Notes on the IFRS basis results

These condensed consolidated interim financial statements for the six months ended 30 June 2012 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 IFRSs that are applicable or available for early adoption for the next annual financial statements and other policy improvements. EU-endorsed IFRSs may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. At 30 June 2012, there were no unendorsed standards effective for the period ended 30 June 2012 affecting the condensed consolidated financial statements of the Group, and there were no differences between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to the Group.

The IFRS basis results for the 2012 and 2011 half years are unaudited. Except for the effect of the adoption of altered US GAAP reporting requirements for Group IFRS reporting as explained in note B, the 2011 full year IFRS basis results have been derived from the 2011 statutory accounts. The auditors have reported on the 2011 statutory accounts which have been delivered to the Registrar of Companies. The auditors’ report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The 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 2011, except for the adoption of altered US GAAP reporting requirements for Group IFRS report as described below.

Background

In October 2010, the Emerging Issues Trust Force of the US Financial Accounting Standards Board issued update No 2010-26 on ‘Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts’ (the ‘Update’). The Update was issued to address perceived diversity by companies preparing financial statements in accordance with US GAAP as regards the types of acquisition costs being deferred. Under US GAAP, costs that can be deferred and amortised are those that ‘vary with and are primarily related to the acquisition of insurance contracts’. The Update requires insurers to capitalise only those incremental costs directly relating to acquiring a contract for financial statements for reporting periods beginning after 15 December 2011. All other indirect acquisition expenses are required to be charged to the income statements as incurred expenses. Accordingly, the main impact of the Update is to disallow insurers from deferring costs that are not directly related to successful sales.

The Group’s IFRS accounting policies include that under IFRS 4, ‘Insurance Contracts’, insurance assets and liabilities other than those for UK regulated with-profits funds, are measured using the GAAP basis applied prior to IFRS adoption in 2005. On this basis insurance assets and liabilities are measured under the UK Modified Statutory Basis (MSB) which was codified by the Statement of Recommended Practice (SORP) on accounting for insurance business issued by the Association of British Insurers (ABI) in 2003. The MSB requires the deferral of acquisition costs and, in the first instance, the use of a gross premium valuation basis of liability measurement unless a net premium valuation basis is required by the regulator. However, the SORP also permits the use of local GAAP subject to the requirement for adjustments to be made to ensure sufficient consistency of measurement under the UK GAAP framework under which the SORP was developed.

In applying this overarching basis, the Group has chosen to apply US GAAP for measuring the insurance assets and liabilities of Jackson. In addition, for the Group’s operations in India, Japan, Taiwan and Vietnam, where the local GAAP basis would not be appropriate as the start point for deriving MSB insurance asset and liabilities, the measurement has been determined substantially by reference to US GAAP requirements.

For half year 2012, the Group has the option to either continue with its current basis of measurement or improve its accounting policy under IFRS 4 to acknowledge the issuance of the Update. Prudential has chosen to improve its accounting policy in 2012 to apply the US GAAP update, on a retrospective basis, to the results of Jackson and the four Asia operations.

The half year and full year 2011 comparatives in these condensed consolidated interim financial statements have been adjusted accordingly for the retrospective application of this Update.

Effect of change in accounting policy

(a) The effect of the change in accounting policy for deferred acquisition costs (DAC) on the income statement, earnings per share, comprehensive income, changes in equity and statement of financial position is shown in the tables below.

Condensed consolidated income statement

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  Half year 2012 £m Half year 2011 £m Full year 2011 £m
  Under
previous
basis
Effect of
change
Under
new
policy
As
reported
under
previous
basis
Effect of
change
Under
new
policy
As
reported
under
previous
basis
Effect of
change
Under
new
policy
Total revenue, net of reinsurance 23,881 23,881 21,603 21,603 36,506 36,506
Acquisition costs and other expenditure (2,520) (72) (2,592) (2,615) (50) (2,665) (5,005) (115) (5,120)
Total other charges, net of reinsurance (19,990) (19,990) (17,730) (17,730) (29,575) (29,575)
Profit before tax (being tax attributable to shareholders' and policyholders' returns) 1,371 (72) 1,299 1,258 (50) 1,208 1,926 (115) 1,811
(Less) Add tax (charge) credit attributable to policyholders' returns (40) (40) (94) (94) 17 17
Profit before tax attributable to shareholders 1,331 (72) 1,259 1,164 (50) 1,114 1,943 (115) 1,828
Total tax charge attributable to policyholders and shareholders (371) 24 (347) (395) 18 (377) (432) 40 (392)
Adjustment to remove tax charge (credit) attributable to policyholders' returns 40 40 94 94 (17) (17)
Tax charge attributable to shareholders' returns (331) 24 (307) (301) 18 (283) (449) 40 (409)
Profit for the period 1,000 (48) 952 863 (32) 831 1,494 (75) 1,419
Profit for the period attributable to equity holders of the Company 1,000 (48) 952 861 (32) 829 1,490 (75) 1,415
Earnings per share
(in pence)
                 
Based on profit attributable to the equity holders of the Company:                  
Basic 39.4p (1.9)p 37.5p 34.0p (1.3)p 32.7p 58.8p (3.0)p 55.8p
Diluted 39.4p (1.9)p 37.5p 33.9p (1.3)p 32.6p 58.7p (3.0)p 55.7p

Condensed consolidated statement of comprehensive income and statement of changes in equity

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  Half year 2012 £m Half year 2011 £m Full year 2011 £m
  Under
previous
basis
Effect of
change
Under
new
policy
  As
reported
under
previous
basis
Effect of
change
Under
new
policy
  As
reported
under
previous
basis
Effect of
change
Under
new
policy
Profit for the period 1,000 (48) 952   863 (32) 831   1,494 (75) 1,419
Exchange movements on foreign operations and net investment hedges, net of related tax (56) 2 (54)   (75) 13 (62)   (100) (5) (105)
Unrealised valuation movements on securities of US insurance operations classified as available-for-sale 482 482   237 237   811 811
Related change in amortisation of deferred income and acquisition costs (211) 30 (181)   (97) 26 (71)   (331) 56 (275)
Related tax (94) (11) (105)   (49) (8) (57)   (168) (19) (187)
Total 177 19 196   91 18 109   312 37 349
Total comprehensive income for the period 1,121 (27) 1,094   879 (1) 878   1,706 (43) 1,663
                       
Total comprehensive income for the period attributable to equity holders of the Company 1,121 (27) 1,094   877 (1) 876   1,702 (43) 1,659
                       
Net increase in shareholders' equity 755 (27) 728   470 (1) 469   1,086 (43) 1,043
At beginning of period 9,117 (553) 8,564   8,031 (510) 7,521   8,031 (510) 7,521
At end of period 9,872 (580) 9,292   8,501 (511) 7,990   9,117 (553) 8,564

Condensed Consolidated Statement of Financial Position

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  30 Jun 2012 £m 30 Jun 2011 £m 31 Dec 2011 £m
  Under
previous
basis
Effect of
change
Under
new
policy
As
reported
under
previous
basis
Effect of
change
Under
new
policy
As
reported
under
previous
basis
Effect of
change
Under
new
policy
Assets                  
Deferred acquisition costs and other intangible assets attributable to shareholders 5,207 (874) 4,333 4,829 (769) 4,060 5,069 (835) 4,234
Total other assets 278,292 278,292 264,637 264,637 268,511 268,511
Total assets 283,499 (874) 282,625 269,466 (769) 268,697 273,580 (835) 272,745
                   
Liabilities                  
Deferred tax liabilities 4,207 (294) 3,913 4,194 (258) 3,936 4,211 (282) 3,929
Total other liabilities 269,386 269,386 256,725 256,725 260,209 260,209
Total liabilities 273,593 (294) 273,299 260,919 (258) 260,661 264,420 (282) 264,138
                   
Equity                  
Shareholders' equity 9,872 (580) 9,292 8,501 (511) 7,990 9,117 (553) 8,564
Non-controlling interests 34 34 46 46 43 43
Total equity 9,906 (580) 9,326 8,547 (511) 8,036 9,160 (553) 8,607

(b) The effect of the change in accounting policy for deferred acquisition costs on the Group's supplementary analysis of profit is shown in the table below.

Segment disclosure – income statement

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  Half year 2012 £m Half year 2011 £m Full year 2011 £m
  Under
previous
basis
Effect of
change
Under
new
policy
As
reported
under
previous
basis
Effect of
change
Under
new
policy
As
reported
under
previous
basis
Effect of
change
Under
new
policy
Operating profit based on longer-term investment returns                  
Asia insurance operations.note (i) 411 (5) 406 324 (2) 322 704 704
US insurance operationsnote (ii) 491 (49) 442 368 (28) 340 694 (43) 651
Other operations 314 314 366 366 672 672
Total 1,216 (54) 1,162 1,058 (30) 1,028 2,070 (43) 2,027
Short-term fluctuations in investment returns on shareholder-backed business (14) (18) (32) 113 (20) 93 (148) (72) (220)
Shareholders' share of actuarial and other gains and losses on defined benefit pension schemes 87 87 (7) (7) 21 21
Gain on dilution of Group holdings 42 42
Profit before tax attributable to shareholders 1,331 (72) 1,259 1,164 (50) 1,114 1,943 (115) 1,828
Basic EPS based on operating profit based on longer-term investment returns after tax and non-controlling interests 36.0p (1.5)p 34.5p 32.2p (0.8)p 31.4p 63.9p (1.1)p 62.8p
Basic EPS based on total profit after tax and non-controlling interests 39.4p (1.9)p 37.5p 34.0p (1.3)p 32.7p 58.8p (3.0)p 55.8p

Notes on the effect of the change in the accounting policy on operating profit based on longer-term investment returns

  1. Asia insurance operations

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      2012
    Half year
    £m
    2011
    Half year
    £m
    2011
    Full year
    £m
      Effect of
    change
    Effect of
    change
    Effect of
    change
    New business      
    Acquisition costs on new contracts not able to be deferred (5) (10) (16)
    Business in force at beginning of period      
    Reduction in amortisation on reduced DAC balance 8 16
    Total (5) (2)
  2. US insurance operations

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      2012
    Half year
    £m
    2011
    Half year
    £m
    2011
    Full year
    £m
      Effect of
    change
    Effect of
    change
    Effect of
    change
    New business      
    Acquisition costs on new contracts not able to be deferred (82) (80) (156)
    Business in force at beginning of period      
    Reduction in amortisation on reduced DAC balance 33 52 113
    Total (49) (28) (43)

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    2012 £m 2011 £m
  Note Half year Half year* Full year*
Asia operations        
Insurance operations E(i) 409 324 709
Development expenses   (3) (2) (5)
Total Asia insurance operations after development expenses   406 322 704
Eastspring Investments   34 43 80
Total Asia operations   440 365 784
         
US operations        
Jackson (US insurance operations) E(ii) 442 340 651
Broker-dealer and asset management   17 17 24
Total US operations   459 357 675
         
UK operations        
UK insurance operations:        
Long-term business E(iii) 336 332 683
General insurance commissionnote (i)   17 21 40
Total UK insurance operations   353 353 723
M&G   199 199 357
Total UK operations   552 552 1,080
Total segment profit   1,451 1,274 2,539
         
Other income and expenditure        
Investment return and other income   5 5 22
Interest payable on core structural borrowings   (140) (140) (286)
Corporate expenditure H (120) (118) (219)
Total   (255) (253) (483)
RPI to CPI inflation measure change on defined benefit pension schemesnote (ii)   42 42
Solvency II implementation costs   (27) (27) (55)
Restructuring costsnote (iii)   (7) (8) (16)
Operating profit based on longer-term investment returns   1,162 1,028 2,027
Short-term fluctuations in investment returns on shareholder-backed business F (32) 93 (220)
Shareholders' share of actuarial and other gains and losses on defined benefit pension schemesnote (iv)   87 (7) 21
Gain on dilution of Group holdings G 42
Profit before tax attributable to shareholders   1,259 1,114 1,828

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    2012 2011
  Note Half year Half year* Full year*

* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

Notes

  1. UK operations transferred its general insurance business to Churchill Insurance in 2002. General insurance commission represents the net commission receivable net of expenses for Prudential-branded general insurance products as part of this arrangement.
  2. During the first half of 2011 the Group altered its inflation measure basis for future statutory increases to pension payments for certain tranches of its UK defined benefit pension schemes. This reflected the UK government's decision to replace the basis of indexation from Retail Price Index (RPI) with Consumer Price Index (CPI). This resulted in a credit to the operating profit before tax in half year and full year 2011 of £42 million.
  3. Restructuring costs are incurred in the UK and represent one-off expenses incurred in securing expense savings.
  4. For the 2011 comparatives, the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes comprises the aggregate effect of actual less expected returns on scheme assets, experience gains and losses, the effect of changes in assumptions and altered provisions for deficit funding, where relevant. For half year 2012, these items also apply. However, the shareholders' share of actuarial and other gains and losses on defined benefit pension schemes also includes £51 million for the effect of partial recognition of surplus of the main Prudential Staff Pension Scheme (PSPS). This credit arises from altered funding arrangement following the 5 April 2011 triennial valuation. Additional details are provided in note X.
Basic EPS based on operating profit based on longer-term investment returns after tax and non-controlling interests L 34.5p 31.4p 62.8p
Basic EPS based on total profit after tax and non-controlling interests L 37.5p 32.7p 55.8p

Determining operating segments and performance measure of operating segments

The Group’s operating segments determined in accordance with IFRS 8, ‘Operating Segments’, are as follows:

Insurance operations

  • Asia
  • US (Jackson)
  • UK

Asset management operations

  • M&G (including Prudential Capital)
  • Eastspring Investments
  • US broker-dealer and asset management (including Curian)

The Group’s operating segments are also its reportable segments with the exception of Prudential Capital which has been incorporated into the M&G operating segment for the purposes of segment reporting.

The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer-term investment returns. This measure excludes the recurrent items of short-term fluctuations in investment returns and the shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes. In addition for half year 2012, this measure excluded a gain arising upon the dilution of the Group’s holding in PPM South Africa. Operating earnings per share is calculated on operating profit based on longer-term investment returns, after tax and non-controlling interests.

Segment results that are reported to the Group Executive Committee include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asia Regional Head Office.

Except in the case of the assets backing the UK annuity business, unit-linked and US variable annuity separate account liabilities, operating profit based on longer-term investment returns for shareholder-financed business is determined on the basis of expected longer-term investment returns. In the case of assets backing the UK annuity business, unit-linked and US variable annuity separate account liabilities, the basis of determining operating profit based on longer-term investment returns is as follows:

  • Assets backing UK annuity business liabilities. For UK annuity business, policyholder liabilities are determined by reference to current interest rates. The value movements of the assets covering liabilities are closely correlated with the related change in liabilities. Accordingly, asset value movements are recorded within the ‘operating results based on longer-term investment returns’. Policyholder liabilities include a margin for credit risk. Variations between actual and best estimate expected impairments are recorded as a component of short-term fluctuations in investment returns.
  • Assets backing unit-linked and US variable annuity business separate account liabilities. For such business, the policyholder unit liabilities are directly reflective of the asset value movements. Accordingly, the operating results based on longer-term investment returns reflect the current period value movements in unit liabilities and the backing assets.

In the case of other shareholder-financed business, the measurement of operating profit based on longer-term investment returns reflects the particular features of long-term insurance business where assets and liabilities are held for the long-term and for which the accounting basis for insurance liabilities under current IFRS is not generally conducive to demonstrating trends in underlying performance of life businesses exclusive of the effects of short-term fluctuations in market conditions. In determining the profit on this basis, the following key elements are applied to the results of the Group’s shareholder-financed operations.

(a) Debt and equity-type securities

Longer-term investment returns for both debt and equity-type securities comprise longer-term actual income receivable (interest/dividend income) for the period and longer-term capital returns.

In principle, for debt securities, the longer-term capital returns comprise two elements. The first element is a risk margin reserve (RMR) based charge for the expected level of defaults for the period, which is determined by reference to the credit quality of the portfolio. The difference between impairment losses in the reporting period and the RMR charge to the operating result is reflected in short-term fluctuations in investment returns. The second element is for the amortisation of interest-related realised gains and losses to operating results based on longer-term investment returns to the date when sold bonds would have otherwise matured.

The shareholder-backed operation for which the distinction between impairment losses and interest-related realised gains and losses is in practice relevant to a significant extent is Jackson. Jackson has used the ratings by Nationally Recognised Statistical Ratings Organisations (NRSRO) or ratings resulting from the regulatory ratings detail issued by the National Association of Insurance Commissioners (NAIC) developed by external third parties such as PIMCO or BlackRock Solutions to determine the average annual RMR. Further details of the RMR charge, as well as the amortisation of interest-related realised gains and losses, for Jackson are shown in note F.

For debt securities backing non-linked shareholder-financed business of the UK insurance operations (other than the annuity business) and of the Asia insurance operations, the realised gains and losses are principally interest related. Accordingly, all realised gains and losses to date for these operations are being amortised over the period to the date those securities would otherwise have matured, with no explicit RMR charge.

At 30 June 2012, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the Group was a net gain of £443 million (30 June 2011: £390 million; 31 December 2011: £462 million).

For equity-type securities, the longer-term rates of return are estimates of the long-term trend investment return for income and capital having regard to past performance, current trends and future expectations. Equity-type securities held for shareholder-financed operations other than the UK annuity business, unit-linked and US variable annuity are of significance for the US and Asia insurance operations. Different rates apply to different categories of equity-type securities.

As at 30 June 2012, the equity-type securities for US insurance non-separate account operations amounted to £1,017 million (30 June 2011: £862 million; 31 December 2011: £902 million). For these operations, the longer-term rates of return for income and capital applied in half year 2012 are as follows:

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  2012 2011
  Half year Half year Full year
Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds 5.6% to 6.2% 7.1% to 7.5% 5.9% to 7.5%
Other equity-type securities such as investments in limited partnerships and private equity funds 7.6% to 8.2% 9.1% to 9.5% 7.9% to 9.5%

For Asia insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to £741 million as at 30 June 2012 (30 June 2011: £449 million; 31 December 2011: £590 million). Of this balance, £106 million (30 June 2011: £122 million; 31 December 2011: £88 million) related to the Group’s 7.74 per cent (30 June 2011: 8.66 per cent; 31 December 2011: 7.37 per cent) stake in China Life Insurance Company of Taiwan. This £106 million (30 June 2011: £122 million; 31 December 2011: £88 million) investment is in the nature of a trade investment for which the determination of longer-term investment returns is on the basis as described in note (e) below. For the investments representing the other equity securities which had period end balances of £635 million (30 June 2011: £327 million; 31 December 2011: £502 million), the rates of return applied in half year 2012 and 2011 ranged from 1.0 per cent to 13.8 per cent, with the rates applied varying by territory.

The longer-term rates of return discussed above for equity-type securities are determined after consideration by the Group’s in-house economists of long-term expected real government bond returns, equity risk premium and long-term inflation. These rates are broadly stable from period to period but may be different between countries, reflecting, for example, differing expectations of inflation in each territory. The assumptions are for returns expected to apply in equilibrium conditions. The assumed rates of return do not reflect any cyclical variability in economic performance and are not set by reference to prevailing asset valuations.

(b) US variable and fixed index annuity business

The following value movements for Jackson’s variable and fixed index annuity business are excluded from operating profit based on longer-term investment returns:

  • Fair value movements for equity-based derivatives;
  • Fair value movements for embedded derivatives for Guaranteed Minimum Withdrawal Benefit (GMWB) ‘not for life’ and fixed index annuity business, and Guaranteed Minimum Income Benefit (GMIB) reinsurance (see note);
  • Movements in accounts carrying value of Guaranteed Minimum Death Benefit (GMDB) and GMWB ‘for life’ liabilities, for which, under the ‘grandfathered’ US GAAP applied under IFRS for Jackson’s insurance assets and liabilities, the measurement basis gives rise to a muted impact of current period market movements;
  • Fee assessments and claim payments, in respect of guarantee liabilities; and
  • Related changes to amortisation of deferred acquisition costs for each of the above items.

Note: US operations – embedded derivatives for variable annuity guarantee features

The GMIB liability, which is fully reinsured, subject to a deductible and annual claim limits, is accounted for in accordance with FASB ASC Subtopic 944-80 Financial Services – Insurance – Separate Accounts (formerly SOP 03-1) under IFRS using ‘grandfathered’ US GAAP. As the corresponding reinsurance asset is net settled, it is considered to be a derivative under IAS 39, ‘Financial Instruments: Recognition and Measurement’, and the asset is therefore recognised at fair value. As the GMIB benefit is economically reinsured the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.

(c) Other derivative value movements

Generally, derivative value movements are excluded from operating results based on longer-term investment returns (unless those derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in operating profit). The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are excluded from operating profit arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly based hedging programme for features of Jackson’s bond portfolio (for which value movements are booked in the statement of comprehensive income rather than the income statement), product liabilities (for which US GAAP accounting as ‘grandfathered’ under IFRS 4 does not fully reflect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives.

(d) Other liabilities to policyholders and embedded derivatives for product guarantees

Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies between territories depending upon the nature of the ‘grandfathered’ measurement basis. In general, in those instances where the liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market movements on the assets and liabilities is broadly equivalent in the income statement, and operating profit based on longer-term investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between the elements that relate to longer-term market conditions and short-term effects.

However, some types of business movements in liabilities do require bifurcation to ensure that at the net level (ie after allocated investment return and change for policyholder benefits) the operating result reflects longer-term market returns.

Examples where such bifurcation is necessary are:

(i) Asia

Vietnam participating business

For the participating business in Vietnam the liabilities include policyholders’ interest in investment appreciation and other surplus. Bonuses paid in a reporting period and accrued policyholders’ interest in investment appreciation and other surpluses primarily reflect the level of realised investment gains above contract specific hurdle levels. For this business, operating profit based on longer-term investment returns includes the aggregate of longer-term returns on the relevant investments, a credit or charge equal to movements on the liability for the policyholders’ interest in realised investment gains (net of any recovery of prior deficits on the participating pool), less amortisation over five years of current and prior movements on such credits or charges.

The overall purpose of these adjustments is to ensure that investment returns included in operating results equal longer-term returns but that in any one reporting period movements on liabilities to policyholders caused by investment returns are substantially matched in the presentation of the supplementary analysis of profit before tax attributable to policyholders.

Non-participating business

Bifurcation for the effect of determining the movement in the carrying value of liabilities to be included in operating results based on longer-term investment returns, and the residual element for the effect of using year end rates is included in short-term fluctuations and in the income statement.

Guaranteed Minimum Death Benefit (GMDB) product features

For unhedged GMDB liabilities accounted for under IFRS using ‘grandfathered’ US GAAP, such as in the Japanese business, the change in carrying value is determined under FASB ASC subtopic 944-80, Financial Services – Insurance – Separate Accounts (formerly SOP 03-1), which partially reflects changes in market conditions. Under the Company’s segmental basis of reporting the operating profit reflects the change in liability based on longer-term market conditions with the difference between the charge to the operating result and the movement reflected in the total result included in short-term fluctuations in investment returns.

(ii) UK shareholder-backed annuity business

The operating result based on longer-term investment returns reflects the impact of value movements on policyholder liabilities for annuity business in PRIL and the PAC non-profit sub-fund after adjustments to allocate the following elements of the movement to the category of ‘short-term fluctuations in investment returns’ in the Group’s supplementary analysis of profit:

  • (i) The impact on credit risk provisioning of actual upgrades and downgrades during the period; and
  • (ii) Credit experience compared to assumptions.

Credit experience reflects the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring by issuers that include effectively an element of permanent impairment of the security held. Negative experience compared to assumptions is included within short-term fluctuations in investment returns without further adjustment. This is to be contrasted with positive experience where surpluses are retained in short-term allowances for credit risk for IFRS reporting purposes.

The effects of other changes to credit risk provisioning are included in the operating result, as is the net effect of changes to the valuation rate of interest due to portfolio rebalancing to align more closely with management benchmark.

(e) Fund management and other non-insurance businesses

For these businesses, the particular features applicable for life assurance noted above do not apply. For these businesses it is inappropriate to include returns in the operating result on the basis described above. Instead, it is appropriate to generally include realised gains and losses (including impairments) in the operating result with unrealised gains and losses being included in short-term fluctuations. For this purpose impairments are calculated as the credit loss determined by comparing the projected cash flows discounted at the original effective interest rate to the carrying value. In some instances it may also be appropriate to amortise realised gains and losses on derivatives and other financial instruments to operating results over a time period that reflects the underlying economic substance of the arrangements.

Additional segmental analysis of revenue

The additional segmental analyses of revenue from external customers excluding investment return and net of outward reinsurance premiums are as follows:

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  Half year 2012 £m
  Asia  US  UK  Intra-group  Total 
Revenue from external customers:          
 Insurance operations  3,871 7,063 3,374 –  14,308
 Asset management  136 357 462 (154) 801
 Unallocated corporate  –  –  10 –  10
Intra-group revenue eliminated on consolidation  (42) (36) (76) 154 – 
Total  3,965 7,384 3,770 –  15,119

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  Half year 2011 £m
  Asia US UK Intra-group Total
Revenue from external customers:          
Insurance operations 3,568 6,664 2,872 (10) 13,094
Asset management 129 332 448 (152) 757
Unallocated corporate 2 2
Intra-group revenue eliminated on consolidation (41) (35) (86) 162
Total 3,656 6,961 3,236 13,853

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  Full year 2011 £m
  Asia US UK Intra-group Total
Revenue from external customers:          
Insurance operations 7,307 12,516 5,740 25,563
Asset management 290 653 923 (323) 1,543
Unallocated corporate 40 40
Intra-group revenue eliminated on consolidation (93) (68) (162) 323
Total 7,504 13,101 6,541 27,146

Total Group revenue by type from external customers comprises:

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  2012 £m 2011 £m
  Half year Half year Full year
Earned premiums, net of reinsurance 14,111 12,930 25,277
Fee income from investment contract business and asset management
(presented as ‘Other income’)
1,008 923 1,869
Total revenue from external customers 15,119 13,853 27,146

In their capacity as fund managers to fellow Prudential Group subsidiaries, M&G, Eastspring Investments and the US asset management businesses generate fees for investment management and related services. These services are charged at appropriate arm’s length prices, typically priced as a percentage of funds under management. Intra-group fees included within asset management revenue were earned by the following asset management segment:

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  2012 £m 2011 £m
  Half year Half year Full year
Intra-group revenue generated by:      
M&G 76 76 162
Eastspring Investments 42 41 93
US broker-dealer and asset management (including Curian) 36 35 68
Total intra-group fees included within asset management segment 154 152 323

At half year 2011, a further £10 million of intra-group revenue was recorded between UK insurance operations.

Revenue from external customers of Asia, US and UK insurance operations shown above are net of outwards reinsurance premiums of £85 million, £38 million and £67 million respectively (half year 2011: £79 million, £37 million and £62 million respectively; full year 2011: £226 million, £72 million and £131 million respectively).

The profit included in the income statement in respect of asset management operations is as follows:

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  2012 £m 2011 £m
  M&G US Eastspring
Investments
note (iv)
Half year Total Half year Total Full year Total
Revenue (excluding revenue of consolidated investment funds and NPH broker-dealer fees) 607 142 138 887 802 1,583
Revenue of consolidated investment fundsnote (i) (24) (24) 18 9
NPH broker-dealer feesnote (i) 215 215 207 405
Gross revenue* 583 357 138 1,078 1,027 1,997
Charges (excluding charges of consolidated investment funds and NPH broker-dealer fees) (298) (125) (104) (527) (534) (1,147)
Charges of consolidated investment fundsnote (i) 24 24 (18) (9)
NPH broker-dealer feesnote (i) (215) (215) (207) (405)
Gross charges (274) (340) (104) (718) (759) (1,561)
Profit before tax 309 17 34 360 268 436
Comprising:            
Operating profit based on longer-term investment returnsnote (ii) 199 17 34 250 259 461
Short-term fluctuations in investment returnsnote (iii) 41 41 13 (29)
Shareholder’s share of actuarial gains and losses on defined benefit pension schemes 27 27 (4) 4
Gain on dilution of Group holdingsnote G 42 42
Profit before tax 309 17 34 360 268 436

* For half year 2012 gross revenue includes the Group's share of results from the associate PPM South Africa. In prior years, PPM South Africa was treated as a subsidiary and accounted for accordingly.

Notes

  1. Under IFRS, disclosure details of segment revenue are required. The segment revenue of the Group's asset management operations are required to include two items that are for amounts which, reflecting their commercial nature, are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from these two items which are:

    (a) Investment funds managed on behalf of third parties and are consolidated under IFRS in recognition of the control arrangements for the funds. The gains and losses of these funds are non-recourse to M&G and the Group; and

    (b) NPH broker-dealer fees which represent commissions received, which are then paid on to the writing brokers on sales of investment products.

    The presentation in the table above shows the amounts attributable to these two items so that the underlying revenue and charges can be seen.

  2. M&G operating profit based on longer-term investment returns:

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      2012
    Half year
    £m
    2011
    Half year
    £m
    2011
    Full year
    £m
    Asset management fee income 351 329 662
    Other income 3 1 4
    Staff costs (120) (125) (270)
    Other costs (66) (58) (134)
    Underlying profit before performance-related fees 168 147 262
    Share of associate results 6 13 26
    Performance-related fees 1 12 13
    Operating profit from asset management operations 175 172 301
    Operating profit from Prudential Capital 24 27 56
    Total M&G operating profit based on longer-term investment returns 199 199 357

    Following the divestment in the first half of 2012 of M&G's holding in PPM South Africa from 75 per cent to 47 per cent and its treatment from 2012 as an associate, M&G's operating income and expense no longer include any element from PPM South Africa, with the share of associate's results being presented in a separate line. The table above reflects the retrospective application of this basis of presentation for half year 2011 and full year 2011 results. Total profit remains the same.

    The difference between the fees and other income shown above in respect of asset management operations, and the revenue figure for M&G shown (excluding consolidated investment funds) in the main table primarily relates to total revenue of Prudential Capital (including short-term fluctuations) of £99 million (half year 2011: £71 million; full year 2011: £96 million) and commissions which have been netted off in arriving at the fee income of £351 million (half year 2011: £329 million; full year 2011: £662 million) in the table above. The difference in the presentation of commission is aligned with how management reviews the business.

  3. Short-term fluctuations in investment returns for M&G are primarily in respect of unrealised value movements on Prudential Capital's bond portfolio.
  4. Included within Eastspring Investments revenue and charges are £41 million of commissions (half year 2011: £30 million; full year 2011: £44 million).

i Asia insurance operations

In half year 2012, IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net £17 million credit arising from a small number of items that are not anticipated to reoccur in future periods (half year 2011: £25 million; full year 2011: £38 million).

ii US insurance operations

Amortisation of deferred acquisition costs

Under the Group’s basis of applying IFRS 4, the insurance assets and liabilities of Jackson’s traditional life business are accounted for under US GAAP. In line with industry practice, Jackson applies the mean reversion technique method for amortisation of deferred acquisition costs which dampens the effects of short-term market movements on expected gross profits against which deferred acquisition costs are amortised. To the extent that the mean reversion methodology does not fully dampen the effects of market returns there is a charge or credit for accelerated or decelerated amortisation. For half year 2012, reflecting the positive market returns in the period, there was a credit for decelerated amortisation of £25 million (half year 2011: charge for accelerated amortisation of £66 million; full year 2011: charge for accelerated amortisation of £190 million, as explained in note Q).

iii UK insurance operations

Annuity business: allowance for credit risk

For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments to policyholders that would have otherwise applied. Since mid-2007 there has been a significant increase in the actual and perceived credit risk associated with corporate bonds as reflected in the significant widening that has occurred in corporate bond spreads. Although bond spreads over swap rates have narrowed from their peak in March 2009, they are still high compared with the levels seen in the years immediately preceding the start of the dislocated markets in 2007. The allowance that should therefore be made for credit risk remains a particular area of judgement.

The additional yield received on corporate bonds relative to swaps can be broken into the following constituent parts:

(a) the expected level of future defaults;

(b) the credit risk premium that is required to compensate for the potential volatility in default levels;

(c) the liquidity premium that is required to compensate for the lower liquidity of corporate bonds relative to swaps; and

(d) the mark to market risk premium that is required to compensate for the potential volatility in corporate bond spreads (and hence market values) at the time of sale.

The sum of (c) and (d) is often referred to as ‘liquidity premium’.

The allowance for credit risk comprises (i) an amount for long-term best estimate defaults and (ii) additional provisions for credit risk premium, downgrade resilience and short-term defaults.

The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL at 30 June 2012, 30 June 2011 and 31 December 2011, based on the asset mix at the relevant balance sheet date are shown below.

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  30 June 2012 bps
  Pillar 1
regulatory
basis
Adjustment
from
regulatory to
IFRS basis
IFRS
Bond spread over swap rates note (i) 191 191
Credit risk allowance:      
Long-term expected defaults note (ii) 16 16
Additional provisions note (iii) 50 (23) 27
Total credit risk allowance 66 (23) 43
Liquidity premium 125 23 148

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  30 June 2011 bps
  Pillar 1
regulatory
basis
Adjustment
from
regulatory to
IFRS basis
IFRS
Bond spread over swap rates note (i) 151 151
Credit risk allowance:      
Long-term expected defaults note (ii) 16 16
Additional provisions note (iii) 51 (25) 26
Total credit risk allowance 67 (25) 42
Liquidity premium 84 25 109

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  31 December 2011 bps
  Pillar 1
regulatory
basis
Adjustment
from
regulatory to
IFRS basis
IFRS

Notes

  1. Bond spread over swap rates reflect market observed data.
  2. Long-term expected defaults are derived by applying Moody's data from 1970 to 2009 and the definition of the credit rating used is the second highest credit rating published by Moody's, Standard and Poor's and Fitch.
  3. Additional provisions comprise credit risk premium, which is derived from Moody's data from 1970 to 2009, an allowance for a 1-notch downgrade of the portfolio subject to credit risk and an additional allowance for short-term defaults.

The prudent Pillar 1 regulatory basis reflects the overriding objective of ensuring sufficient provisions and capital to ensure payments to policyholders can be made. The approach for IFRS aims to establish liabilities that are closer to 'best estimate'.

Bond spread over swap rates note (i) 201 201
Credit risk allowance:      
Long-term expected defaults note (ii) 15 15
Additional provisions note (iii) 51 (24) 27
Total credit risk allowance 66 (24) 42
Liquidity premium 135 24 159

Movement in the credit risk allowance for PRIL in the six months ended 30 June 2012

The movement in the first half of 2012 of the average basis points allowance for PRIL on IFRS basis is as follows:

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  Pillar 1
regulatory
basis
bps
IFRS
bps
  Total Total
Total allowance for credit risk at 31 December 2011 66 42
Credit rating changes 2 1
Asset trading
Asset mix (effect of market value movements)
New business and other (2)
Total allowance for credit risk at 30 June 2012 66 43

For half year 2011 and other prior periods, favourable credit experience was retained in short-term allowances for credit risk on both the Pillar 1 and IFRS bases. From full year 2011 onwards the methodology applied is to continue to retain such surplus experience in the IFRS credit provisions but not for Pillar 1.

Overall the movement has led to the credit allowance for Pillar 1 purposes to be 35 per cent (30 June 2011: 45 per cent; 31 December 2011: 33 per cent) of the bond spread over swap rates. For IFRS purposes it represents 22 per cent (30 June 2011: 28 per cent; 31 December 2011: 20 per cent) of the bond spread over swap rates.

The reserves for credit risk allowance at 30 June 2012 for the UK shareholder annuity fund were as follows:

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  Pillar 1
regulatory
basis
£bn
IFRS
£bn
  Total Total
PRIL 1.9 1.2
PAC non-profit sub-fund 0.2 0.1
Total – 30 June 2012 2.1 1.3
Total – 31 December 2011 2.0 1.3
Total – 30 June 2011 1.8 1.1

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  2012 £m 2011 £m
  Half year Half year* Full year*
Insurance operations:      
Asia note (ii) 42 14 (92)
US note (iii) (125) 7 (167)
UK note (iv) 5 44 159
Other operations:      
Economic hedge value movement note (v) (15)
Other note (vi) 61 28 (120)
Total note (i) (32) 93 (220)

Notes

  1. General overview of defaults
    The Group did not experience any defaults on its shareholder-backed debt securities portfolio in half year 2012 and 2011.
  2. Asia insurance operations
    The fluctuations for Asia insurance operations of positive £42 million in half year 2012 (half year 2011: £14 million; full year 2011: negative £(92) million) include a £13 million unrealised gain (half year 2011: £26 million; full year 2011: unrealised loss £(14) million) on the Group's 7.74 per cent stake (30 June 2011: 8.66 per cent; 31 December 2011: 7.37 per cent) in China Life Insurance Company of Taiwan.
  3. US insurance operations
    The short-term fluctuations in investment returns for US insurance operations comprise the following items:

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      2012
    Half year
    £m
    2011
    Half year*
    £m
    2011
    Full year*
    £m
    Short-term fluctuations relating to debt securities:      
    Charges in the period:      
    Defaults
    Losses on sales of impaired and deteriorating bonds (16) (2) (32)
    Bond write downs (25) (14) (62)
    Recoveries/reversals 8 3 42
    Total charges in the periodnote (a) (33) (13) (52)
    Less: Risk margin charge included in operating profit based on longer-term investment returnsnote (b) 38 35 70
      5 22 18
    Interest-related realised gains (losses):      
    Arising in the period 29 92 158
    Less: Amortisation of gains and losses arising in current and prior years to operating profit based on longer-term investment returns (44) (43) (84)
      (15) 49 74
    Related change to amortisation of deferred acquisition costs 2 (9) (3)
    Total short-term fluctuations related to debt securities (8) 62 89
    Derivatives (other than equity-related): market value movement (net of related change to amortisation of deferred acquisition costs)note (c) 179 29 554
    Net equity hedge results (net of related change to amortisation of deferred acquisition costs)note (d) (320) (107) (788)
    Equity-type investments: actual less longer-term return (net of related change to amortisation of deferred acquisition costs)note C 22 28
    Other items (net of related change to amortisation of deferred acquisition costs) 2 (5) (22)
    Total (125) 7 (167)

    * The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

    The short-term fluctuations shown in the table above are stated net of the related change to amortisation of deferred acquisition costs of £80 million (half year 2011: £68 million; full year 2011: £287 million). See note Q.

    Notes

    1. The charges on the debt securities of Jackson comprise the following:

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        Defaults
      £m
      Bond
      write
      downs
      £m
      Losses on
      sale of
      impaired
      and
      deterior-
      ating
      bonds
      £m
      Recoveries/
      reversals
      £m
      2012
      Total
      Half year
      £m
      2011
      Total
      Half year
      £m
      2011
      Total
      Full year
      £m
      Residential mortgage-backed securities:              
      Prime (including agency) (1) (1) 3 1 (10) (25)
      Alt-A (2) 3 1 (1) (1)
      Sub-prime (3) (3)
      Total residential mortgage-backed securities (4) (3) 6 (1) (11) (26)
      Corporate debt securities (13) 1 (12) (2) (14)
      Other (21) 1 (20) (12)
      Total (25) (16) 8 (33) (13) (52)
    2. The risk margin reserve (RMR) charge for longer-term credit-related losses included in operating profit based on longer-term investment returns for half year 2012 is based on an average annual RMR of 27 basis points (half year 2011: 25 basis points; full year 2011: 25 basis points) on average book values of US$ 44.2 billion (half year 2011: US$ 44.5 billion; full year 2011: US$ 44.4 billion) as shown below:

      Moody's rating category (or equivalent under NAIC ratings of MBS)

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        Half year 2012
        Average
      book value
      US$m
      RMR
      %
      Annual expected loss*
      US$m £m
      A3 or higher 21,149 0.11 (23) (15)
      Baa1, 2 or 3 20,655 0.26 (54) (34)
      Ba1, 2 or 3 1,616 1.11 (18) (11)
      B1, 2 or 3 560 2.97 (17) (11)
      Below B3 174 3.77 (6) (4)
      Total 44,154 0.27 (118) (75)
      Related change to amortisation of deferred acquisition costs (see below)     18 11
      Risk margin reserve charge to operating profit for longer-term credit related losses     100 (64)

      Moody's rating category (or equivalent under NAIC ratings of MBS)

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        Half year 2011
        Average
      book value
      US$m
      RMR
      %
      Annual expected loss*
      US$m £m
      A3 or higher 21,283 0.08 (16) (10)
      Baa1, 2 or 3 20,729 0.27 (55) (34)
      Ba1, 2 or 3 1,826 1.02 (19) (12)
      B1, 2 or 3 425 3.01 (13) (8)
      Below B3 221 3.87 (9) (6)
      Total 44,484 0.25 (112) (70)
      Related change to amortisation of deferred acquisition costs (see below)     22 14
      Risk margin reserve charge to operating profit for longer-term credit related losses     (90) (56)

      * Annual expected loss : Charge for the half year 2012 was £(38) million (half year 2011: £(35) million).

      Moody's rating category (or equivalent under NAIC ratings of MBS)

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        Full year 2011
        Average
      book value
      US$m
      RMR
      %
      Annual expected loss
      US$m £m
      A3 or higher 21,255 0.08 (17) (11)
      Baa1, 2 or 3 20,688 0.26 (54) (34)
      Ba1, 2 or 3 1,788 1.04 (19) (11)
      B1, 2 or 3 474 3.01 (14) (9)
      Below B3 211 3.88 (8) (5)
      Total 44,416 0.25 (112) (70)
      Related change to amortisation of deferred acquisition costs (see below)     22 14
      Risk margin reserve charge to operating profit for longer-term credit related losses     (90) (56)

      Consistent with the basis of measurement of insurance assets and liabilities for Jackson's IFRS results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related changes to amortisation of deferred acquisition costs.

    3. The gain of £179 million (half year 2011: gain of £29 million; full year 2011: gain of £554 million) is principally for the value movement of non-equity free-standing derivatives held to manage interest rate exposures and for the GMIB reinsurance asset that is considered to be a derivative under IAS 39.

      Under IAS 39, unless hedge accounting is applied, value movements on derivatives are recognised in the income statement. For the derivatives programme attaching to the general account business, the Group has continued its approach of not seeking to apply hedge accounting under IAS 39. This decision reflects the inherent constraints of IAS 39 for hedge accounting investments and life assurance assets and liabilities under 'grandfathered' US GAAP under IFRS 4.

    4. The amount of £(320) million (half year 2011: £(107) million; full year 2011: £(788) million) relates to the net equity hedge accounting effect of the equity-based derivatives and associated guarantee liabilities of Jackson's variable and fixed index annuity business. The details of the value movements excluded from operating profit based on longer-term investment returns are as described in note C. The principal movements are for (i) value for free-standing and GMWB 'not for life' embedded derivatives, (ii) accounting values for GMDB and GMWB 'for life' guarantees, (iii) fee assessments and claim payments in respect of guarantee liabilities and (iv) related changes to DAC amortisation. In half year 2012, the charge of £(320) million principally reflects fair value movements on free-standing futures contracts and short-dated options. The movements included within the net equity hedge result included the effect of lower interest rates for which the movement was particularly significant in 2011. The value movements on derivatives held to manage this and any other interest rate exposure are included in the £179 million (half year 2011: £29 million; full year 2011: £554 million) described above in note (c).

      In addition to the items discussed above, for US insurance operations, included within the statement of comprehensive income is an increase in net unrealised gains on debt securities classified as available-for-sale of £482 million (half year 2011: £237 million; full year 2011: £811 million). Temporary market value movements do not reflect defaults or impairments. Additional details on the movement in the value of the Jackson portfolio are included in note U.

  4. UK insurance operations

    The short-term fluctuations gain for UK insurance operations of £5 million (half year 2011: £44 million; full year 2011: £159 million) reflects net investment gains arising in the period on fixed income assets backing the capital of the annuity business.

  5. Economic hedge value movement
    This item represents the value movement in the half year 2012 on short-dated hedge contracts to provide downside protection against severe UK equity market falls.

  6. Other

    Short-term fluctuations of other operations, in addition to the previously discussed economic hedge value movement, were positive £61 million (half year 2011: positive £28 million; full year 2011: negative £(120) million) representing unrealised value movements on investments, including centrally held swaps to manage foreign exchange and certain macroeconomic exposures of the Group.

PPM South Africa

On 22 February 2012, M&G completed transactions to (i) exchange bonus share rights for equity holdings with the employees of PPM South Africa and (ii) the sale of a 10 per cent holding in the majority of the business to Thesele Group, a minority shareholder, for cash. Following these transactions M&G’s majority holding in the business reduced from 75 per cent to 47 per cent. Under IFRS requirements, the divestment is accounted for as the disposal of the 75 per cent holding and an acquisition of a 47 per cent holding at fair value resulting in a reclassification of PPM South Africa from a subsidiary to an associate. As a consequence of the IFRS application, the transactions give rise to a gain on dilution of £42 million. This amount is accounted for in the Group’s half year 2012 supplementary analysis of profit as a gain on dilution of holdings which is excluded from the Group’s IFRS operating profit based on longer-term investment returns. The cash outflow arising from this change to the Group’s holdings, as shown in the condensed consolidated statement of cash flows, was £23 million, representing cash and cash equivalents no longer consolidated net of the cash proceeds received.

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  2012 £m 2011 £m
  Half year Half year* Full year*
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.
Acquisition costs incurred 1,192 1,106 2,264
Acquisition costs deferred less amortisation of acquisition costs (327) (218) (520)
Administration costs and other expenditure 1,746 1,764 3,524
Movements in amounts attributable to external unit holders (19) 13 (148)
Total acquisition costs and other expenditure 2,592 2,665 5,120

The acquisition costs as shown on the table above relate to policy acquisition costs. Acquisition costs from business combinations are included within other expenditure.

Included within total acquisition costs and other expenditure is depreciation of £44 million (half year 2011: £45 million; full year 2011: £95 million).

The total amounts for acquisition costs and other expenditure shown above includes Corporate Expenditure shown in note C (Segment disclosure – income statement). The charge for Corporate Expenditure comprises:

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  2012 £m 2011 £m
  Half year Half year Full year
Group head office 86 88 168
Asia regional office:      
Gross costs 45 48 86
Recharges to Asia operations (11) (18) (35)
  34 30 51
Total 120 118 219

Investment return is attributable to policyholders and shareholders. A key feature of the accounting policies under IFRS is that the investment return included in the income statement relates to all investment assets of the Group, irrespective of whether the return is attributable to shareholders, to policyholders or to the unallocated surplus of with-profits funds, the latter two of which have no net impact on shareholders’ profit. The table below provides a breakdown of the investment return for each regional operation attributable to each type of business.

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  2012 £m 2011 £m
  Half year Half year Full year
Asia operations      
Policyholders’ returns:      
Assets backing unit-linked liabilities 296 208 (812)
With-profits business 423 404 756
  719 612 (56)
Shareholders' returns 333 178 341
Total 1,052 790 285
US operations      
Policyholders’ returns:      
Assets held to back (separate account) unit-linked liabilities 2,095 1,530 (869)
Shareholders’ returns:      
Realised gains and losses (including impairment losses on available-for-sale bonds) (331) 81 (238)
Value movements on derivative hedging programme for general account business 252 93 841
Interest/dividend income and value movements on other financial instruments for which fair value movements are booked in the income statement 638 570 1,714
  559 744 2,317
Total 2,654 2,274 1,448
UK operations      
Policyholders’ returns:      
Scottish Amicable Insurance Fund (SAIF) 289 303 321
Assets held to back unit-linked liabilities 534 657 208
With-profits fund (excluding SAIF) 3,000 2,808 4,094
  3,823 3,768 4,623
Shareholders’ returns:      
Prudential Retirement Income Limited (PRIL) 772 555 2,153
Other business 461 342 956
  1,233 897 3,109
Total 5,056 4,665 7,732
Unallocated corporate      
Shareholders’ returns 21 (105)
Group Total      
Policyholders’ returns 6,637 5,910 3,698
Shareholders’ returns 2,125 1,840 5,662
Total 8,762 7,750 9,360

The returns as shown in the table above are delineated between those returns allocated to policyholders and those allocated to shareholders. In making this distinction, returns allocated to policyholders are those from investments in which shareholders have no direct economic interest, namely:

  • Unit-linked business in the UK, Asia and SAIF in the UK, for which the investment return is wholly attributable to policyholders;
  • Separate account business of US operations, the investment return of which is also wholly attributable to policyholders; and
  • With-profits business (excluding SAIF) in the UK and Asia (in which the shareholders’ economic interest, and the basis of recognising IFRS basis profits, is restricted to a share of the actuarially determined surplus for distribution (in the UK 10 per cent)). Except for this surplus the investment return of the with-profit funds is attributable to policyholders (through the asset-share liabilities) or the unallocated surplus, which is accounted for as a liability under IFRS 4.

The investment return related to the types of business above does not impact shareholders’ profits directly. However, there is an indirect impact, for example, investment-related fees or the effect of investment return on the shareholders’ share of the cost of bonuses of with-profits funds.

Investment returns for unit-linked and similar products have reciprocal impact on benefits and claims, with a decrease in market returns on the attached pool of assets affecting policyholder benefits on these products. Similarly for with-profits funds there is a close correlation between increases or decreases in investment returns and the level of combined charge for policyholder benefits and movement on unallocated surplus that arises from such returns.

Shareholders’ returns

For shareholder-backed non-participating business of the UK (comprising PRIL and other non-linked non-participating business) and of the Asia operations, the investment return is not directly attributable to policyholders and therefore does impact shareholders’ profit directly. However, it should be noted that for UK shareholder-backed annuity business, principally PRIL, where the durations of asset and liability cash flows are closely matched, the discount rate applied to measure liabilities to policyholders (under ‘grandfathered’ UK GAAP and under IFRS 4) reflects movements in asset yields (after allowances for the future defaults) of the backing portfolios. Therefore, the net impact on the shareholders’ profits of the investment return of the assets backing liabilities of the UK shareholder-backed annuity business is after taking into account the consequential effect on the movement in policyholder liabilities.

Changes in shareholders’ investment returns for US operations reflect primarily movements in the investment income, movements in the value of the derivative instruments held to manage the general account assets and liability portfolio, and realised gains and losses. However, separately, reflecting Jackson’s types of business, an allocation is made to policyholders through the application of crediting rates.

The majority of the investments held to back the US general account business are debt securities for which the available-for-sale designation is applied for IFRS basis reporting. Under this designation the return included in the income statement reflects the aggregate of investment income and realised gains and losses (including impairment losses). However, movements in unrealised appreciation or depreciation are recognised in other comprehensive income. The return on these assets is attributable to shareholders.

Benefits and claims represent payments, including final bonuses, to policyholders in respect of maturities, surrenders and deaths plus the change in technical provisions (which primarily represents the movement in amounts owed to policyholders). Benefits and claims are amounts attributable to policyholders. The movement in unallocated surplus of with-profits funds represents the transfer to (from) the unallocated surplus each year through a (charge) credit to the income statement of the annual excess (shortfall) of income over expenditure of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders and shareholders.

Benefits and claims and movements in unallocated surplus of with-profits funds net of reinsurance can be further analysed as follows:

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  Half year 2012 £m
  Asia US UK Total
Claims incurred (1,587) (2,499) (5,057) (9,143)
Increase in policyholder liabilities (2,109) (6,410) (1,600) (10,119)
Movement in unallocated surplus of with-profits funds (note) 137 (725) (588)
  (3,559) (8,909) (7,382) (19,850)

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  Half year 2011 £m
  Asia US UK Total
Claims incurred (1,460) (2,647) (4,838) (8,945)
Increase in policyholder liabilities (1,827) (5,465) (713) (8,005)
Movement in unallocated surplus of with-profits funds (note) 52 (692) (640)
  (3,235) (8,112) (6,243) (17,590)

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  Full year 2011 £m
  Asia US UK Total

Note

The unallocated surplus of with-profits funds represents the excess of assets of with-profits funds over policyholder and other liabilities of the funds. The surplus is therefore sensitive to the measurement basis of the assets and liabilities. The movements on unallocated surplus of with-profits funds also reflect the impact of market fluctuations of investment values backing the surplus. The Asia movement principally arises in the Hong Kong branch operation.

Claims incurred (2,955) (4,678) (10,103) (17,736)
Increase in policyholder liabilities (2,950) (7,973) (1,655) (12,578)
Movement in unallocated surplus of with-profits funds (note) 540 485 1,025
  (5,365) (12,651) (11,273) (29,289)

i Tax charge

The total tax charge comprises:

Tax charge

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  Half year 2012
£m
Half year 2011*
£m
Full year 2011*
£m
  Current tax Deferred tax Total Total Total
UK tax (98) 14 (84) (85) (20)
Overseas tax (294) 31 (263) (292) (372)
Total tax charge (392) 45 (347) (377) (392)

The current tax charge of £392 million includes £8 million for half year 2012 (half year 2011: charge of £8 million; full year 2011: charge of £16 million) in respect of the tax charge for Hong Kong. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either (i) 5 per cent of the net insurance premium or (ii) the estimated assessable profits, depending on the nature of the business written.

The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders as shown below:

Tax charge

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  Half year 2012
£m
Half year 2011*
£m
Full year 2011*
£m
  Current tax Deferred tax Total Total Total
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.
Tax (charge) credit to policyholders' returns (137) 97 (40) (94) 17
Tax charge attributable to shareholders' returns (255) (52) (307) (283) (409)
Total tax charge (392) 45 (347) (377) (392)

The principal reason for the reduction in the tax charge attributable to policyholders’ returns compared to the six-month period ended June 2011 is due to a reduction in the value of unrealised gains on investments which results in a decrease in the policyholders’ deferred tax charge. An explanation of the tax charge attributable to shareholders is shown in note (iii) below.

ii Deferred tax

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

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  30 June 2012 £m 30 June 2011* £m 31 December 2011* £m
  Deferred
tax assets
Deferred
tax liabilities
Deferred
tax assets
Deferred
tax liabilities
Deferred
tax assets
Deferred
tax liabilities
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.
Unrealised gains and losses on investments 206 (1,629) 319 (1,654) 297 (1,566)
Balances relating to investment and insurance contracts 22 (969) 17 (745) 13 (667)
Short-term timing differences 1,820 (1,307) 1,374 (1,524) 1,513 (1,687)
Capital allowances 12 (8) 18 (13) 15 (9)
Unused tax losses 119 392 438
Total 2,179 (3,913) 2,120 (3,936) 2,276 (3,929)

Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.

The taxation regimes applicable across the Group often apply separate rules to trading and capital profits and losses. The distinction between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets. Accordingly, for the 2012 half year results and financial position at 30 June 2012, the possible tax benefit of approximately £156 million (30 June 2011: £106 million; 31 December 2011: £158 million), which may arise from capital losses valued at approximately £0.7 billion (30 June 2011: £0.5 billion; 31 December 2011: £0.7 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £122 million (30 June 2011: £241 million; 31 December 2011: £147 million), which may arise from tax losses and other potential temporary differences totalling £0.5 billion (30 June 2011: £1.0 billion; 31 December 2011: £0.6 billion) is sufficiently uncertain that it has not been recognised. Of these, losses of £116 million will expire within the next 10 years. The remaining losses have no expiry date.

Under IAS 12, ‘Income Taxes’, deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on the tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting periods.

As part of the Finance Act 2011, the UK government enacted a corporation tax rate change to 25 per cent with effect from 1 April 2012. However in March 2012, the UK government announced a revised tax rate change to 24 per cent which was effective from 1 April 2012 after being substantively enacted on 26 March 2012 by a resolution under the Provisional Collection of Taxes Act 1968. Additionally, the reduction in the UK corporation tax rate to 23 per cent from 1 April 2013 was substantively enacted on 3 July 2012 in the 2012 Finance Bill, however this has no effect on half year 2012 financial results.

The subsequent proposed phased rate changes to 22 per cent are expected to have the effect of reducing the UK with-profits and shareholder-backed business elements of the net deferred tax balances at 30 June 2012 by £55 million.

The UK government has announced that there will be substantial changes to the rules relating to the taxation of life insurance companies, which will be effective 1 January 2013. The effects of these changes are not reflected in the financial statements for the period ended 30 June 2012 as the 2012 Finance Act had not been enacted at the balance sheet date. Based on the Finance (No.4) Bill, the new regime is not expected to have a material impact on the Group’s net assets.

iii Reconciliation of tax charge on profit attributable to shareholders for continuing operations

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  Half year 2012 £m (except for tax rates)
  Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
Total
Profit before tax attributable to shareholders:          
Operating profit based on longer-term investment returns note (iii) 406 442 353 (39) 1,162
Short-term fluctuations in investment returns 42 (125) 5 46 (32)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 9 78 87
Gain on dilution of Group holdings 42 42
Total 448 317 367 127 1,259
Expected tax rate:note (i)          
Operating profit based on longer-term investment returns note (iii) 24% 35% 24.5% 24.5% 28%
Short-term fluctuations in investment returns 24% 35% 24.5% 24.5% 69%
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 24.5% 24.5% 24.5%
Gain on dilution of Group holdings 24.5% 24.5%
Expected tax (charge) credit based on expected tax rates:          
Operating profit based on longer-term investment returns note (iii) (97) (155) (86) 10 (328)
Short-term fluctuations in investment returns (10) 44 (1) (11) 22
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (2) (19) (21)
Gain on dilution of Group holdings (10) (10)
Total (107) (111) (89) (30) (337)
Variance from expected tax charge:note (ii)          
Operating profit based on longer-term investment returns note (iii) 19 40 12 (28) 43
Short-term fluctuations in investment returns (13) (6) (4) (23)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Gain on dilution of Group holdings 10 10
Total 6 40 6 (22) 30
Actual tax (charge) credit:          
Operating profit based on longer-term investment returns note (iii) (78) (115) (74) (18) (285)
Short-term fluctuations in investment returns (23) 44 (7) (15) (1)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (2) (19) (21)
Gain on dilution of Group holdings
Total (101) (71) (83) (52) (307)
Actual tax rate:          
Operating profit based on longer-term investment returns 19% 26% 21% (46)% 25%
Total profit 23% 22% 23% 41% 24%

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  Half year 2011* £m (except for tax rates)
  Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
Total
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.
Profit before tax attributable to shareholders:          
Operating profit based on longer-term investment returns note (iii) 322 340 353 13 1,028
Short-term fluctuations in investment returns 14 7 44 28 93
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (2) (5) (7)
Total 336 347 395 36 1,114
Expected tax rate:note (i)          
Operating profit based on longer-term investment returns note (iii) 24% 35% 26.5% 26.5% 29%
Short-term fluctuations in investment returns 22% 35% 26.5% 26.5% 26%
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 26.5% 26.5% 26.5%
Expected tax (charge) credit based on expected tax rates:          
Operating profit based on longer-term investment returns note (iii) (77) (119) (94) (3) (293)
Short-term fluctuations in investment returns (3) (2) (12) (7) (24)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 1 1 2
Total (80) (121) (105) (9) (315)
Variance from expected tax charge:note (ii)          
Operating profit based on longer-term investment returns note (iii) 39 19 5 1 64
Short-term fluctuations in investment returns (33) 1 (32)
Total 6 19 6 1 32
Actual tax (charge) credit:          
Operating profit based on longer-term investment returns note (iii) (38) (100) (89) (2) (229)
Short-term fluctuations in investment returns (36) (2) (11) (7) (56)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 1 1 2
Total (74) (102) (99) (8) (283)
Actual tax rate:          
Operating profit based on longer-term investment returns 12% 29% 25% 15% 22%
Total profit 22% 29% 25% 22% 25%

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  Full year 2011* £m (except for tax rates)
  Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
Total

* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

Notes

  1. Expected tax rates for profit (loss) attributable to shareholders
    1. The expected tax rates shown in the table above reflect the corporation tax rates generally applied to taxable profits of the relevant country jurisdictions.
    2. For Asia operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profits of operations contributing to the aggregate business result.
    3. The expected tax rate for Other operations reflects the mix of business between UK and overseas operations, which are taxed at a variety of rates.
  2. For 2012 and 2011, the principal variances arise from a number of factors, including:
    1. Asia long-term operations
      For half year 2012 and 2011, profits in certain countries which are not taxable, along with utilising brought forward tax losses on which no deferred tax assets were previously recognised, partly offset by the inability to fully recognise deferred tax assets on losses being carried forward.
    2. Jackson
      For half year 2012 and 2011, the benefit of a deduction from taxable income of a proportion of dividends received attributable to the variable annuity business.
    3. UK insurance operations
      For half year 2012 and 2011, the effect of the reduction in the UK corporation tax rate on deferred tax liabilities and the different tax bases of UK life business. Additionally, for 2011 this is partially offset by routine revisions to prior period tax returns.
    4. Other operations
      For half year 2012 and 2011 the effect of the reduction in UK corporation tax rate on deferred tax assets and revisions to prior period tax returns. For full year 2011 the settlement of outstanding issues with HMRC at an amount below that previously provided, partly offset by prior year adjustments arising from the revisions of prior period tax returns.
  3. Operating profit based on longer-term investment returns is net of attributable restructuring costs and development expenses. Related tax charges are determined on the basis of current taxation legislation.
Profit (loss) before tax attributable to shareholders:          
Operating profit based on longer-term investment returns note (iii) 704 651 723 (51) 2,027
Short-term fluctuations in investment returns (92) (167) 159 (120) (220)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 18 3 21
Total 612 484 900 (168) 1,828
Expected tax rate:note (i)          
Operating profit based on longer-term investment returns note (iii) 24% 35% 27% 27% 29%
Short-term fluctuations in investment returns 20% 35% 27% 27% 30%
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 27% 27% 26.5%
Expected tax (charge) credit based on expected tax rates:          
Operating profit based on longer-term investment returns note (iii) (169) (228) (195) 14 (578)
Short-term fluctuations in investment returns 18 58 (43) 32 65
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (5) (1) (6)
Total (151) (170) (243) 45 (519)
Variance from expected tax charge:note (ii)          
Operating profit based on longer-term investment returns note (iii) 47 43 5 50 145
Short-term fluctuations in investment returns (20) 8 (24) (36)
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 1 1
Total 27 43 14 26 110
Actual tax (charge) credit:          
Operating profit based on longer-term investment returns note (iii) (122) (185) (190) 64 (433)
Short-term fluctuations in investment returns (2) 58 (35) 8 29
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (4) (1) (5)
Total (124) (127) (229) 71 (409)
Actual tax rate:          
Operating profit based on longer-term investment returns 17% 28% 26% 125% 21%
Total profit 20% 26% 25% 42% 22%

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  Half year 2012
  Before tax
note C
£m
Tax
note K
£m
Non-
controlling
interests
£m
Net of tax
and non-
controlling
interests
£m
Basic
earnings
per share
Diluted
earnings
per share
Based on operating profit based on longer-term investment returns 1,162 (285) 877 34.5p 34.5p
Short-term fluctuations in investment returns on shareholder-backed business (32) (1) (33) (1.3)p (1.3)p
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 87 (21) 66 2.6p 2.6p
Gain on dilution of Group holdings 42 42 1.7p 1.7p
Based on profit for the period 1,259 (307) 952 37.5p 37.5p

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  Half year 2011*
  Before tax
note C
£m
Tax
note K
£m
Non-
controlling
interests
£m
Net of tax
and non-
controlling
interests
£m
Basic
earnings
per share
Diluted
earnings
per share
Based on operating profit based on longer-term investment returns 1,028 (229) (2) 797 31.4p 31.3p
Short-term fluctuations in investment returns on shareholder-backed business 93 (56) 37 1.5p 1.5p
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes (7) 2 (5) (0.2)p (0.2)p
Based on profit for the period 1,114 (283) (2) 829 32.7p 32.6p

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  Full year 2011*
  Before tax
note C
£m
Tax
note K
£m
Non-
controlling
interests
£m
Net of tax
and non-
controlling
interests
£m
Basic
earnings
per share
Diluted
earnings
per share

* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

Based on operating profit based on longer-term investment return 2,027 (433) (4) 1,590 62.8p 62.7p
Short-term fluctuations in investment returns on shareholder-backed business (220) 29 (191) (7.6)p (7.6)p
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes 21 (5) 16 0.6p 0.6p
Based on profit for the year 1,828 (409) (4) 1,415 55.8p 55.7p

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

The weighted average number of shares for calculating earnings per share:

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  2012 2011
  Half year
(in millions)
Half year
(in millions)
Full year
(in millions)
Weighted average number of shares for calculation of:      
Basic earnings per share 2,536 2,533 2,533
Diluted earnings per share 2,539 2,539 2,538

Dividends per share (in pence)

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  2012 2011
Half year Half year Full year
Dividends relating to reporting period:      
Interim dividend (2012 and 2011) 8.40p 7.95p 7.95p
Final dividend (2011) 17.24p
Total 8.40p 7.95p 25.19p
Dividends declared and paid in reporting period:      
Current year interim dividend 7.95p
Final dividend for prior year 17.24p 17.24p 17.24p
Total 17.24p 17.24p 25.19p

Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. The final dividend for the year ended 31 December 2011 of 17.24 pence per ordinary share was paid to eligible shareholders on 24 May 2012.

The 2012 interim dividend of 8.40 pence per ordinary share will be paid on 27 September 2012 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on Friday, 24 August 2012 (the ‘Record Date’), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 5 October 2012. The interim dividend will be paid on or about 4 October 2012 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 9 August 2012. The exchange rate at which the dividend payable to the SG Shareholders will be translated into SG$, will be determined by CDP. The dividend will distribute an estimated £215 million of shareholders’ equity.

Shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan (DRIP).

i Group statement of financial position analysis

To explain more comprehensively the assets, liabilities and capital of the Group’s businesses, it is appropriate to provide analyses of the Group’s statement of financial position by operating segment and type of business.

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  2012 £m 2011 £m
By operating segment Insurance operations Total
insurance
opera-
tions
Asset
manage-
ment
opera-
tions
Unallo-
cated
to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
30 Jun
Group
Total
30 Jun*
Group
Total
31 Dec*
Group
Total
UK US Asia
Assets                    
Intangible assets attributable to shareholders:                    
Goodwill note P 237 237 1,230 1,467 1,469 1,465
Deferred acquisition costs
and other intangible
assets note Q
109 3,203 987 4,299 15 19 4,333 4,060 4,234
Total 109 3,203 1,224 4,536 1,245 19 5,800 5,529 5,699
Intangible assets attributable to with-profits funds:                    
In respect of acquired
subsidiaries for venture fund and other investment purposes
178 178 178 169 178
Deferred acquisition costs
and other intangible assets
6 78 84 84 93 89
Total 184 78 262 262 262 267
Total 293 3,203 1,302 4,798 1,245 19 6,062 5,791 5,966
Deferred tax assets note K 243 1,633 95 1,971 110 98 2,179 2,120 2,276
Other non-investment and non-cash assets note (i) 5,437 1,536 1,053 8,026 1,104 4,079 (5,860) 7,349 6,521 6,638
Investments of long-term business and other operations:                    
Investment properties 10,786 25 11 10,822 10,822 10,965 10,757
Investments accounted for
using the equity method
70 70 42 112 71 70
Financial investments:                    
Loans note S 3,435 4,168 1,171 8,774 1,207 9,981 9,017 9,714
Equity securities and
portfolio holdings in unit trusts
34,036 43,874 12,553 90,463 79 90,542 91,037 87,349
Debt securities note T 79,900 27,061 19,433 126,394 1,875 128,269 117,213 124,498
Other investments 4,683 2,634 703 8,020 72 51 8,143 6,121 7,509
Deposits 11,105 228 1,041 12,374 55 12,429 10,858 10,708
Total investments 144,015 77,990 34,912 256,917 3,330 51 260,298 245,282 250,605
Properties held for sale 394 3
Cash and cash equivalents 2,554 293 1,927 4,774 1,580 383 6,737 8,589 7,257
Total assets 152,542 84,655 39,289 276,486 7,369 4,630 (5,860) 282,625 268,697 272,745

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  2012 £m 2011 £m
By operating segment Insurance operations Total
insurance
opera-
tions
Asset
manage-
ment
opera-
tions
Unallo-
cated
to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
30 Jun
Group
Total
30 Jun*
Group
Total
31 Dec*
Group
Total
UK US Asia

* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

Notes

  1. Within other non-investment and non-cash assets are premiums receivable of £274 million (30 June 2011: £290 million; 31 December 2011: £265 million) of which approximately two-thirds are due within one year. The remaining one-third, due after one year, relates to products where charges are levied against premiums in future years.
  2. Within other non-insurance liabilities are other creditors of £2,989 million (30 June 2011: £2,599 million; 31 December 2011: £2,544 million) of which £2,683 million (30 June 2011: £2,599 million; 31 December 2011: £2,268 million) are due within one year.
Equity and liabilities                    
Equity                    
Shareholders’ equity 2,722 3,919 2,403 9,044 1,888 (1,640) 9,292 7,990 8,564
Non-controlling interests 29 5 34 34 46 43
Total equity 2,751 3,919 2,408 9,078 1,888 (1,640) 9,326 8,036 8,607
Liabilities                    
Policyholder liabilities and unallocated surplus of with-profits funds:                    
Contract liabilities (including
amounts in respect of contracts classified as investment contracts under IFRS 4) note Y
128,387 75,264 32,768 236,419 236,419 221,432 227,075
Unallocated surplus of
with-profits funds note Y
9,750 52 9,802 9,802 10,872 9,215
Total policyholder liabilities and unallocated surplus of with-profits funds 138,137 75,264 32,820 246,221 246,221 232,304 236,290
Core structural borrowings of shareholder-financed operations:                    
Subordinated debt 2,638 2,638 3,044 2,652
Other 159 159 250 549 958 954 959
Total note V 159 159 250 3,187 3,596 3,998 3,611
Operational borrowings attributable to shareholder-financed operations note W 42 91 93 226 10 2,568 2,804 2,912 3,340
Borrowings attributable to with-profits operations note W 955 955 955 1,440 972
Deferred tax liabilities note K 1,258 2,069 550 3,877 20 16 3,913 3,936 3,929
Other non-insurance liabilities note (ii) 9,399 3,153 3,418 15,970 5,201 499 (5,860) 15,810 16,071 15,996
Total liabilities 149,791 80,736 36,881 267,408 5,481 6,270 (5,860) 273,299 260,661 264,138
Total equity and liabilities 152,542 84,655 39,289 276,486 7,369 4,630 (5,860) 282,625 268,697 272,745

ii Group statement of financial position – additional analysis by business type

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  2012 £m 2011 £m
Parti-
cipating
funds
Shareholder-backed business Intra-
group
elimin-
ations
30 Jun
Group
Total
30 Jun*
Group
Total
31 Dec*
Group
Total
Unit-
linked
and
variable
annuity
Non-
linked
business
Asset
manage-
ment
operations
Unallo-
cated
to a
segment
(central
opera-
tions)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.
Assets                  
Intangible assets attributable to shareholders:                  
Goodwill note P 237 1,230 1,467 1,469 1,465
Deferred acquisition costs and other
intangible assets note Q
4,299 15 19 4,333 4,060 4,234
Total 4,536 1,245 19 5,800 5,529 5,699
Intangible assets attributable to with-profits funds:                  
In respect of acquired subsidiaries for venture fund and other investment purposes 178 178 169 178
Deferred acquisition costs and other intangible assets 84 84 93 89
Total 262 262 262 267
Total 262 4,536 1,245 19 6,062 5,791 5,966
Deferred tax assets note K 104 1 1,866 110 98 2,179 2,120 2,276
Other non-investment and non-cash assets 3,245 575 4,206 1,104 4,079 (5,860) 7,349 6,521 6,638
Investments of long-term business and other operations:                  
Investment properties 8,564 685 1,573 10,822 10,965 10,757
Investments accounted for using the equity method 70 42 112 71 70
Financial investments:                  
Loansnote S 2,866 1 5,907 1,207 9,981 9,017 9,714
Equity securities and portfolio holdings in unit trusts 23,406 66,050 1,007 79 90,542 91,037 87,349
Debt securities note T 58,930 9,062 58,402 1,875 128,269 117,213 124,498
Other investments 4,664 125 3,231 72 51 8,143 6,121 7,509
Deposits 8,830 1,433 2,111 55 12,429 10,858 10,708
Total investments 107,260 77,356 72,301 3,330 51 260,298 245,282 250,605
Properties held for sale 394 3
Cash and cash equivalents 2,176 1,308 1,290 1,580 383 6,737 8,589 7,257
Total assets 113,047 79,240 84,199 7,369 4,630 (5,860) 282,625 268,697 272,745

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  2012 £m 2011 £m
Parti-
cipating
funds
Shareholder-backed business Intra-
group
elimin-
ations
30 Jun
Group
Total
30 Jun*
Group
Total
31 Dec*
Group
Total
Unit-
linked
and
variable
annuity
Non-
linked
business
Asset
manage-
ment
operations
Unallo-
cated
to a
segment
(central
opera-
tions)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.
Equity and liabilities                  
Equity                  
Shareholders’ equity 9,044 1,888 (1,640) 9,292 7,990 8,564
Non-controlling interests 29 5 34 46 43
Total equity 29 9,049 1,888 (1,640) 9,326 8,036 8,607
Liabilities                  
Policyholder liabilities and unallocated surplus of with-profits funds:                  
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) note Y 94,635 77,476 64,308 236,419 221,432 227,075
Unallocated surplus of with-profits
funds note Y
9,802 9,802 10,872 9,215
Total policyholder liabilities and unallocated surplus of with-profits funds 104,437 77,476 64,308 246,221 232,304 236,290
Core structural borrowings of shareholder-financed operations:                  
Subordinated debt 2,638 2,638 3,044 2,652
Other 159 250 549 958 954 959
Total note V 159 250 3,187 3,596 3,998 3,611
Operational borrowings attributable to shareholder-financed operations
note W
226 10 2,568 2,804 2,912 3,340
Borrowings attributable to with-profits operations
note W
955 955 1,440 972
Deferred tax liabilities note K 1,149 31 2,697 20 16 3,913 3,936 3,929
Other non-insurance liabilities 6,477 1,733 7,760 5,201 499 (5,860) 15,810 16,071 15,996
Total liabilities 113,018 79,240 75,150 5,481 6,270 (5,860) 273,299 260,661 264,138
Total equity and liabilities 113,047 79,240 84,199 7,369 4,630 (5,860) 282,625 268,697 272,745

i UK insurance operations

Overview

  • In order to reflect the different types of UK business and fund structure, the statement of financial position of the UK insurance operations analyses assets and liabilities between those of the Scottish Amicable Insurance Fund (SAIF), the PAC with-profits sub-fund (WPSF), unit-linked assets and liabilities and annuity (principally PRIL) and other long-term business.
  • £93 billion of the £144 billion of investments are held by SAIF and the PAC WPSF. Shareholders are exposed only indirectly to value movements on these assets.

By operating segment

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  2012 £m 2011 £m
  Scottish
Amicable
Insurance
Fund
note (ii)
PAC with-profits fund note (i) Other funds and subsidiaries 30 Jun
Total
30 Jun
Total
31 Dec
Total
Excluding
Prudential
Annuities
Limited
Prudential
Annuities
Limited
note (iii)
Total
note (iv)
Unit-
linked
assets and
liabilities
Annuity
and other
long-term
business
Total
Assets                      
Intangible assets attributable to shareholders:                      
Deferred acquisition costs
and other intangible assets
  109 109 109 118 113
Total   109 109 109 118 113
Intangible assets attributable to with-profits funds:                      
In respect of acquired
subsidiaries for venture fund and other investment purposes
178 178   178 169 178
Deferred acquisition costs 6 6   6 11 6
Total 184 184   184 180 184
Total 184 184   109 109 293 298 297
Deferred tax assets 103 1 104   139 139 243 198 231
Other non-investment and non-cash assets 400 2,397 142 2,539   471 2,027 2,498 5,437 3,949 4,771
Investments of long-term business and other operations:                      
Investment properties 552 7,283 729 8,012   685 1,537 2,222 10,786 10,930 10,712
Investments accounted for
using the equity method
  70 70 70 69 70
Financial investments:                      
Loansnote S 129 1,936 75 2,011   1,295 1,295 3,435 2,401 3,115
Equity securities and
portfolio holdings in unit trusts
2,086 18,572 119 18,691   13,242 17 13,259 34,036 40,470 36,722
Debt securities note T 3,988 38,684 5,783 44,467   6,135 25,310 31,445 79,900 74,818 77,953
Other investments note (v) 290 3,688 292 3,980   84 329 413 4,683 4,046 4,568
Deposits 956 7,530 290 7,820   936 1,393 2,329 11,105 9,759 9,287
Total investments 8,001 77,693 7,288 84,981   21,082 29,951 51,033 144,015 142,493 142,427
Properties held for sale   391
Cash and cash equivalents 85 1,267 122 1,389   714 366 1,080 2,554 3,815 2,965
Total assets 8,486 81,644 7,553 89,197   22,267 32,592 54,859 152,542 151,144 150,691

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  2012 £m 2011 £m
  Scottish
Amicable
Insurance
Fund
note (ii)
PAC with-profits fund note (i) Other funds and subsidiaries 30 Jun
Total
30 Jun
Total
31 Dec
Total
Excluding
Prudential
Annuities
Limited
Prudential
Annuities
Limited
note (iii)
Total
note (iv)
Unit-
linked
assets and
liabilities
Annuity
and other
long-term
business
Total
Equity and liabilities                      
Equity                      
Shareholders’ equity   2,722 2,722 2,722 2,342 2,581
Non-controlling interests 29 29   29 38 33
Total equity 29 29   2,722 2,722 2,751 2,380 2,614
Liabilities                      
Policyholder liabilities and unallocated surplus of with-profits funds:                      
Contract liabilities (including
amounts in respect of contracts classified as investment contracts under IFRS 4) note Y
8,143 67,764 5,384 73,148   21,258 25,838 47,096 128,387 126,544 127,024
Unallocated surplus of with-profits funds (reflecting application of ‘realistic’ basis provisions for UK regulated with-
profits funds) note Y and (vi)
8,305 1,445 9,750   9,750 10,811 9,165
Total 8,143 76,069 6,829 82,898   21,258 25,838 47,096 138,137 137,355 136,189
Operational borrowings attributable to shareholder-financed operations   42 42 42 102 103
Borrowings attributable to with-profits funds 18 937 937   955 1,440 972
Deferred tax liabilities 31 616 129 745   482 482 1,258 1,626 1,349
Other non-insurance liabilities 294 3,993 595 4,588   1,009 3,508 4,517 9,399 8,241 9,464
Total liabilities 8,486 81,615 7,553 89,168   22,267 29,870 52,137 149,791 148,764 148,077
Total equity and liabilities 8,486 81,644 7,553 89,197   22,267 32,592 54,859 152,542 151,144 150,691

Notes

  1. The WPSF mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). The WPSF's profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defined Charges Participating Sub-fund which comprises 3.3 per cent of the total assets of the WPSF and includes the with-profits annuity business transferred to Prudential from the Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profits to shareholders on this with-profits annuity business emerge on a 'charges less expenses' basis and policyholders are entitled to 100 per cent of the investment earnings.
  2. The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are entitled to asset management fees on this business. SAIF is a separate sub-fund within the PAC long-term business fund.
  3. Wholly-owned subsidiary of the PAC WPSF that writes annuity business.
  4. Excluding policyholder liabilities of the Hong Kong branch of PAC.
  5. Other investments comprise:

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      2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m

    * In the UK, Prudential uses derivatives to reduce equity and credit risk, interest rate and currency exposures, and to facilitate efficient portfolio management. After derivative liabilities of £1,337 million (30 June 2011: £909 million; 31 December 2011: £1,298 million), which are also included in the statement of financial position, the overall derivative position was a net liability of £27 million (30 June 2011: net liability of £68 million; 31 December 2011: net asset of £163 million).

    † Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily investments in limited partnerships and additionally investments in property funds.

    Derivative assets* 1,310 841 1,461
    Partnerships in investment pools and other† 3,373 3,205 3,107
      4,683 4,046 4,568
  6. Unallocated surplus of with-profits funds
    Prudential's long-term business written in the UK comprises predominantly life insurance policies under which the policyholders are entitled to participate in the returns of the funds supporting these policies. Business similar to this type is also written in certain of the Group's Asia operations, subject to local market and regulatory conditions. Such policies are called with-profits policies. Prudential maintains with-profits funds within the Group's long-term business funds, which segregate the assets and liabilities and accumulate the returns related to that with-profits business. The amounts accumulated in these with-profits funds are available to provide for future policyholder benefit provisions and for bonuses to be distributed to with-profits policyholders. The bonuses, both annual and final, reflect the right of the with-profits policyholders to participate in the financial performance of the with-profits funds. Shareholders' profits with respect to bonuses declared on with-profits business correspond to the shareholders' share of the cost of bonuses as declared by the Board of Directors. The shareholders' share currently represents one-ninth of the cost of bonuses declared for with-profits policies.
    The unallocated surplus represents the excess of assets over policyholder liabilities for the Group's with-profits funds. As allowed under IFRS 4, the Group has opted to continue to record unallocated surplus of with-profits funds wholly as a liability. The annual excess (shortfall) of income over expenditure of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders and shareholders, is transferred to (from) the unallocated surplus each year through a (charge) credit to the income statement. The balance retained in the unallocated surplus represents cumulative income arising on the with-profits business that has not been allocated to policyholders or shareholders, including the shareholders' share of future bonuses that has been provided for in determining policyholders' liabilities. The balance of the unallocated surplus is determined after full provision for deferred tax on unrealised appreciation of investments.

ii US insurance operations

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  2012 £m 2011 £m
  Variable
annuity
separate
account
assets and
liabilities
note (i)
Fixed
annuity,
GIC and
other
business
note (i)
30 Jun
Total
30 Jun*
Total
31 Dec*
Total
Assets          
Intangible assets attributable to shareholders:          
Deferred acquisition costs and other intangibles 3,203 3,203 2,939 3,115
Total 3,203 3,203 2,939 3,115
Deferred tax assets 1,633 1,633 1,346 1,392
Other non-investment and non-cash assets 1,536 1,536 1,151 1,542
Investments of long-term business and other operations:          
Investment properties 25 25 25 35
Financial investments:          
Loans note S 4,168 4,168 4,062 4,110
Equity securities and portfolio holdings
in unit trusts note (iv)
43,625 249 43,874 36,263 38,036
Debt securities note T and U 27,061 27,061 25,286 27,022
Other investments note (ii) 2,634 2,634 1,352 2,376
Deposits 228 228 182 167
Total investments 43,625 34,365 77,990 67,170 71,746
Properties held for sale 3 3
Cash and cash equivalents 293 293 214 271
Total assets 43,625 41,030 84,655 72,823 78,069
Equity and liabilities          
Equity          
Shareholders’ equity note (iii) 3,919 3,919 3,298 3,761
Total equity 3,919 3,919 3,298 3,761
Liabilities          
Policyholder:          
Contract liabilities (including amounts in respect
of contracts classified as investment contracts under IFRS 4) note Y
43,625 31,639 75,264 64,707 69,189
Total 43,625 31,639 75,264 64,707 69,189
Core structural borrowings of shareholder-
financed operations
159 159 155 160
Operational borrowings attributable to shareholder-
financed operations
91 91 34 127
Deferred tax liabilities 2,069 2,069 1,554 1,818
Other non-insurance liabilities 3,153 3,153 3,075 3,014
Total liabilities 43,625 37,111 80,736 69,525 74,308
Total equity and liabilities 43,625 41,030 84,655 72,823 78,069

* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

Notes

  1. Assets and liabilities attaching to variable annuity business that are not held in the separate account are shown within other business.
  2. Other investments comprise:

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      2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m

    * In the US, Prudential uses derivatives to reduce interest rate risk, to facilitate efficient portfolio management to match liabilities under annuity policies and for certain equity-based product management activities. After taking account of derivative liabilities of £1,046 million (30 June 2011: £718 million; 31 December 2011: £887 million), which are also included in the statement of financial position, the overall derivative position is a net asset of £820 million (30 June 2011: £31 million; 31 December 2011: £790 million).

    † Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private Equity Fund and diversified investments in other partnerships by independent money managers that generally invest in various equities and fixed income loans and securities.

    Derivative assets* 1,866 749 1,677
    Partnerships in investment pools and other† 768 603 699
      2,634 1,352 2,376
  3. Changes in shareholders' equity

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      2012
    30 Jun
    £m
    2011*
    30 Jun
    £m
    2011*
    31 Dec
    £m
    Operating profits based on longer-term investment returns note C 442 340 651
    Short-term fluctuations in investment returns note F (125) 7 (167)
    Profit before shareholder tax 317 347 484
    Tax note K (71) (102) (127)
    Profit for the period 246 245 357

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      2012
    30 Jun
    £m
    2011*
    30 Jun
    £m
    2011*
    31 Dec
    £m

    * The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

    Profit for the period (as above) 246 245 357
    Items recognised in other comprehensive income:      
    Exchange movements (34) (80) 35
    Unrealised valuation movements on securities classified as available-for sale:      
    Unrealised holding gains arising during the period 470 287 912
    Add back net losses/deduct net (gains) included in income statement 12 (50) (101)
    Total unrealised valuation movements 482 237 811
    Related change in amortisation of deferred income and acquisition costs note Q (181) (71) (275)
    Related tax (105) (57) (187)
    Total other comprehensive income 162 29 384
    Total comprehensive income for the period 408 274 741
    Dividends, interest payments to central companies and other movements (250) (326) (330)
    Net increase (decrease) in equity 158 (52) 411
    Shareholders’ equity at beginning of period:      
    As previously reported 4,271 3,815 3,815
    Effect of change in accounting policy for deferred acquisition costs (510) (465) (465)
    After effect of change 3,761 3,350 3,350
    Shareholders’ equity at end of period 3,919 3,298 3,761
  4. Equity securities and portfolio holdings in unit trusts includes investments in mutual funds, the majority of which are equity based.

iii Asia insurance operations

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  2012 £m 2011 £m
  With-
profits
business+
Unit-
linked
assets and
liabilities
Other 30 Jun
Total
30 Jun*
Total
31 Dec*
Total

* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

+ The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore with-profits operations. Assets and liabilities of other participating business are included in the column for 'Other business'.

Assets            
Intangible assets attributable to shareholders:            
Goodwill 237 237 239 235
Deferred acquisition costs and other intangible assets 987 987 981 977
Total 1,224 1,224 1,220 1,212
Intangible assets attributable to with-profits funds:            
Deferred acquisition costs and other intangible assets 78 78 82 83
Deferred tax assets 1 94 95 94 115
Other non-investment and non-cash assets 306 104 643 1,053 899 1,024
Investments of long-term business and other operations:            
Investment properties 11 11 10 10
Investments accounted for using the equity method 2
Financial investments:            
Loans note S 726 1 444 1,171 1,283 1,233
Equity securities and portfolio holdings in unit trusts 2,629 9,183 741 12,553 14,159 11,997
Debt securities note T 10,475 2,927 6,031 19,433 15,357 17,681
Other investments 394 41 268 703 504 470
Deposits 54 497 490 1,041 827 1,165
Total investments 14,278 12,649 7,985 34,912 32,142 32,556
Cash and cash equivalents 702 594 631 1,927 2,075 1,977
Total assets 15,364 13,348 10,577 39,289 36,512 36,967
Equity and liabilities            
Equity            
Shareholders’ equity 2,403 2,403 2,224 2,306
Non-controlling interests 5 5 5 5
Total equity 2,408 2,408 2,229 2,311
Liabilities            
Policyholder liabilities and unallocated surplus of with-profits funds:            
Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) note Y 13,344 12,593 6,831 32,768 30,181 30,862
Unallocated surplus of with-profits funds note Y 52 52 61 50
Total 13,396 12,593 6,831 32,820 30,242 30,912
Operational borrowings attributable to shareholder-financed operations 93 93 139 141
Deferred tax liabilities 373 31 146 550 518 506
Other non-insurance liabilities 1,595 724 1,099 3,418 3,384 3,097
Total liabilities 15,364 13,348 8,169 36,881 34,283 34,656
Total equity and liabilities 15,364 13,348 10,577 39,289 36,512 36,967

iv Asset management operations

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  2012 £m 2011 £m
  M&G
note (i)
US Eastspring
Investments
30 Jun
Total
30 Jun
Total
31 Dec
Total
Assets            
Intangible assets:            
Goodwill note P 1,153 16 61 1,230 1,230 1,230
Deferred acquisition costs 11 2 2 15 10 16
Total 1,164 18 63 1,245 1,240 1,246
Other non-investment and non-cash assets note (iii) 945 176 93 1,214 1,172 1,129
Investments accounted for using the equity method 42 42
Financial investments:            
Loans note S 1,207 1,207 1,271 1,256
Equity securities and portfolio holdings in
unit trusts
66 13 79 145 594
Debt securities note T 1,867 8 1,875 1,752 1,842
Other investments 70 2 72 49 78
Deposits 5 15 35 55 90 89
Total investments note (iii) 3,257 17 56 3,330 3,307 3,859
Cash and cash equivalents note (iii) 1,408 47 125 1,580 2,179 1,735
Total assets 6,774 258 337 7,369 7,898 7,969
Equity and liabilities            
Equity            
Shareholders’ equity 1,501 124 263 1,888 1,860 1,783
Non-controlling interests 3 5
Total equity 1,501 124 263 1,888 1,863 1,788
Liabilities            
Core structural borrowing of shareholder-financed operations 250 250 250 250
Intra-group debt represented by operational borrowings at Group level note (ii) 2,568 2,568 2,633 2,956
Net asset value attributable to unit holders of consolidated unit trusts and similar funds note (iii) 313 313 516 678
Other non-insurance liabilities note (iii) and (iv) 2,142 134 74 2,350 2,636 2,297
Total liabilities 5,273 134 74 5,481 6,035 6,181
Total equity and liabilities 6,774 258 337 7,369 7,898 7,969

Notes

  1. M&G includes those assets and liabilities in respect of Prudential Capital.
  2. Intra-group debt represented by operational borrowings at Group level
    Operational borrowings for M&G are in respect of Prudential Capital's short-term fixed income security programme and comprise:

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      2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    Commercial paper 2,318 2,384 2,706
    Medium-term notes 250 249 250
    Total intra-group debt represented by operational borrowings at Group level 2,568 2,633 2,956
  3. Consolidated investment funds
    The M&G statement of financial position shown above includes investment funds which are managed on behalf of third parties. In respect of these funds, the statement of financial position includes the following, which are non-recourse to M&G and the Group:

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      2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    Cash and cash equivalents 305 357 348
    Total investments 88 193 415
    Other net assets and liabilities (80) (34) (85)
    Net asset value attributable to unit holders of consolidated unit trusts and similar funds (313) (516) (678)
    Shareholders' equity
  4. Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors.

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  2012 £m 2011 £m
  30 Jun 30 Jun 31 Dec
Cost      
At beginning of period 1,585 1,586 1,586
Exchange differences 2 3 (1)
At end of period 1,587 1,589 1,585
Aggregate impairment (120) (120) (120)
Net book amount at end of period 1,467 1,469 1,465

Goodwill attributable to shareholders comprises:

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  2012 £m 2011 £m
  30 Jun 30 Jun 31 Dec
M&G 1,153 1,153 1,153
Other 314 316 312
  1,467 1,469 1,465

Other represents goodwill amounts allocated to entities in the Asia and US operations. Other goodwill amounts are individually not material.

Significant costs are incurred in connection with acquiring new insurance business. Except for acquisition costs of with-profits contracts of the UK regulated with-profits funds, which are accounted for under the realistic FSA regimes, these costs are accounted for in a way that is consistent with the principles of the ABI SORP with deferral and amortisation against margins in future revenues on the related insurance policies. In general, this deferral is presentationally shown by an explicit carrying value for deferred acquisition costs (DAC) in the balance sheet. However, in some Asia operations the deferral is implicit through the reserving methodology. The recoverability of the explicitly and implicitly deferred acquisition costs is measured and is deemed impaired if the projected margins are less than the carrying value. To the extent that the future margins differ from those anticipated, an adjustment to the carrying value will be necessary. For UK regulated with-profits funds where the realistic FSA regime is applied, the basis of setting liabilities is such that it would be inappropriate for acquisition costs to be deferred, therefore these costs are expensed as incurred.

The deferral and amortisation of acquisition costs is of most relevance to the Group’s results for shareholder-financed long-term business of Jackson and Asia operations. The majority of the UK shareholder-backed business is individual and group annuity business where the incidence of acquisition costs is negligible.

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

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  2012
£m
2011
£m
  30 Jun 30 Jun* 31 Dec*
Deferred acquisition costs related to insurance contracts as classified under IFRS 4 3,919 3,628 3,805
Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 103 107 107
  4,022 3,735 3,912
Present value of acquired in-force policies for insurance contracts as classified
under IFRS 4 (PVIF)
62 68 64
Other intangibles† 249 257 258
  311 325 322
Total of deferred acquisition costs and other intangible assets 4,333 4,060 4,234

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  Deferred acquisition costs PVIF and
Other
intan-
gibles
£m
Total
30 Jun
2012
£m
Total
30 Jun
2011*
£m
Total
31 Dec
2011*
£m
  UK
£m
US
note (i)
£m
Asia
£m
Asset
manage-
ment
£m
Balance at beginning of period:                    
As previously reported 111 3,880 744 12   322   5,069 4,667 4,667
Effect of change in accounting policy note B (785) (50)     (835) (766) (766)
After effect of change 111 3,095 694 12   322   4,234 3,901 3,901
Additions 6 398 130 1   14   549 618 1,117
Amortisation to the income statement:                    
Operating profit (10) (179) (97) (2)   (23)   (311) (385) (792)
Amortisation related to short-term fluctuations in investment returns 80     80 68 287
  (10) (99) (97) (2)   (23)   (231) (317) (505)
Exchange differences (28) (8)   (2)   (38) (71) (2)
Change in shadow DAC related to movement in unrealised appreciation of Jackson's securities classified as available-for-sale (181)     (181) (71) (275)
Disposals     (2)
Balance at end of period 107 3,185 719 11   311   4,333 4,060 4,234

* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

† In the second half of 2011, the Group made a reclassification of computer software from tangible assets to other intangible assets. Accordingly, for the 30 June 2011 position, computer software with a net book value of £56 million has been transferred from tangible assets (as previously published) to other intangible assets. This is only a presentational adjustment with no impact on the Group's results or shareholders' equity.

Note

  1. The DAC amount in respect of US insurance operations comprises amounts in respect of:

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      2012
    30 Jun
    £m
    2011*
    30 Jun
    £m
    2011*
    31 Dec
    £m

    * The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

    Variable annuity business 3,287 2,451 2,960
    Other business 794 962 855
    Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income) (896) (491) (720)
    Total DAC for US operations 3,185 2,922 3,095

Overview of the deferral and amortisation of acquisition costs for Jackson

Under IFRS 4, the Group applies ‘grandfathered’ US GAAP for measuring the insurance assets and liabilities of Jackson. In the case of Jackson term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive life business, acquisition costs are deferred and amortised in line with a combination of historical and future expected gross profits on the relevant contracts. For fixed and indexed annuity and interest-sensitive life business, the key assumption is the long-term spread between the earned rate on investments and the rate credited to policyholders, which is based on an annual spread analysis. Expected gross profits also depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges), all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis of actual mortality, lapse and expense experience is performed using internally developed experience studies.

As with fixed and indexed annuity and interest-sensitive life business, acquisition costs for Jackson’s variable annuity products are amortised in line with the emergence of profits. The measurement of the amortisation in part reflects current period fees (including those for guaranteed minimum death, income, or withdrawal benefits) earned on assets covering liabilities to policyholders, and the historical and expected level of future gross profits which depends on the assumed level of future fees, as well as components related to mortality, lapse, and expense.

Change of accounting policy

As explained in note B, the Company has adopted the US Financial Accounting Standards Board requirements in EITF Update No 2010-26 on ‘Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts’ from 1 January 2012 into Prudential’s Group IFRS reporting for the results of Jackson and those Asia operations whose IFRS insurance assets and liabilities are measured principally by reference to US GAAP principles. Under the Update insurers are required to capitalise only those incremental costs directly relating to acquiring a contract from 1 January 2012. For Group IFRS reporting the Company has chosen to apply this new basis retrospectively for the results of these operations.

On application of the new policy for Jackson the deferred costs balance for business in force at 31 December 2011 was retrospectively reduced from £3,880 million to £3,095 million.

Mean reversion technique

Under US GAAP (as ‘grandfathered’ under IFRS 4) the projected gross profits, against which acquisition costs are amortised, reflect an assumed long-term level of equity return which, for Jackson, is 8.4 per cent after deduction of net external fund management fees. This is applied to the period end level of separate account assets after application of a mean reversion technique that removes a portion of the effect of levels of short-term variability in current market returns.

Under the mean reversion technique applied by Jackson, the projected level of return for each of the next five years is adjusted from period to period so that in combination with the actual rates of return for the preceding two years and the current year, the 8.4 per cent annual return is realised on average over the entire eight-year period. Projected returns after the mean reversion period revert back to the 8.4 per cent assumption.

However, to ensure that the methodology does not over anticipate a reversion to trend following adverse markets, the mean reversion technique has a cap and floor feature whereby the projected returns in each of the next five years can be no more than 15 per cent per annum and no less than 0 per cent per annum (both after deduction of net external fund management fees) in each year. The capping feature was relevant in late 2008, 2009 and 2010 due to the very sharp market falls in 2008. Notwithstanding this capping feature the mean reversion technique gave rise to a benefit in 2008 of £110 million. This benefit was effectively ‘paid back’ under the mean reversion technique through charges for accelerated amortisation in 2011, as discussed below.

At 31 December 2011, the projected rate of return for the next five years was less than 8.4 per cent. If Jackson had not applied the mean reversion methodology and had instead applied a constant 8.4 per cent from asset values at 31 December 2011, the Jackson DAC balance would have increased by approximately £30 million from £3,095 million to £3,125 million.

Sensitivity of amortisation charge

The amortisation charge to the income statement is reflected in operating profit and short-term fluctuations in investment returns. The amortisation charge to the operating profit in a reporting period comprises:

(i) a core amount that reflects a relatively stable proportion of underlying profits; and

(ii) an element of acceleration or deceleration arising from market movements differing from expectations.

In periods where the cap and floor feature of the mean reversion technique are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect.

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

Half year and full year 2011

In half and full year 2011, the DAC amortisation charge to operating profit included £66 million and £190 million of accelerated amortisation respectively. These amounts reflected the combined effect of:

(i) the separate account performance in the periods (half year 2011: 4 per cent; full year 2011: negative 4 per cent, net of all fees) as it compared with the assumed level for the period; and

(ii) the reduction in the previously assumed future rates of return for the upcoming 5 years from 15 per cent, to a level nearer the middle of the corridor (of 0 per cent and 15 per cent), so that in combination with the historical returns, the 8-year average in the mean reversion calculation was the 8.4 per cent assumption.

The reduction in assumed future rates reflected in large part the elimination from the calculation in 2011, of the 2008 negative returns. Setting aside other complications and the growth in the book, the 2011 accelerated amortisation can be broadly equated as ‘paying back’ the benefit experienced in 2008.

Half year 2012

In half year 2012, the DAC amortisation charge to operating profit was determined after including a credit for decelerated amortisation of £25 million. This amount primarily reflects the separate account performance of 5 per cent, net of all fees, over the assumed level for the period.

Full year 2012

The sensitivity for the full year 2012 remains broadly the same as previously published with the 2011 full year results, namely that on the assumption that market returns for 2012 are within the range of negative 15 per cent to positive 15 per cent, the estimated effect on the amortisation charge, is a range from acceleration of £100 million to deceleration of £100 million.

The accounting carrying values of the Group’s assets reflect the requirements of IFRS. For financial investments the basis of valuation reflects the Group’s application of IAS 39 ‘Financial Instruments: Recognition and Measurement’ as described further below. The basis applied for the assets section of the statement of financial position at 30 June 2012 is summarised below:

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  2012 £m 2011 £m
  At fair
value
Cost/
Amortised
cost
note (i)
30 Jun
Total
At fair
value
Cost/
Amortised
cost
note (i)
30 Jun*
Total
At fair
value
Cost/
Amortised
cost
note (i)
31 Dec*
Total

* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement in accounting policy described in note B.

Notes

  1. Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements. This category also includes assets which are valued by reference to specific IFRS standards such as reinsurers' share of insurance contract liabilities, deferred tax assets and investments accounted for under the equity method.
  2. Realised gains and losses on the Group's investments for half year 2012 amounted to a net gain of £3.6 billion (half year 2011: £2.5 billion; full year 2011: £4.3 billion).
Intangible assets attributable to shareholders:                  
Goodwill note P 1,467 1,467 1,469 1,469 1,465 1,465
Deferred acquisition costs and
other intangible assets
note Q
4,333 4,333 4,060 4,060 4,234 4,234
Total 5,800 5,800 5,529 5,529 5,699 5,699
Intangible assets attributable to
with-profits funds:
                 
In respect of acquired subsidiaries
for venture fund and other investment purposes
178 178 169 169 178 178
Deferred acquisition costs and
other intangible assets
84 84 93 93 89 89
Total 262 262 262 262 267 267
Total 6,062 6,062 5,791 5,791 5,966 5,966
Other non-investment and non-cash assets:                  
Property, plant and equipment 798 798 705 705 748 748
Reinsurers’ share of insurance
contract liabilities
1,703 1,703 1,334 1,334 1,647 1,647
Deferred tax assets
note K
2,179 2,179 2,120 2,120 2,276 2,276
Current tax recoverable 308 308 384 384 546 546
Accrued investment income 2,713 2,713 2,460 2,460 2,710 2,710
Other debtors 1,827 1,827 1,638 1,638 987 987
Total 9,528 9,528 8,641 8,641 8,914 8,914
Investments of long-term business and other operations: note (ii)                  
Investment properties 10,822 10,822 10,965 10,965 10,757 10,757
Investments accounted for using
the equity method
112 112 71 71 70 70
Loans note S 285 9,696 9,981 245 8,772 9,017 279 9,435 9,714
Equity securities and portfolio
holdings in unit trusts
90,542 90,542 91,037 91,037 87,349 87,349
Debt securities
note T
128,269 128,269 117,213 117,213 124,498 124,498
Other investments 8,143 8,143 6,121 6,121 7,509 7,509
Deposits 12,429 12,429 10,858 10,858 10,708 10,708
Total 238,061 22,237 260,298 225,581 19,701 245,282 230,392 20,213 250,605
Properties held for sale 394 394 3 3
Cash and cash equivalents 6,737 6,737 8,589 8,589 7,257 7,257
Total assets 238,061 44,564 282,625 225,975 42,722 268,697 230,395 42,350 272,745
Percentage of Group total assets 84% 16% 100% 84% 16% 100% 84% 16% 100%

Determination of fair value

The fair values of the financial assets and liabilities of the Group have been determined on the following bases.

The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments, or by using quotations from independent third-parties, such as brokers and pricing services or by using appropriate valuation techniques. 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. These techniques may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of these instruments. When determining the inputs into the valuation techniques used, priority is given to publicly available prices from independent sources when available, but overall the source of pricing is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date.

The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Group’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses from selling the financial instrument being fair valued. In some cases the disclosed value cannot be realised in immediate settlement of the financial instrument.

The loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from discounted cash flows expected to be received. The rate of discount used was the market rate of interest.

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. In accordance with the Group’s risk management framework, all internally generated valuations are subject to assessment against external counterparties’ valuations.

The fair value of other financial liabilities is determined using discounted cash flows of the amounts expected to be paid.

Level 1, 2 and 3 fair value measurement hierarchy of Group financial instruments

The table overleaf includes financial instruments carried at fair value analysed by level of the IFRS 7 ‘Financial Instruments: Disclosures’ 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.

The classification criteria and its application to Prudential can be summarised as follows:

Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities

Level 1 includes financial instruments where there is clear evidence that the valuation is based on a quoted publicly traded price in an active market (eg exchange listed equities, mutual funds with quoted prices and exchange traded derivatives).

Level 2 – inputs other than quoted prices included within level 1 that are observable either directly (ie as prices) or indirectly (ie derived from prices)

Level 2 includes investments where a direct link to an actively traded price is not readily apparent, but which are valued using inputs which are largely observable either directly (ie as prices) or indirectly (ie derived from prices). A significant proportion of the Group’s level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades.

Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single valuation is obtained and applied.

When prices are not available from pricing services, quotes are sourced directly from brokers. Prudential seeks to obtain a number of quotes from different brokers so as to obtain the most comprehensive information available on their executability. Where quotes are sourced directly from brokers, the price used in the valuation is normally selected from one of the quotes based on a number of factors, including the timeliness, regularity and accuracy of the quotes considering the spreads provided. The selected quote is the one which best represents an executable quote for the security at the measurement date.

Generally, no adjustment is made to the prices obtained from independent third parties. Adjustment is made in only limited circumstances, where it is determined that the third party valuations obtained do not reflect fair value (eg either because the value is stale and/or the values are extremely diverse in range). These are usually securities which are distressed or that could be subject to a debt restructure or where reliable market prices are no longer available due to an inactive market or market dislocation. In these instances, prices are derived using internal valuation techniques including those as described above in this note with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The techniques used require a number of assumptions relating to variables such as credit risk and interest rates. Examples of such variables include an average credit spread based on the corporate bond universe and the relevant duration of the asset being valued. Prudential measures the input assumptions based on the best available information at the measurement dates. Securities valued in such manner are classified as level 3 where these significant inputs are not based on observable market data.

Of the total level 2 debt securities of £97,052 million at 30 June 2012 (30 June 2011: £89,051 million; 31 December 2011: £94,378 million), £7,287 million are valued internally (30 June 2011: £6,644 million; 31 December 2011: £6,847 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to interpretation.

Level 3 – significant inputs for the asset or liability that are not based on observable market data (unobservable inputs)

Level 3 includes investments which are internally valued or subject to a significant number of unobservable assumptions (eg private equity funds and certain derivatives which are bespoke or long-dated).

At 30 June 2012 the Group held £4,863 million (30 June 2011: £4,423 million; 31 December 2011: £4,565 million), 2 per cent of the fair valued financial investments, net of derivative liabilities (30 June 2011: 2 per cent; 31 December 2011: 2 per cent), within level 3. Of these amounts £3,971 million (30 June 2011: £3,723 million; 31 December 2011: £3,732 million) was held by the Group’s participating funds and therefore shareholders’ profit and equity are not impacted by movements in the valuation of these financial instruments. At 30 June 2012, the £3,971 million (30 June 2011: £3,723 million; 31 December 2011: £3,732 million) represented 4.6 per cent (30 June 2011: 4.3 per cent; 31 December 2011: 4.3 per cent) of the total fair valued financial instruments, net of derivative liabilities of the participating funds.

Of the £861 million level 3 fair valued financial investments, net of derivative liabilities at 30 June 2012 (30 June 2011: £699 million; 31 December 2011: £800 million), which support non-linked shareholder-backed business (representing 1.4 per cent of the total fair valued financial investments net of derivative liabilities backing this business (30 June 2011: 1.2 per cent; 31 December 2011: 1.3 per cent)), £819 million of net assets are externally valued and £42 million are internally valued (30 June 2011: net assets of £745 million and net liabilities of £(46) million respectively; 31 December 2011: net assets of £757 million and £43 million respectively). These level 3 internal valuations, which represent 0.1 per cent of the total fair valued financial investments net of derivative liabilities supporting non-linked shareholder-backed business at 30 June 2012 (30 June 2011: (0.1) per cent; 31 December 2011: 0.1 per cent), are inherently more subjective than the external valuations.

Transfers between levels

During half year 2012, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to 2 of £263 million and from level 3 to 2 of £145 million. These transfers which relate to equity securities and debt securities arose to reflect the change in the observability of the inputs used in valuing these securities.

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  30 Jun 2012 £m
  Level 1 Level 2 Level 3 Total
Analysis of financial investments, net of derivative
liabilities by business type
       
         
With-profits        
Equity securities and portfolio holdings in unit trusts 21,543 1,388 475 23,406
Debt securities 14,549 43,849 532 58,930
Other investments (including derivative assets) 295 1,405 2,964 4,664
Derivative liabilities (41) (1,410) (1,451)
Total financial investments, net of derivative liabilities 36,346 45,232 3,971 85,549
Percentage of total 42% 53% 5% 100%
Unit-linked and variable annuity separate account        
Equity securities and portfolio holdings in unit trusts 65,845 183 22 66,050
Debt securities 3,843 5,210 9 9,062
Other investments (including derivative assets) 45 80 125
Derivative liabilities (8) (9) (17)
Total financial investments, net of derivative liabilities 69,725 5,464 31 75,220
Percentage of total 93% 7% 0% 100%
Non-linked shareholder-backed        
Loans 285 285
Equity securities and portfolio holdings in unit trusts 1,002 11 73 1,086
Debt securities 12,069 47,993 215 60,277
Other investments (including derivative assets) 32 2,548 774 3,354
Derivative liabilities (132) (1,651) (201) (1,984)
Total financial investments, net of derivative liabilities 12,971 49,186 861 63,018
Percentage of total 21% 78% 1% 100%
Group total analysis, including other financial liabilities
held at fair value
       
         
Group total        
Loans 285 285
Equity securities and portfolio holdings in unit trusts 88,390 1,582 570 90,542
Debt securities 30,461 97,052 756 128,269
Other investments (including derivative assets) 372 4,033 3,738 8,143
Derivative liabilities (181) (3,070) (201) (3,452)
Total financial investments, net of derivative liabilities 119,042 99,882 4,863 223,787
Borrowings attributable to the with-profits fund held at fair value (41) (41)
Investment contract liabilities without discretionary participation features held at fair value (15,221) (15,221)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (2,779) (466) (533) (3,778)
Other financial liabilities held at fair value (311) (311)
Total 116,263 83,843 4,330 204,436
Percentage of total 57% 41% 2% 100%

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30 Jun 2011 £m
Level 1 Level 2 Level 3 Total
Analysis of financial investments, net of derivative
liabilities by business type
       
         
With-profits        
Equity securities and portfolio holdings in unit trusts 28,379 1,269 361 30,009
Debt securities 12,673 40,755 721 54,149
Other investments (including derivative assets) 133 1,228 2,688 4,049
Derivative liabilities (40) (895) (47) (982)
Total financial investments, net of derivative liabilities 41,145 42,357 3,723 87,225
Percentage of total 47% 49% 4% 100%
Unit-linked and variable annuity separate account        
Equity securities and portfolio holdings in unit trusts 60,132 13 60,145
Debt securities 4,148 4,577 1 8,726
Other investments (including derivative assets) 16 96 112
Total financial investments, net of derivative liabilities 64,296 4,686 1 68,983
Percentage of total 93% 7% 0% 100%
Non-linked shareholder-backed        
Loans 245 245
Equity securities and portfolio holdings in unit trusts 755 23 105 883
Debt securities 10,385 43,719 234 54,338
Other investments (including derivative assets) 52 1,298 610 1,960
Derivative liabilities (36) (1,117) (250) (1,403)
Total financial investments, net of derivative liabilities 11,156 44,168 699 56,023
Percentage of total 20% 79% 1% 100%
Group total analysis, including other financial liabilities
held at fair value
       
         
Group total        
Loans 245 245
Equity securities and portfolio holdings in unit trusts 89,266 1,305 466 91,037
Debt securities 27,206 89,051 956 117,213
Other investments (including derivative assets) 201 2,622 3,298 6,121
Derivative liabilities (76) (2,012) (297) (2,385)
Total financial investments, net of derivative liabilities 116,597 91,211 4,423 212,231
Borrowings attributable to the with-profits fund held at fair value (71) (71)
Investment contract liabilities without discretionary participation features held at fair value (14,708) (14,708)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (1,773) (980) (450) (3,203)
Total 114,824 75,452 3,973 194,249
Percentage of total 59% 39% 2% 100%

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31 Dec 2011 £m
Level 1 Level 2 Level 3 Total
Analysis of financial investments, net of derivative
liabilities by business type
       
         
With-profits        
Equity securities and portfolio holdings in unit trusts 24,001 1,762 284 26,047
Debt securities 13,298 43,279 655 57,232
Other investments (including derivative assets) 252 1,378 2,793 4,423
Derivative liabilities (214) (1,127) (1,341)
Total financial investments, net of derivative liabilities 37,337 45,292 3,732 86,361
Percentage of total 43% 53% 4% 100%
Unit-linked and variable annuity separate account        
Equity securities and portfolio holdings in unit trusts 59,662 198 30 59,890
Debt securities 4,160 4,698 3 8,861
Other investments (including derivative assets) 18 95 113
Derivative liabilities (2) (7) (9)
Total financial investments, net of derivative liabilities 63,838 4,984 33 68,855
Percentage of total 93% 7% 0% 100%
Non-linked shareholder-backed        
Loans 279 279
Equity securities and portfolio holdings in unit trusts 1,175 176 61 1,412
Debt securities 11,753 46,401 251 58,405
Other investments (including derivative assets) 30 2,237 706 2,973
Derivative liabilities (78) (1,408) (218) (1,704)
Total financial investments, net of derivative liabilities 12,880 47,685 800 61,365
Percentage of total 21% 78% 1% 100%
Group total analysis, including other financial liabilities
held at fair value
       
         
Group total        
Loans 279 279
Equity securities and portfolio holdings in unit trusts 84,838 2,136 375 87,349
Debt securities 29,211 94,378 909 124,498
Other investments (including derivative assets) 300 3,710 3,499 7,509
Derivative liabilities (294) (2,542) (218) (3,054)
Total financial investments, net of derivative liabilities 114,055 97,961 4,565 216,581
Borrowings attributable to the with-profits fund held at fair value (39) (39)
Investment contract liabilities without discretionary participation features held at fair value (15,056) (15,056)
Net asset value attributable to unit holders of consolidated unit trusts and similar funds (2,586) (805) (449) (3,840)
Other financial liabilities held at fair value (281) (281)
Total 111,469 81,780 4,116 197,365
Percentage of total 57% 41% 2% 100%

Loans are accounted for at amortised cost net of impairment except for certain mortgage loans of the UK insurance operations which have been designated at fair value through profit and loss as this loan portfolio is managed and evaluated on a fair value basis. The amounts included in the statement of financial position are analysed as follows:

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2012 £m 2011 £m
30 Jun 30 Jun 31 Dec
Insurance operations      
UK note(i) 3,435 2,401 3,115
US note (ii) 4,168 4,062 4,110
Asia note (iii) 1,171 1,283 1,233
Asset management operations      
M&G note (iv) 1,207 1,271 1,256
Total 9,981 9,017 9,714

Notes

  1. UK insurance operations
    The loans of the Group’s UK insurance operations comprise:

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    SAIF and PAC WPSF      
    Mortgage loans* 1,282 269 1,036
    Policy loans 18 22 20
    Other loans 840 1,031 917
    Total PAC WPSF loans 2,140 1,322 1,973
    Shareholder-backed      
    Mortgage loans* 1,290 1,075 1,137
    Other loans 5 4 5
    Total shareholder-backed loans 1,295 1,079 1,142
    Total UK insurance operations loans 3,435 2,401 3,115

    * The mortgage loans are collateralised by properties. £1,161 million of the £1,290 million held for shareholder-backed business relate to lifetime (equity release) mortgage business which have an average loan to property value of 29 per cent.

    † Other loans held by the PAC WPSF are all commercial loans and comprise mainly syndicated loans.

  2. US insurance operations

    The loans of the Group’s US insurance operations comprise:

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    Mortgage loans 3,623 3,525 3,559
    Policy loans 545 536 551
    Other loans 1
    Total US insurance operations loans 4,168 4,062 4,110

    † All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are mainly industrial, multi-family residential, suburban office, retail and hotel. The breakdown by property type is as follows:

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    2012
    30 Jun
    %
    2011
    30 Jun
    %
    2011
    31 Dec
    %
    Industrial 27 27 28
    Multi-family residential 24 23 23
    Office 19 19 19
    Retail 19 20 19
    Hotels 11 10 11
    Other 1
      100 100 100

    The US insurance operations’ commercial mortgage loan portfolio has an average loan size of £6.7 million (30 June 2011: £6.3 million; 31 December 2011: £6.6 million). The portfolio has a current estimated average loan to value of 66 per cent (30 June 2011: 72 per cent; 31 December 2011: 68 per cent) which provides significant cushion to withstand substantial declines in value.

    At 30 June 2012, Jackson had mortgage loans with a carrying value of £84 million where the contractual terms of the agreements had been restructured. In addition to the regular impairment review afforded all loans in the portfolio, restructured loans are also reviewed for impairment. An impairment will be 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.

    ‡ The policy loans are fully secured by individual life insurance policies or annuity policies. These loans are accounted for at amortised cost, less any impairment.

  3. Asia insurance operations

    The loans of the Group’s Asia insurance operations comprise:

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    Mortgage loans‡ 34 31 31
    Policy loans‡ 593 544 572
    Other loans§ 544 708 630
    Total Asia insurance operations loans 1,171 1,283 1,233

    ‡ The mortgage and policy loans are secured by properties and life insurance policies respectively.

    § The majority of the other loans are commercial loans held by the operation in Malaysia and which are all investment graded by two local rating agencies.

  4. M&G

    The M&G loans relate to loans and receivables managed by Prudential Capital. These assets are generally secured but have no external credit ratings. Internal ratings prepared by the Group’s asset management operations, as part of the risk management process, are:

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    Loans and receivables internal ratings:      
    A+ to A- 108 29 129
    BBB+ to BBB- 980 943 1,000
    BB+ to BB- 89 255 89
    B+ to B- 30 44 38
    Total M&G loans 1,207 1,271 1,256

    All loans in the portfolio are currently paying interest on scheduled coupon dates and no interest due has been capitalised or deferred. All loans are in compliance with their covenants at 30 June 2012. The loans in the portfolio generally have ratchet mechanisms included within the loan agreements at inception so that margins increase over time to encourage early repayment or have had margins increased to reflect revised commercial terms.

Debt securities are carried at fair value. The amounts included in the statement of financial position are analysed as follows, with further information relating to the credit quality of the Group’s debt securities at 30 June 2012 provided in the notes below.

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2012 £m 2011 £m
30 Jun 30 Jun 31 Dec
Insurance operations      
UK note (i) 79,900 74,818 77,953
US note (ii) 27,061 25,286 27,022
Asia note (iii) 19,433 15,357 17,681
Asset management operations note (iv) 1,875 1,752 1,842
Total 128,269 117,213 124,498

Notes

  1. UK insurance operations

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    PAC with-profits sub-fund Other funds and subsidiaries UK insurance operations

    Scottish
    Amicable
    Insurance
    Fund
    £m
    Excluding
    Prudential
    Annuities
    Limited
    £m
    Prudential
    Annuities
    Limited
    £m
    Total
    £m
    Unit-
    linked
    assets
    £m
    PRIL
    £m
    Other
    annuity
    and
    long-term
    business
    £m
    2012
    30 Jun
    Total
    £m
    2011
    30 Jun
    Total
    £m
    2011
    31 Dec
    Total
    £m
    S&P – AAA 464 4,235 496 4,731 611 2,886 455 9,147 11,642 9,928
    S&P – AA+ to AA- 544 3,827 714 4,541 737 3,009 343 9,174 7,040 8,647
    S&P – A+ to A- 1,109 10,893 1,303 12,196 1,743 6,382 846 22,276 21,437 21,474
    S&P – BBB+ to BBB- 899 9,255 656 9,911 1,224 3,783 607 16,424 12,775 15,746
    S&P – Other 241 2,176 59 2,235 152 254 38 2,920 3,080 3,175
      3,257 30,386 3,228 33,614 4,467 16,314 2,289 59,941 55,974 58,970
    Moody’s – Aaa 262 2,510 1,227 3,737 1,186 2,412 691 8,288 7,898 7,945
    Moody’s – Aa1 to Aa3 37 340 85 425 109 429 87 1,087 687 651
    Moody’s – A1 to A3 39 473 62 535 52 428 53 1,107 772 1,008
    Moody’s – Baa1 to Baa3 52 539 164 703 99 321 41 1,216 1,001 1,030
    Moody’s – Other 13 170 8 178 41 29 7 268 404 242
      403 4,032 1,546 5,578 1,487 3,619 879 11,966 10,762 10,876
    Fitch 21 208 77 285 31 164 19 520 475 492
    Other 307 4,058 932 4,990 150 1,922 104 7,473 7,607 7,615
    Total debt securities 3,988 38,684 5,783 44,467 6,135 22,019 3,291 79,900 74,818 77,953

    Where no external ratings are available, internal ratings produced by the Group’s asset management operation, which are prepared on the Company’s assessment of a comparable basis to external ratings, are used where possible. The £7,473 million total debt securities held at 30 June 2012 (30 June 2011: £7,607 million; 31 December 2011: £7,615 million) which are not externally rated are either internally rated or unrated. These are analysed as follows:

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    Internal ratings or unrated:      
    AAA to A- 2,847 2,276 2,726
    BBB to B- 3,599 3,791 3,773
    Below B- or unrated 1,027 1,540 1,116
    Total 7,473 7,607 7,615

    The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. Of the £2,026 million PRIL and other annuity and long-term business investments which are not externally rated, £6 million were internally rated AAA, £313 million AA, £641 million A, £838 million BBB, £112 million BB and £116 million were internally rated B+ and below or unrated.

  2. US insurance operations

    US insurance operations held total debt securities with a carrying value of £27,061 million at 30 June 2012 (30 June 2011: £25,286 million; 31 December 2011: £27,022 million). The table below provides information relating to the credit risk of the aforementioned debt securities.

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    Summary 2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    Corporate and government security and commercial loans:      
    Government 2,107 1,758 2,163
    Publicly traded and SEC Rule 144A securities 16,724 14,872 16,281
    Non-SEC Rule 144A securities 3,263 3,058 3,198
    Total 22,094 19,688 21,642
    Residential mortgage-backed securities 2,282 2,536 2,591
    Commercial mortgage-backed securities 2,129 2,274 2,169
    Other debt securities 556 788 620
    Total debt securities 27,061 25,286 27,022

    The following table summarises the securities detailed above by rating as at 30 June 2012 using Standard and Poor’s (S&P), Moody’s, Fitch and implicit ratings of mortgage-backed securities (MBS) based on NAIC valuations:

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec*
    £m
    S&P – AAA 71 3,252 133
    S&P – AA+ to AA- 4,187 835 4,476
    S&P – A+ to A- 6,767 5,490 6,382
    S&P – BBB+ to BBB- 8,516 7,872 8,446
    S&P – Other 954 939 999
      20,495 18,388 20,436
    Moody’s – Aaa 69 110 62
    Moody’s – Aa1 to Aa3 17 14 15
    Moody’s – A1 to A3 24 34 29
    Moody’s – Baa1 to Baa3 63 73 67
    Moody’s – Other 21 60 17
      194 291 190
    Implicit ratings of MBS based on NAIC valuations (see below)      
    NAIC 1 2,577 2,914 2,577
    NAIC 2 114 209 147
    NAIC 3-6 289 222 368
      2,980 3,345 3,092
    Fitch 220 97 184
    Other 3,172 3,165 3,120
    Total debt securities 27,061 25,286 27,022

    In the table above, with the exception of some mortgage-backed securities, S&P ratings have been used where available. For securities where S&P ratings are not immediately available, those produced by Moody’s and then Fitch have been used as alternatives.

    For some mortgage-backed securities within Jackson, the table above includes these securities using the regulatory ratings detail issued by the NAIC. These regulatory ratings levels were established by external third parties (PIMCO for residential mortgage-backed securities and BlackRock Solutions for commercial mortgage-backed securities).

    * The movement in the S&P AAA rated debt securities in the second half of 2011 reflects the downgrade of US Sovereign debt to AA+ in the period.

    † The amounts within ‘Other’ which are not rated by S&P, Moody’s nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following NAIC classifications:

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    NAIC 1 1,279 1,217 1,258
    NAIC 2 1,823 1,861 1,792
    NAIC 3-6 70 87 70
    Total 3,172 3,165 3,120
  3. Asia insurance operations

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    With-profits
    business
    £m
    Unit-linked
    assets
    £m
    Other
    business
    £m
    2012
    30 Jun
    Total
    £m
    2011
    30 Jun
    Total
    £m
    2011
    31 Dec
    Total
    £m
    S&P – AAA 605 20 40 665 2,370 1,423
    S&P – AA+ to AA- 2,877 84 1,868 4,829 1,981 3,843
    S&P – A+ to A- 1,843 582 1,088 3,513 3,070 3,055
    S&P – BBB+ to BBB- 1,204 79 366 1,649 1,066 1,451
    S&P – Other 1,081 578 765 2,424 1,787 2,137
      7,610 1,343 4,127 13,080 10,274 11,909
    Moody’s – Aaa 691 233 475 1,399 1,344 1,489
    Moody’s – Aa1 to Aa3 62 70 10 142 129 128
    Moody’s – A1 to A3 210 32 62 304 146 304
    Moody’s – Baa1 to Baa3 139 183 68 390 52 131
    Moody’s – Other 72 14 14 100 64 59
      1,174 532 629 2,335 1,735 2,111
    Fitch 27 18 29 74 146 351
    Other 1,664 1,034 1,246 3,944 3,202 3,310
    Total debt securities 10,475 2,927 6,031 19,433 15,357 17,681

    The following table analyses debt securities of ‘Other business’ which are not externally rated:

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    2012
    30 Jun
    Total £m
    2011
    30 Jun
    Total £m
    2011
    31 Dec
    Total £m
    Government bonds 352 387 244
    Corporate bonds rated as investment grade by local external ratings agencies 854 626 776
    Structured deposits issued by banks which are themselves rated, but where the specific deposits are not rated 113
    Other 40 25 45
    Total 1,246 1,151 1,065
  4. Asset Management Operations

    Of the total debt securities at 30 June 2012 of £1,875 million, £1,867 million was held by M&G.

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    M&G      
    AAA to A- by Standard and Poor’s or Aaa rated by Moody’s 1,620 1,573 1,547
    Other 247 166 287
    Total M&G 1,867 1,739 1,834
  5. Group exposure to holdings in asset-backed securities

    The Group’s exposure to holdings in asset-backed securities, which comprise residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed securities (ABS), at 30 June 2012 is as follows:

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    2012
    30 Jun
    £m
    2011
    30 Jun
    £m
    2011
    31 Dec
    £m
    Shareholder-backed operations (excluding assets held in unit-linked funds):      
    UK insurance operationsnote (a) 1,538 993 1,358
    US insurance operationsnote (b) 4,967 5,598 5,380
    Asia insurance operations 172 110 176
    Other operationsnote (d) 622 659 594
      7,299 7,360 7,508
    With-profits operations:      
    UK insurance operationsnote (a) 5,743 5,602 5,351
    Asia insurance operationsnote (c) 407 263 454
      6,150 5,865 5,805
    Total 13,449 13,225 13,313

    Notes

    1. UK insurance operations

      The UK insurance operations’ exposure to asset-backed securities at 30 June 2012 comprises:

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      2012
      30 Jun
      £m
      2011
      30 Jun
      £m
      2011
      31 Dec
      £m
      Shareholder-backed business (2012: 37% AAA, 12% AA)* 1,538 993 1,358
      With-profits operations (2012: 61% AAA, 8% AA)† 5,743 5,602 5,351
      Total 7,281 6,595 6,709

      * All of the exposure of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL.

      † Of the £5,743 million exposure of the with-profits operations at 30 June 2012 (30 June 2011: £5,602 million; 31 December 2011: £5,351 million), £1,683 million (30 June 2011: £1,242 million; 31 December 2011: £1,314 million) relates to exposure to the US markets and with the remaining exposure being primarily to the UK market.

    2. US insurance operations

      US insurance operations’ exposure to asset-backed securities at 30 June 2012 comprises:

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      2012
      30 Jun
      £m
      2011
      30 Jun
      £m
      2011
      31 Dec
      £m
      RMBS      
      Sub-prime (2012: 21% AAA, 3% AA) 213 218 207
      Alt-A (2012: 12% AAA, 4% AA) 281 390 310
      Prime including agency (2012: 3% AAA, 77% AA) 1,788 1,928 2,074
      CMBS (2012: 36% AAA, 10% AA) 2,129 2,274 2,169
      CDO funds (2012: 0% AAA, 1% AA)*, including £nil exposure to sub-prime 37 107 44
      Other ABS (2012: 16% AAA, 18% AA), including £6.4 million exposure to sub-prime 519 681 576
      Total 4,967 5,598 5,380

      * Including the Group’s economic interest in Piedmont and other consolidated CDO funds.

      † MBS ratings refer to the ratings implicit within NAIC risk-based capital valuation see note C (a).

    3. Asia insurance operations

      The Asia insurance operations’ exposure to asset-backed securities is primarily held by the with-profits operations.

      The £407 million (30 June 2011: £263 million; 31 December 2011: £454 million) asset-backed securities exposure of the Asia with-profits operations comprises:

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      2012
      30 Jun
      £m
      2011
      30 Jun
      £m
      2011
      31 Dec
      £m
      CMBS 124 88 149
      CDO funds and ABS 283 175 305
      Total 407 263 454

      The £407 million includes £332 million (30 June 2011: £176 million; 31 December 2011: £398 million) held by investment funds consolidated under IFRS in recognition of the control arrangements for those funds and include an amount not owned by the Group with a corresponding liability of £22 million (30 June 2011: £7 million; 31 December 2011: £20 million) on the statement of financial position for net asset value attributable to external unit holders in respect of these funds, which are non-recourse to the Group. Of the £407 million, 61 per cent (30 June 2011: 52 per cent; 31 December 2011: 75 per cent) are investment graded by Standard and Poor’s.

    4. Other operations

      Other operations’ exposure to asset-backed securities at 30 June 2012 is held by Prudential Capital and comprises:

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      2012
      30 Jun
      £m
      2011
      30 Jun
      £m
      2011
      31 Dec
      £m
      RMBS: Prime (2012: 92% AAA, 4% AA) 363 340 340
      CMBS (2012: 30% AAA, 14% AA) 132 185 146
      CDO funds and other ABS – all without sub-prime exposure (2012: 99% AAA) 127 134 108
      Total 622 659 594
  6. Group sovereign debt exposure

    The exposure of the Group’s shareholder and with-profits funds to sovereign debt (including credit default swaps that are referenced to sovereign debt) at 30 June 2012 is as follows:

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    30 Jun 2012 £m 31 Dec 2011 £m
    Shareholder
    sovereign
    debt
    With-profits
    sovereign
    debt
    Shareholder
    sovereign
    debt
    With-profits
    sovereign
    debt
    Continental Europe:        
    Italy 44 54 43 52
    Spain 1 36 1 33
      45 90 44 85
    Germany 463 530 598 602
    Other Europe (principally Isle of Man and Belgium) 58 47 48 62
      566 667 690 749
    United Kingdom 3,323 2,303 3,254 2,801
    United States 2,365 3,305 2,448 2,615
    Other, predominantly Asia 2,888 341 2,850 332
    Total 9,142 6,616 9,242 6,497

    Sovereign debt represented 15 per cent or £9.1 billion of the debt portfolio backing shareholder business at 30 June 2012 (31 December 2011: 16 per cent or £9.2 billion). 43 per cent of this was rated AAA and 91 per cent investment grade (31 December 2011: 43 per cent AAA, 94 per cent investment grade). At 30 June 2012, the Group’s total holding in continental Europe shareholder sovereign debt fell from £690 million at 31 December 2011 to £566 million, principally due to a reduction in the level of German debt held from £598 million to £463 million. Of the total £566 million debt, 82 per cent was AAA rated (31 December 2011: 87 per cent AAA rated). Shareholder exposure to the Eurozone sovereigns of Portugal, Italy, Ireland, Greece and Spain (PIIGS) is £45 million (31 December 2011: £44 million). The Group does not have any sovereign debt exposure to Greece, Portugal or Ireland.

Exposure to bank debt securities

The Group held the following direct exposures to bank debt securities of shareholder-backed business at 30 June 2012 and 31 December 2011.

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  Bank debt securities – shareholder-backed business £m
  Senior debt Subordinated debt    
Covered Senior Total senior
debt
  Tier 2 Tier 1 Total
subordinated
debt
  30 Jun
2012
Total
Portugal 26 26     26
Ireland 14 14     14
Italy 11 11   56 56   67
Greece    
Spain 137 10 147   42 3 45   192
  137 61 198   98 3 101   299
Austria   10 10   10
Belgium    
France 17 34 51   58 30 88   139
Germany 31 31   1 1   32
Luxembourg    
Netherlands 11 11   89 66 155   166
United Kingdom 457 182 639   618 101 719   1,358
Total Europe 611 319 930   874 200 1,074   2,004
United States 1,434 1,434   382 1 383   1,817
Other, predominantly Asia 20 303 323   339 229 568   891
Total 631 2,056 2,687   1,595 430 2,025   4,712

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Bank debt securities – shareholder-backed business £m
Senior debt Subordinated debt    
Covered Senior Total senior
debt
  Tier 2 Tier 1 Total
subordinated
debt
  31 Dec
2011
Total
Portugal 24 24     24
Ireland 13 13     13
Italy 11 11   56 14 70   81
Greece    
Spain 107 11 118   90 2 92   210
  107 59 166   146 16 162   328
Austria   9 9   9
Belgium    
France 2 34 36   78 35 113   149
Germany 28 28   1 1   29
Luxembourg    
Netherlands 7 7   81 64 145   152
United Kingdom 228 145 373   615 95 710   1,083
Total Europe 337 273 610   930 210 1,140   1,750
United States 1,362 1,362   352 2 354   1,716
Other, predominantly Asia 246 246   562 33 595   841
Total 337 1,881 2,218   1,844 245 2,089   4,307

In addition to the exposures held by the shareholder-backed business, the Group held the following bank debt securities at 30 June 2012 and 31 December 2011 within its with-profits funds.

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Bank debt securities – participating funds £m
Senior debt Subordinated debt    
Covered Senior Total senior
debt
  Tier 2 Tier 1 Total
subordinated
debt
  30 Jun
2012
Total
Portugal 7 7     7
Ireland 5 - 5     5
Italy 47 47   49 49   96
Greece    
Spain 157 12 169   5 1 6   175
  162 66 228   54 1 55   283
Austria    
Belgium    
France 11 69 80   48 5 53   133
Germany 6 6     6
Luxembourg    
Netherlands 133 133   4 4   137
United Kingdom 704 435 1,139   753 42 795   1,934
Total Europe 877 709 1,586   855 52 907   2,493
United States 1,720 1,720   202 36 238   1,958
Other, predominantly Asia 9 437 446   202 130 332   778
Total 886 2,866 3,752   1,259 218 1,477   5,229

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Bank debt securities – shareholder-backed business £m
Senior debt Subordinated debt    
Covered Senior Total senior
debt
  Tier 2 Tier 1 Total
subordinated
debt
  31 Dec
2011
Total
Portugal 7 7     7
Ireland 5 5     5
Italy 45 45   49 2 51   96
Greece    
Spain 137 137   1 1   138
  142 52 194   50 2 52   246
Austria    
Belgium    
France 80 80   47 17 64   144
Germany 7 7     7
Luxembourg 7 7     7
Netherlands 80 80   14 28 42   122
United Kingdom 319 385 704   772 74 846   1,550
Total Europe 461 611 1,072   883 121 1,004   2,076
United States 1,378 1,378   396 278 674   2,052
Other, predominantly Asia 1 384 385   341 20 361   746
Total 462 2,373 2,835   1,620 419 2,039   4,874

i Valuation basis

Under IAS 39, unless categorised as ‘held to maturity’ or ‘loans and receivables’ debt securities are required to be fair valued. Where available, quoted market prices are used. However, where securities do not have an externally quoted price based on regular trades or where markets for the securities are no longer active as a result of market conditions, IAS 39 requires that valuation techniques be applied. IFRS 7 requires classification of the fair values applied by the Group into a three level hierarchy. At 30 June 2012, 0.1 per cent of Jackson’s debt securities were classified as level 3 (30 June 2011: 0.1 per cent; 31 December 2011: 0.1 per cent) comprising of fair values where there are significant inputs which are not based on observable market data.

ii Accounting presentation of gains and losses

With the exception of debt securities of US insurance operations classified as ‘available-for-sale’ under IAS 39, unrealised value movements on the Group’s investments are booked within the income statement. For with-profits operations, such value movements are reflected in changes to asset share liabilities to policyholders or the liability for unallocated surplus. For shareholder-backed operations, the unrealised value movements form part of the total return for the year booked in the profit before tax attributable to shareholders. Separately, as noted elsewhere and in note C in this report, and as applied previously, the Group provides an analysis of this profit distinguishing operating profit based on longer-term investment returns and short-term fluctuations in investment returns.

However, for debt securities classified as available-for-sale, unless impaired, fair value movements are recognised in other comprehensive income. Realised gains and losses, including impairments, recorded in the income statement are as shown in note F of this report. This classification is applied for most of the debt securities of the Group’s US insurance operations.

iii Half year 2012 movements in unrealised gains and losses

In half year 2012 there was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of £2,057 million to a net unrealised gain of £2,522 million. This increase reflects the effects of lower interest rates. The gross unrealised gain in the statement of financial position increased from £2,303 million at 31 December 2011 to £2,679 million at 30 June 2012, while the gross unrealised loss decreased from £246 million at 31 December 2011 to £157 million at 30 June 2012.

These features are included in the table shown below of the movements in the values of available-for-sale securities.

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30 Jun 2012 31 Dec 2011
Changes in
unrealised
appreciation
Foreign
exchange
translation
Reflected as part of movement in comprehensive income
£m £m £m £m
  • * Book value represents cost/amortised cost of the debt securities.
  • † Translated at the average rate of US$1.5768: £1.
  • ‡ Debt securities for US operations included in the statement of financial position at 30 June 2012 and as referred to in note T, comprise:
Assets fair valued at below book value:        
Book value* 1,670     2,455
Unrealised loss(iv)(a), (b) (157) 87 2 (246)
Fair value (as included in statement of financial position) 1,513     2,209
Assets fair valued at or above book value:        
Book value* 22,863     22,504
Unrealised gain 2,679 395 (19) 2,303
Fair value (as included in statement of financial position) 25,542     24,807
Total:        
Book value* 24,533     24,959
Net unrealised gain (loss) 2,522 482 (17) 2,057
Fair value (as included in statement of financial position)‡ 27,055     27,016

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2012
30 Jun
£m
2011
31 Dec
£m
Available-for-sale 27,055 27,016
Consolidated investment funds classified as fair value through profit and loss 6 6
  27,061 27,022

Included within the movement in gross unrealised losses for the debt securities of Jackson of £87 million as shown above was a net decrease in value of £12 million relating to sub-prime and Alt-A securities for which the carrying values are shown in the ‘Fair value of securities as a percentage of book value’ table below.

iv Debt securities classified as available-for-sale in an unrealised loss position

The following tables show some key attributes of those securities that are in an unrealised loss position at 30 June 2012.

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

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

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30 Jun 2012 £m 31 Dec 2011 £m
Fair value Unrealised
loss
Fair value Unrealised
loss
Between 90% and 100% 1,160 (27) 1,829 (60)
Between 80% and 90% 190 (31) 172 (28)
Below 80%note (d) 163 (99) 208 (158)
Total 1,513 (157) 2,209 (246)

Included within the table above are amounts relating to sub-prime and Alt-A securities of:

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30 Jun 2012 £m 31 Dec 2011 £m
Fair value Unrealised
loss
Fair value Unrealised
loss
Between 90% and 100% 127 (5) 142 (7)
Between 80% and 90% 50 (9) 58 (11)
Below 80%note(d) 62 (25) 69 (35)
Total 239 (39) 269 (53)

(b) Unrealised losses by maturity of security

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2012
30 Jun
£m
2011
31 Dec
£m
Less than 1 year
1 year to 5 years (2) (7)
5 years to 10 years (18) (28)
More than 10 years (11) (28)
Mortgage-backed and other debt securities (126) (183)
Total (157) (246)

(c) Age analysis of unrealised losses for the years 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:

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30 Jun 2012 £m 31 Dec 2011 £m
Non-
investment
grade
Investment
grade
Total Non-
investment
grade
Investment
grade
Total
Less than 6 months (7) (15) (22) (11) (31) (42)
6 months to 1 year (4) (6) (10) (7) (8) (15)
1 year to 2 years (5) (3) (8) (5) (1) (6)
2 years to 3 years (3) (3) (7) (10) (17)
More than 3 years (52) (62) (114) (61) (105) (166)
Total (71) (86) (157) (91) (155) (246)

At 30 June 2012, the gross unrealised losses in the statement of financial position for the sub-prime and Alt-A securities in an unrealised loss position were £39 million (31 December 2011: £53 million), as shown above in note (a). Of these losses £2 million (31 December 2011: £10 million) relate to securities that have been in an unrealised loss position for less than one year and £37 million (31 December 2011: £43 million) to securities that have been in an unrealised loss position for more than one year.

(d) Securities whose fair value were below 80 per cent of the book value

As shown in the table (a) above, £99 million of the £157 million of gross unrealised losses at 30 June 2012 (31 December 2011: £158 million of the £246 million of gross unrealised losses) related to securities whose fair value was below 80 per cent of the book value. The analysis of the £99 million (31 December 2011: £158 million), by category of debt securities and by age analysis indicating the length of time for which their fair value was below 80 per cent of the book value, is as follows:

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  30 Jun 2012 £m 31 Dec 2011 £m
Category analysis Fair
value
Unrealised
loss
Fair
value
Unrealised
loss
Residential mortgage-backed securities:        
Prime (including agency) 27 (10) 38 (16)
Alt-A 11 (3) 12 (3)
Sub-prime 51 (22) 58 (32)
  89 (35) 108 (51)
Commercial mortgage-backed securities 8 (29) 6 (29)
Other asset-backed securities 53 (31) 65 (58)
Total structured securities 150 (95) 179 (138)
Corporates 13 (4) 29 (20)
Total 163 (99) 208 (158)

The following table shows the age analysis as at 30 June 2012, of the securities whose fair value were below 80 per cent of the book value:

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  30 Jun 2012 £m 31 Dec 2011 £m
Age analysis Fair
value
Unrealised
loss
Fair
value
Unrealised
loss
Less than 3 months 32 (10) 15 (5)
3 months to 6 months 45 (15)
More than 6 months 131 (89) 148 (138)
Total 163 (99) 208 (158)

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  2012 £m 2011 £m
  30 Jun 30 Jun 31 Dec

Notes

  1. The maturity profile, currencies and interest rates applicable to the core structural borrowings of shareholder-financed operations of the Group are as detailed in note H13 of the Group's consolidated financial statements for the year ended 31 December 2011. There were no changes in half year 2012 affecting these core structural borrowings.
  2. These debt classifications are consistent with the treatment of capital for regulatory purposes, as defined in the FSA handbook. In January 2011, the Company issued US$550 million 7.75 per cent Tier 1 subordinated debt, primarily to retail investors. The proceeds, net of costs, were US$539 million (£340 million) and were used to finance the repayments of the €500 million Tier 2 subordinated debt in December 2011. The Group has designated US$2.85 billion (30 June and 31 December 2011: US$2.85 billion) of its Tier 1 subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the net investment in Jackson.
  3. The senior debt ranks above subordinated debt in the event of liquidation.
  4. The £250 million PruCap bank loan was made in December 2010 in two tranches: £135 million maturing in June 2014, currently drawn at a cost of twelve month £LIBOR plus 1.2 per cent and £115 million maturing in December 2012, currently drawn at a cost of twelve month £LIBOR plus 0.99 per cent.
  5. Including central finance subsidiaries.
Core structural borrowings of shareholder-financed operations:note (i)      
Perpetual subordinated capital securities (Innovative Tier 1)note (ii) 1,808 1,764 1,823
Subordinated notes (Lower Tier 2)note (ii) 830 1,280 829
Subordinated debt total 2,638 3,044 2,652
Senior debt:note (iii)      
2023 300 300 300
2029 249 249 249
Holding company total 3,187 3,593 3,201
PruCap bank loannote (iv) 250 250 250
Jackson surplus notes (Lower Tier 2)note (ii) 159 155 160
Total (per condensed consolidated statement of financial position) 3,596 3,998 3,611
Less: Holding company cash and short-term investments (recorded within the condensed consolidated statement of financial position)note (v) (1,222) (1,476) (1,200)
Net core structural borrowings of shareholder-financed operations 2,374 2,522 2,411

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  2012 £m 2011 £m
  30 Jun 30 Jun 31 Dec

Notes

  1. In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in April 2012 which mature in October 2012. These Notes have been wholly subscribed to by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued in October 2008 and have been reissued upon their maturity.
  2. Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall. In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB) and was secured on collateral posted with FHLB by Jackson. The Group has chosen to designate as a fair value hedge under IAS 39 certain fixed to floating rate swaps which hedge the fair value interest rate exposure movements of these borrowings.
Operational borrowings attributable to shareholder-financed operationsnote (i)      
Borrowings in respect of short-term fixed income securities programmes 2,568 2,633 2,956
Non-recourse borrowings of US operations 20 34 21
Other borrowingsnote (ii) 216 245 363
Total 2,804 2,912 3,340
Borrowings attributable to with-profits operations      
Non-recourse borrowings of consolidated investment funds 742 1,212 747
£100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc 100 100 100
Other borrowings (predominantly obligations under finance leases) 113 128 125
Total 955 1,440 972

The Group asset/liability in respect of defined benefit pension schemes is as follows:

Summary Group position

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  2012 £m 2011 £m
  PSPS Other schemes 30 Jun 30 Jun 31 Dec

* At 30 June 2012, the PSPS’ pension asset of £167 million and the other schemes’ pension liability of £160 million were included within ‘Other debtors’ and ‘Provisions’, respectively on the condensed consolidated statement of financial position. The 2011 comparative liabilities of £361 million and £229 million as at 30 June 2011 and 31 December 2011 respectively, were included within ‘Provisions’.

Underlying economic surplusnote (ii) 1,416 9 1,425 754 1,543
Less: unrecognised surplus and adjustment for obligation for deficit fundingnote (ii) (1,249) (1,249) (893) (1,607)
Economic surplus (deficit) (including investment in Prudential insurance policies)note (ii) 167 9 176 (139) (64)
Attributable to:          
PAC with-profits fund 116 (18) 98 (74) (41)
Shareholder-backed operations 51 27 78 (65) (23)
Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies (169) (169) (222) (165)
IAS 19 pension asset (liability) on the Group statement of financial position* 167 (160) 7 (361) (229)

The Group business operations operate a number of pension schemes. The largest defined benefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). In the UK, the Group also operates two smaller defined benefit schemes for employees in respect of Scottish Amicable and M&G. For all three schemes the projected unit method was used for the most recent full actuarial valuations. There is also a small defined benefit pension scheme in Taiwan.

Defined benefit schemes in the UK are generally required to be subject to full actuarial valuation every three years in order to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds. The valuation of PSPS as at 5 April 2011 was finalised in the second quarter of 2012. This valuation demonstrated the scheme to be 111 per cent funded by reference to the Scheme Solvency Target that forms the basis of the scheme’s funding objective. As a result of this valuation, future contributions into the scheme have been reduced to the minimum level of contributions required under the scheme rules effective from July 2012. Excluding expenses, the contributions will fall to approximately £6 million per annum from the £50 million per annum paid previously. The new contributions are only for ongoing service of current employees. No deficit type funding is required. Deficit funding for PSPS, where applicable, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations following detailed consideration in 2005 of the sourcing of previous contributions. Employer contributions for ongoing service of current employees are apportioned in the ratio relevant to current activity.

The valuation of the Scottish Amicable Pension Scheme (SAPS) as at 31 March 2008 demonstrated the scheme to be 91 per cent funded. Based on this valuation and subsequent agreement with the Trustees, deficit funding of £13.1 million per annum is currently being paid into the scheme. The valuation of SAPS as at 31 March 2011 is currently being finalised, but it is anticipated the current level of funding will continue, extending the Group’s commitment to pay deficit funding.

The valuation of the M&G pension scheme as at 31 December 2008 demonstrated the scheme to be 76 per cent funded. Based on this valuation, deficit funding amounts designed to eliminate the actuarial deficit over a five year period have been made from January 2010 of £14.1 million per annum for the first two years and £9.3 million per annum for the subsequent three years. During 2011, the Group agreed with the Trustees to pay an additional funding of £1.2 million per annum from January 2012, until the conclusion of the next formal valuation as at 31 December 2011 which is currently in progress.

Under the IAS 19 ‘Employee Benefits’ valuation basis, the Group applies IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’. Under IFRIC 14, a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service which have been substantively enacted or contractually agreed. Further, the IFRS financial position recorded reflects the higher of any underlying IAS 19 deficit and any obligation for committed deficit funding obligation.

For PSPS, the Group does not have unconditional right of refund to any surplus of the scheme. Accordingly, prior to the finalisation of the 5 April 2011 triennial valuation, the Group had not recognised the underlying surplus of PSPS (30 June 2011: £858 million gross of deferred tax; 31 December 2011: £1,588 million gross of deferred tax) and had recognised a liability for deficit funding (30 June 2011: £35 million gross of deferred tax; 31 December 2011: £19 million gross of deferred tax).

The underlying IAS 19 surplus for PSPS at 30 June 2012 was £1,416 million. The finalisation of the 5 April 2011 triennial valuation was accompanied by an agreement with the Trustees that additional deficit type funding would no longer be necessary and furthermore, the level of contributions for ongoing service of current employees was reduced to the minimum level required by the scheme rules. As a consequence, a portion of the surplus, being £169 million, is now recognised as recoverable. The £169 million represents the present value of the economic benefits available from the reductions to future ongoing contributions to the scheme. Accordingly, including a £2 million residual obligation for deficit funding from the 2008 valuation agreement, a net surplus of £167 million gross of deferred tax was recognised at 30 June 2012. Of this amount, £116 million was allocated to the PAC with-profits fund and £51 million was allocated to the shareholders’ fund.

The IAS 19 deficit of the Scottish Amicable Pension Scheme at 30 June 2012 was £35 million (30 June 2011: deficit of £99 million; 31 December 2011: deficit of £55 million) and has been allocated approximately 50 per cent to the PAC with-profits fund and 50 per cent to the shareholders’ fund.

The IAS 19 surplus of the M&G pension scheme on an economic basis at 30 June 2012 was £44 million (30 June 2011: deficit of £5 million; 31 December 2011: surplus of £10 million) and is wholly attributable to shareholders. The underlying position on an economic basis reflects the assets (including investments in Prudential insurance policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. As at 30 June 2012, the M&G pension scheme has invested £169 million in Prudential insurance policies (30 June 2011: £222 million; 31 December 2011: £165 million). After excluding these investments that are offset against liabilities to policyholders, the IAS 19 basis position of the M&G pension scheme is a deficit of £125 million (30 June 2011: deficit of £227 million; 31 December 2011: deficit of £155 million).

i Assumptions

The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the period ended 30 June 2012 were as follows:

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  2012
30 Jun
%
2011
30 Jun
%
2011
31 Dec
%
  • * The discount rate has been determined by reference to an ‘AA’ corporate bond index adjusted, where applicable, to allow for the difference in duration between the index and the pension liabilities.
  • † The rate of inflation reflects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes.
  • ‡ The rates of 2.5 per cent are those for PSPS. Assumed rates of increase of pensions in payments for inflation for all other schemes are 2.6 per cent for 30 June 2012 (30 June 2011: 2.7 per cent; 31 December 2011: 2.9 per cent).
Discount rate* 4.6 5.6 4.7
Rate of increase in salaries 2.6 5.7 2.9
Rate of inflation      
Retail Price Index (RPI) 2.6 3.7 2.9
Consumer Price Index (CPI) 1.6 2.7 1.9
Rate of increase of pensions in payment for inflation:      
Guaranteed (maximum 5%) 2.5 2.7 2.5
Guaranteed (maximum 2.5%) 2.5 2.5 2.5
Discretionary 2.5 2.5 2.5
Expected returns on plan assets 3.1 5.1 5.1

The calculations are based on current actuarially calculated mortality estimates with a specific allowance made for future improvements in mortality. The specific allowance for half year 2012 and full year 2011 is in line with a custom calibration of the 2009 mortality model from the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries (CMI).

The tables used for PSPS immediate annuities in payment at 30 June 2012, 30 June 2011 and 31 December 2011 were:

Male: 108.6 per cent PNMA 00 with improvements in line with a custom calibration of the CMIs 2009 mortality model, with a long-term mortality improvement rate of 1.75 per cent per annum; and

Female: 103.4 per cent PNFA 00 with improvements in line with a custom calibration of the CMIs 2009 mortality model, with a long-term mortality improvement rate of 1.00 per cent per annum.

ii Estimated pension scheme deficit – economic basis

Movements on the pension scheme deficit (determined on the economic basis) are as follows, with the effect of the application of IFRIC 14 being shown separately:

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  Half year 2012 £m
    (Charge) credit to
income statement
   
  Surplus
(deficit)
in scheme at
1 Jan 2012
Operating
results
(based on
longer-term
investment
returns)
note (a)
Actuarial and
other gains
and losses
note (b)
Contributions
paid
Surplus
(deficit)
in scheme at
30 Jun 2012
note (c)
All schemes          
Underlying position (without the effect of IFRIC 14)          
Surplus (deficit) 1,543 (137) (26) 45 1,425
Less: amount attributable to PAC with-profits fund (1,083) 89 40 (21) (975)
Shareholders’ share:          
Gross of tax surplus (deficit) 460 (48) 14 24 450
Related tax (117) 18 (3) (6) (108)
Net of shareholders’ tax 343 (30) 11 18 342
Effect of IFRIC 14          
Derecognition of surplus and set-up of additional funding obligation (1,607) 119 239 (1,249)
Less: amount attributable to PAC with-profits fund 1,124 (81) (166) 877
Shareholders’ share:          
Gross of tax surplus (deficit) (483) 38 73 (372)
Related tax 123 (16) (18) 89
Net of shareholders’ tax (360) 22 55 (283)
With the effect of IFRIC 14          
Surplus (deficit) (64) (18) 213 45 176
Less: amount attributable to PAC with-profits fund 41 8 (126) (21) (98)
Shareholders’ share:          
Gross of tax surplus (deficit) (23) (10) 87 24 78
Related tax 6 2 (21) (6) (19)
Net of shareholders’ tax (17) (8) 66 18 59

Notes

  1. The components of the credit (charge) to operating results (comprising amounts attributable to the PAC with-profits fund and shareholderbacked operations) are as follows:

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  2012
Half year
£m
2011
Half year
£m
2011
Full year
£m
Current service cost (17) (19) (35)
Past service cost:      
RPI to CPI inflation measure change in 2011note (i) 282 282
Exceptional discretionary pension increase for PSPS in 2012note (i) (106)
Finance (expense) income:      
Interest on pension scheme liabilities (132) (153) (299)
Expected return on assets 118 156 308
Total (charge) credit without the effect of IFRIC 14 (137) 266 256
Effect of IFRIC 14 for pension schemes 119 (220) (229)
Total (charge) credit after the effect of IFRIC 14 as shown above relating to the Group’s operating profit based on longer-term investment returnsnote (ii) (18) 46 27

Notes

  1. Past service cost
    RPI/CPI inflation measure change in 2011
    During 2011 the Group altered its inflation measure basis for future statutory increases to pension payments for certain tranches of its UK defined benefit pension schemes. This reflected the UK Government's decision to replace the basis of indexation from RPI with CPI.
    The £282 million credit in 2011 shown above comprised £216 million for PSPS and £66 million for other schemes. As noted earlier, the PSPS scheme surplus was not recognised for accounting purposes due to the application of IFRIC 14. The £66 million for other schemes (as shown in the table below) was allocated as £24 million to PAC with-profits fund and £42 million to shareholders referred to in note C.

    Exceptional discretionary pension increase for PSPS in 2012
    During the first half of 2012, the Group awarded an exceptional discretionary increase to pensions in payment of PSPS, which resulted in a past service cost of £106 million. As the PSPS scheme surplus is substantially not recognised for accounting purposes, this past service cost has no impact on the Group's results.
  2. The net (charge) credit to operating profit (comprising amounts attributable to the PAC with-profits fund and shareholder-backed operations) of £(18) million (half year 2011: £46 million; full year 2011: £27 million) is made up the following:

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  2012
Half year
£m
2011
Half year
£m
2011
Full year
£m

Consistent with the derecognition of a substantial portion of the Company's interest in the underlying IAS 19 surplus of PSPS, the charge to operating profit based on longer-term investment returns for PSPS reflects the cash cost of contributions for ongoing service of active members. In addition, the charge to the operating results also includes a charge for the unwind of discount on the opening provision for deficit funding for PSPS.

Underlying IAS 19 charge for other pension schemes (8) (9) (17)
Cash costs for PSPS (10) (10) (20)
Unwind of discount on opening provision for deficit funding for PSPS (1) (2)
Negative past service cost – RPI to CPI inflation measure change (note (i) to table above) 66 66
  (18) 46 27

(b) The components of the credit (charge) for actuarial and other gains and losses (comprising amounts attributable to the PAC with-profits fund and shareholder-backed operations) are as follows:

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  2012
Half year
£m
2011
Half year
£m
2011
Full year
£m
Actual less expected return on assets (32) 65 982
Gains (losses) on changes of assumptions for plan liabilities 10 69 (414)
Experience (losses) gains on liabilities (4) (5) 314
Total (charge) credit without the effect of IFRIC 14 (26) 129 882
Effect of IFRIC 14 for pension schemes 239 (141) (846)
Actuarial and other gains and losses after the effect of IFRIC 14 213 (12) 36

The net credit (charge) for actuarial and other gains and losses is recorded within the income statement but, within the segmental analysis of profit, the shareholders’ share of actuarial and other gains and losses (ie net of allocation of the share to the PAC with-profits funds) is excluded from operating profit based on longer-term investment returns.

The half year 2012 actuarial and other gains of £213 million (comprising amounts attributable to PAC with-profits fund and shareholder-backed operations and before the application of IFRIC 14) primarily reflects the positive impact of inflation rate movements in the period, offset by lower discount rates as interest rate falls, and partial recognition of actuarial surplus in PSPS described below.

Consistent with the derecognition of a substantial portion of the Company’s interest in the underlying IAS 19 surplus of PSPS under IFRIC 14, the actuarial gains and losses of PSPS is not included in the £213 million above. Rather, for half year 2012, a £51 million credit was included in the actuarial and other gains for the effect of the partial recognition of PSPS’ surplus. This credit arises from altered funding arrangement following the finalisation of the 5 April 2011 triennial valuation.

(c) On the ‘economic basis’, after including the underlying assets represented by the investments in Prudential insurance policies as scheme assets, the underlying statements of financial position of the schemes were:

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  2012
30 Jun
£m
2011
30 Jun
£m
2011
31 Dec
£m
Equities 512 513 483
Bonds 5,852 4,491 5,954
Properties 327 345 317
Cash-like investments 485 805 409
Total value of assets 7,176 6,154 7,163
Present value of benefit obligations (5,751) (5,400) (5,620)
  1,425 754 1,543
Effect of the application of IFRIC 14 for pension schemes:      
Derecognition of PSPS surplus (1,247) (858) (1,588)
Adjust for additional funding for PSPS (2) (35) (19)
Pre-tax surplus (deficit) 176 (139) (64)

iii Sensitivity of the pension scheme liabilities to key variables

The total underlying Group pension scheme liabilities of £5,751 million (30 June 2011: £5,400 million; 31 December 2011: £5,620 million) comprise £5,007 million (30 June 2011: £4,612 million; 31 December 2011: £4,844 million) for PSPS and £744 million (30 June 2011: £788 million; 31 December 2011: £776 million) for the other schemes. The table below shows the sensitivity of the underlying PSPS and the other scheme liabilities at 30 June 2012, 30 June 2011 and 31 December 2011 to changes in discount rates, inflation rates and mortality rates.

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30 Jun 2012
Assumption Change in assumption Impact on scheme liabilities on IAS 19 basis  
Discount rate Decrease by 0.2% from 4.6% to 4.4% Increase in scheme liabilities by:  
    PSPS 3.0%
    Other schemes 4.8%
Discount rate Increase by 0.2% from 4.6% to 4.8% Decrease in scheme liabilities by:  
    PSPS 2.9%
    Other schemes 4.5%
Rate of inflation RPI: Decrease by 0.2% from 2.6% to 2.4%
CPI: Decrease by 0.2% from 1.6% to 1.4%
with consequent reduction in salary increases
Decrease in scheme liabilities by:  
    PSPS 1.5%
    Other schemes 4.3%
Mortality rate Increase life expectancy by 1 year Increase in scheme liabilities by:  
    PSPS 2.7%
    Other schemes 2.3%

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30 Jun 2011
Assumption Change in assumption Impact on scheme liabilities on IAS 19 basis  
Discount rate Decrease by 0.2% from 5.6% to 5.4% Increase in scheme liabilities by:  
    PSPS 3.5%
    Other schemes 5.0%
Discount rate Increase by 0.2% from 5.6% to 5.8% Decrease in scheme liabilities by:  
    PSPS 3.3%
    Other schemes 4.6%
Rate of inflation RPI: Decrease by 0.2% from 3.7% to 3.5%
CPI: Decrease by 0.2% from 2.7% to 2.5%
with consequent reduction in salary increases
Decrease in scheme liabilities by:  
    PSPS 1.1%
    Other schemes 4.7%
Mortality rate Increase life expectancy by 1 year Increase in scheme liabilities by:  
    PSPS 2.1%
    Other schemes 2.6%

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31 Dec 2011
Assumption Change in assumption Impact on scheme liabilities on IAS 19 basis  
Discount rate Decrease by 0.2% from 4.7% to 4.5% Increase in scheme liabilities by:  
    PSPS 3.3%
    Other schemes 4.8%
Discount rate Increase by 0.2% from 4.7% to 4.9% Decrease in scheme liabilities by:  
    PSPS 3.1%
    Other schemes 4.5%
Rate of inflation RPI: Decrease by 0.2% from 2.9% to 2.7%
CPI: Decrease by 0.2% from 1.9% to 1.7%
with consequent reduction in salary increases
Decrease in scheme liabilities by:  
    PSPS 0.6%
    Other schemes 4.1%
Mortality rate Increase life expectancy by 1 year Increase in scheme liabilities by:  
    PSPS 2.7%
    Other schemes 2.4%

The sensitivity of the underlying pension scheme liabilities to changes in discount, inflation and mortality rates as shown above does not directly equate to an impact on the profit or loss attributable to shareholders or shareholders’ equity due to the effect of the application of IFRIC 14 on PSPS and the allocation of a share of the interest in financial position of the PSPS and Scottish Amicable schemes to the PAC with-profits fund as described above.

The sensitivity to the changes in the key variables as shown in the table above has no significant impact on the pension costs included in the Group’s operating results. This is due to the pension costs charged in each of the periods presented being derived largely from market conditions at the beginning of the period. After applying IFRIC 14 and to the extent attributable to shareholders, any residual impact from the changes to these variables is reflected as actuarial gains and losses on defined benefit pension schemes within the supplementary analysis of profits. The relevance of this is described further below.

For PSPS, a substantial portion of the underlying surplus of the scheme to the amount of £1,355 million (30 June 2011: the whole surplus of £858 million; 31 December 2011: the whole surplus of £1,588 million) has not been recognised under IFRIC 14. Changes to the underlying scheme liabilities as a result of assumption changes are used to reduce this unrecognised surplus before there is an impact on the Group’s results and financial position. As such, based on the underlying financial position of PSPS as at 30 June 2012, none of the changes to the underlying scheme liabilities for the changes in the variables shown in the table above have had an impact on the Group’s half year 2012 results and financial position.

In the event that a change in the PSPS scheme liabilities results in a deficit position for the scheme which is recognisable, the deficit recognised affects the Group’s results and financial position only to the extent of the amounts attributable to shareholder operations. The amounts attributable to the PAC with-profits fund are absorbed by the liability for unallocated surplus and have no direct effect on the profit or loss attributable to shareholders or shareholders’ equity.

The deficit of the Scottish Amicable pension scheme has been allocated approximately 50 per cent to the PAC with-profits fund and 50 per cent to the shareholders. Accordingly, half of the changes to its scheme liabilities, which at 30 June 2012 were £516 million (30 June 2011: £540 million; 31 December 2011: £527 million), for the changes in the variables shown in the table above would have had an impact on the Group’s shareholder results and financial position.

Analysis of movement in policyholder liabilities and unallocated surplus of with-profits funds

Group insurance operations

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  Insurance operations £m
Half year 2012 movements UK US Asia Total

* Averages have been based on opening and closing balances and exclude the unallocated surplus of the with-profits funds.

Comprising:        
– Policyholder liabilities 127,024 69,189 30,862 227,075
– Unallocated surplus of with-profits funds 9,165 50 9,215
At 1 January 2012 136,189 69,189 30,912 236,290
Premiums 4,062 7,303 2,641 14,006
Surrenders (2,378) (2,083) (1,252) (5,713)
Maturities/Deaths (3,819) (451) (294) (4,564)
Net flows (2,135) 4,769 1,095 3,729
Shareholders’ transfers post-tax (110) (15) (125)
Investment-related items and other movements 4,276 1,906 1,055 7,237
Foreign exchange translation differences (83) (600) (227) (910)
At 30 June 2012 138,137 75,264 32,820 246,221
Comprising:        
– Policyholder liabilities 128,387 75,264 32,768 236,419
– Unallocated surplus of with-profits funds 9,750 52 9,802
Half year 2011 movements        
Comprising:        
– Policyholder liabilities 125,530 60,523 28,674 214,727
– Unallocated surplus of with-profits funds 10,187 66 10,253
At 1 January 2011 135,717 60,523 28,740 224,980
Premiums 3,871 6,805 2,395 13,071
Surrenders (2,301) (2,153) (1,119) (5,573)
Maturities/Deaths (3,571) (436) (341) (4,348)
Net flows (2,001) 4,216 935 3,150
Shareholders’ transfers post-tax (113) (14) (127)
Investment-related items and other movements 3,632 1,429 634 5,695
Foreign exchange translation differences 120 (1,461) (53) (1,394)
At 30 June 2011 137,355 64,707 30,242 232,304
Comprising:        
– Policyholder liabilities 126,544 64,707 30,181 221,432
– Unallocated surplus of with-profits funds 10,811 61 10,872
Average policyholder liability balances*        
Half year 2012 127,705 72,227 31,815 231,747
Half year 2011 126,037 62,615 29,428 218,080

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.

Premiums, surrenders and maturities/deaths represent the amounts impacting policyholder liabilities and are not intended to represent the total cash paid/received (for example, premiums are net of any deductions to cover acquisition costs and claims represents the policyholder liabilities released).

UK insurance operations

A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations is as follows:

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    Other shareholder-backed funds and subsidiaries  
Half year 2012 movements SAIF
and PAC
with-profits
sub-fund
£m
Unit-
linked
liabilities
£m
Annuity
and other
long-term
business
£m
Total
£m

* Averages have been based on opening and closing balances and exclude the unallocated surplus of the with-profits funds.

Notes

  1. Net outflows increased from £2.0 billion in the first half of 2011 to £2.1 billion for the same period in 2012. An improvement in the net outflows of the with-profits business, following increased sales of with-profits bonds in the period, has been more than offset by an increase in outflows in the unit-linked business. The levels of inflows/outflows for unit-linked business is driven by the activity of corporate pension schemes with transfers in or out from only one or two schemes influencing the level of flows in the period. The net flows of negative £497 million in unit-linked business was a result of lower single premiums in and higher transfers out of the All Stocks Corporate Bonds fund.
  2. Investment-related items and other movements of £4.3 billion across fund types reflected the continued strong performance of UK equity markets in 2012, as well as investment gains from debt securities.
Comprising:        
– Policyholder liabilities 80,976 21,281 24,767 127,024
– Unallocated surplus of with-profits funds 9,165 9,165
At 1 January 2012 90,141 21,281 24,767 136,189
Premiums 2,044 1,064 954 4,062
Surrenders (1,071) (1,247) (60) (2,378)
Maturities/Deaths (2,649) (314) (856) (3,819)
Net flowsnote (a) (1,676) (497) 38 (2,135)
Shareholders’ transfers post-tax (110) (110)
Switches (131) 131
Investment-related items and other movementsnote (b) 2,900 343 1,033 4,276
Foreign exchange translation differences (83) (83)
At 30 June 2012 91,041 21,258 25,838 138,137
Comprising:        
– Policyholder liabilities 81,291 21,258 25,838 128,387
– Unallocated surplus of with-profits funds 9,750 9,750
Half year 2011 movements        
Comprising:        
– Policyholder liabilities 81,586 21,671 22,273 125,530
– Unallocated surplus of with-profits funds 10,187 10,187
At 1 January 2011 91,773 21,671 22,273 135,717
Premiums 1,693 1,261 917 3,871
Surrenders (1,216) (1,085) (2,301)
Maturities/Deaths (2,473) (322) (776) (3,571)
Net flowsnote (a) (1,996) (146) 141 (2,001)
Shareholders’ transfers post-tax (113) (113)
Switches (113) 113
Investment-related items and other movementsnote (b) 2,527 666 439 3,632
Foreign exchange translation differences 120 120
At 30 June 2011 92,198 22,304 22,853 137,355
Comprising:        
– Policyholder liabilities 81,387 22,304 22,853 126,544
– Unallocated surplus of with-profits funds 10,811 10,811
Average policyholder liability balances*        
Half year 2012 81,134 21,269 25,302 127,705
Half year 2011 81,487 21,987 22,563 126,037

US insurance operations

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Half year 2012 movements Variable
annuity
separate
account
liabilities
£m
Fixed annuity,
GIC and other
business
£m
Total
£m

* Averages have been based on opening and closing balances

Notes

  1. Movements in the period have been translated at an average rate of $1.58/£1.00 (30 June 2011: $1.62/£1.00). The closing balances have been translated at closing rate of $1.57/£1.00 (30 June 2011: $1.61/£1.00). Differences upon retranslation are included in foreign exchange translation differences.
  2. Net flows have increased by £553 million from £4,216 million in the first half of 2011 to £4,769 million in the first half of 2012. The increase was largely driven by increased new business volumes for fixed annuity and GIC business. The flows in the fixed annuity, GIC and other business column include flows from non-VA business as well as the flows in relation to investments into the general account from the variable annuities where policyholders have selected this basis.
  3. Positive investment-related items and other movements in variable annuity separate account liabilities of £1.6 billion for the first six months of 2012 reflects the increase in the US equity market during the period. Fixed annuity,GIC and other business investment and other movements primarily reflects the interest credited to policyholder account in the period.
At 1 January 2012 37,833 31,356 69,189
Premiums 5,060 2,243 7,303
Surrenders (1,024) (1,059) (2,083)
Maturities/Deaths (194) (257) (451)
Net flowsnote (b) 3,842 927 4,769
Transfers from general to separate account 708 (708)
Investment-related items and other movementsnote (c) 1,557 349 1,906
Foreign exchange translation differencesnote (a) (315) (285) (600)
At 30 June 2012 43,625 31,639 75,264
Half year 2011 movements      
At 1 January 2011 31,203 29,320 60,523
Premiums 5,015 1,790 6,805
Surrenders (974) (1,179) (2,153)
Maturities/Deaths (148) (288) (436)
Net flowsnote (b) 3,893 323 4,216
Transfers from general to separate account 541 (541)
Investment-related items and other movementsnote (c) 1,103 326 1,429
Foreign exchange translation differences (735) (726) (1,461)
At 30 June 2011 36,005 28,702 64,707
Average policyholder liability balances *      
Half year 2012 40,729 31,498 72,227
Half year 2011 33,604 29,011 62,615

Asia insurance operations

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Half year 2012 movements With-profits
business
£m
Unit-linked
liabilities
£m
Other
£m
Total
£m

* Averages have been based on opening and closing balances and exclude unallocated surplus of the with-profits funds. There were no corporate transactions in both periods that had an impact on the averages.

Notes

  1. Movements in the period have been translated at the average exchange rate for the six months ended 30 June 2012. The closing balance has been translated at the closing spot rates as at 30 June 2012. Differences upon retranslation are included in foreign exchange translation differences.
  2. Net flows have increased by £160 million from £935 million in 2011 to £1,095 million in 2012 primarily reflecting increased flows from new business and growth in the in-force books.
  3. The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 5.2 per cent in the first half of 2012 which is broadly in line with 5.1 per cent in the first half of 2011. For with-profits business, surrenders have increased from £215 million in 2011 to £303 million in 2012, primarily as a result of certain products in Hong Kong reaching their five year anniversary, the point at which some product features trigger.
  4. Positive investment-related items and other movements of £1,055 million in half year 2012 primarily reflects improvements in the Asian equity market, together with positive movements within the with-profits funds including positive returns in Hong Kong and Singapore.
Comprising:        
– Policyholder liabilities 12,593 12,015 6,254 30,862
– Unallocated surplus of with-profits funds 50 50
At 1 January 2012 12,643 12,015 6,254 30,912
Premiums        
New business 110 638 297 1,045
In-force 593 617 386 1,596
  703 1,255 683 2,641
Surrendersnote (c) (303) (819) (130) (1,252)
Maturities/Deaths (196) (16) (82) (294)
Net flowsnote (b) 204 420 471 1,095
Shareholders’ transfers post-tax (15) (15)
Investment-related items and other movementsnote (d) 558 325 172 1,055
Foreign exchange translation differencesnote (a) 6 (167) (66) (227)
At 30 June 2012 13,396 12,593 6,831 32,820
Comprising:        
– Policyholder liabilities 13,344 12,593 6,831 32,768
– Unallocated surplus of with-profits funds 52 52
Half year 2011 movements        
Comprising:        
– Policyholder liabilities 10,958 12,724 4,992 28,674
– Unallocated surplus of with-profits funds 66 66
At 1 January 2011 11,024 12,724 4,992 28,740
Premiums        
New business 90 553 305 948
In-force 506 578 363 1,447
  596 1,131 668 2,395
Surrendersnote (c) (215) (799) (105) (1,119)
Maturities/Deaths (249) (16) (76) (341)
Net flowsnote (b) 132 316 487 935
Shareholders’ transfers post-tax (14) (14)
Investment-related items and other movementsnote (d) 449 110 75 634
Foreign exchange translation differencesnote (a) (61) 72 (64) (53)
At 30 June 2011 11,530 13,222 5,490 30,242
Comprising:        
– Policyholder liabilities 11,469 13,222 5,490 30,181
– Unallocated surplus of with-profits funds 61 61
Average policyholder liability balances*        
Half year 2012 12,969 12,304 6,542 31,815
Half year 2011 11,214 12,973 5,241 29,428

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  Number of
ordinary
shares
Share
capital
£m
Share
premium
£m
  Number of
ordinary
shares
Share
capital
£m
Share
premium
£m
Issued shares of 5p each fully paid:      
At 1 January 2011 2,545,594,506 127 1,856
Shares issued under share option schemes 2,122,869 15
At 30 June 2011 2,547,717,375 127 1,871
       
At 1 January 2011 2,545,594,506 127 1,856
Shares issued under share option schemes 2,444,824 17
At 31 December 2011 2,548,039,330 127 1,873
       
At 1 January 2012 2,548,039,330 127 1,873
Shares issued under share option schemes 8,209,568 14
At 30 June 2012 2,556,248,898 127 1,887

Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account.

At 30 June 2012, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:

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  Number of shares
to subscribe for
Share price range Exercisable
by year
  from to
30 June 2012 8,181,704 288p 572p 2017
30 June 2011 12,027,702 288p 572p 2016
31 December 2011 13,329,709 288p 572p 2017

Transactions by Prudential plc and its subsidiaries in Prudential plc shares

The Group buys and sells Prudential plc (own shares) either in relation to its share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. Further information about these transactions is set out below.

The cost of own shares of £101 million as at 30 June 2012 (30 June 2011: £82 million; 31 December 2011: £109 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans and savings-related share option schemes. At 30 June 2012, 6.5 million (30 June 2011: 5.2 million; 31 December 2011: 8.1 million) Prudential plc shares with a market value of £49 million (30 June 2011: £38 million; 31 December 2011: £52 million) were held in such trusts. Of this total, 6.5 million (30 June 2011: 5.1 million; 31 December 2011: 8.0 million) shares were held in trusts under employee incentive plans.

In half year 2012, the Company purchased the following number of shares in respect of employee incentive plans.

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  Number of
shares
purchased*
(in millions)
Cost
£m

* The maximum number of shares held during half year 2012 was 8.1 million which was at the beginning of the period.

Half year 2012 5.8 44.2
Half year 2011 3.2 15.5
Full year 2011 8.2 54.7

Of the total shares held in trust 0.1 million (30 June 2011: 0.1 million; 31 December 2011: 0.1 million) were held by a qualifying employee share ownership trust. These shares are expected to be fully distributed in the future on maturity of savings-related share option schemes.

The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 30 June 2012 was 8.3 million (30 June 2011: 9.2 million; 31 December 2011: 8.6 million) and the cost of acquiring these shares of £50 million (30 June 2011: £45 million; 31 December 2011: £52 million) is included in the cost of own shares. The market value of these shares as at 30 June 2012 was £56 million (30 June 2011: £66 million; 31 December 2011: £54 million).

During half year 2012 these funds made net disposals of 357,340 Prudential shares (30 June 2011: 554,285; 31 December 2011: 1,171,635) for a net decrease of £2.6 million to book cost (30 June 2011: net decrease of £2 million; 31 December 2011: net increase of £4.8 million).

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

Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2012 or 2011.

Acquisition of Reassure America Life Insurance Company (REALIC)

On 30 May 2012, Jackson National Life Insurance Company (JNLI), an indirect wholly-owned subsidiary of Prudential plc, entered into an agreement to buy SRLC America Holding Corp. (SRLC), a life insurance business, from Swiss Re. The primary operating subsidiary of SRLC is REALIC. Swiss Re will retain a portion of the SRLC business through reinsurance arrangements to be undertaken prior to closing. JNLI will pay US$621 million (£398 million) in cash for the business financed from its own resources. The price is subject to adjustment to reflect the actual value of SRLC according to its balance sheet at closing. This adjustment is not expected to exceed £60 million. The transaction is subject to regulatory approval and is expected to close in the third quarter of 2012. The acquisition-related costs incurred in the period have been expensed in half year 2012.

The Group had two associates at 30 June 2012 (30 June 2011: two; 31 December 2011: one) that were accounted for under the equity method. The Group’s associates at 30 June 2012 are a 25 per cent interest in PruHealth Holdings Limited and a 47 per cent interest in PPM South Africa, following the dilution of the Group’s holding in the period (see note G). At 30 June 2011, in addition to PruHealth, the Group had a 30 per cent interest in The Nam Khang, a Vietnamese property developer which was disposed of in the second half of 2011. The Group’s share of the profit and loss of these associates during the period was a profit of £6 million (half year 2011: a loss of £1 million; full year 2011: a loss of £3 million). This is reflected in the Group’s profit after tax attributable to equity holders during the period.

The Group owns a number of joint ventures. Joint ventures represent activities over which the Group exercises joint control through contractual agreement with one or more parties. The Group’s significant joint ventures, which are accounted for using proportionate consolidation, comprise various joint ventures relating to property investments where the Group has a 50 per cent interest as well as the following interests:

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Investment % held Principal activity Country
CITIC Prudential Life Insurance Company Limited 50 Life assurance China
CITIC-Prudential Fund Management Company Limited 49 Asset management China
ICICI Prudential Asset Management Company Limited 49 Asset management India
Prudential BSN Takaful Berhad 49 General and life insurance Malaysia
BOCI-Prudential Asset Management Limited 36 Asset management China
ICICI Prudential Life Insurance Company Limited 26 Life assurance India

Joint ventures contributed £51 million (30 June 2011: £20 million; 31 December 2011: £54 million) to profit after tax attributable to equity holders during the period. The period-on-period movements in these joint ventures’ contributions reflect primarily the growth in their operating profit based on longer-term investment returns and the increase in short-term fluctuations in investment returns by these joint ventures.

Further, in June 2012, the PAC with-profits fund, via its venture fund holdings and as part of its investment portfolio, entered into a joint venture to acquire control of Veolia Water RegCo, the UK regulated water business of Veolia Environnement S.A. This joint venture investment is carried at fair value through profit and loss in the Group’s financial statements, as permitted under IAS 28, ‘Investments in associates and joint ventures’.

In addition to the above, the Group has associates that are carried at fair value through profit and loss, as allowed under IAS 28, that comprise investment in Open-Ended Investment Companies (OEICs), unit trusts, funds holding collateralised debt obligations, property unit trusts and venture capital investments of the PAC with-profits funds where the Group has significant influence.

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 2011.

There were no transactions with related parties during the six months ended 30 June 2012 which have had a material effect on the results or financial position of the Group.

The Group is involved in various litigation and regulatory issues. Whilst the outcome of such matters cannot be predicted with certainty, Prudential believes that the ultimate outcome of such litigation and regulatory issues will not have a material adverse effect on the Group’s financial condition, results of operations or cash flows.

There have been no material changes to the Group’s contingencies and related obligations in the six month period ended 30 June 2012.

The 2012 interim dividend approved by the Board of Directors after 30 June 2012 is as described in note M.

Details of the reduction in the UK corporation tax rate to 23 per cent which became substantively enacted after the balance sheet date on 3 July 2012 and the subsequent proposed phased rate change to 22 per cent are as described in note K. The changes to the rules relating to the taxation of life insurance companies, which will be effective 1 January 2013 are also outlined in note K.

 
 

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