Financial review

Results summary

International Financial Reporting Standards (IFRS) basis results

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2013 2012
  Half year Half year Full year
Profit after tax attributable to equity holders of the Companynote £365m £887m £2,163m
Basic earnings per sharenote 14.3p 35.0p 85.1p
Shareholders' equity, excluding non-controlling interests £9.6bn £9.3bn £10.4bn

European Embedded Value (EEV) basis results

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2013 2012
  Half year Half year Full year

Note

  • For IFRS reporting purposes, the Group adopted new and amended accounting standards in 2013. Accordingly, the IFRS elements and EEV basis shareholders' interest for the comparative results have been adjusted for the retrospective application of this adoption of IFRS accounting policies, as discussed in note B of the IFRS financial statement and note 1 of the EEV basis results.
Profit after tax attributable to shareholdersnote £1,924m £1,364m £3,769m
Basic earnings per sharenote 75.5p 53.8p 148.3p
Shareholders' equity, excluding non-controlling interests £24.5bn £20.6bn £22.4bn

Basis of preparation

Results bases

The IFRS basis results have been prepared in accordance with the accounting policies discussed in note A of the IFRS financial statements.

Life insurance products are, by their nature, long term and the profit on this business is generated over a significant number of years. Accounting under IFRS alone does not, in Prudential’s opinion, fully reflect the value of future profit streams. Prudential considers that embedded value reporting provides investors with a measure of the future profit streams of the Group’s in-force long-term businesses and is a valuable supplement to statutory accounts. The EEV basis results have been prepared in accordance with the EEV principles discussed in note 1 of the EEV basis supplementary information.

Operating profit based on longer-term investment returns

The Group provides supplementary analysis of profit before tax attributable to shareholders so as to distinguish operating profit based on longer-term investment returns from the other elements of total profit shown. Operating profit per share is calculated using operating profits based on longer-term investment returns, after related tax and non-controlling interests. In 2013, operating profit excludes the results of the Japan Life insurance business, together with the effect of it being classified as held for sale and written down to fair value less costs to sell at 30 June 2013. 2012 comparatives have been retrospectively adjusted on a comparable basis.

Exchange translation – Actual Exchange Rate (AER) and Constant Exchange Rate (CER)

The comparative results have been prepared using previously reported exchange rates (AER basis) except where otherwise stated. Results on a CER basis are also shown for the analysis of IFRS and EEV operating profit based on longer-term investment returns.

IFRS profits

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AER CER
  Half year
2013
£m
Half year
2012
note
£m
Change
%
Half year
2012
note
£m
Change
%

Note

The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards as discussed in note B of the IFRS financial statements. In addition, following its reclassification as held for sale at 30 June 2013, operating results exclude the result of the Japan Life insurance business. 2012 comparatives have been retrospectively adjusted on a comparable basis.

Insurance business  
Long-term business:  
Asia 476 406 17 409 16
US 582 442 32 452 29
UK 341 336 1 336 1
Development expenses (2) (3) 33 (3) 33
Long-term business operating profit 1,397 1,181 18 1,194 17
UK general insurance commission 15 17 (12) 17 (12)
Asset management business:  
M&G (including Prudential Capital) 225 199 13 199 13
Eastspring Investments 38 32 19 32 19
Curian 14 7 100 7 100
US broker-dealer and asset management 20 10 100 11 82
1,709 1,446 18 1,460 17
Other income and expenditure (270) (255) (6) (255) (6)
Solvency II implementation costs (13) (27) 52 (27) 52
Restructuring costs (11) (7) (57) (7) (57)
Total IFRS basis operating profit based on longer-term investment returns 1,415 1,157 22 1,171 21
Short-term fluctuations in investment returns:  
Insurance operations (725) (94)
Other operations (30) 47
(755) (47)
(Loss) profit attaching to held for sale Japan Life business (124) 14
Gain on dilution of Group holdings 42
Amortisation of acquisition accounting adjustments (30)
Profit before tax attributable to shareholders 506 1,166
Tax charge attributable to shareholders’ returns (141) (279)
Profit for the period attributable to shareholders 365 887

In the first half of 2013, the Group’s IFRS operating profit based on longer-term investment returns was £1,415 million, an increase of 22 per cent from the first half of 2012. The improvement predominantly reflects the strong growth in total contributions from Asia and the US, which were up 18 per cent and 34 per cent respectively, reflecting the continuing growth of the in-force portfolio.

The total profit before tax attributable to shareholders was £506 million in the first half of 2013 compared to £1,166 million in the first half of 2012. As well as the improvement in operating profit discussed above, profit before tax is impacted by:

Short-term fluctuations in investment returns

IFRS operating profit is based on longer-term investment return assumptions. The difference between actual investment returns recorded in the income statement and these longer-term returns is shown as short-term fluctuations in investment returns. In 2013, for our insurance operations these total negative £725 million, comprising negative £137 million for Asia, negative £441 million in the US and negative £147 million in the UK.

In Asia, the negative short-term fluctuations of £137 million primarily reflect net unrealised movements on bond holdings following a rise in bond yields during the period. Negative fluctuations of £441 million in the US mainly represent the net unrealised value movement on derivatives held to manage the Group’s exposure to market movements following rises in equity values. Jackson hedges its variable annuity book on an economic basis and, thus, accepts a degree of variability in its IFRS results in the short term in order to achieve the appropriate economic result. The negative fluctuations of £147 million in the UK relate to net unrealised movements on fixed income assets supporting the capital of the shareholder-backed annuity business.

Short-term fluctuations for other operations were negative £30 million (2012: positive £47 million) representing net unrealised movements on centrally held derivatives to manage foreign exchange and certain macroeconomic exposures of the Group.

Amortisation of acquisition accounting adjustments

The amortisation primarily comprises the difference between the yield on the acquired investments on purchase of REALIC in 2012 based on market values at acquisition and historic investment income on book yields recognised in IFRS operating profit. Movement in the fair value acquisition adjustments on the value of in-force business acquired is also included.

Agreement to sell Japan Life business

On 16 July 2013, the Group reached an agreement to sell its closed book life insurance business in Japan, PCA Life Insurance Company Limited, to SBI Holdings Inc. for US$85 million (£56 million at 30 June 2013 closing exchange rate). The transaction is subject to regulatory approval. Consistent with the classification of the business as held for sale, the IFRS carrying value has been set to £53 million, representing the estimated proceeds, net of related expenses of £3 million. The loss of £124 million (2012: profit of £14 million) comprises the 2013 reduction on remeasuring the carrying value of the business and its trading results.

Effective tax rates

The 2013 effective rate of tax on operating profit based on longer-term investment returns was 24 per cent (2012: 24 per cent).

The 2013 effective rate of tax on the total IFRS profit was 28 per cent (2012: 24 per cent). The 2013 effective tax rate reflects the inclusion of items in the overall result (such as the loss on the held for sale Japan business) which attracts no tax relief.

EEV profits

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AER CER
  Half year
2013
£m
Half year
2012
note
£m
Change
%
Half year
2012
note
£m
Change
%

Note

For IFRS reporting purposes, the Group adopted new and amended accounting standards in 2013. Accordingly, the IFRS elements and EEV basis shareholders' interest for the comparative results have been adjusted for the retrospective application of this adoption of IFRS accounting policies, as discussed in note 1 of the EEV basis results. In addition, following its reclassification as held for sale at 30 June 2013, operating results exclude the result of the Japan Life insurance business. 2012 comparatives have been retrospectively adjusted on a comparable basis.

Insurance business
Long-term business:
 
Asia 1,079 874 23 880 23
US 1,016 805 26 822 24
UK 404 490 (18) 490 (18)
Development expenses (2) (3) 33 (3) 33
Long-term business operating profit 2,497 2,166 15 2,189 14
UK general insurance commission 15 17 (12) 17 (12)
Asset management business:  

M&G (including Prudential Capital) 225 199 13 199 13
Eastspring Investments 38 32 19 32 19
Curian 14 7 100 7 100
US broker-dealer and asset management 20 10 100 11 82
2,809 2,431 16 2,455 14
Other income and expenditure (304) (285) (7) (285) (7)
Solvency II implementation costs (14) (29) 52 (29) 52
Restructuring costs (12) (8) (50) (8) (50)
Total EEV basis operating profit 2,479 2,109 18 2,133 16
Short-term fluctuations in investment returns:  
Insurance operations (778) 162
Other operations (30) 47
(808) 209
Mark to market value movements on core borrowings 203 (113)
Effect of changes in economic assumptions 684 (361)
(Loss) profit attaching to held for sale Japan Life business (47) 5
Gain on dilution of Group holdings 42
Profit before tax attributable to shareholders 2,511 1,891
Tax charge attributable to shareholders’ profit (587) (527)
Profit for the year attributable to shareholders 1,924 1,364

Prudential Group’s EEV operating profit based on longer-term investment returns was £2,479 million in the first half of 2013, 18 per cent higher than the £2,109 million earned in the first half of 2012. The improvement reflects higher profits generated from new business (up 11 per cent to £1,268 million) and increased profitability from our growing in-force portfolio.

Long-term business operating profit generated by the Group was £2,497 million (2012: £2,166 million). This profit comprises:

  • New business profit of £1,268 million (2012: £1,141 million);
  • In-force profit of £1,231 million (2012: £1,028 million); and
  • Negative £2 million for development expenses (2012: negative £3 million).

The contribution to operating profit from life in-force business increased by 20 per cent to £1,231 million (2012: £1,028 million), reflecting our focus on managing our existing book of business for value. This result comprises £954 million (2012: £761 million) from the unwind of the discount on the opening embedded value and other expected returns and £277 million (2012: £267 million) from the effect of operating assumption changes, experience variances and other items. The unwind of discount and other expected returns is £193 million higher than 2012, primarily reflecting the recent growth in the business and the positive effect of higher long-term interest rates.

Asia continues to be the highest contributor to the Group’s life profit, contributing £1,079 million in the first half of 2013 (2012: £874 million). Included in Asia’s result is £420 million of profit from in-force business (2012: £327 million), comprising £400 million (2012: £318 million) from the unwind of the discount rate and operating assumption changes and experience variances which netted to an overall modest positive of £20 million (2012: positive £9 million). This evidences the resilience of our portfolio of businesses in the region.

US life in-force profit was higher at £537 million in the first half of 2013 compared to £363 million in the first half of 2012, with the first half of 2013 including £23 million of profit from REALIC. Overall experience and operating assumption changes contributed positive £250 million towards in-force profits compared to £165 million in the first half of 2012. Within these amounts, beneficial spread gains were £125 million (2012: £98 million) with the remaining £125 million (2012: £67 million) profit representing Jackson’s focus on managing its in-force book of business with discipline.

UK life in-force profit was lower for the first six months of 2013 at £274 million (2012: £338 million). The unwind of the discount increased to £267 million for 2013 (2012: £245 million), primarily reflecting the growth of the in-force portfolio. Despite the market disruptions that accompanied the introduction of a number of regulatory developments, the UK life in-force business has delivered a positive overall experience result of £7 million (2012: £93 million). The 2012 result benefited from sizeable trading profits which did not recur and, among other items, included a positive £43 million, representing the effects on future profits arising from the reduction in UK corporation taxes enacted during that period. Recently announced further reductions to UK tax rates were not enacted until July 2013, so the benefit of these will be recognised in the second half of 2013.

In the first half of 2013, total profits before tax attributable to shareholders were 33 per cent higher at £2,511 million (2012: £1,891 million). As well as the increase in operating profit discussed above, this profit before tax is impacted by:

EEV short-term fluctuations in investment returns

EEV operating profit is based on longer-term investment return assumptions rather than actual investment returns achieved. Short-term fluctuations in investment returns represent the difference between the actual investment return and those assumed in arriving at the reported operating profit.

Short-term fluctuations in investment returns for insurance operations of negative £778 million comprised negative £282 million for Asia, negative £404 million for our US operations and negative £92 million in the UK.

In Asia, negative short-term fluctuations of £282 million principally reflect unrealised movements on bond holdings in the period. In the US, the favourable impact of market movements on the expected level of future fee income from the variable annuity separate accounts is more than offset by the net value movements on derivatives held to manage Group’s equity and interest rate exposure, to give overall negative fluctuations of £404 million in the first half of 2013. In the UK, negative fluctuations of £92 million includes the impact of rising bond yields on the unrealised value movements on the fixed income assets supporting the shareholder-backed annuity business.

Effect of changes in economic assumptions

The effect of changes in economic assumptions of positive £684 million comprises positive £333 million for Asia, positive £62 million for the US and positive £289 million for the UK. These reflect the aggregate net benefit of the increase in long-term yields in the first half of 2013 on future in-force profits across all of these businesses.

Agreement to sell Japan Life business

On 16 July 2013, the Group reached an agreement to sell its closed book life insurance business in Japan, PCA Life Insurance Company Limited, to SBI Holdings Inc. for US$85 million (£56 million at 30 June 2013 closing exchange rate). The transaction is subject to regulatory approval. Consistent with the classification of the business as held for sale, the EEV carrying value has been set to £53 million, representing the estimated proceeds, net of related expenses of £3 million. The loss of £47 million (2012: profit of £5 million) comprises the 2013 reduction on remeasuring the carrying value of the business and its trading results.

Effective tax rates

The 2013 effective rate of tax on operating profit based on longer-term investment returns was 27 per cent (2012: 27 per cent).

The 2013 effective rate of tax on total EEV profit of 23 per cent was lower than the equivalent rate in the previous year (2012: 28 per cent), reflecting changes in the composition of non-operating items and non-tax effective mark to market value adjustments.

Movement on shareholders’ funds

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  AER
  IFRS £m EEV £m
  Half year
2013
Half year
2012
note (a)
Full year
2012
note (a)
Half year
2013
Half year
2012
note (a)
Full year
2012
note (a)

Notes

  1. For IFRS reporting purposes, the Group adopted new and amended accounting standards in 2013. Accordingly, the IFRS elements and EEV basis shareholders' interest for the comparative results have been adjusted for the retrospective application of this adoption of IFRS accounting policies, as discussed in note B of the IFRS financial statement and note 1 of the EEV basis results.
  2. Net of related changes to deferred acquisition costs and tax.
  3. EEV shareholders' funds excluding goodwill attributable to shareholders at 30 June 2013 is £23,048 million (30 June 2012: £19,138 million; 31 December 2012: £20,974 million).
Operating profit based on longer-term investment returns 1,415 1,157 2,520 2,479 2,109 4,313
Items excluded from operating profit (909) 9 227 32 (218) 644
Total profit before tax 506 1,166 2,747 2,511 1,891 4,957
Tax and non-controlling interests (141) (279) (584) (587) (527) (1,188)
Profit for the period 365 887 2,163 1,924 1,364 3,769
Exchange movements, net of related tax 232 (54) (216) 693 (125) (469)
Unrealised gains and losses on Jackson securities classified as available-for-salenote (b) (837) 196 387
Shareholders' share of actuarial and other gains and losses on defined pension schemes (21) 65 34 (26) 77 44
Dividends (532) (440) (655) (532) (440) (655)
New share capital subscribed 1 14 17 1 14 17
Other 58 60 65 19 78 100
Net (decrease) increase in shareholders’ funds (734) 728 1,795 2,079 968 2,806
Shareholders’ funds at beginning of the period 10,359 8,564 8,564 22,443 19,637 19,637
Shareholders’ funds at end of the period 9,625 9,292 10,359 24,522 20,605 22,443
Comprising:  
Long-term business:  
Free surplus   3,278 2,778 2,957
Required capital   4,263 3,623 3,898
Net worth   7,541 6,401 6,855
Value of in-force   17,114 14,001 15,411
Total   24,655 20,402 22,266
Other business   (133) 203 177
Totalnote (c)   24,522 20,605 22,443
Net asset value per share 376p 364p 405p 958p 806p 878p

IFRS

IFRS shareholders’ funds at 30 June 2013 were £9.6 billion. This compares to £10.4 billion at 31 December 2012, a decrease of £0.8 billion.

This decrease of £0.8 billion mainly reflect the profit after tax of £365 million and positive foreign exchange movements of £232 million, following the strengthening of the US dollar and certain Asian currencies, being more than offset by dividend payments of £532 million and the unrealised loss of £837 million arising in the first half of 2013 on Jackson’s debt securities. For debt securities in Jackson which are classified as ‘available-for-sale’, unless impaired, fair value movements are recognised in other comprehensive income while realised gains and losses, including impairments, are recorded in income statement. At 30 June 2013, the cumulative unrealised gain on Jackson’s ‘available-for-sale’ debt securities included in the shareholders’ funds was a positive £588 million, net of DAC and tax (31 December 2012: £1,425 million).

EEV

On an EEV basis, which recognises the shareholders’ interest in long-term business, shareholders’ funds at 30 June 2013 were £24.5 billion, an increase of £2.1 billion from 31 December 2012 (£22.4 billion). This increased level of shareholders’ funds primarily reflects the profit after tax of £1,924 million, the positive exchange movements of £693 million as a result of the strengthening of the US dollar and certain Asian currencies, offset by dividend payments of £532 million.

Free surplus and holding company cash flow

Overview

The Group manages its internal cash flow by focusing on the free surplus generated by the life and asset management businesses. Remittances are, however, made as and when required by the holding company with excess surplus being left in the businesses where it can be redeployed most profitably.

Free surplus generation

Sources and uses of free surplus generation from the Group’s insurance and asset management operations

The Group’s free surplus at the end of the period comprises free surplus for the insurance businesses, representing the excess of the net worth over the required capital included in the EEV results, and IFRS net assets for the asset management businesses excluding goodwill.

The free surplus generation for the insurance business represents amounts maturing from the in-force operations during the period less the investment in new business. For asset management operations we have defined free surplus generation to be the total post-tax IFRS profit for the period.

The Group’s free surplus generated also includes the general insurance commission earned during the period and excludes foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs.

The total movement in free surplus net of tax in the period can be analysed as follows:

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2013 £m 2012 £mnote (a)
  Half year Half year Full year

Notes

  1. For IFRS reporting purposes, the Group adopted the amended accounting standard on pension accounting. Accordingly, the IFRS elements and EEV basis shareholders' interest for the comparative results have been adjusted for the retrospective application of this adoption of IFRS accounting policy as discussed in note 1 of the EEV basis results. In addition, following its reclassification as held for sale at 30 June 2013, operating results exclude the result of the Japan Life insurance business. 2012 comparatives have been retrospectively adjusted on a comparable basis.
  2. Other movements and timing differences includes £365 million arising on the acquisition of Thanachart Life.
Free surplus generation  
Expected in-force cash flows (including expected return on net assets): 1,345 1,270 2,405
Life operations 1,106 1,079 2,019
Asset management and other operations 239 191 386
Changes in operating assumptions and experience variances 203 125 293
Underlying free surplus generated in the period from in-force business 1,548 1,395 2,698
Investment in new business (396) (364) (618)
Underlying free surplus generated in the period 1,152 1,031 2,080
Market-related items (294) (201) (104)
Increase in EEV assumed level of required capital (59)
Gain on dilution of Group holdings 42 42
Acquisition of REALIC (169)
(Loss) profit attaching to held for sale Japan Life business (56) 25 31
Free surplus generated in the period 743 897 1,880
Net cash remitted by the business units (844) (726) (1,200)
Other movements (including foreign exchange effects) and timing differencesnote (b) 556 (143) (412)
Total movement during the period 455 28 268
Free surplus at 1 January 3,689 3,421 3,421
Free surplus at end of the period 4,144 3,449 3,689
Comprised of:  
Free surplus relating to long-term insurance business 3,278 2,778 2,957
Free surplus of other insurance business 11 13 25
IFRS net assets of asset management businesses excluding goodwill 855 658 707
Total free surplus 4,144 3,449 3,689

During the first half of 2013, Prudential generated underlying free surplus from the in-force book of £1,548 million (2012: £1,395 million), reflecting the progress we have made in growing the portfolio of business and our focus on managing the in-force book for value. Changes in operating assumptions and experience variances were £203 million in the first half of 2013 compared with £125 million in 2012. These variances included positive £32 million from Asia (2012: negative £6 million), £38 million from the UK (2012: £14 million) and £133 million from the US (2012: £117 million), principally driven by favourable spread experience in the period.

Underlying free surplus generated from in-force business has been used by our life businesses to invest in new business. Investment in new business has increased by 9 per cent to £396 million in the first half of 2013. This compares to a 7 per cent increase in APE sales and an 11 per cent increase in new business profit.

Market-related movements of negative £294 million in the first half of 2013, principally represents negative £395 million arising in the US, offset by positive £146 million from the UK. The US movement is principally driven by the net unrealised value movement on derivatives held to manage the Group’s exposure to market movements following rises in equity values. The increase in the US’s required capital of £59 million arises from the increase in capital from 235 per cent of US Risk-Based Capital Company Action level to 250 per cent in line with the changes made to IGD reporting, see section ‘C.1 Regulatory capital (IGD)’ of Risk and capital management.

Value created through investment in new business by life operations

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Half year 2013 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Group
total
Free surplus invested in new business (165) (211) (20) (396)
Increase in required capital 57 172 32 261
Net worth invested in new business (108) (39) 12 (135)
Value of in-force created by new business 610 350 88 1,048
Post-tax new business profit for the period 502 311 100 913
Tax 157 168 30 355
Pre-tax new business profit for the period 659 479 130 1,268
New business sales (APE) 1,010 797 355 2,162
Internal rate of returnnote >20% >20% >20%  
Undiscounted payback period for shareholder-backed business 4 2 4

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AER
Half year 2012 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Group
total
Free surplus invested in new business (162) (180) (22) (364)
Increase in required capital 48 151 44 243
Net worth invested in new business (114) (29) 22 (121)
Value of in-force created by new business 528 317 94 939
Post-tax new business profit for the period 414 288 116 818
Tax 133 154 36 323
Pre-tax new business profit for the period 547 442 152 1,141
New business sales (APE) 899 719 412 2,030
Internal rate of returnnote >20% >20% >20%
Undiscounted payback period for shareholder-backed business 4 2 3

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CER
Half year 2012 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Group
total

Note

The internal rate of return (IRR) is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the lifetime of the business written in shareholder-backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is equal to the amount required to pay acquisition costs and set up statutory reserves less premiums received, plus required capital as defined for EEV. The impact of the time value of options and guarantees is included in the calculation.

Free surplus invested in new business (165) (184) (22) (371)
Increase in required capital 49 154 44 247
Net worth invested in new business (116) (30) 22 (124)
Value of in-force created by new business 533 323 94 950
Post-tax new business profit for the period 417 293 116 826
Tax 134 158 36 328
Pre-tax new business profit for the period 551 451 152 1,154
New business sales (APE) 910 734 412 2,056
Internal rate of returnnote >20% >20% >20%
Undiscounted payback period for shareholder-backed business 4 2 3

In Asia, we utilised capital of £165 million (2012: £162 million) to invest in new business in 2013, an increase of 2 per cent, and generated £659 million of new business profits, an increase of 20 per cent from the same period in 2012. This improved capital efficiency reflects, in part, higher interest rates in Hong Kong and the beneficial impact they have on the level of reserves established on policy inception.

In the US, investment in new business was £211 million (2012: £180 million), an increase of 17 per cent, and compares to 8 per cent increase in new business profit in the period. The higher new business strain primarily reflects the increase in capital requirement from 235 per cent of the US Risk Based Capital Company Action level to 250 per cent, higher sales volumes and changes in business mix.

In the UK, investment in new business was broadly comparable to the prior year at £20 million (2012: £22 million). The fall in capital investment as a result of lower sales in 2013 has been partly offset by a change in product mix.

Holding company cash flow

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2013 £m 2012 £m
  Half year Half year Full year

Note

Including central finance subsidiaries.

Net cash remitted by business units:  
UK net remittances to the Group  
UK Life fund paid to the Group 206 216 216
Shareholder-backed business:  
Other UK paid to the Group 20 14 101
Group invested in UK (4)
Total shareholder-backed business 20 14 97
Total UK net remittances to the Group 226 230 313
 
US remittances to the Group 294 247 249
 
Asia net remittances to the Group  
Asia paid to the Group:  
Long-term business 228 170 491
Other operations 33 31 60
261 201 551
Group invested in Asia:  
Long-term business (3) (107)
Other operations (including funding of Regional Head Office costs) (68) (75) (103)
(71) (75) (210)
Total Asia net remittances to the Group 190 126 341
 
M&G remittances to the Group 109 98 206
PruCap remittances to the Group 25 25 91
Net remittances to the Group from business units 844 726 1,200
Net interest paid (142) (136) (278)
Tax received 114 89 194
Corporate activities (89) (70) (158)
Solvency II costs (15) (31) (47)
Total central outflows (132) (148) (289)
Operating holding company cash flow before dividendnote 712 578 911
Dividend paid (532) (440) (655)
Operating holding company cash flow after dividendnote 180 138 256
Issue of hybrid debt, net of costs 429
Acquisition of Thanachart Life (397)
Hedge purchase cost (equity tail risks) (48) (32)
Other net cash payments (97) (68) (43)
Total holding company cash flow 115 22 181
Cash and short-term investments at beginning of period 1,380 1,200 1,200
Foreign exchange movements (5) (1)
Cash and short-term investments at end of period 1,490 1,222 1,380

We continue to manage cash flows across the Group with a view to achieving a balance between ensuring sufficient net remittances from the businesses to cover the dividend (after corporate costs) and maximising value for shareholders through the retention of the free surplus generated at business unit level, so that it can be reinvested in the profitable opportunities available to the Group. On this basis, the holding company cash flow statement at an operating level should ordinarily balance close to zero before exceptional cash flows, but from time to time additional remittances from business operations will be made to provide the Group with greater financial flexibility at the corporate centre.

Operating holding company cash flow for half year 2013 before the shareholder dividend was £712 million, £134 million higher than 2012. After deducting the shareholder dividend the operating holding company cash flow was £180 million (2012: £138 million).

Cash remittances to the Group from business units

The holding company received £844 million of net cash remittances from the business units in the first half of 2013, an increase of £118 million from the £726 million received in the first half of 2012.

Asia remitted £190 million to the Group in the first half of 2013, an increase of £64 million from the first half of 2012. Asia’s 2013 remittance includes a stronger first half bias than in 2012, due to timing differences.

As in prior years, the Jackson full-year dividend of £294 million (2012: £247 million) has been received in the first half of the year.

The UK insurance operations remitted £226 million in the first half of 2013 (2012: £230 million). Cash from the annual with-profits transfer to shareholders contributed £206 million (2012: £216 million).

M&G and Prudential Capital collectively remitted £134 million in the first half of 2013 (2012: £123 million), as the asset management businesses continue to remit significant portions of their annual post-tax earnings to the Group.

Net central outflows and other movements

Net central outflows improved to £132 million in the first half of 2013 (2012: £148 million), with higher corporate costs and higher net interest payments offset by lower Solvency II costs and higher tax receipts.

After central costs, there was a net cash inflow before dividend of £712 million in the first half of 2013 compared to £578 million in 2012. The dividend paid was £532 million in the first half of 2013 compared to £440 million in the same period in 2012.

Outside of the normal recurring central cash flow items, the holding company issued US$700 million (£429 million) of hybrid debt in January 2013 and paid £397 million for the acquisition of Thanachart Life. The holding company incurred £97 million of other cash payments in the first half of 2013, including payments in respect of amounts due to the UK tax authorities following the settlement reached in 2010 on historic tax issues, and amounts totalling £30 million paid to the Financial Services Authority over issues related to the terminated AIA transaction.

The overall holding company cash and short-term investment balance at 30 June 2013 was £1,490 million, £110 million higher than the balance held at the end of 2012. The Company seeks to maintain a central cash balance in excess of £1 billion.

Balance sheet and associated information

Balance sheet summary

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2013
£m
2012
£m1
  30 Jun 30 Jun 31 Dec
Goodwill attributable to shareholders 1,474 1,467 1,469
Investments 294,705 258,145 281,260
Holding company cash and short-term investments 1,490 1,222 1,380
Other 28,168 19,038 23,535
Total assets 325,837 279,872 307,644
Less: liabilities  
Policyholder liabilities 272,728 233,507 257,674
Unallocated surplus of with-profits funds 11,434 9,802 10,589
284,162 243,309 268,263
Less: shareholders’ accrued interest in the long-term business (14,897) (11,313) (12,084)
269,265 231,996 256,179
Core structural borrowings of shareholders’ financed operations (IFRS book value basis) 4,149 3,596 3,554
Other liabilities including non-controlling interest 27,901 23,675 25,468
Total liabilities and non-controlling interest 301,315 259,267 285,201
EEV basis net assets 24,522 20,605 22,443
 
Share capital and premium 2,018 2,014 2,017
IFRS basis shareholders’ reserves 7,607 7,278 8,342
IFRS basis shareholders’ equity (excluding non-controlling interest) 9,625 9,292 10,359
Additional EEV basis retained profit 14,897 11,313 12,084
EEV basis shareholders’ equity (excluding non-controlling interest) 24,522 20,605 22,443

Net asset value per share (in pence)

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2013 2012
  30 Jun 30 Jun 31 Dec
EEV 958p 806p 878p
IFRS 376p 364p 405p

Total assets1 of the Group at £325.8 billion were 6 per cent higher than at 31 December 2012 (£307.6 billion) driven by the growth in our business and improved equity markets (policyholder liabilities were up 6 per cent at £272.7 billion). In January 2013, Prudential issued a new US$700 million 5.25 per cent perpetual Tier 1 notes which increased the core structural borrowings from £3.6 billion to £4.1 billion. EEV shareholder equity has increased by 9 per cent from £22.4 billion as at 31 December 2012 to £24.5 billion as at 30 June 2013.

Acquisition of Thanachart Life

On 3 May 2013, the agreement we entered into in November 2012 to establish an exclusive 15-year partnership with Thanachart Bank Public Company Limited (Thanachart Bank) to develop jointly their bancassurance business in Thailand was launched. At the same time, Prudential Thailand completed the acquisition of Thanachart Life Assurance Company Limited (Thanachart Life), a wholly-owned life insurance subsidiary of Thanachart Bank. This transaction builds on Prudential’s strategy of focusing on the highly attractive markets of South-east Asia and is in line with the Group’s multichannel distribution strategy.

The consideration for the transaction is THB 18.981 billion (£412 million), of which THB 17.500 billion (£380 million) was settled in cash on completion in May 2013 with a further payment of THB 0.946 billion (£20 million), for adjustments to reflect net asset value as at completion date, payable in July 2013. In addition, a deferred payment of THB 0.535 billion (£12 million) is payable 12 months after completion. The THB 18.981 billion (£412 million), includes the amounts attributable to the acquisition of the distribution rights associated with the exclusive 15-year bancassurance partnership agreement with Thanachart Bank. No goodwill arose on this acquisition.

Note

  1. For IFRS reporting purposes, the Group adopted new and amended accounting standards in 2013. Accordingly, the IFRS elements and EEV basis shareholders' interest for the comparative results have been adjusted for the retrospective application of this adoption of IFRS accounting policies, as discussed in note 1 of the EEV basis results and note B of the IFRS financial statements.

Policyholder liabilities and unallocated surplus of with-profits funds

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Half year
2013 £m
Half year 2012 £m
Shareholder-backed business Asia US UK Total Total

Note

  1. Including net flows of the Group's insurance joint ventures.
  2. The reclassification of Japan Life business as held for sale reflects the value of policyholder liabilities reclassified at 30 June 2013. Asia net flows includes negative £45 million for half year 2013 (half year 2012: negative £42 million) in respect of the Japan Life business.
At 1 January 21,213 92,261 49,505 162,979 133,506
Premiums 2,379 8,208 2,090 12,677 11,259
Surrenders (1,194) (2,420) (1,252) (4,866) (4,339)
Maturities/deaths (146) (620) (1,174) (1,940) (1,719)
Net cash flowsnote (i) 1,039 5,168 (336) 5,871 5,201
Investment-related items and other movements 549 2,038 901 3,488 3,910
Acquisition of subsidiaries 487 487
Reclassification of Japan Life business as held for salenote (ii) (970) (970)
Foreign exchange translation differences 585 6,748 7,333 (833)
At 30 June 22,903 106,215 50,070 179,188 141,784
With-profits funds:  

– Policyholder liabilities  

96,877 94,635
– Unallocated surplus  

11,434 9,802
Total at 30 June  

108,311 104,437
Total policyholder liabilities at 30 June  

287,499 246,221
Comprising:  

– Policyholder liabilities included on statement of financial position  

272,728 233,507
– Unallocated surplus of with-profits funds on statement of financial position  

11,434 9,802
– Group's share of policyholder liabilities of insurance joint ventures  

3,337 2,912

Policyholder liabilities and unallocated surplus of with-profits funds

Policyholder liabilities relating to shareholder-backed business grew by £16 billion from £163 billion at 31 December 2012 to £179 billion at 30 June 2013, demonstrating the ongoing growth of our business.

The increase reflects positive net flows (premiums net of upfront charges less surrenders, withdrawals, maturities and deaths) of £5.9 billion in the first half of 2013 (2012: £5.2 billion), driven by strong inflows in the US £5.2 billion and Asia £1.0 billion. Net flows in Asia have increased by 17 per cent to £1,039 million in the first half of 2013 (2012: £891 million). The surrenders for shareholder-backed business in the first half of 2013 is broadly consistent with the equivalent period in 2012 once an allowance is made for the movements in investment markets and foreign exchange.

Other movements include positive foreign exchange effect of £7.3 billion (2012: negative £0.8 billion) together with investment-related items and other movements of £3.5 billion (2012: £3.9 billion), which is principally driven by increases in equity markets in the period offset by the movement in bond values following an increase in bond yields. The acquisition of subsidiaries reflects the liabilities of Thanachart Life at the date of acquisition.

During the first half of 2013, the unallocated surplus, which represents the excess of assets over policyholder liabilities for the Group’s with-profits funds on an IFRS basis, increased by 8 per cent from £10.6 billion at 31 December 2012 to £11.4 billion at 30 June 2013.

Shareholders’ net borrowings and ratings

Shareholders’ net borrowings and ratings at 30 June 2013:

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30 Jun 2013 £m 31 Dec 2012 £m
IFRS
basis
Mark to
market
value
EEV
basis
IFRS
basis
Mark to
market
value
EEV
basis
Perpetual subordinated capital securities (Innovative Tier 1) 2,327 60 2,387 1,746 120 1,866
Subordinated notes (Lower Tier 2) 834 187 1,021 831 258 1,089
3,161 247 3,408 2,577 378 2,955
Senior debt:  

2023 300 71 371 300 94 394
2029 249 42 291 249 64 313
Holding company total 3,710 360 4,070 3,126 536 3,662
Prudential Capital 275 275 275 275
Jackson surplus notes (Lower Tier 2) 164 25 189 153 43 196
Total 4,149 385 4,534 3,554 579 4,133
Less: Holding company cash and short-term investments (1,490) (1,490) (1,380) (1,380)
Net core structural borrowings of shareholder-financed operations 2,659 385 3,044 2,174 579 2,753

Shareholders’ net borrowings and ratings

In addition to its core structural borrowings set out above, Prudential also has in place an unlimited global commercial paper programme. As at 30 June 2013, we had issued commercial paper under this programme totalling £555 million, US$2,154 million, €165 million and AU$9 million. The central treasury function also manages our £5 billion medium term note (MTN) programme, covering both core and non-core borrowings. In January 2013, Prudential issued a new US$700 million 5.25 per cent perpetual Innovative Tier 1 hybrid under this programme, primarily to Asian retail investors. Under the same programme at 30 June 2013, the outstanding subordinated debt was £835 million, US$2 billion and €20 million. In addition, Prudential’s holding company has access to £2.1 billion of syndicated and bilateral committed revolving credit facilities, provided by 17 major international banks, expiring between 2015 and 2018. Apart from small drawdowns to test the process, these facilities have never been drawn, and there were no amounts outstanding at 30 June 2013. The commercial paper programme, the MTN programme and the committed revolving credit facilities are all available for general corporate purposes and to support the liquidity needs of Prudential’s holding company and are intended to maintain a strong and flexible funding capacity.

Prudential manages the Group’s core debt within a target level consistent with its current debt ratings. At 30 June 2013, the gearing ratio (debt, net of cash and short-term investments, as a proportion of EEV shareholders’ funds plus net debt) was 9.8 per cent, compared with 8.8 per cent at 31 December 2012. Prudential plc has strong debt ratings from Standard & Poor’s, Moody’s and Fitch. Prudential’s long-term senior debt is rated A+, A2 and A from Standard & Poor’s, Moody’s and Fitch, while short-term ratings are A-1, P-1 and F1 respectively. All ratings on Prudential and its subsidiaries are on stable outlook.

The financial strength of PAC is rated AA by Standard & Poor’s, Aa2 by Moody’s and AA by Fitch.

Jackson National Life Insurance Company’s financial strength is rated AA by Standard & Poor’s, A1 by Moody’s and AA by Fitch.

Financial strength of the UK Long-term Fund

On a UK regulatory Pillar I Peak 2 or ‘realistic’ valuation basis, ie with liabilities recorded on a market consistent basis, the free assets were valued at approximately £7.8 billion at 30 June 2013 (31 December 2012: £7.0 billion), before a deduction for the risk capital margin. The value of the shareholders’ interest in future transfers from the UK with-profits fund is estimated at £2.4 billion (31 December 2012: £2.1 billion).

Despite the continued volatility in financial markets, Prudential UK’s With-Profits fund performed well achieving a 3.3 per cent pre-tax investment return for policyholder asset shares during the first half of 2013. On an annualised basis this equates to 6.6 per cent.

 
 

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