Prudential : 2019 Half Year Financial Report

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2378 Code: Stock HK

Prudential plc

2019 Half Year Financial Report

Prudential helps people de‑risk their lives and deal with their biggest financial concerns.

Summary financials

	Half year	Half year	Change on an actual		Change on a constant
	2019	2018
	exchange rate basis8		exchange rate basis8
Adjusted IFRS operating profit from continuing operations1	£2,024m	£1,669m	21%	14%
Adjusted IFRS operating profit from discontinued operations1	£687m	£736m	(7)%	(7)%
Operating free surplus generated from continuing operations2	£1,502m	£1,173m	28%	22%
Life new business profit from continuing operations3	£1,643m	£1,588m	3%	(2)%
Life new business profit from discontinued operations3	£152m	£179m	(15)%	(15)%
IFRS profit after tax4	£1,540m	£1,356m	14%	7%
Net cash remittances from business units (both continuing and	£1,212m	£1,111m	9%		-
discontinued operations)5
	30 June 31 December	Change on an actual
	2019	2018
	exchange rate basis8
IFRS shareholders' funds per share	757p	665p	14%
EEV shareholders' funds per share	2,055p	1,920p	7%
Group Solvency II cover ratio6,7	222%	232%	(10)pp

First interim ordinary dividend

2019

2018

UK and Europe

Throughout this report we use M&GPrudential to refer to the Group's discontinued UK and Europe operations. M&GPrudential has announced that it will change its name in preparation for listing to M&G plc, providing a single corporate identity while retaining its two customer-facing brands of Prudential and M&G Investments.

Notes

• This alternative performance measure is reconciled to IFRS profit for the period in note B1.1 of the IFRS financial statements. Continuing operations relate to Asia, US and central operations (including Africa). It excludes M&GPrudential which met the criteria to be classified as held for distribution at 30 June 2019 and hence is shown as discontinued.

16.45 pence +5%

15.67 pence

• For insurance operations, operating free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax operating profit for the period. Restructuring costs are presented separately from the underlying business unit amount. The amount

is for continuing operations only (ie M&GPrudential is excluded). Further information is set out in note 9 of the EEV basis results.

• New business profit, on a post-tax basis, on business sold in the period, calculated in accordance with EEV Principles.

• IFRS profit after tax reflects the combined effects of operating results determined on the basis of longer-term investment returns, together with short-term investment variances, which in half year 2019 were driven by those arising in the US, results attaching to disposal of businesses and corporate transactions, amortisation of acquisition

accounting adjustments and the total tax charge for the period.

• Net cash remitted by business units are included in the Holding company cash flow, which is disclosed in detail

in note I(iii) of the Additional financial information.

• The Group shareholder capital position covers continuing and discontinued operations and excludes the contribution to own funds and the Solvency Capital Requirement

from ring-fencedwith-profits funds and staff pension schemes in surplus. The estimated solvency positions include management's calculation of UK transitional measures reflecting operating and market conditions at each valuation date.

• Estimated before allowing for first interim ordinary dividend (31 December 2018: second interim ordinary dividend).

• Further information on actual and constant exchange rate basis is set out in note A1 of the IFRS financial statements.

Prudential plc2019 Half Year Financial Report

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Contents

		Page
01	Group overview	02
	Group Chief Executive's report	02
02	Business performance	05
	Chief Financial Officer's report on the 2019 first half financial	06
	performance
	Group Chief Risk and Compliance Officer's report on the risks facing	19
	our business and how these are managed
03	International Financial Reporting Standards (IFRS) basis results	37
04	European Embedded Value (EEV) basis results	105
05	Additional information	133
	Additional financial information	134
	Risk factors	161
	Corporate governance	170
	Disclosure of interests of Directors	171
	Shareholder information	175
	How to contact us	177

overview Group  01

performance Business  02

results basis IFRS  03

results basis EEV  04

information Additional  05

www.prudential.co.uk

2019 Half Year Financial Report  Prudential plc01

Group Chief Executive's report - Mike Wells

Sustained operational improvement and continued investment

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

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

In Asia, we are continuing to grow at pace, while benefiting from high-quality recurring income. We continue to invest in Asia. Over the 18 month period since the start of 2018 this has included the acquisition, in 2018, of our initial 65 per cent interest in TMB Asset Management Co., Ltd. in Thailand for £197 million1, the renewal

of our regional strategic bancassurance alliance with UOB for an initial fee of £662 million9 (£230 million9 of which was paid in the first half of 2019) and a total investment over this period of £738 million1 of free surplus in new business. In the US, we are diversifying the product mix and building new distributor relationships.

Across the Group, we are well placed to continue fulfilling our purpose of helping people plan for the future with confidence by removing the uncertainty from life's big financial events. In Asia, we are focused on serving the health, protection and savings needs of the region's rapidly growing and increasingly affluent population, and we have intensified our drive to strengthen

and deepen our operational capabilities through innovative product design, broadened distribution, including via non-traditional partners, and differentiated value-added services for our customers. In the US, we are continuing to target the growing asset pool in the world's largest retirement market, while M&GPrudential is addressing the compelling retirement and savings opportunity in the UK

and internationally.

Operating environment

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

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

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

Financial performance

Our adjusted IFRS operating profit based on longer-term investment returns3 (operating profit) from continuing operations

- that is, excluding M&GPrudential - was 14 per cent4 higher at £2,024 million (21 per cent higher on an actual exchange

rate basis). APE sales5 from continuing operations were up 5 per cent4 (10 per cent on an actual exchange rate basis), while new business profit6 from continuing operations was 2 per cent4 lower at £1,643 million (3 per cent higher on an actual exchange rate basis), with Asia up

10 per cent4. EEV basis operating profit6 from continuing operations increased 1 per cent4 (7 per cent on an actual exchange rate basis) to £2,641 million. Operating free surplus generation7 from continuing operations, our preferred measure of cash generation, from our life and asset management businesses increased by 22 per cent4 to £1,502 million (28 per cent on an actual exchange rate basis), including a £274 million benefit following the integration of the recently acquired US John Hancock business, and after financing £516 million (2018: £461 million) of new business investment.

Our performance was led by our Asia business, which delivered double-digit growth in operating profit (up 14 per cent4), new business profit (up 10 per cent4) and operating free surplus generation (up

13 per cent4). In the US, Jackson's operating profit increased by 14 per cent4, while new business profit decreased by 30 per cent4, reflecting the adverse effect of lower US interest rates and lower sales of variable annuities during the period. Despite challenging external macroeconomic and political conditions, M&GPrudential's total funds under management8 grew by

6 per cent in the six months to 30 June 2019 to £341.1 billion (31 December 2018: £321.2 billion), reflecting favourable investment markets.

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

02Prudential plc2019 Half Year Financial Report

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investments classified as available-for-sale of £1,726 million, offset by dividend payments to shareholders of £870 million. EEV shareholders' funds increased by

7 per cent to £53.4 billion (31 December 2018: £49.8 billion), equivalent to 2,055 pence per share6.

Our Group Solvency II surplus10,11 is estimated at £16.7 billion, equivalent to a cover ratio of 222 per cent (31 December 2018: £17.2 billion; 232 per cent).

We have increased our first interim ordinary dividend by 5 per cent to

16.45 pence per share, in line with our existing dividend policy.

Asia

Our broad portfolio of life insurance and asset management businesses, high- quality products with distinctive value- added services and multi-channel strategy ensured that we continue to benefit from growing demand for the health, protection and savings solutions we provide. Our APE sales5 in Asia reached £1,978 million in the first half, up 10 per cent4 (up 14 per cent on an actual exchange rate basis), leading to growth in new business profit of 10 per cent4 to £1,295 million (up 15 per cent on an actual exchange rate basis).

Our multi-platform distribution in the region, with strong agency forces and bank partnerships, and growing digital channels, is continuing to drive our performance. We have continued to grow on a broad base in the region, with APE sales5 growth in 11 markets in the first half. APE sales5

in Hong Kong increased by 5 per cent4 to £830 million, in Singapore by 8 per cent4 to £231 million and in Malaysia by 3 per cent4 to £122 million. In Hong Kong, 63 per cent of our sales came from visitors from Mainland China.

We are also seeing a stabilisation in sales in Indonesia following the refresh of our product line and action in agency force productivity, with a strong performance in the second quarter leading to overall sales growth of 4 per cent4. We have formed

a strategic partnership with PT Visionet International (OVO), a leading digital payments, rewards and financial services platform in Indonesia, which we expect will enhance our reach in one of Asia's largest insurance markets, with a population that is increasingly embracing digital tools.

Our sales through our joint venture, CITIC-Prudential, are up 45 per cent4 in the half year to £270 million, and we have received approval to open our 20th branch in Mainland China, in Shaanxi province.

Through our joint venture, we now have a comprehensive network of 231 sales offices in 89 cities, with access to regions accounting for 80 per cent of Mainland China's GDP.

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

We are continuing to develop our distribution reach in Asia, including through the renewal of our successful regional strategic bancassurance alliance with United Overseas Bank Limited, through which APE sales5 increased by

27 per cent4 in the first half. To ensure that we provide our solutions as widely as possible across the region, we have also been actively tailoring our propositions to suit digital sales channels. In the first half of 2019 we have activated our partnership with O bank, our digital bank partner in Taiwan, and will look to build on this success through UOB's new digital bank, TMRW.

We are continuing to build partnerships in Asia in a number of areas. We are committed to improving access to healthcare, and have launched Pulse by Prudential, a digital health app that is the first of its kind to offer holistic health management to consumers. The health technology and services company Tictrac has become one of our partners in Pulse, joining Babylon Health as part of our health ecosystem. Earlier this month, we also announced partnerships with Halodoc, Indonesia's homegrown healthcare start-up, to help deliver digital solutions that will meet a critical need for affordable and accessible healthcare, and with MyDoc, which offers consumers access to health services on their mobile phones. Following its launch in Singapore in 2018, we expanded PRUworks, our digital ecosystem designed to help small and medium-sized enterprises (SMEs) grow their businesses, to Indonesia. We have also entered into an agreement with specialist technology provider Hæ¯ lthTech, whose cloud-computing technology will be integrated into PRUworks and will facilitate the platform in offering one-stop access to

insurance products, employee benefits and business services to small and medium- sized enterprises across Asia. At the same time, we are making good progress with our tailored offering for high net worth clients in Singapore, Opus by Prudential, which is designed to address the unfulfilled wealth protection needs of this fast- growing sector. All of these initiatives enable us to offer improved services to more customers.

US

Our approach in this market has been to proceed with discipline. Consumer regulation in the US, while now starting to become clearer, has been uncertain for some time, and has resulted in an industry- wide slowdown in variable annuity sales. APE sales5 in the US were down 4 per cent4 at £831 million. Importantly, consistent with our intent to diversify our US product mix, fixed-index annuity APE sales5, at £93 million, rose as a share of APE sales5 from 2 per cent for the first six months of 2018 to 11 per cent in 2019. In addition, we successfully integrated last year's John Hancock paid-up annuities bolt-on transaction, which increased diversification and contributed materially to the US statutory capital generation in the period.

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

Africa

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

overview Group  01

performance Business  02

results basisIFRS  03

results basisEEV  04

information Additional  05

www.prudential.co.uk

2019 Half Year Financial Report  Prudential plc03