Prudential plc - HY20 Results - IFRS

RNS Number : 7146V
Prudential PLC
11 August 2020
 

CONDENSED CONSOLIDATED INCOME STATEMENT





2020 $m


2019 $m




Note

Half year


Half year*

Full year

Continuing operations:






Gross premiums earned


19,842


21,081

45,064

Outward reinsurance premiums

B3

(30,149)


(673)

(1,583)

Earned premiums, net of reinsurance

B3

(10,307)


20,408

43,481

Investment return


3,910


31,873

49,555

Other income


333


258

700

Total revenue, net of reinsurance

B3

(6,064)


52,539

93,736

Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance


9,855


(47,448)

(83,905)

Acquisition costs and other expenditure

B2

(3,032)


(3,508)

(7,283)

Finance costs: interest on core structural borrowings of shareholder-financed businesses


(163)


(293)

(516)

Gain (loss) attaching to corporate transactions


-


17

(142)

Total charges net of reinsurance


6,660


(51,232)

(91,846)

Share of profit from joint ventures and associates, net of related tax


133


137

397

Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (i)


729


1,444

2,287

Remove tax charge attributable to policyholders' returns


(66)


(285)

(365)

Profit before tax attributable to shareholders' returns

B1.1

663


1,159

1,922

Total tax charge attributable to shareholders' and policyholders' returns

B4

(195)


(286)

(334)

Remove tax charge attributable to policyholders' returns


66


285

365

Tax (charge) credit attributable to shareholders' returns

B4

(129)


(1)

31

Profit from continuing operations


534


1,158

1,953

Discontinued UK and Europe operations' profit after tax


-


835

1,319

Re-measurement of discontinued operations on demerger


-


-

188

Cumulative exchange loss recycled from other comprehensive income


-


-

(2,668)

Profit (loss) from discontinued operations note (ii)


-


835

(1,161)

Profit for the period


534


1,993

792









Attributable to:






Equity holders of the Company:







From continuing operations


512


1,152

1,944


From discontinued operations


-


835

(1,161)

Non-controlling interests from continuing operations


22


6

9



534


1,993

792

 

Earnings per share (in cents)


2020


2019




Note

Half year


Half year*

Full year

Based on profit attributable to equity holders of the Company:

B5






Basic








Based on profit from continuing operations


19.7¢


44.6¢

75.1¢



Based on profit (loss) from discontinued operations


-


32.3¢

(44.8)¢


Total


19.7¢


76.9¢

30.3¢


Diluted








Based on profit from continuing operations


19.7 ¢


44.6¢

75.1¢



Based on profit (loss) from discontinued operations


-


32.3¢

(44.8)¢


Total


19.7 ¢


76.9¢

30.3¢









 

Dividends per share (in cents)


2020


2019



Note

Half year


Half year*

Full year

Dividends relating to reporting period:

B6






First interim ordinary dividend


5.37¢


20.29¢

20.29¢


Second interim ordinary dividend


-


-

25.97¢

Total


5.37¢


20.29¢

46.26¢

Dividends paid in reporting period:

B6






Current year first interim dividend


-


-

20.29¢


Second interim ordinary dividend for prior year


25.97¢


42.89¢

42.89¢

Total


25.97¢


42.89¢

63.18¢

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

 

Notes

(i)  This measure is the formal profit before tax measure under IFRS. It is not the result attributable to shareholders principally because total corporate tax of the Group includes those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the IFRS profit before tax measure is not representative of pre-tax profit attributable to shareholders as it is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for tax borne by policyholders.

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

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 





2020 $m


2019 $m




Note

Half year


Half year*

Full year

Continuing operations






Profit for the period


534


1,158

1,953

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


(201)


45

152


Related tax


-


1

(15)





(201)


46

137

Valuation movements on available-for-sale debt securities:







Unrealised gains arising in the period (before the impact of Jackson's reinsurance transaction with Athene):







Net unrealised gains on holdings arising in the period


2,737


3,411

4,208


Deduct net gains included in the income statement on disposal and impairment


(197)


(25)

(185)





2,540


3,386

4,023


Related change in amortisation of deferred acquisition costs

C4.2

(287)


(560)

(631)


Related tax


(472)


(593)

(713)





1,781


2,233

2,679

Impact of Jackson's reinsurance transaction with Athene:

D1






Gains recycled to the income statement on transfer of debt securities to Athene


(2,817)


-

-


Related change in amortisation of deferred acquisition costs

C4.2

535


-

-


Related tax


479


-

-





(1,803)


-

-


Total valuation movements on available-for-sale debt securities


(22)


2,233

2,679









Total items that may be reclassified subsequently to profit or loss


(223)


2,279

2,816

Items that will not be reclassified to profit or loss






Shareholders' share of actuarial gains and losses on defined benefit pension schemes:







Net actuarial losses on defined benefit pension schemes


-


(112)

(108)


Related tax


-


18

19

Total items that will not be reclassified to profit or loss


-


(94)

(89)

Other comprehensive (loss) income


(223)


2,185

2,727

Total comprehensive income for the period from continuing operations


311


3,343

4,680







Profit (loss) for the period from discontinued operations


-


835

(1,161)

Cumulative exchange loss recycled through profit or loss


-


-

2,668

Other items, net of related tax


-


4

203

Total comprehensive income for the period from discontinued operations


-


839

1,710

Total comprehensive income for the period


311


4,182

6,390









Attributable to:






Equity holders of the Company







From continuing operations


290


3,337

4,669


From discontinued operations


-


839

1,710

Non-controlling interests from continuing operations


21


6

11



311


4,182

6,390

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

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

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 




 Period ended 30 June 2020 $m


Note

Share

 capital

Share

premium

Retained

  earnings

Translation

reserve

Available

-for-sale

 securities

reserves

Shareholders'

equity 


Non-

controlling

interests


Total

 equity

Reserves












Profit for the period


-

-

512

-

-

512


22


534

Other comprehensive loss


-

-

-

(200)

(22)

(222)


(1)


(223)

Total other comprehensive income (loss) for the period


-

-

512

(200)

(22)

290


21


311

Dividends

B6

-

-

(674)

-

-

(674)


(16)


(690)

Reserve movements in respect of share-based payments


-

-

29

-

-

29


-


29

Effect of transactions relating to non-controlling interests


-

-

32

-

-

32


-


32














Share capital and share premium












New share capital subscribed

C8

-

10

-

-

-

10


-


10














Treasury shares












Movement in own shares in respect of share-based payment plans


-

-

(54)

-

-

(54)


-


(54)

Net increase (decrease) in equity


-

10

(155)

(200)

(22)

(367)


5


(362)

Balance at beginning of period


172

2,625

13,575

893

2,212

19,477


192


19,669

Balance at end of period


172

2,635

13,420

693

2,190

19,110


197


19,307

 




 Period ended 30 June 2019* $m



Note

Share

 capital

Share

premium

Retained

earnings

Translation

reserve

Available

-for-sale

securities

reserves

Shareholders'

equity


Non-

 controlling

interests


Total

 equity

Reserves












Profit from continuing operations for the period


-

-

1,152

-

-

1,152


6


1,158

Other comprehensive income (loss) from continuing operations


-

-

(94)

46

2,233

2,185


-


2,185

Total comprehensive income from continuing operations for the period


-

-

1,058

46

2,233

3,337


6


3,343

Total comprehensive income from discontinued operations for the period


-

-

838

1

-

839


-


839

Total comprehensive income (loss) for the period


-

-

1,896

47

2,233

4,176


6


4,182













Dividends

B6

-

-

(1,108)

-

-

(1,108)


-


(1,108)

Reserve movements in respect of share-based payments


-

-

3

-

-

3


-


3














Share capital and share premium












New share capital subscribed

C8

-

13

-

-

-

13


-


13

Foreign exchange translation differences due to change in presentation currency

C8

(1)

(3)

-

-

-

(4)


-


(4)














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


-

-

1

-

-

1


-


1

Net increase (decrease) in equity


(1)

10

780

47

2,233

3,069


6


3,075

Balance at beginning of period


166

2,502

21,817

(2,050)

(467)

21,968


23


21,991

Balance at end of period


165

2,512

22,597

(2,003)

1,766

25,037


29


25,066

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

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

 





 Year ended 31 December 2019 $m


Note

Share

 capital

Share

premium

Retained

  earnings

Translation

reserve*

Available

-for-sale

 securities

reserves

Shareholders'

equity

Non-

 controlling

  interests

Total

 equity

Reserves










Profit from continuing operations


-

-

1,944

-

-

1,944

9

1,953

Other comprehensive income (loss) from continuing operations


-

-

(89)

135

2,679

2,725

2

2,727

Total comprehensive income from continuing operations


-

-

1,855

135

2,679

4,669

11

4,680

Total comprehensive income (loss) from discontinued operations*


-

-

(1,098)

2,808

-

1,710

-

1,710

Total comprehensive income for the year


-

-

757

2,943

2,679

6,379

11

6,390











Demerger dividend in specie of M&G plc

B6

-

-

(7,379)

-

-

(7,379)

-

(7,379)

Other dividends

B6

-

-

(1,634)

-

-

(1,634)

-

(1,634)

Reserve movements in respect of share-based payments


-

-

64

-

-

64

-

64

Effect of transactions relating to non-controlling interests


-

-

(143)

-

-

(143)

158

15












Share capital and share premium










New share capital subscribed

C8

-

22

-

-

-

22

-

22

Impact of change in presentation currency in relation to share capital and share premium

C8

6

101

-

-

-

107

-

107












Treasury shares










Movement in own shares in respect of share-based payment plans


-

-

38

-

-

38

-

38

Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS


-

-

55

-

-

55

-

55

Net increase (decrease) in equity


6

123

(8,242)

2,943

2,679

(2,491)

169

(2,322)

Balance at beginning of year


166

2,502

21,817

(2,050)

(467)

21,968

23

21,991

Balance at end of year


172

2,625

13,575

893

2,212

19,477

192

19,669

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

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 





2020 $m


2019 $m




Note

30 Jun


30 Jun*

31 Dec

Assets






Goodwill

C4.1

942


649

969

Deferred acquisition costs and other intangible assets

C4.2

18,604


16,111

17,476

Property, plant and equipment


964


999

1,065

Reinsurers' share of insurance contract liabilitiesnote (i)


44,918


12,919

13,856

Deferred tax assets

C7

4,259


3,515

4,075

Current tax recoverable


387


472

492

Accrued investment income


1,517


1,695

1,641

Other debtors


3,211


2,560

2,054

Investment properties


23


14

25

Investments in joint ventures and associates accounted for using the equity method


1,507


1,311

1,500

Loans


14,910


15,925

16,583

Equity securities and holdings in collective investment schemesnote (ii)


234,698


233,757

247,281

Debt securitiesnote (ii)


121,462


126,856

134,570

Derivative assets


2,459


1,555

1,745

Other investmentsnote (ii)


1,569


1,220

1,302

Deposits


3,351


1,898

2,615

Assets held for distributionnote (iii)


-


277,861

-

Cash and cash equivalents


8,384


6,628

6,965

Total assets

C1

463,165


705,945

454,214









Equity






Shareholders' equity 


19,110


25,037

19,477

Non-controlling interests


197


29

192

Total equity

C1

19,307


25,066

19,669









Liabilities






Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)

C3.1

391,924


362,933

385,678

Unallocated surplus of with-profits funds

C3.1

5,512


3,747

4,750

Core structural borrowings of shareholder-financed businesses

C5.1

6,499


9,470

5,594

Operational borrowings


2,245


2,421

2,645

Obligations under funding, securities lending and sale and repurchase agreements


9,085


8,598

8,901

Net asset value attributable to unit holders of consolidated investment funds


5,967


4,432

5,998

Deferred tax liabilities

C7

5,278


4,710

5,237

Current tax liabilities


428


406

396

Accruals, deferred income and other liabilities


16,208


13,487

14,488

Provisions


245


323

466

Derivative liabilities


467


1,320

392

Liabilities held for distributionnote (iii)


-


269,032

-

Total liabilities

C1

443,858


680,879

434,545

Total equity and liabilities

C1

463,165


705,945

454,214

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

 

Notes

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

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

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

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 





2020 $m


2019 $m




Note

Half year


Half year*

Full year

Continuing operations:






Cash flows from operating activities






Profit before tax (being tax attributable to shareholders' and policyholders' returns)


729


1,444

2,287

Adjustments to profit before tax for non-cash movements in

operating assets and liabilities:







Investments


24,670


(38,673)

(60,812)


Other non-investment and non-cash assets


(32,617)


(2,685)

(2,487)


Policyholder liabilities (including unallocated surplus)


8,188


34,702

56,067


Other liabilities (including operational borrowings)


1,466


4,072

5,097

Other itemsnote (i)


(327)


102

(361)

Net cash flows from operating activities


2,109


(1,038)

(209)

Cash flows from investing activities






Net cash flows from purchases and disposals of property, plant and equipment


(43)


(21)

(64)

Net cash flows from other investing activitiesnote (ii)


(733)


(102)

(260)

Net cash flows from investing activities


(776)


(123)

(324)

Cash flows from financing activities






Structural borrowings of shareholder-financed operations:note (iii)

C5.1






Issuance of debt, net of costs


982


-

367


Redemption of subordinated debt


-


(504)

(504)


Fees paid to modify terms and conditions of debt issued by the Group


-


(182)

(182)


Interest paid


(157)


(289)

(526)

Equity capital:







Issues of ordinary share capital


10


13

22

External dividends:







Dividends paid to the Company's shareholders

B6

(674)


(1,108)

(1,634)


Dividends paid to non-controlling interests


(16)


-

-

Net cash flows from financing activities


145


(2,070)

(2,457)

Net increase (decrease) in cash and cash equivalents from continuing operations


1,478


(3,231)

(2,990)

Net cash flows from discontinued operations note (iv)


-


292

(5,690)

Cash and cash equivalents at beginning of period


6,965


15,442

15,442

Effect of exchange rate changes on cash and cash equivalents


(59)


10

203

Cash and cash equivalents at end of period


8,384


12,513

6,965

Comprising:







Cash and cash equivalents from continuing operations


8,384


6,628

6,965


Cash and cash equivalents from discontinued operations


-


5,885

-

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

 

Notes

(i)  The adjusting items to profit before tax included within other items are adjustments in respect of non-cash items together with operational interest receipts and payments, dividend receipts and tax paid.

(ii)  Net cash flows from other investing activities include amounts paid for distribution rights and cash flows arising from the acquisitions and disposals of businesses.  

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

 



Cash movements $m


Non-cash movements $m



Balance at

beginning

of period

Issue

 of debt

Redemption

 of debt


Foreign

exchange

movement

Demerger of

UK and Europe

operations

Other

 movements

Balance

at end

of period


30 Jun 2020

5,594

982

-


(84)

-

7

6,499


30 Jun 2019

9,761

-

(504)


(6)

219

-

9,470


31 Dec 2019

9,761

367

(504)


116

(4,161)

15

5,594

 

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

 

NOTES TO PRIMARY STATEMENTS

 

A  Basis of preparation

A1  Basis of preparation and exchange rates

 

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

 

The IFRS basis results for half year 2020 and half year 2019 are unaudited. The 2019 full year IFRS basis results have been derived from the 2019 statutory accounts. The auditors have reported on the 2019 statutory accounts which have been delivered to the Registrar of Companies. The auditors' report was: (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

 

Going concern basis of accounting

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

 

Risk management is core to the Group's activities. In assessing going concern, the Directors took account of the Group's principal risks and the mitigations available to it which are described in the Group Chief Risk and Compliance Officer's report.

 

After making sufficient enquiries the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for a period of at least 12 months from the date that these interim financial statements are approved. No material uncertainties that may cast significant doubt on the ability of the Group to continue as a going concern have been identified.

 

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

 

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

 

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

 

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

 

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

 

Exchange rates

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

 

$: Local currency

Closing rate as at period end


Average rate for the period to date


30 Jun 2020

30 Jun 2019

31 Dec 2019


Half year 2020

Half year 2019

Full year 2019

China

7.07

6.87

6.97


7.03

6.78

6.91

Hong Kong

7.75

7.81

7.79


7.76

7.84

7.84

Indonesia

14,285.00

14,127.50

13,882.50


14,574.24

14,192.79

14,140.84

Malaysia

4.29

4.13

4.09


4.25

4.12

4.14

Singapore

1.40

1.35

1.34


1.40

1.36

1.36

Thailand

30.87

30.69

29.75


31.62

31.61

31.05

UK

0.81

0.79

0.75


0.79

0.77

0.78

Vietnam

23,206.00

23,305.00

23,172.50


23,303.21

23,253.04

23,227.64

 

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

 

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

 

A2  New accounting pronouncements in 2020

 

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

 

-  Amendments to IAS 1 and IAS 8 'Definition of Material';

-  Amendment to IFRS 3 'Business Combinations'; and

-  Amendments to IFRS 9, IAS 39 and IFRS 7 'Interest Rate Benchmark Reform'.

 

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

 

B  EARNINGS PERFORMANCE

 

B1  Analysis of performance by segment

 

B1.1  Segment results

 





2020 $m


2019 $m


2020 vs 2019 %


2019 $m




Note

Half year


AER

Half year

CER

Half year


AER

Half year

CER

Half year


AER

Full year







note (i)

note (i)


note (i)

note (i)


note (i)

Continuing operations:











Asia











Insurance operations


1,590


1,417

1,396


12%

14%


2,993

Asset management


143


133

130


8%

10%


283

Total Asia


1,733


1,550

1,526


12%

14%


3,276

US











Insurance operations (Jackson)


1,256


1,556

1,556


(19)%

(19)%


3,038

Asset management


10


16

16


(38)%

(38)%


32

Total US


1,266


1,572

1,572


(19)%

(19)%


3,070

Total segment profit


2,999


3,122

3,098


(4)%

(3)%


6,346

Other income and expenditure:












Investment return and other income


18


32

31


(44)%

(42)%


50


Interest payable on core structural borrowings


(163)


(293)

(286)


44%

43%


(516)


Corporate expenditurenote (ii)


(205)


(212)

(211)


3%

3%


(460)

Total other income and expenditure


(350)


(473)

(466)


26%

25%


(926)

Restructuring and IFRS 17 implementation costs


(108)


(30)

(28)


(260)%

(286)%


(110)

Adjusted operating profit

B1.3

2,541


2,619

2,604


(3)%

(2)%


5,310

Short-term fluctuations in investment returns on shareholder-backed business

B1.2

(2,706)


(1,455)

(1,445)


(86)%

(87)%


(3,203)

Amortisation of acquisition accounting adjustmentsnote (iii)


(18)


(22)

(21)


18%

14%


(43)

Gain (loss) attaching to corporate transactions

D1

846


17

20


n/a

n/a


(142)

Profit before tax attributable to shareholders


663


1,159

1,158


(43)%

(43)%


1,922

Tax (charge) credit attributable to shareholders' returns

B4

(129)


(1)

1


n/a

n/a


31

Profit for the period from continuing operations


534


1,158

1,159


(54)%

(54)%


1,953

Discontinued UK and Europe operations' profit after tax


-


835

813


n/a

n/a


1,319

Re-measurement of discontinued operations on demerger


-


-

-


n/a

n/a


188

Cumulative exchange loss recycled from other comprehensive income


-


-

-


n/a

n/a


(2,668)

Profit (loss) for the period from discontinued operations


-


835

813


n/a

n/a


(1,161)

Profit for the period


534


1,993

1,972


(73)%

(73)%


792












Attributable to:











Equity holders of the Company












From continuing operations


512


1,152

1,153


(56)%

(56)%


1,944


From discontinued operations


-


835

813


n/a

n/a


(1,161)

Non-controlling interests from continuing operations


22


6

6


267%

267%


9





534


1,993

1,972


(73)%

(73)%


792














Basic earnings per share (in cents)


2020


2019


2020 vs 2019 %


2019




Note

AER

Half year


AER

Half year

CER

Half year


AER

Half year

CER

Half year


AER

Full year




B5

note (i)


note (i)

note (i)


note (i)

note (i)


note (i)

Based on adjusted operating profit, net of tax, from continuing operationsnote (iv)


79.0¢


84.5¢

84.3¢


(7)%

(6)%


175.0¢

Based on profit for the period from continuing operations


19.7 ¢


44.6¢

44.8¢


(56)%

(56)%


75.1¢

Based on profit (loss) for the period from discontinued operations


-


32.3¢

31.5¢


n/a

n/a


(44.8)¢

 

Notes

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

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

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

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

 

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

 



2020 $m


2019 $m



Half year


Half year

Full year

Asia operationsnote (i)

(448)


544

657

US operationsnote (ii)

(2,288)


(1,968)

(3,757)

Other operations

30


(31)

(103)

Total

(2,706)


(1,455)

(3,203)

 

(i)  Asia operations

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

 

(ii)  US operations

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

 



2020 $m 


2019 $m



Half year


Half year

Full year

Net equity hedge resultnote (a)

(4,378)


(2,529)

(4,582)

Other than equity-related derivativesnote (b)

2,114


560

678

Debt securitiesnote (c)

175


14

156

Equity-type investments: actual less longer-term return

(128)


(9)

18

Other items

(71)


(4)

(27)

Total net of related DAC amortisation

(2,288)


(1,968)

(3,757)

 

Notes

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

 

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

 

-  The variable annuity guarantees and fixed indexed annuity embedded options being only partially fair valued under 'grandfathered' US GAAP;

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

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

 

The net equity hedge result can be summarised as follows:

 



2020 $m


2019 $m



Half year


Half year

Full year


Fair value movements on equity hedge instruments

(301)


(3,190)

(5,314)


Accounting value movements on the variable and fixed indexed annuity guarantee liabilities*

(4,503)


294

(22)


Fee assessments net of claim payments

426


367

754


Total net of related DAC amortisation

(4,378)


(2,529)

(4,582)

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

 

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

 

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

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

-  Related amortisation of DAC.

 

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

 

(c)  Short-term fluctuations related to debt securities is analysed below:

 




2020 $m 


2019 $m




Half year 


Half year

Full year


Credits (charges) in the period:







Losses on sales of impaired and deteriorating bonds

(148)


(24)

(28)



Bond write-downs

(31)


(1)

(15)



Recoveries/reversals

1


1

1



Total credits (charges) in the period

(178)


(24)

(42)


Risk margin allowance deducted from adjusted operating profit*

55


54

109




(123)


30

67


Interest-related realised gains (losses):







Gains (losses) arising in the period

369


42

220



Amortisation of gains and losses arising in current and prior periods to adjusted operating profit

(67)


(59)

(129)




302


(17)

91


Related amortisation of deferred acquisition costs

(4)


1

(2)


Total short-term fluctuations related to debt securities net of related DAC amortisation

175


14

156

* The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in adjusted operating profit with variations from period to period included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in adjusted operating profit of Jackson for half year 2020 is based on an average annual risk margin reserve of 18 basis points (half year 2019: 18 basis points; full year 2019: 17 basis points ) on average book values of $62.3 billion (half year 2019: $60.0 billion; full year 2019: $62.6 billion) as shown below:

 

Moody's rating category (or equivalent under NAIC ratings of mortgage-backed securities)

 



Half year 2020


Half year 2019


Full year 2019



 Average

 book

 value

RMR

Annual expected loss


Average

 book

 value

RMR

Annual expected loss


Average

 book

 value

RMR

Annual expected loss



$m

%

$m


$m

%

$m


$m

%

$m


A3 or higher

39,118

0.10

(40)


34,318

0.10

(36)


38,811

0.10

(38)


Baa1, 2 or 3

21,521

0.24

(51)


24,385

0.23

(55)


22,365

0.24

(53)


Ba1, 2 or 3

1,383

0.74

(10)


1,008

0.93

(10)


1,094

0.85

(9)


B1, 2 or 3

200

2.39

(5)


246

2.62

(6)


223

2.56

(6)


Below B3

108

3.36

(4)


37

3.42

(1)


75

3.39

(3)


Total

62,330

0.18

(110)


59,994

0.18

(108)


62,568

0.17

(109)















Related amortisation of deferred acquisition costs

20




18




19


Risk margin reserve charge to adjusted operating profit for longer-term credit-related losses


(90)




(90)




(90)

 

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

 

In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax gain of $2,253 million for net unrealised gains arising during the period on debt securities classified as available-for-sale net of related amortisation of deferred acquisition costs (half year 2019: gain of $2,826 million; full year 2019: gain of $3,392 million for net unrealised losses), together with a pre-tax loss of $(2,282) million for the recycling of the gains on transfer of debt securities to Athene (see note D1) to the income statement, net of related amortisation of deferred acquisition costs. Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C1.1 .

 

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


Operating segments

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

 

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

 

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

 

Performance measure  

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

 

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

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

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

 

The determination of adjusted operating profit for investment and liability movements is as described in note B1.3 of the Group's consolidated financial statements for the year ended 31 December 2019.

 

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

 

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

 

-  For Asia insurance operations, investments in equity securities held for non-linked shareholder-backed business amounted to $5,712 million as at 30 June 2020 ( 30 June 2019: $2,904 million; 31 December 2019: $3,473 million ). The longer-term rates of return applied in half year 2020 ranged from 4 .6 per cent to 17.6 per cent (30 June 2019: 5.2 per cent to 17.6 per cent; 31 December 2019: 5.0 per cent to 17.6 per cent ) with the rates applied varying by business unit.

 

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

 



2020


2019



Half year


Half year

Full year


Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds

4.9% to 5.8%


6.0% to 6.7%

5.5% to 6.7%


Other equity-type securities such as investments in limited partnerships and private equity funds

6.9% to 7.8%


8.0% to 8.7%

7.5% to 8.7%

 

B2  Acquisition costs and other expenditure

 


2020 $m


2019 $m


Half year


Half year

Full year

Acquisition costs incurred for insurance policies

(1,433)


(2,109)

(4,177)

Acquisition costs deferrednote C4.2

614


625

1,422

Amortisation of acquisition costsnote (i)

(470)


376

694

Recoveries for expenses associated with Jackson's business ceded to Athenenote (ii)

1,231


-

-

Administration costs and other expenditurenote (iii)

(2,584)


(2,291)

(5,019)

Movements in amounts attributable to external unit holders

of consolidated investment funds

(390)


(109)

(203)

Total acquisition costs and other expenditure

(3,032)


(3,508)

(7,283)

 

Notes

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

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

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

 

B3  Additional segmental analysis of revenue

 



Half year 2020 $m



Asia

US

Total

 segment

Unallocated

to a

segment

Group

total

Gross premiums earned

10,890

8,892

19,782

60

19,842

Outward reinsurance premiumsnote (i)

50

(30,195)

(30,145)

(4)

(30,149)

Earned premiums, net of reinsurance

10,940

(21,303)

(10,363)

56

(10,307)

Other incomenote (ii)

285

28

313

20

333

Total external revenue

11,225

(21,275)

(10,050)

76

(9,974)

Intra-group revenue

-

17

17

(17)

-

Interest income

883

1,283

2,166

22

2,188

Other investment return

3,235

(1,575)

1,660

62

1,722

Total revenue, net of reinsurance

15,343

(21,550)

(6,207)

143

(6,064)

 



Half year 2019 $m



Asia

US

Total

segment

Unallocated

to a

segment

Group

total

Gross premiums earned

11,458

9,588

21,046

35

21,081

Outward reinsurance premiums

(499)

(170)

(669)

(4)

(673)

Earned premiums, net of reinsurance

10,959

9,418

20,377

31

20,408

Other incomenote (ii)

228

14

242

16

258

Total external revenue

11,187

9,432

20,619

47

20,666

Intra-group revenue

21

31

52

(52)

-

Interest income

805

1,460

2,265

27

2,292

Other investment return

8,826

20,732

29,558

23

29,581

Total revenue, net of reinsurance

20,839

31,655

52,494

45

52,539

 



Full year 2019 $m



Asia

US

Total

 segment

Unallocated

to a

segment

Group

total

Gross premiums earned

23,757

21,209

44,966

98

45,064

Outward reinsurance premiums

(1,108)

(467)

(1,575)

(8)

(1,583)

Earned premiums, net of reinsurance

22,649

20,742

43,391

90

43,481

Other incomenote (ii)

548

61

609

91

700

Total external revenue

23,197

20,803

44,000

181

44,181

Intra-group revenue

-

34

34

(34)

-

Interest income

1,569

2,971

4,540

67

4,607

Other investment return

13,406

31,623

45,029

(81)

44,948

Total revenue, net of reinsurance

38,172

55,431

93,603

133

93,736

 

Notes

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

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

 

B4  Tax charge

 

B4.1  Total tax charge by nature

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

 



2020 $m


2019 $m

Tax charge

Current

 tax

Deferred

 tax

Half year

Total


Half year

Total

Full year

Total

Attributable to shareholders:








Asia operations

(103)

(127)

(230)


(244)

(468)


US operations

(70)

183

113


143

345


Other operations

(16)

4

(12)


100

154

Tax (charge) credit attributable to shareholders' returns

(189)

60

(129)


(1)

31

Attributable to policyholders:








Asia operations

(69)

3

(66)


(285)

(365)

Total tax (charge) credit

(258)

63

(195)


(286)

(334)

 

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

 

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

 

B4.2  Reconciliation of shareholder effective tax rate

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

 





2020




2019






Half year



Half year


Full year




Asia

operations

US

operations

Other

operations

Total

attributable to

 shareholders

Percentage

 impact

on ETR


Total

attributable to

 shareholders

Percentage

impact

on ETR


Total

attributable to

 shareholders

Percentage

impact

on ETR




$m

$m

$m

$m

%


$m

%


$m

%






note (iv)









Adjusted operating profit (loss)

1,733

1,266

(458)

2,541



2,619



5,310


Non-operating (loss) profit

(450)

(1,458)

30

(1,878)



(1,460)



(3,388)


Profit (loss) before tax

1,283

(192)

(428)

663



1,159



1,922


Expected tax rate:

20%

21%

18%

21%









Tax at the expected rate

257

(40)

(77)

140

21.1%


232

20.0%


393

20.4%


Effects of recurring tax reconciliation items:














Income not taxable or taxable at concessionary rates

(31)

(14)

 -

(45)

(6.8)%


(70)

(6.0)%


(126)

(6.6)%



Deductions not allowable for tax purposes

12

6

3

21

3.2%


26

2.2%


55

2.9%



Items related to taxation of life insurance businessesnote (i)

7

(62)

 -

(55)

(8.3)%


(179)

(15.4)%


(317)

(16.5)%



Deferred tax adjustments

3

 -

 -

3

0.5%


(12)

(1.0)%


(33)

(1.7)%



Unrecognised tax lossesnote (ii)

 -

 -

72

72

10.9%


 -

-


46

2.4%



Effect of results of joint ventures and associates

(31)

 -

(6)

(37)

(5.6)%


(35)

(3.0)%


(100)

(5.2)%



Irrecoverable withholding taxes

 -

 -

26

26

3.9%


27

2.3%


59

3.1%



Other

3

13

(6)

10

1.5%


5

0.4%


13

0.7%



Total

(37)

(57)

89

(5)

(0.7)%


(238)

(20.5)%


(403)

(20.9)%


Effects of non-recurring tax reconciliation items:














Adjustments to tax charge in relation to prior years

21

 -

 -

21

3.1%


20

1.7%


(67)

(3.5)%



Movements in provisions for open tax mattersnote (iii)

(12)

 -

 -

(12)

(1.8)%


8

0.7%


(1)

0.0%



Demerger related activities

 -

 -

 -

 -

-


4

0.4%


76

4.1%



Impact of carry back of US losses

 -

(16)

 -

(16)

(2.4)%


 -

-


 -

-



Impact of changes in local statutory tax rates

1

 -

 -

1

0.2%


 -

-


 -

-



Adjustments in relation to business disposals

 -

 -

 -

 -

-


(25)

(2.2)%


(29)

(1.4)%



Total

10

(16)

 -

(6)

(0.9)%


7

0.6%


(21)

(1.1)%

Total actual tax charge (credit)

230

(113)

12

129

19.5%


1

0.1%


(31)

(1.6)%

Analysed into:













Tax on adjusted operating profit (loss)

260

195

12

467



430



773



Tax on non-operating (loss) profit

(30)

(308)

 -

(338)



(429)



(804)


Actual tax rate on:













Adjusted operating profit (loss):














Including non-recurring tax reconciling items

15%

15%

(3)%

18%



16%



15%




Excluding non-recurring tax reconciling items

14%

15%

(3)%

18%



16%



15%



Total profit (loss)

18%

59%

(3)%

19%



0%



(2)%


 

Notes

(i)  The $62 million reconciling item in US operations reflects the impact of the dividend received deduction on the taxation of profits from variable annuity business. The $7 million adverse reconciling item in Asia operations reflects non tax deductible investment related marked-to-market losses.

(ii)  The $72 million adverse reconciling item in unrecognised tax losses reflects losses arising where it is unlikely that relief for the losses will be available in future periods.

(iii)  The statement of financial position contains the following provisions in relation to open tax matters.




Half year 2020 $m


At beginning of period

198



Movements in the current period included in tax charge attributable to shareholders

(12)



Provisions utilised in the period

(34)



Other movements*

(3)


At end of period

149

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

 

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

 




Half year 2019 %


Full year 2019 %




Asia

operations

US

operations

Other

operations

Total

attributable to

shareholders


Asia

operations

US

operations

Other

operations

Total

attributable to

shareholders


Tax rate on adjusted operating profit (loss)

14%

17%

10%

16%


13%

14%

10%

15%


Tax rate on profit (loss) before tax

10%

35%

13%

0%


11%

48%

10%

(2)%

 

B5  Earnings per share













Half year 2020




Before

 tax

Tax 

Non-controlling interests

Net of tax

and non-

controlling interests

Basic

earnings

 per share

Diluted

 earnings

 per share




$m

$m

$m

$m

cents

cents

Based on adjusted operating profit


2,541

(467)

(22)

2,052

79.0¢

79.0¢

Short-term fluctuations in investment returns on shareholder-backed business


(2,706)

513

-

(2,193)

(84.4)¢

(84.4)¢

Amortisation of acquisition accounting adjustments


(18)

3

-

(15)

(0.6)¢

(0.6)¢

Gain (loss) attaching to corporate transactions


846

(178)

-

668

25.7¢

25.7¢

Based on profit for the period


663

(129)

(22)

512

19.7¢

19.7¢













Half year 2019




Before

 tax

Tax 

Non-controlling interests

Net of tax

and non-

controlling interests

Basic

earnings

 per share

Diluted

 earnings

 per share




$m

$m

$m

$m

cents

cents

Based on adjusted operating profit


2,619

(430)

(6)

2,183

84.5¢

84.5¢

Short-term fluctuations in investment returns on shareholder-backed business


(1,455)

407

-

(1,048)

(40.6)¢

(40.6)¢

Amortisation of acquisition accounting adjustments


(22)

4

-

(18)

(0.7)¢

(0.7)¢

Gain (loss) attaching to corporate transactions


17

18

-

35

1.4¢

1.4¢

Based on profit for the period from continuing operations


1,159

(1)

(6)

1,152

44.6¢

44.6¢

Based on profit for the period from discontinued operations





835

32.3¢

32.3¢

Based on profit for the period





1,987

76.9¢

76.9¢

 




Full year 2019




Before

 tax

Tax 

Non-controlling interests

Net of tax

and non-

controlling interests

Basic

earnings

 per share 

Diluted

 earnings

 per share




$m 

$m 

$m 

$m 

cents

cents

Based on adjusted operating profit


5,310

(773)

(9)

4,528

175.0¢

175.0¢

Short-term fluctuations in investment returns on shareholder-backed business


(3,203)

772

-

(2,431)

(94.0)¢

(94.0)¢

Amortisation of acquisition accounting adjustments


(43)

8

-

(35)

(1.3)¢

(1.3)¢

Gain (loss) attaching to corporate transactions


(142)

24

-

(118)

(4.6)¢

(4.6)¢

Based on profit for the year from continuing operations


1,922

31

(9)

1,944

75.1¢

75.1¢

Based on loss for the year from discontinued operations





(1,161)

(44.8)¢

(44.8)¢

Based on profit for the year





783

30.3¢

30.3¢

 

Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests.

 

The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated investment funds, is set out as below:

 



Number of shares (in millions)



2020


2019

Weighted average number of shares for calculation of:

Half year


Half year

Full year

Basic earnings per share

2,596


2,583

2,587

Shares under option at end of period

2


4

4

Shares that would have been issued at fair value on assumed option price

(2)


(3)

(4)

Diluted earnings per share

2,596


2,584

2,587

 

 

B6  Dividends

 



Half year 2020


Half year 2019


Full year 2019


Cents per share

$m


Cents per share

$m


Cents per share

$m

Dividends relating to reporting period:










First interim ordinary dividend

5.37¢

140


20.29¢

526


20.29¢

528


Second interim ordinary dividend

-

-


-

-


25.97¢

675

Total

5.37¢

140


20.29¢

526


46.26¢

1,203

Dividends paid in reporting period:










Current year first interim ordinary dividend

-

-


-

-


20.29¢

526


Second interim ordinary dividend for prior year

25.97¢

674


42.89¢

1,108


42.89¢

1,108

Total

25.97¢

674


42.89¢

1,108


63.18¢

1,634

 

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

 

Dividend per share

The 2020 first interim dividend of 5.37 cents per ordinary share will be paid on 28 September 2020 to shareholders in the UK on the register at 6.00pm BST and to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on 21 August 2020 (Record Date). Shareholders holding shares on the UK or Hong Kong share registers will continue to receive their dividend payments in either pounds sterling or Hong Kong dollars respectively, unless they elect otherwise. Shareholders holding shares on the UK or Hong Kong registers may elect to receive dividend payments in US dollars. Elections must be made through the relevant UK or Hong Kong share registrar on or before 7 September and 11 September 2020 respectively. The corresponding amount per share in pounds sterling and Hong Kong dollars is expected to be announced on or about 17 September 2020.The US dollar to pound sterling and Hong Kong dollar conversion rates will be determined by the actual rates achieved by Prudential buying those currencies during the two working days preceding the subsequent announcement. Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 28 September 2020. The 2020 first interim dividend will be paid on or about 5 October 2020 to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The exchange rate at which the dividend payable to the SG Shareholders will be translated from US dollars into Singapore dollars, will be determined by CDP.

 

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

 

C  FINANCIAL POSITION

 

C1  Group assets and liabilities by business type

 

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

 

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

 

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

 

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

 

In the table below, AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB- ratings. Financial assets which fall outside this range are classified as below BBB-.

 




30 Jun 2020 $m




Asia insurance











With

-profits

business

Unit-linked

assets and

liabilities

Other

business

Asia

Asset

manage-

ment

Elimina-

tions

Total

Asia

US

Unallocated

to a segment

Elimination

of intra-group

debtors

and

creditors

Group

total




note (i)






note (ii)




Debt securities note (ix), note C1.1











Sovereign debt












Indonesia

381

580

455

-

-

1,416

-

-

-

1,416


Singapore

2,788

525

904

88

-

4,305

-

-

-

4,305


Thailand

-

-

1,567

16

-

1,583

-

-

-

1,583


United Kingdom

-

7

-

-

-

7

-

154

-

161


United States

24,656

23

2,356

-

-

27,035

5,371

-

-

32,406


Vietnam

-

14

2,789

-

-

2,803

-

-

-

2,803


Other (predominantly Asia)

1,816

687

3,216

13

-

5,732

19

140

-

5,891

Subtotal

29,641

1,836

11,287

117

-

42,881

5,390

294

-

48,565

Other government bonds












AAA

1,464

103

479

-

-

2,046

447

-

-

2,493


AA+ to AA-

353

34

101

-

-

488

519

-

-

1,007


A+ to A-

524

113

226

-

-

863

191

-

-

1,054


BBB+ to BBB-

466

88

248

8

-

810

2

-

-

812


Below BBB- and unrated

104

17

331

-

-

452

-

1

-

453

Subtotal

2,911

355

1,385

8

-

4,659

1,159

1

-

5,819

Corporate bonds












AAA

1,122

270

504

-

-

1,896

265

-

-

2,161


AA+ to AA-

1,575

273

1,712

2

-

3,562

973

-

-

4,535


A+ to A-

6,670

808

4,723

-

-

12,201

11,792

-

-

23,993


BBB+ to BBB-

7,806

1,043

3,389

-

-

12,238

14,036

-

-

26,274


Below BBB- and unrated

2,835

655

945

3

-

4,438

2,046

7

-

6,491

Subtotal

20,008

3,049

11,273

5

-

34,335

29,112

7

-

63,454

Asset-backed securities












AAA

108

16

23

-

-

147

2,227

-

-

2,374


AA+ to AA-

36

6

8

-

-

50

184

-

-

234


A+ to A-

17

-

25

-

-

42

575

-

-

617


BBB+ to BBB-

15

-

10

-

-

25

193

-

-

218


Below BBB- and unrated

6

-

-

-

-

6

175

-

-

181

Subtotal

182

22

66

-

-

270

3,354

-

-

3,624

Total debt securities

52,742

5,262

24,011

130

-

82,145

39,015

302

-

121,462

Loans












Mortgage loansnote C1.2

-

-

158

-

-

158

8,119

-

-

8,277


Policy loans

1,189

-

324

-

-

1,513

4,705

8

-

6,226


Other loans

389

-

18

-

-

407

-

-

-

407

Total loans

1,578

-

500

-

-

2,078

12,824

8

-

14,910

Equity securities and holdings in collective investment schemes












Direct equities

14,493

10,345

1,537

56

-

26,431

263

4

-

26,698


Collective investment schemes

13,455

6,097

4,175

10

-

23,737

36

7

-

23,780


US separate account assetsnote (iii)

-

-

-

-

-

-

184,220

-

-

184,220

Total equity securities and holdings in collective investment schemes

27,948

16,442

5,712

66

-

50,168

184,519

11

-

234,698

Other financial investments note (iv)

991

572

1,817

97

-

3,477

3,827

75

-

7,379

Total financial Investments

83,259

22,276

32,040

293

-

137,868

240,185

396

-

378,449

Investment properties

-

-

7

-

-

7

7

9

-

23

Investments in joint ventures and associates accounted for using the equity method

-

-

1,268

239

-

1,507

-

-

-

1,507

Cash and cash equivalents

913

599

1,242

132

-

2,886

2,493

3,005

-

8,384

Reinsurers' share of insurance contract liabilitiesnote (v)

211

-

8,709

-

-

8,920

35,993

5

-

44,918

Other assetsnote (vi)

1,954

482

8,051

799

(33)

11,253

17,942

3,828

(3,139)

29,884

Total assets 

86,337

23,357

51,317

1,463

(33)

162,441

296,620

7,243

(3,139)

463,165














Shareholders' equity

-

-

10,535

994

-

11,529

8,955

(1,374)

-

19,110

Non-controlling interests

-

-

2

159

-

161

-

36

-

197

Total equity

-

-

10,537

1,153

-

11,690

8,955

(1,338)

-

19,307














Contract liabilities and unallocated surplus of with-profits fundsnote (iii)

76,647

21,376

33,541

-

-

131,564

265,655

217

-

397,436

Core structural borrowings

-

-

-

-

-

-

250

6,249

-

6,499

Operational borrowings

243

15

111

25

-

394

1,212

639

-

2,245

Other liabilitiesnote (vii)

9,447

1,966

7,128

285

(33)

18,793

20,548

1,476

(3,139)

37,678

Total liabilities

86,337

23,357

40,780

310

(33)

150,751

287,665

8,581

(3,139)

443,858

Total equity and liabilities

86,337

23,357

51,317

1,463

(33)

162,441

296,620

7,243

(3,139)

463,165

 




30 Jun 2019 $m




Asia insurance












With

-profits

business

Unit-linked

assets and

liabilities

Other

business

Asia

Asset

manage-

ment

Elimina-

tions

Total

Asia

US

Unallocated

to a segment

Discontinued

operations

Elimination

of intra-group

debtors

and

creditors

Group

total




note (i)






note (ii)





Debt securities note (ix), note C1.1












Sovereign debt













Indonesia

184

516

445

-

-

1,145

-

-

-

-

1,145


Singapore

2,188

376

649

47

-

3,260

-

-

-

-

3,260


Thailand

-

-

1,407

-

-

1,407

-

-

-

-

1,407


United Kingdom

-

6

-

-

-

6

-

1,248

-

-

1,254


United States

16,617

18

2,162

-

-

18,797

6,022

-

-

-

24,819


Vietnam

1

13

2,479

-

-

2,493

-

-

-

-

2,493


Other (predominantly Asia)

2,314

638

2,488

15

-

5,455

9

74

-

-

5,538

Subtotal

21,304

1,567

9,630

62

-

32,563

6,031

1,322

-

-

39,916

Other government bonds













AAA

1,658

44

440

-

-

2,142

966

-

-

-

3,108


AA+ to AA-

176

8

88

-

-

272

493

-

-

-

765


A+ to A-

826

136

319

-

-

1,281

262

-

-

-

1,543


BBB+ to BBB-

316

72

357

-

-

745

4

-

-

-

749


Below BBB- and unrated

22

4

341

-

-

367

-

-

-

-

367

Subtotal

2,998

264

1,545

-

-

4,807

1,725

-

-

-

6,532

Corporate bonds













AAA

700

179

550

-

-

1,429

362

262

-

-

2,053


AA+ to AA-

1,769

527

1,735

-

-

4,031

1,498

169

-

-

5,698


A+ to A-

5,464

536

4,480

-

-

10,480

17,184

182

-

-

27,846


BBB+ to BBB-

5,577

893

2,898

-

-

9,368

23,042

25

-

-

32,435


Below BBB- and unrated

2,669

595

454

-

-

3,718

2,091

6

-

-

5,815

Subtotal

16,179

2,730

10,117

-

-

29,026

44,177

644

-

-

73,847

Asset-backed securities













AAA

231

22

91

-

-

344

3,357

401

-

-

4,102


AA+ to AA-

53

3

16

-

-

72

694

-

-

-

766


A+ to A-

20

-

21

-

-

41

1,024

-

-

-

1,065


BBB+ to BBB-

-

-

-

-

-

-

335

-

-

-

335


Below BBB- and unrated

22

-

7

-

-

29

264

-

-

-

293

Subtotal

326

25

135

-

-

486

5,674

401

-

-

6,561

Total debt securities

40,807

4,586

21,427

62

-

66,882

57,607

2,367

-

-

126,856

Loans













Mortgage loansnote C1.2

-

-

179

-

-

179

9,655

-

-

-

9,834


Policy loans

996

-

296

-

-

1,292

4,692

-

-

-

5,984


Other loans

80

-

19

-

-

99

-

8

-

-

107

Total loans

1,076

-

494

-

-

1,570

14,347

8

-

-

15,925

Equity securities and holdings in collective investment schemes













Direct equities

15,316

13,100

1,386

-

-

29,802

160

65

-

-

30,027


Collective investment schemes

11,890

5,223

1,518

52

-

18,683

128

2

-

-

18,813


US separate account assetsnote (iii)

-

-

-

-

-

-

184,917

-

-

-

184,917

Total equity securities and holdings in collective investment schemes

27,206

18,323

2,904

52

-

48,485

185,205

67

-

-

233,757

Other financial investments note (iv)

511

626

800

93

-

2,030

2,342

301

-

-

4,673

Total financial Investments

69,600

23,535

25,625

207

-

118,967

259,501

2,743

-

-

381,211

Investment properties

-

-

7

-

-

7

7

-

-

-

14

Investments in joint ventures and associates accounted for using the equity method

-

-

1,092

219

-

1,311

-

-

-

-

1,311

Cash and cash equivalents

680

509

1,500

139

-

2,828

1,506

2,294

-

-

6,628

Reinsurers' share of insurance contract liabilitiesnote (v)

105

-

4,502

-

-

4,607

8,308

4

-

-

12,919

Assets held for distributionnote (viii)

-

-

-

-

-

-

-

-

281,427

(3,566)

277,861

Other assetsnote (vi)

3,288

401

6,572

542

(44)

10,759

16,416

3,269

-

(4,443)

26,001

Total assets 

73,673

24,445

39,298

1,107

(44)

138,479

285,738

8,310

281,427

(8,009)

705,945















Shareholders' equity

-

-

9,005

722

-

9,727

8,594

(3,822)

10,538

-

25,037

Non-controlling interests

-

-

2

15

-

17

-

12

-

-

29

Total equity

-

-

9,007

737

-

9,744

8,594

(3,810)

10,538

-

25,066















Contract liabilities and unallocated surplus of with-profits fundsnote (iii)

65,004

22,392

23,470

-

-

110,866

257,279

61

-

(1,526)

366,680

Core structural borrowings

-

-

-

-

-

-

250

9,220

-

-

9,470

Operational borrowings

303

46

112

17

-

478

1,017

926

-

-

2,421

Liabilities held for distributionnote (viii)

-

-

-

-

-

-

-

-

270,889

(1,857)

269,032

Other liabilitiesnote (vii)

8,367

2,007

6,709

353

(45)

17,391

18,598

1,913

-

(4,626)

33,276

Total liabilities

73,674

24,445

30,291

370

(45)

128,735

277,144

12,120

270,889

(8,009)

680,879

Total equity and liabilities

73,674

24,445

39,298

1,107

(45)

138,479

285,738

8,310

281,427

(8,009)

705,945

 




31 Dec 2019 $m




Asia insurance









With

-profits

business

Unit-linked

assets and

liabilities

Other

business

Asia

Asset

manage-

ment

Elimina-

tions

Total

Asia

US

Unallocated

to a segment

Elimination

of intra-group

debtors

and

creditors

Group

total




note (i)






note (ii)




Debt securities note (ix), note C1.1











Sovereign debt












Indonesia

222

610

488

-

-

1,320

-

-

-

1,320


Singapore

3,514

554

708

94

-

4,870

-

-

-

4,870


Thailand

-

-

1,398

19

-

1,417

-

-

-

1,417


United Kingdom

-

7

-

-

-

7

-

615

-

622


United States

20,479

113

2,827

-

-

23,419

6,160

597

-

30,176


Vietnam

1

15

2,900

-

-

2,916

-

-

-

2,916


Other (predominantly Asia)

1,745

665

2,809

13

-

5,232

9

116

-

5,357

Subtotal

25,961

1,964

11,130

126

-

39,181

6,169

1,328

-

46,678

Other government bonds












AAA

1,752

81

538

-

-

2,371

977

-

-

3,348


AA+ to AA-

135

8

78

-

-

221

495

-

-

716


A+ to A-

890

159

389

-

-

1,438

245

-

-

1,683


BBB+ to BBB-

356

88

201

-

-

645

4

-

-

649


Below BBB- and unrated

31

9

381

-

-

421

-

2

-

423

Subtotal

3,164

345

1,587

-

-

5,096

1,721

2

-

6,819

Corporate bonds












AAA

732

384

516

-

-

1,632

341

-

-

1,973


AA+ to AA-

1,574

441

1,908

-

-

3,923

1,566

-

-

5,489


A+ to A-

5,428

542

5,063

-

-

11,033

17,784

-

-

28,817


BBB+ to BBB-

5,443

883

3,497

-

-

9,823

22,775

-

-

32,598


Below BBB- and unrated

2,111

569

781

3

-

3,464

2,157

2

-

5,623

Subtotal

15,288

2,819

11,765

3

-

29,875

44,623

2

-

74,500

Asset-backed securities












AAA

236

19

104

-

-

359

3,658

-

-

4,017


AA+ to AA-

132

6

46

-

-

184

780

-

-

964


A+ to A-

1

-

14

-

-

15

1,006

-

-

1,021


BBB+ to BBB-

-

-

-

-

-

-

359

-

-

359


Below BBB- and unrated

-

-

-

-

-

-

212

-

-

212

Subtotal

369

25

164

-

-

558

6,015

-

-

6,573

Total debt securities

44,782

5,153

24,646

129

-

74,710

58,528

1,332

-

134,570

Loans












Mortgage loansnote C1.2

-

-

165

-

-

165

9,904

-

-

10,069


Policy loans

1,089

-

316

-

-

1,405

4,707

9

-

6,121


Other loans

374

-

19

-

-

393

-

-

-

393

Total loans

1,463

-

500

-

-

1,963

14,611

9

-

16,583

Equity securities and holdings in collective investment schemes












Direct equities

14,143

12,440

1,793

59

-

28,435

150

4

-

28,589


Collective investment schemes

15,230

6,652

1,680

14

-

23,576

40

6

-

23,622


US separate account assetsnote (iii)

-

-

-

-

-

-

195,070

-

-

195,070

Total equity securities and holdings in collective investment schemes

29,373

19,092

3,473

73

-

52,011

195,260

10

-

247,281

Other financial investments note (iv)

963

383

1,363

106

-

2,815

2,791

56

-

5,662

Total financial Investments

76,581

24,628

29,982

308

-

131,499

271,190

1,407

-

404,096

Investment properties

-

-

7

-

-

7

7

11

-

25

Investments in joint ventures and associates accounted for using the equity method

-

-

1,263

237

-

1,500

-

-

-

1,500

Cash and cash equivalents

963

356

1,015

156

-

2,490

1,960

2,515

-

6,965

Reinsurers' share of insurance contract liabilitiesnote (v)

152

-

5,306

-

-

5,458

8,394

4

-

13,856

Other assetsnote (vi)

1,277

237

6,983

826

(35)

9,288

17,696

3,440

(2,652)

27,772

Total assets 

78,973

25,221

44,556

1,527

(35)

150,242

299,247

7,377

(2,652)

454,214














Shareholders' equity

-

-

9,801

1,065

-

10,866

8,929

(318)

-

19,477

Non-controlling interests

-

-

2

153

-

155

-

37

-

192

Total equity

-

-

9,803

1,218

-

11,021

8,929

(281)

-

19,669














Contract liabilities and unallocated surplus of with-profits fundsnote (iii)

70,308

23,571

26,814

-

-

120,693

269,549

186

-

390,428

Core structural borrowings

-

-

-

-

-

-

250

5,344

-

5,594

Operational borrowings

302

21

123

27

-

473

1,501

671

-

2,645

Other liabilitiesnote (vii)

8,363

1,629

7,816

282

(35)

18,055

19,018

1,457

(2,652)

35,878

Total liabilities

78,973

25,221

34,753

309

(35)

139,221

290,318

7,658

(2,652)

434,545

Total equity and liabilities

78,973

25,221

44,556

1,527

(35)

150,242

299,247

7,377

(2,652)

454,214

 

Notes

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

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

 



30 Jun 2020 $m


2019 $m



Insurance

Asset

management

Total


30 Jun

Total

31 Dec

Total


Shareholders' equity

8,943

12

8,955


8,594

8,929

 

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

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

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

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

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

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

(vii) Within 'Other liabilities' at 30 June 2020 is accruals, deferred income and other liabilities of $16,209 million (30 June 2019: $13,487 million; 31 December 2019: $14,488 million), of which $11,213 million (30 June 2019: $8,555 million; 31 December 2019: $9,172 million) are due within one year.

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

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

 

C1.1 Additional analysis of debt securities

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

 

(a)  Holdings by consolidated investment funds of the Group

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

 


30 Jun 2020 $m


2019 $m


Asia

US

Group total


30 Jun

31 Dec

Debt securities held by consolidated investment funds

17,219

1,244

18,463


21,914

22,113

 

(b)  Additional analysis of US debt securities

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

 



2020 $m 


2019 $m 



30 Jun


30 Jun

31 Dec

Available-for-sale

37,597


56,225

57,091

Fair value through profit and loss

1,418


1,382

1,437

Total US debt securities

39,015


57,607

58,528

 

The corporate bonds held by the US insurance operations comprise:

 



2020 $m 


2019 $m 



30 Jun


30 Jun

31 Dec

Publicly traded and SEC Rule 144A securities*

21,215


34,895

34,781

Non-SEC Rule 144A securities

7,897


9,282

9,842

Total US corporate bonds

29,112


44,177

44,623

* A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors. The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities.

 

(c)  Movements in unrealised gains and losses on Jackson available-for-sale debt securities

The movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of $3,496 million at 31 December 2019 to a net unrealised gain of $3,219 million at 30 June 2020 is analysed in the table below.

 




Changes in unrealised

 appreciation reflected in

 other comprehensive income




30 Jun 2020 $m

Gains recycled to income statement on transfer of debt securities to Athene

Unrealised

gains (losses)

arising in

the period

31 Dec 2019 $m




note D1



Assets fair valued at below book value






Book value*

2,188



3,121


Unrealised gain (loss)

(109)


(82)

(27)


Fair value (as included in statement of financial position)

2,079



3,094

Assets fair valued at or above book value






Book value*

32,190



50,474


Unrealised gain (loss)

3,328

(2,817)

2,622

3,523


Fair value (as included in statement of financial position)

35,518



53,997

Total






Book value*

34,378



53,595


Net unrealised gain (loss)

3,219

(2,817)

2,540

3,496


Fair value (as included in the footnote above in the overview table and the statement of financial position)

37,597



57,091

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

 

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

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

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

 



30 Jun 2020 $m


30 Jun 2019 $m


31 Dec 2019 $m



Fair

value

Unrealised

loss


Fair

value

Unrealised

loss


Fair

value

Unrealised

loss

Between 90% and 100%

1,871

(62)


2,827

(41)


3,083

(25)

Between 80% and 90%

111

(17)


48

(7)


11

(2)

Below 80%

97

(30)


40

(15)


-

-

Total

2,079

(109)


2,915

(63)


3,094

(27)

 

(ii)  Unrealised losses by maturity of security

 



2020 $m 


2019 $m 



30 Jun


30 Jun

31 Dec

1 year to 5 years

(30)


(3)

(1)

5 years to 10 years

(39)


(13)

(12)

More than 10 years

(20)


(24)

(7)

Mortgage-backed and other debt securities

(20)


(23)

(7)

Total

(109)


(63)

(27)

 

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

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

 














30 Jun 2020 $m



30 Jun 2019 $m


31 Dec 2019 $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

(24)

(80)

(104)


(1)

(5)

(6)


(1)

(20)

(21)

6 months to 1 year

(3)

(1)

(4)


(1)

(18)

(19)


(1)

(1)

(2)

1 year to 2 years

-

-

-


(1)

(11)

(12)


-

(1)

(1)

2 years to 3 years

(1)

-

(1)


-

(13)

(13)


-

(1)

(1)

More than 3 years

-

-

-


-

(13)

(13)


-

(2)

(2)

Total

(28)

(81)

(109)


(3)

(60)

(63)


(2)

(25)

(27)

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

 

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

 


30 Jun 2020 $m


30 Jun 2019 $m


31 Dec 2019 $m

Age analysis

Fair

value

Unrealised

loss


Fair

value

Unrealised

loss


Fair

value

Unrealised

loss

Less than 3 months

60

(17)


33

(13)


-

-

3 months to 6 months

37

(13)


7

(2)


-

-

Total below 80%

97

(30)


40

(15)


-

-

 

(d)  Asset-backed securities

The Group's holdings in asset-backed securities (ABS) comprise residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed securities.

 

The US operations' exposure to asset-backed securities comprises:

 



2020 $m 


2019 $m



30 Jun


30 Jun

31 Dec

RMBS






Sub-prime (30 Jun 2020: 2% AAA)

35


112

93


Alt-A (30 Jun 2020: 35% AAA, 39% A)

14


129

116


Prime including agency (30 Jun 2020: 85% AAA, 6% AA, 5% A)

263


736

862

CMBS (30 Jun 2020: 86% AAA, 5% AA, 3% A)

1,646


2,884

3,080

CDO funds (30 Jun 2020: 81% AAA, 9% AA, 5% A), $nil exposure to sub-prime

397


449

696

Other ABS (30 Jun 2020: 26% AAA, 5% AA, 48% A), $35 million exposure to sub-prime

999


1,364

1,168

Total US asset-backed securities

3,354


5,674

6,015

 

(e)  Group bank debt exposure

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

 

Exposure to bank debt securities  

 


30 Jun 2020 $m


2019 $m


Senior debt


Subordinated debt


Group

total


30 Jun

31 Dec


Total


Tier 1

Tier 2

Total




Group total

Group total

Shareholder-backed business











Asia

549


572

329

901


1,450


858

993

Eurozone

223


-

26

26


249


410

337

United Kingdom

352


7

91

98


450


892

723

United States

1,565


5

52

57


1,622


3,037

3,134

Other

259


-

137

137


396


693

647

Total

2,948


584

635

1,219


4,167


5,890

5,834












With-profits funds 











Asia

534


87

572

659


1,193


1,198

1,130

Eurozone

77


-

101

101


178


129

131

United Kingdom

182


1

105

106


288


146

155

United States

670


2

15

17


687


25

34

Other

116


-

262

262


378


256

284

Total

1,579


90

1,055

1,145


2,724


1,754

1,734

 

C1.2  Additional analysis of US mortgage loans

 

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

 

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

 

C2  Fair value measurement

 

(a)  Determination of fair value

The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments, or by using quotations from independent third parties, such as brokers and pricing services or by using appropriate valuation techniques.

 

The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an arm's length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties or valued internally using standard market practices.

 

Other than the loans which have been designated at fair value through profit or loss, the carrying value of loans and receivables is presented net of provisions for impairment. The fair value of loans is estimated from discounted cash flows expected to be received. The discount rate used is updated for the market rate of interest where applicable.

 

The fair value of the subordinated and senior debt issued by the parent company is determined using quoted prices from independent third parties.

 

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

 

Valuation approach for level 2 fair valued assets and liabilities

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

 

Valuation approach for level 3 fair valued assets and liabilities

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

 

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

 

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

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

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

 

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

 

Financial instruments at fair value

 



30 Jun 2020 $m


Level 1

Level 2

Level 3



Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

Loans

-

-

3,606

3,606

Equity securities and holdings in collective investment schemes

230,670

3,554

474

234,698

Debt securities

64,300

57,091

71

121,462

Other investments (including derivative assets)

109

2,350

1,569

4,028

Derivative liabilities

(65)

(402)

-

(467)

Total financial investments, net of derivative liabilities

295,014

62,593

5,720

363,327

Investment contract liabilities without discretionary participation features held at fair value

-

(936)

-

(936)

Net asset value attributable to unit holders of consolidated investment funds

(5,521)

(8)

(438)

(5,967)

Other financial liabilities held at fair value

-

-

(3,743)

(3,743)

Total financial instruments at fair value

289,493

61,649

1,539

352,681

Percentage of total (%)

82%

18%

0%

100%







Analysed by business type:





Financial investments, net of derivative liabilities at fair value:






With-profits

67,290

12,963

314

80,567


Unit-linked and variable annuity separate account

204,723

1,208

-

205,931


Non-linked shareholder-backed business

23,001

48,422

5,406

76,829

Total financial investments, net of derivative liabilities at fair value

295,014

62,593

5,720

363,327

Other financial liabilities at fair value

(5,521)

(944)

(4,181)

(10,646)

Group total financial instruments at fair value

289,493

61,649

1,539

352,681

 



30 Jun 2019 $m


Level 1

Level 2

Level 3



Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

Loans

-

-

3,562

3,562

Equity securities and holdings in collective investment schemes

230,817

2,723

217

233,757

Debt securities

61,763

65,085

8

126,856

Other investments (including derivative assets)

190

1,361

1,224

2,775

Derivative liabilities

(66)

(675)

(579)

(1,320)

Total financial investments, net of derivative liabilities

292,704

68,494

4,432

365,630

Investment contract liabilities without discretionary participation features held at fair value

-

(847)

-

(847)

Net asset value attributable to unit holders of consolidated investment funds

(4,432)

-

-

(4,432)

Other financial liabilities held at fair value

-

(6)

(3,922)

(3,928)

Total financial instruments at fair value

288,272

67,641

510

356,423

Percentage of total (%)

81%

19%

0%

100%







Analysed by business type:





Financial investments, net of derivative liabilities at fair value:






With-profits

61,541

6,451

203

68,195


Unit-linked and variable annuity separate account

206,548

1,256

-

207,804


Non-linked shareholder-backed business

24,615

60,787

4,229

89,631

Total financial investments, net of derivative liabilities at fair value

292,704

68,494

4,432

365,630

Other financial liabilities at fair value

(4,432)

(853)

(3,922)

(9,207)

Group total financial instruments at fair value

288,272

67,641

510

356,423

 



31 Dec 2019 $m


Level 1

Level 2

Level 3



Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

Loans

-

-

3,587

3,587

Equity securities and holdings in collective investment schemes

243,285

3,720

276

247,281

Debt securities

67,927

66,637

6

134,570

Other investments (including derivative assets)

70

1,676

1,301

3,047

Derivative liabilities

(185)

(207)

-

(392)

Total financial investments, net of derivative liabilities

311,097

71,826

5,170

388,093

Investment contract liabilities without discretionary participation features held at fair value

-

(1,011)

-

(1,011)

Net asset value attributable to unit holders of consolidated investment funds

(5,973)

(23)

(2)

(5,998)

Other financial liabilities held at fair value

-

-

(3,760)

(3,760)

Total financial instruments at fair value

305,124

70,792

1,408

377,324

Percentage of total (%)

81%

19%

0%

100%







Analysed by business type:





Financial investments, net of derivative liabilities at fair value:






With-profits

66,061

7,762

260

74,083


Unit-linked and variable annuity separate account

217,838

1,486

-

219,324


Non-linked shareholder-backed business

27,198

62,578

4,910

94,686

Total financial investments, net of derivative liabilities at fair value

311,097

71,826

5,170

388,093

Other financial liabilities at fair value

(5,973)

(1,034)

(3,762)

(10,769)

Group total financial instruments at fair value

305,124

70,792

1,408

377,324

 

Assets and liabilities at amortised cost and their fair value

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

 


2020 $m



2019 $m



30 Jun


30 Jun


31 Dec


Carrying

 value

Fair

value


Carrying

 value

Fair

value


Carrying

 value

Fair

value

Assets









Loans

11,304

11,435


12,363

12,740


12,996

13,511

Liabilities









Investment contract liabilities without discretionary participation features

(3,730)

(3,793)


(3,986)

(3,996)


(3,891)

(3,957)

Core structural borrowings of shareholder-financed businesses

(6,499)

(7,087)


(9,470)

(10,248)


(5,594)

(6,227)

Operational borrowings (excluding lease liabilities)

(1,703)

(1,703)


(1,858)

(1,857)


(2,015)

(2,015)

Obligations under funding, securities lending and sale and repurchase agreements

(9,085)

(9,442)


(8,598)

(8,769)


(8,901)

(9,135)

Total

(9,713)

(10,590)


(11,549)

(12,130)


(7,405)

(7,823)










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

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

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

 

Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses, unrealised gains and losses on the assets classified at fair value through profit and loss and foreign exchange movements on an individual entity's overseas investments.

 

Total gains and losses recorded in other comprehensive income includes unrealised gains and losses on debt securities held as

available-for-sale principally within Jackson and foreign exchange movements arising from the retranslation of the Group's overseas subsidiaries and branches.

 



Half year 2020 $m

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

Loans

Equity

securities

and

holdings in

collective

investment

schemes

Debt

securities

Other

investments

(including

derivative

assets)

Net asset

value

attributable

to unit

holders of

consolidated

investment funds

Other

financial

liabilities

Total

Balance at beginning of period

3,587

276

6

1,301

(2)

(3,760)

1,408

Total gains (losses) in income statement*

120

(44)

(6)

(170)

134

(91)

(57)

Total gains (losses) recorded in other comprehensive income

-

(4)

-

-

-

-

(4)

Purchases and other additions

-

348

20

484

(583)

-

269

Sales

-

(102)

(2)

(46)

13

-

(137)

Issues

52

-

-

-

-

(53)

(1)

Settlements

(153)

-

-

-

-

161

8

Transfers into level 3

-

-

53

-

-

-

53

Balance at end of period

3,606

474

71

1,569

(438)

(3,743)

1,539

 



Half year 2019 $m

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

Loans

Equity

securities

and

holdings in

collective

investment

schemes

Debt

securities

Other

investments

(including

derivative

assets)

Derivative

liabilities

Borrowings

attributable

 to with

-profits

businesses

Net asset

value

attributable

to unit

holders of

consolidated

investment funds

Other

financial

liabilities

Total

Balance at beginning of period

6,054

656

1,505

6,714

(539)

(2,045)

(1,258)

(4,335)

6,752

Reclassification to held for distribution

(2,509)

(440)

(1,498)

(5,513)

-

2,045

1,258

451

(6,206)

Total gains (losses) in income statement*

118

(2)

6

19

(19)

-

-

(140)

(18)

Total gains (losses) recorded in other comprehensive income

1

-

1

(12)

(21)

-

-

(10)

(41)

Purchases

-

3

-

164

-

-

-

-

167

Sales

-

-

(6)

(148)

-

-

-

-

(154)

Issues

34

-

-

-

-

-

-

(46)

(12)

Settlements

(136)

-

-

-

-

-

-

158

22

Balance at end of period

3,562

217

8

1,224

(579)

-

-

(3,922)

510

 






Full year 2019 $m




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

Loans

Equity

securities

and

holdings in

collective

investment

schemes

Debt

securities

Other

investments

(including

derivative

assets)

Derivative

liabilities

Borrowings

attributable

 to with

-profits

businesses

Net asset

value

attributable

to unit

holders of

consolidated

investment funds

Other

financial

liabilities

Total

Balance at beginning of year

6,054

656

1,505

6,714

(539)

(2,045)

(1,258)

(4,335)

6,752

Demerger of UK and Europe operations

(2,509)

(440)

(1,498)

(5,513)

-

2,045

1,258

451

(6,206)

Total gains (losses) in income statement*

1

(11)

6

30

539

-

-

(28)

537

Total gains (losses) recorded in other comprehensive income

-

3

-

(6)

-

-

-

(11)

(14)

Purchases

-

69

-

269

-

-

(2)

-

336

Sales

-

(1)

(7)

(193)

-

-

-

-

(201)

Issues

275

-

-

-

-

-

-

(143)

132

Settlements

(234)

-

-

-

-

-

-

306

72

Balance at end of year

3,587

276

6

1,301

-

-

(2)

(3,760)

1,408

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



2020 $m


2019 $m



30 Jun


30 Jun

31 Dec


Equity securities and holdings in collective investment schemes

(72)


(2)

(11)


Debt securities

(5)


-

-


Other investments

(157)


51

34


Derivative liabilities

-


(19)

-


Net asset value attributable to unit holders of consolidated investment funds

132


-

-


Other financial liabilities

(1)


(18)

(4)


Total

(103)


12

19

 

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

 

Included within these net assets and liabilities are policy loans of $3,606 million at 30 June 2020 (30 June 2019: $3,562 million; 31 December 2019: $3,587 million) measured as the loan outstanding balance, plus accrued investment income, attached to acquired REALIC business and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of $3,743 million at 30 June 2020 (30 June 2019: $3,758 million; 31 December 2019: $3,760 million) is also classified within level 3. The fair value of the liabilities is equal to the fair value of the underlying assets held as collateral, which primarily consist of policy loans and debt securities. The assets and liabilities offset and therefore their movements have no impact on shareholders' profit and equity.

 

Excluding the loans and funds withheld liability under Jackson's REALIC reinsurance arrangements as described above, which amounted to a net liability at 30 June 2020 of $(137) million (30 June 2019: $(196) million; 31 December 2019: $(173) million), the level 3 fair valued financial assets net of financial liabilities were a net asset of $1,676 million at 30 June 2020 (30 June 2019: $706 million; 31 December 2019: $1,581 million). Of this amount, equity securities of $2 million are internally valued, representing less than 0.1 per cent of the total fair valued financial assets net of financial liabilities (30 June and 31 December 2019: nil). Internal valuations are inherently more subjective than external valuations.

 

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

 

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

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

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

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

 

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

 

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

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

 

(d)  Transfers into and transfers out of levels  

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

 

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

 

C3  Policyholder liabilities and unallocated surplus

C3.1  Group overview

(i)  Analysis of movements in policyholder liabilities and unallocated surplus of with-profits fundsnotes (a),(b)

 



Half year 2020 $m



Asia

US

Total



note C3.2

note C3.3


At 1 January 2020

132,570

269,549

402,119

Comprising:





- Policyholder liabilities on the consolidated statement of financial position





(excludes $186 million classified as unallocated to a segment)

115,943

269,549

385,492


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

4,750

-

4,750


- Group's share of policyholder liabilities of joint ventures and associate note (d)

11,877

-

11,877

Net flows:





Premiums

9,746

8,865

18,611


Surrenders

(2,083)

(7,455)

(9,538)


Maturities/deaths

(1,153)

(1,793)

(2,946)

Net flowsnote (d)

6,510

(383)

6,127

Shareholders' transfers post-tax

(54)

-

(54)

Investment-related items and other movements

6,526

(3,511)

3,015

Foreign exchange translation differences

(1,580)

-

(1,580)

At 30 June 2020

143,972

265,655

409,627

Comprising:





- Policyholder liabilities on the consolidated statement of financial position





(excludes $217 million classified as unallocated to a segment)

126,052

265,655

391,707


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

5,512

-

5,512


- Group's share of policyholder liabilities of joint ventures and associate note (d)

12,408

-

12,408

 



Half year 2019 $m



Asia

US

Discontinued

UK and

Europe

Total


note C3.2

note C3.3



At 1 January 2019

105,408

236,380

210,002

551,790

Comprising:






- Policyholder liabilities on the consolidated statement of financial position






(excludes $50 million classified as unallocated to a segment) note (c)

91,836

236,380

193,020

521,236


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

3,198

-

16,982

20,180


- Group's share of policyholder liabilities of joint ventures and associate note (d)

10,374

-

-

10,374






Reclassification of UK and Europe liabilities as held for distribution

-

-

(210,002)

(210,002)

Net flows:






Premiums

9,800

9,136

-

18,936


Surrenders

(1,982)

(8,279)

-

(10,261)


Maturities/deaths

(1,278)

(1,744)

-

(3,022)

Net flowsnote (d)

6,540

(887)

-

5,653

Shareholders' transfers post-tax

(49)

-

-

(49)

Investment-related items and other movements

7,947

21,786

-

29,733

Foreign exchange translation differences

547

-

-

547

At 30 June 2019

120,393

257,279

-

377,672

Comprising:






- Policyholder liabilities on the consolidated statement of financial position






(excludes $61 million classified as unallocated to a segment) note (c)

105,593

257,279

-

362,872


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

3,747

-

-

3,747


- Group's share of policyholder liabilities of joint ventures and associate note (d)

11,053

-

-

11,053

Average policyholder liability balancesnote (e)






Half year 2020

133,141

267,602

-

400,743


Half year 2019

109,428

246,830

-

356,258

 

Notes  

(a)  The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the year but exclude liabilities that have not been allocated to a reporting segment. The items above are shown gross of external reinsurance.  

(b)  The analysis includes the impact of premiums, claims and investment movements on policyholders' liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, premiums shown above exclude any deductions for fees/charges; claims (surrenders, maturities and deaths) shown above represent the policyholder liabilities provision released rather than the claims amount paid to the policyholder.  

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

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

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

 

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

 


Half year 2020 $m


Asia

US

Total

At 1 January 2020

62,262

269,549

331,811

Net flows:




  Premiums

5,155

8,865

14,020

  Surrenders

(1,702)

(7,455)

(9,157)

  Maturities/deaths

(477)

(1,793)

(2,270)

Net flowsnote

2,976

(383)

2,593

Investment-related items and other movements

3,139

(3,511)

(372)

Foreign exchange translation differences

(1,052)

-

(1,052)

At 30 June 2020

67,325

265,655

332,980





Comprising:




  - Policyholder liabilities on the consolidated statement of financial position

54,917

265,655

320,572

(excludes $217 million classified as unallocated to a segment)




  - Group's share of policyholder liabilities relating to joint ventures and associate

12,408

-

12,408





 


Half year 2019 $m


Asia

US

Discontinued

UK and Europe

Total

At 1 January 2019

51,705

236,380

51,911

339,996

Reclassification of UK and Europe liabilities as held for distribution

-

-

(51,911)

(51,911)

Net flows:





  Premiums

5,076

9,136

-

14,212

  Surrenders

(1,714)

(8,279)

-

(9,993)

  Maturities/deaths

(567)

(1,744)

-

(2,311)

Net flowsnote

2,795

(887)

-

1,908

Investment-related items and other movements

2,100

21,786

-

23,886

Foreign exchange translation differences

315

-

-

315

At 30 June 2019

56,915

257,279

-

314,194






Comprising:





  - Policyholder liabilities on the consolidated statement of financial position





(excludes $61 million classified as unallocated to a segment)

45,862

257,279

-

303,141

  - Group's share of policyholder liabilities relating to joint ventures and associate

11,053

-

-

11,053

 

Note

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

 

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

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

 


Contract liabilities

Reinsurers' share of insurance contract liabilities

Unallocated

surplus of

with-profits funds


$m

$m

$m

At 1 January 2020

385,678

(13,856)

4,750

Income and expense included in the income statementnote (a)

7,555

(31,066)

742

Other movementsnote (b)

(110)

-

-

Foreign exchange translation differences

(1,199)

4

20

At 30 June 2020

391,924

(44,918)

5,512





At 1 January 2019

521,286

(14,193)

20,180

Removal of opening balances relating to the discontinued UK and Europe operationsnote (c)

(193,020)

2,169

(16,982)

Income and expense included in the income statement

33,996

(880)

655

Other movementsnote (b)

53

-

(116)

Foreign exchange translation differences

618

(15)

10

At 30 June 2019

362,933

(12,919)

3,747

 

Notes

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

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

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

 

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

 

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

 

C3.2   Asia insurance operations

 



Half year 2020 $m



With-profits

 business

Shareholder-backed business

Total 



Unit-linked 

 liabilities 

Other 

business

At 1 January 2020

70,308

28,850

33,412

132,570

Comprising:






- Policyholder liabilities on the consolidated statement of financial position

65,558

23,571

26,814

115,943


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

4,750

-

-

4,750


- Group's share of policyholder liabilities relating to joint ventures and associate note (a)

-

5,279

6,598

11,877

Premiums:






New business

375

909

1,009

2,293


In-force

4,216

1,148

2,089

7,453



4,591

2,057

3,098

9,746

Surrendersnote (b)

(381)

(1,209)

(493)

(2,083)

Maturities/deaths

(676)

(87)

(390)

(1,153)

Net flows

3,534

761

2,215

6,510

Shareholders' transfers post tax

(54)

-

-

(54)

Investment-related items and other movements note (c)

3,387

(2,243)

5,382

6,526

Foreign exchange translation differencesnote (d)

(528)

(794)

(258)

(1,580)

At 30 June 2020

76,647

26,574

40,751

143,972

Comprising:






 - Policyholder liabilities on the consolidated statement of financial position

71,135

21,376

33,541

126,052


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

5,512

-

-

5,512


- Group's share of policyholder liabilities relating to joint ventures and associate note (a)

-

5,198

7,210

12,408









Half year 2019 $m



With-profits 

 business

Shareholder-backed business

Total 



Unit-linked 

 liabilities 

Other 

business

At 1 January 2019

53,703

25,704

26,001

105,408

Comprising:






- Policyholder liabilities on the consolidated statement of financial position

50,505

20,846

20,485

91,836


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

3,198

-

-

3,198


- Group's share of policyholder liabilities relating to joint ventures and associate note (a)

-

4,858

5,516

10,374

Premiums:






New business

769

1,003

1,180

2,952


In-force

3,955

1,206

1,687

6,848



4,724

2,209

2,867

9,800

Surrendersnote (b) 

(268)

(1,385)

(329)

(1,982)

Maturities/deaths

(711)

(89)

(478)

(1,278)

Net flows

3,745

735

2,060

6,540

Shareholders' transfers post-tax

(49)

-

-

(49)

Investment-related items and other movementsnote (c)

5,847

753

1,347

7,947

Foreign exchange translation differencesnote (d)

232

176

139

547

At 30 June 2019

63,478

27,368

29,547

120,393

Comprising:






- Policyholder liabilities on the consolidated statement of financial position

59,731

22,392

23,470

105,593


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

3,747

-

-

3,747


- Group's share of policyholder liabilities relating to joint ventures and associate note (a)

-

4,976

6,077

11,053

Average policyholder liability balancesnote (e)






Half year 2020

68,347

27,712

37,082

133,141


Half year 2019

55,118

26,536

27,774

109,428

 

Notes

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

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

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

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

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

C3.3   US insurance operations

 



Half year 2020 $m



Variable annuity

separate account

liabilities

General

account

and other

 business

Total




note (d)


At 1 January 2020

195,070

74,479

269,549

Premiums

6,544

2,321

8,865

Surrenders

(5,353)

(2,102)

(7,455)

Maturities/deaths

(848)

(945)

(1,793)

Net flowsnote (a)

343

(726)

(383)

Transfers from separate to general account

(1,042)

1,042

-

Investment-related items and other movementsnote (b)

(10,151)

6,640

(3,511)

At 30 June 2020

184,220

81,435

265,655








Half year 2019 $m


Variable annuity

separate account

liabilities

General

account

and other 

 business

Total

At 1 January 2019

163,301

73,079

236,380

Premiums

6,032

3,104

9,136

Surrenders

(6,008)

(2,271)

(8,279)

Maturities/deaths

(782)

(962)

(1,744)

Net flowsnote (a)

(758)

(129)

(887)

Transfers from general to separate account

637

(637)

-

Investment-related items and other movements

21,737

49

21,786

At 30 June 2019

184,917

72,362

257,279

Average policyholder liability balancesnote (c)





Half year 2020

189,645

77,957

267,602


Half year 2019

174,109

72,721

246,830

 

Notes  

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

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

(c)  Average policyholder liabilities have been based on opening and closing balances, adjusted for any acquisitions, disposals and other corporate transactions arising in the period.

(d)  Included within the policyholder liabilities for the general account and other business of $81,435 million at 30 June 2020 are $27.7 billion in respect of the reinsured Jackson's in-force fixed and fixed indexed annuity liabilities to Athene Life Re Ltd, as discussed in note D1.

 

C4  Intangible assets

 

C4.1  Goodwill

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

 


2020 $m


2019 $m


30 Jun


30 Jun

31 Dec

Carrying value at beginning of period

969


2,365

2,365

Reclassification/Demerger of UK and Europe operations

-


(1,731)

(1,731)

Additions in the period

-


-

299

Exchange differences

(27)


15

36

Carrying value at end of period

942


649

969

 

C4.2  Deferred acquisition costs and other intangible assets

 



2020 $m


2019 $m



30 Jun


30 Jun

31 Dec

Deferred acquisition costs and other intangible assets attributable to shareholders

18,538


16,037

17,409

Other intangible assets, including computer software, attributable to with-profits funds

66


74

67

Total of deferred acquisition costs and other intangible assets

18,604


16,111

17,476

 

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

 


2020 $m


2019 $m


30 Jun


30 Jun

31 Dec

Deferred acquisition costs related to insurance contracts as classified under IFRS 4

14,567


13,142

14,206

Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4

34


34

33

Deferred acquisition costs related to insurance and investment contracts

14,601


13,176

14,239

Present value of acquired in-force policies for insurance contracts as classified under

IFRS 4 (PVIF)

34


39

38

Distribution rights and other intangibles

3,903


2,822

3,132

Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders

3,937


2,861

3,170

Total of deferred acquisition costs and other intangible assetsnote (a)

18,538


16,037

17,409

 

Notes

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

 



2020 $m





2019 $m




Deferred acquisition costs


PVIF and other


30 Jun


30 Jun


31 Dec




Asia

US*


  intangibles


Total


Total 


Total 


Balance at beginning of period:

1,999

12,240


3,170


17,409


15,008


15,008


Removal of UK and Europe operations from opening balance

-

-


-


-


(143)


(143)


Additions

261

353


904


1,518


1,469


2,601


Amortisation to the income statement:note (c)













Adjusted operating profit

(157)

(363)


(111)


(631)


(371)


(792)



Non-operating profit (loss)

-

50


(2)


48


616


1,243



(157)

(313)


(113)


(583)


245


451


Disposals and transfers

-

-


(13)


(13)


(6)


(11)


Exchange differences and other movements

(30)

-


(11)


(41)


24


134


Amortisation of DAC related to net unrealised valuation movements on the US insurance operation's available-for-sale securities recognised within other comprehensive income

-

248


-


248


(560)


(631)


Balance at end of period

2,073

12,528


3,937


18,538


16,037


17,409


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

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

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

 

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

 


2020 $m 


2019 $m 


30 Jun


30 Jun

31 Dec

Variable annuity and other business

12,975


12,038

12,935

Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)*

(447)


(622)

(695)

Total DAC for US operations

12,528


11,416

12,240

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

 

 

(c)  Sensitivity of US DAC amortisation charge

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

 

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

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

 

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

 

Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result.

 

In half year 2020, the DAC amortisation charge for adjusted operating profit was determined after including a charge for accelerated amortisation of $(32) million (half year 2019: credit for deceleration: $191 million ; full year 2019: credit for deceleration: $280 million). DAC amortisation for variable annuities is sensitive to separate account performance. The acceleration arising in the first half of 2020 reflects a mechanical increase in the projected separate account return for the next five years under the mean-reversion technique. Under this technique, the projected level of return for each of the next five years is adjusted so that in combination with the actual rates of return for the preceding three years (including the current period) the assumed long-term annual separate account return of 7.4 per cent is realised on average over the entire eight-year period.

 

The application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. At 30 June 2020, it would take approximate movements in separate account values of more than either negative 30 per cent or positive 42 per cent for the mean reversion assumption to move outside the corridor.

 

C5  Borrowings

 

C5.1  Core structural borrowings of shareholder-financed businesses

 




2020 $m


2019 $m




30 Jun


30 Jun

31 Dec

Central operations:





Subordinated and other debt not substituted to M&G plc in 2019:






Subordinated debt:







US$250m 6.75% Notesnote (i)

250


250

250



US$300m 6.5% Notesnote (i)

300


300

300



US$700m 5.25% Notes

700


700

700



US$1,000m 5.25% Notes

997


994

996



US$725m 4.375% Notes

723


721

721



US$750m 4.875% Notes

746


743

744



€20m Medium Term Notes 2023

22


23

22



£435m 6.125% Notes 2031

533


548

571


Senior debt:note (ii)







£300m 6.875% Notes 2023

366


375

392



£250m 5.875% Notes 2029

280


285

298



$1,000m 3.125% Notes 2030note (iii)

982


-

-


Bank loansnote (iv)







$350m Loan 2024

350


-

350



£275m Loan 2022

-


350

-

Total debt not substituted to M&G plc in 2019

6,249


5,289

5,344

Subordinated debt substituted to M&G plc in 2019

-


3,931

-

Total central operations

6,249


9,220

5,344

Jackson US$250m 8.15% Surplus Notes 2027note (v)

250


250

250

Total core structural borrowings of shareholder-financed businesses

6,499


9,470

5,594

 

Notes

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

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

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

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

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

 

C5.2  Operational borrowings

 










2020 $m 


2019 $m 



30 Jun


30 Jun


31 Dec

Borrowings in respect of short-term fixed income securities programmes - commercial paper

506


841


520

Lease liabilities under IFRS 16

318


291


371

Non-recourse borrowings of consolidated investment fundsnote (a)

1,081


694


1,045

Other borrowingsnote (b)

97


292


406

Operational borrowings attributable to shareholder-financed businesses

2,002


2,118


2,342







Lease liabilities under IFRS 16

224


272


259

Other borrowings

19


31


44

Operational borrowings attributable to with-profits businesses

243


303


303








Total operational borrowings

2,245


2,421


2,645

 

Notes

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

(b)  Other borrowings mainly include s enior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson.

 

C6  Sensitivity analysis to key market risks

 

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

 

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

 

C6. 1  Sensitivity to interest rate risk

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

 

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

 

Asia insurance $m


US insurance $m


Decrease of 0.5%

Increase of 1%


Decrease of 0.5%

Increase of 1%

Net effect on shareholders' equity*

(1,203)

64


(90)

(123)

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

 

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

 

Asia insurance $m


US insurance $m


Decrease of 1%

Increase of 1%


Decrease of 1%

Increase of 1%

Net effect on shareholders' equity*

(702)

(718)


20

(553)

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

 

Asia insurance operations

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

 

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

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

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

 

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

 

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

 

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

 

US insurance operations

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

 

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

 

Asset management and other operations

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

 

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

 

C6.   2 Sensitivity to equity and property price risk

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

 

The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices at 30 June 2020 is as follows:

 

Asia insurance $m


US insurance $m


Decrease of 20%

Increase of 10%


Decrease of 20%

Increase of 10%

Net effect on shareholders' equity*

(559)

302


2,174

(484)

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

 

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

 

Asia insurance $m


US insurance $m


Decrease of 20%

Increase of 10%


Decrease of 20%

Increase of 10%

Net effect on shareholders' equity*

(816)

408


762

608

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

 

Asia insurance operations

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

 

US insurance operations

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

 

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

 

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

 

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

 

Asset management and other operations

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

 

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

 

C7  Deferred tax

 

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

 


Half year 2020 $m


Balance

at 1 Jan

Movement in income statement

Movement

through

other comprehensive income and equity

Other movements including foreign currency movements

Balance

at 30 Jun

Deferred tax assets






Unrealised losses or gains on investments

-

-

-

1

1

Balances relating to investment and insurance contracts

32

8

-

(1)

39

Short-term temporary differences

3,889

238

-

1

4,128

Unused tax losses

154

(64)

-

1

91

Total

4,075

182

-

2

4,259







Deferred tax liabilities






Unrealised losses or gains on investments

(877)

19

7

3

(848)

Balances relating to investment and insurance contracts

(1,507)

(110)

-

68

(1,549)

Short-term temporary differences

(2,853)

(28)

-

-

(2,881)

Total

(5,237)

(119)

7

71

(5,278)

 

C8  Share capital, share premium and own shares

 


30 Jun 2020


30 Jun 2019


31 Dec 2019

Issued shares of 5p each

Number of ordinary shares

Share

 capital

Share

premium


Number of ordinary shares

Share

 capital

Share premium


Number of ordinary shares

Share

 capital

Share

premium

fully paid:


$m

$m



$m

$m



$m

$m

Balance at beginning of period

2,601,159,949

172

2,625


2,593,044,409

166

2,502


2,593,044,409

166

2,502

Shares issued under share-based schemes

7,700,498

-

10


6,751,790

-

13


8,115,540

-

22

Impact of change in presentation currency

-

-

-


-

(1)

(3)


-

6

101

Balance at end of period

2,608,860,447

172

2,635


2,599,796,199

165

2,512


2,601,159,949

172

2,625

 

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

 


Number of shares


Share price range


Exercisable


to subscribe for


from

to


by year

30 Jun 2020

2,197,782


1,104p

1,455p


2025

30 Jun 2019

3,808,687


901p

1,455p


2024

31 Dec 2019

3,805,447


1,104p

1,455p


2025

 

Transactions by Prudential plc and its subsidiaries in Prudential plc shares

The Group buys and sells Prudential plc shares ('own shares') either in relation to its employee share schemes or, up until the demerger of its UK and Europe operations (M&G plc) in October 2019, via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of $237 million at 30 June 2020 (30 June 2019: $228 million; 31 December 2019: $183 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2020, 11.5 million (30 June 2019: 9.5 million; 31 December 2019: 8.4 million) Prudential plc shares with a market value of $173 million (30 June 2019: $207 million; 31 December 2019: $161 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 11.5 million which was in June 2020.

 

Within the trusts, shares are notionally allocated by business unit reflecting the employees to which the awards were made.

 

The Company purchased the following number of shares in respect of employee incentive plans:

 


Number of shares

purchased

(in millions)

Cost*

$m

Half year 2020

5.8

75.2

Half year 2019

3.1

64.2

Full year 2019

3.7

73.8

* The cost in US dollars shown has been calculated from the share prices in pounds sterling using the monthly average exchange rate for the month in which those shares were purchased.

 

The Group consolidated a number of authorised investment funds where it was deemed to control these funds under IFRS up until the demerger in October 2019. Some of these funds held shares in Prudential plc and the cost of acquiring these shares was included in the cost of own shares in 2019.

 

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

 

Other than set out above, the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2020 or 2019.

 

D  OTHER INFORMATION

 

D1  Gain (loss) attaching to corporate transactions

 


2020 $m


2019 $m


Half year


Half year

Full year

Gain arising on reinsurance of Jackson's in-force fixed and fixed indexed annuity businessnote (i)

846


-

-

Gain on disposalsnote (ii)

-


270

265

Other transactionsnote (iii)

-


(253)

(407)

Total gain (loss) attaching to corporate transactions

846


17

(142)

 

Notes

(i)  With effect from 1 June 2020, Jackson reinsured substantially all of its in-force portfolio of US fixed and fixed indexed annuities with Athene Life Re Ltd, which resulted in a pre-tax gain of $846 million, after allowing for the write-off of deferred acquisition costs associated with the business reinsured. The transaction excluded Jackson's legacy life and institutional business as well as the REALIC portfolio and group pay-out annuity business reinsured from John Hancock and was collateralised to reduce the exposure to counterparty risk.

 

Under the reinsurance arrangement, Jackson reinsured $27.6 billion liabilities (valued at 1 June 2020) in return for a premium of $28.9 billion net of ceding commission, comprising principally of bonds. The pre-tax gain also includes the realised gains arising on the bonds net of the deferred acquisition costs written off as a result of the transaction. After allowing for tax and the reduction in unrealised gains recorded directly in other comprehensive income, the impact of the reinsurance transaction on IFRS shareholders' equity is a reduction of $(1.1) billion.

(ii)  In 2019, the gain on disposals principally related to profits arising from a 4 per cent reduction in the Group's stake in its associate in India, ICICI Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly-owned subsidiary that provides consumer finance.

(iii)  In 2019, other transactions primarily reflected costs related to the demerger of the Group's UK and Europe operations (M&G plc).

 

D2  Contingencies and related obligations

 

The Group is involved in various litigation and regulatory proceedings. These may from time to time include class actions involving Jackson. While the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their ultimate outcome will not have a material adverse effect on the Group's financial condition, results of operations or cash flows.

 

There have been no material changes to the Group's contingencies and related obligations in the six month ended 30 June 2020.

 

D3  Post balance sheet events

 

First interim ordinary dividend

The 2020 first interim ordinary dividend approved by the Board of Directors after 30 June 2020 is as described in note B6.

 

Completion of the equity investment by Athene into US business

On 17 July 2020, the Group completed the equity investment by Athene into the US business, which was announced in June 2020. Under the transaction, Athene Life Re Ltd invested $500 million in Prudential's US business in return for an 11.1 per cent economic interest for which the voting interest is 9.9 per cent. Athene's investment is in the form of a cash subscription for the issuance of new common equity in the holding company containing Prudential's US businesses, including Jackson National Life Insurance Company and PPM America. If the transaction had completed at 30 June 2020, the effect on the IFRS shareholders' equity would have been a reduction of $550 million. There would have been no impact on profit or loss for the period.

 

D4  Related party transactions

 

There were no transactions with related parties during the six months ended 30 June 2020 which have had a material effect on the results or financial position of the Group.

 

The nature of the related party transactions of the Group has not changed from those described in the Group's consolidated financial statements for the year ended 31 December 2019.

 

Statement of Directors' responsibilities

 

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

 

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

 

-  the condensed consolidated financial statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting', as adopted by the European Union;

 

-  the Half Year Financial Report includes a fair review of information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 2020, and their impact on the condensed consolidated financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place during the six months ended 30 June 2020 and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the Group's consolidated financial statements for the year ended 31 December 2019 that could do so.

 

Prudential plc Board of Directors:

 

Chairman

Paul Manduca

 

Executive Directors

Michael Wells

Mark FitzPatrick CA

James Turner FCA FCSI FRM

 

Independent Non-executive Directors

The Hon. Philip Remnant CBE FCA

Jeremy Anderson CBE

David Law ACA

Kaikhushru Nargolwala FCA

Anthony Nightingale CMG SBS JP

Alice Schroeder

Shriti Vadera

Thomas Watjen

Fields Wicker-Miurin OBE

Amy Yip

 

 

 

11 August 2020

 

 

Independent Review Report to Prudential plc 

Conclusion 

We have been engaged by the Company to review the International Financial Reporting Standards (IFRS) condensed set of financial statements in the Half Year Financial Report for the six months ended 30 June 2020 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes.

 

Based on our review, nothing has come to our attention that causes us to believe that the IFRS condensed set of financial statements in the Half Year Financial Report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union ('EU') and the Disclosure Guidance and Transparency Rules ('the DTR') of the UK's Financial Conduct Authority ('the UK FCA').

 

We have also been engaged by the Company to review the European Embedded Value (EEV) basis supplementary financial information for the six months ended 30 June 2020 which comprises the Summarised Consolidated Income Statement, the Movement in Shareholders' Equity, the Summary Statement of Financial Position and the related explanatory notes.

 

Based on our review, nothing has come to our attention that causes us to believe that the EEV basis supplementary financial information for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with the European Embedded Value Principles issued by the European Insurance CFO Forum in 2016 ("the EEV Principles"), using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information.

 

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the Half Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the IFRS condensed set of financial statements or the EEV basis supplementary financial information.

 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

 

Directors' responsibilities 

The Half Year Financial Report, including the IFRS condensed set of financial statements therein, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half Year Financial Report in accordance with the DTR of the UK FCA. The Directors have accepted responsibility for preparing the EEV basis supplementary financial information in accordance with the EEV Principles and for determining the methodology and assumptions used in the application of those principles.

 

The annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The Directors are responsible for preparing the IFRS condensed set of financial statements included in the Half Year Financial Report in accordance with IAS 34 as adopted by the EU.

 

The EEV basis supplementary financial information has been prepared in accordance with the EEV Principles using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information. The EEV basis supplementary financial information should be read in conjunction with the IFRS condensed set of financial statements .

 

Our responsibility 

Our responsibility is to express to the Company a conclusion on the IFRS condensed set of financial statements in the Half Year Financial Report and the EEV basis supplementary financial information based on our reviews.  

 

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA and also to provide a review conclusion to the Company on the EEV basis supplementary financial information. Our review of the IFRS condensed set of financial statements has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. Our review of the EEV basis supplementary financial information has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. 

 

Philip Smart

For and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

London

E14 5GL

11 August 2020

 

I  Additional financial information

 

I(i)  Group capital position

 

Overview

Prudential plc applies the local capital summation method (LCSM) that has been agreed with the Hong Kong Insurance Authority (IA) to determine group regulatory capital requirements (both minimum and prescribed levels). Ultimately, Prudential will become subject to the Group Wide Supervision (GWS) framework . The timing of finalisation and implementation of the GWS Framework remains uncertain, although it is expected to become effective in early 2021 . The Legislative Council of the Hong Kong Special Administrative Region approved the enabling primary legislation in July and further implementation guidance is expected in the second half of the year. Subject to that guidance we currently expect the GWS methodology to be largely consistent to that applied under LCSM. Further detail on the LCSM is included in the basis of preparation section below.

 

For regulated insurance entities, the a vailable and required capital included in the LCSM measure for Hong Kong IA Group regulatory purposes are based on the local solvency regime applicable in each jurisdiction. At 30 June 2020, the Prudential Group's total surplus of available capital over the regulatory Group Minimum Capital Requirement (GMCR), calculated using this LCSM was $25.5 billion, before allowing for the payment of the 2020 first interim ordinary dividend.

 

The Group holds material participating business in Hong Kong, Singapore and Malaysia. If the available capital and minimum capital requirement attributed to this policyholder business are excluded, then the Prudential Group shareholder LCSM surplus of available capital over the regulatory GMCR at 30 June 2020 was $12.4 billion, before allowing for the payment of the 2020 first interim ordinary dividend.

 

Estimated Group LCSM capital position based on Group Minimum Capital Requirement (GMCR) 

 


30 Jun 2020


31 Dec 2019


Total

Less

policyholder

Shareholder


Total

Less

policyholder

Shareholder

Available capital ($bn)

37.0

(19.3)

17.7


33.1

(19.1)

14.0

Group Minimum Capital Requirement ($bn)

11.5

(6.2)

5.3


9.5

(5.0)

4.5

LCSM surplus (over GMCR) ($bn)

25.5

(13.1)

12.4


23.6

(14.1)

9.5

LCSM ratio (over GMCR) (%)

323%


334%


348%


309%

 

The shareholder LCSM capital position by segment is presented below at 30 June 2020 and 31 December 2019 for comparison:

 





Shareholder

30 Jun 2020 ($bn)

Total

Asia

Less

policyholder


Asia

US

Unallocated

 to a segment

Group

total

Available capital

29.0

(19.3)


9.7

8.2

(0.2)

17.7

Group Minimum Capital Requirement

9.4

(6.2)


3.2

2.1

-

5.3

LCSM surplus (over GMCR)

19.6

(13.1)


6.5

6.1

(0.2)

12.4













Shareholder

31 Dec 2019 ($bn)

Total

Asia

Less

policyholder


Asia

US

Unallocated

 to a segment

Group

total

Available capital

26.8

(19.1)


7.7

5.3

1.0

14.0

Group Minimum Capital Requirement

8.0

(5.0)


3.0

1.5

-

4.5

LCSM surplus (over GMCR)

18.8

(14.1)


4.7

3.8

1.0

9.5

 

The 30 June 2020 Jackson local statutory results reflect the reinsurance of an in-force portfolio of Jackson's US fixed and fixed indexed annuity liabilities to Athene Life Re Ltd the effect of which is shown in the table below. Athene's $500 million equity investment in Prudential's US business in return for an 11.1 per cent economic interest completed in July 2020 and is not reflected in the 30 June 2020 results above. If this transaction had been completed at 30 June 2020 the Group LCSM shareholder surplus (i.e. after allowing for the minority interest) would be $0.2 billion lower with the cover ratio increasing by 6 percentage points.

 

The 30 June 2020 Group LCSM position includes the impact of a change in the calculation of the valuation interest rate (VIR) used to value long term insurance liabilities in Hong Kong, which has been formally granted by the regulator.

 

Sensitivity analysis

The estimated sensitivity of the Group shareholder LCSM capital position (based on GMCR) to significant changes in market conditions is as follows:



30 Jun 2020


31 Dec 2019

Impact of market sensitivities

LCSM surplus

($bn)

LCSM ratio

(%)


LCSM surplus

($bn)

LCSM ratio

(%)

Base position

12.4

334%


9.5

309%

Impact of:







10% instantaneous increase in equity markets

(0.7)

(3)%


n/a

n/a


20% instantaneous fall in equity markets

(0.2)

(5)%


1.5

(9)%


40% fall in equity marketsnote (1)

(1.2)

(19)%


(0.2)

(39)%


50 basis points reduction in interest rates

(0.2)

(13)%


(0.2)

(17)%


100 basis points increase in interest rates

(0.1)

24%


(1.3)

(19)%


100 basis points increase in credit spreadsnote (2)

0.2

12%


(1.6)

(36)%

 

Notes

(1)  Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period.

(2)  At 31 December 2019 the US RBC solvency position was included using a stress of 10 times expected credit defaults rather than the 100 basis points increase in credit spreads applied at 30 June 2020 .

 

The sensitivity results above assume instantaneous market movements and reflect all consequential impacts as at the valuation dates. In particular, where relevant, the 30 June 2020 sensitivities reflect potential tax benefits that would arise under the relief provided by the CARES Act in the US for 2020. An exception to the instantaneous market movements assumed is the -40 per cent equity sensitivity where for Jackson an instantaneous 20 per cent market fall is assumed to be followed by a further market fall of 20 per cent over a four-week period with dynamic hedges assumed to be rebalanced over the period. Aside from this assumed dynamic hedge rebalancing for Jackson in the -40 per cent equity sensitivity, the sensitivity results only allow for limited management actions such as changes to future policyholder bonuses. If such economic conditions persisted, the financial impacts may differ to the instantaneous impacts shown above. In this case management could also take additional actions to help mitigate the impact of these stresses. These actions include, but are not limited to, rebalancing investment portfolios, further market risk hedging, increased use of reinsurance, repricing of in-force benefits, changes to new business pricing and the mix of new business being sold.

 

Analysis of movement in Group shareholder LCSM surplus

A summary of the estimated movement in the Group shareholder LCSM surplus (based on GMCR) from $9.5 billion at 31 December 2019 to $12.4 billion at 30 June 2020 is set out in the table below.

 



2020 ($bn)

2019 ($bn)



Half year

Full year

Balance at beginning of period

9.5

9.7

Operating:




Operating capital generation from the in-force business

1.2

2.5


Investment in new business

(0.2)

(0.6)

Operating capital generation

1.0

1.9

Non-operating and other capital movements:




Non-operating experience (including market movements and modelling changes)

0.4

(0.6)


Regulatory changes

2.2

0.1


Reinsurance of US fixed and fixed indexed annuity in-force portfolio to Athene

0.8

-


Other corporate activities (excluding demerger items)

(0.8)

(0.8)


Demerger costs

-

(0.4)


Subordinated debt redemption

-

(0.5)


Demerger related impacts

-

1.0

Non-operating results

2.6

(1.2)

Remittances from discontinued operations (M&G plc)

-

0.7

External dividends

(0.7)

(1.6)

Net dividend impact

(0.7)

(0.9)





Net movement in LCSM surplus

2.9

(0.2)

Balance at end of period

12.4

9.5

 

The estimated movement in the Group shareholder LCSM surplus over first half of 2020 is driven by:

 

Operating capital generation of $1.0 billion: generated by expected return on in-force business net of strain on new business written in 2020;

Non-operating experience of $0.4 billion: this reflects the impact of falling interest rates and equity markets on the level of policyholder reserves and required capital net of the favourable impact of mitigating hedging measures together with other management actions, including a $1.1 billion benefit from the change to the Hong Kong valuation interest rate described earlier, and US modelling refinements;

Regulatory changes of $2.2 billion: reflecting the benefit from the new Singapore risk-based capital framework (RBC2) effective at 31 March 2020;

Reinsurance of US fixed and fixed indexed annuity in-force portfolio to Athene of $0.8 billion: the impact of the transaction, which was effective at 1 June 2020, was an increase to LCSM surplus comprising of the ceding commission received and required capital released less tax and adverse consequential effects on the US's available capital. This corresponds to a 25 percentage point increase in the Group LCSM cover ratio and is before the effect of the $500 million equity investment by Athene discussed above; 

Other Corporate activities (excluding demerger items) of $(0.8) billion: this is the effect on LCSM surplus of corporate transactions in the period, which in 2020 comprised the strategic bancassurance partnership with TMB in Thailand, and;

Net dividend impact of $(0.7) billion: this is the payment of the 2019 second interim dividend paid in May 2020.

 

Reconciliation of Group shareholder LCSM surplus to EEV free surplus (excluding intangibles)

 


30 Jun 2020 $bn


31 Dec 2019 $bn


Asia

US

Unallocated to a segment

Group total


Group total

Estimated Group shareholder LCSM surplus (over GMCR)

6.5

6.1

(0.2)

12.4


9.5

Increase required capital for EEV free surplusnote (1)

(0.7)

(3.2)

-

(3.9)


(2.8)

Adjust surplus assets and core structural borrowings to market valuenote (2)

0.3

0.2

(0.3)

0.2


0.3

Add back inadmissible assetsnote (3)

0.2

0.1

-

0.3


0.2

Deductions applied to EEV free surplusnote (4)

(2.8)

-

-

(2.8)


(0.9)

Other

(0.1)

0.2

0.1

0.2


0.3

EEV free surplus excluding intangibles*

3.4

3.4

(0.4)

6.4


6.6

* As per the "Free surplus excluding distribution rights and other intangibles" from note 10 of the Group's EEV basis results.

 

Notes

(1)  Required capital under EEV is set at least equal to local statutory notification requirements for Asia and so can differ from the minimum capital requirement. Jackson required capital is set at 250 per cent of the risk-based capital (RBC) required by the NAIC at the Company Action Level (CAL). This is higher than the solo legal entity statutory minimum capital requirement of 100 per cent CAL that is included in the LCSM surplus (over GMCR).

(2)  The EEV Principles require surplus assets to be included at fair value and central core senior debt is held at market value. Within LCSM surplus, some local regulatory regimes value certain assets at cost and core senior debt is held at amortised cost.

(3)  LCSM restricts the valuation of certain sundry non-intangible assets. In most cases these assets are considered fully recognisable in free surplus. As an exception to this, both LCSM surplus and EEV free surplus restrict the deferred tax asset held by Jackson to the level allowed to be admitted by the local regulator in local statutory available capital.

(4)  Deductions applied to EEV free surplus primarily include: the impact of reporting EEV free surplus for Singapore based on the Tier 1 requirements under the RBC2 framework, which removes certain negative reserves permitted to be recognised in the full RBC 2 regulatory position used for LCSM and applying the embedded value reporting approach issued by the China Association of Actuaries (CAA) within EEV free surplus as compared to the C-ROSS surplus reported for local regulatory purposes (predominantly arising from the requirement under the CAA embedded value methodology to establish a deferred profit liability within EEV net worth).

 

Reconciliation of Group IFRS shareholders' equity to shareholder LCSM available capital position

 


30 Jun 2020

 $bn

31 Dec 2019

 $bn

Group IFRS shareholders' equity

19.1

19.5

Remove DAC, goodwill and intangibles recognised on the IFRS statement of financial position

(19.3)

(18.2)

Add subordinated debt at IFRS book valuenote (1)

4.5

4.6

Valuation differencesnote (2)

13.5

8.6

Other

(0.1)

(0.5)

Estimated Group shareholder LCSM available capital

17.7

14.0

 

Notes

(1)  Subordinated debt is treated as available capital under LCSM but as a liability under IFRS.

(2)  Valuation differences reflect differences in the basis of valuing assets and liabilities between IFRS and local statutory valuation rules, including deductions for inadmissible assets. Material differences arise in Jackson where IFRS variable annuity guarantee reserves are valued on a fair value basis compared to local statutory reserves which reflect long term historic rates. Further, local US statutory reserves are reduced by an expense allowance linked to surrender charges, whereas IFRS makes no such allowance but instead defers acquisition costs on the balance sheet as a separate asset (which is not recognised on the statutory balance sheet). Other material differences include in Singapore where the local available capital position under RBC2 permits the recognition of certain negative reserves in the local statutory position that are not recognised under IFRS.

 

Basis of preparation

In advance of the GWS framework coming into force, Prudential applies the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). The summation of local statutory capital requirements across the Group is used to determine group regulatory capital requirements, with no allowance for diversification between business operations. The Group available capital is determined by the summation of available capital across local solvency regimes for regulated entities and IFRS net assets (with adjustments described below) for non-regulated entities.

 

In determining the LCSM available capital and required capital the following principles have been applied:

 

-  For regulated insurance entities, a vailable and required capital are based on the local solvency regime applicable in each jurisdiction, with minimum required capital set at the solo legal entity statutory minimum capital requirements. The treatment of participating funds is consistent with the local basis;

For the US insurance entities, available and required capital are based on the local US RBC framework set by the NAIC, with minimum required capital set at 100 per cent of the CAL RBC;

-  For asset management operations and other regulated entities, the shareholder capital position is derived based on the sectoral basis applicable in each jurisdiction, with minimum required capital based on the solo legal entity statutory minimum capital requirement;

-  For non-regulated entities, the available capital is based on IFRS net assets after deducting intangible assets. No required capital is held in respect of unregulated entities;

-  Investments in subsidiaries, joint ventures and associates (including, if any, loans that are recognised as capital on the receiving entity's balance sheet) are eliminated from the relevant holding company to prevent the double counting of available capital; and

-  The Hong Kong IA has agreed that specific bonds (being those subordinated debt instruments held by Prudential plc at the date of demerger) can be included as part of the Group's capital resources for the purposes of satisfying group minimum and prescribed capital requirements. Senior debt instruments held by Prudential plc have not been included as part of the Group capital resources and are treated as a liability in the LCSM results presented above (this is equivalent to a 27 per cent reduction in the Group shareholder LCSM coverage ratio (over GMCR)). Grandfathering provisions under the GWS framework remain subject to further consultation and the Hong Kong legislative process in due course.

 

I(ii)  Funds under management

 

For Prudential's asset management businesses, funds managed on behalf of third parties are not recorded on the statement of financial position. They are, however, a driver of profitability. Prudential therefore analyses the movement in the funds under management each period, focusing on those which are external to the Group and those primarily held by the Group's insurance businesses. The table below analyses, by segment, the funds of the Group held in the statement of financial position and the external funds that are managed by Prudential's asset management businesses.

 



2020 $bn


2019 $bn



30 Jun


30 Jun*

31 Dec

Asia operations:






Internal funds

149.7


127.9

141.9


Eastspring Investments external funds, including M&G plc (as analysed in note I(v))

98.1


110.1

124.7



247.8


238.0

266.6

US operations - internal funds

242.9


261.3

273.4

Other operations

3.4


5.0

3.9

Total Group funds under management

494.1


504.3

543.9

* The half year 2019 comparatives have been adjusted to include cash and cash equivalents and to exclude assets held that are attributable to external unit holders of consolidated collective investment schemes to align to the current period's presentation since full year 2019.  In addition, funds managed on behalf of M&G plc are presented as external rather than internal funds under management to align to the presentation since the demerger in October 2019.  

 

Note

Total Group funds under management comprise:

 



2020 $bn


2019 $bn



30 Jun


30 Jun

31 Dec

Total investments and cash and cash equivalents held by the continuing operations on the consolidated statement of financial position

388.4


389.2

412.6

External funds of Eastspring Investments, including M&G plc

98.1


110.1

124.7

Internally managed funds held in joint ventures and associate, excluding assets attributable to external unit holders of the consolidated collective investment schemes and other adjustments

7.6


5.0

6.6

Total Group funds under management

494.1


504.3

543.9

 

I(iii)  Holding company cash flow

 

The holding company cash flow describes the movement in the cash and short-term investments of the centrally managed group holding companies and differs from the IFRS cash flow statement, which includes all cash flows in the year including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group's central liquidity.

 



2020 $m


2019 $m



Half year


Half year

Full year





note (f)

note (f)

Net cash remitted by business units: note (a)





From continuing operations






Asianote (b)

400


578

950


Jacksonnote (b)

-


509

509


Other operations

32


6

6


Total continuing operations

432


1,093

1,465

From discontinued UK and Europe operations

-


453

684

Net cash remittances by business units

432


1,546

2,149

Net interest paidnote (c)

(147)


(283)

(527)

Tax received

94


120

265

Corporate activities

(119)


(125)

(260)

Total central outflows

(172)


(288)

(522)

Holding company cash flow before dividends and other movements

260


1,258

1,627

Dividends paid

(674)


(1,108)

(1,634)

Operating holding company cash flow after dividends but before other movements

(414)


150

(7)

Other movements






Issuance and redemption of debt for continuing operations

982


(504)

(504)


Other corporate activities relating to continuing operationsnote (d)

(762)


(330)

(338)


Transactions to effect the demerger, including debt substitutionnote (e)

-


(237)

(146)


Demerger costs

(17)


(211)

(424)


Early settlement of UK-inflation-linked derivative liability

-


-

(587)

Total other movements

203


(1,282)

(1,999)

Total holding company cash flow

(211)


(1,132)

(2,006)

Cash and short-term investments at beginning of period

2,207


4,121

4,121

Foreign exchange movements

(89)


21

92

Cash and short-term investments at end of period

1,907


3,010

2,207

 

Notes

(a)  Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation.  

(b)  Significant cash remittances from business units were hedged into sterling using forward contracts during 2019 and these contracts determine the amount of sterling recorded in the holding company cash flow for the relevant remittances. The implicit rates may therefore differ from that applied to present the holding company cash flow in US dollars (see note (f)). The dividend paid by Jackson in the US in US dollars in 2019 was $525 million.

(c)  The net interest paid in half year 2019 included $115 million (full year 2019: $231 million) on debt substituted to M&G plc shortly prior to its demerger.

(d)  Other corporate activities relating to continuing operations primarily reflect payments made for bancassurance arrangements including those with UOB and TMB Bank.

(e)  Transactions to effect the demerger represented the effects on holding company cash flow of steps taken in 2019 as part of the preparation for the demerger of the UK and Europe operations (M&G plc). These included the transfer of subsidiaries, settlement of intercompany loans, receipt of the pre-demerger dividend and the substitution of M&G plc as issuer of certain sub-ordinated debt in place of Prudential plc. Further information is provided in note I(iii) in additional financial information for the year ended 31 December 2019.

(f)  At 31 December 2019, the Group changed its basis of managing central cash-holdings from sterling to US dollars. Accordingly, the half year 2020 holding company cash flow statement presented above has been prepared directly in US dollars and half year 2019 amounts are re-presented from those previously published to reflect the change. Half year and full year 2019 comparatives were prepared in sterling, reflecting the management of holding company cash at that time. Cash movements in the period have been converted from sterling into US dollars by using the month-end sterling to US dollar exchange rate for the month in which the transaction occurred. Cash balances at the start and end of the period were translated from sterling to US dollars using the spot rates at the beginning and end of the period respectively. As an exception to the above, external dividends paid during 2019 have been translated at the exchange rate relevant to the day they were paid to ensure consistency with the financial statements.

 

I(iv)  Analysis of adjusted operating profit by driver

 

This schedule classifies the Group's adjusted operating profit from continuing operations into the underlying drivers using the following categories:

 

-   Spread income represents the difference between net investment income and amounts credited to certain policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets.

-   Fee income represents profit driven by net investment performance, being fees that vary with the size of the underlying policyholder funds, net of investment management expenses.

-   With-profits represents the pre-tax shareholders' transfer from the with-profits business for the period .

-   Insurance margin primarily represents profit derived from the insurance risks of mortality and morbidity.

-   Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses (see below).

-   Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. These exclude items such as restructuring and IFRS 17 implementation costs, which are not included in the segment profit, as well as items that are more appropriately included in other categories (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).

-   DAC adjustments comprise DAC amortisation for the period , excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business written in the period.

 

(a)  Margin analysis

The following analysis expresses certain of the Group's sources of adjusted operating profit as a margin of policyholder liabilities or other relevant drivers.

 



Half year 2020



Asia 

US 

Group

total

Average

liability

Margin



$m

$m

$m

$m

bps



note (b)

note (c)




Spread income

146

273

419

93,964

89

Fee income

135

1,596

1,731

208,714

166

With-profits

58

-

58

68,347

17

Insurance margin

1,287

708

1,995



Margin on revenues

1,345


1,345



Expenses:







Acquisition costs

(864)

(484)

(1,348)

2,644

(51)%


Administration expenses

(711)

(853)

(1,564)

310,524

(101)


DAC adjustments

117

(10)

107



Expected return on shareholder assets

95

26

121





1,608

1,256

2,864



Share of related tax charges from joint ventures and associate

(18)

-

(18)



Adjusted operating profit - long-term business

1,590

1,256

2,846



Adjusted operating profit - asset management

143

10

153



Total segment adjusted operating profit

1,733

1,266

2,999



 



Half year 2019 AER



Asia 

US 

Group

total

Average

liability

Margin



$m

$m

$m

$m

bps



note (b)

note (c)




Spread income

154

298

452

83,861

108

Fee income

144

1,601

1,745

203,145

172

With-profits

53

-

53

55,118

19

Insurance margin

1,103

711

1,814



Margin on revenues

1,454


1,454



Expenses:







Acquisition costs

(1,038)

(494)

(1,532)

3,635

(42)%


Administration expenses

(708)

(825)

(1,533)

290,416

(106)


DAC adjustments

170

247

417



Expected return on shareholder assets

90

18

108





1,422

1,556

2,978



Share of related tax charges from joint ventures and associate

(5)

-

(5)



Adjusted operating profit - long-term business

1,417

1,556

2,973



Adjusted operating profit - asset management

133

16

149



Total segment adjusted operating profit

1,550

1,572

3,122



 



Half year 2019 CER



Asia 

US 

Group

total

Average

liability

Margin



$m

$m

$m

$m

bps



note (b)

note (c)


note (1)

 note (2)

Spread income

150

298

448

84,020

107

Fee income

140

1,601

1,741

202,997

172

With-profits

52

-

52

55,170

19

Insurance margin

1,086

711

1,797



Margin on revenues

1,440

-

1,440



Expenses:







Acquisition costs

(1,029)

(494)

(1,523)

3,615

(42)%


Administration expenses

(695)

(825)

(1,520)

290,426

(105)


DAC adjustments

169

247

416



Expected return on shareholder assets

88

18

106





1,401

1,556

2,957



Share of related tax charges from joint ventures and associate

(5)

-

(5)



Adjusted operating profit - long-term business

1,396

1,556

2,952



Adjusted operating profit - asset management

130

16

146



Total segment adjusted operating profit

1,526

1,572

3,098



 

(b)  Margin analysis - Asia

 



Half year 2020


Half year 2019 AER


Half year 2019 CERnote (6)




Average 




Average




Average




Profit

liability

Margin


Profit

liability

Margin


Profit

liability

Margin



$m

$m

bps


$m

$m

bps 


$m

$m

bps



note (1)

note (2)



note (1)

note (2)



note (1)

note (2)

Spread income

146

37,082

79


154

27,774

111


150

27,933

107

Fee income

135

27,712

97


144

26,536

109


140

26,388

106

With-profits

58

68,347

17


53

55,118

19


52

55,170

19

Insurance margin

1,287




1,103




1,086



Margin on revenues

1,345




1,454




1,440



Expenses:













Acquisition costsnote (3)

(864)

1,665

(52)%


(1,038)

2,560

(41)%


(1,029)

2,540

(41)%


Administration expenses

(711)

64,794

(219)


(708)

54,310

(261)


(695)

54,320

(256)


DAC adjustmentsnote (4)

117




170




169



Expected return on shareholder assets

95




90




88





1,608




1,422




1,401



Share of related tax charges from joint ventures and associatenote (5)

(18)




(5)




(5)



Adjusted operating profit - long-term business

1,590




1,417




1,396



Adjusted operating profit - asset management

(Eastspring Investments)

143




133




130



Total Asia adjusted operating profit

1,733




1,550




1,526



 

Notes

(1)  For Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period.

(2)  Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus.

(3)  The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.

(4)  The DAC adjustments contain a credit of $13 million in respect of joint ventures and associate in half year 2020 (half year 2019: credit of $32 million on an AER basis).

(5)  Under IFRS, the Group's share of results from its investments in joint ventures and associate accounted for using the equity method is included in the Group's profit before tax on a net of related tax basis. These tax charges are shown separately in the analysis of Asia operating profit drivers in order for the contribution from the joint ventures and associate to be included in the margin analysis on a consistent basis as the rest of the Asia's operations.

(6)  The half year 2019 comparative information has been presented at both AER and CER to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current year foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia, CER average liabilities have been translated using current period opening and closing exchange rates.

 

(c)  Margin analysis - US

 



Half year 2020


Half year 2019




Average




Average




Profit

liability

Margin


Profit

liability

Margin



$m

$m

bps


$m

$m

bps



note (1)

note (2)



note (1)

note (2)

Spread income

273

56,882

96


298

56,087

106

Fee income

1,596

181,002

176


1,601

176,609

181

Insurance margin

708

-

-


711

-

-

Expenses:









Acquisition costsnote (3)

(484)

979

(49)%


(494)

1,075

(46)%


Administration expenses

(853)

245,730

(69)


(825)

236,106

(70)


DAC adjustments

(10)




247



Expected return on shareholder assets

26




18



Adjusted operating profit - long-term business

1,256




1,556



Adjusted operating profit - asset management

10




16



Total US adjusted operating profit

1,266




1,572



 

Notes

(1)  The calculation of average liabilities for the US is generally derived from month-end balances throughout the period as opposed to opening and closing balances only. The average liabilities for fee income in the US have been calculated using daily balances instead of month-end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income is attached and exclude the liabilities reinsured to Athene in the June 2020 month-end balance. Average liabilities used to calculate the administration expenses margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson and the liabilities reinsured to Athene in the June 2020 month-end balance.

(2)  Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities.

(3)  The ratio of acquisition costs is calculated as a percentage of APE sales relating to shareholder-backed business.

 

Analysis of adjusted operating profit for US insurance operations before and after acquisition costs and DAC adjustments

 



Half year 2020 $m


Half year 2019 $m



Before acquisition costs and DAC adjustments

Acquisition costs

After acquisition costs and DAC adjustments


Before acquisition costs and DAC adjustments

Acquisition costs

After acquisition costs and DAC adjustments




Incurred

Deferred




Incurred

Deferred


Total adjusted operating profit before acquisition costs and DAC adjustments

1,750

-

-

1,750


1,803

-

-

1,803

Less investment in new business

-

(484)

353

(131)


-

(494)

369

(125)

Other DAC adjustments - amortisation of previously deferred acquisition costs:











Normal

-

-

(331)

(331)


-

-

(313)

(313)


Deceleration (acceleration)

-

-

(32)

(32)


-

-

191

191

Total US adjusted operating profit - long-term business

1,750

(484)

(10)

1,256


1,803

(494)

247

1,556

 

I(v)  Asia operations - analysis of adjusted operating profit by business unit

 

(a)  Analysis of adjusted operating profit by business unit

Adjusted operating profit for Asia operations are analysed below. The table below presents the half year 2019 results on both AER and CER bases to eliminate the impact of exchange translation.

 



 2020 $m


 2019 $m


Half year 2020 vs half year 2019 %


 2019 $m



 

Half year


Half year

AER

Half year

CER


AER

CER


Full year

AER

China JV

101


89

86


13%

17%


219

Hong Kong

412


337

340


22%

21%


734

Indonesia

249


258

251


(3)%

(1)%


540

Malaysia

158


141

136


12%

16%


276

Philippines

40


34

34


18%

18%


73

Singapore

262


228

219


15%

20%


493

Taiwan

37


31

32


19%

16%


74

Thailand

75


62

63


21%

19%


170

Vietnam

125


108

108


16%

16%


237

Other

45


38

39


18%

15%


70

Non-recurrent items*

104


96

93


8%

12%


138

Total insurance operations

1,608


1,422

1,401


13%

15%


3,024

Share of related tax charges from joint ventures and associate

(18)


(5)

(5)


260%

260%


(31)

Total long-term business

1,590


1,417

1,396


12%

14%


2,993

Asset management (Eastspring Investments)

143


133

130


8%

10%


283

Total Asia

1,733


1,550

1,526


12%

14%


3,276

* In half year 2020, the adjusted operating profit for Asia insurance operations included a net credit of $104 million (half year 2019: $96 million; full year 2019: $138 million) representing a small number of items that are not expected to reoccur.

 

(b)  Analysis of Eastspring Investments adjusted operating profits

 


2020 $m


2019 $m


Half year


Half year

Full year

Operating income before performance-related feesnote (1)

313


309

636

Performance-related fees

2


1

12

Operating income (net of commission)note (2)

315


310

648

Operating expensenote (2)

(157)


(157)

(329)

Group's share of tax on joint ventures' operating profit

(15)


(20)

(36)

Adjusted operating profit

143


133

283

Average funds managed by Eastspring Investments

$224.1bn


$206.7bn

$214.0bn

Margin based on operating income*

28bps


30bps

30bps

Cost/income ratio

50%


51%

52%






 

Notes

(1)  Operating income before performance-related fees for Eastspring Investments can be further analysed as follows:

 










 

Retail

Margin*

Institutional

Margin*

Total

Margin*



$m

bps 

$m

bps 

$m

bps 


30 Jun 2020

188

50

125

17

313

28


30 Jun 2019

191

51

118

18

309

30


31 Dec 2019

392

52

244

18

636

30

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

  Cost/income ratio represents cost as a percentage of operating income before performance-related fees.

  Institutional includes internal funds.

(2)  Operating income and expense include the Group's share of contribution from joint ventures. In the condensed consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item.

 

(c)  Eastspring Investments total funds under management

Eastspring Investments, the Group's asset management business in Asia, manages funds from external parties and also funds for the Group's insurance operations. The table below analyses the total funds managed and Eastspring Investments.

 



2020 $bn


2019 $bn



30 Jun


30 Jun*

31 Dec

External funds under management, excluding funds managed on behalf of M&G plcnote (1)






Retail


62.4

73.7


Institutional


9.4

11.0


Money market funds (MMF)

13.0


13.4

13.3



82.4


85.2

98.0

Funds managed on behalf of M&G plcnote (2)

15.7


24.9

26.7







External funds under management including M&G plc

98.1


110.1

124.7

Internal funds under management

121.6


105.6

116.4

Total funds under managementnote (3)

219.7


215.7

241.1

* The half year 2019 comparatives have been re-presented to show the $24.9 billion of funds managed on behalf of M&G plc as external rather than internal funds under management to align to the presentation since the demerger in October 2019.

 

Notes

(1)  External funds under management, excluding those managed on behalf of M&G plc - analysis of movements

 




2020 $m


2019 $m




30 Jun


30 Jun

31 Dec


At beginning of period

98,005


77,762

77,762


Market gross inflows

69,839


154,998

282,699


Redemptions

(78,172)


(152,306)

(276,215)


Market and other movements

(7,348)


4,770

13,759


At end of period*

82,324


85,224

98,005

* The analysis of movements above includes $13,021 million relating to Asia Money Market Funds at 30 June 2020 (30 June 2019: $13,352 million; 31 December 2019: $13,337 million).   Investment flows for half year 2020 include Eastspring Money Market Funds gross inflows of $48,234 million (half year 2019: gross inflows of $133,709 million; full year 2019: $236,603 million) and net inflows of $29 million (half year 2019: net outflows of $(1,264) million; full year 2019: net outflows of $(1,856) million).

 

(2)  Funds managed on behalf of M&G plc - analysis of movements

 



2020 $m



30 Jun


At beginning of period

26,717


Net flows

(7,258)


Other

(3,717)


At end of period

15,742

 

(3)  Total funds under management - analysis by asset class

 



30 Jun 2020


30 Jun 2019


31 Dec 2019



$bn

% of total


$bn

% of total


$bn

% of total


Equity

86.3

39%


98.8

46%


107.0

44%


Fixed income

115.7

53%


99.3

46%


116.2

48%


Alternatives

2.9

1%


3.1

1%


3.4

2%


Money Market Funds

14.8

7%


14.5

7%


14.5

6%


Total funds under management

219.7

100%


215.7

100%


241.1

100%

 

II  Calculation of alternative performance measures

The half year 2020 report uses alternative performance measures (APMs) to provide more relevant explanations of the Group's financial position and performance. This section sets out explanations for each APM and reconciliations to relevant IFRS balances.

 

II(i)  Reconciliation of adjusted operating profit to profit before tax

 

Adjusted operating profit presents the operating performance of the business. This measurement basis adjusts for the following items within total IFRS profit before tax:

 

-  Short-term fluctuations in investment returns on shareholder-backed business;

-  Amortisation of acquisition accounting adjustments arising on the purchase of business; and

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

 

More details on how adjusted operating profit is determined are included in note B1.3 of the Group IFRS basis results. A full reconciliation to profit after tax is given in note B1.1.

 

II(ii)  Calculation of IFRS gearing ratio

 

IFRS gearing ratio is calculated as net core structural borrowings of shareholder-financed businesses divided by closing IFRS shareholders' equity plus net core structural borrowings.

 


2020 $m


2019 $m


30 Jun


30 Jun

31 Dec

Core structural borrowings of shareholder-financed businesses

6,499


9,470

5,594

Less holding company cash and short-term investments

(1,907)


(3,010)

(2,207)

Net core structural borrowings of shareholder-financed businesses

4,592


6,460

3,387

Closing shareholders' equity

19,110


25,037

19,477

Closing shareholders' equity plus net core structural borrowings

23,702


31,497

22,864

IFRS gearing ratio

19%


21%

15%

 

II(iii) Return on IFRS shareholders' equity

As stated in the 2019 Annual Report, the Group has introduced a new return on equity performance measure for the Group's 2020 Prudential Long-Term Incentive Plan (PLTIP) awards alongside other metrics. This measure is calculated as adjusted operating profit after tax, and net of non-controlling interests, divided by average shareholders' equity. Accordingly, the calculation of the return on IFRS shareholders' equity has been aligned at half year 2020 and is now based on average shareholders' equity.

 

In terms of comparatives, the significant changes in Group's shareholders' equity as a result of the demerger of M&G plc in October 2019 results in Group half year 2019 comparatives that are not meaningful. Asia and US half year 2019 returns on shareholders' equity have been re-presented on average shareholders' equity basis. The full year 2019 returns disclosed in the table below are consistent with those previously published and use profit from continuing operations and closing shareholders' equity. As supplementary information, full year 2019 Asia and US returns on shareholders' equity have also been presented on an average shareholders' equity basis.

 

Detailed reconciliation of adjusted operating profit to IFRS profit before tax for the Group is shown in note B1.1 to the Group IFRS basis results.

 


Half year 2020* $m


Half year 2019* $m


Asia

US

Other

Group


Asia

US

Adjusted operating profit

1,733

1,266

(458)

2,541


1,550

1,572

Tax on adjusted operating profit

(260)

(195)

(12)

(467)


(217)

(263)

Operating profit attributable to non-controlling interests

(22)

-

-

(22)


(5)

-

Adjusted operating profit, net of tax and non-controlling interests

1,451

1,071

(470)

2,052


1,328

1,309

Average shareholders' equity

11,198

8,942

(846)

19,294


8,951

7,879

Operating return on average shareholders' equity (%)

26%

24%

n/a

21%


30%

33%

* Half year profits are annualised by multiplying by two.

  Given the significant changes of Group shareholders' equity as a result of the demerger of the UK and Europe operations in October 2019, it is not meaningful to compare the half year 2020 and half year 2019 returns on shareholders' equity at a Group level. The half year 2019 comparatives have therefore excluded the presentation of a Group return on shareholders' equity. Additionally, the half year 2019 comparatives for Asia and US operations have been re-presented from those previously published to reflect the use of average rather than opening shareholders' equity to be on a comparable basis with the half year 2020 calculation.

 


Full year 2019 $m

Continuing operations

Asia

US

Other

Group

Add back

demerger-

related

items*

Adjusted

Group

(excluding

demerger-

related

items)

Adjusted operating profit

3,276

3,070

(1,036)

5,310

179

5,489

Tax on adjusted operating profit

(436)

(437)

100

(773)

(34)

(807)

Operating profit attributable to non-controlling interests

(6)

-

(3)

(9)

-

(9)

Adjusted operating profit, net of tax and non-controlling interests

2,834

2,633

(939)

4,528

145

4,673

Closing shareholders' equity

10,866

8,929

(318)

19,477

-

19,477

Operating return on closing shareholders' equity (%)

26%

29%

n/a

23%

-

24%

Supplementary information:







Average shareholders' equity

9,521

8,046





Operating return on average shareholders' equity (%)

30%

33%





* Demerger-related items comprise interest on the subordinated debt that was substituted to M&G plc prior to the demerger ($179 million pre-tax) and one-off costs of the demerger ($407 million pre-tax).

 

Average shareholders' equity has been based on opening and closing balances as follows:

 


Half year 2020 $m


Half year 2019 $m


Full year 2019 $m


Asia

US

Other

Group


Asia

US


Asia

US

Balance at beginning of period

10,866

8,929

(318)

19,477


8,175

7,163


8,175

7,163

Balance at end of period

11,529

8,955

(1,374)

19,110


9,727

8,594


10,866

8,929

Average shareholders' equity

11,198

8,942

(846)

19,294


8,951

7,879


9,521

8,046

 

II (iv) Calculation of IFRS shareholders' funds per share

 

IFRS shareholders' funds per share is calculated as closing IFRS shareholders' equity divided by the number of issued shares at the end of the period (30 June 2020: 2,609 million shares; 30 June 2019: 2,600 million shares; 31 December 2019: 2,601 million shares) .

 



30 Jun 2020



Asia

US

Other

Total

continuing

operations

Discontinued

 UK and Europe

 operations

Group total

Closing IFRS shareholders' equity ($ million)

11,529

8,955

(1,374)

19,110

-

19,110

Shareholders' funds per share (cents)

442¢

343¢

(53)¢

732¢

-

732¢










30 Jun 2019



Asia

US

Other

Total

continuing

operations

Discontinued

 UK and Europe

 operations

Group total

Closing IFRS shareholders' equity ($ million)

9,727

8,594

(3,822)

14,499

10,538

25,037

Shareholders' funds per share (cents)

374¢

331¢

(147)¢

558¢

405¢

963¢










31 Dec 2019



Asia

US

Other

Total

continuing

operations

Discontinued

 UK and Europe

 operations

Group total

Closing IFRS shareholders' equity ($ million)

10,866

8,929

(318)

19,477

-

19,477

Shareholders' funds per share (cents)

418¢

343¢

(12)¢

749¢

-

749¢

 

II(v)  Calculation of asset management cost/income ratio

 

The asset management cost/income ratio is calculated as asset management operating expenses, adjusted for commission and joint venture contribution, divided by asset management total IFRS revenue adjusted for commission, joint venture contribution, performance-related fees and non-operating items.

 


Eastspring Investments


 2020 $m


2019 $m


Half year


Half year

Full year

Operating income before performance-related fees note

313


309

636

Share of joint venture revenue

(111)


(120)

(244)

Commission

85


88

165

Performance-related fees

2


1

12

IFRS revenue

289


278

569






Operating expense

157


157

329

Share of joint venture expense

(45)


(52)

(102)

Commission

85


88

165

IFRS charges

197


193

392

Cost/income ratio: operating expense/operating income before performance-related fees

50%


51%

52%

 

Note

IFRS revenue and charges for Eastspring Investments are included within the IFRS Income statement in 'other income' and 'acquisition costs and other expenditure' respectively. Operating income and expense include the Group's share of contribution from joint ventures. In the consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item.

 

II(vi)  Reconciliation of Asia renewal insurance premium to gross premiums earned

 

Reconciliation of Asia renewal insurance premium to gross earned premiums and calculation of Asia Life weighted premium income.

 


2020 $m


2019 $m


Half year


AER

Half year

CER

Half year

Full year

Asia renewal insurance premium

9,702


9,177

9,123

19,007

Add: General insurance premium

66


65

65

135

Add: IFRS gross earned premium from new regular and single premium business

2,054


3,113

3,101

6,386

Less: Renewal premiums from joint ventures

(932)


(897)

(858)

(1,771)

Asia segment IFRS gross premiums earned

10,890


11,458

11,431

23,757







Asia renewal insurance premium (as above)

9,702


9,177

9,123

19,007

Asia APE

1,665


2,560

2,540

5,161

Asia life weighted premium income

11,367


11,737

11,663

24,168

 

II(vii)  Reconciliation of APE new business sales to gross premiums earned

 

The Group reports APE new business sales as a measure of the new policies sold in the period . This differs from the IFRS measure of gross premiums earned as shown below:

 


2020 $m


2019 $m


Half year


Half year

Full year

Annual premium equivalents (APE)

2,644


3,635

7,384

Adjustment to include 100% of single premiums on new business sold in the periodnote (a)

10,205


11,337

23,409

Premiums from in-force business and other adjustmentsnote (b)

6,993


6,109

14,271

Gross premiums earned

19,842


21,081

45,064

 

Notes

(a)  APE new business sales only include one-tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums.

(b)  Other adjustments principally include amounts in respect of the following:

-  Gross premiums earned include premiums from existing in-force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in-force premiums form the vast majority of the other adjustment amount;

-  APE includes new policies written in the period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts. These are excluded from gross premiums earned and recorded as deposits;

-  APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and

-  For the purpose of reporting APE new business sales, the Group's share of amounts sold by the Group's insurance joint ventures and associates are included. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned.

 

II(viii) Reconciliation between IFRS and EEV shareholders' equity

 

The table below shows the reconciliation of EEV shareholders' equity and IFRS shareholders' equity at the end of the period:

 


2020 $m


2019 $m


30 Jun


30 Jun

31 Dec

EEV shareholders' equity

48,942


67,983

54,711

Less: Value of in-force business of long-term businessnote (a)

(33,771)


(45,267)

(41,893)

Deferred acquisition costs assigned zero value for EEV purposes

14,601


13,291

14,239

Othernote (b)

(10,662)


(10,970)

(7,580)

IFRS shareholders' equity

19,110


25,037

19,477

 

Notes

(a)  The EEV shareholders' equity comprises the present value of the shareholders' interest in the value of in-force business, total net worth of long-term business operations and IFRS shareholders' equity of asset management and other operations. The value of in-force business reflects the present value of expected future shareholder cash flows from long-term in-force business which are not captured as shareholders' interest on an IFRS basis. Total net worth represents the net assets for EEV reporting that reflect the regulatory basis position, with adjustments to achieve consistency with the IFRS treatment of certain items as appropriate.

(b)  Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value total net worth for long-term insurance operations. These also include the mark-to-market value movements of the Group's core structural borrowings which are fair valued under EEV but are held at amortised cost under IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson, IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset), whereas the local regulatory basis used for EEV reporting is based on expected future cash flows due to the policyholder on a prudent basis, with the consideration of an expense allowance, as applicable, but with no separate deferred acquisition cost asset.

 


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