TIDMLGEN
RNS Number : 5293B
Legal & General Group Plc
05 March 2014
IFRS and Cash Page 27
Operating profit
For the year ended 31 December 2013
2013 2012 (1)
Notes GBPm GBPm
From continuing operations
Legal & General Assurance Society (LGAS) 2.02 444 462
Legal & General Retirement (LGR) 2.02 310 281
Legal & General Investment Management (LGIM) 2.04 304 272
Legal & General Capital (LGC) 2.05 179 163
Legal & General America (LGA) 92 99
Operating profit from divisions 1,329 1,277
Group debt costs(2) (127) (127)
Group investment projects and expenses(3) (44) (63)
Operating profit 1,158 1,087
Investment and other variances 2.06 (27) (42)
Gains/(losses) on non-controlling interests 3 (12)
Profit before tax 1,134 1,033
Tax expense attributable to equity holders
of the Company (238) (235)
Profit for the year 896 798
Profit attributable to equity holders of the
Company 893 810
p p
Earnings per share
Based on profit attributable to equity holders
of the Company 15.20 13.84
Diluted earnings per share
Based on profit attributable to equity holders
of the Company 15.00 13.61
1. Investment and other variances have been adjusted to reflect the
adoption by the Group of amendments to IAS 19, 'Employee Benefits'.
The impact is to reduce profit for the year by GBP3m for 2012, offset
by a corresponding change in the Consolidated Statement of Comprehensive
Income.
2. Group debt costs exclude interest on non recourse financing.
3. Group investment projects and expenses include investment project
costs of GBP25m (2012: GBP50m) that predominantly relate to the Economic
Capital programme and other strategic projects.
This supplementary operating profit information (one of the
Group's key performance indicators) provides further analysis of
the results reported under IFRS and we believe gives shareholders a
better understanding of the underlying performance of the
business.
Operating profit measures the pre-tax result reflecting
longer-term economic assumptions for our insurance businesses and
shareholder funds, except for LGA which excludes unrealised
investment returns to align with the liability measurement under US
GAAP. Variances between actual and smoothed assumptions are
reported below operating profit. Income and expenses arising
outside the normal course of business, such as merger and
acquisition and restructuring costs, are excluded from operating
profit, as are profits and losses arising on the elimination of own
debt holdings.
During the year, the Group has made changes to the
organisational structure, effective from 1 July 2013. The prior
period segmental information has been represented to reflect these
changes.
LGAS represents Protection business (retail protection, group
protection and general insurance) and Savings business (platforms,
workplace, SIPPs, mature savings and with-profits). The LGAS
segment also includes Legal & General France (LGF), Legal &
General Netherlands (LGN) and emerging markets.
LGR represents Annuities (both individual and bulk purchase) and
longevity insurance.
The LGIM segment represents institutional and retail investment
management businesses.
LGC represents the long term investment return (less investment
expenses) on Group invested assets, using assumptions applied to
the average balance of Group invested assets (including interest
bearing intra-group balances) calculated on a monthly basis.
The LGA segment comprises protection business written in the
USA.
IFRS and Cash Page 28
2.01 Operational cash generation
The table below provides an analysis of the operational cash generation
by each of the Group's business segments, together with a reconciliation
to operating profit before tax.
Opera- Changes Operating
tional Net in Operating profit/
cash New cash Exper- valuation Non-cash Inter- profit/ Tax (loss)
gene- business gene- ience assump- items national (loss) expense/ before
and
For the year ration(1) strain ration variances tions other and after (credit) tax
ended other(2) tax
31 December GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2013
LGAS 474 (73) 401 (34) 31 (69) 10 339 105 444
-
Protection 310 (15) 295 (7) 20 (47) 10 271 84 355
- Savings 164 (58) 106 (27) 11 (22) - 68 21 89
LGR 260 33 293 9 (13) (48) - 241 69 310
LGIM 239 - 239 - - - - 239 65 304
LGC 137 - 137 - - - - 137 42 179
LGA 44 - 44 - - - 14 58 34 92
Total from
divisions 1,154 (40) 1,114 (25) 18 (117) 24 1,014 315 1,329
Group debt
costs (97) - (97) - - - - (97) (30) (127)
Group
investment
projects
and expenses (15) - (15) - - - (19) (34) (10) (44)
Total 1,042 (40) 1,002 (25) 18 (117) 5 883 275 1,158
1. Operational cash generation includes dividends remitted from LGF
of GBP2m (2012: GBP2m), LGN of GBP14m (2012: GBP12m) and LGA of GBP44m
(2012: GBP40m).
2. International and other includes the operating profits not remitted
as dividends from LGF of GBP4m (2012: GBP8m), LGN of GBP6m (2012: GBP9m)
within the Protection line and LGA of GBP14m (2012: GBP22m).
Operational cash generation for LGAS and LGR represents the expected
surplus generated in the period from the UK in-force non profit Protection,
Savings and Annuities businesses using best estimate assumptions. The
LGAS operational cash generation also includes the shareholders' share
of bonuses on with-profits business, dividends remitted from LGF and
LGN and operating profit after tax from remaining Savings businesses.
New business strain for LGAS and LGR represents the cost of acquiring
new business and setting up regulatory reserves in respect of the new
business for UK non profit Protection, Savings and Annuities, net of
tax. The new business strain and operational cash generation for both
LGAS and LGR exclude required solvency margin from the liability calculation.
Net cash generation for LGAS and LGR is defined as operational cash
generation less new business strain.
Operational cash generation and net cash for LGIM represents the operating
profit (net of tax).
Operational cash generation for LGC represents the long term expected
investment returns (net of tax) on Group invested assets.
The operational cash generation for LGA represents the dividends received.
See Note 2.02 for more detail on variances, assumption changes and non-cash
items.
IFRS and Cash Page 29
2.01 Operational cash generation (continued)
Opera- Changes Operating
tional Net in Operating profit/
cash New cash Exper- valuation Non-cash Inter- profit/ Tax (loss)
gene- business gene- ience assump- items national (loss) expense/ before
and
For the year ration(1) strain ration variances tions other and after (credit) tax
ended other(2) tax
31 December GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
2012
LGAS 436 (107) 329 (47) 45 4 15 346 116 462
-
Protection 279 (45) 234 (8) 25 1 17 269 90 359
- Savings 157 (62) 95 (39) 20 3 (2) 77 26 103
LGR 243 14 257 43 (24) (64) - 212 69 281
LGIM 219 - 219 - - - - 219 53 272
LGC 123 - 123 - - - - 123 40 163
LGA 40 - 40 - - - 22 62 37 99
Total from
divisions 1,061 (93) 968 (4) 21 (60) 37 962 315 1,277
Group debt
costs (96) - (96) - - - - (96) (31) (127)
Group
investment
projects
and expenses (7) - (7) - - - (40) (47) (16) (63)
Total 958 (93) 865 (4) 21 (60) (3) 819 268 1,087
1. Operational cash generation includes dividends remitted from LGF
of GBP2m, LGN of GBP12m and LGA of GBP40m.
2. International and other includes the operating profits not remitted
as dividends from LGF of GBP8m, LGN of GBP9m within the Protection line
and LGA of GBP22m.
IFRS and Cash Page 30
2.02 Analysis of LGAS and LGR operating profit
LGAS LGR LGAS LGR
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Net cash generation 401 293 329 257
Experience variances
Persistency 5 1 (3) (2)
Mortality/Morbidity - 14 (1) 5
Expenses (3) - 5 -
BPA Loading - 4 - 37
Project and development
costs(1) (23) (11) (38) (5)
Other (13) 1 (10) 8
Total experience variances (34) 9 (47) 43
Changes to valuation assumptions
Persistency 7 - (10) -
Mortality/Morbidity(2) 9 (13) 9 (23)
Expenses 8 - 18 -
Other(3) 7 - 28 (1)
Total valuation assumption
changes 31 (13) 45 (24)
Movement in non-cash
items
Deferred tax (4) - (3) (1)
Utilisation of brought forward
trading losses (4) (70) (2) (70)
Acquisition expense tax
relief (4) (51) - 14 -
Deferred Acquisition costs
(DAC)(5) (54) - (9) -
Deferred Income Liabilities
(DIL)(6) 47 - 14 -
Other(7) (3) 22 (10) 7
Total non-cash movement items (69) (48) 4 (64)
Other(8) 10 - 15 -
Operating profit
after tax 339 241 346 212
Tax gross up 105 69 116 69
Operating profit
before tax 444 310 462 281
1. The project and development costs in LGAS primarily relate to expenditure
on workplace savings and the Retail Distribution Review. For LGR, it
is primarily related to expenditure on our enhanced annuity platform
proposition.
2. LGR adverse Mortality/Morbidity assumption changes primarily relate
to the strengthening of the prudence margin for base mortality.
3. Other valuation assumption changes for LGAS in 2012 primarily relate
to a reduction in the best estimate reserves within retail protection
for reinsurer default and applying PS06/14 to a retail protection product.
4. Net cash for LGAS Protection and insured savings recognises tax relief
from prior year acquisition expenses, which are spread evenly over seven
years under relevant 'I-E' tax legislation, in the period the cash flows
actually occur. In contrast, operating profit typically recognises the
value of these future cash flows in the same period as the underlying
expense as deferred tax amounts. The reconciling amounts arising from
these items are included in the table above. Following the removal of
new retail protection business from the I-E tax regime, and the removal
of commission from new insured savings business under the Retail Distribution
Review at the end of 2012, no material amount of deferred tax assets
arise on new acquisition expenses. From 2013, as the deferred tax asset
on prior period acquisition expenses unwinds, no replacement asset is
created resulting in a higher level of Net Cash in 2013, which will
then reduce over the following 6 years.
5. The DAC in LGAS represents the amortisation charges offset by new
acquisitions costs deferred in the year. The decrease in deferred costs
reflects the removal of commission payable on savings and investment
business following the implementation of the requirements of the Retail
Distribution Review on 1 January 2013.
6. The DIL in LGAS reflects initial fees on insured savings business
which relate to the future provision of services and are deferred and
amortised over the anticipated period in which these services are provided.
The significant movement in the year is driven by the implementation
of the requirements of the Retail Distribution Review on 1 January 2013.
7. The GBP22m in other non-cash items in LGR primarily relates to movement
in valuation differences between IFRS and regulatory bases.
8. Other in LGAS includes the operating profits not remitted back as
dividends from LGF GBP4m (2012: GBP8m) and LGN GBP6m (2012: GBP9m).
IFRS and Cash Page 31
2.03 General insurance combined operating ratio(1)
2013 2012
% %
General insurance combined operating
ratio(2) 84 95
1. The calculation of the general insurance combined operating ratio
incorporates commission and expenses as a percentage of earned premiums.
2. The reduced combined operating ratio reflects the continued pricing
and underwriting discipline, improvements in the claims management processes
during 2013 and benign weather experienced in the first 11 months of
the year.
2.04 LGIM
2013 2012
GBPm GBPm
Revenues 594 533
Expenses (290) (261)
Total LGIM operating profit(1) 304 272
1. Total LGIM operating profit includes GBP37m (2012: GBP29m) from
retail investment management.
2.05 LGC
2013 2012
GBPm GBPm
Investment return 185 168
Investment expenses (6) (5)
Total LGC operating profit 179 163
2.06 Investment and other variances
2013 2012
GBPm GBPm
Investment variance(1) 29 (23)
M&A related(2) (16) -
Other(3) (40) (19)
Total (27) (42)
1. Investment variance is positive due to strong equity returns from
shareholder funds and a positive impact from the increase in exposure
to Direct Investments. This has been partly offset by the defined pension
benefit scheme variance of GBP(30)m (2012: GBP40m), that reflects the
actuarial gains and losses and valuation difference arising on annuity
assets held by defined benefit pension schemes that have been purchased
from Legal & General Assurance Society Limited. All other actuarial
gains and losses on the defined benefit scheme assets and liabilities
are presented in the Other Comprehensive Income.
2. M&A related includes gains, expenses and intangible amortisation
relating to acquisitions.
3. Other includes new business start up costs, restructuring costs,
and other non-investment related variance items.
IFRS and Cash Page 32
Consolidated Income Statement
For the year ended 31 December 2013
2013 2012 (1)
Notes GBPm GBPm
Revenue
Gross written premiums 6,162 5,668
Outward reinsurance premiums (874) (718)
Net change in provision for unearned premiums (18) (25)
Net premiums earned 5,270 4,925
Fees from fund management and investment contracts 1,040 875
Investment return 32,221 28,828
Operational income 720 342
Total revenue 39,251 34,970
Expenses
Claims and change in insurance liabilities 5,767 8,588
Reinsurance recoveries (1,113) (779)
Net claims and change in insurance liabilities 4,654 7,809
Change in provisions for investment contract
liabilities 30,458 23,656
Acquisition costs 855 784
Finance costs 163 165
Other expenses 1,694 1,194
Transfers to unallocated divisible surplus 112 155
Total expenses 37,936 33,763
Profit before tax 1,315 1,207
Tax expense attributable to policyholder returns (181) (174)
Profit before tax 1,134 1,033
Total tax expense (419) (409)
Tax expense attributable to policyholder returns 181 174
Tax expense attributable to equity holders (238) (235)
Profit for the year 896 798
Attributable to:
Non-controlling interests 3 (12)
Equity holders of the Company 893 810
Dividend distributions to equity holders of
the Company during the year 2.10 479 394
Dividend distributions to equity holders of
the Company proposed after the year end 2.10 408 337
p p
Earnings per share
Based on profit attributable to equity holders
of the Company 2.07 15.20 13.84
Diluted earnings per share
Based on profit attributable to equity holders
of the Company 2.07 15.00 13.61
1. The Consolidated Income Statement has been restated to reflect the
adoption by the Group of amendments to IAS 19, 'Employee Benefits'.
Further details are contained in Note 2.21. The impact is to reduce
profit for the year by GBP3m for 2012.
IFRS and Cash Page 33
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2013
2013 2012 (1)
GBPm GBPm
Profit for the year 896 798
Items that will not be reclassified subsequently
to profit or loss
Actuarial losses on defined benefit pension
schemes (145) (101)
Actuarial losses on defined benefit pension schemes transferred
to unallocated divisible surplus 49 38
Total items that will not be reclassified to
profit or loss subsequently (96) (63)
Items that may be reclassified subsequently
to profit or loss
Exchange differences on translation of overseas
operations (16) (13)
Net change in financial investments designated
as available-for-sale (88) 32
Total items that may be reclassified to profit
or loss subsequently (104) 19
Other comprehensive (expense) after tax (200) (44)
Total comprehensive income for the year 696 754
Total comprehensive income/(expense) attributable
to:
Non-controlling interests 3 (12)
Equity holders of the Company 693 766
1. The Consolidated Statement of Comprehensive Income has been
restated to reflect the adoption by the Group of amendments to IAS
19, 'Employee Benefits'. Further details are contained in Note
2.21. The impact is to reduce profit for the year by GBP3m for
2012, offset by a corresponding change in the Other Comprehensive
Income.
IFRS and Cash Page 34
Consolidated Balance Sheet
As at 31 December 2013
2013 2012
Notes GBPm GBPm
Assets
Goodwill 2.08 73 -
Purchased interest in long term businesses and
other intangible assets 308 211
Deferred acquisition costs 1,880 1,904
Investment in associates and joint ventures 101 87
Property, plant and equipment 129 92
Investment property 2.09 6,060 5,143
Financial investments 2.09 331,802 316,748
Reinsurers' share of contract liabilities 2,897 2,499
Deferred tax asset 82 316
Current tax recoverable 310 194
Other assets 2,115 1,564
Assets of operations classified as held for sale(1) - 891
Cash and cash equivalents 17,407 16,652
Total assets 363,164 346,301
Equity
Share capital 2.11 148 148
Share premium 2.11 959 956
Employee scheme treasury shares (39) (43)
Capital redemption and other reserves 57 153
Retained earnings 4,517 4,227
Shareholders' equity 5,642 5,441
Non-controlling interests 58 39
Total equity 5,700 5,480
Liabilities
Participating insurance contracts 2.15 6,972 8,116
Participating investment contracts 2.16 7,493 7,403
Unallocated divisible surplus 1,221 1,153
Value of in-force non-participating contracts (248) (242)
Participating contract liabilities 15,438 16,430
Non-participating insurance contracts 2.15 40,273 37,728
Non-participating investment contracts 2.16 278,754 264,958
Non-participating contract liabilities 319,027 302,686
Core borrowings 2.13 2,453 2,445
Operational borrowings 2.14 704 920
Provisions 2.19 1,128 983
Deferred tax liabilities 362 382
Current tax liabilities 14 68
Payables and other financial liabilities 8,931 8,083
Other liabilities 1,032 959
Net asset value attributable to unit holders 8,375 7,702
Liabilities of operations classified as held
for sale(1) - 163
Total liabilities 357,464 340,821
Total equity and liabilities 363,164 346,301
1. Assets and liabilities of operations classified as held for
sale at 31 December 2012 relate to seed capital the Group had
invested into newly established funds. They are classified as held
for sale when the Group expects its ownership to reduce below the
level for control within 12 months of classification. There are no
such transactions at 31 December 2013.
IFRS and Cash Page 35
Consolidated Statement of Changes in Equity
Employee Capital
scheme redemption Non-
Share Share treasury and other Retained controlling Total
capital premium shares reserves earnings Total interests equity
For the year ended GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
31 December 2013
As at 1 January 2013 148 956 (43) 153 4,227 5,441 39 5,480
Profit for the year - - - - 893 893 3 896
Exchange differences
on translation of
overseas operations - - - (16) - (16) - (16)
Actuarial losses on
defined benefit
pension schemes - - - - (145) (145) - (145)
Actuarial losses on
defined benefit
pension schemes transferred
to
unallocated divisible
surplus - - - - 49 49 - 49
Net change in financial
investments
designated as available-for-sale - - - (88) - (88) - (88)
Total comprehensive
income/(expense)
for the year - - - (104) 797 693 3 696
Options exercised under
share option schemes:
- Executive share option
schemes - 1 - - - 1 - 1
- Savings related share
option scheme - 2 - - - 2 - 2
Shares purchased - - (12) - - (12) - (12)
Shares vested - - 16 (19) - (3) - (3)
Employee scheme treasury
shares:
- Value of employee
services - - - 28 - 28 - 28
Share scheme transfers
to retained earnings - - - - (29) (29) - (29)
Dividends - - - - (479) (479) - (479)
Movement in third party
interests - - - - - - 16 16
Currency translation
differences - - - (1) 1 - - -
As at 31 December 2013 148 959 (39) 57 4,517 5,642 58 5,700
IFRS and Cash Page 36
Consolidated Statement of Changes in Equity (continued)
Employee Capital
scheme redemption Non-
Share Share treasury and other Retained controlling Total
capital premium shares reserves earnings(1) Total interests equity
For the year ended GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
31 December 2012
As at 1 January 2012 147 941 (48) 117 3,899 5,056 66 5,122
Profit for the year - - - - 810 810 (12) 798
Exchange differences
on translation of
overseas operations - - - (13) - (13) - (13)
Actuarial losses on
defined benefit
pension schemes - - - - (101) (101) - (101)
Actuarial losses on
defined benefit
pension schemes transferred
to
unallocated divisible
surplus - - - - 38 38 - 38
Net change in financial
investments
designated as available-for-sale - - - 32 - 32 - 32
Total comprehensive
income/(expense)
for the year - - - 19 747 766 (12) 754
Options exercised under
share option schemes:
- Executive share option
schemes - 1 - - - 1 - 1
- Savings related share
option scheme 1 14 - - - 15 - 15
Shares purchased - - (3) - - (3) - (3)
Shares vested - - 8 (21) - (13) - (13)
Employee scheme treasury
shares:
- Value of employee
services - - - 19 - 19 - 19
Share scheme transfers
to retained earnings - - - - (6) (6) - (6)
Dividends - - - - (394) (394) - (394)
Movement in third party
interests - - - - - - (15) (15)
Currency translation
differences - - - 19 (19) - - -
As at 31 December 2012 148 956 (43) 153 4,227 5,441 39 5,480
1. The Consolidated Statement of Changes in Equity has been restated
to reflect the adoption by the Group of amendments to IAS 19, 'Employee
Benefits'. Further details are contained in the Basis of Preparation
note. The impact is to reduce profit for the year by GBP3m for 2012.
IFRS and Cash Page 37
Consolidated Cash Flow Statement
For the year ended 31 December 2013
2013 2012 (1)
GBPm GBPm
Cash flows from operating activities
Profit for the year 896 798
Adjustments for non cash movements in net profit
for the year
Realised and unrealised gains on financial
investments and investment properties (21,443) (18,429)
Investment income (9,504) (9,464)
Interest expense 163 165
Tax expense 419 409
Other adjustments 98 67
Net decrease/(increase) in operational assets
Investments held for trading or designated
as fair value through profit or loss 3,571 (1,118)
Investments designated as available-for-sale 60 30
Other assets 553 (3,008)
Net increase/(decrease) in operational liabilities
Insurance contracts 1,384 3,221
Transfer from unallocated divisible surplus 63 112
Investment contracts 13,835 13,795
Value of in-force non-participating contracts (6) -
Other liabilities 2,221 7,026
Cash used in operations (7,690) (6,396)
Interest paid (169) (164)
Interest received 4,981 5,013
Tax paid(2) (287) (193)
Dividends received 4,497 4,539
Net cash flows from operating activities 1,332 2,799
Cash flows from investing activities
Net acquisition of plant, equipment and intangibles (48) (59)
Acquisitions (net of cash acquired)(3) (97) (27)
Acquisition of joint ventures (68) -
Net cash flows from investing activities (213) (86)
Cash flows from financing activities
Dividend distributions to ordinary equity holders
of the Company during the year (479) (394)
Proceeds from issue of ordinary share capital 3 16
Purchase of employee scheme shares (4) (3)
Proceeds from borrowings 1,231 1,318
Repayment of borrowings (1,115) (1,105)
Net cash flows from financing activities (364) (168)
Net increase in cash and cash equivalents 755 2,545
Exchange gains/(losses) on cash and cash equivalents - (6)
Cash and cash equivalents at 1 January 16,652 14,113
Cash and cash equivalents at 31 December 17,407 16,652
1. The Consolidated Cash Flow Statement has been restated to reflect
the adoption by the Group of amendments to IAS 19, 'Employee Benefits'.
Further details are contained in Note 2.21. The impact is to reduce
profit for the year by GBP3m for 2012, offset by corresponding changes
to net cash flows from operating activities.
2. Tax comprises UK corporation tax paid of GBP133m (2012: GBP60m),
overseas corporate taxes of GBP6m (2012: GBP8m) and overseas withholding
tax of GBP148m (2012: GBP125m).
3. Net cash flows from acquisitions includes cash paid of GBP286m (2012:
GBP33m) less cash and cash equivalents acquired of GBP190m (2012: GBP6m).
The Group's consolidated cash flow statement includes all cash and cash
equivalent flows, including those relating to the UK long term fund
policyholders.
IFRS and Cash Page 38
2.07 Earnings per share
(a) Earnings per share
Profit Earnings Profit Earnings
after per share(1) after per share(1)
tax tax
2013 2013 2012 (2) 2012
GBPm p GBPm p
Operating profit 883 15.03 819 14.00
Investment and other
variances 13 0.22 (2) (0.04)
Impact of change in
UK tax rates (3) (0.05) (7) (0.12)
Earnings per share
based on profit
attributable to equity
holders 893 15.20 810 13.84
(b) Diluted earnings per share
Profit Number Earnings Profit Number Earnings
after of shares(3) per share after of shares(3) per share
tax tax
2013 2013 2013 2012 (2) 2012 2012
GBPm m p GBPm m p
Profit attributable to equity holders
of the Company 893 5,875 15.20 810 5,851 13.84
Net shares under options allocable
for no further consideration - 79 (0.20) - 99 (0.23)
Diluted earnings per
share 893 5,954 15.00 810 5,950 13.61
1. Earnings per share is calculated by dividing profit after tax derived
from continuing operations by the weighted average number of ordinary
shares in issue during the year, excluding employee scheme treasury
shares.
2. Profit for the year has been restated to reflect the adoption by
the Group of amendments to IAS 19, 'Employee Benefits'. Further details
are contained in Note 2.21. The impact is to reduce profit for the year
by GBP3m for 2012.
3. For diluted earnings per share, the weighted average number of ordinary
shares in issue, excluding employee scheme treasury shares, is adjusted
to assume conversion of all potential ordinary shares, such as share
options granted to employees.
IFRS and Cash Page 39
2.08 Goodwill
Lucida Cofunds IDOL Total
2013 2013 2013 2013
GBPm GBPm GBPm GBPm
Consideration at date of acquisition
Cash payment for 100%
acquisition 149 - - 149
Cash payment for 75%
acquisition - 131 - 131
Cash payment for 46%
holding - - 6 6
Acquisition date fair value of the 25% holding
immediately prior to the acquisition - 44 - 44
Acquisition date fair value of the 49% holding
immediately prior to the acquisition - - 6 6
Total consideration 149 175 12 336
Recognised amounts of identifiable assets transferred
and liabilities assumed at fair value
Purchased interest in long term business and
other intangible assets - 88 4 92
Other assets 1,351 44 1 1,396
Cash and cash equivalents 168 22 - 190
Non-participating contract
liabilities (1,294) - - (1,294)
Other liabilities (62) (44) (1) (107)
Net assets attributable to equity holders of
the Company 163 110 4 277
Goodwill arising on acquisition recognised
in the Income statement (14) - - (14)
Goodwill arising on acquisition recognised
in the Balance sheet - 65 8 73
IFRS and Cash Page 40
2.09 Financial investments and Investment property
2013 2012
GBPm GBPm
Equities 163,227 148,488
Unit trusts 9,457 7,238
Debt securities(1) 152,409 152,526
Accrued interest 1,633 1,669
Derivative assets(2) 4,746 6,445
Loans and receivables 330 382
Financial investments 331,802 316,748
Investment property 6,060 5,143
Total financial investments and
investment property 337,862 321,891
1. Detailed analysis of debt securities which shareholders are directly
exposed to are disclosed in Note 4.03.
2. Derivatives are used to ensure efficient portfolio management, especially
the use of interest rate swaps, inflation swaps, credit default swaps
and foreign exchange forward contracts for asset and liability management.
Derivative assets are shown gross of derivative liabilities and include
GBP2,391m (2012: GBP3,296m) held on behalf of unit linked policyholders.
IFRS and Cash Page 41
2.10 Dividends
Per Per
Dividend share(1) Dividend share(1)
2013 2013 2012 2012
GBPm p GBPm p
Ordinary share dividends
paid in the year
- Prior year final
dividend 337 5.69 278 4.74
- Current year interim
dividend 142 2.40 116 1.96
479 8.09 394 6.70
Ordinary share dividend
proposed(2) 408 6.90 337 5.69
1. The dividend per share calculation is based on the number of equity
shares registered on the ex-dividend date.
2. The dividend proposed is not included as a liability in the balance
sheet.
2.11 Share capital and share premium
2013 2012
Number 2013 Number 2012
of of
Authorised share capital shares GBPm shares GBPm
At 31 December: ordinary shares
of 2.5p each 9,200,000,000 230 9,200,000,000 230
Share Share
Number capital premium
of
Issued share capital, shares GBPm GBPm
fully paid
As at 1 January 2013 5,912,782,826 148 956
Options exercised under share option schemes
- Executive share option
scheme 1,422,327 - 1
- Savings related share
option scheme 2,861,483 - 2
As at 31 December 2013 5,917,066,636 148 959
Share Share
Number capital premium
of
Issued share capital, shares GBPm GBPm
fully paid
As at 1 January 2012 5,872,166,893 147 941
Options exercised under share option schemes
- Executive share option
scheme 1,626,478 - 1
- Savings related share
option scheme 38,989,455 1 14
As at 31 December 2012 5,912,782,826 148 956
There is one class of ordinary shares of 2.5p each. All shares issued
carry equal voting rights.
The holders of the Company's ordinary shares are entitled to receive
dividends as declared and are entitled to one vote per share at shareholder
meetings of the Company.
IFRS and Cash Page 42
2.12 Segmental analysis of shareholders' equity
2013 2012
GBPm GBPm
General insurance 225 180
Netherlands (LGN) 163 156
France (LGF) 212 204
Other 183 145
LGAS 783 685
LGR - -
LGIM 421 423
LGC and group expenses 3,622 3,414
LGA 816 919
Shareholders' equity 5,642 5,441
Overseas shareholder equity is presented on a legal entity basis, whereas
UK shareholder equity is based on a management assessment of this business.
The Group has five reportable segments comprising LGAS, LGR, LGIM, LGC
and group expenses and LGA.
LGAS represents Protection business (retail protection, group protection
and general insurance) and Savings business (platforms, workplace, SIPPs,
mature savings and with-profits). The LGAS segment also includes Legal
& General France (LGF), Legal & General Netherlands (LGN) and emerging
markets.
LGR represents Annuities (both individual and bulk purchase) and longevity
insurance.
The LGIM segment represents institutional and retail investment management
businesses.
Shareholders' equity supporting the non profit LGR and LGAS businesses
is held within Legal & General Assurance Society Limited and Legal &
General Pensions Limited and is managed on a groupwide basis within
LGC and group expenses. This also includes capital within the Group's
treasury function, and unit trust funds and property partnerships, which
are managed on behalf of clients but are required to be consolidated
under IFRS, which do not constitute a separately reportable segment.
The LGC and group expenses segment also includes inter-segmental elimination.
The LGA segment represents protection business written in the USA.
IFRS and Cash Page 43
2.13 Core Borrowings
Carrying Fair Carrying Fair
amount value amount value
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Subordinated borrowings
6.385% Sterling perpetual capital
securities (Tier 1) 680 650 700 636
5.875% Sterling undated subordinated
notes (Tier 2) 418 438 419 425
4.0% Euro subordinated notes 2025
(Tier 2) 498 531 479 502
10% Sterling subordinated notes
2041 (Tier 2) 309 417 309 425
Client fund holdings of Group debt(1) (13) (13) (17) (17)
Total subordinated
borrowings 1,892 2,023 1,890 1,971
Senior borrowings
Sterling medium term notes
2031-2041 608 721 608 767
Client fund holdings of Group debt(1) (47) (55) (53) (66)
Total senior borrowings 561 666 555 701
Total core borrowings 2,453 2,689 2,445 2,672
1. GBP60m (2012: GBP70m) of the Group's subordinated and senior borrowings
are currently held by Legal & General customers through unit linked
products. These borrowings are shown as a deduction from total core
borrowings in the table above.
All of the Group's core borrowings are measured using amortised cost.
The presented fair values of the Group's core borrowings reflect quoted
prices in active markets and they have been classified as level 1 in
the fair value hierarchy.
Subordinated borrowings
6.385% Sterling perpetual capital securities
In 2007, Legal & General Group Plc issued GBP600m of 6.385%
Sterling perpetual capital securities. Simultaneous with the
issuance, the fixed coupon was swapped into six month LIBOR plus
0.94% pa. These securities are callable at par on 2 May 2017 and
every three months thereafter. If not called, the coupon from 2 May
2017 will be reset to three month LIBOR plus 1.93% pa. For
regulatory purposes these securities are treated as innovative tier
1 capital.
5.875% Sterling undated subordinated notes
In 2004, Legal & General Group Plc issued GBP400m of 5.875%
Sterling undated subordinated notes. These notes are callable at
par on 1 April 2019 and every five years thereafter. If not called,
the coupon from 1 April 2019 will be reset to the prevailing five
year benchmark gilt yield plus 2.33% pa. These notes are treated as
tier 2 capital for regulatory purposes.
4.0% Euro subordinated notes 2025
In 2005, Legal & General Group Plc issued EUR600m of 4.0%
Euro dated subordinated notes. The proceeds were swapped into
sterling. The notes are callable at par on 8 June 2015 and each
year thereafter. If not called, the coupon from 8 June 2015 will
reset to a floating rate of interest based on prevailing three
month Euribor plus 1.7% pa. These notes mature on 8 June 2025 and
are treated as tier 2 capital for regulatory purposes.
10% Sterling subordinated notes 2041
On 16 July 2009, Legal & General Group Plc issued GBP300m of
10% dated subordinated notes. The notes are callable at par on 23
July 2021 and every five years thereafter. If not called, the
coupon from 23 July 2021 will be reset to the prevailing five year
benchmark gilt yield plus 9.325% pa. These notes mature on 23 July
2041 and are treated as tier 2 capital for regulatory purposes.
IFRS and Cash Page 44
2.14 Operational Borrowings
Carrying Fair Carrying Fair
amount value amount value
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Short term operational borrowings
Euro Commercial paper 173 173 333 333
Bank loans/other 16 16 6 6
Total short term operational borrowings 189 189 339 339
Non recourse borrowings
US Dollar Triple X securitisation
2037 268 230 272 272
Suffolk Life unit linked
borrowings 116 116 123 123
LGV 6/LGV 7 Private Equity Fund
Limited Partnership 131 131 128 128
Consolidated Property Limited Partnerships 58 58 58 58
Total non recourse borrowings 573 535 581 581
Group holding of operational
borrowings(1) (58) (49) - -
Total operational borrowings 704 675 920 920
1. The Group investments in operational borrowings have been eliminated
from the Group consolidated balance sheet.
The presented fair values of the Group's operational borrowings
reflect observable market information and have been classified as
level 2 in the fair value hierarchy.
Short term operational borrowings
Short term assets available at the holding company level
exceeded the amount of short term operational borrowings of GBP189m
(2012: GBP339m). Short term operational borrowings comprise Euro
Commercial paper, bank loans and overdrafts.
Non recourse borrowings
US Dollar Triple X securitisation 2037
In 2006, a subsidiary of LGA issued US$450m of non recourse debt
in the US capital markets to meet the Triple X reserve requirements
of part of the US term insurance written after 2005 and 2006. It is
secured on the cash flows related to that tranche of business.
Suffolk Life unit linked borrowings
All of these non recourse borrowings are in relation to
commercial properties held within SIPP plans and the borrowings
solely relate to client investments.
LGV6/LGV7 Private Equity Fund Limited Partnerships
These borrowings are non recourse bank borrowings.
Consolidated Property Limited Partnerships
These borrowings are non recourse bank borrowings.
Syndicated credit facility
As at 31 December 2013, the Group had in place a GBP1.00bn
syndicated committed revolving credit facility provided by a number
of its key relationship banks, GBP0.04bn matures in October 2017
and GBP0.96bn matures in October 2018. A test drawing was made
under this facility during 2013. No amounts were outstanding at 31
December 2013.
IFRS and Cash Page 45
2.15 Insurance contract liabilities
(a) Analysis of insurance contract liabilities
Re- Re-
Gross insurance Gross insurance
2013 2013 2012 2012
Notes GBPm GBPm GBPm GBPm
Participating insurance contracts 2.15(b) 6,972 (1) 8,116 (1)
Non-participating insurance
contracts 2.15(c) 39,975 (2,596) 37,445 (2,277)
General insurance contracts 2.15(d) 298 (5) 283 (8)
Insurance contract liabilities 47,245 (2,602) 45,844 (2,286)
(b) Movement in participating insurance contract liabilities
Re- Re-
Gross insurance Gross insurance
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
As at 1 January 8,116 (1) 8,750 (1)
New liabilities in
the year 75 - 262 -
Liabilities discharged in
the year (1,606) - (1,413) -
Unwinding of discount rates 79 - 78 -
Effect of change in non-economic
assumptions 4 - 4 -
Effect of change in economic
assumptions 291 - 329 -
Other 13 - 106 -
As at 31 December 6,972 (1) 8,116 (1)
IFRS and Cash Page 46
2.15 Insurance contract liabilities (continued)
(c) Movement in non-participating insurance contract
liabilities
Re- Re-
Gross insurance Gross insurance
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
As at 1 January 37,445 (2,277) 33,761 (2,110)
New liabilities in the year(1) 3,872 (334) 2,667 (392)
Liabilities discharged in
the year (2,307) 167 (2,271) 213
Unwinding of discount rates 1,308 (134) 1,311 (118)
Effect of change in non-economic
assumptions 77 (25) (124) 132
Effect of change in economic
assumptions (430) - 2,229 (17)
Foreign exchange adjustments 10 7 (128) 15
As at 31 December 39,975 (2,596) 37,445 (2,277)
1. New liabilities includes those acquired with Lucida Ltd of GBP1,294m
(See Note 2.08).
(d) Analysis of General insurance contract liabilities
Re- Re-
Gross insurance Gross insurance
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Outstanding claims 66 - 74 -
Claims incurred but not reported 37 - 30 -
Unearned premiums 195 (5) 179 (8)
General insurance contract
liabilities 298 (5) 283 (8)
(e) Movement in General insurance claim liabilities
Re- Re-
Gross insurance Gross insurance
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
As at 1 January 104 - 93 (1)
Claims arising 175 - 181 -
Claims paid (156) - (172) 1
Adjustments to prior year
liabilities (20) - 2 -
As at 31 December 103 - 104 -
IFRS and Cash Page 47
2.16 Investment contract liabilities
(a) Analysis of investment contract liabilities
Re- Re-
Gross insurance Gross insurance
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Participating investment
contracts 7,493 - 7,403 (2)
Non-participating investment
contracts 278,754 (295) 264,958 (211)
Investment contract
liabilities 286,247 (295) 272,361 (213)
(b) Movement in investment contract liabilities
Re- Re-
Gross insurance Gross insurance
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
As at 1 January 272,361 (213) 258,621 (172)
Reserves in respect of new business 30,816 (237) 28,347 (281)
Amounts paid on surrenders and
maturities during the year (47,055) 66 (37,662) 16
Investment return and related
benefits 30,369 89 23,432 224
Management charges (295) - (300) -
Foreign exchange adjustments 51 - (55) -
Other - - (22) -
As at 31 December 286,247 (295) 272,361 (213)
Change in provisions for investment contract liabilities represents
the total gross and reinsurance investment return and related benefits
of GBP30,458m (2012: GBP23,656m).
Fair value movements of GBP30,095m (2012: GBP23,199m) are included within
the income statement arising from movements in investment contract liabilities
designated as fair value through profit and loss.
IFRS and Cash Page 48
2.17 IFRS sensitivity analysis
Impact Impact
on on
pre-tax Impact pre-tax Impact
on on
Group Group Group Group
profit equity profit equity
net of net of net of net of
re- re- re- re-
insurance insurance insurance insurance
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Economic sensitivity
Long-term insurance
1% increase in interest
rates 39 32 8 7
1% decrease in interest
rates (11) (10) (46) (35)
Credit spread widens by 100bps with no change
in expected defaults (100) (76) (123) (93)
1% increase in inflation 45 36 (10) (8)
10% decrease in listed
equities (143) (114) (124) (95)
10% fall in property
values (53) (41) (31) (24)
10bps increase in credit
default assumption (284) (218) (282) (213)
10bps decrease in credit
default assumption 292 224 280 212
Non-economic sensitivity
Long-term insurance
1% decrease in annuitant
mortality (105) (80) (96) (73)
Default of largest
reinsurer (666) (512) (651) (491)
General Insurance
Single storm event with 1
in 200 year probability (73) (56) (63) (47)
Subsidence event - worst
claims ratio in last 30 years (55) (42) (50) (37)
5% decrease in overall
claims ratio 7 5 8 6
5% surplus over claims
liabilities 5 4 5 4
The table above shows the impacts on Group pre-tax profit and
equity, net of reinsurance, under each sensitivity scenario for the
Group. The participating funds have been excluded in the above
sensitivity analysis as the impact of the sensitivities on IFRS
profit and equity is offset by the movement in the unallocated
divisible surplus (UDS). The shareholders' share of with-profit
bonus declared in the year is relatively insensitive to market
movements due to the smoothing policies applied.
The above sensitivity analyses do not reflect management actions
which could be taken to reduce the impacts. The Group seeks to
actively manage its asset and liability position. A change in
market conditions may lead to changes in the asset allocation or
charging structure which may have a more, or less, significant
impact on the value of the liabilities. The analyses also ignore
any second order effects of the assumption change, including the
potential impact on the Group asset and liability position and any
second order tax effects. In calculating the alternative values,
all other assumptions are left unchanged, though in practice, items
of the Group's experience may be correlated. The sensitivity of the
profit and equity to changes in assumptions may not be linear.
These results should not be extrapolated to changes of a much
larger order.
The interest rate sensitivity assumes a 100 basis point change
in the gross redemption yield on fixed interest securities together
with a 100 basis point change in the real yields on variable
securities. For the UK long term funds, valuation interest rates
are assumed to move in line with market yields adjusted to allow
for the impact of PRA regulations. The interest rate sensitivities
reflect the impact of the regulatory restrictions on the
reinvestment rate used to value the liabilities of the long term
business.
In the sensitivity for credit spreads, corporate bond yields
have increased by 100bps, gilt and approved security yields are
unchanged, and there has been no adjustment to the default
assumptions.
The inflation stress adopted is a 1% pa increase in inflation
resulting in a 1% pa reduction in real yield and no change to the
nominal yield. In addition the expense inflation rate is increased
by 1% pa.
The equity stress is a 10% fall in listed equity market values.
The property stress adopted is a 10% fall in property market value.
Rental income is assumed to be unchanged; however the vacant
possession value is stressed down by 10% in line with the market
value stress. Where property is being used to back liabilities, the
valuation interest rate used to place a value on the liabilities
moves with the implied change in property yields.
The annuitant mortality stress is a 1% reduction in the
mortality rates for immediate and deferred annuitants with no
change to the mortality improvement rates.
The credit default stress assumes a +/-10bps stress to the
current credit default assumption for unapproved corporate bonds
which will have an impact on the valuation interest rates used to
discount liabilities. The credit default assumption is set based on
the credit rating of the individual bonds in the asset portfolio
and their outstanding term using Moody's global credit default
rates.
For the sensitivity to the default of the Group's largest
reinsurer, the reinsurer stress shown is equal to the technical
provisions ceded to the reinsurer and represents the impact of the
default of largest reinsurer at an entity level.
IFRS and Cash Page 49
2.18 Foreign exchange rates
Principal rates of exchange
used for translation are:
Year end exchange rates At 31.12.13 At 31.12.12
United States Dollar 1.66 1.63
Euro 1.20 1.23
01.01.13 01.01.12
- -
Average exchange rates 31.12.13 31.12.12
United States Dollar 1.57 1.58
Euro 1.18 1.23
2.19 Provisions
(a) Analysis of provisions
2013 2012
Note GBPm GBPm
Retirement benefit
obligations 2.19(b) 1,113 969
Other provisions 15 14
1,128 983
(b) Retirement benefit obligations
Fund and Fund and
Scheme Overseas Scheme Overseas
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Gross pension obligations included in provisions (1,113) - (967) (2)
Annuity obligations insured by Society 646 - 636 -
Gross defined benefit pension deficit (467) - (331) (2)
Deferred tax on defined benefit pension deficit 93 - 76 -
Net defined benefit pension deficit (374) - (255) (2)
The Legal & General Group UK Pension and Assurance Fund and
the Legal & General Group UK Senior Pension Scheme are defined
benefit pension arrangements and account for all UK and the
majority of worldwide assets of, and contributions to, such
arrangements. At 31 December 2013, the combined after tax deficit
arising from these arrangements (net of annuity obligations insured
by Society) has been estimated at GBP374m (2012: GBP255m). These
amounts have been recognised in the financial statements with
GBP236m charged against shareholder equity (2012: GBP152m) and
GBP138m against the unallocated divisible surplus (2012:
GBP103m).
The increase in gross defined benefit pension deficit is
primarily due to the change in valuation assumption around
inflation rates, partly offset by recovery plan payments and
investment return in excess of the discount rate.
IFRS and Cash Page 50
2.20 Contingent liabilities, guarantees and indemnities
Provision for the liabilities arising under contracts with
policyholders is based on certain assumptions. The variance between
actual experience from that assumed may result in those liabilities
differing from the provisions made for them. Liabilities may also
arise in respect of claims relating to the interpretation of
policyholder contracts, or the circumstances in which policyholders
have entered into them. The extent of these liabilities is
influenced by a number of factors including the actions and
requirements of the PRA, ombudsman rulings, industry compensation
schemes and court judgments.
Various Group companies receive claims and become involved in
actual or threatened litigation and regulatory issues from time to
time. The relevant members of the Group ensure that they make
prudent provision as and when circumstances calling for such
provision become clear, and that each has adequate capital and
reserves to meet reasonably foreseeable eventualities. The
provisions made are regularly reviewed. It is not possible to
predict, with certainty, the extent and the timing of the financial
impact of these claims, litigation or issues.
In 1975, Legal & General Assurance Society Limited (the
Society) was required by the Institute of London Underwriters (ILU)
to execute the ILU form of guarantee in respect of policies issued
through the ILU's Policy Signing Office on behalf of NRG Victory
Reinsurance Company Ltd (Victory), a company which was then a
subsidiary of the Society. In 1990, Nederlandse Reassurantie Groep
Holding NV (the assets and liabilities of which have since been
assumed by Nederlandse Reassurantie Groep NV under a statutory
merger in the Netherlands) acquired Victory and provided an
indemnity to the Society against any liability the Society may have
as a result of the ILU's requirement, and the ILU agreed that its
requirement of the Society would not apply to policies written or
renewed after the acquisition. Nederlandse Reassurantie Groep NV is
now owned by Columbia Insurance Company, a subsidiary of Berkshire
Hathaway Inc. Whether the Society has any liability as a result of
the ILU's requirement and, if so, the amount of its potential
liability is uncertain. The Society has made no payment or
provision in respect of this matter.
Group companies have given indemnities and guarantees as a
normal part of their business and operating activities or in
relation to capital market transactions. Legal & General Group
Plc has provided indemnities and guarantees in respect of the
liabilities of Group companies in support of their business
activities, including Pension Protection Fund compliant guarantees
in respect of certain Group companies' liabilities under the Group
pension fund and scheme.
IFRS and Cash Page 51
2.21 Basis of preparation
The Group financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRSs) issued by
the International Accounting Standards Board (IASB) as adopted by
the European Union, and with those parts of the UK Companies Act
2006 applicable to companies reporting under IFRS. Except for the
provisions of IFRS 10 'Consolidated Financial Statements', IFRS 11
'Joint Arrangements' and IFRS 12 'Disclosures of Interests in Other
Entities' which have been endorsed for compulsory application in
the EU for financial periods beginning on or after 1 January 2014,
the Group financial statements also comply with IFRS and
interpretations by the IFRS Interpretations Committee as issued by
the IASB. The Group financial statements have been prepared under
the historical cost convention, as modified by the revaluation of
land and buildings, available-for-sale financial assets, and
financial assets and financial liabilities (including derivative
instruments) at fair value through profit and loss.
The Group has selected accounting policies which state fairly
its financial position, financial performance and cash flows for a
reporting period. The accounting policies have been consistently
applied to all years presented, unless otherwise stated.
The Group presents its balance sheet in order of liquidity. This
is considered to be more relevant than a before and after 12 months
presentation, given the long term nature of the Group's core
business. However, for each asset and liability line item which
combines amounts expected to be recovered or settled before and
after 12 months from the balance sheet date, disclosure of the
split is made by way of a note.
Financial assets and financial liabilities are disclosed gross
in the balance sheet unless a legally enforceable right of offset
exists and there is an intention to settle recognised amounts on a
net basis. Income and expenses are not offset in the income
statement unless required or permitted by any accounting standard
or interpretations by the IFRS Interpretations Committee.
Foreign currency transactions are translated into the functional
currency using the exchange rate prevailing at the date of the
transactions. The functional currency of the Group's foreign
operations is the currency of the primary economic environment in
which the entity operates. The assets and liabilities of all of the
Group's foreign operations are translated into sterling, the
Group's presentation currency, at the closing rate at the date of
the balance sheet. The income and expenses for each income
statement are translated at average exchange rates. On
consolidation, exchange differences arising from the translation of
the net investment in foreign entities, and of borrowings and other
currency instruments designated as hedges of such investments, are
taken to a separate component of shareholders' equity.
Use of estimates
The preparation of the financial statements includes the use of
estimates and assumptions which affect items reported in the
consolidated balance sheet and income statement and the disclosure
of contingent assets and liabilities at the date of the financial
statements. Although these estimates are based on management's best
knowledge of current circumstances and future events and actions,
actual results may differ from those estimates, possibly
significantly. This is particularly relevant for the determination
of fair values of investment property and unquoted and illiquid
financial investments; the estimation of deferred acquisition
costs; tax balances; and the estimation of insurance and investment
contract liabilities. The basis of accounting for these areas, and
the significant judgements used in determining them, are outlined
in the respective notes to the financial statements.
Reportable segments
Under the requirements of IFRS 8, 'Operating segments',
operating and reportable segments are presented in a manner
consistent with the internal reporting provided to the chief
operating decision maker, which has been identified as the Board of
Legal & General Group Plc.
During the year, the Group has made changes to the
organisational structure, effective from 1 July 2013. This has had
the consequence of changing the reportable segments of the Group as
outlined below. In accordance with the requirements of IFRS 8,
'Operating Segments', the prior period segmental information has
been restated to reflect these changes.
The Group has five reportable segments comprising Legal &
General Retirement (LGR), Legal & General Assurance Society
(LGAS), Legal & General Investment Management (LGIM), Legal
& General America (LGA), and Legal & General Capital (LGC
and group expenses).
LGAS represents Protection business (retail protection, group
protection and general insurance) and Savings business (platforms,
workplace, SIPPs, mature savings and with-profits). The LGAS
segment also includes Legal & General France (LGF), Legal &
General Netherlands (LGN) and emerging markets.
LGR represents Annuities (both individual and bulk purchase) and
longevity insurance.
The LGIM segment represents institutional and retail investment
management businesses.
Shareholders' equity supporting the non profit LGR and LGAS
businesses is held within Legal & General Assurance Society
Limited and Legal & General Pensions Limited and is managed on
a groupwide basis within LGC and group expenses. This also includes
capital within the Group's treasury function and unit trust funds
and property partnerships, which are managed on behalf of clients
but are required to be consolidated under IFRS, which do not
constitute a separately reportable segment. The group expenses
segment also includes inter-segmental elimination.
The LGA segment comprises protection business written in the
USA.
Transactions between reportable segments are on normal
commercial terms, and are included within the reported
segments.
The Group assesses performance and allocates resources on the
basis of IFRS supplementary operating profit before tax. Segmental
IFRS supplementary operating profit before tax is reconciled to the
consolidated profit from continuing operations before tax
attributable to equity holders and consolidated profit from
ordinary activities after income tax.
IFRS and Cash Page 52
2.21 Basis of preparation (continued)
Changes to accounting policy - IAS 19 'Employee Benefits'
During 2013 the Group has changed its accounting policy on the
recognition and measurement of defined benefit pension expense and
termination benefits following the publication by the IASB in June
2011 of an amendment to IAS 19 'Employee Benefits'. This is
compulsory for periods beginning on or after 1 January 2013. The
impact of the amendment is to reduce profit for the year by GBP4m,
following the allocation of the with-profit element to the
unallocated divisible surplus, with an equivalent increase in Other
Comprehensive Income. Total Comprehensive Income therefore remains
unchanged.
The impact of this change upon the 2012 annual income statement,
statement of comprehensive income, and cash flow statement is shown
below. As the impact of the change is shown within investment
variances there is no impact upon Group Operating Profit.
As the change has no balance sheet impact, an additional balance
sheet for 31 December 2011 and related notes have not been
presented.
31.12.12
GBPm
Profit for the period as previously
reported 801
Investment return
IAS 19 'Employee Benefits'
amendment (6)
Expenses
Transfers to unallocated
divisible surplus 3
Revised profit for the
period (after tax) 798
Actuarial gain on defined benefit
pension schemes 6
Actuarial gain on defined benefit pension schemes transferred
to unallocated divisible surplus (3)
Other items in other
comprehensive income (47)
-------------------------------------------------------------- ----------
Total Comprehensive Income for
the period 754
-------------------------------------------------------------- ----------
The consolidated cash flow statement has been restated in line
with these changes.
Changes to accounting policy - IFRS 13 'Fair Value
Measurement'
On 1 January 2013 the Group adopted IFRS 13 'Fair Value
Measurement'. This Standard defines fair value, sets out in a
single IFRS a framework for measuring fair value, and requires
disclosure about fair value measurements. The application impact on
the Group for the full year lies in the expansion of the fair value
disclosure requirements. The application of this standard can be
found in the Annual Report and Accounts.
Key technical terms and definitions
The report refers to various key performance indicators,
accounting standards and other technical terms. A comprehensive
list of these definitions is contained within the glossary of the
Group's 2013 Annual Report and Accounts.
Asset and premium flows Page 53
3.01 Legal & General investment management assets under management
Active
Index fixed Solu- Property Active
funds interest tions(1) & other equities Total
Year ended 31 December 2013 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
At 1 January 2013 243.2 82.2 64.0 8.9 7.7 406.0
External inflows(2,3) 31.3 11.0 8.6 1.0 0.1 52.0
External outflows(2) (31.8) (5.0) (5.2) (0.3) (0.4) (42.7)
External net flows (0.5) 6.0 3.4 0.7 (0.3) 9.3
Internal net flows 0.7 (1.7) 0.8 0.2 (0.2) (0.2)
Total net flows 0.2 4.3 4.2 0.9 (0.5) 9.1
Market and other movements 26.4 2.9 2.2 1.5 1.4 34.4
At 31 December 2013 269.8 89.4 70.4 11.3 8.6 449.5
Active
Index fixed Solu- Property Active
funds interest tions(1) & other equities Total
Year ended 31 December 2012 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
At 1 January 2012 224.2 72.4 58.4 9.0 7.2 371.2
External inflows(2) 24.2 6.6 5.9 0.3 0.1 37.1
External outflows(2) (22.5) (5.1) (3.7) (0.1) (0.4) (31.8)
External net flows 1.7 1.5 2.2 0.2 (0.3) 5.3
Internal net flows 0.7 (1.8) 0.1 (0.1) (0.2) (1.3)
Total net flows 2.4 (0.3) 2.3 0.1 (0.5) 4.0
Market and other movements 16.6 10.1 3.3 (0.2) 1.0 30.8
At 31 December 2012 243.2 82.2 64.0 8.9 7.7 406.0
12 12
months months
to to
31.12.13 31.12.12
GBPbn GBPbn
LGIM total net flows 9.1 4.0
Attributable to:
International(3) 15.7 7.8
UK Institutional (5.3) 0.1
UK Retail 0.4 (1.9)
Annuities(4) 1.4 0.6
Mature Savings (3.1) (2.6)
1. Solutions includes liability driven investments and multi-asset funds.
2. Includes unit trust business, both retail and institutional, now
part of LGIM, following the organisational changes effective from 1
July 2013.
3. Includes GBP2.9bn of Legal & General France assets.
4. Pension funds already managed by LGIM that switch into LGR annuities
are excluded.
Asset and premium flows Page 54
3.02 Legal & General investment management assets under management quarterly
progression
Active
Index fixed Solu- Property Active
funds interest tions(1) & other equities Total
Year ended 31 December 2013 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
At 1 January 2013 243.2 82.2 64.0 8.9 7.7 406.0
External inflows(2) 11.0 2.2 1.1 0.1 - 14.4
External outflows(2) (7.1) (0.9) (1.1) - (0.1) (9.2)
External net flows 3.9 1.3 - 0.1 (0.1) 5.2
Internal net flows 0.1 (0.7) 0.1 - - (0.5)
Total net flows 4.0 0.6 0.1 0.1 (0.1) 4.7
Market and other movements 20.1 2.0 7.3 0.3 0.8 30.5
At 31 March 2013 267.3 84.8 71.4 9.3 8.4 441.2
External inflows(2) 6.2 1.3 4.6 0.2 - 12.3
External outflows(2) (7.9) (0.5) (0.7) (0.1) (0.3) (9.5)
External net flows (1.7) 0.8 3.9 0.1 (0.3) 2.8
Internal net flows 0.4 (0.8) 0.6 - - 0.2
Total net flows (1.3) - 4.5 0.1 (0.3) 3.0
Market and other movements (3.9) (1.9) (5.0) - (0.4) (11.2)
At 30 June 2013 262.1 82.9 70.9 9.4 7.7 433.0
External inflows(2,3) 8.0 4.8 2.2 0.4 0.1 15.5
External outflows(2) (8.3) (2.0) (1.7) (0.1) - (12.1)
External net flows (0.3) 2.8 0.5 0.3 0.1 3.4
Internal net flows - 0.6 - 0.1 (0.1) 0.6
Total net flows (0.3) 3.4 0.5 0.4 - 4.0
Market and other movements 3.2 1.4 0.1 0.6 0.3 5.6
At 30 September 2013 265.0 87.7 71.5 10.4 8.0 442.6
External inflows(2) 6.1 2.7 0.7 0.3 - 9.8
External outflows(2) (8.5) (1.6) (1.7) (0.1) - (11.9)
External net flows (2.4) 1.1 (1.0) 0.2 - (2.1)
Internal net flows 0.2 (0.8) 0.1 0.1 (0.1) (0.5)
Total net flows (2.2) 0.3 (0.9) 0.3 (0.1) (2.6)
Market and other movements 7.0 1.4 (0.2) 0.6 0.7 9.5
At 31 December 2013 269.8 89.4 70.4 11.3 8.6 449.5
1. Solutions includes liability driven investments and multi-asset funds.
2. Includes unit trust business, both retail and institutional, now
part of LGIM, following the organisational changes effective from 1
July 2013.
3. Includes GBP2.9bn of Legal & General France assets.
Asset and premium flows Page 55
3.02 Legal & General investment management assets under management quarterly
progression (continued)
Active
Index fixed Solu- Property Active
funds interest tions(1) & other equities Total
Year ended 31 December 2012 GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
At 1 January 2012 224.2 72.4 58.4 9.0 7.2 371.2
External inflows(2) 4.6 1.8 1.7 0.1 - 8.2
External outflows(2) (4.7) (0.4) (0.9) - (0.1) (6.1)
External net flows (0.1) 1.4 0.8 0.1 (0.1) 2.1
Internal net flows 0.4 (0.8) - (0.2) (0.1) (0.7)
Total net flows 0.3 0.6 0.8 (0.1) (0.2) 1.4
Market and other movements 8.8 1.3 (0.2) (0.1) 0.5 10.3
At 31 March 2012 233.3 74.3 59.0 8.8 7.5 382.9
External inflows(2) 4.4 2.0 1.7 0.1 - 8.2
External outflows(2) (5.4) (1.3) (0.4) (0.1) - (7.2)
External net flows (1.0) 0.7 1.3 - - 1.0
Internal net flows - (0.8) - 0.1 - (0.7)
Total net flows (1.0) (0.1) 1.3 0.1 - 0.3
Market and other movements (5.3) 3.0 0.9 - (0.5) (1.9)
At 30 June 2012 227.0 77.2 61.2 8.9 7.0 381.3
External inflows(2) 7.1 1.4 0.5 - - 9.0
External outflows(2) (5.7) (2.0) (1.4) 0.1 (0.1) (9.1)
External net flows 1.4 (0.6) (0.9) 0.1 (0.1) (0.1)
Internal net flows 0.3 (0.2) - - - 0.1
Total net flows 1.7 (0.8) (0.9) 0.1 (0.1) -
Market and other movements 7.3 3.9 (2.2) (0.1) 0.5 9.4
At 30 September 2012 236.0 80.3 58.1 8.9 7.4 390.7
External inflows(2) 8.1 1.4 2.0 0.1 0.1 11.7
External outflows(2) (6.7) (1.4) (1.0) (0.1) (0.2) (9.4)
External net flows 1.4 - 1.0 - (0.1) 2.3
Internal net flows - - 0.1 - (0.1) -
Total net flows 1.4 - 1.1 - (0.2) 2.3
Market and other movements 5.8 1.9 4.8 - 0.5 13.0
At 31 December 2012 243.2 82.2 64.0 8.9 7.7 406.0
1. Solutions includes liability driven investments and multi-asset funds.
2. Includes unit trust business, both retail and institutional, now
part of LGIM, following the organisational changes effective from 1
July 2013.
Asset and premium flows Page 56
3.02 Legal & General investment management assets under management quarterly
progression (continued)
3 3 3 3 3 3 3 3
months months months months months months months months
to to to to to to to to
31.12.13 30.09.13 30.06.13 31.03.13 31.12.12 30.09.12 30.06.12 31.03.12
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
LGIM total net flows (2.6) 4.0 3.0 4.7 2.3 - 0.3 1.4
Attributable to:
International(1) 1.8 6.4 0.8 6.7 2.3 3.2 1.2 1.1
UK Institutional (3.8) (3.2) 2.7 (1.0) 0.6 (2.2) 0.3 1.4
UK Retail 0.1 0.3 0.3 (0.3) (0.4) (0.7) (0.4) (0.4)
Annuities(2) (0.1) 1.4 0.1 - 0.5 0.3 (0.1) (0.1)
Mature Savings (0.6) (0.9) (0.9) (0.7) (0.7) (0.6) (0.7) (0.6)
1. Q3 2013 International net flows include GBP2.9bn of Legal & General
France assets.
2. Pension funds already managed by LGIM that switch into LGR annuities
are excluded.
Asset and premium flows Page 57
3.03 Assets under administration
Consol-
Mature idation Retail
Retail Work- Suffolk adjust- Total Invest-
Platforms(1) Savings(2) place Life ment(3) LGAS ments(4) Annuities
Year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2013
At 1 January 2013 8.6 36.2 6.0 5.1 (1.4) 54.5 15.6 32.2
Gross inflows(5) 11.0 1.4 2.1 1.3 (0.3) 15.5 3.2 4.0
Gross outflows (3.1) (5.1) (0.6) (0.4) 0.5 (8.7) (3.3) -
Payments to annuitants - - - - - - - (1.9)
Net flows 7.9 (3.7) 1.5 0.9 0.2 6.8 (0.1) 2.1
Cofunds acquisition 45.7 - - - (5.4) 40.3 - -
Market and other movements 1.9 3.8 1.2 0.6 (0.2) 7.3 1.5 0.1
At 31 December 2013 64.1 36.3 8.7 6.6 (6.8) 108.9 17.0 34.4
Consol-
Mature idation Retail
Retail Work- Suffolk adjust- Total Invest-
Platforms(1) Savings(2) place Life ment(3) LGAS ments(4) Annuities
Year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2012
At 1 January 2012 6.7 36.4 3.8 4.3 (1.2) 50.0 14.9 28.4
Gross inflows 2.9 2.3 2.2 0.8 (0.2) 8.0 2.4 2.4
Gross outflows (1.6) (5.5) (0.6) (0.3) 0.1 (7.9) (3.0) -
Payments to annuitants - - - - - - - (1.8)
Net flows 1.3 (3.2) 1.6 0.5 (0.1) 0.1 (0.6) 0.6
Market and other movements 0.6 3.0 0.6 0.3 (0.1) 4.4 1.3 3.2
At 31 December 2012 8.6 36.2 6.0 5.1 (1.4) 54.5 15.6 32.2
1. Platforms includes Investor Portfolio Services (IPS)
and Cofunds since acquisition.
2. Mature retail savings products includes with-profit products,
bonds and retail pensions.
3. Consolidation adjustment represents Suffolk Life and Mature Retail
Savings assets included in the Platforms column.
4. Retail Investments includes unit trust products (both LGIM and externally
managed) and structured products (deposits and investments). It also
includes GBP1.2bn of Cofunds assets.
5. Platforms gross inflows include Cofunds institutional
net flows.
Asset and premium flows Page 58
3.04 Assets under administration quarterly progression
Consol-
Mature idation Retail
Retail Work- Suffolk adjust- Total Invest-
Platforms(1) Savings(2) place Life ment(3) LGAS ments(4) Annuities
Year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2013
At 1 January 2013 8.6 36.2 6.0 5.1 (1.4) 54.5 15.6 32.2
Gross inflows 0.2 0.4 0.5 0.2 - 1.3 0.7 0.8
Gross outflows (0.2) (1.2) (0.2) (0.1) 0.1 (1.6) (1.0) -
Payments to annuitants - - - - - - - (0.4)
Net flows - (0.8) 0.3 0.1 0.1 (0.3) (0.3) 0.4
Market and other movements 0.5 1.7 0.6 0.3 (0.1) 3.0 1.0 0.7
At 31 March 2013 9.1 37.1 6.9 5.5 (1.4) 57.2 16.3 33.3
Gross inflows(5) 1.7 0.4 0.5 0.3 - 2.9 1.0 0.6
Gross outflows (0.7) (1.4) (0.1) (0.1) - (2.3) (0.9) -
Payments to annuitants - - - - - - - (0.5)
Net flows 1.0 (1.0) 0.4 0.2 - 0.6 0.1 0.1
Cofunds acquisition 45.7 - - - (5.4) 40.3 - -
Market and other movements (2.1) (0.4) - - 0.3 (2.2) (0.3) (1.2)
At 30 June 2013 53.7 35.7 7.3 5.7 (6.5) 95.9 16.1 32.2
Gross inflows(5) 4.5 0.3 0.5 0.4 (0.1) 5.6 0.9 2.3
Gross outflows (1.2) (1.4) (0.1) (0.1) 0.2 (2.6) (0.8) -
Payments to annuitants - - - - - - - (0.5)
Net flows 3.3 (1.1) 0.4 0.3 0.1 3.0 0.1 1.8
Market and other movements 1.3 1.4 0.2 0.1 (0.2) 2.8 0.5 0.5
At 30 September 2013 58.3 36.0 7.9 6.1 (6.6) 101.7 16.7 34.5
Gross inflows(5) 4.6 0.3 0.6 0.4 (0.2) 5.7 0.6 0.3
Gross outflows (1.0) (1.1) (0.2) (0.1) 0.2 (2.2) (0.6) -
Payments to annuitants - - - - - - - (0.5)
Net flows 3.6 (0.8) 0.4 0.3 - 3.5 - (0.2)
Market and other movements 2.2 1.1 0.4 0.2 (0.2) 3.7 0.3 0.1
At 31 December 2013 64.1 36.3 8.7 6.6 (6.8) 108.9 17.0 34.4
1. Platforms includes Investor Portfolio Services (IPS)
and Cofunds since acquisition.
2. Mature retail savings products includes with-profit products,
bonds and retail pensions.
3. Consolidation adjustment represents Suffolk Life and Mature Retail
Savings assets included in the Platforms column.
4. Retail Investments includes unit trust products (both LGIM and externally
managed) and structured products (deposits and investments). It also
includes GBP1.2bn of Cofunds assets.
5. Platforms gross inflows include Cofunds institutional net flows.
Asset and premium flows Page 59
3.04 Assets under administration quarterly progression
(continued)
Consol-
Mature idation Retail
Retail Work- Suffolk adjust- Total Invest-
Platforms(1) Savings(2) place Life ment(3) LGAS ments(4) Annuities
Year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2012
At 1 January 2012 6.7 36.4 3.8 4.3 (1.2) 50.0 14.9 28.4
Gross inflows 0.5 0.6 0.4 0.2 - 1.7 0.7 0.3
Gross outflows (0.2) (1.3) - (0.1) - (1.6) (1.1) -
Payments to annuitants - - - - - - - (0.4)
Net flows 0.3 (0.7) 0.4 0.1 - 0.1 (0.4) (0.1)
Market and other movements 0.4 1.8 0.3 0.2 (0.1) 2.6 0.7 0.1
At 31 March 2012 7.4 37.5 4.5 4.6 (1.3) 52.7 15.2 28.4
Gross inflows 0.8 0.5 0.4 0.2 - 1.9 0.7 0.3
Gross outflows (0.4) (1.2) (0.1) (0.1) - (1.8) (0.6) -
Payments to annuitants - - - - - - - (0.4)
Net flows 0.4 (0.7) 0.3 0.1 - 0.1 0.1 (0.1)
Market and other movements (0.3) (0.7) (0.2) (0.1) - (1.3) (0.2) 0.6
At 30 June 2012 7.5 36.1 4.6 4.6 (1.3) 51.5 15.1 28.9
Gross inflows 0.9 0.6 0.7 0.2 (0.1) 2.3 0.5 0.8
Gross outflows (0.7) (1.5) (0.3) - 0.1 (2.4) (0.7) -
Payments to annuitants - - - - - - - (0.5)
Net flows 0.2 (0.9) 0.4 0.2 - (0.1) (0.2) 0.3
Market and other movements 0.4 0.9 0.3 0.1 - 1.7 0.5 1.3
At 30 September 2012 8.1 36.1 5.3 4.9 (1.3) 53.1 15.4 30.5
Gross inflows 0.7 0.6 0.7 0.2 (0.1) 2.1 0.5 1.0
Gross outflows (0.3) (1.5) (0.2) (0.1) - (2.1) (0.6) -
Payments to annuitants - - - - - - - (0.5)
Net flows 0.4 (0.9) 0.5 0.1 (0.1) - (0.1) 0.5
Market and other movements 0.1 1.0 0.2 0.1 - 1.4 0.3 1.2
At 31 December 2012 8.6 36.2 6.0 5.1 (1.4) 54.5 15.6 32.2
1. Platforms includes Investor Portfolio Services (IPS).
2. Mature retail savings products includes with-profit products,
bonds and retail pensions.
3. Consolidation adjustment represents Suffolk Life and Mature Retail
Savings assets included in the Platforms column.
4. Retail Investments includes unit trust products (both LGIM and externally
managed) and structured products (deposits and investments).
Asset and premium flows Page 60
3.05 Annuities single premiums
Single Single
premiums premiums
31.12.13 31.12.12
GBPm GBPm
Individual annuities 1,277 1,320
Bulk purchase annuities 2,812 1,019
Total Annuities 4,089 2,339
3.06 Annuities single premiums quarterly progression
3 3 3 3 3 3 3 3
months months months months months months months months
to to to to to to to to
31.12.13 30.09.13 30.06.13 31.03.13 31.12.12 30.09.12 30.06.12 31.03.12
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Individual annuities 200 323 348 406 448 350 254 268
Bulk purchase annuities 199 1,943 313 357 544 408 31 36
Total Annuities 399 2,266 661 763 992 758 285 304
3.07 Insurance new business
Annual Annual
premiums premiums
31.12.13 31.12.12
GBPm GBPm
Group Protection 70 70
Retail Protection 148 151
France (LGF) Protection 21 37
Netherlands (LGN) Protection 7 12
US Protection 99 90
Longevity insurance 270 -
Total insurance new
business 615 360
3.08 Insurance new business annual premiums quarterly progression
3 3 3 3 3 3 3 3
months months months months months months months months
to to to to to to to to
31.12.13 30.09.13 30.06.13 31.03.13 31.12.12 30.09.12 30.06.12 31.03.12
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Group Protection 13 17 20 20 13 20 25 12
Retail Protection 43 40 38 27 43 36 36 36
France (LGF) Protection - - - 21 12 - 10 15
Netherlands (LGN) Protection 2 1 2 2 3 3 3 3
US Protection 26 28 23 22 24 24 22 20
Longevity insurance 95 - - 175 - - - -
Total insurance new
business 179 86 83 267 95 83 96 86
Asset and premium flows Page 61
3.09 Gross written premiums on Insurance business
12 12
months months
to to
31.12.13 31.12.12
GBPm GBPm
Group protection 336 321
Retail protection 990 947
General Insurance 375 349
France (LGF) 168 159
Netherlands (LGN) 54 47
US Protection 654 584
Longevity insurance 212 70
Total 2,789 2,477
3.10 Gross written premiums on Insurance business quarterly progression
3 3 3 3 3 3 3 3
months months months months months months months months
to to to to to to to to
31.12.13 30.09.13 30.06.13 31.03.13 31.12.12 30.09.12 30.06.12 31.03.12
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Group protection 54 74 123 85 56 62 129 74
Retail protection 256 250 244 240 244 240 233 230
General Insurance 95 97 97 86 97 87 82 83
France (LGF) 41 41 43 43 40 40 39 40
Netherlands (LGN) 13 14 13 14 12 12 11 12
US Protection 172 156 172 154 156 140 150 138
Longevity insurance 60 60 60 32 18 18 17 17
Total 691 692 752 654 623 599 661 594
3.11 Overseas new business in local currency
Annual Single Annual Single
premiums premiums APE premiums premiums APE
31.12.13 31.12.13 31.12.13 31.12.12 31.12.12 31.12.12
US Protection ($m) 155 - 155 142 - 142
Netherlands (LGN) (EURm) 10 126 23 17 101 27
France (LGF) (EURm) 26 312 57 46 287 75
India (Rs m) - Group's
26% interest 491 4,264 917 564 2,264 790
Egypt (Pounds m) - Group's
55% interest 136 - 136 134 - 134
Gulf (US$m) - Group's
50% interest 3 4 3 6 10 7
Asset and premium flows Page 62
3.12 Worldwide new business
Annual Single Annual Single
premiums premiums APE premiums premiums APE Increase/
2013 2013 2013 2012 2012 2012 (decrease)
GBPm GBPm GBPm GBPm GBPm GBPm %
Individual annuities - 1,277 128 - 1,320 132 (3)
Bulk purchase annuities - 2,812 281 - 1,019 102 175
Total LGR(1) - 4,089 409 - 2,339 234 75
Group Protection 70 - 70 70 - 70 -
Retail Protection 148 - 148 151 - 151 (2)
France (LGF) 22 264 48 38 233 61 (21)
Netherlands (LGN) 8 107 19 13 82 21 (10)
Workplace Savings 660 747 735 502 1,115 614 20
Platforms (Cofunds
& IPS)(2) 43 2,452 288 59 2,137 273 5
Suffolk Life - 1,330 133 - 774 77 73
Mature Retail Savings(3) 11 790 90 17 1,331 150 (40)
With-profits 53 80 61 58 342 92 (34)
Total LGAS 1,015 5,770 1,592 908 6,014 1,509 6
Retail Investments(4) 12 3,427 355 10 2,311 241 47
US Protection 99 - 99 90 - 90 10
India (26% share) 5 46 10 7 24 9 11
Egypt (55% share) 13 - 13 14 - 14 (7)
Gulf (50% share) 2 3 2 4 6 5 (60)
Total emerging markets
new business 20 49 25 25 30 28 (11)
Total worldwide new
business 1,146 13,335 2,480 1,033 10,694 2,102 18
1. Total LGR new business excludes GBP270m (2012: GBPnil) of APE in
relation to longevity insurance transactions. It is not included in
the table due to the unpredictable deal flow from this type of business.
2. Platforms APE includes retail business only.
3. Includes bonds and retail pensions.
4. Includes retail unit trusts and structured products only.
Asset and premium flows Page 63
3.13 Worldwide new business APE quarterly progression
3 3 3 3 3 3 3 3
months months months months months months months months
to to to to to to to to
31.12.13 30.09.13 30.06.13 31.03.13 31.12.12 30.09.12 30.06.12 31.03.12
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Individual annuities 20 33 35 40 45 35 26 26
Bulk purchase annuities 20 194 31 36 54 41 3 4
Total LGR(1) 40 227 66 76 99 76 29 30
Group Protection 13 17 20 20 13 20 25 12
Retail Protection 43 40 38 27 43 36 36 36
France (LGF) 4 7 6 31 19 4 18 20
Netherlands (LGN) 4 4 4 7 5 5 5 6
Workplace Savings 240 166 127 202 285 159 76 94
Platforms (Cofunds
& IPS)(2) 99 94 69 26 62 78 83 50
Suffolk Life 44 39 31 19 18 19 19 21
Mature Retail Savings(3) 25 21 22 22 35 39 36 40
With-profits 17 13 14 17 16 18 30 28
Total LGAS 489 401 331 371 496 378 328 307
Retail Investments(4) 83 94 104 74 55 49 70 67
US Protection 26 28 23 22 24 24 22 20
India (26% share) 1 2 1 6 2 1 1 5
Egypt (55% share) 3 3 3 4 3 3 4 4
Gulf (50% share) - 1 - 1 1 2 1 1
Total emerging markets
new business 4 6 4 11 6 6 6 10
Total worldwide new
business 642 756 528 554 680 533 455 434
1. Total LGR new business excludes GBP270m (2012: GBPnil) of APE in
relation to longevity insurance transactions. It is not included in
the table due to the unpredictable deal flow from this type of business.
2. Platforms APE includes retail business only.
3. Includes bonds and retail pensions.
4. Includes retail unit trusts and structured products only.
Asset and premium flows Page 64
3.14 Worldwide APE by channel
Annual Single
premiums premiums APE % of
For the year ended 31 December GBPm GBPm GBPm total
2013
Employee benefit consultants(1) 796 3,597 1,156 47
Retail independent
and restricted 228 7,871 1,015 41
Tied including bancassurance 95 1,418 237 10
Direct 27 449 72 2
Total 1,146 13,335 2,480 100
1. Includes Lucida
business.
Annual Single
premiums premiums APE % of
For the year ended 31 December GBPm GBPm GBPm total
2012
Employee benefit consultants 662 2,242 886 42
Retail independent
and restricted 198 5,010 699 33
Tied including bancassurance 153 3,008 454 22
Direct 20 434 63 3
Total 1,033 10,694 2,102 100
3.15 Worldwide APE by channel quarterly progression
3 3 3 3 3 3 3 3
months months months months months months months months
to to to to to to to to
31.12.13 30.09.13 30.06.13 31.03.13 31.12.12 30.09.12 30.06.12 31.03.12
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Employee benefit consultants(1) 283 386 191 296 377 232 131 146
Retail independent
and restricted 279 295 259 182 188 166 176 169
Tied including bancassurance 61 58 59 59 103 118 130 103
Direct 19 17 19 17 12 17 18 16
Total 642 756 528 554 680 533 455 434
1. Includes Lucida
business.
Capital and Investments Page 65
4.01 Group regulatory capital
(a) Insurance Group's Directive (IGD)
The Group is required to measure and monitor its capital resources on
a regulatory basis and to comply with the minimum capital requirements
of regulators in each territory in which it operates. At Group level,
Legal & General must comply with the requirements of the IGD. The table
below shows the estimated total Group capital resources, Group capital
resources requirement and the Group surplus.
At At
31.12.13 31.12.12
GBPbn GBPbn
Core tier 1 6.3 6.2
Innovative tier 1 0.6 0.6
Tier 2 1.2 1.2
Deductions (0.8) (0.8)
Group capital resources 7.3 7.2
Group capital resources requirement(1) 3.3 3.1
IGD surplus 4.0 4.1
Coverage ratio (Group capital resources
/ 2.22 2.34
Group capital resources requirement)(2) times times
1. The Group capital resources requirement includes a With-profits Insurance
Capital Component (WPICC) of GBP0.2bn (2012: GBP0.1bn).
2. Coverage ratio is calculated on unrounded values.
A reconciliation of the Group capital resources on an IGD basis to the
capital and reserves attributable to the equity holders of the Company
on an IFRS basis is given below.
At At
31.12.13 31.12.12
GBPbn GBPbn
Capital and reserves attributable
to equity holders on an IFRS basis 5.6 5.4
Innovative tier 1 0.6 0.6
Tier 2 1.2 1.2
UK unallocated divisible surplus 1.1 1.0
Proposed dividends (0.4) (0.3)
Intangibles(1) (0.4) (0.2)
Other regulatory adjustments(2) (0.4) (0.5)
Group capital resources 7.3 7.2
1. Increase in intangibles related to the acquisition of remaining shareholdings
of Cofunds and IDOL during 2013.
2. Other regulatory adjustments includes differences between accounting
and regulatory basis.
The table below demonstrates how the Group's net cash generation
flows to the IGD capital surplus position.(1)
At
31.12.13
GBPbn
IGD surplus at 1 January 4.1
Net cash generation 1.0
Dividends (0.6)
Capital impact of organic growth (0.1)
Capital impact of acquisitions (0.3)
Other variances and regulatory adjustments (0.1)
IGD surplus at 31 December 4.0
1. All IGD amounts are estimated, unaudited and after accrual of the
final dividend of GBP408m (2012: GBP337m)
Capital and Investments Page 66
4.01 Group regulatory capital (continued)
(b) Legal & General Assurance Society Ltd capital
surplus
Legal & General Assurance Society Ltd is the principal insurance regulated
entity in the Group. The society is required to measure and monitor
its capital resources on a regulatory basis.
At At At At
31.12.13 31.12.13 31.12.12 31.12.12
Long General Long General
term insu- term insu-
business rance business rance
GBPbn GBPbn GBPbn GBPbn
Available capital resources - Tier
1 5.8 0.2 5.5 0.2
Insurance capital requirement 2.6 0.1 2.6 0.1
Capital requirements of regulated
related undertakings 0.3 - 0.2 -
With-profits Insurance Capital Component 0.2 - 0.1 -
Capital resources requirement 3.1 0.1 2.9 0.1
Regulatory capital surplus 2.7 0.1 2.6 0.1
The table below shows the breakdown of Legal & General Assurance Society
Ltd long term insurance capital requirement.
At At
31.12.13 31.12.12
Pillar 1 capital requirement GBPbn GBPbn
Protection 0.7 0.7
LGR 1.2 1.2
Non profit pensions and unit linked
bonds 0.1 0.1
Non profit 2.0 2.0
With-profits 0.6 0.6
Long term insurance capital requirement 2.6 2.6
On a regulatory basis (Peak 1), Society long term business regulatory
capital surplus of GBP2.7bn (2012: GBP2.6bn) comprises capital resources
within the long term fund of GBP3.0bn (2012: GBP2.7bn) and capital resources
outside the long term fund of GBP2.8bn (2012: GBP2.8bn) less the capital
resources requirement of GBP3.1bn (2012: GBP2.9bn).
The With-profits Insurance Capital Component (WPICC) is an additional
capital requirement calculated if the surplus in the with-profits fund
on a Peak 2 basis is lower than on a Peak 1 basis and represents the
difference in the surplus between the two bases. It is calculated based
on the most onerous risk capital margin stress referred to in 4.01 (c).
(c) With-profits realistic balance
sheet
The table below summarises the realistic position of the with-profits
part of Legal & General Assurance Society Ltd long term fund.
At At
31.12.13 31.12.12
GBPbn GBPbn
With-profits surplus 0.8 0.7
Risk capital margin 0.1 0.1
Surplus 0.7 0.6
Legal & General Assurance Society Ltd is required to maintain a surplus
in the with-profits part of the fund on a realistic basis (Peak 2).
The risk capital margin is calculated based on the most onerous capital
requirement calculated after performing five stresses specified by the
PRA. The surplus includes the present value of future shareholder transfers
of GBP0.3bn (2012: GBP0.3bn) as a liability in the calculation.
Capital and Investments Page 67
4.02 Investment portfolio
Market Market
value value
2013 2012
GBPm GBPm
Worldwide assets under management 452,260 413,152
Client and policyholder
assets (391,521) (351,663)
Non-unit linked with-profits
assets(1) (17,380) (18,605)
Investments to which shareholders are directly
exposed 43,359 42,884
1. Includes assets backing participating business in LGF of GBP2,347m
(2012: GBP2,304m).
Analysed by investment class:
Other
non profit Other
LGR insurance LGC shareholder
investments(1) investments investments investments Total Total
2013 2013 2013 2013 2013 2012
Note GBPm GBPm GBPm GBPm GBPm GBPm
Equities(2) 83 1 1,492 8 1,584 1,432
Bonds 4.03 30,018 2,628 1,783 1,268 35,697 34,923
Derivative assets(3) 2,100 26 180 1 2,307 3,103
Property 1,294 - 143 4 1,441 773
Cash (including cash
equivalents), loans
& receivables 689 145 1,057 439 2,330 2,653
34,184 2,800 4,655 1,720 43,359 42,884
1. LGR investments includes all business written in LGPL and excludes
WP non-participating business.
2. Includes equity investment in CALA Group Limited.
3. Derivative assets are shown gross of derivative liabilities. Exposures
arise from the use of derivatives for efficient portfolio management,
especially the use of interest rate swaps, inflation swaps, credit default
swaps and foreign exchange forward contracts for asset and liability
management.
Direct investments:(1)
Direct(2) Traded(3) Direct(2) Traded(3)
investments securities Total investments securities Total
2013 2013 2013 2012 2012 2012
GBPm GBPm GBPm GBPm GBPm GBPm
Equities 208 1,376 1,584 94 1,338 1,432
Bonds 1,048 34,649 35,697 419 34,504 34,923
Derivative assets - 2,307 2,307 - 3,103 3,103
Property 1,441 - 1,441 773 - 773
Cash (including -
cash
equivalents),
loans & receivables 6 2,324 2,330 - 2,653 2,653
2,703 40,656 43,359 1,286 41,598 42,884
1. The analysis of Direct Investments above excludes GBP176m (2012:
GBP135m) of assets which do not meet the definition of financial investments.
2. Direct Investments constitute a bilateral agreement with another
party and represents an exposure to untraded and often less liquid
asset classes. Direct Investments include physical assets, bilateral
loans, private equity, and exclude hedge funds.
3. Traded securities are defined by exclusion. If an instrument is not
a direct investment, then it is classed as a traded security.
Capital and Investments Page 68
4.03 Bond portfolio summary
(a) Analysed by sector
LGR LGR Total Total
2013 2013 2013 2013
Note GBPm % GBPm %
Sovereigns, Supras and
Sub-Sovereigns 4.03(b) 4,772 16 6,502 18
Banks:
- Tier 1 100 - 105 -
- Tier 2 and other subordinated 637 2 698 2
- Senior 1,406 5 2,169 6
Financial Services
- Tier 1 2 - 5 -
- Tier 2 and other subordinated 206 1 251 1
- Senior 800 3 1,041 3
Insurance
- Tier 1 144 1 152 -
- Tier 2 and other subordinated 579 2 625 2
- Senior 481 2 552 2
Utilities 4,013 13 4,329 12
Consumer Services and
Goods & Health Care 3,128 10 3,716 10
Technology and Telecoms 1,995 7 2,333 7
Industrials & Oil and
Gas 3,074 10 3,626 10
Property 981 3 1,053 3
Asset backed securities:(1)
- Traditional 763 3 1,395 4
- Securitisations and
debentures 5,839 19 6,047 17
CDO(2) 1,098 3 1,098 3
Total 30,018 100 35,697 100
1. Traditional asset backed securities are securities, often with variable
expected redemption profiles issued by Special Purpose Vehicles and
typically backed by pools of receivables from loans or personal credit.
Securitisations are securities with fixed redemption profiles that are
issued by Special Purpose Vehicles and secured on revenues from specific
assets or operating companies and Debentures are securities with fixed
redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio has had no reference entity defaults
in 2012 or 2013. The CDOs are termed as super senior since default losses
on the reference portfolio have to exceed 27.5%, on average across the
reference portfolio, before the CDOs incur any default losses. Assuming
an average recovery rate of 30%, then over 39% of the reference names
would have to default before the CDOs incur any default losses. These
CDOs are valued using an external valuation which is based on observable
market inputs. This is then validated against the internal valuation.
Capital and Investments Page 69
4.03 Bond portfolio summary (continued)
(a) Analysed by sector
(continued)
LGR LGR Total Total
2012 2012 2012 2012
Note GBPm % GBPm %
Sovereigns, Supras and Sub-Sovereigns 4.03(b) 4,543 16 6,328 18
Banks:
- Tier 1 212 1 223 1
- Tier 2 and other subordinated 707 2 776 2
- Senior 1,399 5 2,243 6
Financial Services:
- Tier 1 4 - 4 -
- Tier 2 and other subordinated 46 - 67 -
- Senior 930 3 1,127 3
Insurance:
- Tier 1 134 - 142 -
- Tier 2 and other subordinated 546 2 575 2
- Senior 545 2 645 2
Utilities 3,928 13 4,177 12
Consumer Services and
Goods & Health Care 3,484 12 3,966 12
Technology and Telecoms 2,010 7 2,337 7
Industrials & Oil and
Gas 3,294 11 3,825 11
Property 628 2 698 2
Asset backed securities:(1)
- Traditional 742 3 1,512 4
- Securitisations and
debentures 5,005 17 5,181 15
CDO(2) 1,097 4 1,097 3
Total 29,254 100 34,923 100
1. Traditional asset backed securities are securities, often with variable
expected redemption profiles issued by Special Purpose Vehicles and
typically backed by pools of receivables from loans or personal credit.
Securitisations are securities with fixed redemption profiles that are
issued by Special Purpose Vehicles and secured on revenues from specific
assets or operating companies and Debentures are securities with fixed
redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio has had no reference entity defaults
in 2012 or 2013. The CDOs are termed as super senior since default losses
on the reference portfolio have to exceed 27.5%, on average across the
reference portolio, before the CDOs incur any default losses. Assuming
an average recovery rate of 30%, then over 39% of the reference names
would have to default before the CDOs incur any default losses. These
CDOs are valued using an external valuation which is based on observable
market inputs. This is then validated against the internal valuation.
Capital and Investments Page 70
4.03 Bond portfolio summary (continued)
(b) Analysed by domicile
The tables below are based on the legal domicile of the security.
LGR Total LGR Total
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Market value by region
United Kingdom 13,099 14,178 11,569 12,578
USA 7,237 9,779 8,394 10,856
Netherlands 1,736 2,164 1,661 2,267
France 1,382 1,681 1,313 1,742
Germany 411 791 316 651
GIIPS:
- Greece - - - -
- Ireland(1) 234 271 271 289
- Italy 636 786 636 744
- Portugal 15 31 13 16
- Spain 178 263 192 260
Rest of Europe 1,299 1,721 1,191 1,636
Rest of World 2,693 2,934 2,601 2,787
CDO 1,098 1,098 1,097 1,097
Total 30,018 35,697 29,254 34,923
1. Within LGR, out of the GBP234m of bonds domiciled in Ireland, GBP218m
relate to financing vehicles where the underlying exposure lies outside
Ireland.
Additional analysis of sovereign debt exposures
Sovereigns, Supras and Sub-Sovereigns
LGR Total LGR Total
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
Market value by region
United Kingdom 3,340 3,725 3,158 3,552
USA 282 664 323 470
Netherlands 10 194 1 423
France 90 220 80 299
Germany 212 472 165 380
GIIPS:
- Greece - - - -
- Ireland - 7 - 6
- Italy 236 323 240 312
- Portugal - 16 - 4
- Spain - 14 - 47
Rest of Europe 474 661 459 669
Rest of World 128 206 117 166
Total 4,772 6,502 4,543 6,328
Capital and Investments Page 71
4.03 Bond portfolio summary (continued)
(c) Analysed by credit rating
LGR LGR Total Total
2013 2013 2013 2013
GBPm % GBPm %
AAA(1) 1,378 5 3,1449
AA 6,743 22 7,599 21
A 10,236 34 11,703 34
BBB 8,326 28 9,456 26
BB or below 603 2 8742
Unrated: Bespoke CDOs(2) 983 3 9833
Other(3) 1,749 6 1,9385
30,018 100 35,697 100
LGR LGR Total Total
2012 2012 2012 2012
GBPm % GBPm%
AAA 4,899 17 6,892 20
AA 3,240 11 4,087 12
A 9,810 34 11,466 33
BBB 8,625 29 9,595 27
BB or below 467 2 5211
Unrated: Bespoke CDOs(2) 975 3 9753
Other(3) 1,238 4 1,3874
29,254 100 34,923 100
1. During 2013 the UK sovereign debt was downgraded from AAA to AA+.
2. The CDOs are termed as super senior since default losses have to
exceed 27.5%, on average across the reference portfolio, before the
CDOs incur any default losses. The underlying reference portfolio has
had no reference entity defaults in 2012 or 2013. Losses are limited
under the terms of the CDOs to assets and collateral invested.
3. Other unrated bonds have been assessed and rated internally.
4.04 Value of policyholder assets held in Society and LGPL
2013 2012
GBPm GBPm
With-profits business 23,959 24,656
Non profit business 49,949 46,869
73,908 71,525
Capital and Investments Page 72
European Embedded Value Page 73
Group embedded value - summary
Covered business
---------------------------
LGAS Non-
UK overseas covered
business business LGA business Total
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm
2013
At 1 January
Value of in-force business
(VIF) 4,402 146 735 - 5,283
Shareholder net worth (SNW) 3,178 296 239 (96) 3,617
Embedded value at 1 January
2013 7,580 442 974 (96) 8,900
Exchange rate movements - 9 (14) (10) (15)
Operating profit after tax
for the year 804 16 70 168 1,058
Non-operating profit/(loss)
for the year 222 60 (24) (27) 231
Profit for the year 1,026 76 46 141 1,289
Intra-group distributions(1) (602) (15) (44) 661 -
Dividends to equity holders
of the Company - - - (479) (479)
Transfer to non-covered business(2) (27) - - 27 -
Other reserve movements including
pension deficit(3) (35) - (29) (45) (109)
Embedded value at 31 December
2013 7,942 512 933 199 9,586
Value of in-force business 4,693 197 699 - 5,589
Shareholder net worth 3,249 315 234 199 3,997
Embedded value per share (p)(4) 162
1. UK intra-group distributions reflect a GBP625m dividend paid from
Society to Group, and dividends of GBP10m (2012: GBP40m) paid to Society
from subsidiaries (primarily Nationwide Life). Dividends of EUR16m (2012:
EUR15m) from LGN are also paid to Society. Dividends of $69m (2012:
$63m) from LGA and EUR2m (2012: EUR3m) from LGF were paid to the group.
2. The transfer to non-covered business represents the IFRS profits
arising in the period from the provisions of investment management services
by LGIM to the UK covered business, which have been included in the
operating profit of the covered business on the look through basis.
3. The other reserve movements reflect the pension deficit movement,
the movement of investment project costs from covered to non-covered
business and the effect of reinsurance arrangement transactions between
UK and US covered business.
4. The number of shares in issue at 31 December 2013 was 5,917,066,636
(31 December 2012: 5,912,782,826).
Further analysis of the LGAS and LGR covered business can be found in
Note 5.01.
European Embedded Value Page 74
Group embedded value - summary (continued)
Covered business
----------------------------
LGAS Non-
UK overseas covered
business business LGA business Total
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm
2012 (1)
At 1 January
Value of in-force business
(VIF) 4,247 217 913 - 5,377
Shareholder net worth (SNW) 3,218 252 149 (388) 3,231
At 1 January 2012 7,465 469 1,062 (388) 8,608
Exchange rate movements - (12) (50) 40 (22)
Operating profit after tax
for the year 653 19 77 71 820
Non-operating loss for the
year (23) (20) (18) (26) (87)
Profit/(loss) for the year 630 (1) 59 45 733
Intra-group distributions(2) (473) (14) (40) 527 -
Dividends to equity holders
of the Company - - - (394) (394)
Transfer to non-covered business(3) (22) - - 22 -
Other reserve movements including
pension deficit(4) (20) - (57) 52 (25)
Embedded value at 31 December
2012 7,580 442 974 (96) 8,900
Value of in-force business 4,402 146 735 - 5,283
Shareholder net worth 3,178 296 239 (96) 3,617
Embedded value per share
(p)(5) 151
1. This note has been restated to reflect an amendment to IAS 19 'Employee
Benefits'. Details of this restatement are outlined in Note 5.09.
2. UK intra-group distributions reflect a GBP525m dividend paid from
Society to Group and dividends of GBP40m paid to Society from subsidiaries
(primarily Nationwide Life). Dividends of EUR15m from LGN are also paid
to Society. Dividends of $63m from LGA and EUR3m from LGF were paid
to the group.
3. The transfer to non-covered business represents the IFRS profits
arising in the period from the provisions of investment management services
by Legal & General Investment Management to the UK covered business,
which have been included in the operating profit of the covered business
on the look through basis.
4. The other reserve movements reflect the pension deficit movement,
the movement of investment project costs from covered to non-covered
business and the effect of reinsurance arrangement transactions between
UK and US covered business.
5. The number of shares in issue at 31 December 2012 was 5,912,782,826.
Further analysis of the LGAS and LGR covered business can be found in
Note 5.01.
European Embedded Value Page 75
5.01 LGAS and LGR embedded value reconciliation
Shareholder net Total
worth
---------------------------
Free Required Value embedded
of
surplus capital Total in-force value
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm
2013
At 1 January 2013(1) 1,259 2,215 3,474 4,548 8,022
Exchange movement 3 3 6 3 9
Operating profit/(loss) after
tax - UK business:
- New business contribution(2) (324) 284 (40) 484 444
- Expected return on VIF - - - 266 266
- Expected transfer from non
profit VIF to SNW(3) 815 (181) 634 (634) -
- With-profits transfer 54 - 54 (54) -
- Expected return on SNW 40 76 116 - 116
-------- --------- ------ -------- --------
Generation of embedded value 585 179 764 62 826
- Experience variances 5 (9) (4) 14 10
- Operating assumption changes (24) 2 (22) 21 (1)
- Development costs (31) - (31) - (31)
-------- --------- ------ -------- --------
Variances (50) (7) (57) 35 (22)
Operating profit after tax
- LGAS overseas 7 1 8 8 16
Operating profit after tax 542 173 715 105 820
Non-operating profit/(loss)
after tax - UK business:
- Economic variances 109 (8) 101 80 181
- Effect of tax rate changes
and other taxation impacts(4) - - - 41 41
-------- --------- ------ -------- --------
Non-operating profit after
tax - LGAS overseas 20 - 20 40 60
Non-operating profit/(loss)
after tax for the year 129 (8) 121 161 282
Profit for the year 671 165 836 266 1,102
Intra-group distributions(5) (617) - (617) - (617)
Transfer to non-covered business(6) (27) - (27) - (27)
Other reserve movements including
pension deficit(7) (115) 7 (108) 73 (35)
Embedded value at 31 December
2013 1,174 2,390 3,564 4,890 8,454
1. Opening balances at 1 January
2013 include LGF and LGN.
2. The UK free surplus reduction of GBP324m to finance new business
includes GBP40m new business strain and GBP284m additional required
capital.
3. The increase in UK free surplus of GBP815m from the expected transfer
from the in-force non profit business includes GBP634m of operational
cash generation and a GBP181m reduction in required capital.
4. Reflects the implementation of the UK planned future reductions in
corporation tax to 20% on 1 April 2015.
5. UK intra-group dividends reflect a GBP625m dividend paid from Society
to Group and dividends of GBP10m paid to Society from subsidiaries (primarily
Nationwide Life). Dividends of EUR16m from LGN are also paid to Society.
6. The transfer to non-covered business represents the IFRS profits
arising in the period from the provisions of investment management services
by LGIM to the UK covered business, which have been included in the
operating profit of the covered business on the look through basis.
7. The other reserve movements reflects the pension deficit movement,
the movement of investment project costs from covered to non-covered
business and the effect of reinsurance arrangement transactions between
UK and US covered business.
The value of in-force business of GBP4,890m is comprised of GBP4,454m
of non profit business and GBP436m of with-profits business.
European Embedded Value Page 76
5.01 LGAS and LGR embedded value reconciliation (continued)
Shareholder net worth Total
---------------------------
Free Required Value embedded
of
surplus capital Total in-force value
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm
2012
At 1 January 2012 1,492 1,978 3,470 4,464 7,934
Exchange movement (3) (3) (6) (6) (12)
Operating profit/(loss) after
tax - UK business:
- New business contribution(1) (275) 182 (93) 386 293
- Expected return on VIF - - - 270 270
- Expected transfer from non
profit VIF to SNW(2) 762 (171) 591 (591) -
- With-profits transfer 52 - 52 (52) -
- Expected return on SNW 53 63 116 - 116
-------- --------- ------ -------- --------
Generation of embedded value 592 74 666 13 679
- Experience variances (26) 18 (8) 20 12
- Operating assumption changes 13 1 14 (23) (9)
- Development costs (29) - (29) - (29)
-------- --------- ------ -------- --------
Variances (42) 19 (23) (3) (26)
Operating profit after tax
- LGAS overseas 11 10 21 (2) 19
Operating profit after tax 561 103 664 8 672
Non-operating profit/(loss)
after tax - UK business:
- Economic variances (182) 107 (75) (37) (112)
- Effect of tax rate changes
and other taxation impacts(3) - - - 89 89
-------- --------- ------ -------- --------
Non-operating profit after
tax - LGAS overseas 24 19 43 (63) (20)
Non-operating (loss)/profit
after tax (158) 126 (32) (11) (43)
Profit for the year 403 229 632 (3) 629
Intra-group distributions(4) (487) - (487) - (487)
Transfer to non-covered business(5) (22) - (22) - (22)
Other reserve movements including
pension deficit(6) (124) 11 (113) 93 (20)
Embedded value at 31 December
2012 1,259 2,215 3,474 4,548 8,022
1. The UK free surplus reduction of GBP275m to finance new business
includes GBP93m new business strain and GBP182m additional required
capital.
2. The increase in UK free surplus of GBP762m from the expected transfer
from the in-force non profit business includes GBP591m of operational
cash generation and a GBP171m reduction in required capital.
3. Reflects the implementation of the UK planned future reductions in
corporation tax to 21% on 1 April 2014.
4. UK intra-group dividends reflect a GBP525m dividend paid from Society
to Group and dividends of GBP40m paid to Society from subsidiaries (primarily
Nationwide Life). Dividends of EUR15m from LGN were also paid to Society.
5. The transfer to non-covered business represents the IFRS profits
arising in the period from the provisions of investment management services
by LGIM to the UK covered business, which have been included in the
operating profit of the covered business on the look through basis.
6. The other reserve movements reflects the pension deficit movement,
the movement of investment project costs from covered to non-covered
business and the effect of reinsurance arrangement transactions between
UK and US covered business.
The value of in-force business of GBP4,548m is comprised of GBP4,154m
of non profit business and GBP394m of with-profits business.
European Embedded Value Page 77
5.02 Analysis of shareholders' equity
LGC
LGAS and group
and
LGR LGIM expenses LGA Total
As at 31 December 2013 GBPm GBPm GBPm GBPm GBPm
Analysed as:
IFRS basis shareholders'
equity(1) 783 421 3,622 816 5,642
Additional retained profit/(loss)
on an EEV basis 4,830 - (1,003) 117 3,944
Shareholders' equity on
an EEV basis 5,613 421 2,619 933 9,586
Comprising:
Business reported on an
IFRS basis 408 421 (630) - 199
Business reported on an
EEV basis:
Shareholder net worth
- Free surplus(2) 67 1,107 192 1,366
- Required capital to
cover solvency margin 248 2,142 42 2,432
Value of in-force
- Value of in-force business(3) 5,398 711 6,109
- Cost of capital (508) (12) (520)
1. Shareholders' equity supporting the UK non profit LGAS and LGR businesses
is held within Legal & General Assurance Society Limited and Legal &
General Pensions Limited and is managed on a groupwide basis within
the LGC and group expenses segment.
2. Free surplus is the value of any capital and surplus allocated to,
but not required to support, the in-force covered business at the valuation
date.
3. Value of in-force business includes a deduction for the time value
of options and guarantees of GBP23m (2012: GBP30m).
LGC
LGAS and group
and
LGR LGIM expenses LGA Total
As at 31 December 2012 GBPm GBPm GBPm GBPm GBPm
Analysed as:
IFRS basis shareholders'
equity(1) 685 423 3,414 919 5,441
Additional retained profit/(loss)
on an EEV basis 4,484 - (1,080) 55 3,459
Shareholders' equity on
an EEV basis 5,169 423 2,334 974 8,900
Comprising:
Business reported on an
IFRS basis 325 423 (844) - (96)
Business reported on an
EEV basis:
Shareholder net worth
- Free surplus(2) 57 1,202 206 1,465
- Required capital to
cover solvency margin 239 1,976 33 2,248
Value of in-force
- Value of in-force business(3) 5,054 745 5,799
- Cost of capital (506) (10) (516)
1. Shareholders' equity supporting the UK non profit LGAS and LGR businesses
is held within Legal & General Assurance Society Limited and Legal &
General Pensions Limited and is managed on a groupwide basis within
the LGC and group expenses segment.
2. Free surplus is the value of any capital and surplus allocated to,
but not required to support, the in-force covered business at the valuation
date.
3. Value of in-force business includes a deduction for the time value
of options and guarantees of GBP30m.
Further analysis of shareholders' equity is included in Note 5.03.
European Embedded Value Page 78
5.03 Segmental analysis of shareholders' equity
Covered Other Covered Other
business business business business
EEV IFRS EEV IFRS
basis basis Total basis basis Total
2013 2013 2013 2012 2012 2012
GBPm GBPm GBPm GBPm GBPm GBPm
LGAS
- LGAS UK Protection
and Savings 2,331 - 2,331 2,197 - 2,197
- LGAS overseas business 512 - 512 442 - 442
- General insurance and
other - 408 408 - 325 325
Total LGAS 2,843 408 3,251 2,639 325 2,964
LGR 2,362 - 2,362 2,205 - 2,205
LGIM - 421 421 - 423 423
LGC and group expenses 3,249 (630) 2,619 3,178 (844) 2,334
LGA 933 - 933 974 - 974
Total 9,387 199 9,586 8,996 (96) 8,900
5.04 Reconciliation of shareholder
net worth
UK UK
covered covered
business Total business Total
2013 2013 2012 2012
GBPm GBPm GBPm GBPm
SNW of long term operations
(IFRS basis) 4,291 5,443 4,294 5,537
Other assets/(liabilities)
(IFRS basis) - 199 - (96)
Shareholders' equity on
the IFRS basis 4,291 5,642 4,294 5,441
Purchased interest in
long term business (52) (59) (63) (64)
Deferred acquisition costs/deferred
income liabilities (223) (1,129) (235) (1,093)
Deferred tax(1) (162) 232 (253) 74
Other(2) (605) (689) (565) (741)
Shareholder net worth
on the EEV basis 3,249 3,997 3,178 3,617
1. Deferred tax represents all tax which is expected to be paid under
current legislation.
2. Other primarily relates to the different treatment of annuities and
LGA Triple X securitisation on an EEV and IFRS basis.
European Embedded Value Page 79
5.05 Profit/(loss) for the
year
LGC
LGAS and group
and
LGR LGIM expenses LGA Total
For the year ended 31 December Note GBPm GBPm GBPm GBPm GBPm
2013
Business reported on an EEV
basis:
Contribution from new business
after cost of capital 5.06 544 107 651
Contribution from in-force
business:
- expected return(1) 358 68 426
- experience variances (2) 52 (23) 29
- operating assumption changes(3) (9) (52) (61)
Development costs (40) - (40)
Contribution from shareholder
net worth 5 113 7 125
Operating profit on covered
business 910 - 113 107 1,130
Business reported on an IFRS
basis(4,5,6) 47 270 (106) - 211
Total operating profit 957 270 7 107 1,341
Economic variances(7) 250 (6) 8 (37) 215
Gains on non-controlling interests - - 3 - 3
Profit before tax 1,207 264 18 70 1,559
Tax (expense)/credit on profit from
ordinary activities (251) (57) 21 (24) (311)
Effect of tax rate changes
and other taxation impacts(8) 41 - - - 41
Profit for the year 997 207 39 46 1,289
Operating profit attributable
to:
LGAS 360
LGR 597
p
Earnings per share
Based on profit attributable to equity
holders of the Company 21.91
Diluted earnings per share
Based on profit attributable to equity
holders of the Company 21.61
1. The expected return on in-force is based on the unwind of the risk
discount rate on the opening, adjusted base value of in-force (VIF).
The opening base VIF of the UK LGAS and LGR business was GBP4,402m in
2013 (2012: GBP4,247m). This is adjusted for the effects of opening
model changes of GBP27m (2012: GBP86m) to give an adjusted opening base
VIF of GBP4,429m (2012: GBP4,333m). This is then multiplied by the opening
risk discount rate of 6.0% (2012: 6.2%) and the result grossed up at
the notional attributed tax rate of 20% (2012: 21%) to give a return
of GBP331m (2012: GBP340m). The same approach has been applied for the
LGAS overseas businesses.
2. LGAS and LGR variance primarily reflects UK cost of capital unwind,
bulk purchase annuity data loading, fewer retail protection lapses and
better longevity experience. LGA experience variance primarily relates
to adverse persistency experience and mortality experience within term
assurance and universal life products respectively.
3. LGAS and LGR assumption changes primarily reflects mortality assumption
changes in LGR. LGA assumption changes primarily relate to improved
modelling of term business in the period after the end of the guaranteed
level premium period.
4. LGAS and LGR non-covered business primarily reflects GI operating
profit and other of GBP47m (2012: GBP10m).
5. LGIM operating profit includes Retail Investments and excludes GBP34m
(2012: GBP27m) of profits arising from the provision of investment management
services at market referenced rates to the covered business on a look
through basis and as a consequence are included in the LGAS and LGR
covered business on an EEV basis.
6. LGC and group expenses non-covered business primarily reflects the
shareholder interest expense and Investment projects (predominantly
Economic Capital Programme and other strategic investments).
7. The LGAS and LGR positive variance has resulted from a number of
factors including equity market outperformance, favourable default experience,
actions to improve the yield on annuity assets and a lower risk margin
offset by a higher risk free rate. The higher risk free rate has contributed
to a negative variance in LGA.
8. Primarily reflects the implementation of the UK planned future reductions
in corporation tax to 20% on 1 April 2015.
European Embedded Value Page 80
5.05 Profit/(loss) for the year (continued)
LGC
LGAS and group
and
LGR LGIM expenses LGA Total
For the year ended 31 December Note GBPm GBPm GBPm GBPm GBPm
2012(1)
Business reported on an EEV
basis:
Contribution from new business
after cost of capital 5.06 377 98 475
Contribution from in-force
business:
- expected return(2) 372 76 448
- experience variances (3) 12 (59) (47)
- operating assumption changes(4) (11) (18) (29)
Development costs (37) - (37)
Contribution from shareholder
net worth 6 134 5 145
Operating profit on covered
business 719 - 134 102 955
Business reported on an IFRS
basis(5,6,7,8) 10 245 (165) (4) 86
Total operating profit/(loss) 729 245 (31) 98 1,041
Economic variances(9) (157) (5) (41) 8 (195)
Losses attributable to non-controlling
interests - - (12) - (12)
Profit/(loss) before tax 572 240 (84) 106 834
Tax (expense)/credit on profit
from ordinary activities (121) (46) 27 (28) (168)
Effect of tax rate changes
and other taxation impacts(10) 89 - - (22) 67
Profit/(loss) for the year 540 194 (57) 56 733
Operating profit attributable
to:
LGAS 291
LGR 438
p(1)
Earnings per share
Based on profit attributable to equity
holders of the Company 12.73
Diluted earnings per share
Based on profit attributable to equity
holders of the Company 12.52
1. The Profit for the period has been restated to reflect an amendment
to IAS 19 'Employee Benefits'. Details of this restatement are outlined
in Note 5.09.
2. The expected return on in-force is based on the unwind of the risk
discount rate on the opening, adjusted base value of in-force (VIF).
The opening base VIF of the UK LGAS and LGR business was GBP4,247m.
This is adjusted for the effects of opening model changes of GBP86m
to give an adjusted opening base VIF of GBP4,333m. This is then multiplied
by the opening risk discount rate of 6.2% and the result grossed up
at the notional attributed tax rate of 21% to give a return of GBP340m.
The same approach has been applied for the LGAS overseas businesses.
3. LGAS and LGR primarily reflects UK cost of capital unwind and bulk
purchase annuity data loading, partially offset by model changes and
negative persistency experience as a result of higher than expected
lapses in unit linked bonds. LGA modelling and other experience variances
mostly relate to additional reserving associated with the introduction
of AG38 regulatory requirements.
4. Operating assumption changes in LGAS and LGR have been driven by
negative mortality and demographic assumption changes in the annuity
business and higher investment expense assumptions, largely offset by
positive impacts reflecting changes in UK tax legislation. LGA operating
assumption changes mostly relate to higher mortality assumptions on
unit linked secondary guarantee business.
5. LGAS and LGR non-covered business primarily reflects GI operating
profit and other of GBP10m.
6. LGIM operating profit excludes GBP27m of profits arising from the
provision of investment management services at market referenced rates
to the covered business. These are reported on a look through basis
and as a consequence are included in the LGAS, LGR and L&G Capital and
group expenses covered business on an EEV basis.
7. LGA non-covered business includes business unit costs of GBP4m allocated
to the LGA segment.
8. LGC and group expenses non-covered business primarily reflects the
shareholder interest expense and Investment projects (predominantly
Economic Capital Programme and other strategic investments).
9. LGAS and LGR primarily reflect the impact of changes in reinvestment
and disinvestment rates, higher costs of capital on increasing reserves
mainly due to narrowing credit spreads, and other consequential impacts
within lower yielding environments, partially offset by a lower risk
discount rate.
10. Primarily reflects the implementation of the UK planned future reductions
in corporation tax to 21% on 1 April 2014.
European Embedded Value Page 81
5.06 New business by product(1)
Present Contri-
value Capital- bution
of
Annual annual isation Single from
new
premiums premiums factor(2) premiums PVNBP business(3) Margin
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm %
2013
UK Protection 218 1,141 5.2 - 1,141 101 8.9
Overseas business 30 229 7.6 371 600 5 0.8
UK Savings 724 2,516 3.5 2,495 5,011 2 -
Total LGAS 972 3,886 4.0 2,866 6,752 108 1.6
LGR(4) n/a 939 n/a 4,089 5,028 436 8.7
LGA 99 926 9.4 - 926 107 11.6
Total new business 1,071 5,751 5.4 6,955 12,706 651 5.1
Cost of capital 72
Contribution from new business before
cost of capital 723
Present Contri-
value Capital- bution
of
Annual annual isation Single from
new
premiums premiums factor(2) premiums PVNBP business(3) Margin
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm %
2012
UK Protection 221 1,176 5.3 - 1,176 139 11.8
Overseas business 51 409 8.0 315 724 5 0.7
UK Savings 577 2,117 3.7 3,002 5,119 27 0.5
Total LGAS 849 3,702 4.4 3,317 7,019 171 2.4
LGR(4) n/a - n/a 2,339 2,339 206 8.8
LGA 90 830 9.2 - 830 98 11.8
Total new business 939 4,532 4.8 5,656 10,188 475 4.7
Cost of capital 60
Contribution from new business before
cost of capital 535
1. Covered business only.
2. The capitalisation factor is the present value of annual premiums
divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value
at point of sale of assumed profits from new business written in the
period and then rolled forward to the end of the financial period
using the risk discount rate applicable at the end of the reporting
period.
4. LGR includes present value of annual premiums for longevity insurance
on a net of reinsurance basis to enable a more representative margin
figure. The gross of reinsurance longevity insurance annual premium
is GBP270m (2012 : GBPnil). The LGR PVNBP contribution from new business
and margin are also inclusive of longevity insurance.
European Embedded Value Page 82
5.07 Sensitivities
In accordance with the guidance issued by the European Insurance CFO
Forum in October 2005 the table below shows the effect of alternative
assumptions on the long term embedded value and new business contribution.
Effect on embedded value as
at 31 December 2013
1% 1% 1%
lower higher 1% 1% higher
As risk risk lower higher equity/
pub- discount discount interest interest property
lished rate rate rate rate yields
GBPm GBPm GBPm GBPm GBPm GBPm
LGAS and LGR(1) 8,454 614 (525) 295 (241) 128
LGA 933 115 (96) 38 (37) -
Total covered business 9,387 729 (621) 333 (278) 128
5% 5%
10% 10% lower lower
lower lower 10% mortality mortality
As equity/ main- lower (UK (other
pub- property tenance lapse annu- busi-
lished values expenses rates ities) ness)
GBPm GBPm GBPm GBPm GBPm GBPm
LGAS and LGR(1) 8,454 (261) 115 85 (268) 73
LGA 933 - 12 4 n/a 129
Total covered business 9,387 (261) 127 89 (268) 202
Effect on new business contribution
for the year
1% 1% 1%
lower higher 1% 1% higher
As risk risk lower higher equity/
pub- discount discount interest interest property
lished rate rate rate rate yields
GBPm GBPm GBPm GBPm GBPm GBPm
LGAS and LGR(1) 544 76 (63) - (5) 15
LGA 107 14 (12) 1 (1) -
Total covered business 651 90 (75) 1 (6) 15
5% 5%
10% 10% lower lower
lower lower 10% mortality mortality
As equity/ main- lower (UK (other
pub- property tenance lapse annu- busi-
lished values expenses rates ities) ness)
GBPm GBPm GBPm GBPm GBPm GBPm
LGAS and LGR(1) 544 (5) 23 16 (23) 10
LGA 107 - 2 2 n/a 17
Total covered business 651 (5) 25 18 (23) 27
1. Includes LGC.
Opposite sensitivities
are broadly symmetrical.
Sensitivity to changes in assumptions may not be linear, and as such,
they should not be extrapolated to changes of a much larger order. A
2% higher risk discount rate would result in a GBP913m negative impact
on UK embedded value and a GBP108m negative impact on UK new business
contribution for the year.
European Embedded Value Page 83
5.08 Assumptions
UK assumptions
The assumed future pre-tax returns on fixed interest and RPI
linked securities are set by reference to the portfolio yield on
the relevant backing assets held at market value at the end of the
reporting period. The calculated return takes account of
derivatives and other credit instruments in the investment
portfolio. Indicative yields on the portfolio, excluding annuities
within LGR, but after allowance for long term default risk, are
shown below.
For LGR, separate returns are calculated for new and existing
business. Indicative combined yields, after allowance for long term
default risk and the following additional assumptions, are also
shown below. These additional assumptions are:
i. Where cash balances and debt securities are held at the
reporting date in excess of, or below strategic investment
guidelines, then it is assumed that these cash balances or debt
securities are immediately invested or disinvested at current
yields.
ii. Where interest rate swaps are used to reduce risk, it is
assumed that these swaps will be sold before expiry and the
proceeds reinvested in corporate bonds with a redemption yield
0.70% p.a. (0.70% p.a. at 31 December 2012) greater than the swap
rate at that time (i.e. the long term credit rate).
iii. Where reinvestment or disinvestment is necessary to
rebalance the asset portfolio in line with projected outgo, this is
also assumed to take place at the long term credit rate above the
swap rate at that time.
The returns on fixed and index-linked securities are calculated
net of an allowance for default risk which takes account of the
credit rating, outstanding term of the securities, and increase in
the expectation of credit defaults over the economic cycle. The
allowance for corporate securities expressed as a level rate
deduction from the expected returns for annuities was 27bps at 31
December 2013 (26bps at 31 December 2012).
UK covered business
i. Assets are valued at market value.
ii. Future bonus rates have been set at levels which would fully
utilise the assets supporting the policyholders' portion of the
with-profits business in accordance with established practice. The
proportion of profits derived from with-profits business allocated
to shareholders amounts to almost 10% throughout the
projection.
iii. The value of in-force business reflects the cost, including
administration expenses, of providing for benefit enhancement or
compensation in relation to certain products.
iv. Other actuarial assumptions have been set at levels
commensurate with recent operating experience, including those for
mortality, morbidity, persistency and maintenance expenses
(excluding the development costs referred to below). These are
normally reviewed annually.
An allowance is made for future mortality improvement,
commencing 1 January 2010 as per CMIB's mortality improvement model
(CMI 2012) with the following parameters:
Males: Long Term Rate of 1.5% p.a. for future experience and
2.0% p.a. for statutory reserving, up to age 85 tapering to 0% at
120;
Females: Long Term Rate of 1.0% p.a. for future experience and
1.5% p.a. for statutory reserving, up to age 85 tapering to 0% at
120.
Future improvements are generally assumed to converge to the
long term rate in 2026.
On this basis, the best estimate of the expectation of life for
a new 65 year old Male CPA annuitant is 24.3 years (31 December
2012: 24.1 years). The expectation of life on the regulatory
reserving basis is 25.8 years (31 December 2012: 25.7 years).
v. Development costs relate to investment in strategic systems
and development capability that are charged to the covered
business. Projects charged to the non-covered business are included
within Group Investment projects in LGC and group expenses.
Overseas covered business
vi. Other actuarial assumptions have been set at levels
commensurate with recent operating experience, including those for
mortality, morbidity, persistency and maintenance expenses.
European Embedded Value Page 84
5.08 Assumptions (continued)
Economic assumptions
As at As at As at
2013 2012 2011
% p.a. % p.a. % p.a.
Risk margin 3.4 3.7 3.7
Risk free rate(1)
- UK 3.4 2.3 2.5
- Europe 2.2 1.7 2.6
- US 3.1 1.8 1.9
Risk discount
rate (net of
tax)
- UK 6.8 6.0 6.2
- Europe 5.6 5.4 6.3
- US 6.5 5.5 5.6
Reinvestment
rate (US) 5.8 4.3 4.2
Other UK business assumptions
Equity risk premium 3.3 3.3 3.3
Property risk
premium 2.0 2.0 2.0
Investment return (excluding
annuities in LGPL)
- Gilts:
- Fixed interest 2.7 - 3.0 1.9 - 2.3 1.8 - 2.5
- RPI linked 3.6 2.7 2.6
- Non gilts:
- Fixed interest 2.2 - 3.3 1.9 - 2.9 3.0 - 4.6
- Equities 6.7 5.6 5.8
- Property 5.4 4.3 4.5
Long-term rate
of return on
non profit annuities
in LGPL 4.6 4.3 5.0
Inflation
- Expenses/earnings 4.1 3.4 3.5
- Indexation 3.6 2.9 3.0
1. The risk free rate is the gross redemption yield on the 15
year gilt index. The Europe risk free rate is the 10 year ECB
AAA-rated euro area central government bond par yield. The LGA risk
free rate is the 10 year US Treasury effective yield.
Tax
vii. The profits on the covered business, except for the profits
on the Society shareholder capital held outside the long term fund,
are calculated on an after tax basis and are grossed up by the
notional attributed tax rate for presentation in the income
statement. For the UK, the after tax basis assumes the annualised
current tax rate of 23.25% and the subsequent planned future
reductions in corporation tax to 21% from 1 April 2014, and 20%
from 1 April 2015. The tax rate used for grossing up is the long
term corporate tax rate in the territory concerned, which for the
UK is 20% (31 December 2012: 21%) taking into account the expected
further rate reductions to 20% by 1 April 2015. The profits on the
Society shareholder capital held outside the long term fund are
calculated before tax and therefore tax is calculated on an actual
basis.
US, Netherlands and France covered business profits are also
grossed up using the long term corporate tax rates of the
respective territories i.e. US is 35% (31 December 2012: 35%),
France is 34.43% (31 December 2012: 34.3%) and Netherlands is 25%
(31 December 2012: 25%).
European Embedded Value Page 85
5.08 Assumptions (continued)
Stochastic calculations
viii. The time value of options and guarantees is calculated
using economic and non-economic assumptions consistent with those
used for the deterministic embedded value calculations.
A single model has been used for UK and international business,
with different economic assumptions for each territory reflecting
the significant asset classes in each territory.
Government nominal interest rates are generated using a LIBOR
Market Model projecting full yield curves at annual intervals. The
model provides a good fit to the initial yield curve.
The total annual returns on equities and property are calculated
as the return on 1 year bonds plus an excess return. The excess
return is assumed to have a lognormal distribution. Corporate bonds
are modelled separately by credit rating using stochastic credit
spreads over the risk free rates, transition matrices and default
recovery rates. The real yield curve model assumes that the real
short rate follows a mean-reverting process subject to two normally
distributed random shocks.
The significant asset classes are:
- UK with-profits business - equities, property and fixed rate
bonds of various durations;
- UK annuity business - fixed rate and index-linked bonds of
various durations; and
- International business - fixed rate bonds of various
durations.
The risk discount rate is scenario dependent within the
stochastic projection. It is calculated by applying the
deterministic risk margin to the risk free rate in each stochastic
projection.
Sensitivity calculations
ix. A number of sensitivities have been produced on alternative
assumption sets to reflect the sensitivity of the embedded value
and the new business contribution to changes in key assumptions.
Relevant details relating to each sensitivity are:
-- 1% variation in discount rate - a one percentage point
increase/decrease in the risk margin has been assumed in each case
(for example a 1% increase in the risk margin would result in a
4.4% risk margin).
-- 1% variation in interest rate environment - a one percentage
point increased/decreased parallel shift in the risk free curve
with consequential impacts on fixed asset market values, investment
return assumptions, risk discount rate, including consequential
changes to valuation bases.
-- 1% higher equity/property yields - a one percentage point
increase in the assumed equity/property investment returns,
excluding any consequential changes, for example, to risk discount
rates or valuation bases, has been assumed in each case (for
example a 1% increase in equity returns would increase assumed
total equity returns from 6.7% to 7.7%).
-- 10% lower equity/property market values - an immediate 10%
reduction in equity and property asset values.
-- 10% lower maintenance expenses, excluding any consequential
changes, for example, to valuation expense bases or potentially
reviewable policy fees (for example a 10% decrease on a base
assumption of GBP10 per annum would result in a GBP9 per annum
expense assumption).
-- 10% lower assumed persistency experience rates, excluding any
consequential changes to valuation bases, incorporating a 10%
decrease in lapse, surrender and premium cessation assumptions (for
example a 10% decrease on a base assumption of 7% would result in a
6.3% lapse assumption).
-- 5% lower mortality and morbidity rates, excluding any
consequential changes to valuation bases but including assumed
product repricing action where appropriate (for example if base
experienced mortality is 90% of a standard mortality table then,
for this sensitivity, the assumption is set to 85.5% of the
standard table).
The sensitivities for covered business allow for any material
changes to the cost of financial options and guarantees but do not
allow for any changes to reserving bases or capital requirements
within the sensitivity calculation, unless indicated otherwise
above.
European Embedded Value Page 86
5.09 Methodology
Basis of preparation
The supplementary financial statements have been prepared in
accordance with the European Embedded Value (EEV) Principles issued
in May 2004 by the European Insurance CFO Forum.
The supplementary financial statements have been reviewed by
PricewaterhouseCoopers LLP and prepared with assistance from our
consulting actuary Milliman in the USA.
Changes to accounting policy - IAS 19 'Employee Benefits'
During 2013 the Group has changed its accounting policy on the
recognition and measurement of defined benefit pension expense and
termination benefits following the publication by the IASB in June
2011 of an amendment to IAS 19 'Employee Benefits'. This is
compulsory for years beginning on or after 1 January 2013. The
impact of the amendment is to reduce profit for the year by GBP2m.
This reflects the non-covered business component, since the with
profit element is transferred to the unallocated divisible surplus
and the non profit element is included within covered business
(Other reserve movements), with an equivalent increase in Other
Comprehensive Income. Total Comprehensive Income therefore remains
unchanged.
The impact of this change upon the 2012 annual profit for the
year and group embedded value - summary are shown below. As the
impact of the change is shown within investment variances there is
no impact upon group operating profit.
2012
GBPm
Profit for the year as previously
reported 734
Economic variances
IAS 19 'Employee Benefits'
amendment (1)
Revised profit for the
year (after tax) 733
Actuarial gain on defined benefit
pension schemes 4
Actuarial gain on defined benefit pension schemes transferred
to unallocated divisible surplus (3)
Previously reported income (40)
----------------------------------------------------------------- ------
Total comprehensive income
for the year 694
----------------------------------------------------------------- ------
Earnings per share p
Based on profit attributable to equity holders of the Company
as previously reported 12.75
IAS 19 'Employee Benefits' amendment -
Revised earnings per share based on profit attributable
to equity holders of the Company 12.75
----------------------------------------------------------------- ------
Diluted earnings per share
Based on profit attributable to equity holders of the
Company as previously reported 12.54
IAS 19 'Employee Benefits' amendment -
Revised diluted earnings per share based on profit attributable
to equity holders of the Company 12.54
----------------------------------------------------------------- ------
Covered business
The Group uses EEV methodology to value individual and group
life assurance, pensions and annuity business written in the UK,
Continental Europe and the US. The UK covered business also
includes non-insured self invested personal pension (SIPP)
business.
The managed pension funds business has been excluded from
covered business and is reported on an IFRS basis.
All other businesses are accounted for on the IFRS basis adopted
in the primary financial statements.
There is no distinction made between insurance and investment
contracts in our covered business as there is under IFRS.
European Embedded Value Page 87
5.09 Methodology (continued)
Description of methodology
The objective of EEV is to provide shareholders with realistic
information on the financial position and current performance of
the Group.
The methodology requires assets of an insurance company, as
reported in the primary financial statements, to be attributed
between those supporting the covered business and the remainder.
The method accounts for assets in the covered business on an EEV
basis and the remainder of the Group's assets on the IFRS basis
adopted in the primary financial statements.
The EEV methodology recognises profit from the covered business
as the total of:
i. cash transfers during the relevant period from the covered
business to the remainder of the Group's assets; and
ii. the movement in the present value of future distributable
profits to shareholders arising from the covered business over the
relevant reporting period.
Embedded value
Shareholders' equity on the EEV basis comprises the embedded
value of the covered business plus the shareholders' equity of
other businesses, less the value included for purchased interests
in long term business.
The embedded value is the sum of the shareholder net worth (SNW)
and the value of the in-force business (VIF). SNW is defined as
those amounts, within covered business (both within the long term
fund and held outside the long term fund but used to support long
term business), which are regarded either as required capital or
which represent free surplus.
The VIF is the present value of future shareholder profits
arising from the covered business, projected using best estimate
assumptions, less an appropriate deduction for the cost of holding
the required level of capital and the time value of financial
options and guarantees (FOGs).
Service companies
All services relating to the UK covered business are charged on
a cost recovery basis, with the exception of investment management
services provided to Legal & General Pensions Limited (LGPL)
and to Legal & General Assurance Society Limited (Society).
Profits arising on the provision of these services are valued on a
look through basis.
As the EEV methodology incorporates the future capitalised cost
of these internal investment management services, the equivalent
IFRS profits have been removed from the Investment management
segment and are instead included in the results of the LGAS and LGR
segments on an EEV basis.
The capitalised value of future profits emerging from internal
investment management services are therefore included in the
embedded value and new business contribution calculations for the
LGAS and LGR segments. However, the historical profits which have
emerged continue to be reported in the shareholders' equity of the
LGIM segment on an IFRS basis. Since the look through into service
companies includes only future profits and losses, current
intra-group profits or losses must be eliminated from the closing
embedded value and in order to reconcile the profits arising in the
financial period within each segment with the net assets on the
opening and closing balance sheet, a transfer of IFRS profits for
the period from the UK SNW is deemed to occur.
New business
New business premiums reflect income arising from the sale of
new contracts during the reporting period and any changes to
existing contracts, which were not anticipated at the outset of the
contract.
In-force business comprises previously written single premium,
regular premium, recurrent single premium contracts and payments in
relation to existing longevity insurance. Department of Work and
Pensions rebates have not been treated as recurring and are
included in single premium new business when received. Longevity
insurance product comprises the exchange of a stream of fixed leg
payments for a stream of floating payments, with the value of the
income stream being the difference between the two legs. New
business annual premiums have been excluded for longevity insurance
due to the unpredictable deal flow from this type of business.
New business contribution arising from the new business premiums
written during the reporting period has been calculated on the same
economic and operating assumptions used in the embedded value at
the end of the financial period. This has then been rolled forward
to the end of the financial period using the risk discount rate
applicable at the end of the reporting period.
The present value of future new business premiums (PVNBP) has
been calculated and expressed at the point of sale. The PVNBP is
equivalent to the total single premiums plus the discounted value
of regular premiums expected to be received over the term of the
contracts using the same economic and operating assumptions used
for the embedded value at the end of the financial period. The
discounted value of longevity insurance regular premiums is
calculated on a net of reinsurance basis to enable a more
representative margin figure.
The new business margin is defined as new business contribution
at the end of the reporting period divided by the PVNBP. The
premium volumes and projection assumptions used to calculate the
PVNBP are the same as those used to calculate new business
contribution.
Intra-group reinsurance arrangements are in place between the US
and UK businesses, and it is expected that these arrangements will
be periodically extended to cover recent new business. US new
business premiums and contribution reflect the groupwide expected
impact of US directly-written business.
European Embedded Value Page 88
5.09 Methodology (continued)
Projection assumptions
Cash flow projections are determined using best estimate
assumptions for each component of cash flow and for each policy
group. Future economic and investment return assumptions are based
on conditions at the end of the financial period. Future investment
returns are projected by one of two methods. The first method is
based on an assumed investment return attributed to assets at their
market value. The second, which is used by LGA, where the
investments of that subsidiary are substantially all fixed
interest, projects the cash flows from the current portfolio of
assets and assumes an investment return on reinvestment of surplus
cash flows. The assumed discount and inflation rates are consistent
with the investment return assumptions.
Detailed projection assumptions including mortality, morbidity,
persistency and expenses reflect recent operating experience and
are normally reviewed annually. Allowance is made for future
improvements in annuitant mortality based on experience and
externally published data. Favourable changes in operating
experience are not anticipated until the improvement in experience
has been observed.
All costs relating to the covered business, whether incurred in
the covered business or elsewhere in the Group, are allocated to
that business. The expense assumptions used for the cash flow
projections therefore include the full cost of servicing this
business.
Tax
The projections take into account all tax which is expected to
be paid, based on best estimate assumptions, applying current
legislation and practice together with known future changes.
Allowance for risk
Aggregate risks within the covered business are allowed for
through the following principal mechanisms:
i. setting required capital levels with reference to both the
Group's internal risk based capital models, and an assessment of
the strength of regulatory reserves in the covered business;
ii. allowing explicitly for the time value of financial options
and guarantees within the Group's products; and
iii. setting risk discount rates by deriving a Group level risk
margin to be applied consistently to local risk free rates.
Required capital and free surplus
Regulatory capital for the UK LGAS and LGR businesses is
provided by assets backing the with-profits business or by the SNW.
The SNW comprises all shareholders' capital within Society,
including those funds retained within the long term fund and the
excess assets in LGPL (collectively Society shareholder
capital).
Society shareholder capital is either required to cover EU
solvency margin or is free surplus as its distribution to
shareholders is not restricted.
For UK with-profits business, the required capital is covered by
the surplus within the with-profits part of the fund and no effect
is attributed to shareholders except for the burn-through cost,
which is described later. This treatment is consistent with the
Principles and Practices of Financial Management for this part of
the fund.
For UK non profit business, the required capital will be
maintained at no less than the level of the EU minimum solvency
requirement. This level, together with the margins for adverse
deviation in the regulatory reserves, is, in aggregate, in excess
of internal capital targets assessed in conjunction with the
Individual Capital Assessment (ICA) and the with-profits support
account.
The initial strains relating to new non profit business,
together with the related EU solvency margin, are supported by
releases from existing non profit business and the Society
shareholder capital. As a consequence, the writing of new business
defers the release of capital to free surplus. The cost of holding
required capital is defined as the difference between the value of
the required capital and the present value of future releases of
that capital. For new business, the cost of capital is taken as the
difference in the value of that capital assuming it was available
for release immediately and the present value of the future
releases of that capital. As the investment return, net of tax, on
that capital is less than the risk discount rate, there is a
resulting cost of capital which is reflected in the value of new
business.
For LGA, the Company Action Level (CAL) of capital has been
treated as required capital for modelling purposes. The CAL is the
regulatory capital level at which the company would have to take
prescribed action, such as submission of plans to the State
insurance regulator, but would be able to continue operating on the
existing basis. The CAL is currently twice the level of capital at
which the regulator is permitted to take control of the
business.
For LGN, required capital has been set at 100% of EU minimum
solvency margin for all products without FOGs. For those products
with FOGs, capital of between 100% and 350% of the EU minimum
solvency margin has been used. At total level a check is made to
ensure the total requirement meets the 160% Solvency I (both EEV
and NBVA) from the capital policy.The level of capital has been
determined using risk based capital techniques.
For LGF, 100% of EU minimum solvency margin has been used for EV
modelling purposes for all products both with and without FOGs. The
level of capital has been determined using risk based capital
techniques.
The contribution from new business for our International
businesses reflects an appropriate allowance for the cost of
holding the required capital.
European Embedded Value Page 89
5.09 Methodology (continued)
Financial options and guarantees
Under the EEV Principles an allowance for time value of FOGs is
required where a financial option exists which is exercisable at
the discretion of the policyholder. These types of option
principally arise within the with-profits part of the fund and
their time value is recognised within the with-profits burn-through
cost described below. Additional financial options for non profit
business exist only for a small amount of deferred annuity business
where guaranteed early retirement and cash commutation terms apply
when the policyholders choose their actual retirement date.
Further financial guarantees exist for non profit business, in
relation to index-linked annuities where capped or collared
restrictions apply. Due to the nature of these restrictions and the
manner in which they vary depending on the prevailing inflation
conditions, they are also treated as FOGs and a time value cost
recognised accordingly.
The time value of FOGs has been calculated stochastically using
a large number of real world economic scenarios derived from
assumptions consistent with the deterministic EEV assumptions and
allowing for appropriate management actions where applicable. The
management action primarily relates to the setting of bonus rates.
Future regular and terminal bonuses on participating business
within the projections are set in a manner consistent with expected
future returns available on assets deemed to back the policies
within the stochastic scenarios.
In recognising the residual value of any projected surplus
assets within the with-profits part of the fund in the
deterministic projection, it is assumed that terminal bonuses are
increased to exhaust all of the assets in the part of the fund over
the future lifetime of the in-force with-profits policies. However,
under stochastic modelling, there may be some extreme economic
scenarios when the total projected assets within the with-profits
part of the fund are insufficient to pay all projected policyholder
claims and associated costs. The average additional shareholder
cost arising from this shortfall has been included in the time
value cost of financial options and guarantees and is referred to
as the with-profits burn-through cost.
Economic scenarios have been used to assess the time value of
the financial guarantees for non profit business by using the
inflation rate generated in each scenario. The inflation rate used
to project index-linked annuities will be constrained in certain
real world scenarios, for example, where negative inflation occurs
but the annuity payments do not reduce below pre-existing levels.
The time value cost of FOGs allows for the projected average cost
of these constrained payments for the index-linked annuities. It
also allows for the small additional cost of the guaranteed early
retirement and cash commutation terms for the minority of deferred
annuity business where such guarantees have been written.
LGA FOGs relate to guaranteed minimum crediting rates and
surrender values on a range of contracts, as well as impacts on
no-lapse guarantees (NLG). The guaranteed surrender value of the
contract is based on the accumulated value of the contract
including accrued interest. The crediting rates are discretionary
but related to the accounting income for the amortising bond
portfolio. The majority of the guaranteed minimum crediting rates
are between 3% and 4%. The assets backing these contracts are
invested in US Dollar denominated fixed interest securities.
LGN separately provides for two types of guarantees: interest
rate guarantees and maturity guarantees. Certain contracts provide
an interest rate guarantee where there is a minimum crediting rate
based on the higher of 1-year Euribor and the policy guarantee
rate. This guarantee applies on a monthly basis. Certain other
linked contracts provide a guaranteed minimum value at maturity
where the maturity amount is the higher of the fund value and a
guarantee amount. The fund values for both these contracts are
invested in Euro denominated fixed interest securities.
For LGF, FOGs which have been separately provided for relate to
guaranteed minimum crediting rates and surrender values on a range
of contracts. The guaranteed surrender value of the contract is the
accumulated value of the contract including accrued bonuses. The
bonuses are based on the accounting income for the amortising bond
portfolios plus income and releases from realised gains on any
equity type investments. Policy liabilities equal guaranteed
surrender values. Local statutory accounting rules require the
establishment of a specific liability when the accounting income
for a company is less than 125% of the guaranteed minimum credited
returns, although this has never been required. In general, the
guaranteed annual bonus rates are between 0% and 4.5%.
Risk free rate
The risk free rate is set to reflect both the pattern of the
emerging profits under EEV and the relevant duration of the
liabilities where backing assets reflect this assumption (e.g.
equity returns). For the UK, it is set by reference to the gross
redemption yield on the 15 year gilt index. For LGA, the risk free
rate is the 10 year US Treasury effective yield, while the 10 year
ECB AAA-rated Euro area central government bond par yield is used
for LGN and LGF.
European Embedded Value Page 90
5.09 Methodology (continued)
Risk discount rate
The risk discount rate (RDR) is a combination of the risk free
rate and a risk margin, which reflects the residual risks inherent
in the Group's covered businesses, after taking account of
prudential margins in the statutory provisions, the required
capital and the specific allowance for FOGs.
The risk margin has been determined based on an assessment of
the Group's weighted average cost of capital (WACC). This
assessment incorporates a beta for the Group, which measures the
correlation of movements in the Group's share price to movements in
a relevant index. Beta values therefore allow for the market's
assessment of the risks inherent in the business relative to other
companies in the chosen index.
The WACC is derived from the Group's cost of equity and debt,
and the proportion of equity to debt in the Group's capital
structure measured using market values. Each of these three
parameters is forward looking, although informed by historic
information and appropriate judgements where necessary. The cost of
equity is calculated as the risk free rate plus the equity risk
premium for the chosen index multiplied by the Company's beta.
Forward-looking or adjusted betas make allowance for the observed
tendency for betas to revert to 1 and therefore a weighted average
of the historic beta and 1 tends to be a better estimate of the
Company's beta for the future period. We have computed the WACC
using an arithmetical average of forward-looking betas against the
FTSE 100 index.
The cost of debt used in the WACC calculations takes account of
the actual locked-in rates for our senior and subordinated long
term debt. All debt interest attracts tax relief at a rate of
20.1%.
Whilst the WACC approach is a relatively simple and transparent
calculation to apply, subjectivity remains within a number of the
assumptions. Management believes that the chosen margin, together
with the levels of required capital, the inherent strength of the
Group's regulatory reserves and the explicit deduction for the cost
of options and guarantees, is appropriate to reflect the risks
within the covered business.
Analysis of profit
Operating profit is identified at a level which reflects an
assumed longer term level of investment return.
The contribution to operating profit in a period is attributed
to four sources:
i. new business;
ii. the management of in-force business;
iii. development costs; and
iv. return on shareholder net worth.
Further profit contributions arise from actual investment return
differing from the assumed long term investment return (investment
return variances), and from the effect of economic assumption
changes.
The contribution from new business represents the value
recognised at the end of each period from new business written in
that period, after allowing for the actual cost of acquiring the
business and of establishing the required technical provisions and
reserves and after making allowance for the cost of capital. New
business contributions are calculated using closing
assumptions.
The contribution from in-force business is calculated using
opening assumptions and comprises:
i. expected return - the discount earned from the value of
business in-force at the start of the year;
ii. experience variances - the variance in the actual experience
over the reporting period from that assumed in the value of
business in-force as at the start of the year; and
iii. operating assumption changes - the effects of changes in
future assumptions, other than changes in economic assumptions from
those used in valuing the business at the start of the year. These
changes are made prospectively from the end of the year.
Development costs relate to investment in strategic systems and
development capability.
The contribution from shareholder net worth comprises the
increase in embedded value based on assumptions at the start of the
year in respect of the expected investment return on the Society
shareholder capital.
Further profit contributions arise from investment return
variances and the effect of economic assumption changes.
Economic variances represent:
i. the effect of actual investment performance and changes to
investment policy on SNW and VIF business from that assumed at the
beginning of the period; and
ii. the effect of changes in economic variables on SNW and VIF
business from that assumed at the beginning of the period, which
are beyond the control of management, including associated changes
to valuation bases to the extent that they are reflected in revised
assumptions.
This information is provided by RNS
The company news service from the London Stock Exchange
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