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M&G PLC (MNG)

M&G PLC

M&G plc Half Year 2020 Results
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 £309 million and IFRS profit after tax of £826 million

-   Shareholder Solvency II coverage ratio of 164%, comfortably above risk appetite

-   Assets under management and administration (AUMA) reduced to £339 billion, reflecting negative market movements in March

-   £2.8 billion of net inflows into Institutional Asset Management and £0.8 billion of net inflows into Retail Savings, partially offsetting  £7.7 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 £155 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 months ended 30 June

For the year ended 31 December

Performance highlights

2020

2019

2019

Adjusted operating profit before tax (£m)

309

 

714

 

1,149

 

IFRS profit after tax (£m)

826

 

795

 

1,065

 

Savings and Asset Management net client flows (£bn)

(4.1

)

(1.4

)

(1.3

)

Total capital generation (£m)

(202

)

930

 

1,509

 

Assets under management and administration (£bn)

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 £339 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, £15.5 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 £6 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 £2.8 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 £81 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 £136 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 £145 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 £2.2 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 £309 million (30 June 2019: £714 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 £339 billion (31 December 2019: £352 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 £614 million, resulting in total capital generation of £(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 £1.2 billion.

We paid dividends of £410 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 £155 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 months ended 30 June

For the year ended 31 December

£m

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 £19 million for the six months to 30 June 2020 (30 June 2019 : £32 million, year ended 31 December 2019 : £62m), 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 months ended 30 June

For the year ended 31 December

£m

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 £309 million in the six months to 30 June 2020 (30 June 2019: £714 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 £79 million of finance costs in relation to the subordinated debt and £48 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 £30 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 £127 million and secondly from making changes to the staff pension schemes of £64 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 £826 million compared to £795 million for the six months to 30 June 2019 reflecting the fall in adjusted operating profit before tax being offset by a £382 million increase in short-term fluctuations in investment returns, a £60 million reduction in restructuring costs and a £6 million increase in the equity holders tax charge. Short term fluctuations primarily comprise gains on equity hedges of £308 million, a benefit of £134 million from interest rate swaps purchased to protect the Solvency II capital position and £334 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 £117 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 months ended 30 June

For the year ended 31 December

£m

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 £263 million (2019: £442 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 £276 million from other operating capital generation (2019: £322 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 £235 million, resulting in operating capital generation of £539 million (2019: £764 million).

Total capital generation was £(202) million for the six months ended 30 June 2020 (30 June 2019: £930 million), with operating capital generation more than offset by a £614 million reduction in surplus from negative market variances (30 June 2019: £361 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 £3.9 billion as at 30 June 2020 (31 December 2019: £4.5 billion), equivalent to a shareholder Solvency II coverage ratio of 164% (31 December 2019: 176%), reflecting the total capital generation of £(202) million and £410 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 £1 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 ended 30 June

For the year ended 31 December

£m

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 ended 30 June

For the year ended 31 December

£m

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 £1,125 million (31 December 2019; £1,200 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 £1.2 billion with cash remittances of £472 million from our subsidiaries being offset by £95 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

£bn

for the six months to  30 June 2020

for the  six months to 30 June 2019

for the six months to 31 December 2019

As at 30 June 2020

As at 31 December 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 £0.8 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 £64.2 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 £7.7 billion (30 June 2019: £3.8 billion). Net client outflows of £5.6 billion for the first quarter of 2020 have slowed to £2.1 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 £6 billion mandate to manage Asian and Japanese equities for the WIth-Profits Fund, with a further £3 billion expected by the end of the year.

Institutional Asset Management AUMA increased 6% to £81.2 billion in the six months to 30 June 2020, driven by strong net client inflows of £2.8 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 £65.5 billion of AUMA as at 30 June 2020 (31 December 2019: £60.3 billion).

Adjusted operating profit before tax

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

 

For the six months ended 30 June

For the year ended 31 December

£m

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 six months ended 30 June

For the year ended 31 December

£m

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 £163 million in the six months to 30 June 2020 (30 June 2019: £216 million) driven by a 9% reduction in revenue earned to £469 million (30 June 2019: £514 million). The reduction in average AUMA in Retail Asset Management, combined with the downward pressure on retail margins, resulted in lower revenue of £230 million in the six months to 30 June 2020 (30 June 2019: £299 million).  However, revenue earned by Institutional Asset Management increased to £239 million (30 June 2019: £215 million) due to higher average AUMA and improved revenue margins. Asset Management adjusted operating expenses, excluding the £35 million one-off benefit resulting from changes to the Group's defined benefit pension schemes in 2019, reduced by £27 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 £35 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 £28 million (30 June 2019: £36 million) as a result of a downward unit price adjustment following the fall in financial markets. In addition there were fair value losses of £4 million (30 June 2019: £8 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 six months ended 30 June

For the year ended 31 December

£m

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 £186 million (30 June 2019: £243 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 £39 million (30 June 2019: £37 million). New business strain fell by £12 million to £21 million for the first half of 2020 reflecting lower Pru Fund client inflows.

The improvement in other operating capital generation to £18 million in the six months to 30 June 2020 (30 June 2019: £(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 £129.4 billion at 30 June 2020 (2019: £134.0 billion), driven by negative market movements in the period whilst net client outflows of £3.3 billion were in line with expectations (2019 full year: £7.6 billion net outflow).

Adjusted operating profit before tax

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

 

For the six months ended 30 June

For the year ended 31 December

£m

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 months ended 30 June

For the year ended 31 December

£m

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 £128 million (30 June 2019: £124 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 £18 million (30 June 2019: £27 million loss).

Adjusted operating expenses increased by £5m in the six months to 30 June 2020, representing a like for like reduction compared to the first half of 2019 after removing the £29m one off benefits in 2019 resulting from pensions scheme changes.  Other shareholder profit primarily relates to insurance reserve releases of £25 million (30 June 2019: £23 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 months ended 30 June

For the year ended 31 December

£m

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 £127 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 £94 million (30 June 2019: £118 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 £40 million from asset trading and portfolio management actions (30 June 2019: £63 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 months ended 30 June

For the year ended 31 December

​m

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 £40 million over the six months to 30 June 2020 (30 June 2019: £18 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 £169 million (30 June 2019: £204 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 £262 million (30 June 2019: £432 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 £18 million reduction in surplus due to modelling improvements, and a £46 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 £220 million. This included a contribution of £141 million from asset trading and more efficient matching of annuity assets to the liabilities, as well as a £50 million release of SCR to reflect the reduced risk of legacy remediation programmes now coming to completion.

The positive impact of £14 million arising from other items and experience variances contains a £81 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 months ended 30 June

For the year ended 31 December

 

 

2020

 

2019

 

2019

 

 

Note

£m

£m

£m

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 months ended 30 June

For the year ended 31 December

 

2020

 

2019

 

2019

 

 

£m

£m

£m

 

 

 

 

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  30 June

As at 31 December

 

 

2020

 

2019

 

 

Note

£m

£m

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 £65m (31 December 2019 : £88m) of seed capital classified as held for sale as it is expected to be divested within 12 months, £175m of investment property classified as held for sale (31 December 2019: £17m) and £9m (31 December 2019: £14m) 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

 

 

Share capital

Share premium

Shares held by employee benefit trust

Treasury shares

Retained earnings

Other reserves

Total equity attributable to equity holders of M&G plc

Non-controlling interests

Total equity

 

Note

£m

£m

£m

£m

£m

£m

£m

£m

£m

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

 

 

 

Share capital

Share premium

Shares held by employee benefit trust

Treasury shares

Retained earnings

Other reserves

Total equity attributable to equity holders of M&G plc

Non-controlling interests

Total equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

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

 

 

 

 

 

 

Share capital

Share premium

Shares held by employee benefit trust

Treasury shares

Retained earnings

Other reserves

Total equity attributable to equity holders of M&G plc

Non-controlling interests

Total equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

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 £570m, 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 six months ended 30 June

For the year ended 31 December 2019

 

2020

 

2019

 

2019

 

 

£m

£m

£m

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 £244m (30 June 2019: £25m, 31 December 2019: £228m) 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 £12,149m (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 £53m for the year ended 31 December 2019 resulted from the reinsurance of £12bn 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 Management

Heritage

Corporate Centre

Total continuing operations

 

£m

£m

£m

£m

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 £46m (30 June 2019: £42m, 31 December 2019: £110m) 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 £19m (30 June 2019: £32m, 31 December 2019: £62m) 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 Management

Heritage

Corporate Centre

Total continuing operations

 

£m

£m

£m

£m

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 Management

Heritage

Corporate Centre

Total continuing operations

 

£m

£m

£m

£m

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 months ended 30 June

For the year ended 31 December

 

2020

2019

2019

 

£m

£m

£m

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 months ended 30 June

For the year ended 31 December

 

 

 

 

 

2020

2019

2019

 

£m

£m

£m

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 £117m 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 £79m (30 June 2019 £nil, year ended 31 December 2019: £28m). 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 £172m (30 June 2019: £92m, year ended 31 December 2019: £182m).

 

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 months ended 30 June

For the year ended 31 December

 

2020

 

2019

 

2019

 

 

£m

£m

£m

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 £1,035m (30 June 2019: £998m) 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 six months ended 30 June

For the year ended 31 December

 

2020

2019

2019

 

Equity holders

Policyholders

Total

Equity holders

Policyholders

Total

Equity holders

Policyholders

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

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 £209m (30 June 2019: £203m) 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 assets

Current tax liabilities

 

For the six months ended 30 June

 

For the year ended 31 December

 

For the six months ended 30 June

 

For the year ended 31 December

 

 

£m

£m

£m

£m

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 ended 30 June

For the year ended 31 December

 

2020

2019

 

£m

£m

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 operations

Discontinued operations

Total

Continuing operations

Discontinued operations

Total

Continuing operations

Discontinued operations

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

Profit attributable to equity holders of the Company

824

 

-

 

824

 

793

 

59

 

852

 

1,062

 

58

 

1,120

 

 

 

For the six months ended 30 June

For the year ended 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 operations

Discontinued operations

Total

Continuing operations

Discontinued operations

Total

Continuing operations

Discontinued operations

Total

 

Pence per share

Pence per share

Pence per share

Pence per share

Pence per share

Pence per share

Pence per share

Pence per share

Pence 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 months ended 30 June 2020

For the year ended 31 December 2019

 

Pence per share

 

£m

Pence per share

 

£m

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 £155m 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 £1,392m, of which, £849m were non-cash in specie dividends and £543m in cash. A final dividend was paid to Prudential plc prior to demerger on 18 October 2019 of £2,968m.

Prudential Capital Holdings Company Limited was transferred on 20 September 2019 from Prudential plc, and paid a £5m 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 £15m 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

 

£m

£m

£m

£m

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

 

£m

£m

£m

£m

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

 

£m

£m

£m

£m

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

 

£m

£m

£m

£m

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 30 June

For the year ended 31 December

 

2020

2019

Issued shares fully paid

Number of ordinary shares

Share capital

Number of ordinary shares

Share capital

 

 

£m

 

£m

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:

Period ended

Model version

Long-term improvement rate(i)

Smoothing parameter (Sk)(ii)

30 June 2020

CMI 2017

For males: 2.25% pa

For females: 2.00% pa

For males: 7.5

For females: 7.75

31 December 2019

CMI 2017

For males: 2.25% pa

For females: 2.00% pa

For males: 7.5

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 £837m (31 December 2019: £701m). 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 £392m (31 December 2019: £324m). 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 sub-funds(i)

Unit-linked liabilities

Annuity and other long-term business

Total

Reinsurance asset

Net total

 

£m

£m

£m

£m

£m

£m

At 1 January 2019

124,228

 

20,717

 

20,384 </