Prudential plc - HY15 Results - Business Review

Basic earnings per share - based on operating profit after tax
	Actual Exchange Rate				Constant Exchange Rate
	2015 pence	2014 pence	Change %		2014 pence	Change %
	Half year	Half year			Half year
IFRS	57.0	45.2	26		47.4	20
EEV	89.3	76.3	17		80.4	11

 

Underlying free surplus generated3
		Actual Exchange Rate									Constant Exchange Rate
		2015 £m			2014 £m			Change %			2014 £m		Change %
		Half year			Half year						Half year
		Long- term	Total		Long- term	Total		Long- term	Total		Long- term	Total	Long- term	Total
Asia		306	356		266	302		15	18		271	308	13	16
US		536	544		461	456		16	19		505	500	6	9
UK1		295	309		253	262		17	18		253	262	17	18
M&G		-	203		-	182		-	12		-	182	-	12
Prudential Capital		-	6		-	18		-	(67)		-	18	-	(67)
Results of the sold PruHealth and     PruProtect businesses		-	-		-	(1)		-	100		-	(1)	-	100
Total Group		1,137	1,418		980	1,219		16	16		1,029	1,269	10	12

 

Cash remitted by the business units to the Group
	2015 £m	2014 £m
	Half year	Half year	Change %
	Total	Total	Total
Asia	258	216	19
US	403	352	14
UK	231	246	(6)
M&G	151	135	12
Prudential Capital	25	25	-
Total Group	1,068	974	10

 

Cash and capital
	2015	2014
	Half year	Half year	Change %
Dividend per share relating to the reporting period	12.31p	11.19p	10
Holding company cash and short-term investments	£2,094m	£1,902m	10
IGD capital surplus before interim dividend4	£5.2bn	£4.1bn	27
Group shareholders' funds (including goodwill attributable to shareholders)
	2015	2014
	Half year	Half year	Change %
IFRS	£12.1bn	£10.6bn	14
EEV	£30.1bn	£25.9bn	16
	2015 %	2014 %
	Half year	Half year
Return on IFRS shareholders' funds5	24	24
Return on embedded value 5	16	16
	2015	2014
	Half year	Half year	Change %
EEV shareholders' funds per share (including goodwill attributable to shareholders)	1,170p	1,009p	16
EEV shareholders' funds per share (excluding goodwill attributable to shareholders)	1,113p	952p	17

 

¹   Following the disposal of the Group's 25 per cent interest in PruHealth and PruProtect in November 2014, the 2014 comparative results of UK insurance operations have been adjusted to exclude results of those businesses.

²   After Asia development costs.

³   Underlying free surplus generated comprises underlying free surplus generated from the Group's long-term business (net of investment in new business) and that generated from asset management operations.

⁴   Estimated.

⁵   Annualised operating profit after tax and non-controlling interests as a percentage of opening shareholders' funds. 

 

Group Chief Executive's Report

 

In my first update as Group Chief Executive, I am pleased to report a strong, broad-based performance in the first half of 2015.

 

Our focus on the three main opportunities in Asia, US and UK - serving the protection and investment needs of the growing middle class in Asia, providing income in retirement to American baby boomers and meeting the financial needs of an ageing British population - is unchanged. The Group has distinct strengths and capabilities to execute our strategy successfully: leading market positions in its chosen geographies, strong diversification by geography, currency, product and distribution and a high quality, growing in-force book which generates significant earnings and cash. Our teams continue to leverage these strengths effectively and with discipline, as evidenced by the strong progress in the first half of 2015.

 

Currency volatility

 

In both 2014 and 2015 to date, there have been significant fluctuations in the value of sterling against local currencies in the US and in some of our key markets in Asia. These fluctuations continue to be driven by ongoing speculation about relative growth trajectories in the world's major economies and by debate around the timing and size of the withdrawal of the stimulus provided by various central banks. The sizeable component of Prudential's non-sterling earnings and assets means that our headline results and shareholders' equity, which are reported in UK sterling, will also fluctuate from one reporting period to the next.

 

As our businesses across the various jurisdictions in which we operate are not exposed to any cross-currency trading effects, unless otherwise stated, we have continued to comment on our Asia and US business performance in local currency terms (expressed on a constant exchange rate basis), as this represents a more appropriate basis to outline underlying performance. It is worth noting that so far this year we have experienced a favourable currency translation effect, reflecting weaker sterling in the first half of 2015, compared with the equivalent period last year. As a result and contrary to the financial performance trends that we observed last year, the constant exchange rate basis produces higher sterling comparatives and hence lower overall percentage progressions than those observed on an actual exchange rate basis.

 

Group performance¹

 

Our first-half performance is underpinned by material contributions from all our principal business units.

 

Our Group IFRS operating profit based on longer-term investment returns increased by 17 per cent during the first half of 2015 to £1,881 million, with a broad-based contribution to growth from all four principal business operations - Asia, US, UK and M&G. On an actual exchange rate basis, the Group's IFRS operating profit grew by 24 per cent.

 

·      Asia life and asset management operating profit of £632 million, grew by 17 per cent, reflecting our continuing success in capturing profitable growth in markets which are under-penetrated with growing demand for protection and savings products. Our leading position in 9 out of 12 markets in the region, including Eastspring's position as Asia's largest retail asset manager², enables us to meet a wide range of customer needs and deliver a performance that is resilient across the economic cycle.

 

·      US life IFRS operating profit of £834 million was up 11 per cent. A primary driver of our earnings is our growing separate account asset base that has benefitted from both strong net inflows and strong separate account performance.

 

·      UK life IFRS operating profit of £436 million, grew by 19 per cent, reflecting continued pro-active management of our in-force book.

 

·      M&G delivered operating profit of £251 million, an increase of 11 per cent, primarily reflecting higher levels of average funds under management (including internal funds) which are 7 per cent higher at £260.0 billion.

 

The Group is focused on delivering strong cash generation, which underpins both our strategic and financial flexibility.

Underlying free surplus generation³ from our life and asset management businesses, a key indicator of cash generation in these businesses, was 12 per cent higher at £1,418 million after reinvestment in new business. Net cash remittances from our businesses increased by 10 per cent on actual exchange rates to £1,068 million. Cash remittances of £258 million from Asia were 19 per cent higher in the first half of 2015 while those from the US increased by 14 per cent to £403 million, both on an actual exchange rate basis. Our UK operations remitted £231 million (2014: £246 million), as we continue to invest in the business in response to the UK market reforms. M&G delivered an increase in remittances of 12 per cent to £151 million, in line with the growth in earnings. 

 

New business profit⁴ was up 12 per cent to £1,190 million, primarily reflecting higher overall volumes in Asia and the UK. All three of our life businesses made strong contributions to the total, with £664 million (up 30 per cent) of new business profit from Asia, £371 million (lower by 10 per cent as we continue to execute disciplined sales management) from the US and  £155 million (up 12 per cent) from the UK⁴.

 

APE sales^4,5 increased by 13 per cent to £2,733 million. In Asia, APE sales were 31 per cent higher at £1,366 million, with sales volumes reflecting broad-based growth across the region. In the US, APE sales were 10 per cent lower at £857 million as we continued to manage proactively our sales of variable annuities with guarantees. We continue to diversify our product mix with sales of Elite Access, our innovative variable annuity without guarantees, which contributed to the increase in the proportion of variable annuities sold without living benefit guarantees to 34 per cent of total variable annuity sales (2014: 32 per cent). In the UK, APE sales grew by 22 per cent⁴ to £510 million, reflecting strong sales volumes of income drawdown, individual pensions and investment bonds as the business made strong progress in launching new products in response to the new pensions freedom. These initiatives helped offset the adverse impact on our UK retail sales from the significant contraction of the retail annuity market. M&G experienced net outflows of £2.4 billion (2014: inflows of £4.2 billion) driven by retail net outflows of £3.4 billion, mainly reflecting redemptions from bond funds, which more than offset positive net flows from multi-asset funds. Eastspring Investments, our Asia asset management business, delivered record third party net inflows of £4.6 billion (2014: net inflows of £2.5 billion), driven principally by retail flows into equity funds.

 

Our balance sheet continues to be defensively positioned and at the end of the period our Insurance Groups Directive surplus⁶ was estimated at £5.2 billion, equating to coverage of 2.5 times.

 

We are continuing to make progress towards our 2017 objectives announced in December 2013.

 

		Reported actuals								Objectives*
								Half year
Asia Objectives		2012 £m7		2013 £m		2014 £m		2015 £m		2017
Asia life and asset management IFRS operating profit
	Full year	924		1,075		1,140				>£1,858 million**
	Half year	435		512		525		632
Asia Underlying Free Surplus Generation3
	Full year	484		573		592				£0.9 - £1.1 billion
	Half year	201		292		302		356
Group Objective for cumulative period 1 January 2014 to 31 December 2017								Actual		Objective
								1 Jan 2014 to 30 June 2015		1 Jan 2014 to 31 December 2017
Cumulative Group Underlying Free Surplus Generation from 2014 onwards								£4.0 billion		> £10 billion

 

*  The objectives assume exchange rates at December 2013 and economic assumptions made by Prudential in calculating the EEV basis supplementary information for the half year ended 30 June 2013, and are based on regulatory and solvency regimes applicable across the Group at the time the objectives were set. The objectives assume that the existing EEV, IFRS and Free Surplus methodology at December 2013 will be applicable over the period.

** Asia life and asset management pre-tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012-2017.

 

 

Our operating performance by business unit

 

Asia

Asia has delivered a strong performance across all of our key metrics. In the first half of 2015, Asia's IFRS operating profit increased by 17 per cent to £632 million (20 per cent on an actual exchange rate basis), driven by 15 per cent growth in our life businesses and 35 per cent growth in Eastspring Investments, our Asia asset management businesses (19 per cent and 38 per cent respectively on an actual exchange rate basis). Underlying free surplus generation grew by 16 per cent to £356 million (18 per cent on an actual exchange rate basis), reflecting continued disciplined new business growth and the increasing scale of our in-force portfolio. Cash remittances were up 19 per cent at £258 million on an actual exchange rate basis.

 

The macro-economic environment remains broadly supportive, with our markets generating some of the world's highest GDP growth rates and having favourable demographic trends. While in some markets we are seeing local short-term challenges, particularly in Indonesia where the macro-economic outlook remains fragile, our pan-Asian platform across 12 life markets in the region and significant diversification by country, product and channel enables the delivery of a strong regional performance. Our priority remains the provision of products and services that meet the significant savings and financial protection needs of Asia's rapidly growing middle classes while also delivering consistent shareholder returns across the economic cycle.

 

Our life businesses have delivered excellent levels of new business production in the first half, with APE sales up 31 per cent to £1,366 million, driving a 30 per cent increase to £664 million in new business profit. Our new business sales continue to have a high proportion of regular premiums (91 per cent of APE sales), and a significant amount of premium directed towards health and protection coverage (26 per cent of APE sales) which makes our business less correlated to investment markets. In addition, the breadth and quality of our market-leading distribution platform has seen growth in both agency and bancassurance channels, offering further resilience to our progress as we are able to reach a wider customer base. Agency-generated APE sales increased by 32 per cent over prior period driven by higher numbers of active agents and improvements in agency productivity. Bancassurance APE sales were up by 16 per cent, despite the loss of two relationships in Singapore as previously disclosed, and including growth of 35 per cent from our relationship with Standard Chartered Bank.

 

In Hong Kong, APE sales increased by 84 per cent to £519 million driven by a 41 per cent increase in active agency manpower and improved productivity, together with the continuing success of our longstanding relationship with Standard Chartered Bank as well as the smaller, but fast-growing broker channel. The Hong Kong economy has very close ties with mainland China and the market has seen increasing levels of sales to mainland customers. We have an excellent track record in executing on this opportunity and our US dollar-denominated participating products are particularly attractive.

 

Our joint venture with CITIC in China continues to perform well, with APE sales growing by 44 per cent, reflecting progress in both the agency and bank channels as a result of strong momentum from our efforts to grow scale in a vastly under-penetrated market. We continue to monitor closely the recent developments in the China equity markets but to date have not seen any significant impact on our business.

 

Consumer sentiment in Indonesia remains depressed as the economy faces short to medium-term challenges from weaker global demand for its raw material exports, with President Jokowi's ambitious reform programmes progressing at a slower pace than anticipated. Against this backdrop, our new business APE sales were in line with last period at £183 million, while new business profit was lower, reflecting business mix and adverse interest rate effects. We remain confident in the medium-term potential in this market given modest insurance penetration and a growing middle class. We are, therefore, continuing to build out our platform across the country, which positions us well for when more favourable conditions return. Notwithstanding flat sales, the recurring regular premium nature of the unit-linked and protection business that we write in Indonesia has driven IFRS operating profit higher by 21 per cent to £167 million.

 

Our Malaysia strategy in recent years has been to broaden our approach to include a greater focus on the bumiputra sector of the market and increasing penetration of Takaful products. Progress in this area continues to be highly encouraging which, together with strong growth in bancassurance, has resulted in APE sales for the half year growing by 18 per cent.

 

In Singapore, APE sales, excluding the Maybank and Singpost relationships, which ceased in 2014, are broadly in line with the previous period, while new business profit on the same basis increased by 11 per cent, reflecting our decision to focus on higher-value protection products. On a reported basis, APE sales including these discontinued relationships declined 13 per cent while new business profit remained in line with the equivalent period last year.

 

In our smaller businesses in South-east Asia, the economy in Thailand continues to be sluggish and in the context of a 2.4 per cent decline⁸ in the overall insurance market, we are pleased that our business continues to make good progress, with APE sales growth of 4 per cent. We continue to increase the proportion of protection products in the mix of business sold, driving APE from these products 52 per cent higher. The transformation of our business in the Philippines is showing significant improvements following a refocussing on the agency channel, with APE sales higher by 21 per cent. Vietnam also had an excellent first half, with APE sales growing 36 per cent, driven by increases in agency activity.

 

In India our joint venture with ICICI Bank remains the leader in the private sector and delivered APE sales growth of 45 per cent, driven by unit-linked sales. We continue to assess developments in the regulations regarding foreign ownership limits.

 

In Taiwan and Korea, we remain selective in our participation in line with our value strategy. In the first half of the year, APE sales increased by 7 per cent and 48 per cent respectively.

 

We are also setting the foundations for future growth in new Asian markets. We have successfully launched in Cambodia with the market-leading life insurance business, we have opened a representative office in Myanmar and we are in the preliminary stages of entering Laos.

 

Eastspring Investments, the largest Asian retail asset manager², saw net third-party inflows of £4.6 billion, up 79 per cent from 2014, with robust flows into equity funds, particularly from Japan into our Asia Oceania Fund. Total funds under management as at 30 June 2015 were £85.3 billion, growing 28 per cent period on period as a result of net inflows and positive market movements. IFRS operating profit increased 35 per cent to £58 million, driven by the positive impact on revenue from higher levels of average assets under management.

 

Asia's results in the first half of 2015 evidence the quality of our diversified business platform and our disciplined execution, which together enable the business to deliver strong, profitable growth across the economic cycle. We have a market-leading franchise in a region which is well supported by the long-term structural tailwinds of low insurance penetration, a rapidly growing and wealthy middle class and limited social insurance, providing significant headroom to create value for customers and shareholders.

 

US

Jackson continues to benefit from its clear focus on generating earnings and cash. In the first half of 2015, our US business delivered total IFRS operating profit of £846 million, up 13 per cent (24 per cent on an actual exchange rate basis). Jackson's life IFRS operating profit grew 11 per cent (22 per cent on an actual exchange rate basis) to £834 million, reflecting increased fee income from higher levels of separate account assets, which were up 11 per cent period-on-period to £85.9 billion at the end of June 2015 (30 June 2014: £77.7 billion, on a constant exchange rate basis), driven by continued strong net inflows. The growth in earnings also supported strong capital generation, enabling Jackson to remit £403 million of cash to the Group (2014: £352 million), while continuing to maintain a healthy balance sheet. 

 

Despite weak GDP growth in the first quarter of 2015, the US economy has since returned to a path of moderate growth consistent with that seen in the past few years. At 30 June 2015, despite volatility caused by domestic and economic uncertainties, US investment markets closed moderately higher than the start-of-year positions, with the S&P 500 Index up 0.2 per cent and the 10-year Treasury rate increasing by 18 basis points. 

 

The insurance industry continues to deal with emerging regulatory topics, including the Department of Labor's proposed fiduciary standard. Jackson, alongside the rest of the industry, is actively participating in discussions with regulators and industry specialists. The comment period has ended and the public hearing started on 10 August 2015, with any changes not expected to take effect until at least late 2016. 

 

Against this market backdrop, the US competitive landscape continued to see insurers flex the benefits and costs of their variable annuity product offerings and a number of new competitors have entered the investment-only variable annuity market. Jackson remains competitive in its variable annuity offerings and continues to experience success with Elite Access, its investment-only variable annuity.

 

Jackson remains focused on actively managing sales volumes of variable annuities with living benefits to maintain an appropriate balance of our revenue streams and to match our annual risk appetite. As a result, Jackson experiences fluctuations in quarterly sales volumes as we implement management actions through the year to achieve these goals and continue to price new business on a conservative basis, placing value over volume. In line with this approach, Jackson achieved total retail APE sales of £816 million, a decrease of 8 per cent compared to the first half of 2014 (increase of 1 per cent on an actual exchange rate basis). Including institutional sales, total APE sales decreased 10 per cent to £857 million. New business profit of £371 million was lower by 10 per cent (1 per cent lower on an actual exchange rate basis), in line with the decline in sales volumes. Although interest rates remain low, the beneficial impact of product initiatives implemented in previous years means that the economics of our business remain very attractive and we continue to write highly profitable new business through sales of prudently priced annuity products.

 

Variable annuity APE sales decreased 8 per cent to £772 million, reflecting the extremely high sales levels achieved in the first half of 2014 and continuing action to manage sales levels. As a result, variable annuity volumes excluding Elite Access were 10 per cent lower period-on-period at £606 million. Sales of Elite Access, our variable annuity without living benefits, were 1 per cent higher than the prior period at £166 million, with two thirds of our first-half sales coming from non-qualified plans. With the contribution from Elite Access, we continue to improve the diversification of our product mix, with 34 per cent of variable annuity APE sales in the first half of 2015 not featuring living benefit guarantees (2014: 32 per cent).

 

Fixed annuity APE sales of £23 million decreased 21 per cent compared to 2014, primarily as a result of the low interest rate environment. Fixed index annuity APE sales of £21 million remained relatively flat compared to the first half of 2014.

 

Jackson's strategy is unchanged. We continue to price new business on a conservative basis, targeting value over volume. Our hedging remains focused on optimising the economics of our exposures over time while maintaining a strong balance sheet. With this strategy, Jackson has been able to deliver significant profitable growth across the cycle and since 1 January 2008 Jackson has remitted close to US$3.2 billion of cash to the Group. Our performance continues to demonstrate that Jackson's growth translates into value for customers and into profits and cash for shareholders, the ultimate metrics of our successful strategy.

 

UK, Europe and Africa

In the first half of 2015, Prudential's UK business delivered strong growth in IFRS operating profit, new business profit and free surplus generation. This reflects the successful execution of our UK strategy, focusing on the retail and wholesale business segments where the economics are most attractive. Life IFRS operating profit was 19 per cent⁴ higher at £436 million and life free surplus generation (after investment in new business) was 17 per cent higher at £295 million, both driven by our focused approach to new business and effective management of our in-force book. Cash remitted to the Group was £231 million, compared to £246 million in the first half of 2014.

 

The UK market saw significant disruption from the reforms to the pension industry announced in 2014, which came into force in April 2015. Against this backdrop, our strategic focus on providing risk-managed savings and investment products, development of new products and routes to market and disciplined participation in the bulk annuity market, saw total APE sales rise 22 per cent⁴ in the first half of 2015 to £510 million.

 

Our retail business has achieved strong sales performance, with APE sales higher by 25 per cent at £393 million (2014: £315 million⁴) despite the expected slowdown in individual annuity APE sales, which were 56 per cent lower at £28 million. Excluding the impact of individual annuities, retail APE sales were 45 per cent higher, driven by the combination of the strength of our investment proposition and the expanding market for flexible retirement income and pension products. There is significant on-going demand for our PruFund multi-asset funds, with customers attracted by both the performance track record and the benefit of a smoothed return to manage market volatility.

 

We are seeing ongoing diversification in our product portfolio. Onshore bonds APE sales of £122 million increased by 19 per cent and offshore bond APE sales rose by 22 per cent on the same period last year. Following the pension reforms, we have seen income drawdown APE sales more than treble to £39 million and individual pensions APE sales more than double to £62 million, offsetting the volume decline from lower individual annuity sales.

 

Our successful launch in February 2015 of the PruFund range of investment funds within an ISA wrapper generated APE sales of £28 million, with assets under management totalling £260 million at the end of June 2015.

 

In total across all products, PruFund APE sales of £243 million increased by 92 per cent, with total assets under management having increased 18 per cent since the start of the year to £13.7 billion.

 

In our bulk annuity business, we completed two deals in the first half of 2015, generating £117 million of APE sales and £75 million of new business profit compared to four bulk annuity deals over the same period last year (APE sales of £104 million and new business profit of £69 million). Our approach to bulk transactions in the UK continues to be one of disciplined participation, looking for opportunities where we can both bring significant value to our customers and meet our demanding shareholder return hurdles.

 

The ongoing focus on the development of our proposition and delivery of excellent customer service that underpins our strategy has been recognised in a number of ways. We received two 5-star ratings at the Financial Adviser Online Service Awards 2015 and were named Company of the Year. We were also awarded best Multi-Asset Manager of the Year (Developed Markets) at the Global Investor 2015 Investment Excellence Awards for our new Dynamic Growth Funds, which launched in March for corporate pensions customers.

 

While the UK retirement income market continues to undergo significant change, our business remains well placed to prosper in this new environment. Our capabilities in multi-asset investing delivered through the PruFund range, the strength of our brand and diversified distribution position us well to successfully meet evolving customer needs.

 

In Poland, our life company, Prudential Polska, continues to grow ahead of plan. The business now has 16 branches across the country and 582 financial planning consultants. Its success demonstrates our ability to build a new business franchise by transferring our existing product and distribution strengths to a new market.

 

In June 2015 we completed the acquisition of Ugandan company Goldstar Life Assurance, a step forward in our strategy of expanding across Sub-Saharan Africa. 

 

M&G

M&G has delivered an 11 per cent increase in IFRS operating profit to £251 million in the first half of 2015. This reflects the growth in average assets under management between the two periods and effective cost control. The higher level of earnings enabled M&G to remit £151 million to the Group in the first half of 2015, representing a 12 per cent increase on the prior period.

 

Total gross retail and institutional inflows amounted to £20.4 billion, 6 per cent higher than the same period last year. However, larger redemptions saw M&G report overall retail net outflows during the first half of 2015 of £3.4 billion (2014: net inflows of £3.8 billion). M&G experienced net retail outflows of £4.0 billion in the second quarter of 2015, including £2.6 billion from Europe, mainly reflecting a change in investor sentiment away from fixed income, a trend we expect to continue into the second half of the year. Our strategy of diversification by fund has helped drive good net inflows into several M&G multi-asset funds. Total retail funds under management at 30 June 2015 were lower at £69.2 billion (30 June 2014: £71.9 billion). Retail funds under management from Continental Europe have increased by 3 per cent to £28.7 billion over the past 12 months and now represent 42 per cent of total retail assets, up from 39 per cent a year ago.

 

Institutional net inflows increased to £1.0 billion (2014: net inflows of £0.4 billion). The M&G Alpha Opportunities Fund has been particularly popular, attracting net inflows of £1.3 billion. External institutional funds under management have increased to £64.2 billion, up 6 per cent compared with 30 June 2014. The Institutional business continues to have a strong pipeline of new business - money committed by clients but not yet invested - across a diverse range of strategies, thanks to consistently good investment performance and a reputation for innovation.

 

Total external client assets of £133.4 billion (30 June 2014: £132.8 billion) now account for 52 per cent of total funds under management of £256.5 billion (30 June 2014: £253.7 billion).

 

Underlying IFRS operating profit⁹ increased by 14 per cent to £243 million. The beneficial impact on revenues from higher average levels of funds under management, with operating costs unchanged, has resulted in a cost-income ratio of 51 per cent (2014: 54 per cent).

 

M&G remains well placed to service clients thanks to its long-held strategy of diversification by asset class, product and geography and its focus on long-term investment performance.

 

Capital and risk management

We continue to take a disciplined approach to capital management and have implemented a number of measures over the last few years to enable us to make our capital work more efficiently for the Group. Based on the Insurance Groups Directive solvency measure, our surplus position at 30 June 2015 was estimated at £5.2 billion before allowing for the interim dividend (30 June 2014: £4.1 billion; 31 December 2014: £4.7 billion before final dividend). The Insurance Groups Directive surplus at 30 June 2015 is equivalent to a cover of 2.5 times.

 

In July 2013, Prudential plc was listed by the Financial Stability Board as one of nine companies to be designated as a Global Systemically Important Insurer. In July 2014, the International Association of Insurance Supervisors released a consultation paper on the Basic Capital Requirement, one of the two types of capital requirement proposed under this framework. Prudential is monitoring the development and potential impact of the framework of policy measures and engaging closely with the Prudential Regulation Authority on the implications of this designation.

 

Solvency II is scheduled to come into force on 1 January 2016. In preparation for this, we submitted our Solvency II internal model applications to the Prudential Regulation Authority in June 2015. The Prudential Regulation Authority have indicated that they will conclude their review and approval process of our internal model along with our UK peers in December 2015. We welcome the clarification provided by the Prudential Regulation Authority that their assessments of the ability of UK entities to make distributions will be based on capital levels after allowance for transitional measures.

 

Overall we are confident that the final Solvency II outcome will confirm Prudential's position as a strongly capitalised Group. In the meantime our businesses are continuing to produce strong operating earnings, which generate significant economic capital.

 

Dividend

Due to the continued strong operating performance of the Group, the Board decided to rebase the 2014 full year dividend upwards to 36.93 pence per share, representing an increase of 10 per cent over 2013. As in previous years, the interim dividend for 2015 has been calculated formulaically as one third of the prior year's full year dividend. The Board has approved a 2015 interim dividend of 12.31 pence per share, which equates to an increase of 10 per cent over the 2014 interim dividend.

 

The Group's dividend policy remains unchanged. The Board will maintain its focus on delivering a growing dividend from this new higher base, which will continue to be determined after taking into account the Group's financial flexibility and our assessment of opportunities to generate attractive returns by investing in specific areas of the business. The Board believes that in the medium term a dividend cover of around two times is appropriate.

 

Outlook

The Group has made strong progress in the first half of 2015. Our teams remain focused on executing our well defined and successful strategy. The first-half performance builds on a long track record of delivery, meeting the significant customer demand for our products while delivering sustainable shareholder returns.

 

The macro and geo-political environment remains both uncertain and volatile. Investment markets are progressively pricing in the possibility of interest rate increases in the US, resulting in a stronger dollar, which when combined with commodity price declines is leading to softer global growth prospects. Reflecting these pressures, emerging markets in Asia are now expected by the International Monetary Fund to grow more slowly than recent rates in the short term, but they are still forecast to comfortably outpace developed economy growth rates. Equally, as developed economies recover to growth, this will over time provide a tailwind to emerging markets. We have some distinct advantages - diversification by country, currency, product and channel; clear focus on long-term growth opportunities; a large, growing and profitable in-force book and an emphasis on growing insurance margin which is uncorrelated to markets - providing a strong foundation to prosper in a volatile environment.

 

Over the long term, Prudential's geographic footprint provides us with strong organic growth prospects driven by our leadership positions in the three fastest-growing geographies in the world - Asia, the US and the UK. In Asia, we have leadership positions in vastly under-penetrated insurance markets, with our prospects underpinned by significant, growing demand for protection and savings products from a rapidly growing uninsured middle class. We have a strong track record of market outperformance in the region across economic and market cycles, which is testament to the quality of our business platform and the team's focus on execution. In the US, we have implemented our strategy with discipline, meeting the significant needs of the baby boomers for retirement income. In the UK, our life business is positively transitioning to a changing landscape of pension and savings provision, while M&G, despite near-term headwinds, remains well-positioned to build long-term wealth for its customers. The diversity of our businesses, the tailwinds from supportive demographics across our three markets and our disciplined execution, underpinned by strong capital and cash generation, position us well to be able to deliver long-term sustainable shareholder returns.

 

I am pleased to be leading Prudential at such an exciting point for the company. We are in the right markets, with the right products with a proven management team who are executing well on our strategy. My priority is to continue our focus on delivering a strong financial performance through delivering great products and services to our customers, while also ensuring that we continue to develop our capabilities to capture the significant, long-term growth opportunities available to us. We remain confident of being able to deliver strong, sustainable, profitable growth while delivering quality products and services to a large and rapidly growing customer base.

 

Notes:

¹   The comparative results referenced above and elsewhere in this document have been prepared using constant exchange rates basis except where otherwise stated. Comparative results on an actual exchange rate basis are also shown in financial tables in the Chief Financial Officer's report on our half year 2015 financial performance.

²  Asia Asset Management, September 2014 issue (ranked according to participating regional players only). Based on assets sourced from the region (excluding Japan, Australia and New Zealand) as of June 2014.

³ Underlying free surplus generation comprises underlying free surplus released from long-term business (net of investment in new business) and that generated from asset management operations. The 2012 comparative is based on the retrospective application of new and amended accounting standards and excludes the 2012 one-off gain of £51 million from the sale of the Group's holding in China Life Insurance Company of Taiwan.  

⁴  Following the disposal of the Group's 25 per cent interest in PruHealth and PruProtect in November 2014, the 2014 comparative results of UK insurance operations have been adjusted to exclude results of those businesses.

⁵ Annual Premium Equivalent (APE) sales comprise regular premium sales plus one-tenth of single premium insurance sales.

⁶  Before allowing for interim dividend.

⁷  Asia 2012 IFRS operating profit of £924 million is based on the retrospective application of new and amended accounting standards as at 31 December 2013, and excludes the 2012 one-off gain of £51 million from the sale of the Group's holding in China Life Insurance Company of Taiwan. 

⁸  Source: Thailand Life Assurance Association. Since 30 June 2014.

⁹  Excluding performance fees, carried interest and share of profits from associate entity, PPM South Africa.

 

 

Chief Financial Officer's report on our 2015 first half financial performance

 

In the first half of 2015 Prudential reported strong performance in our 'growth and cash' metrics, of IFRS operating profit, operating free surplus generation and new business profit. This performance was broad-based with strong contributions from our principal business operations. The Group's overall financial performance and its resilience to events outside our direct control, increasingly benefits from ongoing enhancements in the quality of our earnings delivered through stronger growth in non-interest sensitive sources and from the balance of profit and cash across different geographies, products and distribution channels. The strength of our earnings is underpinned by our focus on business with high return fast payback characteristics and by our cautious approach to risk management. Prudential's balance sheet remains conservatively positioned, our Group solvency under the Insurance Group's Directive (IGD) remains robust and our preparation for the implementation of Solvency II on 1 January 2016 is well advanced.

 

During the first half of 2015, investment markets have seen on-going volatility, although overall movements in both equity and bond markets have been modest. As a result, the impact of short-term market driven effects on non-operating results in the first half of 2015 has been relatively muted.

 

In 2014 we adopted the approach of evaluating the financial performance of the Group by presenting percentage growth rates before the impact of the fluctuations in the value of sterling against local currencies in the US and Asia. In a period of currency volatility this approach allows a more meaningful assessment of underlying performance trends. This is because our businesses in the US and Asia receive premiums and pay claims in local currencies and are, therefore, not exposed to any cross-currency trading effects. To maintain comparability in the discussion below the same basis has been applied. Growth rates based on actual exchange rates are also shown in the financial tables presented in this report. It is worth noting that so far this year, we have experienced favourable currency movements. As a result and contrary to last year, the constant exchange rate basis that we have used below produces lower progressions than the actual exchange rate basis. Consistent with previous reporting periods, the assets and liabilities of our overseas businesses are translated at period-end exchange rates so the effect of currency movements has been fully incorporated within reported shareholders' equity.

 

The key financial highlights of the first half of 2015 were as follows:

·      Group IFRS operating profit was 17 per cent higher at £1,881 million.

·      Group profit before tax attributable to shareholders on an IFRS basis increased 26 per cent to £1,882 million including the financial impact of short-term movements in investment values and other items reported outside the operating result.

·      Underlying free surplus generation¹ (net of investment in new business) rose by 12 per cent to £1,418 million.

·      On the European Embedded Value (EEV) basis of reporting performance, new business profit² increased 12 per cent to £1,190 million, contributing to EEV operating profit of £2,278 million, up 11 per cent.

·      EEV basis shareholders' funds at 30 June 2015 increased to £30.1 billion, 16 per cent higher than the position twelve months ago.

 

IFRS Profits
		Actual Exchange Rate					Constant Exchange Rate
		2015 £m	2014 £m		Change		2014 £m	Change
		Half year	Half year		%		Half year	%
Operating profit before tax								`
Long-term business:
	Asia3	574	483		19		497	15
	US	834	686		22		751	11
	UK2	436	366		19		366	19
Long-term business operating profit before tax2, 3		1,844	1,535		20		1,614	14
UK general insurance commission		17	12		42		12	42
Asset management business:
	M&G	251	227		11		227	11
	Prudential Capital	7	22		(68)		22	(68)
	Eastspring Investments	58	42		38		43	35
	US	12	(5)		n/a		(5)	n/a
Other income and expenditure4		(308)	(320)		4		(320)	4
Results of the sold PruHealth and PruProtect businesses		-	8		(100)		8	(100)
Total operating profit based on longer-term investment returns before tax		1,881	1,521		24		1,601	17
Short-term fluctuations in investment returns:
	Insurance operations	75	(14)		n/a		(26)	n/a
	Other operations	11	(31)		n/a		(31)	n/a
		86	(45)		n/a		(57)	n/a
Other non-operating items4		(85)	(52)		(63)		(56)	(52)
Profit before tax attributable to shareholders		1,882	1,424		32		1,488	26
Tax charge attributable to shareholders' returns		(444)	(279)		(59)		(293)	(52)
Profit for the period attributable to shareholders		1,438	1,145		26		1,195	20

 

IFRS Earnings per share
		Actual Exchange Rate				Constant Exchange Rate
		2015 pence	2014 pence	Change %		2014 pence	Change %
		Half year	Half year			Half year
Basic earnings per share based on operating profit after tax		57.0	45.2	26		47.4	20
Basic earnings per share based on total profit after tax		56.3	45.0	25		46.9	20