TIDMMNG

RNS Number : 8446V

M&G PLC

12 August 2020

M&G plc NEWS RELEASE

12 August 2020

M&G plc half year 2020 results

M&G plc delivers a resilient performance in a challenging market

Highlights

   -         Adjusted operating profit of GBP309 million and IFRS profit after tax of GBP826 million 
   -         Shareholder Solvency II coverage ratio of 164%, comfortably above risk appetite 

- Assets under management and administration (AUMA) reduced to GBP339 billion, reflecting negative market movements in March

- GBP2.8 billion of net inflows into Institutional Asset Management and GBP0.8 billion of net inflows into Retail Savings, partially offsetting GBP7.7 billion of outflow from Retail Asset Management

- Completion of the acquisition of Ascentric scheduled for 1 September following FCA approval of change in control

- Interim dividend of GBP155 million equal to 6.00p per share, in line with our policy of paying one-third of the previous year's final dividend

John Foley, Chief Executive of M&G plc, commented: "This has been a resilient performance in extremely difficult times, with the value of our diversified business mix coming through strongly.

"Earnings from our Heritage Business have remained steady, our balance sheet is robust and credit quality remains high. Over 98% of the debt securities held by the shareholder annuity portfolio are investment grade and only 15% are BBB.

"Despite the disruption caused by the pandemic, net new money has flowed into our Institutional Asset Management business, while our UK retail savings franchise, anchored on our unique PruFund offering, has remained in positive net inflow.

"Outflows in Retail Asset Management declined in the second quarter, as performance rallied. Work is underway here to further improve returns and customer value, while the acquisition of Ascentric will, once completed, bolster our position in the UK market and take us into high-value wealth management.

"Obviously, this is not the backdrop we would have wished as a newly independent company, but I have been hugely impressed by how my colleagues have responded to the challenge of continuing to serve our customers and clients during the pandemic.

"Given our continued financial strength and resilient performance in the first half of 2020, we are declaring an interim dividend of 6.00 pence per share, in line with our dividend policy."

 
                                                             For the six            For the 
                                                             months ended        year ended 
                                                               30 June          31 December 
                                                                             ============== 
 Performance highlights                                        2020    2019            2019 
=======================================================  ==========  ======  ============== 
 Adjusted operating profit before tax (GBPm)                309        714       1,149 
 IFRS profit after tax (GBPm)                               826        795       1,065 
 Savings and Asset Management net client flows (GBPbn)     (4.1)      (1.4)       (1.3) 
 Total capital generation (GBPm)                           (202)       930       1,509 
 Assets under management and administration (GBPbn)         339        341         352 
 Shareholder Solvency II coverage ratio(i)                  164%        n/a        176% 
 

(i) 30 June 2019 comparatives have not been included within this interim financial report.

Enquiries:

 
 Media                                    Investors/Analysts 
=================  ====================  ===================  ==================== 
 Richard Miles      +44 (0)7833 481923    Spencer Horgan       +44 (0)20 3977 7888 
 Jonathan Miller    +44 (0)20 3977 0165 
 

Notes to editors

1. The interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting ('IAS 34'), as endorsed by the European Union ('EU'), and the Disclosure and Transparency Rules of the Financial Conduct Authority based on the consolidated financial statements of M&G plc.

   2.        All key performance measures relate to continuing operations. 

3. The shareholder view of the Solvency II coverage ratio as at 30 June 2020 assumes transitional measures on technical provisions which have been recalculated using management's estimate of the impact of operating and market conditions at the valuation date.

   4.        Total number of M&G plc shares in issue as at 30 June 2020 was 2,599,906,866. 

5. A Q&A webcast will be hosted by John Foley (CEO) and Clare Bousfield (CFO) on Wednesday 12 August at 10:30 BST. The session can be viewed at https://www.investis-live.com/mandg-plc/5f08cbe58ade18100081bd9c/obdf.

The presentation will also be available to replay afterwards using the following link https://global.mandg.com/investors/results-reports-and-presentations

   6.        Ordinary dividend to be paid in September 2020 
 
 Ex-dividend date                 August 20, 2020 
 Record date                      August 21, 2020 
 Payment of dividend              September 30, 2020 
 
   7.        About M&G plc 

M&G plc is an international savings and investments business, managing money for both individual savers and institutional investors in 28 markets. As at 30 June 2020, we had GBP339 billion of assets under management and administration, around 5 million retail customers and more than 800 institutional clients.

With a heritage dating back more than 170 years, M&G plc has a long history of innovation in savings and investments, combining asset management and insurance expertise to offer a wide range of solutions. We serve our savings and insurance customers under the Prudential brand in the UK and Europe and for asset management in South Africa, and under the M&G Investments brand for asset management clients globally.

   8.        Additional information 

M&G plc, a company incorporated in the United Kingdom, is the ultimate parent company of The Prudential Assurance Company Limited. The Prudential Assurance Company Limited is not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.

   9.        Forward-looking statements 

This announcement may contain certain 'forward-looking statements' with respect to M&G plc and its affiliates (the "M&G Group"), its plans, its current 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 M&G plc's beliefs and expectations and including, without limitation, statements containing the words 'may', 'will', 'should', 'continue', 'aims', 'estimates', 'projects', 'believes', 'intends', 'expects', 'plans', 'seeks', 'outlook' 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 persons reading this announcement are cautioned against placing undue reliance on forward-looking statements.

By their nature, all forward-looking statements involve inherent assumptions, risk and uncertainty, as they generally relate to future events and circumstances that may be beyond the M&G Group's control. A number of important factors could cause M&G plc'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, UK domestic and global economic and business conditions (including the political, legal and economic effects of the UK's decision to leave the European Union and the impact of the Covid-19 pandemic); market-related conditions and risk, including fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, corporate liquidity risk and the future trading value of the shares of M&G plc; investment portfolio-related risks, such as the performance of financial markets generally; the policies and actions of regulatory authorities, including, for example, new government initiatives; the impact of competition, economic uncertainty, inflation and deflation; the effect on M&G plc's business and results from, in particular, mortality and morbidity trends, longevity assumptions, 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, such as transformation programmes, failing to meet their objectives; the impact of operational risks, including risk associated with third party arrangements, reliance on third party distribution channels and disruption to the availability, confidentiality or integrity of M&G plc'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 the M&G Group operates; 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.

Any forward-looking statements contained in this document speak only as of the date on which they are made. M&G plc 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, or other applicable laws and regulations. Nothing in this announcement shall be construed as a profit forecast, or an offer to sell or the solicitation of an offer to buy any securities.

LEI: 254900TWUJUQ44TQJY84 Classification: 3.1 Additional regulated information required to be disclosed under the laws of a Member State

Chief Executive's review

M&G plc is a resilient business and our performance during the first half of 2020 has demonstrated our financial strength. I am proud of how our colleagues have risen to the challenge of continuing to serve, from their homes, the millions of customers we have around the world, as well as continuing to focus on delivering our strategy.

Good progress on our growth strategy

We have continued to make good progress on positioning our Savings and Asset Management business for sustainable growth.

In the UK, the acquisition of Ascentric is scheduled to complete on 1 September 2020 since we have received FCA approval for change in control. The acquisition of Ascentric will broaden our coverage of the IFA market and accelerate our move into high value wealth management. Ascentric will bring to M&G Plc an IFA digital wrap and wealth management platform, GBP15.5 billion of assets under administration, and relationships with 1,500 advisers representing 90,000 individual customers.

In Europe, we signed memoranda of understanding for the distribution of products similar to PruFund with two banking groups in different countries. As we have said previously, we expect the first inflows from these arrangements by the turn of the year, Covid-19 restrictions allowing.

In Asia, we repatriated GBP6 billion of assets under management from Eastspring Investments, the Asian asset management arm of Prudential plc. While this results in no change to AUMA at M&G plc level, this will have a positive impact on revenues.

In the US, we established an investment hub in Chicago, which we expect to be operational during the third quarter of this year.

Strong half for Institutional Asset Management

Net inflows into our Institutional Asset Management business were GBP2.8 billion, as our highly-regarded investment teams won a series of new mandates in public fixed income and private assets from clients eager to seize opportunities created by the market disruption.

Steady net inflows over the past five years have driven AUMA in our Institutional Asset Management business to GBP81 billion, making this our largest investment management franchise for external clients.

Net client flows remained positive in our Retail Savings business, in contrast to this the Retail Asset Management business experienced net client outflows resulting from weaker investor sentiment.

Sharpening the focus on investment performance

Performance of our Institutional Asset Management business remains strong, with 84% of strategies meeting or outperforming their benchmark over the past five years.

The GBP136 billion With-Profits Fund also continues to deliver steady returns for customers in our Heritage business and savers who invest in our PruFund offering. Its smoothing strategy successfully cushioned savers from the worst of the market falls in March.

At the beginning of July, the first annual Value Assessment for our M&G Investments branded UK mutual funds was published, showing that 94% of these funds delivered overall value for customers. Although our funds scored highly on most value criteria, the investment performance of many of the funds was more disappointing.

While our SICAV range of funds was not in the scope of Value Assessment, 43% of SICAV funds delivered first or second quartile returns for the three years to 30 June 2020.

Work continues on a series of initiatives in Retail Asset Management to enhance value for customers, through improving investment performance, reviewing our charges, and better product innovation.

Driving down costs

We remain on target to achieve annual run-rate shareholder cost savings of GBP145 million by the end of 2022 through our five year investment in digital transformation which will improve customer experience, strengthen the control environment and improve the efficiency and structure of our cost base, to create a platform for scalable growth.

Given the uncertainty caused by the pandemic, we deferred our target to reduce total staff costs by 10% in 2020 through a voluntary redundancy programme to reassure our colleagues. At the same time, we initiated a programme to capture permanently the cost savings and environmental benefits achieved during the lockdown.

With movement of our colleagues restricted in most of our chosen markets, we have by necessity accelerated the adoption of digital practices. By the end of March, all but a handful of our 6,000 colleagues were serving customers and clients from the safety of their own homes.

When we do return to our offices, our expectation is that the vast majority of our colleagues will work no more than two or three days per week from one of our sites. As ever, our priority will be the well-being and safety of our colleagues.

Our clients and customers have also embraced digital ways of working. Attendance at our virtual conferences and seminars has been strong, with many clients saying they prefer this type of engagement.

Confident about the outlook

I expect further volatility in markets while the Covid-19 virus remains a threat. It is too early to say we are through the worst, despite the rally in the second quarter. Against this backdrop, we remain committed to our dividend policy of stable or increasing pay-outs. We will continue to monitor developments carefully and we do not expect to increase the dividend while the threat of Covid-19 remains.

Despite the difficult market conditions, I remain optimistic about the outlook for M&G plc. In the short term, as a leading savings and investment business, we are well-placed to be the partner of choice for households looking for better returns on the large cash savings they have accumulated during the pandemic.

Longer term, we will continue to position the business for sustainable growth, building on our first-half actions to revitalise our UK retail franchise, deepen our presence in Europe, and expand our international and institutional businesses.

These actions, coupled with our proactive management of the balance sheet, give us the confidence to remain committed to our three-year total capital generation target of GBP2.2 billion assuming we experience more normal market conditions over the remaining period.

Chief Financial Officer's review

I am pleased to present our results for the first half of 2020 which show a resilient financial performance amidst the global economic impact of the Covid-19 pandemic. The robustness of our financial position has been demonstrated with our shareholder Solvency II coverage ratio ([1]) of 164% at 30 June 2020 which, although slightly below the level at the time of the Demerger, reflects the impact of adverse market movements after the dividend payment to shareholders.

Taking into consideration the one-off benefits earned last half year, our adjusted operating profit before tax of GBP309 million (30 June 2019: GBP714 million) demonstrates the ability of the underlying business to deliver stable returns. Adjusted operating profit before tax for the first half of 2020 has been impacted by the decline in financial markets and by the known costs arising from the Demerger, including the interest on subordinated debt and head office expenses. The first half of 2019 benefitted from updating the longevity assumptions from CMI 16 to CMI 17 and changes to the staff pension scheme. Despite the profound impact on global financial markets arising from the Covid-19 pandemic, being an asset owner and asset manager provides diversification of earnings enabling us to continue to produce good returns even in extremely tough market conditions.

Total AUMA declined 4% over the six months 30 June 2020 to GBP339 billion (31 December 2019: GBP352 billion), driven by market falls and net client outflows. Our Institutional Asset Management business and our Retail Savings business both delivered net client inflows. However, market volatility and global uncertainty have led to net client outflows in our Retail Asset Management business.

The strength and resilience of the Group's balance sheet was demonstrated during the period, with the stable and recurring nature of the Group's underlying capital generation, and a series of management actions, mostly offsetting adverse market movements of GBP614 million, resulting in total capital generation of GBP(202) million. The impact of adverse market movements is net of a significant benefit from equity hedges which mitigate the Group's risk exposure to shareholder transfers from the With-Profits Fund.

Liquidity at the parent company has remained at comfortable levels and it has not been adversely impacted by the crisis, with cash and liquid assets remaining stable at GBP1.2 billion.

We paid dividends of GBP410 million on 29 May 2020, comprising an ordinary dividend of 11.92 pence per share and a special demerger dividend of 3.85 pence per share. We will be paying an interim ordinary dividend of GBP155 million equal to 6.00 pence per share, in line with our policy of paying one-third of the previous year final dividend, on 30 September 2020.

In the M&G plc 2019 Annual Report and Accounts we announced our intention to conduct an audit tender process in 2020 led by the Group Audit Committee. Following the IASB's confirmation that IFRS 17 would not be effective until accounting reporting periods beginning on or after 1 January 2023, we have decided that the new Independent Auditor should be appointed for the audit of our 2022 Annual Report and Accounts. This will allow them to review the prior year comparative data in advance of the first effective reporting period under IFRS 17. The audit tender process commenced in July 2020 and is expected to conclude with a decision on the appointment of a new Independent Auditor, by the M&G plc Board, at the end of October 2020.

Adjusted operating profit before tax

The following table shows a reconciliation of adjusted operating profit before tax to IFRS profit after tax from continuing operations:

 
                                                                 For the six            For the 
                                                                 months ended        year ended 
                                                                   30 June          31 December 
                                                                                 ============== 
 GBPm                                                          2020       2019         2019 
===========================================================  ======      =====   ========== 
 Asset Management fee based revenues                            469        514        1,033 
 Other fee based revenues                                       111        123          254 
                                                             ====== 
 Total fee based revenue                                        580        637        1,287 
===========================================================  ======      =====   ========== 
 Annuity margin                                                 139        311          458 
 With-profit shareholder transfer net of hedging                134        126          242 
 Adjusted operating income                                      853      1,074        1,987 
===========================================================  ======      =====   ========== 
 Asset Management operating expenses                           (306)      (298)        (652) 
 Other operating expenses                                      (181)      (126)        (311) 
                                                             ====== 
 Adjusted operating expenses                                   (487)      (424)        (963) 
===========================================================  ======      =====   ========== 
 Other shareholder (loss)/profit                                (62)        56          110 
 Share of profit from joint ventures and associates               5          8           15 
 Adjusted operating profit before tax                           309        714        1,149 
===========================================================  ======      =====   ========== 
 Short-term fluctuations in investment returns                  746        364          298 
 Profit on disposal of business and corporate transactions        -          -           53 
 Restructuring and other costs (i)                              (22)       (82)        (198) 
 IFRS profit attributable to non-controlling interests            2          2            3 
  IFRS profit before tax attributable to equity holders 
   from continuing operations                                 1,035        998        1,305 
===========================================================  ======      =====   ========== 
 Tax charge attributable to equity holders                     (209)      (203)        (240) 
  IFRS profit after tax attributable to equity holders 
   from continuing operations                                   826        795        1,065 
===========================================================  ======      =====   ========== 
 

(i) Restructuring costs excluded from adjusted operating profit relate to merger and transformation costs of GBP19 million for the six months to 30 June 2020 (30 June 2019 : GBP32 million, year ended 31 December 2019 : GBP62m), and rebranding and other change in control costs allocated to the shareholder. Additional restructuring costs are included in the analysis of administrative and other expenses in Note 5.

The following table shows adjusted operating profit before tax split by segment and source of earnings:

 
                                            For the six            For the 
                                            months ended        year ended 
                                              30 June          31 December 
                                                            ============== 
 GBPm                                     2020       2019         2019 
======================================  ======      =====   ========== 
 Asset management                          163        216          381 
 With-Profits                               24         29           55 
 Other                                     (25)        17           38 
 Savings and Asset management              162        262          474 
======================================  ======      =====   ========== 
 With-Profits                              110         97          187 
 Annuities                                 139        311          458 
 Other                                      49         68          107 
 Heritage                                  298        476          752 
======================================  ======      =====   ========== 
 Corporate Centre                         (151)       (24)         (77) 
 Adjusted operating profit before tax      309        714        1,149 
======================================  ======      =====   ========== 
 

Adjusted operating profit before tax fell to GBP309 million in the six months to 30 June 2020 (30 June 2019: GBP714 million). Fee based revenue is lower due to net client outflows and pressure on retail margins in Retail Asset Management. Additionally the first half of 2020 has been impacted by the full cost of the listed infrastructure arising from the demerger in the Corporate Centre, with GBP79 million of finance costs in relation to the subordinated debt and GBP48 million of head office costs. The impact on markets in the first half of 2020 as a result of the Covid-19 pandemic has resulted in a GBP30 million foreign exchange loss in respect of the US dollar subordinated debt. Half year 2019 benefitted, in particular, from two one off items, firstly from updating longevity assumptions from CMI 16 to CMI 17 of GBP127 million and secondly from making changes to the staff pension schemes of GBP64 million. Excluding the additional Corporate Centre costs, one-off items in half year 2019 and market volatility as a result of Covid-19 our adjusted operating profit has remained largely stable.

IFRS profit after tax

IFRS profit after tax attributable to equity holders from continuing operations increased to GBP826 million compared to GBP795 million for the six months to 30 June 2019 reflecting the fall in adjusted operating profit before tax being offset by a GBP382 million increase in short-term fluctuations in investment returns, a GBP60 million reduction in restructuring costs and a GBP6 million increase in the equity holders tax charge. Short term fluctuations primarily comprise gains on equity hedges of GBP308 million, a benefit of GBP134 million from interest rate swaps purchased to protect the Solvency II capital position and GBP334 million increase from fair value movements on surplus annuity assets. These gains have been partially offset by the strengthening of the credit risk allowance for shareholder-backed annuities by GBP117 million, in anticipation of short-term deterioration in the number of company default and downgrades due to the current market conditions arising from the Covid-19 pandemic.

Equity holders' effective tax rate for the six months to 30 June 2020 was 20.2% compared to 20.3% for the six months to 30 June 2019. Excluding non-recurring items, the equity holders' effective tax rate was 18.2% (30 June 2019: 19.4%). This was marginally lower than the UK statutory rate of 19 % (2019: 19%), primarily due to the beneficial impact of non-taxable dividend income together with relatively low levels of non-deductible expenses for the six months to 30 June 2020. The Group's approach to tax is to act responsibly and transparently in all of our tax affairs. We understand the importance to governments and societies of paying the right amount of tax at the right time in the right place. The Group complies with statutory obligations in all the jurisdictions in which we operate and seeks to have an open and effective relationship with tax authorities.

Capital generation

The following table shows an analysis of total capital generation:

 
                                                                  For the six            For the 
                                                                  months ended        year ended 
                                                                    30 June          31 December 
                                                                                  ============== 
 GBPm                                                           2020       2019         2019 
============================================================  ======      =====   ========== 
 Savings and Asset Management underlying capital generation      186        243          414 
 Heritage underlying capital generation                          209        222          459 
 Corporate Centre underlying capital generation                 (132)       (23)         (91) 
 Underlying capital generation                                   263        442          782 
============================================================  ======      =====   ========== 
 Other operating capital generation                              276        322          494 
 Operating capital generation                                    539        764        1,276 
============================================================  ======      =====   ========== 
 Market movements                                               (614)       361          538 
 Restructuring and other                                         (20)       (67)        (133) 
 Tax                                                            (107)      (128)        (172) 
 Total capital generation                                       (202)       930        1,509 
============================================================  ======      =====   ========== 
 

Total capital generation is the change in the Group's Solvency II surplus before dividend payments, capital movements and capital generation from discontinued operations. It is the keystone of our financial plans and underpins our dividend policy. We analyse total capital generation by the following components:

- Underlying capital generation, which includes the expected surplus capital from the life insurance business, the adjusted operating profit before tax and associated capital movements from Asset Management, and other items including head office expenses and debt interest costs.

- Operating capital generation, which is composed of underlying capital generation and other operating items, such as the impact of management actions, assumption changes and model improvements.

- Total capital generation includes operating capital generation, the impact of market movements relative to those expected under long-term assumptions, other non-recurring items such as shareholder restructuring and other costs, and the impact of tax.

Underlying capital generation of GBP263 million (2019: GBP442 million) was lower as a result of the known costs arising from the Demerger, including the interest on subordinated debt and head office expenses, the reduction in adjusted operating profit from the Asset Management business, and a lower expected return assumed for the annuity business. There was a significant contribution of GBP276 million from other operating capital generation (2019: GBP322 million), primarily due to a series of management actions taken to strengthen the solvency position in response to recent market events, which increased surplus by GBP235 million, resulting in operating capital generation of GBP539 million (2019: GBP764 million).

Total capital generation was GBP(202) million for the six months ended 30 June 2020 (30 June 2019: GBP930 million), with operating capital generation more than offset by a GBP614 million reduction in surplus from negative market variances (30 June 2019: GBP361 million positive) and other non-operating items.

Capital position

The Group's solvency position remains resilient and, although slightly below the target level set out at the time of the Demerger, comfortably above our risk appetite. Group Solvency II surplus decreased to GBP3.9 billion as at 30 June 2020 (31 December 2019: GBP4.5 billion), equivalent to a shareholder Solvency II coverage ratio of 164% (31 December 2019: 176%), reflecting the total capital generation of GBP(202) million and GBP410 million of dividends paid to shareholders.

Our With-Profits Fund continues to have a strong Solvency II coverage ratio of 241%. Whilst this is lower than 267% reported at 31 December 2019, it reflects the distribution of GBP1 billion of excess surplus in the fund to our with-profits policyholders announced in February 2020.

The regulatory Solvency II coverage ratio of the Group as at 30 June 2020 was 136% (31 December 2019: 143%). This view of solvency combines the shareholder position and the With-Profits Fund, but excludes all surplus within the With-Profits Fund.

The shareholder, With-Profits Fund, and regulatory views of the Solvency II position assume transitional measures on technical provisions which have been recalculated using management's estimate of the impact of operating and market conditions at the valuation date.

Financing and liquidity

The following table shows key financing and liquidity information:

 
                                              For the 
                                           six months         For the 
                                                ended      year ended 
                                              30 June     31 December 
                                         ============  ============== 
 GBPm                                            2020          2019 
=======================================  ============  ============ 
 Parent company cash and liquid assets          1,203         1,274 
 Nominal value of debt                          3,255         3,227 
 Leverage ratio ([2])                             33%           31% 
=======================================  ============  ============== 
 

The key metric we use to manage our debt is the leverage ratio, defined as nominal value of debt as a percentage of the Group's shareholder Solvency II own funds. Our leverage ratio of 33% (31 December 2019: 31%) is slightly below the level at the point of Demerger (34%).

The following table shows the movement in cash and liquid assets held by the parent company during the year:

 
                                                               For the 
                                                            six months         For the 
                                                                 ended      year ended 
                                                               30 June     31 December 
                                                           ===========  ============== 
 GBPm                                                            2020          2019 
=========================================================  ==========   =========== 
 Opening cash and liquid assets at 1 January                    1,274            18 
 Cash remittances from subsidiaries                               472           477 
 Special dividends from subsidiaries                                -         1,177 
 Substitution of subordinated liabilities                           -         3,241 
 Corporate costs                                                  (23)          (37) 
 Interest paid on core structural borrowings                      (95)          (22) 
 Cash dividends paid to equity holders                           (410)         (543) 
 Final dividend paid to equity holders prior to demerger            -        (2,968) 
 Acquisition of subsidiaries                                        -           (86) 
 Acquisition of shares                                            (23)            - 
 Other shareholder income                                           8            17 
 Closing cash and liquid assets at end of period(i)             1,203         1,274 
=========================================================  ==========   =========== 
 

(i) Closing cash and liquid assets at 30 June 2020 included a GBP1,125 million (31 December 2019; GBP1,200 million) inter-company loan asset with Prudential Capital plc, which acts as the Group's treasury function.

Movements in cash and liquid assets held by the parent company for the first six months of 2020 represent the remittances and payments that will arise in the normal course of business, compared to the year ended 31 December 2019 which includes significant cash flows related to the Demerger. Total cash and liquid assets have remained stable at GBP1.2 billion with cash remittances of GBP472 million from our subsidiaries being offset by GBP95 million interest payments in respect of the subordinated debt and cash dividend payment to equity holders.

Savings and Asset Management

Savings and Asset Management financial performance has proved resilient during the first half of 2020, despite being impacted by the economic volatility surrounding the Covid-19 pandemic. In this environment due to weaker investor sentiment retail customers and clients accessed their savings and investments. By contrast, Institutional Asset Management had a strong performance with net client inflows demonstrating the appeal of the proposition.

Assets under management and administration and net client flows

 
                                                    Net client flows                         AUMA 
                                                                          for the 
                                            for the        for the     six months 
                                         six months     six months          to 31     As at           As at 
                                              to 30          to 30       December   30 June     31 December 
 GBPbn                                    June 2020      June 2019           2019      2020            2019 
====================================  =============  =============  =============  ========  ============== 
 Retail Savings                             0.8            3.2            3.0          61.8          63.5 
   of which: PruFund                        0.6            3.5            2.9          52.3          53.8 
 Retail Asset Management                   (7.7)          (3.8)          (3.6)         64.2          74.9 
 Institutional Asset Management             2.8           (0.8)           0.7          81.2          76.8 
 Other                                        -              -              -           0.8           0.7 
 Total Savings and Asset Management        (4.1)          (1.4)           0.1         208.0         215.9 
====================================  =========      =========      =========      ========  ============ 
 

Net client inflows of GBP0.8 billion experienced by Retail Savings were lower than the first half of 2019 since during the lockdown there was increased demand from customers to access their savings combined with the restrictions on advisors ability to conduct business. Net client flows were also impacted by the continued contraction in defined benefit pension transfers. PruFund AUMA has fallen 3% since 31 December 2019 as a result of negative investment returns.

Retail Asset Management AUMA decreased 14% to GBP64.2 billion over the six months to 30 June 2020, with the volatile economic environment leading to both negative market movements and an increase in net client outflows to GBP7.7 billion (30 June 2019: GBP3.8 billion). Net client outflows of GBP5.6 billion for the first quarter of 2020 have slowed to GBP2.1 billion in the second quarter as the easing of lockdowns has contributed to investor confidence. We continue to work on a number of initiatives across Retail Asset Management to improve investment performance and to develop new products and solutions in order to diversify and increase client flows. The Asia Pacific equities team has won several new mandates in the period with the most significant being the GBP6 billion mandate to manage Asian and Japanese equities for the WIth-Profits Fund, with a further GBP3 billion expected by the end of the year.

Institutional Asset Management AUMA increased 6% to GBP81.2 billion in the six months to 30 June 2020, driven by strong net client inflows of GBP2.8 billion predominantly within our public debt and Infracapital investment propositions. We continued to build investment capabilities in high value added areas of the market and build bespoke investment solutions for our clients.

An important component of our investment capability is our expertise in private assets, which ranges from real estate and private debt to infrastructure, and represents a resilient, high-margin source of revenues. Our private assets under management increased 8.6% to GBP65.5 billion of AUMA as at 30 June 2020 (31 December 2019: GBP60.3 billion).

Adjusted operating profit before tax

The following table shows an analysis of adjusted operating profit before tax:

 
                                                                                 For the 
                                                          For the six               year 
                                                          months ended             ended 
                                                            30 June          31 December 
 GBPm                                                   2020       2019         2019 
====================================================  ======      =====   ========== 
 Asset Management fee based revenues                     469        514        1,033 
 Other fee based revenues                                 72         76          158 
 Total fee based revenues                                541        590        1,191 
====================================================  ======      =====   ========== 
 With-profits shareholder transfer net 
  of hedging                                              24         29           55 
 Adjusted operating income                               565        619        1,246 
====================================================  ======      =====   ========== 
 Asset Management operating expenses                    (306)      (298)        (652) 
 Other operating expenses                                (76)       (80)        (165) 
==================================================== 
 Adjusted operating expenses                            (382)      (378)        (817) 
====================================================  ======      =====   ========== 
 Other shareholder (loss)/profit                         (26)        13           30 
 Share of profit from joint ventures and associates        5          8           15 
 Adjusted operating profit before tax                    162        262          474 
====================================================  ======      =====   ========== 
 

The following table shows adjusted operating profit before tax split by source of earnings:

 
                                                                 For the 
                                           For the six              year 
                                           months ended            ended 
                                             30 June         31 December 
 GBPm                                      2020     2019          2019 
======================================  =======   ======  ============ 
 Asset Management                           163      216           381 
 With-Profits                                24       29            55 
 Other                                      (25)      17            38 
 Adjusted operating profit before tax       162      262           474 
======================================  =======   ======  ============ 
 

Adjusted operating profit before tax from our Asset Management activities decreased to GBP163 million in the six months to 30 June 2020 (30 June 2019: GBP216 million) driven by a 9% reduction in revenue earned to GBP469 million (30 June 2019: GBP514 million). The reduction in average AUMA in Retail Asset Management, combined with the downward pressure on retail margins, resulted in lower revenue of GBP230 million in the six months to 30 June 2020 (30 June 2019: GBP299 million). However, revenue earned by Institutional Asset Management increased to GBP239 million (30 June 2019: GBP215 million) due to higher average AUMA and improved revenue margins. Asset Management adjusted operating expenses, excluding the GBP35 million one-off benefit resulting from changes to the Group's defined benefit pension schemes in 2019, reduced by GBP27 million in the six months to 30 June 2020 driven by lower facilities costs and lower accruals for long term incentive plans resulting from lower revenue. This reflects the new disciplined approach to remuneration.

The Asset Management average fee margin of 36 basis points (bps) was 3 bps lower at 30 June 2020 compared 39 bps at 30 June 2019 reflecting the continued industry wide pressure on fees in Retail Asset Management because of the popularity of passives and changes in the distribution landscape. Average revenue margins in the Institutional Asset Management business were 2 bps higher at 28 bps at 30 June 2020 compared to 26 bps at 30 June 2019, reflecting our focus on the provision of high-value, innovative investment solutions for clients, which has changed our product mix, with net client flows out of our lower margin products and into these more specialised, higher margin solutions.

The cost/income ratio for Asset Management business was 66% (30 June 2019: 58%), with the increase largely driven by the non-recurrence of the GBP35 million past service credit following changes to the M&G defined benefit pension scheme in 2019. If the benefit from the changes in the pensions scheme during 2019 are excluded from operating expenses the cost/income ratio has remained broadly comparable over the last 18 months.

The with-profits shareholder transfer, driven by Pru Fund, decreased to GBP28 million (30 June 2019: GBP36 million) as a result of a downward unit price adjustment following the fall in financial markets. In addition there were fair value losses of GBP4 million (30 June 2019: GBP8 million loss) on the derivative instruments used to mitigate the equity risk to shareholders.

Other shareholder loss in the six months to 30 June 2020 is driven by items impacted by the Covid-19 pandemic, including a loss on seed capital investments.

Capital generation

The following table shows an analysis of operating capital generation:

 
                                                                             For the 
                                                      For the six               year 
                                                      months ended             ended 
                                                        30 June          31 December 
 GBPm                                               2020       2019         2019 
================================================  ======      =====   ========== 
 Asset Management underlying capital generation      155        216          379 
 With-profits underlying capital generation           18          4            - 
   of which: in-force                                 39         37           61 
   of which: new business                            (21)       (33)         (61) 
 Other underlying                                     13         23           35 
 Underlying capital generation                       186        243          414 
================================================  ======      =====   ========== 
 Other operating capital generation                   18        (71)          45 
 Operating capital generation                        204        172          459 
================================================  ======      =====   ========== 
 

Underlying capital generation in the six months to 30 June 2020 fell to GBP186 million (30 June 2019: GBP243 million) driven by the reduction in adjusted operating profit from the Asset Management business. The underlying capital generated from with-profits in-force business, which comprises the expected growth in the value of shareholder transfers under real world assumptions and the release of the Solvency Capital Requirement (SCR), net of hedge impacts, is comparable to prior year levels at GBP39 million (30 June 2019: GBP37 million). New business strain fell by GBP12 million to GBP21 million for the first half of 2020 reflecting lower Pru Fund client inflows.

The improvement in other operating capital generation to GBP18 million in the six months to 30 June 2020 (30 June 2019: GBP(71) million) was primarily due to the first half of 2019 including adverse impacts from management actions and other modelling updates .

Heritage

Heritage, which includes products closed to new business, has delivered a stable financial performance over the first half of 2020 after taking into consideration the one-off benefits incurred during 2019.

AUMA in the Heritage business fell slightly to GBP129.4 billion at 30 June 2020 (2019: GBP134.0 billion), driven by negative market movements in the period whilst net client outflows of GBP3.3 billion were in line with expectations (2019 full year: GBP7.6 billion net outflow).

Adjusted operating profit before tax

The following table shows an analysis of adjusted operating profit before tax:

 
                                                                               For the 
                                                        For the six               year 
                                                        months ended             ended 
                                                          30 June          31 December 
 GBPm                                                 2020       2019         2019 
==================================================  ======      =====   ========== 
 Fee based revenues                                     39         47           96 
 Annuity margin                                        139        311          458 
 With-profits shareholder transfer net of hedging      110         97              187 
 Adjusted operating income                             288        455              741 
==================================================  ======      =====   ============== 
 Adjusted operating expenses                           (30)       (25)         (87) 
 Other shareholder profit                               40         46           98 
 Adjusted operating profit before tax                  298        476              752 
==================================================  ======      =====   ============== 
 

The following table shows adjusted operating profit before tax split by source of earnings:

 
                                           For the six           For the 
                                           months ended       year ended 
                                             30 June         31 December 
 GBPm                                      2020     2019          2019 
======================================  =======  =======  ============ 
 With-profits                               110       97           187 
 Shareholder annuities                      139      311           458 
 Other                                       49       68           107 
 Adjusted operating profit before tax       298      476           752 
======================================  =======  =======  ============ 
 

The shareholder transfer for traditional with-profit business increased to GBP128 million (30 June 2019: GBP124 million) driven by positive investment returns over 2019, offset by fair value losses on the derivative instruments used to mitigate the equity risk to shareholders of GBP18 million (30 June 2019: GBP27 million loss).

Adjusted operating expenses increased by GBP5m in the six months to 30 June 2020, representing a like for like reduction compared to the first half of 2019 after removing the GBP29m one off benefits in 2019 resulting from pensions scheme changes. Other shareholder profit primarily relates to insurance reserve releases of GBP25 million (30 June 2019: GBP23 million), as we complete the review of a number of legacy remediation programmes.

The following table provides further analysis of the annuity margin:

 
                                                     For the six           For the 
                                                     months ended       year ended 
                                                       30 June         31 December 
 GBPm                                                2020     2019          2019 
================================================  =======   ======  ============ 
 Return on excess assets and margin release            94      118           216 
 Asset trading and portfolio management actions        40       63           110 
 Longevity assumption changes                          23      127           126 
 Other                                                (18)       3             6 
 Annuity margin                                        139     311           458 
================================================  ========  ======  ============ 
 

We updated longevity assumptions in the first half of 2019 from CMI 16 to CMI 17 which resulted in a benefit of GBP127 million. In the first half of 2020, there is a smaller benefit from longevity assumption changes that represents changes to the proportion of the annuitant population assumed to be married.

Recurring sources of earnings from the annuity book, primarily the return on assets held to back capital requirements and the release of the margins in respect of credit risk, mortality and expenses, decreased by 20% to GBP94 million (30 June 2019: GBP118 million). The decrease was mainly due to lower excess assets of the annuity portfolio following the payment of dividends to the parent company and decreasing bond yields during the period.

In the six months to 30 June 2020 we earned GBP40 million from asset trading and portfolio management actions (30 June 2019: GBP63 million), which is lower than the first half 2019 due to the impact of a property sale in 2020 on the valuation of the annuity liabilities.

Credit quality of fixed income assets in the annuity portfolio is strong. Over 98% of the debt securities held by the shareholder annuity portfolio are investment grade and only 15% are BBB. In addition 79% of the shareholder annuity portfolio is held in debt securities either categorised as Risk Free or Secured (including cash).

We experienced limited downgrades to 30 June 2020 with only 4% of bonds in the shareholder annuity portfolio subject to a downgrade which changed the letter rating.

Capital generation

The following table shows an analysis of operating capital generation:

 
                                                                  For the six           For the 
                                                                  months ended       year ended 
                                                                    30 June         31 December 
 GBPm                                                             2020     2019          2019 
=============================================================  =======  =======  ============ 
 With-profits underlying capital generation                        40        18            71 
 Shareholder annuity and other underlying capital generation      169       204           388 
 Underlying capital generation                                    209       222           459 
=============================================================  ======   =======  ============ 
   Model improvements                                             (18)      102           142 
   Assumption changes                                              46       146           207 
   Management actions                                             220        92           167 
   Other incl experience variances                                 14        92             1 
                                                               ======   =======  ============ 
 Other operating capital generation                               262       432           517 
=============================================================  ======   =======  ============ 
 Operating capital generation                                     471       654           976 
=============================================================  ======   =======  ============ 
 

Traditional with-profits business generated underlying capital of GBP40 million over the six months to 30 June 2020 (30 June 2019: GBP18 million), driven by the expected growth under real world return assumptions, which was greater in 2020 due to higher opening asset shares than 2019.

There continued to be significant capital generated by the shareholder annuity and other business, with underlying capital generation of GBP169 million (30 June 2019: GBP204 million). Underlying capital generation of annuities consists of the expected returns on assets backing the capital requirements, and the release of credit reserves and SCR. The decrease in annuities underlying capital generation was primarily due to a reduced level of return on annuity assets.

Other operating capital generation was lower at GBP262 million (30 June 2019: GBP432 million), as the large benefits in 2019 due to longevity assumption changes and modelling improvements were not repeated to the same level. The result for the six months to 30 June 2020 includes a GBP18 million reduction in surplus due to modelling improvements, and a GBP46 million positive impact primarily from the longevity assumption changes described in the adjusted operating profit section.

There was, however, significant benefit from a series of management actions taken to strengthen the solvency position in the first half of 2020, which increased surplus by GBP220 million. This included a contribution of GBP141 million from asset trading and more efficient matching of annuity assets to the liabilities, as well as a GBP50 million release of SCR to reflect the reduced risk of legacy remediation programmes now coming to completion.

The positive impact of GBP14 million arising from other items and experience variances contains a GBP81 million reduction in surplus due to strengthening capital requirements following credit downgrade experience, although this has been offset by the release of other provisions and reserves.

Risk management statement

The Covid-19 pandemic crisis represents a global threat, both human and economic, and its impacts permeate throughout our entire risk spectrum. Notwithstanding, the principal risks we are currently facing and to which we will continue to be exposed to remain broadly unchanged from those detailed in the 2019 Annual Report and Accounts, namely: business environment, environmental and market forces; investment performance and risk; financial risks (market, credit, corporate liquidity and longevity); operational risks (including resilience, third party suppliers and technology); change; people; regulatory compliance; and reputational. The Covid-19 pandemic has, however, re-focused current risk management priorities around operational, people, financial and investment performance risks in particular.

The Covid-19 pandemic and the ensuing government guidelines caused widespread operational and technological changes in how our business services, and those of our third party suppliers, are provided and supported. Specific incident management procedures were activated, supported by leaders from across the Group and Covid-19 controls reporting to Executive and Board Committees.

A rapid scaling up in remote working capacity and capability has placed significantly greater reliance on virtual environments and introduced changes in working practices. This has heightened risk in the following key areas: IT connectivity; data security and privacy; cyber crime; fraud; processing failure due to changes to controls; and staff morale and well-being. Further, whilst remote working has presented challenges, there are significant complexities surrounding a return to offices with health and safety and legal considerations key. These, and other risks, are being monitored and managed through our bespoke incident management procedures. We have put the safety and wellbeing of our customers and staff at the forefront of our response to the Covid-19 pandemic, and will continue to do so.

In light of the significant change in the external environment we have reviewed and, where appropriate, re-prioritised our change activity. We remain committed to our extensive change programme which underpins our strategy for growth, improved customer experiences and outcomes, strengthened resilience, and our published cost reduction targets. Our exposure to change risk will therefore remain material through 2020 and beyond. Strong governance is in place for the programme, supported by deep-dive assessments of initiatives, and escalation and reporting of risks to management and the Board.

Profitability and solvency are sensitive to market fluctuations and the crisis has caused significant market volatility. Where appropriate, we match assets and liabilities and we use derivatives for risk reduction, for example, to hedge equities, interest rates and currency risks. This approach has gone some way to mitigate the impact of market fluctuations, but market related uncertainty is likely to remain elevated for some time and will be closely monitored and managed.

Through our With-Profits Fund in particular, we are invested in some illiquid asset classes, notably investment properties. Covid-19 has led to uncertainty in the valuation of investment properties and external valuers have included material uncertainty clauses in their valuation reports. Although some sectors have been improving (for example, industrial), valuation uncertainty is likely to persist in other property sectors, such as retail, and we are exposed to this continuing uncertainty, which we are monitoring.

There is also a heightened risk of a material and persistent deterioration in credit conditions as a result of the market effects of the Covid-19 pandemic. Through our annuity portfolios in particular, we are exposed to excess downgrades and defaults, and to credit spread widening. However, trading over the last decade has led to a significant increase in the proportion of secured assets and an improved credit quality with over 98% of the debt securities held by the shareholder annuity portfolio are investment grade. Further, the portfolio has limited exposure to those sectors, such as travel and leisure and oil and gas, that are likely to be most affected by current events. Regular asset-by-asset analysis of default and downgrade exposures, and scenario analysis, support the pro-active management of credit risk.

Our annuity portfolios are also exposed to longevity risk; unexpected changes in the life expectancy of our customers could have a material adverse impact on both profitability and solvency. An increase in mortality rates may be expected to some extent over the short term due to the Covid-19 pandemic, particularly in relation to the annuitant population which has a higher average age than the non-annuitant population. However, the longer term implications for mortality rates amongst the annuitant population are unknown at this stage, increasing uncertainty in relation to our assumptions.

Delivering strong investment performance for our customers is a key priority. The impact of the Covid-19 pandemic may continue to cause sharp movements in market values, interest rates, dividend levels, rental income and defaults, all of which could adversely impact investment performance and fund flows. Net fund flows have stabilised somewhat after an initial deterioration in the earlier stages of the pandemic, but whilst market volatility persists and customer confidence remains low, there is a risk of further deterioration.

Overall, the business environment is set to remain extremely challenging with the International Monetary Fund forecasting that this year the global economy will experience its steepest downturn since the Great Depression of the 1930s. Economic factors impact on levels of investable wealth in our core markets and our ability to generate an appropriate return for our customers. Whilst governments around the world are now trying to ease their lockdowns and restart their economies, the scale and depth of the fallout from the pandemic and the speed and nature of the recovery are unknown. For the UK, the risk of a hard Brexit at the end of the current transition period exacerbates the business environment uncertainty. We will continue to respond to the impacts of the Covid-19 pandemic as they unfold, and are modelling a range of Covid-19 outcomes to support our business planning and decision-making.

Statement of Directors' responsibilities

The Directors (as listed below) are responsible for preparing the Interim financial report in accordance with applicable law and regulations.

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

- the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU;

   -         the Interim financial Report includes a fair review of the information required by: 

a. DTR 4.2.7R of the Disclosure Guidance and Transparency Rules being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

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

By order of the Board

John Foley Clare Bousfield

Chief Executive Chief Financial Officer

11 August 2020 11 August 2020

M&G plc Board of Directors

Chairman

Mike Evans

Executive Directors

John Foley

Clare Bousfield

Non-Executive Directors

Clive Adamson

Robin Lawther

Clare Thompson

Massimo Tosato

Independent review report to M&G plc

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes.

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

Scope of review

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

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

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

As disclosed in note 1.1, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The Directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

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

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Stuart Crisp

for and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

E14 5GL

11 August 2020

Condensed consolidated income statement

For the six months ended 30 June 2020

 
                                                                    For the six            For the 
                                                                    months ended        year ended 
                                                                       30 June         31 December 
                                                                                    ============== 
                                                                   2020      2019          2019 
                                                           Note     GBPm      GBPm            GBPm 
=========================================================  ====  =======  ========  ============== 
 Gross premiums earned                                            3,459     5,907        11,074 
 Outward reinsurance premiums                                      (440)     (487)          115 
 Earned premiums, net of reinsurance from continuing 
  operations                                                      3,019     5,420        11,189 
=========================================================  ====  ======   =======   =========== 
 Investment return                                               (2,116)   13,386        19,619 
 Fee income                                                   4     540       621         1,286 
 Other income                                                        31        24            35 
 Total revenue, net of reinsurance from continuing 
  operations                                                      1,474    19,451        32,129 
=========================================================  ====  ======   =======   =========== 
 Benefits and claims                                         11  (1,373)  (14,824)      (24,375) 
 Outward reinsurers' share of benefit and claims             11     790       407           431 
 Movement in unallocated surplus of the With-Profits 
  Fund                                                       11   1,200    (2,047)       (2,549) 
 Benefits and claims and movement in unallocated 
  surplus of the With-Profits Fund, net of reinsurance 
  from continuing operations                                        617   (16,464)      (26,493) 
=========================================================  ====  ======   =======   =========== 
 Administrative and other expenses                            5  (1,209)   (1,164)       (2,876) 
 Movements in third party interest in consolidated 
  funds                                                            (103)     (428)       (1,005) 
 Finance costs                                                5     (79)        -           (28) 
 Total charges, net of reinsurance from continuing 
  operations                                                       (774)  (18,056)      (30,402) 
=========================================================  ====  ======   =======   =========== 
 Share of (loss)/profit from joint ventures and 
  associates                                                        (35)       33            18 
 Profit before tax from continuing operations(i)                    665     1,428         1,745 
=========================================================  ====  ======   =======   =========== 
 Tax credit/(charge) attributable to policyholders' 
  returns                                                     6     370      (430)         (440) 
 Profit before tax attributable to equity holders 
  from continuing operations                                      1,035       998         1,305 
=========================================================  ====  ======   =======   =========== 
 Total tax credit/(charge)                                    6     161      (633)         (680) 
 Less tax (credit)/charge attributable to policyholders' 
  returns                                                          (370)      430           440 
=========================================================  ====  ======   =======   =========== 
 Tax charge attributable to equity holders                    6    (209)     (203)         (240) 
=========================================================  ====  ======   =======   =========== 
 Profit after tax attributable to equity holders 
  from continuing operations                                        826       795         1,065 
=========================================================  ====  ======   =======   =========== 
 Profit after tax for the year attributable to equity 
  holders from discontinued operations                                -        59            58 
=========================================================  ====  ======   =======   =========== 
 Profit for the period                                              826       854         1,123 
=========================================================  ====  ======   =======   =========== 
 
 Attributable to equity holders of M&G plc: 
     From continuing operations                                     824       793         1,062 
     From discontinued operations                                     -        59            58 
  Attributable to non-controlling interests: 
     From continuing operations                                       2         2             3 
                                                           ==== 
 Profit for the period                                              826       854         1,123 
=========================================================  ====  ======   =======   =========== 
 
 Earnings per share from continuing operations: 
 Basic (pence per share)                                      7    31.8      30.5          40.9 
 Diluted (pence per share)                                    7    31.8      30.5          40.8 
 Earnings per share: 
 Basic (pence per share)                                      7    31.8      32.8          43.1 
 Diluted (pence per share)                                    7    31.8      32.8          43.0 
 

(i) This measure is the profit before tax measure under IFRS but it is not the result attributable to equity holders. 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 IFRS. Consequently, profit before tax is not representative of pre-tax profits attributable to equity holders. Profit before tax is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the With-Profits Fund after adjusting for taxes borne by policyholders.

Condensed consolidated statement of comprehensive income

For the six months ended 30 June 2020

 
                                                                 For the six            For the 
                                                                 months ended        year ended 
                                                                   30 June          31 December 
                                                                                 ============== 
                                                               2020       2019         2019 
                                                                   GBPm    GBPm            GBPm 
===========================================================  ==========  ======  ============== 
 
 Profit for the period                                          826        854        1,123 
 Less: profit from discontinued operations                        -         59           58 
 Profit from continuing operations                              826        795        1,065 
===========================================================  ======      =====   ========== 
 
 Items that may be reclassified subsequently to profit 
  or loss: 
 Exchange movements arising on foreign operations                 5          1           (7) 
                                                                  5          1           (7) 
===========================================================  ======      =====   ========== 
 Items that will not be reclassified to profit or loss: 
 Loss on remeasurement of defined benefit pension asset         (41)      (192)        (206) 
 Transfer in of net defined benefit pension asset                 -         15           15 
 Tax on remeasurement of defined benefit pension asset            9         30           31 
                                                                (32)      (147)        (160) 
===========================================================  ======      =====   ========== 
 Add amount transferred to unallocated surplus of the 
  With-Profits Fund, net of related tax                           9        149          155 
 Other comprehensive income on items that will not be 
  reclassified to profit or loss                                (23)         2           (5) 
===========================================================  ======      =====   ========== 
 
 Other comprehensive income for the period, net of related 
  tax from continuing operations                                (18)         3          (12) 
===========================================================  ======      =====   ========== 
 
 Total comprehensive income for the period from continuing 
  operations                                                    808        798        1,053 
===========================================================  ======      =====   ========== 
 
 Profit from discontinued operations                              -         59           58 
 Total comprehensive income from discontinued operations          -         59           58 
===========================================================  ======      =====   ========== 
 
 Total comprehensive income for the period                      808        857        1,111 
===========================================================  ======      =====   ========== 
 
  Attributable to equity holders of M&G plc: 
     From continuing operations                                 806        796        1,050 
     From discontinued operations                                 -         59           58 
  Attributable to non-controlling interests: 
     From continuing operations                                   2          2            3 
 Total comprehensive income for the period                      808        857        1,111 
===========================================================  ======      =====   ========== 
 

Condensed consolidated statement of financial position

As at 30 June 2020

 
                                                                             As at           As at 
                                                                           30 June     31 December 
                                                                                    ============== 
                                                                             2020          2019 
                                                                    Note      GBPm            GBPm 
==================================================================  ====            ============== 
 Assets 
 Goodwill and intangible assets                                             1,445         1,439 
 Deferred acquisition costs                                                   104           104 
 Investment in joint ventures and associates accounted 
  for using the equity method                                                 480           524 
 Property, plant and equipment                                              1,702         1,505 
 Investment property                                                       19,192        19,136 
 Defined benefit pension asset                                         9       41            77 
 Deferred tax assets                                                   6       95            78 
 Reinsurance assets                                                   11   11,927        11,958 
 Loans                                                                      5,777         5,954 
 Derivative assets                                                          5,666         3,962 
 Equity securities and pooled investment funds                             65,184        72,388 
 Deposits                                                                  21,791        14,221 
 Debt securities                                                           79,392        85,434 
 Current tax assets                                                    6      423           375 
 Accrued investment income and other debtors                                3,370         2,923 
 Assets held for sale(i)                                                      249           119 
 Cash and cash equivalents                                                  5,750         6,046 
                                                                          ======= 
 Total assets                                                             222,588       226,243 
==================================================================  ====  =======   =========== 
 
 Equity 
 Share capital                                                        10      130           130 
 Share premium reserve                                                        370           370 
 Shares held by employee benefit trust                                        (37)          (26) 
 Treasury shares                                                               (1)           (1) 
 Retained earnings                                                         16,744        16,342 
 Other reserves                                                           (11,677)      (11,690) 
 Equity attributable to equity holders of M&G plc                           5,529         5,125 
==================================================================  ====  =======   =========== 
 Non-controlling interests                                                      7             6 
==================================================================  ====  =======   =========== 
 Total equity                                                               5,536         5,131 
==================================================================  ====  =======   =========== 
 
 Liabilities 
 Insurance contract liabilities                                       11   77,071        78,480 
 Investment contract liabilities with discretionary participation 
  features                                                            11   74,942        78,048 
 Investment contract liabilities without discretionary 
  participation features                                              11   14,074        15,651 
 Unallocated surplus of the With-Profits Fund                         11   14,934        16,072 
 Third party interest in consolidated funds                                11,264        11,643 
 Subordinated liabilities and other borrowings                        12    7,938         7,499 
 Defined benefit pension liability                                     9       76            28 
 Deferred tax liabilities                                              6      621         1,065 
 Current tax liabilities                                               6      189           298 
 Derivative liabilities                                                     4,685         2,204 
 Lease liabilities                                                            361           360 
 Other financial liabilities                                                3,284         3,517 
 Provisions                                                                   256           326 
 Accruals, deferred income and other liabilities                            7,357         5,921 
 Liabilities held for sale                                                      -             - 
 Total liabilities                                                        217,052       221,112 
==================================================================  ==== 
 
 Total equity and liabilities                                             222,588       226,243 
==================================================================  ====  =======   =========== 
 

(i) Assets held for sale on the condensed consolidated statement of financial position as at 30 June 2020 includes GBP65m (31 December 2019 : GBP88m) of seed capital classified as held for sale as it is expected to be divested within 12 months, GBP175m of investment property classified as held for sale (31 December 2019: GBP17m) and GBP9m (31 December 2019: GBP14m) in relation to the Group's consolidated infrastructure capital private equity vehicles.

Condensed consolidated statement of changes in equity

For the six months ended 30 June 2020

 
                                                                                                      Total 
                                                     Shares                                          equity 
                                                       held                                    attributable 
                                                         by                                       to equity 
                                                   employee                                         holders 
                                 Share    Share     benefit    Treasury  Retained     Other          of M&G    Non-controlling     Total 
                               capital  premium       trust      shares  earnings  reserves             plc          interests    equity 
                         Note     GBPm     GBPm        GBPm        GBPm      GBPm      GBPm            GBPm               GBPm      GBPm 
=======================  ====  =======  =======  ==========  ==========  ========  ========  ==============  =================  ======== 
 At 1 January 2020                 130      370    (26)         (1)       16,342   (11,690)    5,125                 6          5,131 
 Profit for the period 
  from continuing 
  operations                         -        -      -           -           824         -       824                 2            826 
 Profit for the period               -        -      -           -             -         -         -                 -              - 
 from discontinued 
 operations 
 Other comprehensive 
  income 
  for the period from 
  continuing 
  operations                         -        -      -           -           (23)        5       (18)                -            (18) 
                                                                         =======             =======   ====  =========  ======  ===== 
 Total comprehensive 
  income 
  for the period                     -        -      -           -           801         5       806                 2            808 
=======================  ====  =======  =======  =====  ===  =====  ===  =======   =======   =======  =====  =========  ======  ===== 
 Dividends paid to 
  non-controlling 
  interests                          -        -      -           -             -         -         -                (1)            (1) 
 Transactions with 
  equity 
  holders                   8        -        -      -           -          (410)        -      (410)                -           (410) 
 Vested employee 
  share-based 
  payments                           -        -     12           -             1       (13)        -                 -              - 
 Movements in respect 
  of share-based 
  payments                           -        -      -           -             -        23        23                 -             23 
 Shares acquired by 
  employee 
  trusts                             -        -    (23)          -             -         -       (23)                -            (23) 
 Tax effect of items 
  recognised 
  directly in equity                 -        -      -           -             -        (2)       (2)                -             (2) 
 Other movements                     -        -      -           -            10         -        10                 -             10 
 Net 
  (decrease)/increase 
  in equity                          -        -    (11)          -           402        13       404                 1            405 
=======================  ====  =======  =======  =====       =====  ===  =======   =======   =======  =====  =========  ======  ===== 
 
 As at 30 June 2020                130      370    (37)         (1)       16,744   (11,677)    5,529                 7          5,536 
=======================  ====  =======  =======  =====       =====       =======   =======   =======  =====  =========  ======  ===== 
 
 
 
                                                                                          Total 
                                           Shares                                        equity 
                                             held                                  attributable 
                                               by                                     to equity 
                                         employee                                       holders 
                         Share    Share   benefit  Treasury  Retained     Other          of M&G  Non-controlling      Total 
                       capital  premium     trust    shares  earnings  reserves             plc        interests     equity 
                          GBPm     GBPm      GBPm      GBPm      GBPm      GBPm            GBPm             GBPm       GBPm 
=====================  =======  =======  ========  ========  ========  ========  ==============  ===============  ========= 
 At 1 January 2019         130      370         -         -   20,157   (11,728)     8,929                      5   8,934 
 Profit for the 
  period 
  from continuing 
  operations                 -        -         -         -      793         -        793                      2     795 
 Profit for the 
  period 
  from discontinued 
  operations                 -        -         -         -       59         -         59                      -      59 
 Other comprehensive 
  income for the 
  period 
  from continuing 
  operations                 -        -         -         -        2         1          3                      -       3 
 Total comprehensive 
  income for the 
  period                     -        -         -         -      854         1        855                      2     857 
=====================  =======  =======  ========  ========  =======   =======   ========  ====  ===============  ====== 
 Dividends paid to           -        -         -         -        -         -          -                      -       - 
 non-controlling 
 interests 
 Transactions with 
  equity 
  holders                    -        -         -         -   (1,113)        -     (1,113)                     -  (1,113) 
 Movements in respect 
  of share-based 
  payments                   -        -         -         -        -         8          8                      -       8 
 Other movements             -        -         -         -        2         -          2                      -       2 
 Net 
  (decrease)/increase 
  in equity                  -        -         -         -     (257)        9       (248)                     2    (246) 
=====================  =======  =======  ========  ========  =======   =======   ========   ===  ===============  ====== 
 
 At 30 June 2019           130      370         -         -   19,900   (11,719)     8,681                      7   8,688 
=====================  =======  =======  ========  ========  =======   =======   ========  ====  ===============  ====== 
 
 
                                                                                              Total 
                                             Shares                                          equity 
                                               held                                    attributable 
                                                 by                                       to equity 
                                           employee                                         holders 
                         Share    Share     benefit    Treasury  Retained     Other          of M&G    Non-controlling      Total 
                       capital  premium       trust      shares  earnings  reserves             plc          interests     equity 
                          GBPm     GBPm        GBPm        GBPm      GBPm      GBPm            GBPm               GBPm       GBPm 
=====================  =======  =======  ==========  ==========  ========  ========  ==============  =================  ========= 
 At 1 January 2019         130      370      -            -       20,157   (11,728)     8,929              5             8,934 
 Profit for the year 
  from 
  continuing 
  operations                 -        -      -            -        1,062         -      1,062              3             1,065 
 Profit for the year 
  from 
  discontinued 
  operations                 -        -      -            -           58         -         58              -                58 
 Other comprehensive 
  income 
  for the year from 
  continuing 
  operations                 -        -      -            -           (5)       (7)       (12)             -               (12) 
 Total comprehensive 
  income 
  for the year               -        -      -            -        1,115        (7)     1,108              3             1,111 
=====================  =======  =======  =====  ===  ======      =======   =======   ========  ====  =======  ========  ====== 
 Dividends paid to 
  non-controlling 
  interests                  -        -      -            -            -         -          -             (2)               (2) 
 Transactions with 
  equity 
  holders(i)                 -        -      -            -       (4,935)        -     (4,935)             -            (4,935) 
 Vested employee 
  share-based 
  payments                   -        -      2            -           (2)        -          -              -                 - 
 Movements in respect 
  of share-based 
  payments                   -        -      -            -            -        40         40              -                40 
 Shares acquired by 
  employee 
  trusts                     -        -    (28)           -            -         -        (28)             -               (28) 
 Treasury shares held 
  by subsidiary 
  companies                  -        -      -           (1)           -         -         (1)             -                (1) 
 Tax effect of items 
  recognised 
  directly in equity         -        -      -            -           99         5        104              -               104 
 Other movements             -        -      -            -          (92)        -        (92)             -               (92) 
 Net 
  (decrease)/increase 
  in equity                  -        -    (26)          (1)      (3,815)       38     (3,804)             1            (3,803) 
=====================  =======  =======  =====       ======      =======   =======   ========   ===  =======  ========  ====== 
 
 At 31 December 2019       130      370    (26)          (1)      16,342   (11,690)     5,125              6             5,131 
=====================  =======  =======  =====       ======      =======   =======   ========  ====  =======  ========  ====== 
 

(i) In addition to amounts noted in Note 8 there was a distribution in kind of GBP570m, which represents the difference between fair value of the subordinated notes at initial recognition and the actual cash transferred by Prudential plc in respect of the notes on substitution of the debt.

Condensed consolidated statement of cash flows

For the six months ended 30 June 2020

 
                                                                                          For the 
                                                                   For the six         year ended 
                                                                   months ended       31 December 
                                                                      30 June                2019 
                                                                                   ============== 
                                                                  2020      2019          2019 
                                                                   GBPm      GBPm            GBPm 
==============================================================  =======  ========  ============== 
 Cash flows from operating activities: 
 Profit before tax from continuing operations                      665     1,428         1,745 
 Profit before tax from discontinued operations                      -        88            88 
 Non-cash movements in operating assets and liabilities 
  included in profit before tax: 
 Investments                                                     6,932   (11,421)      (14,918) 
 Other non-investment and non-cash assets                         (540)      690        (8,613) 
 Policyholder liabilities (including unallocated surplus)       (7,347)    9,885        23,037 
 Other liabilities (including operational borrowings)            1,126      (732)         (866) 
 Interest income, interest expense and dividend income          (2,316)   (2,744)       (4,798) 
 Other non-cash items                                               63         2           417 
 Operating cash items: 
 Interest receipts and payments                                  1,253     1,338         2,595 
 Dividend receipts                                               1,140     1,269         2,107 
 Tax paid(i)                                                      (509)     (261)         (613) 
 Net cash flows from operating activities(ii)                      467      (458)          181 
==============================================================  ======   =======   =========== 
 
 Cash flows from investing activities: 
 Purchases of property, plant and equipment                       (220)     (171)         (393) 
 Proceeds from disposal of property, plant and equipment             2         3             8 
 Acquisition of subsidiaries                                       (26)       (1)          (95) 
 Cash inflow from disposal of subsidiaries(iii)                      -        98            98 
 Net cash flows from investing activities                         (244)      (71)         (382) 
==============================================================  ======   =======   =========== 
 
 Cash flows from financing activities: 
 Interest paid                                                     (95)        -           (22) 
 Substitution of subordinated liabilities                            -         -         3,219 
 Shares purchased by EBT                                           (23)        -             - 
 Dividends paid                                                   (410)     (361)       (3,516) 
 Net cash flows from financing activities                         (528)     (361)         (319) 
==============================================================  ======   =======   =========== 
 
 Net decrease in cash and cash equivalents                        (305)     (890)         (520) 
 Cash and cash equivalents at 1 January                          6,046     6,570         6,570 
 Effect of exchange rate changes on cash and cash equivalents        9        (3)           (4) 
 Cash and cash equivalents at end of period                      5,750     5,677         6,046 
==============================================================  ======   =======   =========== 
 

(i) Tax paid for the six months ended 30 June 2020 includes GBP244m (30 June 2019: GBP25m, 31 December 2019: GBP228m) paid on profits taxable at policyholder rather than shareholder rates.

(ii) Cash flows in respect of other borrowings of the With-Profits Fund, which principally relate to consolidated investment funds, are included within cash flows from operating activities.

(iii) Cash inflow from disposal of subsidiaries reflects the net cash flow from the disposal of Prudential Vietnam Finance Company Limited in 2019.

1 Basis of preparation and significant accounting policies

1.1 Basis of preparation

The condensed consolidated interim financial statements ('the interim financial statements') for the half year ended 30 June 2020 comprise the interim financial statements of M&G plc ('the Company') and its subsidiaries (together referred to as 'the Group'). The interim financial statements are unaudited but have been reviewed by the auditors, KPMG LLP.

The interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting ('IAS 34'), as endorsed by the European Union ('EU'), and the Disclosure and Transparency Rules of the Financial Conduct Authority. The accounting policies applied in the interim financial statements are consistent with those set out in the 2019 consolidated financial statements, except for the new standards, interpretations and amendments that became effective in the current period, as stated below.

The interim financial statements do not include all the information and disclosures required in the Group's 2019 consolidated financial statements. Therefore, these interim financial statements should be read in conjunction with the Group's 2019 annual report and accounts that were prepared in accordance with IFRS, as endorsed by the EU, and those parts of the Companies Act 2006 applicable to entities reporting under IFRS.

The interim financial statements are stated in million pounds Sterling, the Group's presentation currency.

In preparing the interim financial statements the Group has adopted the following standards, interpretations and amendments effective from 1 January 2020:

   -                     Amendments to IFRS 3: Definition of a Business 
   -                     Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform 
   -                     Amendments to IAS 1 and IAS 8: Definition of Material 
   -                     Conceptual Framework for Financial Reporting issued on 29 March 2018 

None of the above interpretations and amendments to standards are considered to have a material effect on these interim financial statements. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

These interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The Group's 2019 annual report and accounts for the year ended 31 December 2019 were delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

Going concern

The Directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence over a period of at least twelve months from the date of approval of the interim financial statements. For this reason, they continue to adopt the going concern basis in preparing the interim financial statements.

To satisfy themselves of the appropriateness of the use of the going concern assumptions in relation to these interim financial statements, specifically in the light of the current Covid-19 pandemic and the resulting economic uncertainty, the Directors have assessed the future prospects of the Group by considering the business plan, which covers the Group's key metric as detailed in the business and financial review, updated for the expected impact of the Covid-19 pandemic, various market scenarios as well as changes in the Group's principal risks, as set out in the risk management statement. In addition, the Directors have also considered the results of downside and reverse stress testing scenarios to assess the potential implications of Covid-19 on the Group's liquidity, solvency and profitability to conclude that the use of the going concern assessment is still appropriate.

Presentation of risk and capital management disclosures

We have provided additional disclosures relating to the nature and extent of certain financial risks and capital management in the Supplementary Information section of this report. We believe these disclosures will assist the users of the interim financial statements to better understand the implications of Covid-19 on our business.

Goodwill

Goodwill is required to be tested for impairment at least annually in accordance with IAS 36, however given the unprecedented uncertainty created by Covid-19 management have considered it an impairment indicator. Therefore goodwill has been reviewed for impairment at 30 June 2020 and management concluded no impairment is required.

2 Group structure and products

2.1 Group composition

The Group structure is available in the full PDF version of this interim report via the following link https://global.mandg.com/investors/results-reports-and-presentations .

2.2 Transactions relating to demerger from Prudential plc

In preparation for the demerger of the Company, a number of restructuring transactions were undertaken with other companies within the Prudential plc group in 2019. For details of these transactions please refer to the 31 December 2019 Annual Report and Accounts.

2.3 Corporate transactions

2.3.1 Proposed sale of annuity portfolio to Rothesay Life plc

On 14 March 2018, Prudential plc announced the reinsurance of GBP12,149m (as at 31 December 2017) of The Prudential Assurance Company Limited (PAC) shareholder-backed annuity portfolio to Rothesay Life plc by way of a collateralised reinsurance arrangement followed by an insurance business transfer scheme (the "Scheme") under Part VII of Financial Services and Markets Act 2000. The terms of the reinsurance arrangement transferred substantially all of the economic risk and capital requirements associated with the Annuity Portfolio to Rothesay Life plc, subject to a residual counterparty credit risk attaching to reinsurance receivables.

On 17 May 2019, the independent expert who was appointed to report to the High Court concluded that the transfer would have no material adverse effect on the security of benefits or the reasonable benefit expectations of PAC's policyholders. However, on 16 August 2019, the High Court declined to sanction the Scheme. PAC and Rothesay Life plc were granted leave to appeal the judgment. A notice of appeal was lodged at the Court of Appeal on 27 September 2019. The High Court's judgment has no direct impact on the reinsurance with Rothesay Life plc.

The appeal hearing will take place at the Court of Appeal in late October 2020. If the appeal is successful, the case will be remitted back to the High Court to consider the sanction. The sanction hearing is likely to take place in 2021.

2.3.2 Ascentric acquisition

On 27 May 2020 the Group announced that they had entered into an agreement with Royal London to acquire its digital wrap and wealth management platform for UK independent financial advisers, Ascentric.

The acquisition of Ascentric is scheduled to complete on 1 September 2020 following approval from the FCA for change in control.

2.4 Insurance and investment products

A full description of the main contract types written by the Group's insurance entities can be found in the 31 December 2019 Annual Report and Accounts.

3 Segmental analysis

The Group's operating segments are defined and presented in accordance with IFRS 8: Operating Segments on the basis of the Group's management reporting structure and its financial management information. The Group's primary reporting format is by customer type, with supplementary information being given by product type. The Chief Operating Decision Maker for the Group is the Group Executive Committee.

3.1 Operating segments

The Group's operating segments are:

Savings and Asset Management

The Group's Savings and Asset Management business provides a range of retirement, savings and investment management solutions to its retail and institutional customers. The Group's retirement and savings products are distributed to retail customers through intermediaries and through its own advisors, and include the Retirement Account (a combined individual pension and income drawdown product), individual pensions, ISAs, collective investments and a range of on-shore and off-shore bonds.

All of the Group's products that give access to the PruFund investment proposition are included in the Savings and Asset Management segment. The PruFund investment proposition gives retail customers access to savings contracts with smoothed investment returns and a wide choice of investment profiles. Unlike the conventional and accumulating with-profits contracts in the Group's Heritage business, no regular or final bonuses are declared. Instead, policyholders participate in profits by means of an increase in their investment, which grows in line with an Expected Growth Rate.

The Group's investment management capability is offered to both retail and institutional investors. The Group's retail customers invest through either UK domiciled Open Ended Investment Companies ("OEICs") or Luxembourg domiciled Sociétés d'Investissement à Capital Variable ("SICAVs") and have access to a broad range of actively managed investment products, including Equities, Fixed Income, Multi-Asset and Real Estate. The Group serves these customers through its many business-to-business relationships both in the UK and overseas, which include independent financial advisers, high-street banks and wealth managers. The Group's institutional investors, include pension funds, insurance companies and banks from around the world, who invest through segregated mandates and pooled funds into a diverse range of Fixed Income and Real Estate investment products and services.

The Savings and Asset Management segment also earns investment management revenues from the significant proportion of Heritage assets it manages.

Heritage

The Group's Heritage business includes individual and corporate pensions, annuities, life, savings and investment products. The majority of the products in the Heritage business are closed to new customers but may accept further contributions from existing policyholders. The annuity contracts include: level annuities, which provide a fixed annuity payment; fixed increase annuities, which incorporate a periodic automatic fixed increase in annuity payments; and inflation-linked annuities, which incorporate a periodic increase based on a defined inflation index. Some inflation-linked annuities have minimum and/or maximum increases relative to the corresponding inflation index.

The life products in Heritage are primarily whole of life assurance, endowment assurances, term assurance contracts, lifetime mortgages, income protection, and critical illness products. Investment products include unit-linked contracts and the Prudential bond offering, which mainly consists of single-premium-invested whole of life policies, where the customer has the option of taking ad-hoc withdrawals, regular income or the option of fully surrendering their bond.

Some of the Group's Heritage products written through conventional and accumulating with-profits contracts, in the PAC With-Profits Sub-Fund, provide returns to policyholders through 'regular' and 'final' bonuses that reflect a smoothed investment return.

The Heritage business includes the closed Scottish Amicable Insurance Fund ("SAIF") with-profits sub-fund. This fund is solely for the benefit of policyholders of SAIF. Shareholders have no entitlement to the profits of this fund although they are entitled to asset management fees on it. It also includes the Defined Charge Participating sub-fund ("DCPSF"), which consists of two types of business: (i) the Defined Charge Participating business, primarily business reinsured from Prudential International Assurance plc; and (ii) the with-profits annuities transferred from Equitable Life Assurance Society on 31 December 2007.

The Groups other reportable segment is:

Corporate Centre

Corporate Centre includes central corporate costs incurred by the M&G Group functions and subordinated debt costs.

3.2 Adjusted operating profit before tax methodology

Adjusted operating profit before tax is the Group's non-GAAP alternative performance measure, which complements IFRS GAAP measures and is key to decision making and the internal performance management of operating segments.

Adjusted operating profit before tax includes IFRS profit from continuing operations only.

For the Group's fee based business, adjusted operating profit before tax includes fees received from customers and operating costs for the business including overheads, expenses required to meet regulatory requirements and regular business development/restructuring and other costs. Costs associated with fundamental one-off Group-wide restructuring and transformation are not included in adjusted operating profit before tax.

For the Group's business written in the With-Profits Fund, adjusted operating profit before tax includes the statutory transfer to shareholders gross of attributable shareholder tax. Derivative instruments are held to mitigate the risk to the shareholder of lower future shareholder transfers, and can be separated into two types:

1. Cash flow hedges: those instruments that are held to mitigate volatility in the Group's IFRS results by being explicitly matched to the expected future shareholder transfers.

2. Capital hedges: instruments that hedge the economic present value of shareholder transfers on a Solvency II basis, to optimise the capital position.

The realised gains or losses on the cash flow hedges are allocated to adjusted operating profit before tax in line with emergence of the corresponding shareholder transfer within IFRS profit. Any short-term temporary movements in the fair value of these instruments, not relating to the current year's shareholder transfer are excluded from adjusted operating profit before tax. As the capital hedges do not explicitly hedge future IFRS profit before tax, all movements in the fair value of these instruments are excluded from adjusted operating profit before tax.

For the Group's shareholder annuity products written by the Heritage segment, adjusted operating profit before tax excludes the impact of short-term components of credit risk provisioning, the impact of credit risk experience variances over the period, and total fair value movements on surplus assets backing the shareholder annuity capital, that are not reflective of the longer-term performance of the business.

Certain additional items are excluded from adjusted operating profit before tax where those items are considered to be non-recurring or strategic, or due to short-term movements not reflective of longer-term performance, or considered to be one-off, due to their size or nature, and therefore not indicative of the long-term operating performance of the Group, including profits or losses arising on corporate transactions and profits or losses arising on discontinued operations.

The key adjusting items between IFRS profit before tax and adjusted operating profit before tax are:

Short-term fluctuations in investment returns

The adjustment for short-term fluctuations in investment returns represents:

(i) Short-term temporary movements in the fair value of instruments held to mitigate equity risk in the with-profits shareholder transfer, including both cash flow and capital hedges.

(ii) Total fair value movements on other capital hedges, which are held solely to optimise the Solvency II capital position.

(iii) Total fair value movements on surplus assets backing the shareholder annuity capital, and the impact of short term credit risk provisioning and experience variances over the period which are not reflective of the longer-term performance of the business, specifically:

   -         The impact of credit risk provisioning for short-term adverse credit risk experience . 

- The impact of credit risk provisioning for actual upgrade and downgrade experience during the year. This is calculated by reference to current interest rates.

- Credit experience variance relative to assumptions, reflecting the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring.

- The impact of market movements on bond portfolio weightings and the subsequent impact on credit provisions.

Items relating to investment returns which are included in adjusted operating profit before tax are:

- The net impact of movements in the value of policyholder liabilities and fair value of the assets backing these liabilities, excluding the items included in short-term fluctuations above. The fair value movements of the assets backing the liabilities are closely correlated with the related change in liabilities.

- The unwind of the credit risk premium, which is the opening value of the assets multiplied by the credit risk premium assumption, with an adjustment for claims paid over the year. The credit risk premium assumption is the difference between the total long-term credit allowance and a best estimate credit allowance (both of which allow for the combination of defaults and downgrades).

- Actual income received in the year, such as coupon payments, redemption payments and rental income, on surplus assets backing the shareholder annuity capital, less an allowance for expenses.

- The net effect of changes to the valuation rate of interest due to asset trading and portfolio rebalancing.

   -         The impact of changes in the long-term component of credit provisioning. 

Profit on disposal of businesses and corporate transactions

The adjusting item of GBP53m for the year ended 31 December 2019 resulted from the reinsurance of GBP12bn of annuities to Rothesay Life in anticipation of sale, which is considered to be non-recurring in nature and is therefore excluded from IFRS adjusted operating profit before tax.

Restructuring costs

Restructuring costs primarily reflect the shareholder allocation of costs associated with the merger, transformation, rebranding and other change in control costs. These costs represent fundamental one-off Group-wide restructuring and transformation and are therefore excluded from IFRS adjusted operating profit.

3.3 Analysis of Group adjusted operating profit before tax by segment from continuing operations

 
                                                                  For the six months ended 30 June 
                                                                                 2020 
                                                               Savings 
                                                             and Asset            Corporate    Total continuing 
                                                            Management  Heritage     Centre          operations 
                                                                  GBPm      GBPm       GBPm                GBPm 
=================================================== 
 Fee based revenues(i)                                        541            39          -              580 
 Annuity margin                                                 -           139          -              139 
 With-profits shareholder transfer net 
  of hedging(ii)                                               24           110          -              134 
 Adjusted operating income                                    565           288          -              853 
===================================================  ============  ===  =======   ========   ============== 
 Adjusted operating expenses                                 (382)          (30)       (75)            (487) 
 Other shareholder (loss)/profit                              (26)           40        (76)             (62) 
 Share of profit from joint ventures and 
  associates                                                    5             -          -                5 
 Adjusted operating profit/(loss) before 
  tax                                                         162           298       (151)             309 
===================================================  ============  ===  =======   ========   ============== 
 Short-term fluctuations in investment 
  returns                                                      74           672          -              746 
 Restructuring and other costs(iii)                           (17)           (4)        (1)             (22) 
                                                     ------------       -------   --------   -------------- 
 IFRS profit/(loss) before tax and non-controlling 
  interests attributable to equity holders 
  from continuing operations                                  219           966       (152)           1,033 
===================================================  ============  ===  =======   ========   ============== 
 IFRS profit attributable to non-controlling 
  interests                                                     2             -          -                2 
 Profit/(loss) before tax attributable 
  to equity holders from continuing operations                221           966       (152)           1,035 
===================================================  ============  ===  =======   ========   ============== 
 

(i) Fee based revenues includes internal revenue, of this amount GBP46m (30 June 2019: GBP42m, 31 December 2019: GBP110m) relates to revenues that Savings and Asset Management has earned from Heritage segment, and other presentational differences which are excluded in the condensed consolidated income statement.

(ii) The with-profits shareholder transfer is paid to the shareholder net of tax. The shareholder transfer amount is grossed up for tax purposes with regard to adjusted operating profit.

(iii) Restructuring costs excluded from adjusted operating profit relate to merger and transformation costs of GBP19m (30 June 2019: GBP32m, 31 December 2019: GBP62m) and rebranding and other change in control costs allocated to the shareholder. Additional restructuring costs are included in the analysis of administrative and other expenses in Note 5.

 
                                                                   For the six months ended 30 June 
                                                                                  2019 
                                                               Savings 
                                                             and Asset              Corporate    Total continuing 
                                                            Management    Heritage     Centre          operations 
                                                                  GBPm        GBPm       GBPm                GBPm 
=================================================== 
 Fee based revenues(i)                                        590           47             -              637 
 Annuity margin                                                 -          311             -              311 
 With-profits shareholder transfer net 
  of hedging(ii)                                               29           97             -              126 
=================================================== 
 Adjusted operating income                                    619          455             -            1,074 
===================================================  ============  ===  ======      ========   ============== 
 Adjusted operating expenses                                 (378)         (25)          (21)            (424) 
 Other shareholder profit/(loss)                               13           46            (3)              56 
 Share of profit from joint ventures and 
  associates                                                    8            -             -                8 
 Adjusted operating profit/(loss) before 
  tax                                                         262          476           (24)             714 
===================================================  ============  ===  ======      ========   ============== 
 Short-term fluctuations in investment 
  returns                                                     (49)         413             -              364 
 Restructuring and other costs(iii)                           (26)         (54)           (2)             (82) 
===================================================                                 ======== 
 IFRS profit/(loss) before tax and non-controlling 
  interests attributable to equity holders 
  from continuing operations                                  187          835           (26)             996 
===================================================  ============  ===  ======      ========   ============== 
 IFRS profit attributable to non-controlling 
  interests                                                     2            -             -                2 
=================================================== 
 Profit/(loss) before tax attributable 
  to equity holders from continuing operations                189          835           (26)             998 
===================================================  ============  ===  ======      ========   ============== 
 
 
                                                                 For the year ended 31 December 2019 
                                                               Savings 
                                                             and Asset            Corporate    Total continuing 
                                                            Management  Heritage     Centre          operations 
                                                                  GBPm      GBPm       GBPm                GBPm 
=================================================== 
 Fee based revenues(i)                                       1,191           96          -            1,287 
 Annuity margin                                                  -          458          -              458 
 With-profits shareholder transfer net 
  of hedging(ii)                                                55          187          -              242 
=================================================== 
 Adjusted operating income                                   1,246          741          -            1,987 
===================================================  =============      =======   ========   ============== 
 Adjusted operating expenses                                  (817)         (87)       (59)            (963) 
 Other shareholder profit/(loss)                                30           98        (18)             110 
 Share of profit from joint ventures and 
  associates                                                    15            -          -               15 
 Adjusted operating profit/(loss) before 
  tax                                                          474          752        (77)           1,149 
===================================================  =============      =======   ========   ============== 
 Short-term fluctuations in investment 
  returns                                                      (59)         357          -              298 
 Profit on disposal of businesses and corporate 
  transactions                                                   -           53          -               53 
 Restructuring and other costs(iii)                            (52)         (98)       (48)            (198) 
===================================================                               ======== 
 IFRS profit/(loss) before tax and non-controlling 
  interests attributable to equity holders 
  from continuing operations                                   363        1,064       (125)           1,302 
===================================================  =============      =======   ========   ============== 
 IFRS profit attributable to non-controlling 
  interests                                                      3            -          -                3 
--------------------------------------------------- 
 Profit/(loss) before tax attributable 
  to equity holders from continuing operations                 366        1,064       (125)           1,305 
===================================================  =============      =======   ========   ============== 
 

The Group has a widely diversified customer base. There are no customers whose revenue represents greater than 10% of fee based revenue.

Each reportable segment reports adjusted operating income as its measure of revenue. Fee based revenues and other income primarily represents asset management charges, transactional charges and annual management charges on unit-linked business. The annuity margin reflects the margin earned on annuity business and includes net earned premiums, claims and benefits paid, net investment return for assets backing the liabilities, net investment income for surplus assets backing the annuity capital, actuarial reserving changes, investment management expenses and administrative expenses. The with-profits shareholder transfer reflects the statutory transfer gross of attributable tax net of hedging gains or losses on cash flow hedges held to match those transfers.

Adjusted operating expenses includes shareholders operating expenses incurred outside of the annuity and with-profits portfolios. Other net shareholder expenses includes non-recurring costs, movements in provisions that are an expense to the shareholder and shareholder investment return earned outside of the annuity portfolio.

Share of profit from joint ventures and associates represents the Group's share of the operating profits of Prudential Portfolio Managers South Africa (PTY) Limited, which is accounted for under the equity method.

4 Fee income

The following table disaggregates management fee revenue by segment:

 
                                                                For the six            For the 
                                                                months ended        year ended 
                                                                  30 June          31 December 
                                                                  2020    2019            2019 
                                                                  GBPm    GBPm            GBPm 
==========================================================  ==========  ======  ============== 
 Savings & Asset Management: 
 Management fees                                               501        585        1,198 
 Rebates                                                       (17)       (25)         (45) 
 Total management fees, less rebates                           484        560        1,153 
==========================================================  ======      =====   ========== 
 Performance fees                                                4          5           18 
 Investment contracts without discretionary participation 
  features                                                      16         17           30 
 Other fees and commissions                                     28         29           60 
 Total Savings & Asset Management fee income                   532        611        1,261 
==========================================================  ======      =====   ========== 
 
 Heritage: 
 Investment contracts without discretionary participation 
  features                                                       8         10           25 
 Total Heritage fee income                                       8         10           25 
==========================================================  ======      =====   ========== 
 
 Total fee income from continuing operations                   540        621        1,286 
==========================================================  ======      =====   ========== 
 

5 Administrative and other expenses

 
                                                              For the six           For the 
                                                              months ended       year ended 
                                                                30 June         31 December 
 
                                                              2020     2019            2019 
                                                              GBPm     GBPm            GBPm 
=========================================================  =======  =======  ============== 
 Staff and employment costs(i)                                 358      221           586 
 Acquisition costs incurred: 
 Insurance contracts                                            67       81           168 
 Investment contracts                                           13       11            20 
 Amortisation of deferred acquisition costs: 
 Insurance contracts                                             3        4             7 
 Investment contracts                                            2        2            10 
 Impairment of deferred acquisition costs                        3        -             - 
 Depreciation of tangible assets                                52       47            97 
 Amortisation of intangible assets                               8        6            11 
 Impairment of goodwill and intangible assets                    5       29            23 
 Impairment of tangible assets                                   5        -             - 
 Restructuring costs                                            65       97           201 
 Expenses under arrangements with reinsurers                     -        -           112 
 Interest expense                                               93       92           154 
 Commission expense                                            117      133           263 
 Investment management fees                                    119       71           221 
 Property-related costs                                         98       73           152 
 Other expenses                                                201      297           851 
 Total administrative and other expenses from continuing 
  operations                                                 1,209    1,164         2,876 
=========================================================  =======  =======  ============ 
 

(i) Benefit of GBP117m resulting from changes to the Group's defined benefit pension schemes was included for the six months ended 30 June 2019 and year ended 31 December 2019 .

In addition to the interest expense shown above, the interest expense incurred in respect of subordinated liabilities for the six months ended 30 June 2020 was GBP79m (30 June 2019 GBPnil, year ended 31 December 2019: GBP28m). This is shown as finance costs in the condensed consolidated income statement. Total finance costs incurred for the six months ended 30 June 2020 were GBP172m (30 June 2019: GBP92m, year ended 31 December 2019: GBP182m).

6 Tax

6.1 Tax (credited)/charged to the condensed consolidated income statement from continuing operations

6.1.1 Income statement tax (credit)/charge

 
                                For the six           For the 
                                months ended       year ended 
                                  30 June         31 December 
                                               ============== 
                                2020     2019          2019 
                                 GBPm    GBPm            GBPm 
=========================== 
 Total current tax               300      457           518 
 Total deferred tax             (461)     176           162 
 Total tax (credit)/charge      (161)     633           680 
===========================  =======   ======  ============ 
 

6.1.2 Allocation of profit before tax and tax charge between equity holders and policyholders

Profit before tax from continuing operations reflected in the consolidated income statement for the six months ended 30 June 2020 of GBP1,035m (30 June 2019: GBP998m) comprises profit attributable to equity holders and pre-tax profit attributable to policyholders of unit-linked and With-Profits Fund and unallocated surplus of the With-Profits fund. This is the formal measure of profit before tax under IFRS but it is not the result attributable to equity holders. 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, this measure of profit before all taxes is not representative of pre-tax profits attributable to equity holders.

The tax charge/(credit) attributable to policyholder returns is removed from the Group's total profit before tax in arriving at the Group's profit before tax attributable to equity holders'. As the net of tax profits attributable to policyholders is zero, the Group's pre-tax profit attributable to policyholders is an amount equal and opposite to the tax charge/(credit) attributable to policyholders included in the total tax charge.

 
                                                                                                 For the year ended 
                                     For the six months ended 30 June                                31 December 
                                                                                        =================================== 
                                 2020                               2019                                2019 
                     Equity                            Equity                             Equity 
                    holders    Policyholders  Total   holders    Policyholders   Total   holders    Policyholders     Total 
                       GBPm             GBPm   GBPm      GBPm             GBPm    GBPm      GBPm             GBPm      GBPm 
=================  ========  ===============  =====  ========  ===============  ======  ========  ===============  ======== 
 Profit before 
  tax 
  from continuing 
  operations         1,035       (370)          665      998        430         1,428     1,305        440         1,745 
 Tax 
  (charge)/credit 
  from continuing 
  operations          (209)       370           161     (203)      (430)         (633)     (240)      (440)         (680) 
                                                                                =====   =======   ========   ====  ===== 
 Profit for the 
  period 
  from continuing 
  operations           826          -           826      795          -           795     1,065          -         1,065 
=================  =======   ========  =====  =====  =======   ========  =====  =====   =======   ========  =====  ===== 
 

6.1.3 Equity holders effective tax rate

The equity holders tax charge for the six months ended 30 June was GBP209m (30 June 2019: GBP203m) representing an effective tax rate for the six months ended 30 June of 20.2% (30 June 2019: 20.3%, year-ended 31 December 2019: 18.4%). The effective tax rate for six months ended 30 June 2020 was in line with that for 30 June 2019 with no significant differences to note.

6.2 Current tax assets and liabilities

 
                          Current tax                  Current tax 
                             assets                     liabilities 
                       For the       For the      For the        For the 
                    six months          year   six months           year 
                         ended         ended        ended          ended 
                       30 June   31 December      30 June    31 December 
                          GBPm          GBPm          GBPm             GBPm 
=================  ===========  ============  ============  =============== 
 Corporation tax           384           364         (131)          (255) 
 Other taxes                39            11          (58)           (43) 
 Total                     423           375         (189)          (298) 
=================  ===========  ============  ===========   ============ 
 

6.3 Deferred tax assets and liabilities

 
                                                        For the 
                                                     six months         For the 
                                                          ended      year ended 
                                                        30 June     31 December 
                                                                 ============== 
                                                           2020            2019 
                                                           GBPm            GBPm 
================================================  =============  ============== 
 Unrealised gains on investments                       (568)            (999) 
 Life tax transitional adjustments                      (86)             (93) 
 Other short term timing differences                     90               73 
 Deferred acquisition costs                              49               53 
 Defined benefit pensions                               (30)             (33) 
 Capital allowances                                     (29)             (29) 
 Tax losses carried forward                              23               18 
 Share based payments and deferred compensation          25               23 
 Net deferred tax liability                            (526)            (987) 
================================================  =========      =========== 
 Assets                                                  95               78 
 Liabilities                                           (621)          (1,065) 
 Net deferred tax liability                            (526)            (987) 
================================================  =========      =========== 
 

7 Earnings per share

Basic earnings per share for the six months ended 30 June 2020 was 31.8p (30 June 2019; 32.8p, 31 December 2019: 43.1p) and diluted earnings per share was 31.8p (30 June 2019; 32.8p, 31 December 2019: 43.0p). Basic earnings per share is based on the weighted average ordinary shares in issue after deducting treasury shares and shares held by the employee benefit trust. Diluted EPS is based on the potential future shares in issue resulting from exercise of options under the various share-based payment schemes in addition to the weighted average ordinary shares in issue.

The following table shows details of basic and diluted earnings per share:

 
                                   For the six months ended 30 June                          For the year ended 
                                                                                                 31 December 
                                                                                     ================================= 
                                 2020                             2019                              2019 
                   Continuing  Discontinued         Continuing  Discontinued         Continuing  Discontinued 
                   operations    operations  Total  operations    operations  Total  operations    operations    Total 
                         GBPm          GBPm   GBPm        GBPm          GBPm   GBPm        GBPm          GBPm     GBPm 
=================  ==========  ============  =====  ==========  ============  =====  ==========  ============  ======= 
 Profit 
  attributable 
  to equity 
  holders 
  of the Company          824             -    824         793            59    852       1,062            58  1,120 
=================  ==========  ============  =====  ==========  ============  =====  ==========  ============  ===== 
 
 
 
                                                              For the six             For the 
                                                              months ended         year ended 
                                                                 30 June          31 December 
                                                                               ============== 
                                                               2020      2019          2019 
                                                           millions  millions        millions 
========================================================  =========  ========  ============== 
 Weighted average number of ordinary shares outstanding       2,589     2,600         2,597 
 Dilutive effect of share options and awards                      4         -             4 
 Weighted average number of diluted ordinary shares 
  outstanding                                                 2,593     2,600         2,601 
========================================================  =========  ========  ============ 
 
 
                               For the six months ended 30 June                              For the year ended 
                                                                                                 31 December 
                                                                                    ==================================== 
                           2020                                2019                                 2019 
            Continuing  Discontinued            Continuing  Discontinued            Continuing  Discontinued 
            operations    operations     Total  operations    operations     Total  operations    operations       Total 
                                         Pence                               Pence 
                 Pence         Pence       per       Pence         Pence       per       Pence         Pence       Pence 
             per share     per share     share   per share     per share     share   per share     per share   per share 
==========  ==========  ============  ========  ==========  ============  ========  ==========  ============  ========== 
 Basic 
  earnings 
  per 
  share           31.8             -      31.8        30.5           2.3      32.8        40.9           2.2      43.1 
            ==========  ============  ========  ==========  ============  ======== 
 Diluted 
  earnings 
  per 
  share           31.8             -      31.8        30.5           2.3      32.8        40.8           2.2      43.0 
==========  ==========  ============  ========  ==========  ============  ========  ==========  ============  ======== 
 

8 Dividends

8.1 Interim dividends

 
                                              For the six           For the year 
                                              months ended        ended 31 December 
                                              30 June 2020              2019 
                                                 Pence                  Pence 
                                             per share  GBPm        per share    GBPm 
=========================================  ===========  ====  ===============  ====== 
 Dividends relating to reporting period: 
 Interim dividends - Ordinary                     6.00   155            11.92   310 
 Interim dividends - Special dividends               -     -             3.85   100 
 Total                                                   155                    410 
=========================================  ===========  ====  ===============  ==== 
 
 Dividends paid in reporting period: 
 Interim dividends - Ordinary                    11.92   310                -     - 
 Interim dividends - Special dividends            3.85   100                -     - 
 Total                                                   410                      - 
=========================================  ===========  ====  ===============  ==== 
 

Subsequent to 30 June 2020, the Board has declared an interim dividend for 2020 of 6.00 pence per ordinary share, an estimated GBP155m in total. The dividend is expected to be paid on 30 September 2020 and will be recorded as an appropriation of retained earnings in the financial statements at the time that it is paid.

8.2 Transaction with equity holders

For the year ended 31 December 2019 dividends included amounts paid to Prudential plc by M&G plc post incorporation on 2 July 2018 up to the date of demerger were GBP1,392m, of which, GBP849m were non-cash in specie dividends and GBP543m in cash. A final dividend was paid to Prudential plc prior to demerger on 18 October 2019 of GBP2,968m.

Prudential Capital Holdings Company Limited was transferred on 20 September 2019 from Prudential plc, and paid a GBP5m dividend prior to this.

9 Defined benefit pension schemes

The Group operates three defined benefit pension schemes, which historically have been funded by the Group and Prudential plc. The largest defined benefit scheme as at 30 June 2020 is the Prudential Staff Pension Scheme ("PSPS"), which accounts for 82% (31 December 2019: 82%) of the present value of the defined benefit pension obligation.

The Group also operates two smaller defined benefit pension schemes that were originally established by the M&G ("M&GGPS") and Scottish Amicable ("SASPS") businesses.

Under IAS 19: Employee Benefits and IFRIC 14: IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, the Group can only recognise a surplus to the extent that it is able to access the surplus either through an unconditional right of refund or through reduced future contributions relating to ongoing service of active members. The Group has no unconditional right of refund to any surplus in PSPS. Accordingly, PSPS's net economic pension surplus is restricted up to the present value of the Group's economic benefit, which is calculated as the difference between the estimated future cost of service for active members and the estimated future ongoing contributions. In contrast, the Group is able to access the surplus of SASPS and M&GGPS through an unconditional right of refund. Therefore, the surplus resulting from the schemes (if any) would be recognised in full. As at 30 June 2020 the SASPS and M&GGPS schemes are in deficit based on the IAS 19 valuation.

Until 30 June 2019, the PSPS net economic pension surplus was attributed 70% to the With-Profits Fund and 30% to Prudential plc which is external to the Group. On 30 June 2019, in preparation for the demerger, the 30% attributable to Prudential plc was formally reallocated to the Group's shareholders, and the full value of the scheme surplus allowable under IFRIC 14 was attributed to the Group from this date. This resulted in an incremental pension surplus of GBP15m recognised on the condensed consolidated statement of financial position of the Group, with the corresponding gain recognised in the condensed consolidated statement of comprehensive income during 2019.

The IAS 19 surplus for M&GGPS is lower than the economic surplus position, as the pension scheme has investments in insurance policies issued by Prudential Pensions Limited, a subsidiary of the Group, through which it invests in certain pooled funds. Under IAS 19, insurance policies issued by a related party do not qualify as plan assets. SASPS's net economic pension deficit is funded 40% by the With-Profits Fund and 60% by the Group's shareholders.

The pension assets and liabilities for the defined benefit pension schemes are as follows:

 
                                                        As at 30 June 2020 
                                                  PSPS    SASPS  M&GGPS      Total 
                                                  GBPm     GBPm    GBPm       GBPm 
============================================= 
 Fair value of plan assets                      8,057      971     740    9,768 
 Present value of defined benefit obligation   (7,301)  (1,018)   (571)  (8,890) 
 Effect of restriction on surplus                (715)       -       -     (715) 
                                               ====== 
 Net economic pension surplus/(deficit)(i)         41      (47)    169      163 
=============================================  ======   ======   =====   ====== 
 Eliminate group issued insurance policies          -        -    (198)    (198) 
                                               ======   ======   =====   ====== 
 Net total pension surplus/(deficit)               41      (47)    (29)     (35) 
=============================================  ======   ======   =====   ====== 
 
 
                                              As at 30 June 2020 
                                        PSPS     SASPS  M&GGPS    Total 
                                        GBPm      GBPm    GBPm     GBPm 
=====================================  =====  ========  ======  ======= 
 Attributable to: 
 Shareholder -- backed business           12   (28)       (29)   (45) 
 With-Profits Fund                        29   (19)         -     10 
===================================== 
 Net total pension surplus/(deficit)      41   (47)       (29)   (35) 
=====================================  =====  ====      =====   ==== 
 
 
                                                     As at 31 December 2019 
                                                  PSPS  SASPS  M&GGPS      Total 
                                                  GBPm   GBPm    GBPm       GBPm 
============================================= 
 Fair value of plan assets                      7,447    867     663    8,977 
 Present value of defined benefit obligation   (6,520)  (895)   (489)  (7,904) 
 Effect of restriction on surplus                (887)     -       -     (887) 
 Net economic pension surplus/(deficit)(i)         40    (28)    174      186 
=============================================  ======   ====   =====   ====== 
 Eliminate group issued insurance policies          -      -    (137)    (137) 
 Net total pension surplus/(deficit)               40    (28)     37       49 
=============================================  ======   ====   =====   ====== 
 
 
                                               As at 31 December 2019 
                                           PSPS       SASPS  M&GGPS    Total 
                                           GBPm        GBPm    GBPm     GBPm 
=====================================  ========  ==========  ======  ======= 
 Attributable to: 
 Shareholder -- backed business              12     (17)         37     32 
 With -- Profits Fund                        28     (11)          -     17 
===================================== 
 Net total pension surplus/(deficit)         40     (28)         37     49 
=====================================  ========  ======      ======  ===== 
 

(i) The economic basis reflects the position of the defined benefit schemes from the perspective of the pension schemes, adjusted for the effect of IFRIC 14 for the derecognition of PSPS's unrecognisable surplus and before adjusting for any non-qualifying assets.

10 Issued share capital

 
                                   For the six months ended                For the year ended 31 
                                            30 June                               December 
                            =====================================  ==================================== 
                                             2020                                  2019 
                                         Number of                           Number of 
 Issued shares fully paid          ordinary shares  Share capital      ordinary shares    Share capital 
                                                             GBPm                                  GBPm 
==========================  ======================  =============  ===================  =============== 
 At 1 January                        2,599,906,866            130        2,597,930,000            130 
 Issue of shares                                 -              -            1,976,866              - 
 At period end                       2,599,906,866            130        2,599,906,866            130 
==========================  ======================  =============  ===================  ============= 
 

Amounts recorded in share capital represent the nominal value of shares issued with any difference between proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued being credited to the share premium account. On 18 October 2019 in preparation of demerger 1,976,866 bonus shares were issued at par value of 5 pence per share by utilising the share premium reserve.

11 Policyholder liabilities and unallocated surplus

11.1 Determination of insurance and investment contract liabilities for different components of business

A description relating to the determination of the policyholder liabilities and the key assumptions for each component of business is set out below:

11.1.1 With-profits business

The With-Profits Fund mainly contains with-profits contracts but also contains some non-profit business (annuities, unit-linked, and term assurances). The liabilities of the With-Profits Fund are accounted for on a realistic basis in accordance with the requirements of FRS 27 Life Assurance. The basis is consistent with the rules for the determination of reserves on the realistic basis under the Solvency I capital regime. Though no longer in force for regulatory purposes, these rules continue to be applied to determine with-profits contract liabilities in accordance with IFRS 4 Insurance Contracts. In aggregate, the regime has the effect of placing a market-consistent value on the liabilities of with-profits contracts, which reflects the amounts expected to be paid based on the current value of investments held by the With-Profits Fund and current circumstances.

The with-profits contracts are a combination of insurance and investment contracts with discretionary participation features, as defined by IFRS 4. The realistic basis requires the value of with-profits policyholder liabilities to be calculated as the sum of:

   (i)                   A with-profits benefits reserve ("WPBR") 
   (ii)                 Future policy-related liabilities ("FPRL") 

The WPBR is primarily based on the retrospective calculation of accumulated asset shares with adjustments to reflect future policyholder benefits and other charges and expenses. Asset shares broadly reflect the policyholders' share of the With-Profits Fund assets attributable to their policies. For certain classes of business, the WBPR is instead calculated using a prospective bonus reserve valuation, valuing future claims and expenses using the expected future bonus rates.

The FPRL is comprised of other components of the liability including a market-consistent valuation of costs of guarantees, options and smoothing, less any related charges, and this amount is determined using stochastic modelling techniques. The FPRL also includes other liabilities such as tax on shareholder transfers and enhancements to policy benefits arising from the distribution of surplus from non-profit business written within the With-Profits Fund.

Assumptions used for the realistic, market-consistent valuation of with-profits business typically do not contain margins, whereas those used for the valuation of other classes of business (for example, annuities) contain margins of prudence within the assumptions. The main assumptions used in the prospective elements of the with-profits policyholder liabilities are listed below:

- Persistency assumptions are set based on the results of the most recent experience analysis looking at the experience over recent years of the relevant business.

   -         Management actions under which the fund is managed in different scenarios. 

- Maintenance and, for some classes of business, termination expense assumptions are expressed as per policy amounts. They are set based on the expenses incurred during the year, including an allowance for ongoing investment expenditure, and are allocated between entities and product groups in accordance with each operation's internal cost allocation model.

- Expense inflation assumptions are set consistent with the economic basis and based on the inflation swap spot curve.

- The contract liabilities for with-profits business also require assumptions for mortality. These are set based on the results of recent experience analysis.

At 30 June 2020, there are no significant external reinsurance arrangements in place in respect of the With-Profits Fund's liabilities.

Unallocated surplus

The unallocated surplus of the With-Profits Fund represents the excess of the fund's assets over policyholder liabilities that have yet to be appropriated between policyholders and shareholders. The unallocated surplus is recorded wholly as a liability with no allocation to equity. The annual excess/shortfall of income over expenditure of the With-Profits Fund, after declaration and attribution of the cost of bonuses to policyholders and shareholders, is transferred to/from the unallocated surplus each year through a charge/credit to the condensed consolidated income statement. The balance retained in the unallocated surplus represents cumulative income arising on the with-profits business that has not been allocated to policyholders or shareholders.

11.1.2 Unit-linked business

For unit-linked contracts, the attaching liability reflects the unit value obligation and, in the case of contracts with significant insurance risk which are therefore classified as insurance contracts, a provision for expense and mortality risk. The latter component is determined by applying mortality assumptions on a basis that is appropriate for the policyholder profile. To calculate the non-unit reserves for unit-linked insurance contracts, assumptions are set for maintenance expenses, the unit growth rate and the valuation interest rate. The valuation interest rate is derived from the yields of assets representative of the returns that will be earned on the assets backing these liabilities.

For those contracts where the level of insurance risk is insignificant, the assets and liabilities arising under the contracts are distinguished between those that relate to the financial instrument liability and acquisition costs and deferred income that relate to the component of the contract that relates to investment management. Acquisition costs and deferred income are recognised consistent with the level of service provision.

Certain parts of the unit-linked business are reinsured externally, either by way of fund reinsurance or by reinsuring specific risk benefits. The reinsurance asset in respect of these reinsurance arrangements is valued in a manner consistent with the valuation of the underlying liabilities.

11.1.3 Annuities and other long-term business

The majority of the policyholder liabilities in the 'annuities and other long-term business' component relate to annuity contracts. The annuity liabilities are calculated as the expected value of future annuity payments and expenses, discounted by a valuation interest rate, having prudent regard to the assumptions used.

On 14 March 2018, part of the annuity liability was reinsured externally to Rothesay Life plc. In addition, some of the longevity risk in respect of the remaining annuity business is reinsured externally. The reinsurance asset in respect of these reinsurance arrangements is valued in a manner consistent with the valuation of the underlying liabilities.

The key assumptions used to calculate the policyholder liability in respect of annuity business are as follows:

Mortality

Mortality assumptions for annuity business are set in light of recent population and internal experience, with an allowance for expected future mortality improvements. Given the long-term nature of annuity business, annuitant mortality remains a significant assumption in determining policyholder liabilities. The assumptions used reference recent population mortality data, with specific risk factors applied on a per policy basis to reflect the features of the Group's portfolio.

The mortality improvements observed in recent population data have been considered as part of the judgement exercised in setting the mortality basis. New mortality projection models are released annually by the Continuous Mortality Investigation ("CMI"). The CMI tables used are adjusted as appropriate each year to reflect anticipated mortality improvements, including an appropriate margin for prudence. The mortality improvement assumptions used are summarised in the table below:

 
                                    Long-term improvement    Smoothing parameter (S(k) 
 Period ended       Model version    rate(i)                  )(ii) 
=================  ==============  =======================  ========================== 
                                    For males: 2.25% pa      For males: 7.5 
 30 June 2020       CMI 2017         For females: 2.00% pa    For females: 7.75 
                                    For males: 2.25% pa      For males: 7.5 
 31 December 2019   CMI 2017         For females: 2.00% pa    For females: 7.75 
=================  ==============  =======================  ========================== 
 

(i) As at 30 June 2020 and 31 December 2019, the long-term improvement rates shown reflected a 0.5% increase to all future improvement rates as a margin for prudence.

(ii) The smoothing parameter controls the amount of smoothing by calendar year when determining the level of initial mortality improvements.

An increase in mortality rates may be expected to some extent over the short term due to the Covid-19 pandemic, particularly in relation to the annuitant population which has a higher average age than the non-annuitant population. However, the longer term implications for mortality rates amongst the annuitant population are unknown at this stage. While no change has been made to the annuitant mortality assumptions since 31 December 2019, this is an area the Group continues to monitor.

Valuation interest rates

Valuation interest rates used to discount the liabilities are based on the yields as at the valuation date on the assets backing the policyholder liabilities. For fixed interest securities, the internal rate of return of the assets backing the liabilities is used. Investment properties are valued using the redemption yield. An adjustment is made to the yield on non risk-free fixed interest securities and property to reflect credit risk. The credit risk allowance comprises an amount for long-term best estimate defaults and downgrades, a provision for credit risk premium, and where appropriate an additional short-term provision.

The credit risk allowance for the Group's shareholder-backed annuity business as at 30 June 2020 was 44 bps per annum (31 December 2019: 37 bps) corresponding to a net of reinsurance reserve of GBP837m (31 December 2019: GBP701m). For the annuity business written in the With-Profits Fund, this amount was 40 bps (31 December 2019: 33 bps) corresponding to a net of reinsurance reserve of GBP392m (31 December 2019: GBP324m). This increase is primarily due to strengthening the short-term provision, in anticipation of short-term deterioration in the number of company default and downgrades due to the current market conditions arising from the Covid-19 pandemic.

Expenses

Maintenance expense assumptions are expressed as per policy amounts. They are set based on forecast expense levels, including an allowance for ongoing investment expenditure and are allocated between entities and product groups in accordance with the Group's internal cost allocation model. A margin for prudence is added to this amount. Expense inflation assumptions are set consistent with the economic basis and based on the inflation swap spot curve.

The sensitivity of IFRS profit after tax to changes in the above assumptions, as at 31 December 2019, is shown in Note 34.2 of the 2019 Annual Report and Accounts. There have been no changes in the Group's longevity or maintenance expense assumptions since 31 December 2019, and while the credit risk assumption has been strengthened, there have been no fundamental changes to the Group's methodology or estimation techniques which would change the nature of the risk profile and the degree of sensitivity to reasonably possible changes in these assumptions previously disclosed.

11.2 Analysis of movements in policyholder liabilities and unallocated surplus of the With-Profits Fund

The following tables show the movement in policyholder liabilities and unallocated surplus of the With-Profits Fund by business component. The analysis includes the impact of premiums, claims and investment movements on policyholder liabilities. The impact does not represent premiums, claims, and investment movements as reported in the condensed consolidated income statement. For example, the premiums shown below exclude any deductions for fees/charges, as the table only shows the impact on the insurance and investment contract liabilities and unallocated surplus of the With-Profits Fund. Claims (surrenders, maturities and deaths) represent the liability released rather than the claim amount paid to the policyholder.

 
                                                  Shareholder-backed 
                                                 funds and subsidiaries 
                              With-profits         Unit-linked     Annuity     Total  Reinsurance    Net total 
                              sub-funds(i)         liabilities   and other                  asset 
                                                                 long-term 
                                                                  business 
                                      GBPm                GBPm        GBPm      GBPm         GBPm         GBPm 
===========================                                                           ===========  =========== 
 At 1 January 2019                124,228           20,717         20,384   165,329       (2,812)    162,517 
 Comprising: 
 Insurance contract 
  liabilities                      43,775            5,219         20,304    69,298 
 Investment contract 
  liabilities 
  with DPF                         67,018                -             20    67,038 
 Investment contract 
  liabilities 
  without DPF                           2           15,498             60    15,560 
 Unallocated surplus of the 
  With-Profits 
  Fund                             13,433                -              -    13,433 
===========================  ============   ==============      =========   ======= 
 Net Flows: 
 Premiums                          11,745              890            287    12,922 
 Surrenders                        (4,987)          (2,667)          (444)   (8,098) 
 Maturities/deaths                 (4,522)            (606)        (1,948)   (7,076) 
 Net flows                          2,236           (2,383)        (2,105)   (2,252) 
===========================  ============   ==============      =========   ======= 
 Reclassification of 
  reinsured 
  UK annuity contracts as 
  held for 
  sale                                  -                -         10,502    10,502 
 Disposal of Hong Kong 
  subsidiaries                        (44)              (9)            53         - 
 Shareholders' transfers 
  post-tax                           (263)               -              -      (263) 
 Switches                            (156)             156              -         - 
 Investment related items 
  and other 
  movements(ii)                    10,925            2,513          1,613    15,051 
 Foreign exchange 
  differences                        (112)               -             (4)     (116) 
=========================== 
 At 31 December 2019 / 1 
  January 
  2020                            136,814           20,994         30,443   188,251      (11,958)    176,293 
===========================  ============   ==============      =========   =======   ==========   ========= 
 Comprising: 
 Insurance contract 
  liabilities                      42,717            5,396         30,367    78,480 
 Investment contract 
  liabilities 
  with DPF                         78,022                -             26    78,048 
 Investment contract 
  liabilities 
  without DPF                           3           15,598             50    15,651 
 Unallocated surplus of the 
  With-Profits 
  Fund                             16,072                -              -    16,072 
=========================== 
 Net Flows: 
 Premiums                           3,289              423            105     3,817 
 Surrenders                        (2,968)          (1,556)           (42)   (4,566) 
 Maturities/deaths                 (2,144)            (315)        (1,004)   (3,463) 
 Net flows                         (1,823)          (1,448)          (941)   (4,212) 
=========================== 
Reclassification of 
reinsured 
UK annuity contracts as 
held for 
sale                                    -                -              -         - 
 Shareholders' transfers 
  post-tax                           (126)               -              -      (126) 
 Switches                             (60)              60              -         - 
Investment related items 
 and other 
 movements(ii)                     (3,547)            (801)         1,372    (2,976) 
 Foreign exchange 
  differences                          84                -              -        84 
=========================== 
 At 30 June 2020                  131,342           18,805         30,874   181,021      (11,927)    169,094 
=========================== 
 Comprising: 
 Insurance contract 
  liabilities                      41,494            4,796         30,781    77,071 
 Investment contract 
  liabilities 
  with DPF                         74,913                -             29    74,942 
 Investment contract 
  liabilities 
  without DPF                           1           14,009             64    14,074 
 Unallocated surplus of the 
  With-Profits 
  Fund                             14,934                -              -    14,934 
=========================== 
 

(i) Includes the PAC With-Profits Sub-Fund, the Defined Charge Participating Sub-Fund and the Scottish Amicable Insurance Fund including the non-profit business written within these funds.

(ii) Investment related items and other movements include the impact of assumption changes. For the shareholder-backed business, assumption changes, including credit downgrade/default provisioning and annuitant mortality, increased policyholder liabilities by GBP134m for the six months ended 30 June 2020 (31 December 2019: GBP340m decrease). For the With-Profits Fund, the impact of assumption changes for the six months ended 30 June 2020 was an increase in policyholder liabilities of GBP48m (31 December 2019: GBP239m decrease), which was offset by a corresponding increase in unallocated surplus of the With-Profits Fund. The assumption change impacts have been amended from those reported in the 31 December 2019 Annual Report & Accounts with no impact on the movement table presented above.

Further analysis of the movement in the Group's insurance contract liabilities, reinsurance asset, investment contract liabilities and unallocated surplus of the With-Profits Fund is provided below. The movement in these items is predominantly allocated to the 'benefits and claims and movement in unallocated surplus of the With-Profits Fund, net of reinsurance' line in the condensed consolidated income statement, although certain movements such as premiums received and claims paid on investment contracts without discretionary participating features, are not charged to the income statement.

 
                                                                                      Unallocated 
                                                                                          surplus 
                                                     Insurance          Investment         of the 
                                                      contract            contract   With-Profits    Reinsurance 
                                                   liabilities     liabilities(ii)           Fund     asset(iii) 
                                                          GBPm                GBPm           GBPm           GBPm 
At 1 January 2019                                      69,298           82,598            13,433       (2,812) 
 Movement charged to the condensed consolidated 
  income statement                                     (1,063)          12,688             2,549        1,356 
 Other movements including amounts included in 
  other comprehensive income(i)                        10,311           (1,583)              136      (10,502) 
Foreign exchange differences                              (66)              (4)              (46)           - 
At 31 December 2019 / 1 January 2020                   78,480           93,699            16,072      (11,958) 
                                                  ===========   ==============      ============   ========== 
Movement charged to the condensed consolidated 
 income statement                                      (1,481)          (3,414)           (1,200)          33 
 Other movements including amounts included in 
  other comprehensive income(i)                             5           (1,246)               (9)           - 
Foreign exchange differences                               67              (23)               71           (2) 
 
At 30 June 2020                                        77,071           89,016            14,934      (11,927) 
 
 

(i) 'Other movements including amounts included in other comprehensive income include premiums received and claims paid on investment contracts without discretionary participating features, which are taken directly to the condensed consolidated statement of financial position in accordance with IAS 39; changes in the unallocated surplus of the With-Profits Fund resulting from actuarial gains and losses on the Group's defined benefit pension schemes, which are recognised directly in other comprehensive income and balance sheet reallocations. The amount for balance sheet reallocations for the year ended 31 December 2019 includes the reclassification of the reinsured UK annuity business out of held for sale, together with reclassifications between insurance contract liabilities and the unallocated surplus of the With-Profits Fund.

(ii) This comprises investment contracts with discretionary participation features of GBP74,942m as at 30 June 2020 (31 December 2019: GBP78,048m) and investment contracts without discretionary participation features of GBP14,074m as at 30 June 2020 (31 December 2019: GBP15,651m).

(iii) Includes reinsurers' share of claims outstanding of GBP151m as at 30 June 2020 (31 December 2019: GBP156m).

The below tables show the 'Benefits and claims and movement in unallocated surplus of the With-Profits Fund, net of reinsurance' as shown in condensed consolidated income statement. 'Benefits and claims and movement in unallocated surplus of the With-Profits Fund, net of reinsurance comprises of the movement charged to the condensed consolidated income statement presented in the table above, and the benefits and claims paid over the period, net of amounts attributable to reinsurers.

 
                                                                            For the six months 
                                                                             ended 30 June 2020 
                                                                   Policyholder    Unallocated    Reinsurance 
                                                                 liabilities(I)        surplus          asset 
                                                                                        of the 
                                                                                  With-Profits 
                                                                                          Fund 
                                                                           GBPm           GBPm           GBPm 
Movement in policyholder liabilities and unallocated 
 surplus of the With-Profits Fund included in the condensed 
 consolidated income statement                                            4,895          1,200          - 
Movement in reinsurance asset included in the condensed 
 consolidated income statement                                            -                  -        (33) 
Benefits and claims paid                                             (6,268)                 -          - 
Benefits and claims attributable to external reinsurers                   -                  -        823 
 
Benefits and claims and movement in unallocated surplus 
 of the With-Profits Fund, net of reinsurance, as shown 
 in condensed consolidated income statement                          (1,373)             1,200        790 
 

(i) Policyholder liabilities includes insurance contract liabilities and investment contract liabilities.

 
                                                                          For the year ended 
                                                                           31 December 2019 
                                                              Policyholder    Unallocated    Reinsurance 
                                                               liabilities        surplus          asset 
                                                                                   of the 
                                                                             With-Profits 
                                                                                     Fund 
                                                                      GBPm           GBPm           GBPm 
Movement in policyholder liabilities and unallocated 
 surplus of the With-Profits Fund included in the condensed 
 consolidated income statement                                    (11,625)        (2,549)           - 
Movement in reinsurance asset included in the condensed 
 consolidated income statement                                          -              -       (1,356) 
Benefits and claims paid                                          (12,750)             -            - 
Benefits and claims attributable to external reinsurers                 -              -        1,787 
Benefits and claims and movement in unallocated surplus 
 of the With-Profits Fund, net of reinsurance as shown 
 in condensed consolidated income statement                       (24,375)        (2,549)         431 
 

12 Subordinated liabilities and other borrowings

 
                                                         As at           As at 
                                                       30 June     31 December 
                                                          2020          2019 
                                                          GBPm            GBPm 
Subordinated liabilities                                 3,780         3,767 
Operational borrowings                                     136           130 
Borrowings attributable to with-profits fund             4,022         3,602 
Total subordinated liabilities and other borrowings      7,938         7,499 
                                                      ========  ============ 
 

Subordinated liabilities

The Group's subordinated liabilities consist of subordinated notes which were transferred from Prudential plc on 18 October 2019 and were recorded at fair value on initial recognition. The transfer of the subordinated liabilities was achieved by substituting the Company in place of Prudential plc as issuer of the debt, as permitted under the terms and conditions of each applicable instrument. All costs related to the transaction were borne by Prudential plc.

 
                                                               As at 31 December 
                                      As at 30 June 2020              2019 
                                       Principal  Carrying    Principal    Carrying 
                                          amount    amount       amount      amount 
                                                      GBPm                     GBPm 
5.625% Sterling fixed rate due on 
 20 October 2061                         GBP750m       858      GBP750m         862 
6.25% Sterling fixed rate due 20 
 October 2068                            GBP500m       608      GBP500m         608 
6.5% US Dollar fixed rate due on 
 20 October 2048                           $500m       473        $500m         448 
6.34% Sterling fixed rate due on 
 19 December 2063                        GBP700m       852      GBP700m         856 
5.56% Sterling fixed rate due on 
 20 July 2055                            GBP600m       681      GBP600m         684 
3.875% Sterling fixed rate due on 
 20 July 2049                            GBP300m       308      GBP300m         309 
Total subordinated liabilities                       3,780                  3,767 
 

Subordinated notes issued by the Company rank below its senior obligations and ahead of its preference shares and ordinary share capital.

A description of the key features of each of the Group's subordinated notes as at 30 June 2020 and 31 December 2019 is as follows:

 
                 5.625% Sterling  6.25% Sterling   6.50% US         6.34% Sterling   5.56% Sterling   3.875% Sterling 
                  fixed rate       fixed rate       Dollar fixed     fixed rate       fixed rate       fixed rate 
                                                    rate 
Principal        GBP750m          GBP500m          $500m            GBP700m          GBP600m          GBP300m 
amount 
Issue date(i)    1 October        1 October        1 October        16 December      9 June 2015      8 July 2019 
                  2018             2018             2018             2013 (amended    (amended 
                                                                     10 June          10 June 
                                                                     2019)            2019) 
Maturity date    20 October       20 October       20 October       19 December      20 July          20 July 
                  2051             2068             2048             2063             2055             2049 
Callable at par  20 October       20 October       20 October       19 December      20 July          20 July 
at the option    2031 (and        2048 (and        2028 (and        2043 (and        2035 (and        2024, 20 
of               each             each             each             each             each             July 2029 
the Company      semi-annual      semi-annual      semi-annual      semi-annual      semi-annual      (and each 
from             interest         interest         interest         interest         interest         semi-annual 
                 payment          payment          payment          payment          payment          interest 
                 date             date             date             date             date             payment 
                 thereafter)      thereafter)      thereafter)      thereafter)      thereafter)      date thereafter) 
Solvency II own  Tier 2           Tier 2           Tier 2           Tier 2           Tier 2           Tier 2 
funds treatment 
 

(i) The subordinated notes were issued by Prudential plc rather than by the Company.

The following table reconciles the movement in subordinated liabilities in the period:

 
                                        As at           As at 
                                      30 June     31 December 
                                        2020         2019 
                                         GBPm            GBPm 
At 1 January                           3,767            - 
 Fair value on initial recognition         -        3,789 
 Amortisation                            (17)          (9) 
 Foreign exchange movements               30          (13) 
At end of period                       3,780        3,767 
 
 

The subordinated liabilities were recognised at fair value on initial recognition, however the cash received in respect of these liabilities from Prudential plc was GBP3,219m. The difference was treated as distribution in kind in accordance with the requirements of section 845 of the Companies Act 2006.

There were no repayments of principal on these loans during the year. The amortisation of premium on the loans based on an effective interest rate and the foreign exchange movement on the translation of the subordinated liabilities denominated in US dollar are both non-cash items.

13 Fair value methodology

13.1 Determination of fair value hierarchy

The fair values of assets and liabilities for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments, by using quotations from independent third parties such as brokers and pricing services, or by using appropriate valuation techniques. Fair value is the amount for which an asset could be exchanged or a liability settled in an arm's length transaction.

To provide further information on the approach used to determine and measure the fair value of certain assets and liabilities, the following fair value hierarchy categorisation has been used. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement.

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

Level 1 principally includes exchange-listed equities, mutual funds with quoted prices, exchange-traded derivatives such as futures and options, and national government bonds, unless there is evidence that trading in a given instrument is so infrequent that the market could not be considered active. It also includes other financial instruments where there is clear evidence that the year-end valuation is based on a traded price in an active market.

Level 2 - inputs other than quoted prices included within level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices)

Level 2 principally includes corporate bonds and other non-national government debt securities which are valued using observable inputs, together with over-the-counter derivatives such as forward exchange contracts and non-quoted investment funds valued with observable inputs. It also includes investment contract liabilities without discretionary participation features that are valued using observable inputs.

Level 3 - Significant inputs for the asset or liability are not based on observable market data (unobservable inputs)

Level 3 principally includes investments in private equity funds, directly held investment properties and investments in property funds which are exposed to bespoke properties or risks and investments which are internally valued or subject to a significant number of unobservable assumptions. It also includes debt securities which are rarely traded or traded only in privately negotiated transactions and hence where it is difficult to assert that their valuations have been based on observable market data.

13.2 Valuation approach for level 2 assets and liabilities

A significant proportion of the Group's level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or quotes from third-party brokers. These valuations are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades.

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

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

Of the total level 2 debt securities of GBP43,836m as at 30 June 2020 (31 December 2019: GBP44,683m), GBP391m were valued internally (31 December 2019: GBP344m). The majority of such securities were valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced by taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments, factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to judgement.

13.3 Level 3 assets and liabilities

13.3.1 Valuation approach for level 3

Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions e.g. market illiquidity. The valuation techniques used include comparison to recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation. These techniques may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of these instruments. When determining the inputs into the valuation techniques used priority is given to publicly available prices from independent sources when available, but overall the source of pricing is chosen with the objective of arriving at a fair value measurement that reflects the price at which an orderly transaction would take place between market participants on the measurement date.

The fair value estimates are made at a specific point in time, based upon any available market information and judgements about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time a significant volume of a particular financial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses from selling the financial instrument being fair valued. In some cases, the disclosed value cannot be realised in immediate settlement of the financial instrument. In accordance with the Group's Group Risk Framework, the estimated fair value of derivative financial instruments valued internally using standard market practices are subject to assessment against external counterparties' valuations.

As at 30 June 2020, the Group held GBP42,034m of assets, net of liabilities, at fair value which were classified as level 3 within the fair value hierarchy (31 December 2019: GBP38,904m). This included GBP1,404m of loans (31 December 2019: GBP1,462m) and corresponding borrowings of GBP1,350m (31 December 2019: GBP1,422m) held by a subsidiary of the Group, attaching to a portfolio of buy-to-let mortgages financed largely by external third-party (non-recourse) borrowings. The Group's exposure to this portfolio is limited to the investments held by the WPSF. The fair value movements of these loans and borrowings have no effect on shareholders' profit and equity. The most significant non-observable inputs to the mortgage fair value are the level of future defaults and prepayments by the mortgage holders.

The investment properties of the Group are externally valued by professionally qualified external valuers using the RICS valuation standards. Within these valuations 55% contained a 'material uncertainty' clause due to the continued disruption to the market caused by Covid-19. These are driven primarily as a result of limited recent market transactions for certain sectors. The Group's investment properties are predominately valued using an 'income capitalisation' technique. This technique calculates the value through the yield and rental value depending on factors such as the lease length, building quality, covenants and location. Typically these variables used are compared to recent transactions with similar features to those of the Group's investment properties. As the comparisons are not with properties that are virtually identical to the Group's investment properties, adjustments are made by the valuers where appropriate to the variables used. As a result of Covid-19, where there were more limited recent market transactions, more emphasis has been placed on the inherent valuation, using the factors previously described which could indicate more uncertainty than normal. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of the properties as at 30 June 2020, and details of our sensitivity analysis to the key factors inherent in these valuations is given in note 13.9.1. The shareholder exposure to investment property is GBP1,529m, representing 8% of the total investment property of GBP19,192m.

13.3.2 Analysis of internally valued level 3 financial instruments

Level 3 financial assets, net of financial liabilities, which were internally valued as at 30 June 2020 were GBP12,174m (31 December 2019: GBP11,207m), representing 8.6% of the total fair-valued financial assets net of financial liabilities (31 December 2019: 7.3%).

Internal valuations are inherently more subjective than external valuations. These internally valued net assets and liabilities primarily consist of the following items:

- Debt securities of GBP11,198m as at 30 June 2020 (31 December 2019: GBP10,187m), of which GBP9,360m (31 December 2019: GBP9,246m) were valued using discounted cash flow models with an internally developed discount rate. The remaining debt securities were valued using other valuation methodologies such as enterprise valuation and estimated recovery (such as liquidators' reports).

- Private equity investments in both debt and equity securities of GBP539m as at 30 June 2020 (31 December 2019: GBP548m), of which investments of GBP539m (31 December 2019: GBP357m) were valued internally using a discounted cash flow model. The most significant inputs to the valuation are the forecast cash flows of the underlying business, discount rate, and terminal value assumption, all of which involve significant judgement. The valuation is performed in accordance with International Private Equity and Venture Capital Association valuation guidelines. These investments are held by the Group's consolidated private equity infrastructure funds.

- Equity release mortgage loans of GBP1,780m as at 30 June 2020 (31 December 2019: GBP1,737m) and a corresponding liability of GBP411m (31 December 2019: GBP390m), which were valued internally using discounted cash flow models. The inputs that are most significant to the valuation of these loans are the discount rate, the current property value, the assumed future property growth and the assumed future annual property rental yields. During 2019, there was a change to the deferment rate assumption which resulted in an increase in assumed property values at redemption. As at 30 June 2020 the assumed future property growth assumption has been adjusted to make allowance for the expected short-term dynamics in the residential property market, as a result of the Covid-19 pandemic.

- Liabilities of GBP1,134m as at 30 June 2020 (31 December 2019: GBP1,135m), for the third-party interest in consolidated funds in respect of the consolidated investment funds, which are non-recourse to the Group. These liabilities were valued by reference to the underlying assets.

13.3.3 Governance of level 3

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

13.4 Fair value hierarchy for assets measured at fair value in the condensed consolidated statement of financial position

The tables below presents the Group's assets measured at fair value by level of the fair value hierarchy for each component of business.

 
                                        As at 30 June 2020 
                               Level 1  Level 2  Level 3      Total 
                                  GBPm     GBPm     GBPm       GBPm 
 
With-profits: 
Investment property                  -        -   17,236   17,236 
Loans                                -        -    1,479    1,479 
Derivative assets                   98    4,563        -    4,661 
Equity securities and pooled 
 investment funds               42,277    1,873    8,106   52,256 
Debt securities                 16,179   28,091    6,084   50,354 
Total with-profits              58,554   34,527   32,905  125,986 
 
Unit-linked: 
Investment property                  -        -      427      427 
Loans                                -        -        -        - 
Derivative assets                    2        3        -        5 
Equity securities and pooled 
 investment funds               11,460      332      929   12,721 
Debt securities                  2,141    5,152        -    7,293 
Total unit-linked               13,603    5,487    1,356   20,446 
 
Annuity and other long-term 
 business: 
Investment property                  -        -    1,529    1,529 
Loans                                -        -    1,780    1,780 
Derivative assets                   81      817        -      898 
Equity securities and pooled 
 investment funds                   14        -        2       16 
Debt securities                  3,218   10,052    7,339   20,609 
Total annuity and other 
 long-term business              3,313   10,869   10,650   24,832 
 
Other: 
Investment property                  -        -        -        - 
Loans                                -        -        -        - 
Derivative assets                    -      102        -      102 
Equity securities and pooled 
 investment funds                  173        -       18      191 
Debt securities                    595      541        -    1,136 
Total other                        768      643       18    1,429 
 
Group: 
Investment property                  -        -   19,192   19,192 
Loans                                -        -    3,259    3,259 
Derivative assets                  181    5,485        -    5,666 
Equity securities and pooled 
 investment funds               53,924    2,205    9,055   65,184 
Debt securities                 22,133   43,836   13,423   79,392 
Total assets at fair value      76,238   51,526   44,929  172,693 
 
 
                                      As at 31 December 2019 
                               Level 1  Level 2  Level 3      Total 
                                  GBPm     GBPm     GBPm       GBPm 
 
With-profits: 
Investment property                  -        -   17,039   17,039 
Loans                                -        -    1,602    1,602 
Derivative assets                   67    3,225        -    3,292 
Equity securities and pooled 
 investment funds               48,532    2,219    7,154   57,905 
Debt securities                 21,913   28,430    5,008   55,351 
Total with-profits              70,512   33,874   30,803  135,189 
 
 
Unit-linked: 
Investment property                  -        -      453      453 
Derivative assets                    3        3        -        6 
Equity securities and pooled 
 investment funds               12,968      352      987   14,307 
Debt securities                  2,382    5,908        -    8,290 
Total unit-linked               15,353    6,263    1,440   23,056 
 
 
Annuity and other long-term 
 business: 
Investment property                  -        -    1,644    1,644 
Loans                                -        -    1,737    1,737 
Derivative assets                    -      603        -      603 
Equity securities and pooled 
 investment funds                   27        -        2       29 
Debt securities                  4,361    9,810    6,207   20,378 
Total annuity and other 
 long-term business              4,388   10,413    9,590   24,391 
 
 
Other: 
Investment property                  -        -        -        - 
Loans                                -        -        -        - 
Derivative assets                    -       61        -       61 
Equity securities and pooled 
 investment funds                  129        -       18      147 
Debt securities                    880      535        -    1,415 
Total other                      1,009      596       18    1,623 
 
 
Group: 
Investment property                  -        -   19,136   19,136 
Loans                                -        -    3,339    3,339 
Derivative assets                   70    3,892        -    3,962 
Equity securities and pooled 
 investment funds               61,656    2,571    8,161   72,388 
Debt securities                 29,536   44,683   11,215   85,434 
Total assets at fair value      91,262   51,146   41,851  184,259 
 
 

13.5 Fair value hierarchy for liabilities measured at fair value in the condensed consolidated statement of financial position

The table below presents the Group's liabilities measured at fair value by level of the fair value hierarchy:

 
                                                              As at 30 June 2020 
                                                        Level   Level  Level     Total 
                                                            1       2      3 
                                                         GBPm    GBPm   GBPm      GBPm 
Investment contract liabilities without discretionary 
 participation features                                     -  14,074      -  14,074 
Third-party interest in consolidated funds              6,035   4,095  1,134  11,264 
Borrowings and subordinated liabilities                     -       -  1,350   1,350 
Derivative liabilities                                     43   4,642      -   4,685 
Accruals, deferred income and other liabilities             -       -    411     411 
Total liabilities at fair value                         6,078  22,811  2,895  31,784 
 
 
 
                                                            As at 31 December 2019 
                                                        Level   Level  Level     Total 
                                                            1       2      3 
                                                         GBPm    GBPm   GBPm      GBPm 
Investment contract liabilities without discretionary 
 participation features                                     -  15,651      -  15,651 
Third-party interest in consolidated funds              6,897   3,611  1,135  11,643 
Borrowings and subordinated liabilities                     -       -  1,422   1,422 
Derivative liabilities                                     32   2,172      -   2,204 
Accruals, deferred income and other liabilities             -       -    390     390 
Total liabilities at fair value                         6,929  21,434  2,947  31,310 
                                                        =====  ======  ===== 
 

13.6 Transfers between levels

The Group's policy is to recognise transfers into and transfers out of levels as at the end of each half-year reporting period, except for material transfers, which are recognised as of the date of the event or change in circumstances that caused the transfer.

Transfers are deemed to have occurred when there is a material change in the observed valuation inputs or a change in the level of trading activities of the securities.

 
                                    For the six months ended 30 June 2020 
                                 Financial Assets and Liabilities - Transfers 
                                                between levels 
                                        Equity securities 
                                    and pooled investment 
                                                    funds  Debt securities     Total 
                                                     GBPm             GBPm      GBPm 
From level 1 to level 2                                 -            7,843   7,843 
From level 1 to level 3                                 9                -       9 
From level 2 to level 1                                 -            4,187   4,187 
From level 2 to level 3                               617            1,030   1,647 
From level 3 to level 2                                 -               23      23 
 
 
                                     For the year ended 31 December 2019 
                                Financial Assets and Liabilities - Transfers 
                                                between levels 
                                      Equity securities  Debt securities      Total 
                                  and pooled investment 
                                                  funds 
                                                   GBPm             GBPm       GBPm 
From level 1 to level 2                           1,263              672    1,935 
From level 1 to level 3                             465                -      465 
From level 2 to level 1                               -           15,357   15,357 
From level 2 to level 3                               -               35       35 
From level 3 to level 2                               -              944      944 
 

13.7 Reconciliation of movements in level 3 assets and liabilities

The movements during the year of level 3 assets and liabilities held at fair value, excluding assets and liabilities held for sale, are analysed in the tables below:

 
                                                       For the six months to 30 June 2020 
                                  Total                                Transfer                   Transfers    Transfers 
                         gains/(losses)                                 to held                        into          out 
                 At 1         in income   Foreign                           for                       level     of level     At 30 
                  Jan         statement  exchange  Purchases  Sales        sale  Settled  Issued          3            3       Jun 
                 GBPm              GBPm      GBPm       GBPm   GBPm        GBPm     GBPm    GBPm       GBPm         GBPm      GBPm 
Level 3 
assets: 
Investment 
 property      19,136     (671)               252        715   (82)   (158)           -        -          -       -       19,192 
Loans           3,339       41                  -          5  (131)      -            -        5          -       -        3,259 
Equity 
 securities 
 and 
 portfolio 
 holdings in 
 unit 
 trusts         8,161      (73)                46        729  (434)      -            -        -        626       -        9,055 
Debt 
 securities    11,215      666                 18        629  (128)      -            -       16      1,030     (23)      13,423 
Total level 3 
 assets        41,851      (37)               316      2,078  (775)   (158)           -       21      1,656     (23)      44,929 
 
Level 3 
liabilities: 
Third-party 
 interest 
 in 
 consolidated 
 funds          1,135      (64)                 -          -     -       -          (38)     101          -       -        1,134 
Borrowings 
 and 
 subordinated 
 liabilities    1,422        -                  -          -     -       -          (72)       -          -       -        1,350 
Other 
 liabilities      390       24                  -          -     -       -           (3)       -          -       -          411 
Total level 3 
 liabilities    2,947      (40)                 -          -     -       -         (113)     101          -       -        2,895 
 
 
                                                          For the year ended 31 December 2019 
                                  Total                                    Transfer                     Transfers    Transfers 
                         gains/(losses)                                     to held                          into          out 
                 At 1         in income     Foreign                             for                         level     of level     At 31 
                  Jan         statement    exchange  Purchases    Sales        sale    Settled  Issued          3            3       Dec 
                 GBPm              GBPm        GBPm       GBPm     GBPm        GBPm       GBPm    GBPm       GBPm         GBPm      GBPm 
Level 3 
assets: 
Investment 
 property      18,003     (859)             32           2,333    (224)   (149)          -           -          -       -       19,136 
Loans           3,281      147               -             120    (207)      -          (2)          -          -       -        3,339 
Equity 
 securities 
 and 
 portfolio 
 holdings in 
 unit 
 trusts         6,952      262             (47)          1,558  (1,022)      -          (7)          -        465       -        8,161 
Debt 
 securities    12,192      693             (16)            689  (1,467)      -           -          33         35    (944)      11,215 
Total level 3 
 assets        40,428      243             (31)          4,700  (2,920)   (149)         (9)         33        500    (944)      41,851 
                    -        -               -               -       -       -           -           -          -       -            - 
Level 3 
liabilities: 
Third-party 
 interest 
 in 
 consolidated 
 funds          1,028      (59)              -               -       -       -        (142)        308          -       -        1,135 
Borrowings 
 and 
 subordinated 
 liabilities    1,606        -               -               -       -       -        (184)          -          -       -        1,422 
Other 
 liabilities      355       41               -               -       -       -          (6)          -          -       -          390 
Total level 3 
 liabilities    2,989      (18)              -               -       -       -        (332)        308          -       -        2,947 
 

13.8 Unrealised Gains and losses in respect of level 3 assets and liabilities

Unrealised gains and losses recognised in the condensed consolidated income statement in relation to assets and liabilities classified as level 3 are analysed as follows:

 
                                                      For the 
                                                   six months         For the 
                                                        ended      year ended 
                                                      30 June     31 December 
                                                     2020            2019 
                                                         GBPm            GBPm 
                                                ============= 
Investment property                                  (687)           (857) 
Loans                                                  37             147 
Equity securities and pooled investment funds           2             282 
Debt securities                                       600             711 
Third party interest in consolidated funds            (54)            (48) 
Other financial liabilities                            24              41 
Total                                                 (78)            276 
 
 

13.9 Sensitivity of the fair value of level 3 instruments to changes in significant inputs

Where possible, the Group assesses the sensitivity of the fair values of level 3 assets to reasonable possible changes in significant unobservable inputs.

13.9.1 Investment property

As at 30 June 2020, the Group held GBP19,192m (31 December 2019: GBP19,136m) of investment property, excluding investment property held for sale, which is all held at fair value and is classified as level 3 in the fair value hierarchy. For GBP17,683m (31 December 2019: GBP17,389m) of these properties, the most significant unobservable inputs in determining the fair value are the equivalent yield and estimated rental value.

The sensitivity of the fair value of these properties to these inputs is presented below:

 
                                                 As at 30      As at 31 
                                                    June        December 
                                                      2020         2019 
                                                  Change in      Change in 
                                                 fair value     fair value 
Unobservable input       Sensitivity                   GBPm           GBPm 
Equivalent yield         Decrease by 50bps           2,084        2,110 
 Increase by 50bps(i)                               (1,681)      (1,315) 
Estimated rental value   Decrease by 10%            (1,425)      (1,334) 
 Increase by 10%                                     1,398        1,427 
 

(i) The sensitivity as reported in the 31 December 2019 Annual Report & Accounts has been restated due to better information being available.

As at 30 June 2020, investment property also included property under development and other properties amounting to GBP1,509m (31 December 2019: GBP1,747m) for which the above approach for assessing the sensitivity is not considered to be appropriate. For such properties, the Group has determined that the unobservable input is the fair value itself, therefore, sensitivity has been assessed by applying a reasonable discount/premium to the valuation. An increase/decrease of 10% would result in the fair value increasing/decreasing by GBP151m (31 December 2019: GBP175m).

13.9.2 Loans held at fair value

As at 30 June 2020, the Group held GBP3,259m (31 December 2019: GBP3,339m) of loans held at fair value, which were all classified as level 3 in the fair value hierarchy. Of these loans, GBP1,780m (31 December 2019: GBP1,737m) were equity-release mortgage loans ("ERMs"). The ERMs have a no-negative equity guarantee ("NNEG") that caps the loan repayment in the event of death, or entry into long-term care, to be no greater than the proceeds from the sale of the property that the loans are secured against.

The ERMs are valued using a discounted cash flow model. Future cashflows are estimated based on assumptions, including prepayment, death and entry into long-term care, and discounted using an appropriate discount rate. The NNEG is based on a Black-Scholes option pricing valuation, using assumptions including the current property value, future property growth and property rental yields, and is recognised as a deduction to the value of the loan.

The most significant unobservable inputs relate to the discount rate, the current property value, the assumed future property growth and the assumed future annual property rental yield, with the following sensitivities:

(i) An increase of 50bps in the discount rate would decrease the fair value of the loans by GBP161m (31 December 2019: decrease of GBP153m) and a decrease of 50bps would increase the fair value by GBP179m (31 December 2019: increase of GBP171m).

(ii) An increase of 10% in the current property value would increase the fair value of the loans by GBP52m (31 December 2019: increase of GBP48m). A decrease of 10% in the current property value would decrease the fair value of the loans by GBP61m (31 December 2019: decrease of GBP57m).

(iii) An increase of 100bps in the assumed future annual property growth rate would increase the fair value of the loans by GBP163m (31 December 2019: increase of GBP151m). A decrease of 100bps in the assumed future annual property growth rate would decrease the fair value of the loans by GBP227m (31 December 2019: decrease of GBP213m).

(iv) An increase of 100bps in the assumed future annual property rental yield would decrease the fair value of the loans by GBP98m (31 December 2019: decrease of GBP94m). A decrease of 100bps in the assumed future annual property rental yield would increase the fair value of the loans by GBP96m (31 December 2019: increase of GBP91m).

As at 30 June 2020, in addition to the ERMs, the Group also held other mortgage and retail loans at fair value amounting to GBP1,479m (31 December 2019: GBP1,602m) which are valued using broker quotes received from an external pricing service. For such loans, the Group has determined that the unobservable input is the fair value itself, therefore, sensitivity has been assessed by applying a reasonable discount/premium to the valuation. An increase/decrease of 10% in the fair value of these loans would result in a fair value increase/decrease of GBP148m (31 December 2019: GBP160m).

13.9.3 Other financial assets

As at 30 June 2020, the Group also held GBP22,478m (31 December 2019: GBP19,376m) of investments in debt and equity instruments which are classified as level 3 in the fair value hierarchy.

13.9.3.1 Equity securities and pooled investment funds

As at 30 June 2020, the Group held GBP9,055m (31 December 2019: GBP8,161m) of equity and pooled investment fund investments classified as level 3 in the fair value hierarchy. These investments predominantly comprise interests in partnerships, venture capital funds and private equity funds as well as unlisted property investment vehicles.

Of these investments, GBP8,856m (31 December 2019: GBP7,993m) is valued using net asset statements. A 10% increase in the net asset value of these investments would increase the fair value of the investments by GBP886m (31 December 2019: increase of GBP799m); a decrease of 10% would have an equal, but opposite, effect.

The remaining GBP199m (31 December 2019: GBP168m) related to equity investments held by the Group's consolidated private equity infrastructure funds which are further described below.

13.9.3.2 Infrastructure fund investments

As at 30 June 2020, GBP539m (31 December 2019: GBP357m) of other financial assets related to debt and equity investments held by the Group's consolidated private equity infrastructure funds which are classified as level 3 in the fair value hierarchy. These investments are valued in accordance with the International Private Equity and Venture Association valuation guidelines (latest edition December 2018). The methodology applied is a discounted cash flow approach using future expected cash flows. These cash flows include dividends due in respect of the equity investments and principal and interest from loan notes in respect of debt investments.

The most significant inputs to the valuations are the forecast cash flows of the underlying business, discount rate and terminal value assumption, all of which involve significant judgement. Valuations are also benchmarked against comparable infrastructure transactions. An increase in the discount rate applied of 10% decreases the valuation of these investments by GBP49m (31 December 2019: decrease of GBP43m). A decrease in the discount rate applied of 10% increases the valuation of these asset by GBP57m (31 December 2019: increase of GBP52m). An increase in the terminal multiple value of 10% would increase the value of the assets by GBP6m (31 December 2019: increase of GBP7m) and a decrease in the terminal multiple value of 10% would decrease the value by GBP6m (31 December 2019: decrease of GBP7m).

13.9.3.3 Debt securities

As at 30 June 2020 , the Group held GBP13,423m (31 December 2019: GBP11,215m) of debt securities classified as level 3 in the fair value hierarchy. These investments mainly comprise investments in private placement loans, income strips and unquoted corporate bonds. In addition, the Group's consolidated private equity infrastructure funds held GBP340m (31 December 2019: GBP189m) of debt securities classified as level 3 as described above.

As at 30 June 2020, the Group held GBP8,959m (31 December 2019: GBP8,868m) of private placement loans which are secured on various assets and are valued using a discounted cash flow model. The discount rate is made up of a risk-free rate and a credit spread. The risk-free rate is taken from an appropriate gilt of comparable duration and the spread is taken from a basket of comparable securities. The valuations are sensitive to movements in the discount rate applied. An increase of 85bps in the discount rate would decrease the fair value of the private placement loans by GBP1,072m (31 December 2019: decrease of GBP690m) and a decrease of 85bps would increase the fair value by GBP1,325m (31 December 2019: increase of GBP947m).

Also included within debt securities classified as level 3 in the fair value hierarchy as at 30 June 2020 are income strips with a fair value of GBP401m (31 December 2019: GBP378m). The income strips are valued using a discounted cash flow model where the discount rate is made up of a risk-free rate and a spread. The risk-free rate is taken from an appropriate gilt of comparable duration and the spread is taken from a basket of comparable securities. The valuations are sensitive to movements in the discount rate applied. An increase of 50bps in the discount rate used would decrease the fair value of the income strips by GBP42m (31 December 2019: decrease of GBP38m) and a decrease of 50bps would increase the fair value of the income strips by GBP53m (31 December 2019: increase of GBP47m).

As at 30 June 2020, the remaining GBP3,723m (31 December 2019: GBP1,780m) of debt securities classified as level 3 in the fair value hierarchy are unquoted corporate bonds which are valued using valuation techniques including broker quotes, enterprise valuation and estimated recovery (such as liquidators' reports). For such instruments, the Group has determined that the unobservable input is the fair value itself, therefore, sensitivity has been assessed by applying a reasonable discount/premium to the valuation. An increase/decrease of 10% would result in the fair value of these bonds increasing/decreasing by GBP372m (31 December 2019: GBP178m).

13.10 Fair value of assets and liabilities at amortised cost

The tables below show the assets and liabilities carried at amortised cost on the condensed consolidated statement of financial position for which fair value is disclosed. The assets and liabilities that are carried at amortised cost, where the carrying value approximates the fair value, are excluded from the analysis below:

 
                                                             As at 30 June 2020 
                                                                                        Total 
                                                Level  Level  Level        Total     carrying 
                                                    1      2      3   fair value        value 
                                                 GBPm   GBPm   GBPm         GBPm         GBPm 
                                                =====  =====  =====  ===========  =========== 
Assets: 
Loans                                               -    706  1,876        2,582      2,518 
                                                =====  =====  =====  ===========  ========= 
Liabilities: 
Subordinated liabilities and other borrowings       -  6,187    101        6,288      6,588 
                                                =====  =====  =====  ===========  ========= 
 
 
                                                           As at 31 December 2019 
                                                                                        Total 
                                                Level  Level  Level        Total     carrying 
                                                    1      2      3   fair value        value 
                                                 GBPm   GBPm   GBPm         GBPm         GBPm 
                                                =====  =====  =====  ===========  =========== 
Assets: 
Loans                                               -    773  1,934        2,707      2,615 
                                                =====  =====  =====  ===========  ========= 
Liabilities: 
Subordinated liabilities and other borrowings       -  5,902     85        5,987      6,077 
                                                =====  =====  =====  ===========  ========= 
 

The estimated fair value of subordinated liabilities are based on the quoted market offer price. The fair value of the other assets and liabilities in the tables above have been estimated from the discounted cash flows expected to be received or paid. Where appropriate, an observable market interest rate has been used and the assets and liabilities are classified within level 2. Otherwise, they are included as level 3 assets or liabilities.

14 Contingencies and related obligations

14.1 Litigation and regulatory matters

In addition to the regulatory provisions held in relation to annuity past sales practices and the litigation in respect of portfolio dividend tax, the Group is involved in various litigation and regulatory issues. While the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Directors believe that their ultimate outcome will not have a material adverse effect on the Group's financial condition, results of operations, or cash flows.

14.2 Guarantees

M&G plc has acted as a guarantor for the 10 Fenchurch Avenue lease between Saxon Land B.V. and M&G Prudential Services Limited.

The Group has also provided other guarantees and commitments to third parties entered into in the normal course of business but the Group does not consider that the amounts involved are significant.

14.3 Support for the With-Profits Fund by shareholders

PAC is liable to meet its obligations to with-profits policyholders even if the assets of the with-profits sub-funds are insufficient to do so. The assets, represented by the unallocated surplus of the With-Profits Fund, in excess of amounts expected to be paid for future terminal bonuses and related shareholder transfers ('the excess assets') in the with-profits sub-funds could be materially depleted over time by, for example, a significant or sustained equity market downturn. In the unlikely circumstance that the depletion of the excess assets within the with-profits sub-funds was such that the Group's ability to satisfy policyholders' reasonable expectations was adversely affected, it might become necessary to restrict the annual distribution to shareholders or to contribute shareholders' funds to the with-profits sub-funds to provide financial support.

The following matters are of relevance with respect to the With-Profits Fund:

14.3.1 Pension mis-selling review

The UK insurance regulator required all UK life insurance companies to review sales of personal pensions policies for potential mis-selling. Whilst PAC believed it met the requirements of the FSA (the UK insurance regulator at that time) to issue offers of redress to all impacted customers by 30 June 2002, there is a population of customers who, whilst an attempt was made at the time to invite them to participate in the review, may not have received their invitation. These customers are being re-engaged, to ensure they have the opportunity to take part in the review. Currently a provision amounting to GBP358m as at 30 June 2020 (31 December 2019: GBP420m) is being held in relation to this within insurance contract liabilities.

The key assumptions underlying the provisions are:

   -         Average cost of redressal per customer. 

- Proportion of provision (reserve rate) held for soft close cases (where all reasonable steps have been taken to contact the customer but the customer has not engaged with the review).

Sensitivities of the value of the provision to change in assumptions are as follows:

 
                                                               As at           As at 
                                                             30 June     31 December 
                                                                2020          2019 
Assumption                            Change in assumption      GBPm            GBPm 
                                         increase/decrease 
Average cost of redressal                           by 10%    +/- 17          +/- 20 
                                         increase/decrease 
Reserve rate for soft closed cases                  by 10%    +/- 31          +/- 30 
 

Costs arising from this review are met by the excess assets of the with-profits sub-fund and hence have not been charged to the asset shares used in the determination of policyholder bonus rates. An assurance was given that these deductions from excess assets would not impact PAC's bonus or investment policy for policies within the with-profits sub-funds that were in force at 31 December 2003. This assurance does not apply to new business since 1 January 2004. In the unlikely event that such deductions would affect the bonus or investment policy for the relevant policies, the assurance provides that support would be made available to the sub-fund from PAC's shareholder resources for as long as the situation continued, so as to ensure that PAC's policyholders were not disadvantaged. PAC's comfort in its ability to make such support available was supported by related intra-group arrangements between Prudential plc and PAC, which formalised the circumstances in which capital support would be made available to PAC by Prudential plc. These intra-group arrangements terminated on 21 October 2019, following the demerger of M&G plc from Prudential plc, at which time intra-group arrangements formalising the circumstances in which M&G plc would make capital support available to PAC became effective.

14.3.2 SAIF

Policies within this sub-fund contain guaranteed benefits to policyholders. Should the assets of the sub-fund be inadequate to meet the guaranteed benefit obligations of the policyholders of SAIF, the WPSF would be liable to cover the deficiency in the first instance. In addition, certain pensions products within this sub-fund have guaranteed annuity rates at retirement, for which a provision of GBP372m is held within the sub-fund as at 30 June 2020 (31 December 2019: GBP385m).

15 Related party transactions

The nature of the related party transactions of the Group had not changed from those described in the Group's consolidated financial statements as at 31 December 2019.

There have been no related party transactions in the six months to 30 June 2020 which have had a material effect on the results or financial position of the Group.

16 Post balance sheet events

There have been no significant events after the reporting period.

Supplementary information

Alternative performance measures

Overview of the Group's key performance measures

The Group measures its financial performance using a number of key performance measures ("KPM"). Two of these measures, referred to as alternative performance measures ("APM"), are derived from the financial statements prepared in accordance with the IFRS financial reporting framework or the Solvency II requirements, but are not defined under IFRS or Solvency II. The APMs are used to complement and not to substitute the disclosures prepared in accordance with IFRS and Solvency II, and provide additional information on the long-term performance of the Group.

All information included in this section does not form part of the Independent Review performed by the external auditors.

The Group's KPMs are summarised below, along with which of these measures are considered APMs by the Group. All of the measures in this section are presented on a continuing operations basis.

 
Key performance measure        Type  Definition 
Adjusted operating profit      APM,  Adjusted operating profit before tax is the 
 before tax                     KPM   Group's non-GAAP alternative performance measure, 
                                      which complements IFRS total profit before 
                                      tax. 
 
                                      Certain adjustments that are considered to 
                                      be non-recurring, strategic or due to short-term 
                                      movements not reflective of longer-term performance 
                                      are made to IFRS profit before tax to derive 
                                      adjusted operating profit before tax, including 
                                      adjustments in respect of short-term fluctuations 
                                      in investment returns, costs associated with 
                                      fundamental one-off Group-wide restructuring 
                                      and transformation, profits or losses arising 
                                      on corporate transactions and profit/(loss) 
                                      before tax from discontinued operations. 
 
                                      The adjusted operating profit methodology is 
                                      described in the "Adjusted operating profit" 
                                      section, along with a reconciliation of total 
                                      IFRS profit before tax to adjusted operating 
                                      profit before tax. 
 
                                      Adjusted operating profit before tax methodology 
                                      is detailed in Note 3.2 within the notes to 
                                      the condensed consolidated financial statements. 
Net client flows               KPM   Net client flows represent gross inflows less 
                                      gross outflows during the period. Gross inflows 
                                      are new funds from clients and customers. Gross 
                                      outflows are funds withdrawn by clients and 
                                      customers. 
Assets under management        KPM   Closing AUMA represents the total market value 
 and/or administration (AUMA)         of all financial assets managed and administered 
                                      on behalf of customers and clients at the end 
                                      of each financial period. 
Shareholder Solvency II        APM,  The regulatory Solvency II capital position 
 coverage ratio                 KPM   considers the Group's overall own funds and 
                                      Solvency Capital Requirements ("SCR"). 
 
                                      The shareholder Solvency II coverage ratio 
                                      is the ratio of own funds to SCR, excluding 
                                      the contribution to own funds and SCR from 
                                      the Group's ring-fenced With-Profits Fund. 
 
                                      The shareholder Solvency II coverage ratio 
                                      is described in the "Solvency II capital position" 
                                      section. 
Total capital generation       KPM   Surplus capital is the amount by which own 
                                      funds exceed SCR under Solvency II. Total capital 
                                      generation is the total change in Solvency 
                                      II surplus capital before dividends and capital 
                                      movements and capital generated from discontinued 
                                      operations. 
Operating capital generation   KPM   Operating capital generation is the total capital 
                                      generation before tax, adjusted to exclude 
                                      market movements relative to those expected 
                                      under long-term assumptions and to remove other 
                                      non-recurring items, including shareholder 
                                      restructuring and other costs. 
 
 

Adjusted operating profit before tax

(i) Adjusted operating profit/ loss before tax by segment

 
                      Savings and 
                    Asset Management             Heritage              Corporate Centre                 Total 
                                 For the                 For the                     For the                    For the 
                  For the           year   For the          year     For the            year     For the           year 
                 six months        ended  six months       ended    six months         ended    six months        ended 
                    ended             31   ended 30           31     ended 30             31     ended 30            31 
                   30 June      December     June       December       June         December       June        December 
                 2020   2019        2019  2020  2019        2019      2020  2019        2019   2020    2019        2019 
                 GBPm   GBPm        GBPm  GBPm  GBPm        GBPm      GBPm  GBPm        GBPm   GBPm    GBPm        GBPm 
Fee based 
 revenue         541    590    1,191       39    47     96           -        -      -         580     637    1,287 
Annuity margin     -      -        -      139   311    458           -        -      -         139     311      458 
With-profits 
 shareholder 
 transfer net 
 of hedging       24     29       55      110    97    187           -        -      -         134     126      242 
Total adjusted 
 operating 
 income          565    619    1,246      288   455    741           -        -      -         853   1,074    1,987 
                                                            ====                        ==== 
Adjusted 
 operating 
 expenses       (382)  (378)    (817)     (30)  (25)   (87)        (75)     (21)   (59)       (487)   (424)    (963) 
Other 
 shareholder 
 (loss)/profit   (26)    13       30       40    46     98         (76)      (3)   (18)        (62)     56      110 
Share of 
 associates' 
 and joint 
 ventures' 
 adjusted 
 operating 
 profit before 
 tax(i)            5      8       15        -     -      -           -        -      -           5       8       15 
Adjusted 
 operating 
 profit/(loss) 
 before 
 tax             162    262      474      298   476    752        (151)     (24)   (77)        309     714    1,149 
                                                            ====                         === 
 

(i) Excludes adjusted operating profit before tax from joint ventures in the With-Profits Fund.

(ii) Adjusted operating profit/loss before tax by segment and source

 
                                     Savings and asset                                            Corporate 
                                         management                         Heritage                Centre 
For the six months ended 30 
June                                 Asset 
2020                            Management  With-profits  Other  Annuities  With-profits  Other        Other 
GBPm 
Asset Management fee based 
 revenues                          469                 -     -           -             -     -          - 
Other fee based revenues             -                 -    72           -             -    39          - 
 
Fee based revenues                 469                 -    72           -             -    39          - 
Annuity margin                       -                 -     -         139             -     -          - 
With-profits shareholder 
 transfer 
 net of hedging                      -                24     -           -           110     -          - 
Adjusted operating income          469                24    72         139           110    39          - 
Asset Management operating 
 expenses                         (306)                -     -           -             -     -          - 
Other operating expenses             -                 -   (76)          -             -   (30)       (75) 
Adjusted operating expenses       (306)                -   (76)          -             -   (30)       (75) 
Other shareholder 
 (loss)/profit                       -                 -   (26)          -             -    40        (76) 
Share of associates and 
 joint 
 ventures operating profit 
 before 
 tax                                 -                 -     5           -             -     -          - 
Adjusted operating 
 profit/(loss) 
 before tax                        163                24   (25)        139           110    49       (151) 
                                                                            ============  ==== 
 
 
                                     Savings and asset                                            Corporate 
                                         management                         Heritage                Centre 
For the six months ended 30 
June                                 Asset 
2019                            Management  With-profits  Other  Annuities  With-profits  Other        Other 
GBPm 
Asset Management fee based 
 revenues                          514                 -     -           -             -     -         - 
Other fee based revenues             -                 -    76           -             -    47         - 
                                                                 ========= 
Fee based revenues                 514                 -    76           -             -    47         - 
Annuity margin                       -                 -     -         311             -     -         - 
With-profits shareholder 
 transfer 
 net of hedging                      -                29     -           -            97     -         - 
Adjusted operating income          514                29    76         311            97    47         - 
Asset Management operating 
 expenses                         (298)                -     -           -             -     -         - 
Other operating expenses             -                 -   (80)          -             -   (25)      (21) 
                                                                 ========= 
Adjusted operating expenses       (298)                -   (80)          -             -   (25)      (21) 
Other shareholder 
 profit/(loss)                       -                 -    13           -             -    46        (3) 
Share of associates and 
 joint 
 ventures operating profit 
 before 
 tax                                 -                 -     8           -             -     -         - 
Adjusted operating 
 profit/(loss) 
 before tax                        216                29    17         311            97    68       (24) 
                                                                 =========  ============  ==== 
 
 
                                    Savings and asset                                           Corporate 
                                        management                        Heritage                Centre 
For the year ended 31 
December                           Asset 
2019                          Management  With-profits  Other  Annuities  With-profits  Other        Other 
GBPm 
Asset Management fee based 
 revenues                         1,033              -     -           -             -     -         - 
Other fee based revenues              -              -   158           -             -    96         - 
                                                               ========= 
Fee based revenues                1,033              -   158           -             -    96         - 
Annuity margin                        -              -     -         458             -     -         - 
With-profits shareholder 
 transfer 
 net of hedging                       -             55     -           -           187     -         - 
Adjusted operating income         1,033             55   158         458           187    96         - 
Asset Management operating 
 expenses                          (652)             -     -           -             -     -         - 
Other operating expenses              -              -  (165)          -             -   (87)      (59) 
                                                               ========= 
Adjusted operating expenses        (652)             -  (165)          -             -   (87)      (59) 
Other shareholder 
 profit/(loss)                        -              -    30           -             -    98       (18) 
Share of associates and 
 joint 
 ventures operating profit 
 before 
 tax                                  -              -    15           -             -     -         - 
Adjusted operating 
 profit/(loss) 
 before tax                         381             55    38         458           187   107       (77) 
                                                               =========  ============  ==== 
 

Adjusted operating profit before tax arising from annuity margin is further analysed in the table below.

 
                                                    For the six           For the 
                                                    months ended       year ended 
                                                      30 June         31 December 
                                                    2020     2019          2019 
Breakdown of contribution from annuity margin        GBPm    GBPm            GBPm 
Return on excess assets and margin release            94      118           216 
Asset trading and portfolio management actions        40       63           110 
Longevity assumption changes                          23      127           126 
Other (see table below for breakdown)                (18)       3             6 
Shareholder annuities                                139      311           458 
 
 
 
                                                        For the six           For the 
                                                        months ended       year ended 
                                                          30 June         31 December 
                                                        2020    2019         2019 
Breakdown of other contribution from annuity margin      GBPm    GBPm            GBPm 
                                                               ======  ============== 
Mismatching profits                                       28      30           55 
Other assumption and model improvements                  (15)    (13)              32 
Experience variances                                      11       8            4 
Other provisions and reserves                            (42)    (22)         (85) 
Other contribution                                       (18)      3            6 
 

Mismatching profits relate to short-term mismatches between the value of annuity liabilities and the long-term assets backing these liabilities due to the impact of market movements.

Other assumptions and model improvements include assumption changes other than those relating to longevity, the most significant of which are changes to the impact of expense assumption changes, and the impact of model improvements.

 
                                                             For the six           For the 
                                                             months ended       year ended 
                                                               30 June         31 December 
                                                             2020    2019         2019 
Breakdown of other Savings and Asset Management adjusted      GBPm    GBPm            GBPm 
 operating profit 
                                                                    ======  ============== 
International business                                         11      13           42 
Investment income                                             (10)     16               25 
 Other                                                        (26)    (12)         (29) 
Other Savings and Asset Management                            (25)     17           38 
 

International business includes our share of profits from our asset management associate in South Africa and profits from our European savings businesses.

Investment income includes income arising in Asset Management, primarily in respect of seed capital investments.

(iii) Reconciliation of adjusted operating profit before tax to IFRS profit after tax from continuing operations

 
                                                                For the six           For the 
                                                                months ended       year ended 
                                                                  30 June         31 December 
                                                                               ============== 
                                                                2020    2019         2019 
                                                                 GBPm    GBPm            GBPm 
Adjusted operating profit before tax                             309     714        1,149 
 Short-term fluctuations in investment returns                   746     364          298 
 Profit on disposal of business and corporate transactions         -       -           53 
 Restructuring and other costs                                   (22)    (82)        (198) 
IFRS profit attributable to non-controlling interests              2       2            3 
                                                             ======= 
 IFRS profit before tax attributable to equity holders 
  from continuing operations                                   1,035     998        1,305 
===========================================================  ======= 
 Tax from continuing operations                                 (209)   (203)        (240) 
 IFRS profit after tax attributable to equity holders 
  from continuing operations                                     826     795        1,065 
===========================================================  ======= 
 

Assets under management and administration (AUMA) and net client flows

AUMA is a key indicator of the scale of the business and demonstrates the potential earnings from investments return and fee income. Closing AUMA is representative of the total market value of all financial assets managed and/or administered on behalf of customers and clients at the end of each financial period.

Net client flows is an indicator of the Group's growth and its ability to attract and retain customer and client investments to its products and funds.

(i) Detailed AUMA and net client flows

 
                             As at 31 
                             December                                     Net client    Market/Other      As at 30 
                                 2019  Gross inflows    Gross outflows         flows       movements     June 2020 
                                GBPbn          GBPbn             GBPbn         GBPbn           GBPbn         GBPbn 
Institutional Asset 
 Management                      76.8            6.5          (3.7)          2.8             1.6            81.2 
Retail Asset Management          74.9            8.4         (16.1)         (7.7)           (3.0)           64.2 
Retail Savings                   63.5            3.8          (3.0)          0.8            (2.5)           61.8 
of which: PruFund                53.8            3.2          (2.6)          0.6            (2.1)           52.3 
Other                             0.7              -             -             -             0.1             0.8 
Total Savings and Asset 
 Management                     215.9           18.7         (22.8)         (4.1)           (3.8)          208.0 
 
Shareholder annuities            35.5              -          (0.9)         (0.9)            1.2            35.8 
Traditional with-profits         84.8            0.2          (2.5)         (2.3)           (2.5)           80.0 
Other                            13.7              -          (0.1)         (0.1)              -            13.6 
Total Heritage                  134.0            0.2          (3.5)         (3.3)           (1.3)          129.4 
 
Corporate assets                  1.6              -             -             -            (0.3)            1.3 
 
Group total                     351.5           18.9         (26.3)         (7.4)           (5.4)          338.7 
 
 
 
                                     As at 
                               31 December     Gross                      Net client    Market/Other      As at 30 
                                      2018   inflows    Gross outflows         flows       movements     June 2019 
                                                                        ============ 
                                     GBPbn     GBPbn             GBPbn         GBPbn           GBPbn         GBPbn 
Institutional Asset 
 Management                           70.5      5.0           (5.8)         (0.8)            4.7            74.4 
Retail Asset Management(i)            76.4     12.8          (16.6)         (3.8)            6.0            78.6 
Retail Savings                        50.6      5.4           (2.2)          3.2             3.5            57.3 
of which: PruFund                     43.0      5.5           (2.0)          3.5             3.1            49.6 
Other                                  0.2        -              -             -            (0.1)            0.1 
Total Savings and Asset 
 Management                          197.7     23.2          (24.6)         (1.4)           14.1           210.4 
Shareholder annuities                 24.9     (0.3)          (0.1)         (0.4)            1.1            25.6 
Traditional with-profits              84.6      0.4           (2.8)         (2.4)            8.4            90.6 
Other                                 14.0     (0.1)          (0.2)         (0.3)            0.8            14.5 
Total Heritage                       123.5        -           (3.1)         (3.1)           10.3           130.7 
                                                                        ========      ==========      ========== 
Corporate assets                         -        -              -             -               -               - 
 
Group total                          321.2     23.2          (27.7)         (4.5)           24.4           341.1 
 
 

(i) Approx. GBP3bn of the gross inflows and gross outflows in Retail Asset Management were in relation to the establishment of the Luxembourg SICAV fund range, in which the Spanish Traspasos regime was used to migrate non-Sterling assets from OEICS to newly created SICAVs, and due to the reregistration of assets as a result of M&A in the GFI (Global Financial Institutions) space.

 
                              As at 31                                                                    As at 31 
                              December                                       Net client  Market/Other     December 
                                  2018    Gross inflows    Gross outflows         flows     movements         2019 
                                 GBPbn            GBPbn             GBPbn         GBPbn         GBPbn        GBPbn 
Institutional Asset 
 Management                       70.5         10.7             (10.8)         (0.1)              6.4       76.8 
Retail Asset Management(i)        76.4         21.2             (28.6)         (7.4)              5.9       74.9 
Retail Savings                    50.6         11.0              (4.8)          6.2               6.7       63.5 
of which: PruFund                 43.0         10.2              (3.8)          6.4               4.4       53.8 
Other                              0.2            -                 -             -               0.5        0.7 
Total Savings and Asset 
 Management                      197.7         42.9             (44.2)         (1.3)             19.5      215.9 
Shareholder annuities             24.9          0.2              (2.3)         (2.1)             12.7       35.5 
Traditional with-profits          84.6          0.6              (5.7)         (5.1)              5.3       84.8 
Other                             14.0         (0.2)             (0.2)         (0.4)              0.1       13.7 
Total Heritage                   123.5          0.6              (8.2)         (7.6)             18.1        134 
                             =========                   ============                    ============ 
Corporate assets                     -            -                 -             -               1.6        1.6 
 
Group total                      321.2         43.5             (52.4)         (8.9)             39.2      351.5 
 
 

(ii) AUMA by asset class

 
                                                     For the six months ended 30 June 2020 
                                       On balance sheet AUMA                                   External AUMA              Total 
                                            Shareholder-backed                Total 
                                                     annuities                   on 
                                                     and other              balance                              Total 
                                                     long-term  Corporate     sheet                           external    Total 
                 With-profits  Unit-linked            business     assets      AUMA    Retail  Institutional      AUMA     AUMA 
                        GBPbn        GBPbn               GBPbn      GBPbn     GBPbn     GBPbn          GBPbn     GBPbn    GBPbn 
Equities                   50           11                   -          -        61        25              3        28     89 
Public fixed 
 income                    41            3                  20          -        64        35             44        79    143 
of which 
 Government                 6            1                   5          -        12        16             21        37     49 
of which 
 Corporate                 35            2                  15          -        52        19             23        42     94 
Private fixed 
 income(i)                  5            -                   3          -         8         1             17        18     26 
Real estate                 9            -                   2          -        11         2             12        14     25 
Alternatives                8            -                   -          -         8         -              4         4     12 
Other(ii)                  23            1                  14          2        40         1              1         2     42 
Other assets 
 under 
 administration                                                                                                             2 
                                                                                                                        ===== 
Total                     136           15                  39          2       192        64             81       145    339 
 
 

(i) Includes debt securities and loans.

(ii) Includes cash and cash equivalents, deposits with credit institutions and reinsurance assets from Rothesay Life plc.

 
                                                       For the year ended 31 December 2019 
                                        On balance sheet AUMA                                   External AUMA              Total 
                                              Shareholder-backed               Total 
                                                       annuities                  on 
                                                       and other             balance                              Total 
                                                       long-term  Corporate    sheet                           external    Total 
                 With-profits  Unit-linked              business     assets     AUMA    Retail  Institutional      AUMA     AUMA 
                        GBPbn        GBPbn                 GBPbn      GBPbn    GBPbn     GBPbn          GBPbn     GBPbn    GBPbn 
Equities                   56           11           -                    -       67        32              2        34    101 
Public fixed 
 income                    46            3          20                    1       70        38             36        74    144 
of which 
 Government                 8            1           6                    1       16        18             15        33     49 
of which 
 Corporate                 38            2          14                    -       54        20             21        41     95 
Private fixed 
 income                     5            -           3                    -        8         1             19        20     28 
Real estate                11            1           1                    -       13         2             12        14     27 
Alternatives                9            -          (1)                   -        8         -              3         3     11 
Other(i)                   16            1          14                    1       32         2              5         7     39 
Other assets 
 under 
 administration                                                                                                              2 
 
Total                     143           16          37                    2      198        75             77       152    352 
                                                        ======== 
 

(iii) AUMA by geography

 
                             For the 
                          six months         For the 
                            ended 30      year ended 
                                June     31 December 
                                      ============== 
                                2020          2019 
                               GBPbn           GBPbn 
UK                               281           288 
Europe                            44            49 
Asia-Pacific                       8             8 
Middle East and Africa             5             6 
Americas                           1             1 
Total AUMA                       339           352 
 
 

AUMA by geography is based on the country of the underlying customer or client.

Solvency II capital position

Solvency II overview

The Group is supervised as an insurance group by the Prudential Regulation Authority. Individual insurance undertakings within the Group are also subject to the supervision of the Prudential Regulation Authority (or other EU competent authorities) on a solo basis under the Solvency II regime.

The Solvency II surplus represents the aggregated capital (own funds) held by the Group less the Solvency Capital Requirement ("SCR"). Own funds is the Solvency II measure of capital available to meet losses, and is based on the assets less liabilities of the Group, subject to certain restrictions and adjustments. The SCR is calculated using the Group's internal model, which calculates the SCR as the 99.5th percentile (or 1-in-200) worst outcome over the coming year, out of 100,000 equally likely scenarios, allowing for the dependency between the risks the business is exposed to.

Estimated and unaudited reconciliation of IFRS shareholders' equity to Group Solvency II own funds

 
                                                                        As at           As at 
                                                                      30 June     31 December 
                                                                        2020         2019 
                                                                        GBPbn           GBPbn 
IFRS shareholders' equity                                                5.5          5.1 
Add back unallocated surplus of the With-Profits Fund                   14.9         16.1 
Deduct goodwill and intangible assets                                   (1.3)        (1.3) 
Net impact of valuing policyholder liabilities and reinsurance 
 assets on Solvency II basis                                             0.4          0.3 
Impact of introducing Solvency II risk margin (net of transitional 
 measures)                                                              (1.7)        (1.5) 
Fair value assets and liabilities not held at fair value under 
 IFRS                                                                   (0.4)        (0.1) 
Other                                                                    0.1          0.1 
                                                                     =======   ========== 
Solvency II excess of assets over liabilities                           17.5         18.7 
                                                                     =======   ========== 
Subordinated debt capital                                                4.1          3.8 
Ring-fenced fund restrictions                                           (6.9)        (7.6) 
Solvency II eligible own funds                                          14.7         14.9 
                                                                     =======   ========== 
 

The key items in the reconciliation are explained below:

- Unallocated surplus of the With-Profits Fund: this amount is treated as a liability under IFRS, but considered surplus assets under Solvency II.

- Goodwill and intangible assets: these assets are not recognised under Solvency II as they are not readily available to meet emerging losses.

- Policyholder liability and reinsurance asset valuation differences: there are significant differences in the valuation of technical provisions between IFRS and Solvency II. The most material differences relate to the exclusion of prudent margins in longevity assumptions under Solvency II, and also the use of different discount rates, both in relation to the valuation of annuity liabilities.

- Solvency II risk margin (net of transitional measures): the risk margin is a significant component of technical provisions required to be held under Solvency II. These additional requirements are partially mitigated by transitional measures which allow the impact to be gradually introduced over a period of 16 years from the introduction of Solvency II on 1 January 2016.

- Subordinated debt capital: subordinated debt is treated as a liability in the IFRS financial statements and in determining the excess of assets over liabilities in the Solvency II balance sheet. However, for Solvency II own funds, the debt can be treated as capital.

- Ring-fenced fund restrictions : any excess of the own funds over the solvency capital requirements from the With-Profits Fund is restricted as these amounts are not available to meet losses elsewhere in the Group.

Composition of own funds

The Group's total estimated and unaudited own funds are analysed by Tier as follows:

 
                           As at           As at 
                         30 June     31 December 
                            2020          2019 
                           GBPbn           GBPbn 
                                  ============== 
Tier 1 (unrestricted)       10.5          11.1 
Tier 1 (restricted)            -             - 
Tier 2                       4.1           3.8 
Tier 3                       0.1             - 
 
Total own funds             14.7          14.9 
                                  ============ 
 

The Group's Tier 2 capital consists of subordinated debt instruments. The terms of these instruments allow them to be treated as capital for the purposes of Solvency II. The instruments were originally issued by Prudential plc, and subsequently substituted to the parent company, as permitted under the terms and conditions of each applicable instrument, prior to demerger. The details of the Group's subordinated liabilities are shown in Note 12. The Solvency II value of the debt differs to the IFRS carrying value due to a different basis of measurement on the respective balance sheets.

The Group's Tier 3 capital of GBP0.1bn (31 December 2019: GBPnil) relates to deferred tax asset balances.

Estimated and unaudited shareholder view of the Solvency II capital position

The Group focuses on a shareholder view of the Solvency II capital position, which is considered to provide a more relevant reflection of the capital strength of the Group.

The estimated and unaudited shareholder Solvency II capital position for the Group as at 30 June 2020 and 31 December 2019 is shown below:

 
                                                                   As at           As at 
                                                                 30 June     31 December 
                                                                    2020            2019 
                                                                   GBPbn           GBPbn 
Shareholder Solvency II own funds                                    9.9            10.3 
Shareholder Solvency II SCR                                        (6.0)           (5.8) 
Solvency II surplus                                                  3.9             4.5 
Shareholder Solvency II coverage ratio(i)                        164%           176% 
 
 

(i) Shareholder Solvency II coverage ratio has been calculated using unrounded figures.

The Group's shareholder Solvency II capital position excludes the contribution to own funds and SCR from the ring-fenced With-Profits Fund. Further information on the ring-fenced With-Profits Fund's capital position is provided in the 'Estimated and unaudited With-Profits Fund view of the Solvency II capital position' section.

In accordance with the Solvency II requirements, these results include:

- A Solvency Capital Requirement which has been calculated using the Group's internal model. The Group received approval from the Prudential Regulation Authority prior to demerger to amend the existing internal model to apply at the level of the Group, rather than at the level of Prudential plc group.

- Transitional measures, which are presented after an assumed recalculation using management's estimate of the impact of operating and market conditions at the valuation date, which as at 30 June 2020 differed from the approved regulatory position.

- A matching adjustment for non-profit annuities, based on approval from the Prudential Regulation Authority and calibrations published by the European Insurance and Occupational Pensions Authority.

- M&G Group Limited and other undertakings carrying out financial activities consolidated under local sectoral or notional sectoral capital requirements.

Breakdown of the shareholder Solvency II SCR by risk type

 
                                              As at           As at 
                                            30 June     31 December 
                                              2020         2019 
                                              GBPbn           GBPbn 
                                           ========  ============== 
Equity                                         1.4              1.4 
Property                                       0.9          0.9 
Interest rate                                  0.3          0.4 
Credit                                         4.0          3.8 
Currency                                       1.0          0.8 
Longevity                                      1.9          1.6 
Lapse                                          0.1          0.2 
Operational and expense                        1.5          1.5 
Sectoral(i)                                    0.5              0.5 
Total undiversified                           11.6         11.1 
                                           =======   ========== 
Diversification, deferred tax, and other      (5.6)        (5.3) 
                                                     ========== 
Shareholder SCR                                6.0          5.8 
                                                     ========== 
 

(i) Includes entities included within the Group's Solvency II capital position on a sectoral or notional sectoral basis, the most material of which is M&G Group Limited.

Sensitivity analysis of the shareholder Solvency II coverage ratio

The estimated sensitivity of the Group's shareholder Solvency II coverage ratio to significant changes in market conditions are shown below. All sensitivities are presented after an assumed recalculation of transitional measures on technical provisions.

 
                                                   As at           As at 
                                                 30 June     31 December 
                                                    2020            2019 
Base shareholder Solvency II coverage ratio     164%           176% 
20% instantaneous fall in equity markets        158%           170% 
20% instantaneous fall in property markets      158%           171% 
50 bp reduction in interest rates               158%           170% 
100 bp widening in credit spreads               159%           172% 
20% credit asset downgrade(i)                   159%           170% 
 

(i) Average impact of one full letter downgrade across 20% of assets exposed to credit risk.

Estimated and unaudited With-Profits Fund view of the Solvency II capital position

The With-Profits Fund view of the Solvency II capital position represents the standalone capital strength of the Group's ring-fenced With-Profits Fund. This view of Solvency II capital takes into account the assets, liabilities, and risk exposures within the ring-fenced With-Profits Fund, which includes the WPSF, SAIF and DCPSF.

The estimated and unaudited Solvency II capital position for the Group under the With-Profits Fund view as at 30 June 2020 and 31 December 2019 is shown below:

 
                                                                   As at           As at 
                                                                 30 June     31 December 
                                                                    2020            2019 
                                                                   GBPbn           GBPbn 
With-Profits Fund Solvency II own funds                             11.8            12.2 
With-Profits Fund Solvency II SCR                                  (4.9)           (4.6) 
With-Profits Fund Solvency II surplus                                6.9             7.6 
With-Profits Fund Solvency II coverage ratio(i)                  241%           267% 
 
 

(i)

With-Profits Fund Solvency II coverage ratio has been calculated using unrounded figures.

Estimated and unaudited regulatory view of the Solvency II capital position

The estimated and unaudited Solvency II capital position for the Group under the 'regulatory' view as at 30 June 2020 and 31 December 2019 is shown below:

 
                                     As at           As at 
                                   30 June     31 December 
                                      2020            2019 
                                     GBPbn           GBPbn 
Solvency II own funds                 14.7            14.9 
Solvency II SCR                     (10.8)          (10.4) 
Solvency II surplus               3.9            4.5 
Solvency II coverage ratio(i)     136%           143% 
 

(i) Solvency II coverage ratio has been calculated using unrounded figures.

Capital generation (estimated and unaudited)

The level of surplus capital is an important financial consideration for the Group. Capital generation measures the change in surplus capital during the reporting period, and is therefore considered a key measure for the Group. It is integral to the running and monitoring of the business, capital allocation and investment decisions, and ultimately the Group's dividend policy.

The overall change in Solvency II surplus capital over the period is analysed as follows:

Total capital generation is the total change in Solvency II surplus capital before dividends and capital movements and capital generated from discontinued operations.

Operating capital generation is the total capital generation before tax, adjusted to exclude market movements relative to those expected under long-term assumptions and to remove other non-recurring items, including shareholder restructuring and other costs as defined under adjusted operating profit before tax. It has two components:

a. Underlying capital generation, which includes: the underlying expected surplus capital from the in-force life insurance business; the change in surplus capital as a result of writing new life insurance business; the adjusted operating profit before tax and associated capital movements from Asset Management; and other items including head office expenses and debt interest costs.

b. Other operating capital generation, which includes non-market related experience variances, assumption changes, modelling changes and other movements.

The expected surplus capital from the in-force life insurance business is calculated on the assumption of real-world investment returns, which are determined by reference to the risk-free rate plus a risk premium based on the mix of assets held for the relevant business. For with-profits business, the assumed average return was 4.30% for the six months ended 30 June 2020, 4.28% for the six months ended 30 June 2019 and the year ended 31 December 2019. For annuity business, the assumed average return on assets backing capital was 2.09% for the six months ended 30 June 2020, 2.44% for the six months ended 30 June 2019 and the year ended 31 December 2019.

The Group's capital generation results in respect of the six months ended 30 June 2020 and 30 June 2019, and year ended 31 December 2019 are shown below, alongside a reconciliation of the total movement in the Group's Solvency II surplus. The reconciliation is presented showing the impact on the shareholder Solvency II own funds and SCR, which excludes the contribution to own funds and SCR from the Group's ring-fenced With-Profits Fund. The shareholder Solvency II capital position, and how this reconciles to the regulatory capital position, is described in detail in the previous section of this supplementary information.

The capital generation results and comparatives have adopted a basis of preparation consistent with the condensed consolidated financial statements. In particular:

- The capital generated from the Prudential Vietnam Finance Company Limited and the capital impact arising on disposal of this entity during 2019, have been reflected within capital generated from discontinued operations.

- Merger accounting principles have been applied meaning that Prudential Capital Holdings Limited ("PruCap") and its subsidiaries, and 10FA India Private Limited (formerly known as Prudential Global Services Private Limited) have been included within the Group's capital generation results from 1 January 2019. The movements in capital attributable to the discontinued corporate treasury activity of PruCap has been included within capital generated from discontinued operations.

 
                                        For the six 
                                        months ended             For the six months             For the year 
                                          30 June                   ended 30 June             ended 31 December 
                                           2020                         2019                        2019 
Reconciliation of movement in         Own                          Own                        Own 
 Group Solvency II surplus       funds(i)  SCR(i)    Surplus  funds(i)  SCR(i)  Surplus  funds(i)  SCR(i)    Surplus 
                                     GBPm    GBPm       GBPm      GBPm    GBPm     GBPm      GBPm    GBPm       GBPm 
Underlying capital generation 
Savings 
 and Asset    Asset 
 Management    Management        163          (8)    155          216       -      216       381      (2)     379 
 With-profits                     87         (69)     18           70     (66)       4       130    (130)       - 
 of which: In-force               76         (37)     39           55     (18)      37        96     (35)      61 
 of which: New business           11         (32)    (21)          15     (48)     (33)       34     (95)     (61) 
 Other                            16          (3)     13           24      (1)      23        37      (2)      35 
 Savings and Asset Management 
  underlying capital 
  generation                     266         (80)    186          310     (67)     243       548    (134)     414 
Heritage      With-profits        49          (9)     40           40     (22)      18        71       -       71 
 Shareholder annuity and 
  other                           95          74     169          131      73      204       255     133      388 
 Heritage underlying capital 
  generation                     144          65     209          171      51      222       326     133      459 
 
             Interest and 
              head office 
Corporate     cost              (134)          2    (132)         (23)      -      (23)      (95)      4      (91) 
                                           ===== 
Underlying capital generation    276         (13)    263          458     (16)     442       779       3      782 
                                      === 
Other operating capital 
generation 
  Savings and Asset 
   Management(ii)                 (9)         27      18          (43)    (28)     (71)       29      16       45 
 Heritage                        152         110     262          166     266      432       222     295      517 
 Corporate Centre(ii)              2          (6)     (4)           8     (47)     (39)       28     (96)     (68) 
Operating capital generation     421         118     539          589     175      764     1,058     218    1,276 
                                      ===  ===== 
 Market movements               (326)       (288)   (614)         688    (327)     361       983    (445)     538 
 Restructuring and other         (20)          -     (20)        (102)     35      (67)     (168)     35     (133) 
 Tax                            (141)         34    (107)        (202)     74     (128)     (139)    (33)    (172) 
Total capital generation         (66)       (136)   (202)         973     (43)     930     1,734    (225)   1,509 
                                           ===== 
Capital generation from 
 discontinued 
 operations                        -           -       -          (26)     30        4        70      88      158 
Total capital generation 
 including 
 discontinued operations         (66)       (136)   (202)         947     (13)     934     1,804    (137)   1,667 
Dividends and capital 
 movements                      (410)          -    (410)      (1,113)      -   (1,113)   (1,213)      2   (1,211) 
Total (decrease)/increase in 
 Solvency 
 II surplus                     (476)       (136)   (612)        (166)    (13)    (179)      591    (135)     456 
                                           ===== 
 

(i) Own funds and SCR movements shown as per the shareholder Solvency II capital position, and do not include the own funds and SCR in respect of the ring-fenced With-Profits Fund.

(ii) Other operating capital generation for Savings and Asset Management and the Corporate Centre include the impact of operating investment variances, which were previously presented within underlying capital generation. This change reflects that these items will fluctuate with market conditions. The results for the six months ended June 2019 and the year ended 31 December 2019 have been restated in light of this change, which has no impact on operating capital generation or total capital generation.

Financial ratios (unaudited)

Included in this section are details of how some of the financial ratios used to help analyse the performance of the Asset Management business are calculated.

(i) Cost/income ratio

Cost/income ratio is a measure of cost efficiency which analyses costs as a percentage of revenue.

 
                                                          For the six             For the 
                                                          months ended         year ended 
                                                            30 June           31 December 
                                                           2020      2019            2019 
                                                           GBPm      GBPm            GBPm 
                                                      =========            ============== 
Total Asset Management operating expenses                   306       298             652 
Adjustment for revaluations(i)                           1        (3)            (7) 
Total Asset Management adjusted costs                       307       295             645 
 
Total Asset Management fee based revenue                    469       514           1,033 
Less: Performance fees                                  (3)       (3)           (20) 
Total Asset Management underlying fee based revenue         466       511            1013 
 
Cost/income ratio (%)                                   66%       58%            64% 
 

(i) Reflects the revaluation of provisions relating to performance based awards that are linked to underlying fund performance. M&G Group hold units in the underlying funds to hedge the exposure on these awards.

(ii) Average revenue margin

This represents the average fee revenue yield on fee business and demonstrates the margin being earned on the assets we manage or administer.

 
                                                                                      For the year ended 
                              For the six months ended 30 June                            31 December 
                            2020                            2019                             2019 
                Average               Revenue   Average               Revenue   Average                 Revenue 
                AUMA(i)  Revenue(ii)   margin   AUMA(i)  Revenue(ii)   margin   AUMA(i)  Revenue(ii)     margin 
                     bn         GBPm      bps        bn         GBPm      bps        bn         GBPm        bps 
Retail Asset 
 Management          92          230       50       104          299       58       102          584       57 
Institutional 
 Asset 
 Management         169          236       28       160          212       26       165          429       26 
Total Asset 
 Management         261          466       36       264          511       39       267        1,013       38 
                =======  ===========                                  =======            =========== 
 

(i) Average AUMA represents the average total market value of all financial assets managed and administered on behalf of customers during the financial period. Average AUMA is calculated using a 13-point average of monthly closing AUMA for full-year periods and seven-point average of monthly closing AUMA for half-year periods.

(ii) Revenue margin is calculated by annualising underlying fee based revenues earned, which excludes performance fees, in the period divided by average AUMA for the period.

Credit risk

The Group's exposure to credit risk primarily arises from the annuity portfolio, which holds large amounts of investments on which a certain level of defaults and downgrades are expected.

While the with-profits and unit-linked funds have large holdings of assets subject to credit risk, the shareholder results of the Group are not directly exposed to credit defaults on assets held in these components. The direct exposure of the Group's shareholders' equity to credit default risk in the 'Other' component is small in the context of the Group. However, the shareholder is indirectly exposed to credit risk on these components through lower shareholder transfers in respect of the with-profits business and lower charges levied in respect of the 'unit-linked' and 'other' components of the business.

Debt securities

Debt securities held in respect of annuities and other long term business are analysed below by asset class:

 
                             As at           As at 
                           30 June     31 December 
                              2020          2019 
                              GBPm            GBPm 
Government bonds             5,442         5,678 
Corporate bonds             14,369        13,909 
Asset backed securities        798           791 
Total debt securities       20,609        20,378 
                          ========  ============ 
 

Debt securities held in respect of annuities and other long term business are analysed below according to external credit ratings ([3]) issued, with equivalent ratings issued by different ratings agencies grouped together. Standard & Poor's ratings have been used where available. For securities where Standard & Poor's ratings are not immediately available those produced by Moody's and then Fitch have been used as an alternative. Debt securities are internally rated where no external credit rating is available.

 
                  As at           As at 
                30 June     31 December 
                   2020          2019 
                   GBPm            GBPm 
AAA               2,335         2,548 
AA+ to AA-        7,593         7,357 
A+ to A-          6,645         7,352 
BBB+ to BBB-      3,395         2,647 
Below BBB-          641           474 
Total            20,609        20,378 
               ========  ============ 
 

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

Asset-backed securities

The annuities and other long term business segment has holdings in asset-backed securities ("ABS") which are presented within debt securities on the condensed consolidated statement of financial position. These holdings in ABS comprise residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS"), collateralised debt obligations ("CDO") funds and other asset-backed securities. At 30 June 2020 the annuities and other longer term business segment holding in asset-backed securities was GBP798m (31 December 2019: GBP791m). The majority of these asset backed securities are UK securities.

Exposure to sovereign debt

The exposure of annuity and other long term business to sovereign debt is analysed as follows:

 
                    As at           As at 
                  30 June     31 December 
                     2020          2019 
                     GBPm            GBPm 
                 ========  ============== 
Spain                  53            47 
France                 22            21 
Germany                 -           188 
Total Eurozone         75           256 
                 ========  ============ 
United Kingdom      2,030         3,003 
Other                 167           157 
Total               2,272         3,416 
                 ========  ============ 
 

(i) This table does not include non-central sovereign debt (Quasi sovereign, Supranational and other public sector debt), therefore does not agree to Government debt balance within the debt securities by industry disclosures that follow.

Exposure to debt securities issued by banks

The exposure of annuities and other long term business to debt securities issued by banks is shown below by type of debt and also by economy. Subordinated debt is a fixed interest debt that ranks below other debt in order of priority for repayment if the issuer is liquidated.

Holders are compensated for the added risk through higher rates of interest. The senior debt ranks above subordinated debt in the event of liquidation, whereas covered senior debt is also backed by other assets in the event of insolvency. These debt tier classifications are consistent with the treatment of capital for regulatory purposes.

 
                              Senior debt                Subordinated debt 
                                                                          Total 
                                      Total senior                 subordinated 
                     Covered  Senior          debt        Tier 2           debt    Total 
As at 30 June 2020      GBPm    GBPm          GBPm          GBPm           GBPm     GBPm 
                                                                                 ======= 
France                    12      33            45             -              -     45 
Germany                    3       -             3            93             93     96 
Netherlands                -      44            44             -              -     44 
Other Eurozone             -      23            23             -              -     23 
 
Total Eurozone            15     100           115            93             93    208 
                                                                                 ===== 
United Kingdom           397     123           520           104            104    624 
United States              -     250           250            29             29    279 
Other                      -      22            22             -              -     22 
 
Total                    412     495           907           226            226  1,133 
                                                                                 ===== 
 
 
                                  Senior debt                Subordinated debt 
                         Covered  Senior  Total senior        Tier 2          Total    Total 
                                                  debt                 subordinated 
                                                                               debt 
As at 31 December 2019      GBPm    GBPm          GBPm          GBPm           GBPm     GBPm 
                                                                                     ======= 
France                        16      16            32             -              -     32 
Germany                        3       -             3            83             83     86 
Netherlands                    -      23            23             -              -     23 
Total Eurozone                19      39            58            83             83    141 
 
United Kingdom               420     229           649            69             69    718 
United States                  -     230           230            30             30    260 
Other                          -      10            10            36             36     46 
Total                        439     508           947           218            218  1,165 
 
 

Exposure of debt securities by sector

The exposure of annuities and other long term business to debt securities is analysed below by sector:

 
                    As at           As at 
                  30 June     31 December 
                     2020          2019 
                     GBPm            GBPm 
                 ========  ============== 
Financial           6,291         5,905 
Government          5,442         5,678 
Real Estate         2,928         2,673 
Utilities           2,843         2,886 
Consumer            1,078         1,045 
Industrial            788           820 
Communications        423           428 
Other                 816           943 
Total              20,609        20,378 
                 ========  ============ 
 

Glossary

 
Term                  Definition                         Term                     Definition 
Adjusted operating    Adjusted operating profit          Company                  M&G plc, a public limited 
 profit before         before tax is the Group's                                   company incorporated 
 tax                   key alternative performance                                 in England and Wales 
                       measure. It is defined                                      with registered number 
                       in the alternative performance                              11444019 whose registered 
                       measure section on page                                     office is 10 Fenchurch 
                       47.                                                         Avenue, London EC3M 5AG, 
                                                                                   United Kingdom; 
Alternative           An alternative performance         Cost/income              The cost-income ratio 
 performance           measure (APM) is a financial       ratio                    represents Asset management 
 measure (APM)         measure of historical                                       operating expenses excluding 
                       or future financial                                         revaluations and restructuring 
                       performance, financial                                      costs, divided by Asset 
                       position or cash flows,                                     management fee based 
                       other than a financial                                      revenue excluding performance 
                       measure defined under                                       fees. 
                       IFRS or under Solvency 
                       II regulations. The 
                       Group's APMs are adjusted 
                       operating profit before 
                       tax and the shareholder 
                       Solvency II coverage 
                       ratio. 
Annuity policy        Annuities are contracts            Demerger                 The demerger of the Group 
                       which offer policyholders                                   from the Prudential Group 
                       a regular income over                                       in October 2019. 
                       the policyholder's life, 
                       in exchange for an upfront 
                       premium. 
Asset backed          Asset Backed Securities            Director                 A Director of the Company. 
 securities (ABS)      (ABS) are collateralised 
                       securities whose value 
                       and income payments 
                       are derived from a specified 
                       pool of underlying assets. 
Assets under          Assets under management            Defined benefit          A pension scheme where 
 management and        and administration is              pension scheme           an employer/sponsor promises 
 administration        the total market value                                      a specified benefit on 
 (AUMA)                of all financial assets                                     retirement that is predetermined 
                       managed and/or administered                                 by the scheme rules based 
                       on behalf of customers.                                     on the employees earnings 
                                                                                   history, length of service 
                                                                                   and age, instead of depending 
                                                                                   directly on investment 
                                                                                   returns. 
Average fee           The average fee margin             Defined contribution     A pension scheme where 
 margin                is calculated by annualising       pension scheme           the benefits at retirement 
                       underlying fee based                                        are determined by contributions 
                       revenues earned in the                                      paid into the fund by 
                       period divided by average                                   the member and the employer. 
                       AuMA for the period,                                        The amount in each fund 
                       and demonstrates the                                        at retirement depends 
                       revenue margin that                                         upon the investment returns 
                       was earned on the assets                                    achieved and member and 
                       we manage.                                                  employer contributions. 
Board                 The Board of directors             Earnings per             Earnings per share (EPS) 
                       of the Company.                    share (EPS)              is a commonly used financial 
                                                                                   metric which can be used 
                                                                                   to measure the profitability 
                                                                                   and strength of a company 
                                                                                   over time. EPS is calculated 
                                                                                   by dividing profit by 
                                                                                   the number of ordinary 
                                                                                   shares. Basic EPS uses 
                                                                                   the weighted average 
                                                                                   number of ordinary shares 
                                                                                   outstanding during the 
                                                                                   year. Diluted EPS adjusts 
                                                                                   the weighted average 
                                                                                   number of ordinary shares 
                                                                                   outstanding to assume 
                                                                                   conversion of all dilutive 
                                                                                   potential ordinary shares, 
                                                                                   such as share options 
                                                                                   awarded to employees. 
Brexit                The vote by the people             Employee benefit         An employee benefit trust 
                       of the United Kingdom              trust (EBT)              (EBT) is a trust set 
                       to leave the European                                       up to enable its Trustee 
                       Union in the referendum                                     to purchase and hold 
                       held on 23 June 2016.                                       shares to satisfy employee 
                                                                                   share-based incentive 
                                                                                   plan awards. 
Chief Operating       The Group Executive                Fair value through       Fair value through profit 
 Decision Maker        Committee.                         profit or loss           or loss (FVTPL) is an 
                                                          (FVTPL)                  IFRS measurement basis 
                                                                                   permitted for assets 
                                                                                   and liabilities which 
                                                                                   meet certain criteria. 
                                                                                   Gains or losses on assets 
                                                                                   or liabilities measured 
                                                                                   at FVTPL are recognised 
                                                                                   directly in the condensed 
                                                                                   consolidated income statement. 
Term                  Definition                         Term                     Definition 
FCA                   Financial Conduct Authority        M&G plc                  M&G plc is a company 
                       - the body responsible                                      incorporated and with 
                       for supervising the                                         its principal place of 
                       conduct of all financial                                    business in England. 
                       services firms and for                                      M&G plc and its affiliated 
                       the prudential regulation                                   companies constitute 
                       of those financial services                                 a savings and investments 
                       firms not supervised                                        business. M&G plc is 
                       by the Prudential Regulation                                the direct parent company 
                       Authority (PRA), such                                       of The Prudential Assurance 
                       as asset managers and                                       Company Limited and M&G 
                       independent financial                                       Group Limited. Throughout 
                       advisers.                                                   this document, unless 
                                                                                   otherwise stated, the 
                                                                                   term "M&G plc" should 
                                                                                   be taken as a reference 
                                                                                   to the Group of companies 
                                                                                   that includes M&G plc, 
                                                                                   and its affiliated companies. 
Group                 The Company and its                Net client flows         Net client flows represent 
                       affiliated companies.                                       gross inflows less gross 
                                                                                   outflows. Gross inflows 
                                                                                   are new funds from clients 
                                                                                   and customers. Gross 
                                                                                   outflows are money withdrawn 
                                                                                   by clients and customers 
                                                                                   during the period. 
Group Executive       The Group Executive                Merger & transformation  In August 2017, Prudential 
 Committee             Committee is composed              Programme                plc announced the merger 
                       of board officers and                                       of its UK and Europe 
                       senior-level executive                                      business with the asset 
                       management. It is the                                       manager M&G to form the 
                       Group's most senior                                         Group (the Merger). In 
                       executive decision-making                                   conjunction with the 
                       forum.                                                      Merger, and as part of 
                                                                                   the execution of its 
                                                                                   business strategy, the 
                                                                                   Group's business is implementing 
                                                                                   a transformation programme, 
                                                                                   with a number of initiatives 
                                                                                   and programmes, which 
                                                                                   is expected to be completed 
                                                                                   in 2022. 
International         International Financial            Operating capital        Operating capital generation 
 Financial Reporting   Reporting Standards                generation               is the total capital 
 Standards (IFRS)      are accounting standards                                    generation before tax, 
                       issued by the International                                 adjusted to exclude market 
                       Accounting Standards                                        movements relative to 
                       Board (IASB). The Group's                                   those expected under 
                       consolidated financial                                      long-term assumptions 
                       statements are prepared                                     and to remove other non-operating 
                       in accordance with IFRS                                     items, including shareholder 
                       as endorsed by the European                                 restructuring costs. 
                       Union. 
Key performance       The Group measures its             Own funds                Own funds is the Solvency 
 measure (KPM)         financial performance                                       II measure of capital 
                       using a number of key                                       available to meet losses, 
                       performance measures.                                       and is based on the assets 
                       These include: adjusted                                     less liabilities of the 
                       operating profit before                                     Group, subject to certain 
                       tax, net client flows,                                      restrictions and adjustments. 
                       AUMA, shareholder Solvency 
                       II coverage ratio, total 
                       capital generation and 
                       operating capital generation. 
Leverage ratio        The leverage ratio is              PRA                      Prudential Regulation 
                       calculated as the nominal                                   Authority - the body 
                       value of debt as a percentage                               responsible for the prudential 
                       of total shareholder                                        regulation and supervision 
                       solvency II Own Funds.                                      of banks, building societies, 
                                                                                   credit unions, insurers 
                                                                                   and major investment 
                                                                                   firms. 
Long term incentive   The part of an executive's         Prudential Group         Prudential plc and its 
 plan (LTIP)           remuneration designed                                       subsidiaries and subsidiary 
                       to incentivise long-term                                    undertakings. 
                       value for shareholders 
                       through an award of 
                       shares with vesting 
                       contingent on employment 
                       and the satisfaction 
                       of stretching performance 
                       conditions linked to 
                       the Group's strategy. 
M&G Group Limited     (MGG) is a private limited         Prudential plc           Prudential plc, a public 
                       company incorporated                                        limited company incorporated 
                       in England and Wales                                        in England and Wales 
                       with registered number                                      with registered number 
                       00633480 whose registered                                   1397169 whose registered 
                       office is 10 Fenchurch                                      office is 1 Angel Court, 
                       Avenue, London EC3M                                         London EC2R 7AG, United 
                       5AG, United Kingdom.                                        Kingdom. 
 
 
Term               Definition                           Term                   Definition 
PruFund            Our PruFund proposition              The Prudential         The Prudential Assurance 
                    provides our retail                  Assurance Company      Company Limited, a private 
                    customers with access                (PAC)                  limited company incorporated 
                    to smoothed savings                                         in England and Wales 
                    contracts with a wide                                       with registered number 
                    choice of investment                                        00015454 whose registered 
                    profiles.                                                   office is 10 Fenchurch 
                                                                                Avenue, London EC3M 5AG, 
                                                                                United Kingdom; 
Restructuring      Restructuring costs                  Thematic review        This review, conducted 
 costs              primarily reflect costs              of annuity sales       by the Financial Conduct 
                    associated with the                  practices              Authority, assessed how 
                    Merger and Transformation                                   firms provided information 
                    Programme and costs                                         to customers, on a non-advised 
                    associated with the                                         basis, about shopping 
                    Demerger. These costs                                       around for enhanced annuities. 
                    represent fundamental 
                    one-off group-wide restructuring 
                    and transformation. 
Scottish Amicable  SAIF is a ring-fenced                Total capital          Total capital generation 
 Insurance Fund     sub-fund of the Prudential           generation             is the total change in 
 (SAIF)             Assurance Company's                                         Solvency II surplus capital 
                    long-term fund following                                    before dividends and 
                    the acquisition of the                                      capital movements. 
                    mutually owned Scottish 
                    Amicable Life Assurance 
                    Society in 1997. The 
                    fund is solely for the 
                    benefit of policyholders 
                    of SAIF. Shareholders 
                    of M&G plc have no entitlement 
                    to the profits of this 
                    fund although they are 
                    entitled to asset management 
                    fees on this business. 
Rothesay Life      Rothesay Life plc.                   Total shareholder      TSR represents the growth 
                                                         return (TSR)           in the value of a share 
                                                                                plus the value of dividends 
                                                                                paid, assuming that the 
                                                                                dividends are reinvested 
                                                                                in the Company's shares 
                                                                                on the ex-dividend date. 
Shareholder        Shareholder Solvency                 Transitional           An adjustment to Solvency 
 Solvency II        II coverage ratio is                 measures on            II technical provisions, 
 coverage ratio     the ratio of own funds               technical provisions   to smooth the impact 
                    to SCR, excluding the                (TMTP)                 of the change in the 
                    contribution to own                                         regulatory regime on 
                    funds and SCR from the                                      1 January 2016. This 
                    Group's ring-fenced                                         decreases linearly over 
                    with-profits fund.                                          16 years following the 
                                                                                implementation of Solvency 
                                                                                II, but may be recalculated 
                                                                                in certain cases, subject 
                                                                                to agreement with the 
                                                                                PRA. 
Solvency II        The regime for the prudential        Unallocated            Unallocated surplus of 
                    regulation of European               surplus of the         the with-profits fund 
                    insurance companies                  with-profits           represents the excess 
                    that came into force                 fund                   of assets over policyholder 
                    on 1 January 2016.                                          liabilities that have 
                                                                                yet to be appropriated 
                                                                                between policyholders 
                                                                                and shareholders. 
Solvency Capital   Solvency Capital Requirement         Unit-linked            A policy where the benefits 
 Requirement        represents the 99.5th                policy                 are determined by the 
 (SCR)              percentile (or 1-in-200)                                    investment performance 
                    worst outcome over the                                      of the underlying assets 
                    coming year, out of                                         in the unit -- linked 
                    100,000 equally likely                                      fund. 
                    scenarios, allowing 
                    for the dependency between 
                    the risks the business 
                    is exposed to. The Solvency 
                    Capital Requirement 
                    is calculated using 
                    the Group's Solvency 
                    II internal model. 
Solvency II        Solvency II surplus                  With-profits           A fund where policyholders 
 surplus            represents the own funds             fund                   are entitled to a share 
                    held by the Group less                                      of the profits of the 
                    the Solvency Capital                                        fund. Normally, policyholders 
                    Requirement.                                                receive their share of 
                                                                                the profits through bonuses. 
                                                                                Also known as a participating 
                                                                                fund as policyholders 
                                                                                have a participating 
                                                                                interest in the with-profits 
                                                                                fund and any declared 
                                                                                bonuses. Generally, policyholder 
                                                                                and shareholder participation 
                                                                                in the with-profits fund 
                                                                                in the UK is split in 
                                                                                a 90:10 ratio. 
 

(1) The shareholder view of the Solvency II position assumes transitional measures on technical provisions which have been recalculated using management's estimate of the impact of operating and market conditions at the valuation date.

(2) Calculated as GBP3,255m nominal value of debt divided by GBP9.9 billion Group shareholder Solvency II own funds for the six months ended 30 June 2020 (GBP3,227 million nominal value of debt divided by GBP10.3 billion Group shareholder Solvency II own funds for the year ended 31 December).

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

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

IR FZGMRLMZGGZM

(END) Dow Jones Newswires

August 12, 2020 02:00 ET (06:00 GMT)

Grafico Azioni M&g (LSE:MNG)
Storico
Da Feb 2024 a Mar 2024 Clicca qui per i Grafici di M&g
Grafico Azioni M&g (LSE:MNG)
Storico
Da Mar 2023 a Mar 2024 Clicca qui per i Grafici di M&g