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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

14 August, 2019

Commission File Number: 1-15040

PRUDENTIAL PUBLIC LIMITED COMPANY

(Name of Registrant)

1 Angel Court,
London EC2R 7AG, United Kingdom

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F   X               Form 40-F        

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):        

Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):        


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This report on Form 6-K is hereby incorporated by reference, in its entirety, into Prudential Public Limited Company's registration statements on Form F-3 (File No. 333-219863) and Form S-8 (File No. 333-213731 and 333-228081).


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TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

  4

SUMMARY OF OUR BUSINESS

  5

About Prudential plc

  5

Selected Historical Financial Information

  6

Summary Overview of Operating and Financial Review and Prospects

  9

FINANCIAL REVIEW

  16

IFRS Critical Accounting Policies

  16

Summary Consolidated Results and Basis of Preparation

  17

Explanation of Movements in Profit after Tax and Profit before Shareholder Tax by Reference to the Basis Applied for Segmental Disclosure

  17

Basis of Performance Measures

  22

Explanation of Performance and Other Financial Measures

  29

Explanation of Movements in Profit Before Shareholder Tax by Nature of Revenue and Charges

  41

EEV Basis, New Business Results and Free Surplus Generation

  49

Additional Information on Liquidity and Capital Resources

  49

GROUP RISK FRAMEWORK

  51

ADDITIONAL INFORMATION

  74

Risk Factors

  74

Limitation on Enforcement of US Laws Against Prudential, Its Directors, Management and Others

  86

FINANCIAL STATEMENTS

  87

Unaudited Condensed Consolidated Interim Financial Statements

  87

Additional Unaudited Financial Information

  149

EXHIBITS

  174

As used in this document, unless the context otherwise requires, the terms 'Prudential', the 'Group', 'we', 'us' and 'our' each refer to Prudential plc, together with its subsidiaries, while the terms 'Prudential plc', the 'Company' and the 'parent company' each refer to 'Prudential plc'.

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FORWARD-LOOKING STATEMENTS

This document may contain 'forward-looking statements' with respect to certain of Prudential's plans and its goals and expectations relating to its future financial condition, performance, results, operating environment, strategy and objectives. Statements that are not historical facts, including statements about Prudential's beliefs and expectations and including, without limitation, statements containing the words 'may', 'will', 'should', 'continue', 'aims', 'estimates', 'projects', 'believes', 'intends', 'expects', 'plans', 'seeks' and 'anticipates', and words of similar meaning, are forward-looking statements. These statements are based on plans, estimates and projections as at the time they are made, and therefore undue reliance should not be placed on them. By their nature, all forward-looking statements, including without limitation those referring to the demerger and the expected timing of the demerger, involve risk and uncertainty. A number of important factors could cause Prudential's actual future financial condition or performance or other indicated results to differ materially from those indicated in any forward-looking statement. Such factors include, but are not limited to, the timing, costs and successful implementation of the demerger of the M&GPrudential business; the future trading value of the shares of Prudential plc and the trading value and liquidity of the shares of the to-be-listed M&GPrudential business following such demerger; future market conditions, including fluctuations in interest rates and exchange rates, the continuance of a sustained low-interest rate environment, and the performance of financial markets generally; the policies and actions of regulatory authorities, including, for example, new government initiatives; the actual or anticipated political, legal and economic ramifications of the UK's withdrawal from the European Union; the impact of continuing application of Global Systemically Important Insurer (or 'G-SII') policy measures on Prudential; the impact of competition, economic uncertainty, inflation and deflation; the effect on Prudential's business and results from, in particular, mortality and morbidity trends, lapse rates and policy renewal rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of internal projects and other strategic actions failing to meet their objectives; disruption to the availability, confidentiality or integrity of Prudential's IT systems (or those of its suppliers); the impact of changes in capital, solvency standards, accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates operate; and the impact of legal and regulatory actions, investigations and disputes. These and other important factors may, for example, result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. Further discussion of these and other important factors that could cause Prudential's actual future financial condition or performance or other indicated results to differ, possibly materially, from those anticipated in Prudential's forward-looking statements can be found under the 'Risk Factors' heading of this document, as well as under the 'Risk Factors' heading of any subsequent Prudential Half Year Financial Report furnished to the US Securities and Exchange Commission on Form 6-K.

Any forward-looking statements contained in this document speak only as of the date on which they are made. Prudential expressly disclaims any obligation to update any of the forward-looking statements contained in this document or any other forward-looking statements it may make, whether as a result of future events, new information or otherwise except as required pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK Disclosure and Transparency Rules, the Hong Kong Listing Rules, the SGX-ST listing rules or other applicable laws and regulations. Prudential may also make or disclose written and/or oral forward-looking statements in reports filed with or furnished to the US Securities and Exchange Commission, the UK Prudential Regulation Authority and UK Financial Conduct Authority or other regulatory authorities, as well as in its annual report and accounts to shareholders, periodic financial reports to shareholders, proxy statements, offering circulars, registration statements, prospectuses and, prospectus supplements, press releases and other written materials and in oral statements made by directors, officers or employees of Prudential to third parties, including financial analysts. All such forward-looking statements are qualified in their entirety by reference to the factors discussed under the 'Risk Factors' heading of this document, as well as under the 'Risk Factors' heading of any subsequent filing Prudential makes with the US Securities and Exchange Commission, including any subsequent Annual Report on Form 20-F. These factors are not exhaustive as Prudential operates in a continually changing business environment with new risks emerging from time to time that it may be unable to predict or that it currently does not expect to have a material adverse effect on its business.

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SUMMARY OF OUR BUSINESS

About Prudential plc

Prudential plc and its affiliated companies constitute one of the world's leading financial services group, serving 26 million customers, with £717 billion of assets under management (as at 30 June 2019). Prudential plc is incorporated in England and Wales and is listed on the stock exchanges in London, Hong Kong and Singapore, and its American Depository Receipts (ADRs) are listed on the New York Stock Exchange. Prudential plc is the parent company of the Prudential group (the Prudential Group, Prudential or the Group). Prudential plc is not affiliated in any manner with Prudential Financial, Inc. or its subsidiary, The Prudential Insurance Company of America, whose principal place of business is in the US.

Prudential provides a broad range of financial products and services, primarily to the retail market. Prudential's principal operations are in Asia, the United States (US) and the United Kingdom and Europe (UK and Europe or M&GPrudential). In March 2018, we announced our intention to demerge M&GPrudential from the Group. We have passed a number of important milestones on our way to demerging M&GPrudential from the Group, which will result in two separately listed companies. We believe that the demerger will enable both businesses to maximise their potential performance. Both will have experienced management teams better able to focus on their strategic priorities and distinct investment prospects, as well as improved allocation of resources and greater flexibility in execution. We expect to complete the demerger in the fourth quarter of 2019.

In preparation for the intended demerger of M&GPrudential from Prudential plc, the results presented within this document are identified as being derived from continuing or discontinued operations. Continuing operations comprise our Asia, US, Africa and central operations. Discontinued operations comprise UK and Europe operations, and are also referred to as M&GPrudential within this document. Results for the comparative period have been restated accordingly. Under IFRS, comparative balance sheet amounts are not re-presented for discontinued operations.

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Selected Historical Financial Information

The following table sets forth selected consolidated financial data for Prudential for the periods indicated. Certain data is derived from Prudential's consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). EU-endorsed IFRS may differ from IFRS as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. As at 30 June 2019, there were no unendorsed standards effective for the periods presented below which impact the consolidated financial information of Prudential and there were no differences between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to Prudential. Accordingly, the selected consolidated financial data presented below that is derived from Prudential's consolidated financial statements has been prepared in accordance with IFRS as issued by the IASB. This table is only a summary and should be read in conjunction with Prudential's unaudited condensed consolidated interim financial statements and the related notes included elsewhere in this document, together with the Financial Review section.

      Six months ended 30 June    

Income statement data

      2019(1)
$m
  2019
£m
  2018(8)
£m
   

Profit from continuing operations:

                   

Gross premiums earned

      20,699   16,293   14,786    

Outward reinsurance premiums

      (661)   (520)   (363)    

Earned premiums, net of reinsurance

      20,038   15,773   14,423    

Investment return

      31,294   24,633   1,381    

Other income

      253   199   215    

Total revenue, net of reinsurance

      51,585   40,605   16,019    

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

      (46,587)   (36,671)   (10,928)    

Acquisition costs and other expenditure

      (3,444)   (2,711)   (3,285)    

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

      (287)   (226)   (189)    

Gain (loss) on disposal of businesses and corporate transactions

      17   13   (57)    

Total charges, net of reinsurance and (loss) gain on disposal of businesses

      (50,301)   (39,595)   (14,459)    

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

      135   106   82    

Profit before tax (being tax attributable to shareholders' and policyholders' returns)(2)

      1,419   1,116   1,642    

Less tax charge attributable to policyholders' returns

      (279)   (220)   (43)    

Profit before tax attributable to shareholders

      1,140   896   1,599    

Total tax charge attributable to policyholders and shareholders

      (280)   (221)   (369)    

Adjustment to remove tax charge attributable to policyholders' returns

      279   220   43    

Tax charge attributable to shareholders' returns

      (1)   (1)   (326)    

Profit from continuing operations for the period

      1,139   895   1,273    

Profit from discontinued operations for the period, net of related tax(8)

      819   645   83    

Profit for the period

      1,958   1,540   1,356    

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  Six months ended 30 June

  2019(1)   2019   2018(8)

Other data

           

Earnings per share based on profit attributable to the equity holders of the Company:

           

Basic

           

Based on profit from continuing operations

  43.7¢   34.4p   49.5p

Based on profit from discontinued operations

  31.8¢   25.0p   3.2p

  75.5¢   59.4p   52.7p

Diluted

           

Based on profit from continuing operations

  43.7¢   34.4p   49.4p

Based on profit from discontinued operations

  31.8¢   25.0p   3.2p

  75.5¢   59.4p   52.6p

Dividends per share paid in the reporting period:

           

Second interim ordinary dividend for prior year(5)

  42.79¢   33.68p   32.50p

Equivalent cents per share(6)

      42.85¢   43.80¢

Market price per share at the end of the period(7)

  2,180¢   1,716p   1,735p

Weighted average number of shares (in millions)

      2,583   2,573

 

  As at 30 June   As at
31 December

  2019(1)
$m
  2019
£m
  2018
£m

Statement of financial position data

           

Total assets

  704,669   554,683   508,645

Total policyholder liabilities and unallocated surplus of with-profits funds(9)

  366,017   288,112   425,146

Core structural borrowings of shareholder-financed businesses

  9,453   7,441   7,664

Total liabilities

  679,648   534,988   491,378

Total equity

  25,021   19,695   17,267

 

  As of and for the six months ended 30 June

  2019(1)
$m
  2019
£m
  2018(8)
£m

Other data

           

New business:

           

Single premium sales from continuing operations(3)

  12,369   9,736   9,284

Single premium sales from discontinued operations(3)

  7,768   6,115   6,690

  20,137   15,851   15,974

New regular premium sales for continuing operations(3)(4)

  2,331   1,835   1,624

New regular premium sales for discontinued operations(3)(4)

  118   93   101

  2,449   1,928   1,725

Funds under management

  911,131   717,200   664,400
(1)
Amounts stated in US dollars in the half year 2019 US dollar column have been translated from pounds sterling at the rate of $1.2704 per £1.00 (the noon buying rate in New York City on 28 June 2019).

(2)
This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.

(3)
The new business premiums in the table shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders (see EEV Basis, New Business results and Free Surplus Generation section of this document). The amounts shown are not, and are not intended to be, reflective of premium income recorded in the IFRS income statement. Internal vesting business is classified as new business where the contracts include an open market option.

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    The details shown above for new business include contributions for contracts that are classified under IFRS 4 'Insurance Contracts' as not containing significant insurance risk. These products are described as investment contracts or other financial instruments under IFRS. Contracts included in this category are primarily certain unit-linked and similar contracts written in UK and Europe insurance operations and Guaranteed Investment Contracts and similar funding agreements written in US operations.

(4)
New regular premium sales are reported on an annualised basis, which represent a full year of instalments in respect of regular premiums irrespective of the actual payments made during the period.

(5)
Under IFRS, dividends declared or approved after the balance sheet date in respect of the prior reporting period are treated as a non-adjusting event. The appropriation reflected in the statement of changes in equity, therefore, includes dividend in respect of the prior year that was declared or approved after the balance sheet date of the prior reporting period. The parent company dividends relating to the reporting period were a first interim ordinary dividend of 16.45 pence per share, as against a first interim dividend of 15.67 pence per share for the first half of 2018.

(6)
The dividend per share has been translated into US dollars at the rate of $1.2723, the noon buying rate in New York City on 17 May 2019 (2018: rate of $1.3476 on 18 May 2018), the date the dividend payment was made.

(7)
Market prices presented are the closing prices of the shares on the London Stock Exchange on the last day of trading for each indicated period.

(8)
Profit from discontinued operations represents the post-tax profit contributed by the UK and Europe operations which are classified as held for distribution at 30 June 2019. A line-by-line analysis of profit for the period for the discontinued UK and Europe operations is included in Note D2.1 to the unaudited condensed consolidated interim financial statements. The half year 2018 comparative results have been re-presented from those previously published accordingly (as described in not A2 of the unaudited condensed consolidated interim financial statements).

(9)
The balance as at 30 June 2019 of £288,112 million is for the Group's continuing operations only, following the classification of UK and Europe as discontinued operations. Total policyholder liabilities and unallocated surplus of with-profits funds for discontinued UK and Europe operations as at 30 June 2019 was £174,720 million. The comparative total policyholder liabilities and unallocated surplus of with-profits funds at 31 December 2018 of £425,146 million included £164,889 million from discontinued UK and Europe operations.

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Summary Overview of Operating and Financial Review and Prospects

The following summary discussion and analysis should be read in conjunction with Prudential's unaudited condensed consolidated interim financial statements and the related notes for the period ended 30 June 2019 included in this document.

A summary of the critical accounting policies which have been applied to these statements is set forth in the section below titled 'IFRS Critical Accounting Policies'.

The results discussed below are not necessarily indicative of the results to be expected in the full year 2019 or in any future periods. This discussion contains forward-looking statements based on current expectations, which involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in these forward-looking statements due to a number of factors, including those set forth in 'Risk Factors' and elsewhere in this document.

Introduction and overview

In the first half of 2019, Prudential continued to provide a broad range of financial products and services, primarily to the retail market. The accounting policies applied by Prudential in determining the IFRS basis results reflected in Prudential's unaudited condensed consolidated interim financial statements for the period ended 30 June 2019 are the same as those previously adopted in Prudential's consolidated financial statements for the year ended 31 December 2018, except for the adoption of the new accounting pronouncements as described in note A3 to the unaudited condensed consolidated interim financial statements.

By focusing on key areas of sustained operational improvement and continued investment we have both delivered growth over the half year and positioned ourselves to deliver further growth, despite an uncertain geopolitical and macroeconomic outlook.

We have passed a number of important milestones on our way to demerging M&GPrudential from the Group, which will result in two separately listed companies. We believe that the demerger will enable both businesses to maximise their potential performance. Both will have experienced management teams better able to focus on their strategic priorities and distinct investment prospects, as well as improved allocation of resources and greater flexibility in execution. We expect to complete the demerger in the fourth quarter of 2019. We are also preparing the Prudential plc Group for life beyond the demerger, and intend to enhance our effectiveness, efficiency and alignment with stakeholders. Throughout the process of preparing for demerger, all of our businesses and people have worked hard on delivering value and service for our customers and this, in turn, has contributed to our performance.

In preparation for the intended demerger of M&GPrudential from Prudential plc, the results presented within my report are identified as being derived from continuing or discontinued operations. Continuing operations comprise our Asia, US, Africa and central operations. Discontinued operations comprise UK and Europe operations, and are also referred to as M&GPrudential within this report. Results for the comparative period have been restated accordingly. Under IFRS, comparative balance sheet amounts are not re-presented for discontinued operations.

In Asia, we are continuing to grow at pace, while benefiting from high-quality recurring income. We continue to invest in Asia. Over the 18 month period since the start of 2018 this has included the acquisition, in 2018, of our initial 65 per cent interest in TMB Asset Management Co., Ltd. in Thailand for £197 million1 and the renewal of our regional strategic bancassurance alliance with UOB for an initial fee of £662 million6 (£230 million6 of which was paid in the first half of 2019). In the US, we are diversifying the product mix and building new distributor relationships.

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Across the Group, we are well placed to continue fulfilling our purpose of helping people plan for the future with confidence by removing the uncertainty from life's big financial events. In Asia, we are focused on serving the health, protection and savings needs of the region's rapidly growing and increasingly affluent population, and we have intensified our drive to strengthen and deepen our operational capabilities through innovative product design, broadened distribution, including via non-traditional partners, and differentiated value-added services for our customers. In the US, we are continuing to target the growing asset pool in the world's largest retirement market, while M&GPrudential is addressing the compelling retirement and savings opportunity in the UK and internationally.

This positive performance has been achieved against the background of a geopolitical and macroeconomic environment that remains uncertain. During the first half of 2019, major equity markets performed strongly, notably with the S&P 500 index up 17 per cent and the MSCI Asia excluding Japan index up 9 per cent, while in the second half to date they have been more volatile.

Economic growth moderated but was still respectable in the US and China, with GDP2 up 1.3 per cent and 3.0 per cent in the period, respectively, while Europe was subdued and the UK was affected by continued Brexit uncertainty. Longer-term yields fell in the US, the UK and in Asia markets and credit conditions remained benign.

Currency volatility

Sterling weakened moderately compared with most of the currencies in our major international markets over the first half of 2019, and has weakened further in the second half. To aid comparison of underlying progress, we continue to express and comment on the performance trends of our international businesses on a constant exchange rate basis.

Our approach to evaluating the financial performance of the Group is to present percentage growth rates before the impact of the fluctuations in the value of sterling against local currencies in the US and Asia. In a period of currency volatility, this approach allows a more meaningful assessment of underlying performance trends. This is because our businesses in the US and Asia receive premiums and pay claims in local currencies and are, therefore, not exposed to any cross-currency trading effects. To maintain comparability in the discussion below, the same basis has been applied. Growth rates based on actual exchange rates (AER) are also shown in the financial tables presented in this report. Consistent with previous reporting periods, the assets and liabilities of our overseas businesses are translated at period-end exchange rates so the effect of currency movements has been fully incorporated within reported shareholders' equity.

The table below explains how the Group's profit after tax on an IFRS basis reconciles to profit before tax and the supplementary analysis of adjusted IFRS operating profit based on longer-term investment returns. Further explanation of the determination of adjusted IFRS operating profit based on longer-term investment returns is provided in the 'Basis of Performance Measures' section. Further explanation of non-operating items is provided in the sub-section 'Non-operating items'. The table presents the half year 2018 results on both AER and CER basis so as to eliminate the impact of exchange translation. AER results are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates for the balance sheet at the balance sheet date. CER results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet.

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IFRS Profit after tax

      Actual Exchange Rate   Constant Exchange Rate    

      2019 £m
Half year
  2018* £m
Half year
  Change
%
      2018* £m
Half year
  Change
%
   

Profit for the period

      1,540   1,356   14%       1,434   7%    

Remove profit for the period from discontinued operations

      (645)   (83)   n/a       (83)   n/a    

Profit for the period from continuing operations

      895   1,273   (30)%       1,351   (34)%    

Tax charge attributable to shareholders' returns

      1   326   100%       343   100%    

Profit from continuing operations before tax attributable to shareholders

      896   1,599   (44)%       1,694   (47)%    

Non-operating items:

                               

Short-term fluctuations in investment returns on shareholder backed business

      1,124   (9)   n/a       (8)   n/a    

Amortisation of acquisition accounting adjustments

      17   22   23%       23   26%    

Loss (gain) on disposal of businesses and corporate transactions

      (13)   57   n/a       60   n/a    

      1,128   70   1,511%       75   1,404%    

Adjusted IFRS operating profit based on longer-term investment returns before tax from continuing operations

      2,024   1,669   21%       1,769   14%    

Analysed into:

                               

Asia

      1,198   1,016   18%       1,055   14%    

US

      1,215   1,002   21%       1,065   14%    

Other income and expenditure

      (366)   (329)   (11)%       (331)   (11)%    

Restructuring costs

      (23)   (20)   (15)%       (20)   (15)%    

Adjusted IFRS operating profit based on longer-term investment returns before tax from continuing operations

      2,024   1,669   21%       1,769   14%    
*
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).

In the remainder of this section every time we comment on the performance of our businesses (except with respect to cash remittances), we focus on their performance measured in local currency (presented here by reference to percentage growth expressed at CER terms) unless otherwise stated. In each such case, the performance of our businesses in AER terms is explained by the same factors discussed in the comments below and the impact of currency movements implicit in the CER data.

Financial performance

Profit after tax from continuing operations for half year 2019 was £895 million compared to a profit of £1,273 million in the first half of 2018 (on an AER basis). The decrease reflects the movement in profit before tax attributable to shareholders, which decreased from £1,599 million in half year 2018 (on an AER basis) to £896 million in half year 2019, offset partially by a decrease in the tax charge attributable to shareholders' returns from £326 million in half year 2018 (on an AER basis) to £1 million in half year 2019.

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On an AER basis, the decrease in profit from continuing operations before tax attributable to shareholders from £1,599 million in half year 2018 to £896 million in half year 2019 reflects an unfavourable change in non-operating items of £1,058 million, from a loss of £(70) million in 2018 to a loss of £(1,128) million) in 2019. This has been offset partially by an increase in adjusted IFRS operating profit based on longer-term investment returns from continuing operations of £355 million. The unfavourable change in non-operating items of £1,058 million is primarily driven by increased equity hedge losses in the US (net of associated policyholder liability movements) following higher equity market levels in the period. The improvement of £355 million in total adjusted IFRS operating profit based on longer-term investment returns from continuing operations on an AER basis reflects primarily an increase in the amount contributed by both Asia (from £1,016 million to £1,198 million) and the US (from £1,002 million to £1,215 million), which are further explained below.

The increase of £355 million (or 21 per cent) in total adjusted IFRS operating profit based on longer-term investment returns from continuing operations includes a negative exchange translation impact of £100 million. Excluding the currency volatility, on a CER basis, total adjusted IFRS operating profit based on longer-term investment returns from continuing operations increased from £1,769 million to £2,024 million, 14 per cent higher than the equivalent amount in half year 2018.

Our performance was led by our Asia business, which delivered double-digit growth in adjusted IFRS operating profit based on longer-term investment returns (up 14 per cent4). In the US, Jackson's adjusted IFRS operating profit based on longer-term investment returns increased by 14 per cent4.

Over the period, IFRS shareholders' funds increased by 14 per cent to £19.7 billion (31 December 2018: £17.2 billion), reflecting profit after tax of £1,540 million (2018: £1,356 million on an actual exchange rate basis). Other movements in shareholders' funds include positive net unrealised valuation movements on US investments classified as available-for-sale of £1,726 million, offset by dividend payments to shareholders of £870 million.

Our Group Solvency II surplus7,8 is estimated at £16.7 billion, equivalent to a cover ratio of 222 per cent (31 December 2018: £17.2 billion; 232 per cent).

We have increased our first interim ordinary dividend by 5 per cent to 16.45 pence per share, in line with our existing dividend policy.

Asia

Our broad portfolio of life insurance and asset management businesses, high-quality products with distinctive value-added services and multi-channel strategy ensured that we continue to benefit from growing demand for the health, protection and savings solutions we provide.

Our multi-platform distribution in the region, with strong agency forces and bank partnerships, and growing digital channels, is continuing to drive our performance. We have continued to grow on a broad base in the region. In Hong Kong, a significant portion of our sales came from visitors from Mainland China.

We are also seeing a stabilisation in sales in Indonesia following the refresh of our product line and action in agency force productivity, with a strong performance in the second quarter leading to overall sales growth. We have formed a strategic partnership with PT Visionet International (OVO), a leading digital payments, rewards and financial services platform in Indonesia, which we expect will enhance our reach in one of Asia's largest insurance markets, with a population that is increasingly embracing digital tools.

Our sales through our joint venture, CITIC-Prudential, are up and we have received approval to open our 20th branch in Mainland China, in Shaanxi province. Through our joint venture, we now have a comprehensive network of 231 sales offices in 89 cities, with access to regions accounting for 80 per cent of Mainland China's GDP.

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Our Asian asset manager, Eastspring, has grown adjusted IFRS operating profit based on longer-term investment returns by 12 per cent, supported by disciplined expense management and the acquisition of TMB Asset Management in the second half of 2018. Its assets under management grew to £169.5 billion, with positive external net flows in the first half of 2019 of £3.1 billion, excluding money market funds (2018: net outflows of £0.9 billion on an actual exchange rate basis), driven by strong retail bond flows in Thailand and equity flows in Korean pensions.

We are continuing to develop our distribution reach in Asia, including through the renewal of our successful regional strategic bancassurance alliance with United Overseas Bank Limited. To ensure that we provide our solutions as widely as possible across the region, we have also been actively tailoring our propositions to suit digital sales channels. In the first half of 2019 we have activated our partnership with O bank, our digital bank partner in Taiwan, and will look to build on this success through UOB's new digital bank, TMRW.

We are continuing to build partnerships in Asia in a number of areas. We are committed to improving access to healthcare, and have launched Pulse by Prudential, a digital health app that is the first of its kind to offer holistic health management to consumers. The health technology and services company Tictrac has become one of our partners in Pulse, joining Babylon Health as part of our health ecosystem. Earlier this month, we also announced partnerships with Halodoc, Indonesia's homegrown healthcare start-up, to help deliver digital solutions that will meet a critical need for affordable and accessible healthcare, and with MyDoc, which offers consumers access to health services on their mobile phones. Following its launch in Singapore in 2018, we expanded PRUworks, our digital ecosystem designed to help small and medium-sized enterprises (SMEs) grow their businesses, to Indonesia. We have also entered into an agreement with specialist technology provider GRAPHIC , whose cloud-computing technology will be integrated into PRUworks and will facilitate the platform in offering one-stop access to insurance products, employee benefits and business services to small and medium-sized enterprises across Asia. At the same time, we are making good progress with our tailored offering for high net worth clients in Singapore, Opus by Prudential, which is designed to address the unfulfilled wealth protection needs of this fast-growing sector. All of these initiatives enable us to offer improved services to more customers.

US

Our approach in this market has been to proceed with discipline. Consumer regulation in the US, while now starting to become clearer, has been uncertain for some time, and has resulted in an industry-wide slowdown in variable annuity sales. In addition, we successfully integrated last year's John Hancock paid-up annuities bolt-on transaction, which increased diversification and contributed materially to the US statutory capital generation in the period.

Jackson has a strong record of product innovation, exceptional distribution relationships, trust and credibility. During the period we added to our products in the fixed-annuity space, which we expect to contribute to sales later in the year. We have a leading position in the annuities industry, with strong long-term economics, and our operating platform has industry-leading cost advantages and is highly digital and scalable. We are in the process of driving a more diversified product mix and developing relationships with new distributors. We are actively exploring options to support the acceleration of this diversification, for example through reinsurance and third-party financing.

Africa

We have also continued to expand our presence in Africa, one of the world's most dynamic and promising regions. In July, we completed our acquisition of a 51 per cent stake in the leading life insurer, Group Beneficial, operating in West and Central Africa, enabling us to enter Cameroon, Côte d'Ivoire and Togo. Combined with our launch over the last five years of businesses in Ghana, Kenya, Uganda, Zambia and Nigeria, this latest step means we now operate in markets in Africa with a total population of almost 400 million.

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Demerger of M&GPrudential (reported as discontinued operations)

We expect to complete the demerger of M&GPrudential as planned. Preparations are complete for the Hong Kong Insurance Authority to be the Group-wide supervisor of the Prudential plc Group, and M&GPrudential's Board is in place. We expect to complete the demerger in the fourth quarter of 2019, subject to shareholder approval. At the same time, M&GPrudential is strongly focused on its internal merger and transformation programme and preparing for entry to the market as a separately listed independent company. It has also announced that it will change its name in preparation for listing to M&G plc, providing a single corporate identity while retaining its two customer-facing brands of Prudential and M&G Investments.

M&GPrudential is an asset manager and asset owner, operating in attractive, growing markets underpinned by long-term favourable trends, in particular ageing populations and the shift of responsibility for retirement to the private sector. Total funds under management5 grew by 6 per cent in the period to £341.1 billion, including PruFund positive net flows of £3.5 billion, leading to total PruFund assets under management of £49.6 billion as at 30 June 2019. M&G's external assets under management were up 4 per cent in the first half of 2019 to £153.0 billion, with market impacts more than offsetting net outflows in the period. The slowdown in industry-defined benefit pension transfers, compared with the elevated volumes in the prior year, contributed to reductions in sales. M&GPrudential's savings and asset management operations are well positioned in with-profits savings, retail asset management and institutional asset management, while its annuity and other insurance operations have a large customer base with long-duration products.

Outlook

We believe our performance for the first half of the year and our continuing operational improvements leave us well positioned as we move forward. We are innovating and investing to grow the range of products and solutions we can offer our clients.

The long-term underlying demographic and economic trends in Asia remain positive and strong, notwithstanding short-term macro volatility, and we expect our broad portfolio to continue to expand. We are carefully monitoring developments in Hong Kong. The strategic focus of the Asia business on recurring premium health and protection businesses, reflected in IFRS earnings through growth in insurance margin, is expected to continue.

In the US, we have recently entered a period of greater regulatory clarity than has been the case in recent years, and expect a process of normalisation in the sales environment for our products. At the same time, we are seeing significant shifts across the market towards fixed and fixed-index annuities. We will continue to follow an active portfolio approach to our business and focus on execution and operational delivery. US IFRS earnings are expected to remain sensitive at an operating level to the impact of equity markets on separate account balances, which drive fee revenues, and on the acceleration and deceleration of deferred acquisition costs (DAC) amortisation.

Interest rates have declined in 2019, and if this trend continues it could influence the level of income from our interest-bearing instruments. Equity market and interest movements will also impact shareholders' returns through hedging positions held for risk management purposes, the valuations of bonds held and changes to associated liability valuations, for which there is a degree of accounting mismatch with the assets held to support them.

The strength of our opportunities and our diversification in terms of geographies, products and distribution platforms leave us well positioned to deal with the protectionist developments and political uncertainties currently affecting the global economy and driving volatility in markets.

We expect to complete the demerger of M&GPrudential in the fourth quarter of 2019. We have refined our strategy as Prudential plc to be Asia-led, focused on structural growth markets, aiming for our US business to deliver enhanced cash returns through the accelerated diversification of its book and we are actively exploring options to achieve this. We are confident that, while managing risks conservatively, we will continue to deliver important benefits for our customers and profitable growth for our shareholders.

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Notes

1
On an actual exchange rate basis.
2
Source: OECD Quarterly National Accounts, Quarterly Growth Rates of real GDP, change on previous quarter, combined for Q1 and Q2 2019.
3
Adjusted IFRS operating profit based on longer-term investment returns is management's primary measure of profitability and provides an underlying operating result based on longer-term investment returns and excludes non-operating items. Further information on its definition and reconciliation to profit for the period is set out in note B1 of the IFRS financial statements.
4
Period-on-period percentage increases are stated on a constant exchange rate basis unless otherwise stated.
5
Represents M&GPrudential asset management external funds under management and internal funds included on the M&GPrudential long-term insurance business balance sheet.
6
Translated using a Singapore dollar: Sterling foreign exchange rate of 1.7360.
7
The Group shareholder capital position covers continuing and discontinued operations and excludes the contribution to own funds and the Solvency Capital Requirement from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency positions include management's calculation of UK transitional measures reflecting operating and market conditions at each valuation date.
8
Estimated before allowing for first interim ordinary dividend (31 December 2018: second interim ordinary dividend).

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FINANCIAL REVIEW

IFRS Critical Accounting Policies

Prudential's discussion and analysis of its financial condition and results of operations are based upon Prudential's consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB and as endorsed by the EU. The Group's policy for preparing this condensed consolidated 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 and other policy improvements. EU-endorsed IFRSs may differ from IFRSs as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. As at 30 June 2019, there were no unendorsed standards effective for the period ended 30 June 2019 affecting the consolidated financial information of Prudential and there were no differences between IFRSs endorsed by the EU and IFRSs issued by the IASB in terms of their application to Prudential. Accordingly, Prudential's financial information for the period ended 30 June 2019 has been prepared in accordance with IFRSs as issued by the IASB. Prudential adopts mandatory requirements of new or altered EU-adopted IFRSs when required, and may consider earlier adoption where permitted and appropriate in the circumstances.

The preparation of our consolidated financial statements requires Prudential to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, which are both recognised and unrecognised (eg contingent liabilities) in the primary financial statements. Prudential evaluates its estimates, including those related to long-term business provisioning and the fair value of assets, on a periodic basis.

Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties, and that can potentially give rise to different results under different assumptions and conditions.

Prudential's critical accounting policies and the critical aspects of its estimates and judgements in determining the measurement of the Group's assets and liabilities are further discussed 'IFRS Critical Accounting Policies' of the Group's 2018 annual report on Form 20-F. In preparing the unaudited condensed consolidated interim financial statements included elsewhere in this document, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were for the same items as those described therein, which are:

    Classification of insurance and investment contracts;
    Measurement of policyholder liabilities and unallocated surplus of with-profits funds;
    Deferred acquisition costs for insurance contracts;
    Financial investments – Valuation;
    Financial investments – Determining impairment in relation to financial assets; and
    Intangible assets – Carrying value of distribution rights.

In addition to the above, management has performed an assessment in accordance with IFRS 5, 'Non-current assets held for distribution' of its UK and Europe operations, M&GPrudential, which the Group is planning to demerge from the Prudential plc group. Following this assessment, the results of M&GPrudential have been classified as held for distribution and as discontinued operations at 30 June 2019 in the unaudited condensed consolidated interim financial statements.

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Summary Consolidated Results and Basis of Preparation

The following table shows Prudential's consolidated total profit on an AER basis for the periods indicated.

      2019 £m   2018* £m    

      Half year   Half year    

Total revenue, net of reinsurance

      40,605   16,019    

Total charges, net of reinsurance and gain (loss) on disposal of businesses

      (39,595)   (14,459)    

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

      106   82    

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

      1,116   1,642    

Less tax charge attributable to policyholders' returns

      (220)   (43)    

Profit before tax from continuing operations attributable to shareholders

      896   1,599    

Total tax charge

      (221)   (369)    

Less: tax attributable to policyholders' returns

      220   43    

Tax charge attributable to shareholders' returns

      (1)   (326)    

Profit from continuing operations for the period

      895   1,273    

Profit from discontinued operations for the period, net of related tax

      645   83    

Profit for the period

      1,540   1,356    
*
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).
This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.

Under IFRS, the pre-tax GAAP measure of profits is profit before policyholder and shareholder taxes. This measure is not relevant for reflecting pre-tax results attributable to shareholders for two reasons. Firstly, this profit measure represents the aggregate of pre-tax results attributable to shareholders and a pre-tax amount attributable to policyholders. Secondly, the amount is determined after charging the transfer to the liability for unallocated surplus, which in turn is determined in part by policyholder taxes borne by the ring-fenced with-profits funds. It is noted that, for the continuing operations, this circular feature is specific to structured overseas funds that are similar to with-profits funds in the UK, and should be distinguished from other products which are referred to as 'with-profits', and the general accounting treatment of premium or other policy taxes.

Accordingly, Prudential has chosen to explain its unaudited condensed consolidated interim results principally by reference to profit for the period, reflecting profit after tax. In explaining movements in profit for the period, reference is made to trends in profit before shareholder tax and the shareholder tax charge. The explanations of movement in profit before shareholder tax are shown below by reference to the profit analysis applied for segmental disclosure as shown in note B1 to Prudential's unaudited condensed consolidated interim financial statements. This basis is used by management and reported externally to the holders of Prudential's securities and the financial markets on which such securities are listed. Separately, in this section, analysis of movements in profits before shareholder tax is provided by nature of revenue and charges.


Explanation of Movements in Profit after Tax and Profit before Shareholder
Tax by Reference to the Basis Applied for Segmental Disclosure

a)    Group overview

Profit after tax for half year 2019 was £1,540 million compared to £1,356 million in half year 2018. This £184 million increase reflects an increase of £562 million in the net of tax result for discontinued operations (representing the profits attributable to M&GPrudential), from a profit of £83 million in half year 2018 to a profit of £645 million in half year 2019. This was offset partially by a decrease in the profit from continuing operations after tax of £378 million, from £1,273 million to £895 million. The rest of the discussion below focuses on continuing operations.

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The decrease in profit from continuing operations after tax of £378 million reflects a decrease in profits before tax attributable to shareholders of £703 million, from £1,599 million in half year 2018 to £896 million in half year 2019, offset partially by a £325 million reduction in the tax charge attributable to shareholders, which decreased from £326 million to £1 million.

The decrease in IFRS profit before shareholder tax from continuing operations from £1,599 million in half year 2018 to £896 million in half year 2019 is primarily due to a £1,058 million increase in non-operating loss from £(70) million to £(1,128) million, offset partially by a £355 million increase in adjusted IFRS operating profit based on longer-term investment returns. The unfavourable movement in non-operating items is primarily due to short-term fluctuations in investment returns on shareholder-backed businesses which were negative £1,124 million (2018: positive £9 million on an actual exchange rate basis). This comprised positive £420 million (2018: negative £326 million on an AER basis) for Asia, negative £1,521 million (2018: positive £244 million on an AER basis) in the US and negative £23 million (2018: positive £91 million on an AER basis) in other operations.

The increase of £355 million (or 21 per cent) in adjusted IFRS operating profit based on longer-term investment returns from continuing operations includes the negative impact of exchange translation of £100 million. Excluding the currency volatility, on a CER basis, the Group adjusted IFRS operating profit based on longer-term investment returns increased by £255 million (or 14 per cent) reflecting double-digit growth in the Group's Asia and US businesses.

The effective tax rate on the total IFRS profit from continuing operations was less than one per cent in the first half of 2019 (2018: 20 per cent). The lower rate is mainly due to non-operating taxable losses arising in the US.

b)    Summary by business segment and geographical region

The Group's operating segments for financial reporting purposes are defined and presented in accordance with IFRS 8, 'Operating Segments' on the basis of the management reporting structure and its financial management information. Further details on the Group's determination of operating segments is provided in the 'Basis of Performance' section.

The following table shows Prudential's IFRS consolidated total profit after tax for the periods indicated presented by summary business segment. The accounting policies applied to the segments below are the same as those used in the Group's consolidated accounts.

  2019 £m   2018* £m

  Half year   Half year

Asia

  1,637   539

US

  (210)   970

Unallocated to a segment

  (532)   (236)

Profit from continuing operations for the period

  895   1,273

Profit from discontinued operations for the period, net of related tax

  645   83

Total profit for the period

  1,540   1,356
*
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).
Includes central operations (Group and Asia Regional Head Offices and Group borrowings), Prudential Capital, the Group's existing treasury company, and Africa operations.

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Asia

The following table shows the movement in profit arising from Asia operations and its components (insurance and asset management) for the periods indicated:

  2019 £m   2018 £m

  Half year   Half year

Insurance operations

  1,722   589

Asset management

  103   89

Profit before shareholder tax

  1,825   678

Shareholder tax charge

  (188)   (139)

Profit after tax

  1,637   539

The increase of £1,098 million in profit after tax from £539 million in half year 2018 to £1,637 million in half year 2019 primarily reflects an increase in the profit before shareholder tax of £1,147 million from £678 million to £1,825 million offset marginally by an increase in shareholder tax charge from £(139) million to £(188) million.

The increase of £1,147 million in profit before shareholder tax includes an increase of £1,133 million in insurance operations from £589 million to £1,722 million and an increase in asset management operations from £89 million to £103 million.

The increase of £1,133 million in the profit before shareholder tax of insurance operations primarily reflects an increase in adjusted IFRS operating profit based on longer-term investment returns of £168 million from £927 million to £1,095 million and a favourable movement in non-operating items of £965 million from a loss of £(338) million to a gain of £627 million. The increase of £168 million in adjusted IFRS operating profit based on longer-term investment returns include a negative exchange translation impact of £36 million. Excluding the currency volatility, adjusted IFRS operating profit based on longer-term investment returns was up 14 per cent or £132 million on a CER basis reflecting the continued growth of our in-force book of recurring premium business. The development of our Asia businesses' adjusted IFRS operating profit based on longer-term investment returns is broad-based and at increasing scale. Eight of our 12 life markets reported growth of 10 per cent or above. Adjusted IFRS operating profit based on longer-term investment returns growth was led by Hong Kong (up 29 per cent to £260 million), China JV (up 28 per cent on a post-tax basis), Vietnam (up 24 per cent), the Philippines (up 24 per cent), Singapore (up 18 per cent) and Malaysia (up 10 per cent). Indonesia remains a significant contributor to Asia's adjusted IFRS operating profit based on longer-term investment returns (£200 million), but was 6 per cent lower compared with the prior period, reflecting the impact of sales declines in the recent past.

The favourable change of £965 million in non-operating items was primarily due to a positive change of £746 million in short-term fluctuations in investment returns from a loss of £(326) million to a gain of £420 million, following falling interest rates in many part of Asia leading to unrealised bond gains in the period, with varying liability accounting treatment in different markets leading to differing liability revaluation effects. Gains on disposal of businesses in the period contributed to the increase in other non-operating items from a loss of £(10) million in half year 2018 to a gain of £209 million in half year 2019 reflecting gains from disposals in the period. For further details, refer to note D1.1 of the unaudited condensed consolidated interim financials statements.

The increase of £14 million in the profit before shareholder tax of asset management operations from £89 million in half year 2018 to £103 million in half year 2019 includes an unfavourable exchange translation impact of £3 million. Excluding the currency volatility, profit from Asia asset management operations was up 12 per cent or £11 million on a CER basis as a result of revenue growth of 5 per cent, driven by the acquisition of TMB Asset Management in the second half of 2018 and higher funds under management, with costs increasing at a slower rate of 2 per cent.

The effective shareholder tax rate on profit from Asia operations decreased to 10 per cent in half year 2019 compared with 21 per cent in half year 2018, with the movement principally due to the non-taxable gain arising on the sale of shares in ICICI Prudential Life Insurance Company, an associate in India.

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US

The following table shows the movement in profit arising from US operations and its components (insurance and asset management) for the periods indicated:

  2019 £m   2018 £m

  Half year   Half year

Insurance operations

  (333)   1,225

Asset management

  12   (39)

Profit before shareholder tax

  (321)   1,186

Shareholder tax charge

  111   (216)

Profit after tax

  (210)   970

The decrease of £1,180 million in profit after tax from a profit of £970 million in half year 2018 to a loss £(210) million in half year 2019 primarily reflects a decrease in profit before shareholder tax from £1,186 million to a loss of £(321) million, offset partly by an decrease in the shareholder tax charge from a tax charge of £(216) million to a tax credit of £111 million.

The decrease of £1,507 million in profit before shareholder tax includes a decrease of £1,558 million in insurance operations from a profit of £1,225 million to a loss of £(333) million offset partially by an increase of £51 million in asset management operations from negative £(39) million to positive £12 million.

The underlying profit on US insurance business (Jackson) predominantly arises from fee income on variable annuity business, spread income from interest sensitive products, such as fixed annuities and institutional products, and insurance margin, net of expenses measured on a US GAAP basis. In addition, the profit (including non-operating items) in any period includes the incidence of realised gains and losses (including impairment) on assets classified as available-for-sale, fair value movement on derivatives and securities classified as fair valued through profit and loss and value movements on product guarantees.

The £1,558 million decrease in the profit before shareholder tax of the insurance operations is primarily due to an unfavourable movement in non-operating items of £(1,760) million from a positive £224 million to a negative £(1,536) million. This was offset partially by an increase of £202 million in adjusted IFRS operating profit based on longer-term investment returns from £1,001 million to £1,203 million. The negative £(1,536) million of non-operating items in half year 2019 includes negative short-term fluctuations in investment returns of £(1,521) million. In the US, higher equity market levels resulted in equity hedge losses, which were only partly offset by a reduction in policyholder liabilities, as the full benefit of the uplift in equity markets was limited by lower long-term interest rates and accounting mismatch effects.

The increase of £202 million in adjusted IFRS operating profit based on longer-term investment returns includes a negative translation impact of £63 million. Excluding the currency volatility, adjusted IFRS operating profit based on longer-term investment return increased by £139 million (or 13 per cent) on a CER basis reflecting broadly stable fee income supported by favourable DAC deceleration compared with unfavourable DAC acceleration in the prior period.

The £51 million increase in the profit before shareholder tax of the asset management in half year 2019 compared with half year 2018 is primarily due to a decrease in non-operating losses from £(40) million in half year 2018 to none in half year 2019. The loss incurred in half year 2018 was primarily due to costs incurred in exiting the NPH broker-dealer business.

The effective shareholder tax rate on profit from US operations was 35 per cent in half year 2019, compared with 18 per cent in half year 2018, principally driven by the hedging losses in the period.

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Unallocated to a segment

The following table shows the movement in the unallocated to a segment result for the periods indicated:

  2019 £m   2018* £m

  Half year   Half year

Loss before shareholder tax

  (608)   (265)

Shareholder tax credit

  76   29

Loss after tax

  (532)   (236)
*
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).

Total net charges for activity unallocated to a segment increased by £296 million from £(236) million in half year 2018 to £(532) million in half year 2019. The £343 million increase in the loss before shareholder tax from £(265) million to £(608) million reflects £(196) million of costs incurred in the period in connection with the preparation for the proposed demerger of M&GPrudential from Prudential plc and the unfavourable movement of £(114) million in the level of short-term fluctuations in investment returns on the financial instruments held from a positive £91 million in half year 2018 to a negative £(23) million in half year 2019. Further information on the costs related to the preparation for the proposed demerger is set out in note D1.1 of the unaudited condensed consolidated interim financial statements.

Discontinued UK and Europe operations

Profit after tax from the discontinued UK and Europe operations increased from £83 million in half year 2018 to £645 million in half year 2019. This is primarily attributable to an increase in profit before tax of £716 million from £101 million to £817 million, offset partially by an increase in shareholder tax charge of £154 million from £(18) million to £(172) million. The increase in profit before shareholder tax of £716 million is mainly from an increase in non-operating items of £765 million from a loss of £(635) million to a gain of £130 million, offset partially by a decrease in adjusted IFRS operating profit based on longer-term investment returns of £49 million from £736 million in half year 2018 to £687 million in half year 2019.

The £130 million non-operating profit in 2019 primarily reflects favourable revaluation effects on fixed income assets supporting the capital of the shareholder-backed annuity business. This compares with a loss of £635 million in the prior period, which included a loss of £513 million arising from the reinsurance of a portfolio of annuity contracts with Rothesay Life, and negative revaluation movements on shareholder assets.

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Basis of Performance Measures

Prudential uses adjusted IFRS operating profit based on longer-term investment returns as its principal measure of performance. The directors believe that this performance measure better reflects underlying performance. It is the basis used by management for the reasons outlined below. It is also the basis on which analysis of the Group's results has been provided to UK shareholders and the UK financial market for some years under long-standing conventions for reporting by proprietary UK life assurers.

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

Under the Group's management and reporting structure its chief operating decision maker is the Group Executive Committee (GEC). In the management structure, responsibility is delegated to the Chief Executive Officers of Prudential Corporation Asia, the North American Business Unit and M&GPrudential for the day-to-day management of their business units (within the framework set out in the Group Governance Manual). Financial management information used by the GEC aligns with these three business segments. These operating segments derive revenue from both long-term insurance and asset management activities. In light of the proposed demerger, the segment analysis for the discontinued UK and Europe operations is provided in note D2 of the unaudited condensed consolidated interim financial statements, separate from those for the continuing operations.

Operations which do not form part of any business unit are reported as 'Unallocated to a segment'. These include Group Head Office and Asia Regional Head Office costs. The Group's existing treasury company, Prudential Capital, and the Africa operations do not form part of any operating segment under the structure, and their assets and liabilities and profit or loss before tax are not material to the overall financial position of the Group. Prudential Capital and Africa operations are therefore also reported as 'Unallocated to a segment'.

Performance measure

The performance measure of operating segments utilised by the Company is adjusted IFRS operating profit based on longer-term investment returns attributable to shareholders. This measurement basis distinguishes adjusted IFRS operating profit based on longer-term investment returns from other constituents of the total profit as follows:

    Short-term fluctuations in investment returns on shareholder-backed business;
    Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012; and
    Gain or loss on corporate transactions, such as disposals undertaken in the period and the costs related to the preparation for the proposed demerger of M&GPrudential from Prudential plc.

Determination of adjusted IFRS operating profit based on longer-term investment returns for investment and liability movements

(a)
General principles
(i)
UK-style with-profits business in the UK and Asia

The adjusted IFRS operating profit based on longer-term investment returns reflects the statutory transfer gross of attributable tax. Value movements in the underlying assets of the with-profits funds do not affect directly the determination of adjusted IFRS operating profit based on longer-term investment returns.

(ii)
Unit-linked business

The policyholder unit liabilities are directly reflective of the underlying asset value movements. Accordingly, the adjusted IFRS operating profit based on longer-term investment returns reflect the current period value movements in both the unit liabilities and the backing assets.

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(iii)
US variable annuity and fixed index annuity business

This business has guarantee liabilities which are measured on a combination of fair value and other US GAAP derived principles. These liabilities are subject to an extensive derivative programme to manage equity and interest rate exposures whose fair value movements pass through the income statement each period. The principles for determination of the adjusted IFRS operating profit based on longer-term investment returns and short-term fluctuations are as discussed in section (c) below.

(iv)
Business where policyholder liabilities are sensitive to market conditions

Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies between business units 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 adjusted IFRS operating profit based on longer-term investment 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, movements in liabilities for some types of business do require bifurcation to ensure that at the net level (ie after allocated investment return and charge for policyholder benefits) the adjusted IFRS operating profit based on longer-term investment returns reflects longer-term market returns.

Examples of where such bifurcation is necessary are in Hong Kong and for the UK shareholder-backed annuity business, as explained in sections b(i) and d(i), respectively. For other types of Asia's non-participating business, expected longer-term investment returns are used to determine the movement in policyholder liabilities for determining adjusted IFRS operating profit based on longer-term investment returns.

(v)
Other shareholder-financed business

For long-term insurance business, where assets and liabilities are held for the long term, the accounting basis for insurance liabilities under current IFRS can lead to profits that include the effects of short-term fluctuations in market conditions, which may not be representative of trends in underlying performance. Therefore, the following key elements are applied to the results of the Group's shareholder-financed businesses to determine adjusted IFRS operating profit based on longer-term investment returns.

Except in the case of assets backing liabilities which are directly matched (such as unit-linked business) or closely correlated with value movements (as discussed below) adjusted IFRS operating profit based on longer-term investment returns for shareholder-financed business is determined on the basis of expected longer-term investment returns. Longer-term investment returns comprise actual income receivable for the period (interest/dividend income) and, for both debt and equity-type securities longer-term capital returns.

Debt securities and loans

In principle, for debt securities and loans, the longer-term capital returns comprise two elements:

    Risk margin reserve 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 risk margin reserve charge to the adjusted IFRS operating profit based on longer-term investment returns is reflected in short-term fluctuations in investment returns; and
    The amortisation of interest-related realised gains and losses to adjusted IFRS operating profit based on longer-term investment returns to the date when sold bonds would have otherwise matured.

For Group debt securities at 30 June 2019 held by the continuing insurance operations in Asia and US, the level of unamortised interest-related realised gains and losses related to previously sold bonds and have yet to be amortised to adjusted IFRS operating profit based on longer-term investment returns for continuing operations was a net gain of £798 million (30 June 2018: net gain of £800 million).

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Equity-type securities

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

Derivative value movements

Generally, derivative value movements are excluded from adjusted IFRS operating profit based on longer-term investment returns. The exception is where the derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in adjusted IFRS operating profit based on longer-term investment returns. The principal example of derivatives whose value movements are excluded from adjusted IFRS operating profit based on longer-term investment returns arises in Jackson, as discussed below in section (c).

(b)
Asia insurance operations
(i)
Business where policyholder liabilities are sensitive to market conditions

For certain Asia non-participating business, for example in Hong Kong, the economic features are more akin to asset management products with policyholder liabilities reflecting asset shares over the contract term. Consequently, for these products, the charge for policyholder benefits in the adjusted IFRS operating profit based on longer-term investment returns reflects the asset share feature rather than volatile movements that would otherwise be reflected if the local regulatory basis (also applied for IFRS basis) was used.

For certain other types of non-participating business expected longer-term investment returns are used to determine the movement in policyholder liabilities for determining adjusted IFRS operating profit based on longer-term investment returns.

(ii)
Other Asia shareholder-financed business

Debt securities

For this business, the realised gains and losses are principally interest related. Accordingly, all realised gains and losses to date for these operations are amortised over the period to the date those securities would otherwise have matured, with no explicit risk margin reserve charge.

Equity-type securities

For Asia insurance operations, investments in equity securities held for non-linked shareholder-backed businesses amounted to £2,282 million as at 30 June 2019 (30 June 2018: £1,622 million). The rates of return applied for 2019 ranged from 5.2 per cent to 17.6 per cent (30 June 2018: 5.1 per cent to 17.2 per cent) with the rates applied varying by business unit. These rates are broadly stable from period to period but may be different between countries reflecting, for example, differing expectations of inflation in each business unit. The assumptions are for the 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.

The longer-term investment returns for the Asia insurance joint ventures accounted for using the equity method are determined on a similar basis as the other Asia insurance operations described above.

(c)
US insurance operations
(i)
Separate account business

For such business the policyholder unit liabilities are directly reflective of the asset value movements. Accordingly, the adjusted IFRS operating profit based on longer-term investment returns reflect the current period value movements in unit liabilities and the backing assets.

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(ii)
US variable and fixed index annuity business

The following value movements for Jackson's variable and fixed index annuity business are excluded from adjusted IFRS operating profit based on longer-term investment returns. See note B1.2 note (i) to the unaudited condensed consolidated interim financial statements:

    Fair value movements for equity-based derivatives;
    Fair value movements for guaranteed benefit options for the 'not for life' portion of Guaranteed Minimum Withdrawal Benefit (GMWB) and fixed index annuity business, and Guaranteed Minimum Income Benefit (GMIB) reinsurance (see below);
    Movements in the accounts carrying value of Guaranteed Minimum Death Benefit (GMDB), GMIB and the 'for life' portion of GMWB liabilities, (see below) 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 (ie they are relatively insensitive to the effect of current period equity market and interest rate changes);
    A portion of the fee assessments as well as claim payments, in respect of guarantee liabilities; and
    Related amortisation of deferred acquisition costs for each of the above items.

Guaranteed benefit options for the 'not for life' portion of GMWB and equity index options for the fixed index annuity business

The 'not for life' portion of GMWB guaranteed benefit option liabilities is measured under the US GAAP basis applied for IFRS in a manner consistent with IAS 39 under which the projected future growth rate of the account balance is based on current swap rates (rather than expected rates of return) with only a portion of the expected future guarantee fees included. Reserve value movements on these liabilities are sensitive to changes to levels of equity markets, implied volatility and interest rates. The equity index option for fixed index annuity business is measured under the US GAAP basis applied for IFRS in a manner consistent with IAS 39 under which the projected future growth is based on current swap rates.

Guaranteed benefit option for variable annuity guarantee minimum income benefit

The GMIB liability, which is substantially reinsured, subject to a deductible and annual claim limits, is accounted for using 'grandfathered' US GAAP. This accounting basis substantially does not recognise the effects of market movements. The corresponding reinsurance asset is measured under the 'grandfathered' US GAAP basis applied for IFRS in a manner consistent with IAS 39, 'Financial Instruments: Recognition and Measurement', and the asset is therefore recognised at fair value. As the GMIB is economically reinsured, the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.

(iii)
Other derivative value movements

The principal example of non-equity based derivatives (for example, interest rate swaps and swaptions) whose value movements are excluded from adjusted IFRS operating profit based on longer-term investment returns, 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 other 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 product options.

(iv)
Other US shareholder-financed business

Debt securities

The distinction between impairment losses and interest-related realised gains and losses is of particular relevance to 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) to determine the average annual risk margin reserve to apply to debt securities held to back general account business. Debt securities held to back separate account and reinsurance funds withheld are not subject to risk margin reserve charge. Further details of the risk margin reserve charge, as well as the amortisation of interest-related realised gains and losses, for Jackson are shown in note B1.2 note (ii)(c).

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Equity-type securities

At 30 June 2019, the equity-type securities for non-separate account operations amounted to £1,178 million (30 June 2018: £1,187 million). The longer-term rates of return for income and capital applied in 2019 and 2018, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums, are as follows:

  2019   2018

  Half year   Half year

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

  6.0% to 6.7%   6.7% to 7.0%

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

  8.0% to 8.7%   8.7% to 9.0%
(d)
Fund management and other non-insurance businesses

For these businesses, the particular features applicable for life assurance noted above do not apply and therefore the adjusted IFRS operating profit based on longer-term investment returns is not determined on the basis described above. Instead, realised gains and losses are generally included in adjusted IFRS operating profit based on longer-term investment returns with temporary unrealised gains and losses being included in short-term fluctuations. In some instances, realised gains and losses on derivatives and other financial instruments are amortised to adjusted IFRS operating profit based on longer-term investment returns over a time period that reflects the underlying economic substance of the arrangements.

(e)
Discontinued UK and Europe insurance operations
(i)
General principles

The general principles for long term businesses as described in section (a) and fund management and other businesses as described in section (d) are also applicable to the discontinued UK and Europe operations.

(ii)
Shareholder-backed annuity business

For this 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 'adjusted IFRS operating profit 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.

The adjusted IFRS operating profit based on longer-term investment returns reflects the impact of value movements on policyholder liabilities for shareholder-backed annuity business within The Prudential Assurance Company Limited (PAC) after adjustments to allocate the following elements of the movement to the category of 'short-term fluctuations in investment returns':

    The impact on credit risk provisioning of actual upgrades and downgrades during the period;
    Credit experience compared with assumptions; and
    Short-term value movements on assets backing the capital of the business.

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. Positive or negative experience compared with assumptions is included within short-term fluctuations in investment returns without further adjustment. The effects of other changes to credit risk provisioning are included in the adjusted IFRS operating profit based on longer-term investment returns, as is the net effect of changes to the valuation rate of interest due to portfolio rebalancing to align more closely with management benchmark.

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(iii)
Non-linked shareholder-financed business

For debt securities backing non-linked shareholder-financed business of the UK and Europe insurance operations (other than the annuity business) 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 risk margin reserve charge.

Analysis of adjusted IFRS operating profit based on longer-term investment returns

The following tables reconcile Prudential's adjusted IFRS operating profit based on longer-term investment returns to total profit attributable to shareholders.

    Half year 2019 £m
    Asia   US   Total
segment
  Unallocated to a
segment (other
operations)
  Group
total
Adjusted IFRS operating profit (loss) based on longer-term investment returns from continuing operations   1,198   1,215   2,413   (389)   2,024
Short-term fluctuations in investment returns on shareholder-backed business   420   (1,521)   (1,101)   (23)   (1,124)
Other non-operating itemsnote (iii)   207   (15)   192   (196)   (4)
Profit (loss) from continuing operations before tax attributable to shareholders   1,825   (321)   1,504   (608)   896
Tax attributable to shareholders' returns from continuing operations                   (1)
Profit from continuing operations for the period                   895
Profit from discontinued operations for the period, net of tax (see below)                   645
Profit for the period                   1,540

 

    Half year 2018 £m (AER)note (i)
    Asia   US   Total
segment
  Unallocated to a
segment (other
operations)
  Group
total
Adjusted IFRS operating profit (loss) based on longer-term investment returns from continuing operations   1,016   1,002   2,018   (349)   1,669
Short-term fluctuations in investment returns on shareholder-backed business   (326)   244   (82)   91   9
Other non-operating itemsnote (iii)   (12)   (60)   (72)   (7)   (79)
Profit (loss) from continuing operations before tax attributable to shareholders   678   1,186   1,864   (265)   1,599
Tax attributable to shareholders' returns from continuing operations                   (326)
Profit from continuing operations for the period                   1,273
Profit from discontinued operations for the period, net of tax (see below)                   83
Profit for the period                   1,356

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    Half year 2018* £m (CER)note (i),(ii)
    Asia   US   Total
segment
  Unallocated to a
segment (other
operations)
  Group
total
Adjusted IFRS operating profit (loss) based on longer-term investment returns from continuing operations   1,055   1,065   2,120   (351)   1,769
Short-term fluctuations in investment returns on shareholder-backed business   (342)   259   (83)   91   8
Other non-operating itemsnote (iii)   (12)   (64)   (76)   (7)   (83)
Profit (loss) from continuing operations before tax attributable to shareholders   701   1,260   1,961   (267)   1,694
Tax attributable to shareholders' returns from continuing operations                   (343)
Profit from continuing operations for the period                   1,351
Profit from discontinued operations for the period, net of tax                   83
Profit for the period                   1,434

Analysis of profit from discontinued operations for the period

  2019 £m   2018note (i) £m

  Half year   Half year
(AER/CER)

Adjusted IFRS operating profit based on longer-term investment returns before tax

  687   736

Non-operating profit (loss)note (iv)

  130   (635)

Profit before tax attributable to shareholders

  817   101

Tax charge attributable to shareholders' returns

  (172)   (18)

Profit from discontinued operations for the period

  645   83

Notes

(i)
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).
(ii)
For half year 2018, the CER results were calculated using the half year 2019 average exchange rates.
(iii)
Other non-operating items of the continuing operations include primarily gains/losses on the disposal of businesses and other corporate transactions. In half year 2019, these items reflected £(196) million incurred in the period in connection with the preparation for the proposed demerger of M&GPrudential from Prudential plc. Further information is set out in note D1.1 to the unaudited condensed consolidated interim financial statements.
(iv)
Non-operating profit (loss) of discontinued operations comprise short-term fluctuations in investment returns and other items. In half year 2019, the other items include £(169) million of increase in debt value as a result of the agreement in the first half of 2019 of holders of two branches of bonds to permit substitution of M&GPrudential as the issuer of these bonds in place of Prudential plc at demerger (see note C6.1(vi) of the unaudited condensed consolidated interim financial statements for further information). The half year 2018 comparatives included a £(513) million loss arising on the reinsurance of part of the UK annuity portfolio to Rothesay Life.

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Explanation of Performance and Other Financial Measures

IFRS profit

  AER   CERnote (iv)

  2019 £m
Half year
  2018£m
Half year
note (iii)
  Change %   2018£m
Half year
note (iii)
  Change %

Adjusted IFRS operating profit based on longer-term investment returns from continuing operations before tax

                   

Asia

                   

Long-term businessnote (ii)

  1,095   927   18%   963   14%

Asset management

  103   89   16%   92   12%

Total Asia

  1,198   1,016   18%   1,055   14%

US

                   

Long-term businessnote (ii)

  1,203   1,001   20%   1,064   13%

Asset management

  12   1   n/a   1   n/a

Total

  1,215   1,002   21%   1,065   14%

Total segment profit from continuing operations

  2,413   2,018   20%   2,120   14%

Other income and expenditure

  (366)   (329)   (11)%   (331)   (11)%

Adjusted IFRS operating profit based on longer-term investment returns before tax and restructuring costs

  2,047   1,689   21%   1,789   14%

Restructuring costs

  (23)   (20)   (15)%   (20)   (15)%

Total adjusted IFRS operating profit based on longer-term investment returns before tax from continuing operations before taxnote (i)

  2,024   1,669   21%   1,769   14%

Non-operating items:

                   

Short-term fluctuations in investment returns on shareholder-backed businessnote (v)

  (1,124)   9   n/a   8   n/a

Amortisation of acquisition accounting adjustments

  (17)   (22)   23%   (23)   26%

(Loss) gain on disposal of businesses and corporate transactions

  13   (57)   n/a   (60)   n/a

Profit from continuing operations before tax attributable to shareholders

  896   1,599   (44)%   1,694   (47)%

Tax charge attributable to shareholders' returns

  (1)   (326)   100%   (343)   100%

Profit for the period from continuing operations

  895   1,273   (30)%   1,351   (34)%

Profit for the period from discontinued operations

  645   83   n/a   83   n/a

Profit for the period

  1,540   1,356   14%   1,434   7%

Notes

(i)
The Group provides supplementary analysis of IFRS profit before tax attributable to shareholders so as to distinguish adjusted IFRS operating profit based on longer-term investment returns from other elements of total profit. Adjusted IFRS operating profit based on longer-term investment returns is the basis on which management regularly reviews the performance of Prudential's segments as defined by IFRS 8. Further discussion on the determination of adjusted IFRS operating profit based on longer-term investment returns is provided in B1.3 to the unaudited condensed consolidated interim financial statements and section 'Basis of Performance Measures' above.
(ii)
The results of the Group's long-term business operations are affected by changes to assumptions, estimates and bases of preparation. Where applicable, these are described in note B3 to the unaudited condensed consolidated interim financial statements.
(iii)
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).
(iv)
For half year 2018, the CER results were calculated using the half year 2019 average exchange rate.

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(v)
Short-term fluctuations in investment returns on shareholder-backed business comprise:

  2019 £m   2018 £m (AER)

  Half year   Half year
note (iii)

Asia operations

  420   (326)

US operations

  (1,521)   244

Other operations

  (23)   91

Total

  (1,124)   9

Further details on the short-term fluctuations in investment returns from continuing operations are provided below and in note B1.2 to the unaudited condensed consolidated interim financial statements.

Earnings per share

  Actual exchange rate   Constant exchange rate

      Half year
2019 pence
  Half year
2018 pence
      Change %       Half year
2018 pence
      Change %

Basic earnings per share based on adjusted IFRS operating profit based on longer-term investment returns after tax

                                   

From continuing operations

      65.3   53.7       22       57.0       15

Basic earnings per share based on total profit after tax

                                   

From continuing operations

      34.4   49.5       (31)       52.6       (35)

From discontinued operations

      25.0   3.2       681       3.2       681

      59.4   52.7       13       55.8       6

Prudential's financial performance in the first half of 2019 reflects our continued focus on driving growth across our Asian markets, products and distribution channels, and the early results of our strategic initiatives to diversify our US business mix.

In preparation for the intended demerger of M&GPrudential from Prudential plc, the results presented within this report are identified as being derived from continuing or discontinued operations. Continuing operations comprise our Asia, US, Africa and central operations. Discontinued operations comprise UK and Europe operations, and are also referred to as M&GPrudential within this report. Results for the comparative period have been restated accordingly. Under IFRS, comparative balance sheet amounts are not re-presented for discontinued operations.

Adjusted IFRS operating profit based on longer-term investment returns from continuing operations in the first half of 2019 increased by 14 per cent (21 per cent on an actual exchange rate basis) to £2,024 million. Profit after tax for the period from continuing operations was £895 million, a decrease of 34 per cent (30 per cent on an actual exchange rate basis), reflecting negative short-term fluctuations. Higher equity market levels resulted in equity hedge losses, which were only partly offset by movements in associated liabilities, as the full benefit of higher equity markets was limited by lower long-term interest rates and accounting mismatch effects.

The profits attributable to M&GPrudential have been classified as discontinued operations, although adjusted IFRS operating profit based on longer-term investment returns from continuing operations still includes the total other income and expenditure that relates to the existing, pre-demerger Group structure, as well as the profits from our Asia and US businesses. For example, debt costs are expected to be rebalanced between continuing operations and discontinued operations from the point of demerger, but are currently incurred in full in continuing operations. Total segment profit from continuing operations, which excludes other income and expenditure, increased by 14 per cent (20 per cent on an actual exchange rate basis).

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Segmental commentary

Asia total adjusted IFRS operating profit based on longer-term investment returns of £1,198 million was 14 per cent higher than the previous year (18 per cent on an actual exchange rate basis). Adjusted IFRS operating profit based on longer-term investment returns from life insurance operations increased by 14 per cent to £1,095 million (18 per cent on an actual exchange rate basis), reflecting the continued growth of our in-force book of recurring premium business, with renewal insurance premiums1 up 12 per cent reaching £7,093 million (17 per cent on an actual exchange rate basis). Insurance margin was up 14 per cent, driven by our continued focus on health and protection business, now contributing to 71 per cent of Asia life insurance revenues2 (2018: 70 per cent).

The development of our Asia businesses' adjusted IFRS operating profit based on longer-term investment returns is broad-based and at increasing scale. Eight of our 12 life markets reported growth of 10 per cent or above. Adjusted IFRS operating profit based on longer-term investment returns growth was led by Hong Kong (up 29 per cent to £260 million), China JV (up 28 per cent on a post-tax basis), Vietnam (up 24 per cent), the Philippines (up 24 per cent), Singapore (up 18 per cent) and Malaysia (up 10 per cent). Indonesia remains a significant contributor to Asia's adjusted IFRS operating profit based on longer-term investment returns (£200 million), but was 6 per cent lower compared with the prior period, reflecting the impact of sales declines in the recent past.

Eastspring's adjusted IFRS operating profit based on longer-term investment returns increased by 12 per cent (up 16 per cent on an actual exchange rate basis) to £103 million. This was a result of revenue growth of 5 per cent, driven by the acquisition of TMB Asset Management in the second half of 2018 and higher funds under management, with costs increasing at a slower rate of 2 per cent. Disciplined cost management has led to an improvement in its cost-income ratio1 to 51 per cent (2018: 54 per cent on an actual exchange rate basis).

Eastspring's external assets under management, excluding money market funds, increased by 14 per cent in the six months to 30 June 2019 (on an actual exchange rate basis) to £56.5 billion in the period, reflecting positive net flows and favourable market movements. Higher internal assets under management, driven by inflows into the life business, lifted Eastspring's total assets under management3 by 12 per cent to £169.5 billion (31 December 2018: £151.3 billion an actual exchange rate basis).

US total adjusted IFRS operating profit based on longer-term investment returns at £1,215 million increased by 14 per cent (21 per cent on an actual exchange rate basis). Broadly stable fee income was supported by favourable deferred acquisition costs (DAC) deceleration compared with unfavourable DAC acceleration in the prior period.

Fee income development reflects an essentially stable average separate account balance compared with the prior period. The evolution of separate account balances in the first half of the year reflects strongly positive investment performance offset by marginally negative net flows. Weak market performance in the latter part of 2018 reduced the level of account balance at the start of the period compared with the prior period.

Spread income was 27 per cent lower reflecting the combination of lower core spread income and lower swap income. The reduction in core spread reflects the effect of lower invested asset yields. The decline in swap income is a result of the unfavourable impact of higher short-term interest rates over much of the period. The associated decline in margin to 106 basis points from 162 basis points at half year 2018 in relation to average spread-related general account assets also reflects the full consolidation of the assets acquired with the John Hancock transaction in November 2018 in the current period. Assuming business mix and market interest rates remain stable at 30 June 2019 levels, the overall spread margin is expected to remain in the region of 100 basis points.

The favourable development of £148 million in DAC deceleration (2018: £45 million unfavourable acceleration on a constant exchange rate basis) is a function of significant outperformance of the separate account return in the period compared with that assumed within the mean reversion formula.

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Analysis of long-term insurance business pre-tax adjusted IFRS operating profit based on longer-term investment returns by driver from continuing operations

  Actual exchange rate   Constant exchange rate

  Half year 2019   Half year 2018   Half year 2018

  Operating
profit
£m
  Margin
bps
  Operating
profit
£m
  Margin
bps
  Operating
profit
£m
  Margin
bps

Spread income

  349   107   407   150   429   150

Fee income

  1,349   171   1,293   172   1,370   173

With-profits

  41   19   30   18   31   17

Insurance margin

  1,401       1,186       1,241    

Other income

  1,207       1,074       1,115    

Total life income from continuing operations

  4,347       3,990       4,186    

Expenses including DAC adjustments*

  (2,049)       (2,062)       (2,159)    

Long-term insurance business pre-tax adjusted IFRS operating profit based on longer-term investment returns from continuing operations

  2,298       1,928       2,027    
*
Expenses including DAC adjustments includes share of related tax charges from joint ventures and associate, see note I(iv) of the Additional financial information.

Insurance margin increased by 13 per cent (up 18 per cent on an actual exchange rate basis) supported by growth in health and protection in our Asia business, while fee income decreased by 2 per cent (up 4 per cent on an actual exchange rate basis) largely reflecting the development in average US separate account balances and associated fee margins. Spread income decreased by 19 per cent (down 14 per cent on an actual exchange rate basis) as a result of a lower contribution from the US business. Administration expenses increased to £1,184 million (2018: £1,143 million on a constant exchange rate basis) as the Asian business continues to expand, alongside higher asset-based commissions within the US business, which are treated as an administrative expense in this analysis. Refer to section I(a) within the "Additional unaudited financial information" for further information on adjusted IFRS operating profit based on longer-term investment returns by driver.

Other income and expenditure and restructuring costs from continuing operations

Other income and expenditure consists of interest payable on core structural borrowings, corporate expenditure and other income. These items, together with restructuring costs of £23 million, increased 11 per cent to a net charge of £389 million (2018: £351 million). Total interest costs in the period were £226 million. This included £85 million for subordinated debt that is capable of being transferred to M&GPrudential. The annualised interest cost of core structural borrowings held at 30 June 2019 which cannot be substituted to M&GPrudential is estimated at £234 million4.

Total Group head office and regional head office costs were £164 million for the six months to 30 June 2019. We are assessing the efficiency and effectiveness of our Group-wide functions to ensure that they better reflect the future needs of the business. Updates on this process and an overview of expected benefits and costs to be incurred will be given in due course. Implementation and preparation for IFRS 17 continues with activity likely to increase in the second half of 2019 onward.

Non-operating items from continuing operations

Non-operating items consist of short-term fluctuations in investment returns on shareholder-backed business of negative £1,124 million (2018: positive £8 million), the results attaching to corporate transactions of positive £13 million (2018: negative £60 million), and the amortisation of acquisition accounting adjustments of negative £17 million (2018: negative £23 million) arising mainly from the REALIC business acquired by Jackson in 2012.

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In the first half of 2019, the total short-term fluctuations in investment returns on shareholder-backed business were negative £1,124 million (2018: positive £9 million on an actual exchange rate basis). This comprised positive £420 million (2018: negative £326 million on an actual exchange rate basis) for Asia, negative £1,521 million (2018: positive £244 million on an actual exchange rate basis) in the US and negative £23 million (2018: positive £91 million on an actual exchange rate basis) in other operations.

Falling interest rates in many parts of Asia led to unrealised bond gains in the period, with varying liability accounting treatment in each market leading to differing liability revaluation effects. In the US, higher equity market levels resulted in equity hedge losses, which were only partly offset by a reduction in policyholder liabilities, as the full benefit of the uplift in equity markets was limited by lower long-term interest rates and accounting mismatch effects. During the period, Jackson incurred net derivative losses of £2,033 million on equity and interest rate hedge instruments used to manage the market exposure of Jackson's products. These were offset partly by £227 million of accounting movements in variable and fixed index annuity liabilities and £284 million of guarantee fee assessments, net of claims, earned in the period5.

Outside of the income statement, as part of other comprehensive income, interest rate falls have given rise to a gain of £1.7 billion on US available-for-sale debt securities. These gains more than offset the non-operating losses in the US, leading to an increase in shareholders' equity of the US business since the end of 2018.

The £13 million benefit of corporate transactions reflects gains from disposals in the period offset by the £(196) million incurred in the period in connection with the preparation for the proposed demerger of M&GPrudential from Prudential plc. Further information is set out in note D1.1 to the financial statements.

The total costs of the demerger transaction, consisting of fees paid to debt holders to facilitate rebalancing of debt between the two entities, costs associated with the separation of the two businesses and adviser fees, is expected to be circa £330 million to £355 million. £227 million has been incurred to 30 June 2019 (including £31 million incurred in 2018). Subject to the completion of the transactions on the expected timetable and the absence of unforeseen circumstances and excluding the expected costs in respect of improvements to the efficiency and effectiveness of our Group-wide functions referred to above, the remaining costs of circa £100 million to £125 million are expected to be incurred in the second half of 2019.

Profit for the period from discontinued operations

IFRS profit from discontinued operations

  Actual exchange rate

  Half year
2019 £m
  Half year
2018 £m
  Change %

Adjusted IFRS operating profit based on longer-term investment returns before tax

           

Long-term business

  496   487   2

General insurance commission

  2   19   (89)

Asset management

  239   272   (12)

Head office costs

  (21)   -   n/a

Adjusted IFRS operating profit based on longer-term investment returns before restructuring costs

  716   778   (8)

Restructuring costs

  (29)   (42)   31

Total adjusted IFRS operating profit based on longer-term investment returns before tax

  687   736   (7)

Non-operating profit (loss)

  130   (635)   n/a

Profit before tax attributable to shareholders

  817   101   n/a

Tax charge attributable to shareholders' returns

  (172)   (18)   n/a

Profit for the period

  645   83   n/a

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M&GPrudential adjusted IFRS operating profit based on longer-term investment returns, before restructuring costs, was 8 per cent lower at £716 million. Life insurance adjusted IFRS operating profit based on longer-term investment returns increased by 2 per cent to £496 million (2018: £487 million). Within this total, the contribution from our core6 with-profits and in-force annuity business was £345 million (2018: £255 million), including higher annuity income (mainly driven by higher asset related gains) and an increased transfer to shareholders from the with-profits funds of £161 million (2018: £157 million). These transfers included a 20 per cent increase in the contribution from the PruFund business of £30 million (2018: £25 million).

The balance of the life insurance result reflects the contribution from other elements which are not expected to recur at the same level. This includes the £127 million benefit (2018: £nil) of updates to annuitant mortality assumptions, which reflect a recent slowdown in life expectancy improvements, and the adoption of the Continuous Mortality Investigation (CMI) 2017 model, albeit with an uplift to the calibration such that additional liabilities are held to cover potential differences in experience between the PAC policyholder portfolio and the England and Wales population.

The non-core result in the prior period included a one-off £166 million insurance recovery, related to the costs of reviewing internally vesting annuities sold without advice after July 2008.

The reduction in general insurance commissions reflects the planned termination of a distribution agreement and replacement with a brand sharing arrangement.

Asset management adjusted IFRS operating profit based on longer-term investment returns decreased 12 per cent to £239 million as a result of lower revenues following net fund outflows during the second half of 2018 and 2019 which reduced the average level of funds managed by M&G Investments to £263.8 billion (2018: £285.3 billion). The cost-income ratio of 57 per cent (2018: 54 per cent) was also affected by the lower revenues. Costs were flat in absolute terms.

Overall assets under management were £341.1 billion at 30 June 2019, up from £321.2 billion at 31 December 2018. External funds under management were up 4 per cent from 31 December 2018 to £153.0 billion at 30 June 2019, as a result of positive market developments. These positive effects were offset partially by institutional net outflows of £0.3 billion and wholesale and direct net outflows of £4.3 billion over the period. Overall, investor risk aversion remains high amid political uncertainties including Brexit. Internal assets under management increased moderately over the period to £188.1 billion at 30 June 2019 (31 December 2018: £174.3 billion). Net flows to PruFund remain positive at £3.5 billion, although below the prior period level due to the lower level of defined benefit pension transfers seen across the market generally.

M&GPrudential remains on track to deliver the announced annual shareholder cost savings of circa £145 million by 2022 for a shareholder investment of circa £250 million. Restructuring costs of £29 million (2018: £42 million) include investment spend of £26 million in relation to its merger and transformation programme and bring the cumulative cost to £169 million, on an IFRS basis, since the project began.

Profit after tax for the period was £645 million (2018: £83 million), a result of a substantial positive swing in non-operating profit. Non-operating profit over the first half of 2019 was £130 million, reflecting favourable revaluation effects on fixed income assets supporting the capital of the shareholder-backed annuity business. This compares with a loss of £635 million in the prior period, which included a loss of £513 million arising from the reinsurance of a portfolio of annuity contracts with Rothesay Life, and negative revaluation movements on shareholder assets.

IFRS effective tax rates

In the first half of 2019, the effective tax rate on adjusted IFRS operating profit based on longer-term investment returns from continuing operations was 16 per cent (2018: 17 per cent). This reflects a lower effective tax rate in Asia as a result of investment returns in the first half of 2019 which are not taxable. The effective tax rate on the total IFRS profit from continuing operations was less than 1 per cent in the first half of 2019 (2018: 20 per cent). The lower rate is mainly due to non-operating taxable losses arising in the US.

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The effective tax rate on adjusted IFRS operating profit based on longer-term investment returns from discontinued operations was 21 per cent (2018: 19 per cent). The effective tax rate on the total IFRS profit from discontinued operations was 21 per cent in the first half of 2019 (2018: 18 per cent).

Group and holding company cash flows

Prudential's consolidated cash flow includes the movement in cash included within both policyholders' and shareholders' funds, such as cash in the with-profits fund. Prudential therefore believes that it is more relevant to consider individual components of the movement in holding company cash flow which relate solely to the shareholders.

We continue to manage cash flows across the Group with a view to achieving a balance between ensuring sufficient remittances are made to service central requirements (including paying the external dividend) and maximising value to shareholders through retention and reinvestment of capital in business opportunities.

Cash remitted to the Group by business units in the first half of 2019 amounted to £1,212 million. Higher remittances of £451 million from Asia include the £191 million of proceeds from the reduction in the Group's shareholding in ICICI Prudential. US remittances increased to £400 million from £342 million in the prior period with the full remittance from Jackson received in the first half of the year. Going forwards, a more balanced cash remittance profile, between the first half and second half of the year, is under consideration. The remittance from M&GPrudential of £356 million was 4 per cent higher than the equivalent remittance in the first half of 2018.

Cash remitted to the Group in the first half of 2019 was used to meet central costs of £222 million (2018: £219 million) and pay the 2018 second interim dividend of £870 million. Corporate activities and other cash flows were negative £999 million (2018: negative £106 million), driven by net debt redemption of £400 million within the period, cash costs paid in respect of the demerger of £166 million and other transactions including payments for bancassurance distribution agreements. This led to holding company cash decreasing from £3,236 million to £2,365 million over the first half of 2019.

Reflecting the rebalancing of holding company cash stock pre-demerger, potential Asian investment opportunities and demerger related costs, holding company cash is anticipated to reduce in the second half of 2019 from the level at 30 June 2019.

Post-demerger, a lower level of holding company cash will be held centrally, commensurate with the reduced size of the Group post-demerger and ensuring sufficient resources are available to provide a buffer to support the retained businesses in stress scenarios and to provide liquidity to service debt, other central expenses and dividends.

Capital position, financing and liquidity

Capital position

Analysis of movement in Group shareholder Solvency II surplus7

  2019 £bn   2018 £bn

  Half year   Half year   Full year

Solvency II surplus at 1 January

  17.2   13.3   13.3

Operating experience

  2.1   1.8   4.2

Non-operating experience (including market movements)

  (1.5)   -   (1.2)

M&GPrudential transactions

  -   0.1   0.4

Other capital movements:

           

Net subordinated debt (redemption)/issuance

  (0.4)   -   1.2

Foreign currency translation impacts

  -   0.1   0.5

Dividends paid

  (0.9)   (0.8)   (1.2)

Model changes

  0.2   (0.1)   -

Estimated Solvency II surplus at end of period

  16.7   14.4   17.2

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The Group Shareholder Solvency II position shown relates to the Group's pre-demerger structure, and includes the discontinued M&GPrudential business.

The Group's shareholders' Solvency II capital surplus8,9 was estimated at £16.7 billion at 30 June 2019 (equivalent to a solvency ratio of 222 per cent), compared with £17.2 billion (232 per cent) at 31 December 2018. Operating experience of £2.1 billion (31 December 2018: £4.2 billion) which included £0.3 billion related to the recently acquired John Hancock business, was more than offset by non-operating experience of £1.5 billion, including the effect of distribution deals of £0.6 billion, dividends to shareholders in the period of £0.9 billion and net debt redemption of £0.4 billion.

Local Capital Summation Method

Following the proposed demerger of M&GPrudential from Prudential plc, the Hong Kong Insurance Authority (IA) will assume the role of the Group-wide supervisor for the retained Group (excluding M&GPrudential). The retained Group will no longer be subject to Solvency II capital requirements. Ultimately, Prudential plc will become subject to the Group Wide Supervision (GWS) framework which is currently under development by the Hong Kong IA for the industry and is not expected to come into force until the second half of 2020 (subject to the legislative process) at the earliest.

Until Hong Kong's GWS framework comes into force, Prudential will apply the Local Capital Summation Method (LCSM) that has been agreed with the Hong Kong IA to determine Group regulatory capital requirements (both minimum and prescribed levels). The summation of local statutory capital requirements across the retained Group will be used to determine Group regulatory capital requirements, with no allowance for diversification between business operations. The Group available capital will be determined by the summation of available capital across local solvency regimes for regulated entities and IFRS net assets (with adjustments) for non-regulated entities. The Hong Kong IA has yet to make any final decisions regarding the GWS framework for the industry and it continues to consider and consult on the proposed legislation and related guidelines. The amounts below should not therefore be interpreted as representing the results or requirements under the industry-wide GWS framework and are not intended to provide a forecast of the eventual position. For further information see note I(i)(b) of the Additional financial information.

The Prudential Group shareholder LCSM surplus of available capital over the Group minimum capital requirement at 30 June 2019, excluding M&GPrudential, was £7.4 billion before allowing for the payment of the first interim ordinary dividend, as shown in the table below. The table also shows the adjustments needed to that position to estimate the pro forma shareholder LCSM capital position assuming the proposed demerger of M&GPrudential from Prudential plc had completed as at 30 June 2019.

  30 June 2019 £bn

Estimated Prudential Group shareholder LCSM capital position

  As reported   Adjustments   Pro forma

Available Capital10

  10.6   +0.3   10.9

Minimum Required Capital

  3.2   -   3.2

LCSM surplus

  7.4   +0.3   7.7

LCSM ratio (%)

  332%   +8%   340%

The adjustments as shown in the table above, which result in an increase in surplus of £0.3 billion, represent the estimated impact on the retained Prudential Group shareholder LCSM capital position of the proposed demerger. The adjustments are based on current indicative estimates and are subject to change, which include:

    A reduction of £2.9 billion for the expected impact of the transfer of subordinated debt to M&GPrudential by substituting M&GPrudential in the place of Prudential as issuer of such debt. The £2.9 billion represents debt capable of being substituted that was held at 30 June 2019. A further £0.3 billion was raised in July bringing the total of subordinated debt expected to be transferred to £3.2 billion;
    An increase for the expected proceeds of £3.0 billion from a pre-demerger dividend to be paid by M&GPrudential to Prudential plc shortly before demerger, together with planned dividends of £0.3 billion expected to be paid earlier. All dividends are subject to the customary legal and governance considerations required before approval by the M&GPrudential Board; and

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    A reduction of £0.1 billion for expected directly attributable transaction costs associated with the proposed demerger that have yet to be incurred at 30 June 2019. Total demerger costs are discussed above in IFRS basis non-operating items from continuing operations.

No account has been taken of any trading and other changes in financial position of the Prudential Group after 30 June 2019, thus the pro forma shareholder LCSM capital position does not reflect the actual shareholder LCSM capital position of the retained Prudential Group following the completion of the proposed demerger.

Local statutory capital

All of our subsidiaries continue to hold appropriate capital levels on a local regulatory basis.

In the US, total adjusted capital was £3.9 billion11 at 30 June 2019 (US$4.9 billion), a £0.5 billion11 (US$0.6 billion) reduction over the period, mainly reflecting £0.6 billion11 (US$0.8 billion) of operating capital generation, offset by the payment of an increased £400 million11 (US$525 million) remittance to the Group alongside £0.8 billion11 (US$1.0 billion) of hedging losses net of reserve movements. Jackson's risk-based capital (RBC) ratio was estimated at above 400 per cent at 30 June 2019, which under the local regulator's 'permitted practice', excludes gains attributable to the valuation of interest rate swaps (if these were included the RBC ratio would be approximately 45 percentage points higher). Operating capital generation includes a favourable reserve release of £0.3 billion11 (US$0.4 billion) net of tax resulting from the block of business acquired from John Hancock in 2018.

The M&GPrudential Group has requested approval from the Prudential Regulatory Authority (PRA) to amend the group internal model to apply at the level of the M&GPrudential Group, rather than at the level of the existing Prudential Group. The decision is pending and is expected to be provided shortly before the planned demerger, such that the Prudential Group internal model remains in place until the demerger with M&GPrudential's model commencing from this point. The results set out below should not be interpreted as representing the Pillar I output from an approved Solvency II internal model for M&GPrudential and are subject to change. Based on the assumptions that underpin the current approved Group internal model, the estimated shareholder Solvency II surplus for the M&GPrudential Group at 30 June 2019 was £3.9 billion. The estimated pro forma position, assuming that the proposed demerger of M&GPrudential from Prudential plc had been completed as at 30 June 2019 based on the operating environment and economic conditions as at that date, was £3.9 billion16 (equivalent to a cover ratio12 of 169 per cent). Further information can be found in note I(i)(a) of the Additional financial information section.

Debt portfolio

The Group continues to maintain a high-quality defensively positioned debt portfolio. Shareholders' exposure to credit is concentrated in the UK and Europe annuity portfolio and the US general account, mainly attributable to Jackson's fixed annuity portfolio. The credit exposure is well diversified and 97 per cent of our M&GPrudential portfolio and 96 per cent of our US portfolio are investment grade13. 10 per cent of the US portfolio is in US treasuries (31 December 2018: 10 per cent). During the first half of 2019, default losses were minimal and reported impairments in the US portfolio were £1 million (2018: £2 million).

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Financing and liquidity

Shareholders' net core structural borrowings

    2019 £m   2018 £m
    30 June   30 June   31 December
Subordinated debt that is capable of being substituted to M&GPrudential (as at 30 June 2019)   3,089   1,287   2,919
Other core structural borrowings   4,352   5,080   4,745
Total borrowings of shareholder-financed businesses   7,441   6,367   7,664
Less: Holding company cash and short-term investments   (2,365)   (2,210)   (3,236)
Net core structural borrowings of shareholder-financed businesses   5,076   4,157   4,428
Gearing ratio*   21%   21%   20%
*
Net core structural borrowings as proportion of IFRS shareholders' funds plus net debt, as set out in note II of the Additional financial information.

The Group had central cash resources of £2.4 billion at 30 June 2019 (31 December 2018: £3.2 billion). Total core structural borrowings decreased by £0.2 billion, from £7.6 billion to £7.4 billion in the first half of 2019, following the redemption of £400 million 11.375 per cent tier 2 Subordinated Notes in May 2019, offset partly by a £169 million increase in the IFRS debt value as a result of the agreement in the first half of 2019 of holders of two tranches of bonds to permit substitution of M&GPrudential as the issuer of these bonds in place of Prudential plc at demerger (see note C.6.1(vi) of the unaudited condensed consolidated interim financial statements for further information).

Prior to the proposed demerger, the Group expects to rebalance its debt capital across Prudential plc and M&GPrudential. This will include the ultimate holding company of M&GPrudential becoming an issuer of debt following substitution from Prudential plc. Based on the operating environment and economic conditions as at 30 June 2019, the total debt expected to be transferred valued at original proceeds less unamortised transaction costs is £3.2 billion, compared with the circa £3.5 billion as previously indicated. Of the £3.2 billion, £2.9 billion was held by Prudential plc at 30 June 2019 (IFRS value of £3.1 billion), with a further £0.3 billion raised in July 2019. Following the substitution Prudential plc is expected to have core structural borrowings valued under IFRS at £4.4 billion at 30 June 2019. As set out in the 'local statutory capital' section above, the shareholder Solvency II ratio of M&GPrudential at 30 June 2019, assuming the demerger had taken place at this date and hence the debt described above had been substituted, was 169 per cent. This is based on assumptions at 30 June 2019 and does not allow for any further trading or change in environment and economic conditions, material changes in which may lead to a different outcome.

In addition to its net core structural borrowings of shareholder-financed businesses set out above, the Group also has access to funding via the money markets and has in place an unlimited global commercial paper programme. As at 30 June 2019, we had issued commercial paper under this programme totalling US$828 million, to finance non-core borrowings.

As at 31 December 2018, the Group had a total of £2.6 billion of undrawn committed facilities, expiring in 2023. In preparation for the demerger of M&GPrudential from Prudential plc, since the year end, these facilities have been replaced with two separate committed facilities totalling £3.5 billion expiring in 2024. Of this amount, £2.0 billion of committed facilities are held by Prudential plc and £1.5 billion of facilities are held by M&GPrudential. Up to the point of demerger, Prudential plc has access to the whole amount through an internal committed facility. No amounts have been drawn under these facilities and there were no amounts outstanding at 30 June 2019. Access to further liquidity is available through the debt capital markets and a commercial paper programme in place, and Prudential plc has maintained a consistent presence as an issuer in the market for the past decade. The medium-term note programme, the US shelf programme (platform for issuance of SEC registered public bonds in the US market), the commercial paper 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 flexible funding capacity.

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In addition to the Group's traditional sources of liquidity and financing, Jackson also has access to funding via the Federal Home Loan Bank of Indianapolis secured by collateral posted by Jackson. Given the wide range of Jackson's product set and breadth of its customer base including retail, corporate and institutional, further sources of liquidity also include premiums and deposits.

Movement in Shareholders' Funds

The following table sets forth a summary of the movement in Prudential's IFRS shareholder funds for the periods indicated:

    2019 £m   2018 £m
    Half year   Half year   Full year
Profit after tax for the period14   1,535   1,355   3,010
Exchange movements, net of related tax   98   69   348
Unrealised gains and losses on US fixed income securities classified as available for sale15   1,726   (908)   (1,083)
Dividends   (870)   (840)   (1,244)
Other   (66)   119   131
Net (decrease) increase in shareholders' funds   2,423   (205)   1,162
Shareholders' funds at beginning of the period   17,249   16,087   16,087
Shareholders' funds at end of the period   19,672   15,882   17,249
Shareholders' value per share1   757p   613p   665p

Group IFRS shareholders' funds in the six months to 30 June 2019 increased by 14 per cent to £19.7 billion (31 December 2018: £17.2 billion on an actual exchange rate basis), driven by the strength of the operating result, offset by dividend payments of £870 million. During the period, UK sterling has weakened relative to the US dollar and various Asian currencies, which generated a positive exchange rate movement on the net assets in the period. In addition, the decrease in US long-term interest rates between the start and the end of the reporting period produced unrealised gains on fixed income securities held by Jackson accounted for through other comprehensive income.

If the demerger had occurred at 30 June 2019, shareholders' equity would have been reduced by £5.1 billion to £14.6 billion16. For further information see note I(vii) of the Additional financial information.

Financial implications of corporate transactions

Renewal and expansion of regional strategic bancassurance alliance with UOB

In January 2019, Prudential and UOB renewed their regional bancassurance alliance until 2034, extending the scope to include a fifth market, Vietnam, alongside our existing footprint across Singapore, Malaysia, Thailand and Indonesia. Under the terms of the renewal, Prudential's life insurance products will be distributed through UOB's extensive network of more than 400 branches in five markets, providing access to over four million UOB customers. In addition, Prudential will use its digital capabilities to deliver protection-focused propositions to aid UOB's digital bank expansion and customer acquisition aspirations. An initial fee of £662 million17 will be paid under the agreement which will be funded through internal resources. This amount will be paid in three instalments. £230 million17 was paid in February 2019 with £331 million17 to be paid in January 2020 and £101 million17 to be paid in January 2021.

Partnership with OVO in Indonesia

In June 2019, Prudential announced a strategic partnership with PT Visionet International (OVO), a leading digital payments, rewards and financial services platform in Indonesia. Prudential and OVO will develop jointly new and comprehensive digital propositions for customers encompassing wellness, health and wealth products and services. Prudential and OVO customers will have the convenience of transacting online with electronic underwriting, e-payments, e-claims and access to Prudential's wide hospital network, complementing the face-to-face service from Prudential's financial consultants in 160 cities. We believe the partnership enhances Prudential's reach in one of Asia's largest insurance markets with a digitally-savvy population.

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Acquisition of majority stake in Group Beneficial

In July 2019, Prudential plc completed its acquisition of a 51 per cent stake in Group Beneficial (Beneficial), one of the leading life insurers in Cameroon, Côte d'Ivoire and Togo. Beneficial provides savings and protection products to over 300,000 customers through 41 branches and more than 2,000 agents. The acquisition enhances Prudential's growing scale in Africa.

Partial disposal of India life insurance associate

In March 2019, the Group reduced its shareholding in ICICI Prudential Life Insurance Company, an Indian associate, from 25.8 per cent to 22.1 per cent. The proceeds from the sale of shares were £191 million resulting in a gain of £150 million before tax. ICICI Prudential Life Insurance Company remains an associate of the Group.

Disposal of Vietnam consumer finance business

In June 2019, the Group completed the sale of Prudential Vietnam Finance Company Limited, its Vietnam consumer finance subsidiary for proceeds of £119 million, resulting in a profit on disposal of £55 million before tax.

Acquisition of majority stake in Thanachart Fund Management

In August 2019, the Group announced that it had entered into a binding memorandum of understanding with Thanachart Bank to acquire a controlling stake in Thanachart Fund Management Co., Ltd. (T-FUND) and expects to enter into definitive agreements by the end of the year. T-FUND is the 9th largest mutual fund manager in Thailand, with total assets under management of over £5 billion as at 31 December 2018. The proposed acquisition will be subject to local regulatory approvals.

Notes

1
1        See note II of the Additional financial information for definition and reconciliation to IFRS balances.
2
Asia insurance revenues include spread income, fee income, with-profits, insurance margin and expected return on shareholder assets.
3
Includes money market funds.
4
Annualised interest cost is calculated based on core structural borrowings held at 30 June 2019, using exchange rates at 30 June 2019, and therefore excludes interest costs relating to bonds redeemed in the period.
5
All figures for net derivative losses and related movements are net of deferred acquisition costs.
6
Core refers to the underlying profit of the M&GPrudential insurance business, excluding the effect of, for example, management actions to improve solvency and material assumption changes. Details of these are set out in note I(vi) of the Additional financial information.
7
The methodology and assumptions used in calculating the Solvency II capital results are set out in note I(i) of the Additional financial information.
8
The Group shareholder capital position covers continuing and discontinued operations and excludes the contribution to own funds and the Solvency Capital Requirement from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency positions include management's calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which as at 31 December 2018 reflected the approved regulatory position.
9
Estimated before allowing for first interim ordinary dividend (31 December 2018: second interim ordinary dividend).
10
Includes £2.9 billion of subordinated debt that is expected to be transferred to M&GPrudential pre-demerger and hence has not been 'grandfathered' with the Hong Kong IA.
11
Movements in the period have been translated at the average exchange rates for the period ended 30 June 2019, apart from remittances to the Group which reflect the exchange rate applied to the transaction. The closing balance has been translated at the closing spot rates as at 30 June 2019.
12
The M&GPrudential shareholder Solvency II ratio is measured as the ratio of Solvency II own funds to the Solvency Capital Requirement. It excludes the contribution to own funds and the Solvency Capital Requirement from ring-fenced with-profits funds and staff pension schemes in surplus and includes management's calculation of UK transitional measures reflecting operating and market conditions at each valuation date.
13
Based on hierarchy of Standard & Poor's, Moody's and Fitch, where available and if unavailable, NAIC and internal ratings have been used.
14
Excluding profit for the year attributable to non-controlling interests.
15
Net of related charges to deferred acquisition costs and tax.
16
No account has been taken of any trading and other changes in financial position of the Prudential Group after 30 June 2019, thus the pro forma financial position does not reflect the actual financial position of the retained Prudential Group following the completion of the proposed demerger.
17
Translated using a Singapore dollar: Sterling foreign exchange rate of 1.7360.

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Explanation of Movements in Profit Before Shareholder Tax by Nature of Revenue and Charges

The following table shows Prudential's consolidated total revenue and consolidated total charges for the following periods.

  2019 £m       2018* £m    

      Half year           Half year    

Profit from continuing operations:

                       

Gross premiums earned

      16,293           14,786    

Outward reinsurance premiums

      (520)           (363)    

Earned premiums, net of reinsurance

      15,773           14,423    

Investment return

      24,633           1,381    

Other income

      199           215    

Total revenue, net of reinsurance

      40,605           16,019    

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

      (36,671)           (10,928)    

Acquisition costs and other expenditure

      (2,711)           (3,285)    

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

      (226)           (189)    

Gain (loss) on disposal of businesses and corporate transactions

      13           (57)    

Total charges, net of reinsurance and gain (loss) on disposal of businesses

      (39,595)           (14,459)    

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

      106           82    

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

      1,116           1,642    

Less tax charge attributable to policyholders' returns

      (220)           (43)    

Profit before tax attributable to shareholders

      896           1,599    

Total tax charge attributable to policyholders and shareholders

      (221)           (369)    

Adjustment to remove tax charge attributable to policyholders' returns

      220           43    

Tax charge attributable to shareholders' returns

      (1)           (326)    

Profit from continuing operations for the period

      895           1,273    

Profit from discontinued operations for the period, net of related taxnote (ii)

      645           83    

Profit for the period

      1,540           1,356    
*
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).

Notes

(i)
This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure is not representative of pre-tax profits attributable to shareholders. Profit before all taxes is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for taxes borne by policyholders.
(ii)
Profit from discontinued operations represents the post-tax profit contributed by the UK and Europe operations which are classified as held for distribution at 30 June 2019 (a line-by-line analysis of profit for the period for the discontinued UK and Europe operations is included in note D2.1 of the unaudited condensed consolidated interim financial statements).The half year 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2 of the unaudited condensed consolidated interim financial statements).

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(a)   Earned premiums, net of reinsurance

  2019 £m   2018 £m

  Half year   Half year

Asia

  8,470   7,514

US

  7,279   6,895

Unallocated to a segment

  24   14

Total from continuing operations

  15,773   14,423
*
The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).

Earned premiums, net of reinsurance for continuing operations totalled £15,773 million in half year 2019, up 9 per cent from £14,423 million in half year 2018. The increase of £1,350 million was primarily driven by growth in both the Asia and US operations of £956 million and £384 million respectively. Unallocated to a segment comprises the premiums related to Africa operations.

Asia

Earned premiums reflect the aggregate of single and recurrent premiums of new business sold in the year and premiums on annual business sold in previous years, net of reinsurance.

Earned premiums for Asia, net of reinsurance increased by £956 million or 13 per cent from £7,514 million in half year 2018 to £8,470 million in half year 2019 on an AER basis. Excluding the impact of exchange translation, net earned premiums in Asia increased by 8 per cent from half year 2018 to half year 2019, from £7,873 million on a CER basis to £8,470 million. The growth in earned premiums reflects the continued growth of our in-force book of recurring premium business. In half year 2019, total gross new business premiums for Asia were £2,406 million, up by £171 million or 8 per cent from half year 2018 (£2,235 million) on an AER basis.

Our multi-platform distribution in the region, with strong agency forces and bank partnerships, and growing digital channels, is continuing to drive our performance. We have continued to grow on a broad base in the region.

US

Earned premiums, net of reinsurance increased by 6 per cent from £6,895 million in half year 2018 to £7,279 million in half year 2019 on an AER basis. Excluding the impact of exchange translation, net earned premiums in the US is broadly in line with half year 2018, from £7,331 million on a CER basis to £7,279 million in half year 2019, reflecting an industry-wide slowdown in variable annuity sales offset by an increase in the sales of fixed index annuity products. This is consistent with the Group's intent to diversify its US product mix.

(b)   Investment return

  2019 £m   2018 £m

  Half year   Half year

Asia

  7,443   (1,190)

US

  17,151   2,426

Unallocated to a segment and intra-segment elimination*

  39   145

Total from continuing operations

  24,633   1,381
*
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).

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Investment return principally comprises interest income, dividends, investment appreciation/depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit and loss and realised gains and losses, including impairment losses, on securities designated as available-for-sale. Movements in unrealised appreciation/depreciation of Jackson's debt securities designated as amortised cost and available-for-sale are not reflected in investment return but are recorded in other comprehensive income.

Allocation of investment return between policyholders and shareholders

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, or to policyholders or the unallocated surplus of with-profits funds, the latter two of which have no direct impact on shareholders' profit. The table below provides a breakdown of the investment return for each regional operation attributable to each type of business.

  2019 £m   2018* £m

  Half year   Half year

Asia

       

Policyholder returns

       

Assets backing unit-linked liabilities

  922   (540)

With-profits business

  4,911   (533)

  5,833   (1,073)

Shareholder returns

  1,610   (117)

Total

  7,443   (1,190)

US

 
 
 
 

Policyholders returns - Assets held to back separate account (unit-linked) liabilities

  18,937   2,194

Shareholder returns

  (1,786)   232

Total

  17,151   2,426

Unallocated to a segment

 
 
 
 

Shareholder returns

  39   145

Group Total

       

Policyholder returns

  24,770   1,121

Shareholder returns

  (137)   260

Total from continuing operations

  24,633   1,381
*
The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2 of the unaudited condensed consolidated interim financial statements).

Policyholder returns

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 Asia for which the investment returns are wholly attributable to policyholders;
Separate account business of US operations, the investment returns of which are also wholly attributable to policyholders; and
With-profits business in 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. Except for this surplus the investment returns of the with-profits funds are attributable to policyholders (through the asset-share liabilities) or the unallocated surplus, which is accounted for as a liability under IFRS 4.

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

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Investment returns for unit-linked and similar products have a reciprocal impact on benefits and claims, with an increase/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.

Shareholder returns

For shareholder-backed non-participating business of the Asia operations, the investment returns are not directly attributable to policyholders and, therefore, impact shareholders' profit directly.

Changes in shareholders' investment returns for US operations reflect primarily movements in the investment income, and realised gains and losses together with movements in the value of the derivative instruments held to manage interest rate exposures and durations within the general account (including variable annuity and fixed index annuity guarantees), GMIB reinsurance and equity derivatives held to manage the equity risk exposure of guarantee liabilities. Separately within Benefits and Claims, there is a charge for the allocation made to policyholders through the application of crediting rates for Jackson's relevant lines of business.

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.

Reasons for period-on-period changes in investment returns

With two exceptions, all Prudential investments are carried at fair value in the statement of financial position with fair value movements, which are volatile from period to period, recorded in the income statement. The exceptions are for:

(i)
debt securities in the general account of US operations, the return on which is attributable to shareholders and which are accounted for on an IAS 39 available-for-sale basis. In this respect, realised gains and losses (including impairment losses) are recorded in the income statement, while movements in unrealised appreciation (depreciation) are booked as other comprehensive income. As a result, the changes in unrealised fair value of these debt securities are not reflected in Prudential's investment returns in the income statement. The unrealised gains and losses in the income statement of US operations primarily arise on the assets of the US separate account business; and

(ii)
loans and receivables, which are generally carried at amortised cost (unless designated at fair value through profit or loss).

Subject to the effect of these two exceptions, the period-on-period changes in investment returns primarily reflect the generality of overall market movements for equities and debt securities. In addition, foreign exchange rates affect the sterling value of the translated income. Consistent with the treatment applied for other items of income and expenditure, investment returns for overseas operations are translated at average exchange rates.

Asia

The table below provides an analysis of investment return attributable to Asia operations for the periods presented:

  2019 £m   2018 £m

  Half year   Half year

Interest/dividend income (including foreign exchange gains and losses)

  1,025   784

Investment appreciation (depreciation)*

  6,418   (1,974)

Total

  7,443   (1,190)
*
Investment appreciation/depreciation comprises net realised or unrealised gains and losses on the investments.

44