments are eliminated against policyholder liabilities of UK insurance operations, so that the formal IAS 19 position for the scheme in isolation excludes these items and the movements on them over the reporting periods. This treatment applies to the M&GGPS investments. However, as a substantial portion of the Company's interest in the underlying surplus of PSPS is not recognised, the adjustment is not necessary for the PSPS investments. Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14 being shown separately: Half year 2017 £m Surplus (deficit) in schemes at 1 Jan 2017 (Charge) credit to income statement Actuarial gains and losses in other comprehensive income Contributions paid Surplus (deficit) in schemes at 30 Jun 2017 All schemes Underlying position (without the effect of IFRIC 14) Surplus 563 (20) 117 23 683 Less: amount attributable to PAC with-profits fund (425) 4 (57) (8) (486) Shareholders' share: Gross of tax surplus (deficit) 138 (16) 60 15 197 Related tax (27) 3 (12) (3) (39) Net of shareholders' tax 111 (13) 48 12 158 Application of IFRIC 14 for the derecognition of PSPS surplus Derecognition of surplus (558) (7) (32) (1) (598) Less: amount attributable to PAC with-profits fund 409 4 26 - 439 Shareholders' share: Gross of tax (149) (3) (6) (1) (159) Related tax 29 1 1 - 31 Net of shareholders' tax (120) (2) (5) (1) (128) With the effect of IFRIC 14 Surplus (deficit) 5 (27) 85 22 85 Less: amount attributable to PAC with-profits fund (16) 8 (31) (8) (47) Shareholders' share: Gross of tax surplus (deficit) (11) (19) 54 14 38 Related tax 2 4 (11) (3) (8) Net of shareholders' tax (9) (15) 43 11 30 C9 Share capital, share premium and own shares 30 Jun 2017 30 Jun 2016 31 Dec 2016 Number of 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 2,581,061,573 129 1,927 2,572,454,958 128 1,915 2,572,454,958 128 1,915 Shares issued under share-based schemes 4,791,845 - 10 6,579,190 - 6 8,606,615 1 12 At end of period 2,585,853,418 129 1,937 2,579,034,148 128 1,921 2,581,061,573 129 1,927 Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account. At 30 June 2017, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows: Number of shares to subscribe for Share price range Exercisable by year from to 30 June 2017 6,280,110 466p 1,155p 2022 30 June 2016 7,128,449 288p 1,155p 2021 31 December 2016 7,068,884 466p 1,155p 2022 Transactions by Prudential plc and its subsidiaries in Prudential plc shares The Group buys and sells Prudential plc shares ('own shares') either in relation to its employee share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of £257 million at 30 June 2017 (30 June 2016: £185 million; 31 December 2016: £226 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2017, 11.5 million (30 June 2016: 11.2 million; 31 December 2016: 10.7 million) Prudential plc shares with a market value of £204 million (30 June 2016: £141 million; 31 December 2016: £175 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 15.1 million which was in March 2017. The Company purchased the following number of shares in respect of employee incentive plans: Number of shares purchased (in millions) Cost £m Half year 2017 3.3 56.0 Half year 2016 3.8 49.5 Full year 2016 4.4 57.2 The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 30 June 2017 was 6.7 million (30 June 2016: 4.8 million; 31 December 2016: 6.0 million) and the cost of acquiring these shares of £75 million (30 June 2016: £39 million; 31 December 2016: £61 million) is included in the cost of own shares. The market value of these shares as at 30 June 2017 was £120 million (30 June 2016: £61 million; 31 December 2016: £97 million). During 2017, these funds made a net purchase of 678,131 Prudential shares (30 June 2016: net disposal of 1,280,258; 31 December 2016: net disposal of 77,423) for a net purchase of £13.8 million to book cost (30 June 2016: net disposal of £14.1 million; 31 December 2016: net purchase of £7.9 million). All share transactions were made on an exchange other than the Stock Exchange of Hong Kong. Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2017 or 2016. D Other notes D1 Sale of Korea life business On 18 May 2017, the Group announced that it had completed the sale of its life insurance subsidiary in Korea, PCA Life Insurance Co. Ltd. to Mirae Asset Life Insurance Co. Ltd., following regulatory approvals. The transaction, announced on 10 November 2016, was for a consideration of KRW170 billion (equivalent to £117 million at 17 May 2017 closing rate).The proceeds, net of £9 million of related expenses, were £108 million. This has changed by £3 million from the £105 million carrying value recorded at 31 December 2016 due to exchange rate movement. On completion of the sale, the cumulative foreign exchange translation gain of the Korea life business of £61 million, that had arisen from 2004 (the year of the Group's conversion to IFRS) to disposal was recycled from other comprehensive income through the profit and loss account in 2017 as required by IAS 21. This amount is included within 'Cumulative exchange gain on the sold Korea life business recycled from other comprehensive income' in the supplementary analysis of profit of the Group as shown in note B1.1. The adjustment has no net effect on shareholders' equity. The net contribution for Korea life business to the half year 2017 profit after tax is the £61 million gain for foreign exchange translation recycling with other elements in the various line items include £5 million remeasurement adjustment netting to nil. The full year 2016 income statement recorded a charge for remeasurement of Korea Life business classified as held for sale of £(238) million. To facilitate comparisons of businesses retained by the Group, the supplementary analysis of profit shown in note B1.1 shows separately the results of the Korea life business. For full year 2016 the result for the year, including short-term fluctuations in investment returns, together with the adjustment to the carrying value gave rise to an aggregate loss of £(227) million (half year 2016: profit of £40 million). D2 Contingencies and related obligations In addition to the matters set out in note B4(b) in relation to the Financial Conduct Authority review of past annuity sales, the Group is involved in various litigation and regulatory issues. These may from time to time include class actions involving Jackson. While the outcome of such matters cannot be predicted with certainty, Prudential believes that the ultimate outcome of such litigation and regulatory issues will not have a material adverse effect on the Group's financial condition, results of operations or cash flows. There have been no material changes to the Group's contingencies and related obligations in the six month period ended 30 June 2017. D3 Post balance sheet events First interim ordinary dividend The 2017 first interim ordinary dividend approved by the Board of Directors after 30 June 2017 is as described in note B7. D4 Related party transactions There were no transactions with related parties during the six months ended 30 June 2017 which have had a material effect on the results or financial position of the Group. The nature of the related party transactions of the Group has not changed from those described in the Group's consolidated financial statements for the year ended 31 December 2016. Statement of directors' responsibilities The Directors (who are listed below) are responsible for preparing the Half Year Financial Report in accordance with applicable law and regulations. Accordingly, the Directors confirm that to the best of their knowledge: - the condensed consolidated financial statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting', as adopted by the European Union; - the Half Year Financial Report includes a fair review of information required by: (a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 2017, and their impact on the condensed consolidated financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and (b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place during the six months ended 30 June 2017 and that have materially affected the financial position or the performance of the Group during the period and changes in the related party transactions described in the Group's consolidated financial statements for the year ended 31 December 2016. Prudential plc Board of Directors: Chairman Paul Manduca Executive Directors Michael Wells Mark FitzPatrick CA (appointed on 17 July 2017) Penelope James ACA John Foley Nicolaos Nicandrou ACA Anne Richards Barry Stowe Independent Non-executive Directors The Hon. Philip Remnant CBE FCA Sir Howard Davies David Law ACA Kaikhushru Nargolwala FCA Anthony Nightingale CMG SBS JP Alice Schroeder Lord Turner FRS Thomas Watjen (appointed on 11 July 2017) 9 August 2017 Independent review report to Prudential plc Conclusion We have been engaged by the company to review the International Financial Reporting Standards (IFRS) basis financial information in the Half Year Financial Report for the six months ended 30 June 2017 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes. Based on our review, nothing has come to our attention that causes us to believe that the IFRS basis financial information in the Half Year Financial Report for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union ("EU") and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA"). We have also been engaged by the company to review the European Embedded Value (EEV) basis supplementary financial information for the six months ended 30 June 2017 which comprises the Post-tax Operating Profit Based on Longer-Term Investment Returns, the Post-tax Summarised Consolidated Income Statement, the Movement in Shareholders' Equity, the Summary Statement of Financial Position and the related explanatory notes and Total Insurance and Investment Products New Business information. Based on our review, nothing has come to our attention that causes us to believe that the EEV basis supplementary financial information for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with the European Embedded Value Principles dated April 2016 by the European Insurance CFO Forum ("the EEV Principles"), using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information and supplementary information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We have read the other information contained in the Half Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the IFRS basis financial information or the EEV basis supplementary financial information. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Directors' responsibilities The Half Year Financial Report, including the IFRS basis financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Half Year Financial Report in accordance with the DTR of the UK FCA. The directors have accepted responsibility for preparing the EEV basis supplementary financial information in accordance with 'the EEV Principles and for determining the methodology and assumptions used in the application of those principles. The annual IFRS basis financial statements of the Group are prepared in accordance with IFRSs as adopted by the 'EU. The directors are responsible for preparing the IFRS basis financial information included in the Half Year Financial Report in accordance with IAS 34 as adopted by the EU. The EEV basis supplementary financial information has been prepared in accordance with the EEV Principles using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information. The EEV basis supplementary financial information should be read in conjunction with the IFRS basis financial information. Our responsibility Our responsibility is to express to the company a conclusion on the IFRS basis financial information in the Half Year Financial Report and the EEV basis supplementary financial information based on our reviews. The purpose of our review work and to whom we owe our responsibilities This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA and also to provide a review conclusion to the company on the EEV basis supplementary financial information. Our review of the IFRS basis financial information has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. Our review of the EEV basis supplementary financial information has been undertaken so that we might state to the company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. Philip Smart For and on behalf of KPMG LLP Chartered Accountants London 9 August 2017 Additional IFRS financial information I IFRS profit and loss information I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver This schedule classifies the Group's pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profits, using the following categories: i Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new business) and amounts credited to certain policyholder accounts. It excludes the operating investment returns on shareholder net assets, which has been separately disclosed as expected return on shareholder assets. ii Fee income represents profits driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses. iii With-profits business represents the gross of tax shareholders' transfer from the with-profits fund for the period. iv Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity. v Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses. vi Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance as well as items that are more appropriately included in other source of earnings lines (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate). vii DAC adjustments comprises DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business. Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business The following analysis expresses certain of the Group's sources of operating profit as a margin of policyholder liabilities or other suitable driver. Details on the calculation of the Group's average policyholder liability balances are given in note (iv) at the end of this section. Half year 2017 Asia US UK Total Average liability Margin £m £m £m £m £m bps note (iv) note(ii) Spread income 108 401 74 583 89,314 131 Fee income 103 1,145 31 1,279 164,152 156 With-profits 30 - 142 172 132,701 26 Insurance margin 658 472 22 1,152 Margin on revenues 1,056 - 82 1,138 Expenses: Acquisition costsnote (i) (736) (463) (42) (1,241) 3,624 (34)% Administration expenses (471) (593) (67) (1,131) 259,451 (87) DAC adjustmentsnote (v) 66 117 3 186 Expected return on shareholder assets 56 - 47 103 870 1,079 292 2,241 Longevity reinsurance and other management actions to improve solvency - - 188 188 Long-term business operating profit based on longer-term investment returns 870 1,079 480 2,429 See notes at the end of this section. * The additional financial information (set out in sections I(a) to II(c)) is not covered by the KPMG independent review opinion. Half year 2016 AER Asia US UK Total Average liability Margin £m £m £m £m £m bps note (vi) note (iv) note (ii) Spread income 81 379 96 556 80,146 139 Fee income 82 878 29 989 129,054 153 With-profits 24 - 138 162 114,109 28 Insurance margin 472 401 25 898 Margin on revenues 860 - 86 946 Expenses: - Acquisition costsnote (i) (573) (412) (42) (1,027) 2,980 (34)% Administration expenses (369) (452) (58) (879) 216,075 (81) DAC adjustmentsnote (v) 51 83 (2) 132 Expected return on shareholder assets 39 11 61 111 667 888 333 1,888 Longevity reinsurance and other management actions to improve solvency - - 140 140 Long-term business operating profit based on longer-term investment returns 667 888 473 2,028 See notes at the end of this section. Half year 2016 CER note (iii) Asia US UK Total Average liability Margin £m £m £m £m £m bps note (vi) note (v) note (iv) note (ii) Spread income 91 426 96 613 85,708 143 Fee income 92 997 29 1,118 143,526 156 With-profits 27 - 138 165 115,945 28 Insurance margin 532 456 25 1,013 Margin on revenues 965 - 86 1,051 Expenses: Acquisition costsnote (i) (644) (469) (42) (1,155) 3,296 (35)% Administration expenses (412) (513) (58) (983) 236,974 (83) DAC adjustmentsnote (v) 56 95 (2) 149 Expected return on shareholder assets 45 18 61 124 752 1,010 333 2,095 Longevity reinsurance and other management actions to improve solvency - - 140 140 Long-term business operating profit based on longer-term investment returns 752 1,010 473 2,235 See notes at the end of this section. Margin analysis of long-term insurance business - Asia Asia note (vi) Half year 2017 Half year 2016 AER Half year 2016 CER note (iii) Average Average Average Profit liability Margin Profit liability Margin Profit liability Margin £m £m bps £m £m bps £m £m bps Long-term business note (iv) note (ii) note (iv) note (ii) note (iv) note (ii) Spread income 108 15,776 137 81 12,637 128 91 13,886 131 Fee income 103 18,170 113 82 14,951 110 92 16,240 113 With-profits 30 28,772 21 24 21,435 22 27 23,271 23 Insurance margin 658 472 532 Margin on revenues 1,056 860 965 Expenses: Acquisition costsnote (i) (736) 1,943 (38)% (573) 1,605 (36)% (644) 1,814 (36)% Administration expenses (471) 33,946 (278) (369) 27,588 (268) (412) 30,126 (274) DAC adjustmentsnote (v) 66 51 56 Expected return on shareholder assets 56 39 45 Operating profit based on longer-term investment returns 870 667 752 See notes at the end of this section. Analysis of Asia operating profit drivers - Spread income has increased on a constant exchange rate basis by 19 per cent (AER: 33 per cent) to £108 million in half year 2017, predominantly reflecting the growth of the Asia non-linked policyholder liabilities. - Fee income has increased by 12 percent at constant exchange rates (AER: 26 per cent) to £103 million in half year 2017, broadly in line with the increase in movement in average unit-linked liabilities. - On a constant exchange rate basis, insurance margin has increased by 24 per cent to £658 million in half year 2017 (AER: 39 per cent), primarily reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products. Insurance margin includes non-recurring items of £66 million (half year 2016: £42 million at AER and £46 million at CER). - Margin on revenue has increased by £91 million on a constant exchange rate basis from £965 million in half year 2016 to £1,056 million in half year 2017, primarily reflecting growth of the in-force book and higher regular premium income recognised in the period. - Acquisition costs have increased by 14 per cent at constant exchange rates (AER: 28 per cent) to £736 million, compared to the 7 per cent increase in APE sales, resulting in an increase in the acquisition costs ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE. If with-profits sales were excluded from the denominator the acquisition cost ratio would become 65 per cent (half year 2016: 72 per cent at CER), the decrease being the result of product and country mix. - Administration expenses have increased by 14 per cent at a constant exchange rate basis (AER: 28 per cent increase) in half year 2017 as the business continues to expand. On a constant exchange rate basis, the administration expense ratio has increased from 274 basis points in half year 2016 to 278 basis points in half year 2017, the result of changes in country and product mix. Margin analysis of long-term insurance business - US US Half year 2017 Half year 2016 AER Half year 2016 CER note (iii) Average Average Average Profit liability Margin Profit liability Margin Profit liability Margin £m £m bps £m £m bps £m £m bps Long-term business note (iv) note (ii) note (iv) note (ii) note (iv) note (ii) Spread income 401 39,731 202 379 34,886 217 426 39,199 217 Fee income 1,145 123,464 186 878 92,608 190 997 105,791 188 Insurance margin 472 401 456 Expenses: Acquisition costsnote (i) (463) 960 (48)% (412) 782 (53)% (469) 889 (53)% Administration expenses (593) 169,180 (70) (452) 134,369 (67) (513) 152,730 (67) DAC adjustments 117 83 95 Expected return on shareholder assets - 11 18 Operating profit based on longer-term investment returns 1,079 888 1,010 See notes at the end of this section. Analysis of US operating profit drivers: - Spread income has decreased by 6 per cent at constant exchange rates (AER: increased by 6 per cent) to £401 million in the first half of 2017. The reported spread margin decreased to 202 basis points from 217 basis points in the first half of 2016, due to lower investment yields. Spread income benefited from swap transactions previously entered into to more closely match the asset and liability duration. Excluding this effect, the spread margin would have been 147 basis points (half year 2016 CER: 150 basis points and AER: 151 basis points). - Fee income has increased by 15 per cent at constant exchange rates (AER: increased by 30 per cent) to £1,145 million during the first half of 2017, primarily due to higher average separate account balances resulting from positive net cash flows from variable annuity business and market appreciation. - Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin increased to £472 million in the first half of 2017 compared to £456 million at constant exchange rates at half year 2016. The increase was primarily due to higher income from variable annuity guarantees partially offset by a decline in the contribution from the closed books of business. - Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, have decreased in absolute terms and as a percentage of APE compared to the first half of 2016 at constant exchange rates. This is due to the continued increase in producers selecting asset-based commissions which are paid upon policy anniversary dates and are treated as an administrative expense in this analysis, rather than front-end commissions and the result of change in product mix. - Administration expenses increased to £593 million during the first half of 2017, compared to £513 million for the first half of 2016 at a constant exchange rate (AER: £452 million), primarily as a result of higher asset-based commissions. Excluding these trail commissions, the resulting administration expense ratio would remain flat at 36 basis points (half year 2016: 36 basis points at CER and AER). - DAC adjustments increased to £117 million during the first half of 2017, compared to £95 million at a constant exchange rate (AER: £83 million) during the first half of 2016, primarily due to lower DAC amortisation due to higher fund returns. Analysis of pre-tax operating profit before and after acquisition costs and DAC adjustments Half year 2017 £m Half year 2016 AER £m Half year 2016 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 1,425 1,425 1,217 1,217 1,384 1,384 Less new business strain (463) 353 (110) (412) 320 (92) (469) 364 (105) Other DAC adjustments - amortisation of previously deferred acquisition costs: Normal (272) (272) (266) (266) (303) (303) Deceleration 36 36 29 29 34 34 Total 1,425 (463) 117 1,079 1,217 (412) 83 888 1,384 (469) 95 1,010 Analysis of operating profit based on longer-term investment returns for US operations by product 2017 £m 2016 £m % Half year AER Half year CER Half year Half year 2017 vs half year 2016 AER Half year 2017 vs half year 2016 CER Spread businessnote (a) 176 154 175 14% 1% Fee businessnote (b) 852 642 730 33% 17% Life and other businessnote (c) 51 92 105 (45)% (51)% Total insurance operations 1,079 888 1,010 22% 7% US asset management and broker-dealer (6) (12) (13) 50% 54% Total US operations 1,073 876 997 22% 8% The analysis of operating profit based on longer-term investment returns for US operations by product represents the net profit generated by each line of business after allocation of costs. Broadly: a) Spread business is the net operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs. b) Fee business represents profits from variable annuity products. As well as fee income revenue for this product line includes spread income from investments directed to the general account and other variable annuity fees included in insurance margin. c) Life and other business includes the profits from the REALIC business and other closed life books. Revenue allocated to this product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after claim costs. Insurance margin forms the vast majority of revenue. Margin analysis of long-term insurance business - UK UK Half year 2017 Half year 2016 Average Average Profit liability Margin Profit liability Margin £m £m bps £m £m bps Long-term business note (iv) note (ii) note (iv) note (ii) Spread income 74 33,807 44 96 32,623 59 Fee income 31 22,518 27 29 21,495 27 With-profits 142 103,929 27 138 92,674 30 Insurance margin 22 25 Margin on revenues 82 86 Expenses: Acquisition costsnote (i) (42) 721 (6)% (42) 593 (7)% Administration expenses (67) 56,325 (24) (58) 54,118 (21) DAC adjustments 3 (2) Expected return on shareholders' assets 47 61 292 333 Longevity reinsurance and other management actions to improve solvency 188 140 Operating profit based on longer-term investment returns 480 473 Analysis of UK operating profit drivers - Spread income has decreased from £96 million in half year 2016 to £74 million in half year 2017 mainly due to lower annuity sales. Spread income has two components: • A contribution from new annuity business which was lower at £4 million in half year 2017 compared to £27 million in half year 2016, reflecting our withdrawal from this market. • A contribution from in-force annuity and other business, which was broadly in line with last year at £70 million (half year 2016: £69 million), equivalent to 41 basis points of average reserves (half year 2016: 42 basis points). - Fee income principally represents asset management fees from unit-linked business, including direct investment only business to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income mostly arise within our UK asset management business. Excluding these schemes, the fee margin on the remaining balance was 40 basis points (half year 2016: 40 basis points). - Margin on revenues represents premium charges for expenses of shareholder-backed business and other sundry net income. - Acquisition costs incurred were £42 million, equivalent to 6 per cent of total APE sales in half year 2017 (half year 2016: 7 per cent). The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. It is therefore impacted by the level of with-profit sales in the year. Acquisition costs as a percentage of shareholder-backed new business sales were 32 per cent in half year 2017 (half year 2016: 33 per cent). - The contribution from longevity reinsurance and other management actions to improve solvency during half year 2017 was £188 million (half year 2016: £140 million). Further explanation and analysis is provided in Additional Financial Information section I(d). Notes (i) The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business. (ii) Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. The margin is on an annualised basis in which half year profits are annualised by multiplying by two. (iii) The half year 2016 comparative information has been presented at Actual Exchange Rates (AER) and Constant Exchange Rates (CER) so as to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia CER average liability calculations the policyholder liabilities have been translated using current period opening and closing exchange rates. For the US CER average liability calculations the policyholder liabilities have been translated at the current period month end closing exchange rates. See also note A1. (iv) For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period. The calculation of average liabilities for Jackson is generally derived from month end balances throughout the period as opposed to opening and closing balances only. The average liabilities for fee income in Jackson have been calculated using daily balances instead of month end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income attaches. Average liabilities used to calculate the administration expense margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson. Average liabilities are adjusted for business acquisitions and disposals in the period. (v) The DAC adjustment contains £10 million in respect of joint ventures and associate in half year 2017 (half year 2016: £14 million). (vi) Following its sale in May 2017, the half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korean life business. This approach is consistent with that applied at full year 2016. I(b) Asia operations - analysis of IFRS operating profit by business unit Operating profit based on longer-term investment returns for Asia operations are analysed below. The table below presents the half year 2016 results on both actual exchange rates (AER) and constant exchange rates (CER) bases so as to eliminate the impact of exchange translation. 2017 £m 2016 £m % 2016 £m Half year AER Half year CER Half year Half year 2017 vs half year 2016 AER Half year 2017 vs half year 2016 CER AER Full year Hong Kong 157 96 109 64% 44% 238 Indonesia 232 193 221 20% 5% 428 Malaysia 86 71 76 21% 13% 147 Philippines 21 17 18 24% 17% 38 Singapore 133 111 125 20% 6% 235 Thailand 46 39 44 18% 5% 92 Vietnam 57 44 49 30% 16% 114 South-east Asia Operations inc. Hong Kong 732 571 642 28% 14% 1,292 China 39 20 21 95% 86% 64 Taiwan 19 13 17 46% 12% 35 Other 27 23 28 17% (4)% 49 Non-recurrent itemsnote (ii) 54 42 46 29% 17% 67 Total insurance operationsnote (i) 871 669 754 30% 16% 1,507 Development expenses (1) (2) (2) 50% 50% (4) Total long-term business operating profit 870 667 752 30% 16% 1,503 Eastspring Investments 83 61 69 36% 20% 141 Total Asia operations 953 728 821 31% 16% 1,644 * Following its sale in May 2017, the half year 2016 comparative operating result has been adjusted to exclude the result attributable to the sold Korea life business. This approach is consistent with that applied at full year 2016. Notes (i) Analysis of operating profit between new and in force business The result for insurance operations comprises amounts in respect of new business and business in force as follows: 2017 £m 2016 £m Half year AER Half year CER Half year AER Full year New business strain† (40) (17) (19) (29) Business in force 857 644 727 1,469 Non-recurrent itemsnote (ii) 54 42 46 67 Total 871 669 754 1,507 † The IFRS new business strain corresponds to approximately (2.0) per cent of new business APE sales for half year 2017 (half year 2016: approximately (1.1) per cent; full year 2016: approximately (0.8) per cent). The strain represents the pre-tax regulatory basis strain to net worth after IFRS adjustments; for deferral of acquisition costs and deferred income where appropriate. (ii) Other non-recurrent items of £54 million in 2017 (half year 2016: £42 million; full year 2016: £67 million) represent a small number of items. I(c) Analysis of asset management operating profit based on longer-term investment returns Half year 2017 £m M&G Eastspring Investments Prudential Capital US Total note (ii) note (ii) Operating income before performance-related fees 495 205 56 124 880 Performance-related fees 6 3 - - 9 Operating income(net of commission)note (i) 501 208 56 124 889 Operating expensenote (i) (261) (113) (50) (130) (554) Share of associate's results 8 - - - 8 Group's share of tax on joint ventures' operating profit - (12) - - (12) Operating profit/(loss) based on longer-term investment returns 248 83 6 (6) 331 Average funds under management £267.2bn £124.9bn Margin based on operating income* 37bps 33bps Cost / income ratio 53% 55% 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 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% Full year 2016 £m M&G Eastspring Investments Prudential Capital US Total note (ii) note (ii) Operating income before performance-related fees 923 353 118 235 1,629 Performance-related fees 33 7 - - 40 Operating income(net of commission)note (i) 956 360 118 235 1,669 Operating expensenote (i) (544) (198) (91) (239) (1,072) Share of associate's results 13 - - - 13 Group's share of tax on joint ventures' operating profit - (21) - - (21) Operating profit based on longer-term investment returns 425 141 27 (4) 589 Average funds under management £250.4bn £109.0bn Margin based on operating income 37bps 32bps Cost / income ratio 59% 56% Notes (i) Operating income and expense include the Group's share of contribution from joint ventures (but excludes any contribution from associates). In the income statement as shown in note B2 of the IFRS financial statements, the net post-tax income of the joint ventures and associates is shown as a single item. (ii) M&G and Eastspring Investments can be further analysed as follows: M&G Eastspring Investments Operating income 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 2017 285 86 210 21 495 37 30 Jun 2017 120 57 85 20 205 33 30 Jun 2016 247 87 193 21 440 36 30 Jun 2016 91 53 64 19 155 30 31 Dec 2016 504 86 419 22 923 37 31 Dec 2016 211 58 142 20 353 32 * Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group's insurance operations which are managed by third parties outside of the Prudential Group are excluded from these amounts. ** Cost/income ratio represents cost as a percentage of operating income before performance related fees. † Institutional includes internal funds. I(d) Contribution to UK life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the Solvency II regime In the first half of 2017, further management actions were taken to improve the solvency of UK insurance operations and to mitigate market risks. These actions included extending the reinsurance of longevity risk to cover a further £0.6 billion of IFRS annuity liabilities. As at 30 June 2017 the total IFRS annuity liabilities subject to longevity reinsurance were £14.8 billion. Management actions also repositioned the fixed income asset portfolio to improve the trade-off between yield and credit risk. The effect of these actions on the UK's long term IFRS operating profit, underlying free surplus generation and EEV operating profit is shown in the tables below. IFRS operating profit of UK long-term business Half year 2017 Half year 2016 Full year 2016 Shareholder-backed annuity new business: Retail 4 27 41 Bulks - - - 4 27 41 In-force business: Longevity reinsurance transactions 31 66 197 Other management actions to improve solvency 157 74 135 Provision for the review of past annuity sales - - (175) 188 140 157 With-profits and other in-force 288 306 601 Total Life IFRS operating profit 480 473 799 Underlying free surplus generation of UK long-term business Half year 2017 Half year 2016 Full year 2016 Expected in-force and return on net worth 349 334 693 Longevity reinsurance transactions 15 53 126 Other management actions to improve solvency 178 137 225 Provision for the review of past annuity sales - - (145) 193 190 206 Changes in operating assumptions, experience variances and solvency II and other restructuring costs 21 31 8 Underlying free surplus generated from in-force business 563 555 907 New business strain (42) (56) (129) Total underlying free surplus generation 521 499 778 EEV post-tax operating profit of UK long-term business Half year 2017 Half year 2016 Full year 2016 Unwind of discount and other expected return 232 205 445 Longevity reinsurance transactions (6) (10) (90) Other management actions to improve solvency 65 41 110 Provision for the review of past annuity sales - - (145) 59 31 (125) Changes in operating assumptions and experience variances 13 23 55 Operating profit from in-force business 304 259 375 New business profit: Shareholder-backed annuity 4 17 32 Other products 157 108 236 161 125 268 Total post-tax Life EEV operating profit 465 384 643 II Other information II(a) Holding company cash flow* 2017 £m 2016 £m Half year Half year Full year Net cash remitted by business units: UK life net remittances to the Group With-profits remittance 215 215 215 Shareholder-backed business remittance - - 85 215 215 300 Other UK paid to Group - 131 147 Total UK net remittances to the Group 215 346 447 US remittances to the Group 475 339 420 Total Asia net remittances to the Group 350 258 516 M&G remittances to the Group 175 150 290 Prudential Capital remittances to the Group 15 25 45 Net remittances to the Group from Business Units 1,230 1,118 1,718 Net interest paid (207) (157) (333) Tax received 84 67 132 Corporate activities (103) (109) (215) Total central outflows (226) (199) (416) Net operating holding company cash flow before dividend 1,004 919 1,302 Dividend paid (786) (935) (1,267) Operating holding company cash flow after dividend 218 (16) 35 Non-operating net cash flow† (186) 382 335 Total holding company cash flow 32 366 370 Cash and short-term investments at beginning of period 2,626 2,173 2,173 Foreign exchange movements (1) 7 83 Cash and short-term investments at end of period 2,657 2,546 2,626 * The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group's central liquidity. ** Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation. † Non-operating net cash flow is principally for corporate transactions for distribution rights and acquired businesses, and issue or repayment of subordinated debt. II(b) Funds under management For our asset management businesses, funds managed on behalf of third parties are not recorded on the balance sheet. They are however a driver of profitability. We therefore analyse the movement in the funds under management each period, focusing on those which are external to the Group and those held by the insurance businesses and included on the Group balance sheet. This is analysed below. (a) Summary 2017 £bn 2016 £bn 30 Jun 30 Jun 31 Dec Business area: Asia operations 75.8 66.3 69.6 US operations 174.6 156.5 173.3 UK operations 193.8 180.9 185.0 Prudential Group funds under managementnote (i) 444.2 403.7 427.9 External funds note (ii) 190.7 158.6 171.4 Total funds under management 634.9 562.3 599.3 Notes (i) Prudential Group funds under management comprise: 2017 £bn 2016 £bn 30 Jun 30 Jun 31 Dec Total investments per the consolidated statement of financial position 437.4 398.2 421.7 Less: investments in joint ventures and associates accounted for using the equity method (1.3) (1.1) (1.2) Internally managed funds held in joint ventures 7.7 6.2 7.0 Investment properties which are held for sale or occupied by the Group (included in other IFRS captions) 0.4 0.4 0.4 Prudential Group funds under management 444.2 403.7 427.9 (ii) External funds shown above as at 30 June 2017 of £190.7 billion (30 June 2016: £158.6 billion; 31 December 2016: £171.4 billion) comprise £202.0 billion (30 June 2016: £169.8 billion; 31 December 2016: £182.5 billion) of funds managed by M&G and Eastspring Investments as shown in note (b) below less £11.3 billion (30 June 2016: £11.2 billion; 31 December 2016: £11.1 billion) that are classified within Prudential Group's funds. (b) Investment products - external funds under management Half year 2017 £m Half year 2016 £m Full year 2016 £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 45,756 136,763 182,519 36,287 126,405 162,692 36,287 126,405 162,692 Market gross inflows 108,240 22,677 130,917 68,465 9,731 78,196 164,004 22,841 186,845 Redemptions (105,468) (15,498) (120,966) (68,221) (16,697) (84,918) (161,766) (30,931) (192,697) Market exchange translation and other movements 4,395 5,176 9,571 3,618 10,217 13,835 7,231 18,448 25,679 At end of period 52,923 149,118 202,041 40,149 129,656 169,805 45,756 136,763 182,519 Note The £202.0 billion (30 June 2016: £169.8 billion; 31 December 2016: £182.5 billion) investment products comprise £193.7 billion (30 June 2016: £162.4 billion; 31 December 2016: £174.8 billion) plus Asia Money Market Funds of £8.3 billion (30 June 2016: £7.4 billion; 31 December 2016: £7.7 billion). (c) M&G and Eastspring Investments - total funds under management Eastspring Investments M&G note 2017 £bn 2016 £bn 2016 £bn 2017 £bn 2016 £bn 2016 £bn 30 Jun 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec External funds under management 52.9 40.1 45.7 149.1 129.7 136.8 Internal funds under management 77.6 64.8 72.2 132.4 125.7 128.1 Total funds under management 130.5 104.9 117.9 281.5 255.4 264.9 Note The external funds under management for Eastspring Investments include Asia Money Market Funds at 30 June 2017 of £8.3 billion (30 June 2016: £7.4 billion; 31 December 2016: £7.7 billion). II(c) Solvency II capital position at 30 June 2017 The estimated Group shareholder Solvency II surplus at 30 June 2017 was £12.9 billion, before allowing for payment of the 2017 first interim dividend and after allowing for management's estimate of transitional measures reflecting operating and market conditions as at 30 June 2017. 30 Jun 30 Jun 31 Dec Estimated Group shareholder Solvency II capital position 2017 £bn 2016 £bn 2016 £bn Own funds 25.6 21.1 24.8 Solvency capital requirement 12.7 12.0 12.3 Surplus 12.9 9.1 12.5 Solvency ratio 202% 175% 201% * The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced With-Profit Funds and staff pension schemes in surplus. The solvency positions include management's estimates of UK transitional measures reflecting operating and market conditions at each valuation date. In accordance with Solvency II requirements, these results allow for: - Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital requirement. As agreed with the Prudential Regulation Authority, this is incorporated in the result above as follows: - Own funds: represents Jackson's local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement (Company Action Level); - Solvency Capital Requirement: represents 150 per cent of Jackson's local US Risk Based Capital requirement (Company Action Level); and - No diversification benefits are taken into account between Jackson and the rest of the Group. - Matching adjustment for UK annuities and volatility adjustment for US dollar denominated Hong Kong with-profits business, based on approvals from the Prudential Regulation Authority and calibrations published by the European Insurance and Occupational Pensions Authority; and - UK transitional measures, which have been recalculated using management's estimate of the impact of operating and market conditions at the valuation date. The estimated Group shareholder surplus would increase from £12.9 billion to £13.6 billion at 30 June 2017 if the approved regulatory transitional amount was applied instead. The Group shareholder Solvency II capital position excludes: - A portion of Solvency II surplus capital (£1.6 billion at 30 June 2017) relating to the Group's Asian life operations, including due to 'contract boundaries'; - The contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds in surplus (representing £4.1 billion of surplus capital from UK with-profits funds at 30 June 2017) and from the shareholders' share of the estate of with-profits funds; and - The contribution to Own Funds and the Solvency Capital Requirement from pension funds in surplus. It also excludes unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates. At Jackson's request, the Department of Insurance Financial Services renewed its approval to carry these instruments at book value in the local statutory returns for the period 31 December 2016 to 1 October 2017. At 30 June 2017, this approval had the effect of decreasing local statutory capital and surplus (and by extension Solvency II Own Funds and Solvency II surplus) by £0.4 billion, net of tax. This arrangement reflects an elective longstanding practice first put in place in 2009, which can be unwound at Jackson's discretion. The 30 June 2017 Solvency II results above allow for the completion of the sale of the Korea life business in the first half of 2017. Further information on the Solvency II capital position for the Group and The Prudential Assurance Company Limited is published annually in the Solvency and Financial Condition Reports. These were last published on the Group's website on 18 May 2017. Analysis of movement in Group capital position A summary of the estimated movement in Group Solvency II surplus from £12.5 billion at year end 2016 to £12.9 billion at half year 2017 is set out in the table below. The movement from the Group Solvency II surplus at 31 December 2015 to the Solvency II surplus at 30 June 2016 and 31 December 2016 is included for comparison. Analysis of movement in Group shareholder surplus Half year 2017 £bn Half year 2016 £bn Full year 2016 £bn Surplus Surplus Surplus Estimated Solvency II surplus at 1 January 2017 / 1 January 2016 12.5 9.7 9.7 Underlying operating experience 1.5 1.0 2.3 Management actions 0.2 0.2 0.4 Operating experience 1.7 1.2 2.7 Non-operating experience (including market movements) 0.0 (2.4) (1.1) Other capital movements Subordinated debt issuance - 0.7 1.2 Foreign currency translation impacts (0.5) 0.9 1.6 Dividends paid (0.8) (0.9) (1.3) Model changes 0.0 (0.1) (0.3) Estimated Solvency II surplus at end period 12.9 9.1 12.5 The estimated movement in Group Solvency II surplus in the first half of 2017 is driven by: - Operating experience of £1.7 billion: generated by in-force business and new business written in 2017, after allowing for amortisation of the UK transitional and the impact of one-off management optimisations implemented over the period; - Non-operating experience: has been neutral overall during the first half of 2017, after allowing for the recalculation of the UK transitional at the valuation date; and - Other capital movements: comprising a loss from foreign currency translation in the first half of 2017 and a reduction in surplus from payment of dividends. Analysis of Group Solvency Capital Requirements The split of the Group's estimated Solvency Capital Requirement by risk type including the capital requirements in respect of Jackson's risk exposures based on 150 per cent of US Risk Based Capital requirements (Company Action Level) but with no diversification between Jackson and the rest of the Group, is as follows: 30 Jun 2017 31 Dec 2016 % 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 56% 71% 55% 68% Equity 13% 21% 12% 19% Credit 25% 40% 25% 41% Yields (interest rates) 14% 8% 13% 7% Other 4% 2% 5% 1% Insurance 27% 21% 28% 23% Mortality/morbidity 5% 2% 5% 2% Lapse 16% 17% 16% 19% Longevity 6% 2% 7% 2% Operational/expense 10% 6% 11% 7% FX translation 7% 2% 6% 2% Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds 30 Jun 2017 £bn 30 Jun 2016 £bn 31 Dec 2016 £bn IFRS shareholders' equity 15.4 14.6 14.7 Restate US insurance entities from IFRS onto local US statutory basis (2.6) (3.1) (2.2) Remove DAC, goodwill and intangibles (3.9) (3.9) (3.8) Add subordinated debt 6.1 5.7 6.3 Impact of risk margin (net of transitionals) (3.6) (3.3) (3.4) Add value of shareholder transfers 4.6 3.1 4.0 Liability valuation differences 10.7 9.7 10.5 Increase in value of net deferred tax liabilities (resulting from valuation differences above) (1.4) (1.2) (1.3) Other 0.3 (0.5) 0.0 Estimated Solvency II Shareholder Own Funds 25.6 21.1 24.8 The key items of the reconciliation as at 30 June 2017 are: - £(2.6) billion represents the adjustment required to the Group's shareholders' funds in order to convert Jackson's contribution from an IFRS basis to the local statutory valuation basis. This item also reflects a derecognition of Own Funds of £0.8 billion, equivalent to the value of 100 per cent of Risk Based Capital requirements (Company Action Level), as agreed with the Prudential Regulation Authority; - £(3.9) billion due to the removal of DAC, goodwill and intangibles from the IFRS balance sheet; - £6.1 billion due to the addition of subordinated debt which is treated as available capital under Solvency II but as a liability under IFRS; - £(3.6) billion due to the inclusion of a risk margin for UK and Asia non-hedgeable risks, net of £2.1 billion from transitional measures (after recalculation for management's estimate of the impact of operating and market conditions on the UK transitional as at 30 June 2017), all of which are not applicable under IFRS; - £4.6 billion due to the inclusion of the value of future shareholder transfers from with-profits business (excluding the shareholders' share of the with-profits estate, for which no credit is given under Solvency II), which is excluded from the determination of the Group's IFRS shareholders' funds; - £10.7 billion due to differences in insurance valuation requirements between Solvency II and IFRS, with Solvency II Own Funds partially capturing the value of in-force business which is excluded from IFRS; - £(1.4) billion due to the impact on the valuation of deferred tax assets and liabilities resulting from the other valuation differences noted above; and - £0.3 billion due to other items, including the impact of revaluing loans, borrowings and debt from IFRS to Solvency II. Sensitivity analysis The estimated sensitivity of the Group shareholder Solvency II capital position to significant changes in market conditions is as follows: Impact of market sensitivities 30 Jun 2017 31 Dec 2016 Surplus £bn Ratio Surplus £bn Ratio Base position 12.9 202% 12.5 201% Impact of: 20% instantaneous fall in equity markets 0.1 4% 0.0 3% 40% fall in equity markets1 (1.2) (3)% (1.5) (7)% 50 basis points reduction in interest rates2,3 (0.4) (9)% (0.6) (9)% 100 basis points increase in interest rates3 0.9 18% 1.0 13% 100 basis points increase in credit spreads 4 (1.1) (3)% (1.1) (3)% 1 Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period. 2 Subject to a floor of zero. 3 Allowing for further transitional recalculation after the interest rate stress. 4 US Risk Based Capital solvency position included using a stress of 10 times expected credit defaults. The Group is positioned to withstand significant deteriorations in market conditions and we continue to use market hedges to manage some of this exposure across the Group, where we believe the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future. UK Solvency II capital position1, 2 On the same basis as above, the estimated UK shareholder Solvency II surplus at 30 June 2017 was £5.3 billion, after allowing for management's estimate of transitional measures reflecting operating and market conditions as at 30 June 2017. This relates to shareholder-backed business including future with-profits shareholder transfers, but excludes the shareholders' share of the estate in line with Solvency II requirements. Estimated UK shareholder Solvency II capital position 30 Jun 2017 £bn 30 Jun 2016 £bn 31 Dec 2016 £bn Own funds 13.0 10.6 12.0 Solvency capital requirement 7.7 7.7 7.4 Surplus 5.3 2.9 4.6 Solvency ratio 168% 138% 163% * The UK shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced With-Profit Funds and staff pension schemes in surplus. The solvency positions include management's estimate of UK transitional measures reflecting operating and market conditions at each valuation date. The estimated UK shareholder surplus would increase from £5.3 billion to £6.0 billion at 30 June 2017 if the approved regulatory transitional amount was applied instead. While the surplus position of the UK with-profits funds remains strong on a Solvency II basis, it is ring-fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK shareholder Solvency II surplus results. The estimated UK with-profits funds Solvency II surplus at 30 June 2017 was £4.1 billion, after allowing for management's estimate of transitional measures reflecting operating and market conditions as at 30 June 2017. Estimated UK with-profits Solvency II capital position 30 Jun 2017 £bn 30 Jun 2016 £bn 31 Dec 2016 £bn Own funds 8.6 8.2 8.4 Solvency capital requirement 4.5 4.7 4.7 Surplus 4.1 3.5 3.7 Solvency ratio 192% 176% 179% Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds2 A reconciliation between the IFRS unallocated surplus and Solvency II Own Funds for UK with-profits business is as follows: Reconciliation of UK with-profits funds 30 Jun 2017 £bn 30 Jun 2016 £bn 31 Dec 2016 £bn IFRS unallocated surplus of UK with-profits funds 12.1 11.2 11.7 Adjustments from IFRS basis to Solvency II: Value of shareholder transfers (2.5) (1.9) (2.3) Risk margin (net of transitional) (0.6) (0.7) (0.7) Other valuation differences (0.4) (0.4) (0.3) Estimated Solvency II Own Funds 8.6 8.2 8.4 Statement of independent review in respect of Solvency II Capital Position at 30 June 20173 The methodology, assumptions and overall result have been subject to examination by KPMG LLP. Notes: 1 The UK shareholder capital position represents the consolidated capital position of the shareholder funds of The Prudential Assurance Company Ltd ('PAC') and all its subsidiaries. 2 The UK with-profits capital position includes the PAC with-profits sub-fund, the Scottish Amicable Insurance Fund and the Defined Charge Participating Sub-Fund. 3 This review is separate from that set out on page 58. This information is provided by RNS The company news service from the London Stock Exchange END IR PLMPTMBTMBLR