TIDMLGEN
RNS Number : 1058V
Legal & General Group Plc
05 August 2015
Capital and Investments 71
4.01 Group regulatory capital - 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 a 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 At
30.06.15 30.06.14 31.12.14
GBPbn GBPbn GBPbn
Core tier 1 6.9 6.7 6.4
Innovative tier 1 0.6 0.6 0.6
Tier 2(1) 1.2 1.8 1.7
Deductions (1.0) (0.9) (1.0)
Group capital resources 7.7 8.2 7.7
Group capital resources requirement(2) 3.9 3.5 3.8
IGD surplus 3.8 4.7 3.9
Group capital resources requirement
coverage ratio(3) 198% 236% 201%
1. In June 2015, the Group redeemed EUR0.6bn Euro subordinated notes,
constituting Lower Tier 2 capital.
2. Group capital resources requirement includes a With-profits Insurance
Capital Component (WPICC) of GBP0.4bn (H1 14: GBP0.3bn; FY 14: GBP0.4bn).
3. Coverage ratio is calculated on unrounded values.
A reconciliation of the capital and reserves attributable to the equity
holders of the Company on an IFRS basis to the Group capital resources
on an IGD basis is given below.
At At At
30.06.15 30.06.14 31.12.14
GBPbn GBPbn GBPbn
Capital and reserves attributable to equity
holders on an IFRS basis 6.0 5.7 6.0
Innovative tier 1 0.6 0.6 0.6
Tier 2 1.2 1.8 1.7
UK unallocated divisible surplus 0.6 1.0 0.7
Proposed dividends (0.2) (0.2) (0.5)
Intangibles (0.4) (0.4) (0.4)
Other regulatory adjustments(1) (0.1) (0.3) (0.4)
Group capital resources 7.7 8.2 7.7
1. Other regulatory adjustments include differences between accounting
and regulatory bases.
The table below demonstrates how the Group's net cash generation
reconciles to the IGD capital surplus position.(1)
At
30.06.15
GBPbn
IGD surplus at 1 January 3.9
Net cash generation 0.6
Dividends (0.2)
New business capital deployed (0.1)
Existing business capital release 0.1
Repayment of subordinated debt (0.5)
IGD surplus at 30 June 3.8
1. All IGD amounts are estimated, unaudited and after accrual of the
interim dividend of GBP205m.
Capital and Investments 72
4.02 Group Economic Capital
Legal & General defines economic capital to be the amount of
capital that the Board believes the Group needs to hold, over and
above its liabilities, in order to meet its strategic objectives.
This is not the same as regulatory capital which reflects
regulatory rules and constraints. The Group's objectives include
being able to meet its liabilities as they fall due whilst
maintaining the confidence of our investors, rating agencies,
customers and intermediaries.
Legal & General has invested considerable time and resource
in developing a risk based capital model that is used to calculate
the Group's Economic Capital Balance Sheet and support the
management of risk within the Group. The Group continues to develop
the economic capital model in light of developments in the Group's
business model, refinements in modelling and the analysis of
experience, emerging market practice and feedback from independent
reviewers. The Group's economic capital position will reflect these
changes as they are implemented. It is intended that this modelling
framework, suitably adjusted for regulatory constraints, should
also meet the needs of the Solvency II regime, due to come in to
force on 1 January 2016. Our Economic Capital model has not been
reviewed by the Prudential Regulatory Authority (PRA), nor will it
be.
The economic capital numbers presented here do not represent our
view of the Solvency II outcome for the Group. Solvency II has
elements which are considered to be inconsistent with the Group's
definition of economic capital, so there will be differences
between the two balance sheets. Legal & General is engaged in
discussions with the PRA and in 2015 we made a formal application
for approval of an internal model for use under Solvency II. Our
Solvency II internal model is being reviewed by the PRA.
(a) Capital position
As at 30 June 2015 the Group had an economic capital surplus of GBP6.4bn
(FY 14: GBP7.0bn), corresponding to an economic capital coverage ratio
of 220% (FY 14: 229%). The economic capital position is as follows:
At At
30.06.15 31.12.14
GBPbn GBPbn
Eligible own funds 11.8 12.5
Economic capital requirement 5.4 5.5
Surplus 6.4 7.0
1-in-200 coverage ratio(1) 220% 229%
1. Coverage ratio is calculated on
unrounded values.
Further explanation of the underlying methodology and assumptions is
set out in the sections below.
(b) Methodology
Eligible own funds are defined to be the excess of the value of
assets over the liabilities. Subordinated debt issued by the Group
is considered to be part of available capital, rather than a
liability, as it is subordinate to policyholder claims.
Assets are valued at IFRS fair value with adjustments to remove
intangibles, deferred acquisition costs and to value reassurers'
share of technical provisions on a basis consistent with the
liabilities on the Economic Capital Balance Sheet. The economic
value of assets excluded from the IFRS Balance Sheet (e.g. present
value of future With-profits transfers) is also included.
Liabilities are valued on a best estimate market consistent
basis, with the application of an Economic Matching Adjustment for
valuing annuity liabilities.
The Economic Capital Requirement is the amount of capital
required to cover the 1-in-200 worst projected future outcome in
the year following the valuation, allowing for realistic management
and policyholder actions and the impact of the stress on the tax
position of the Group. This allows for diversification between the
different firms within the Group and between the risks that they
are exposed to.
The liabilities include a Recapitalisation Cost to allow for the
cost of recapitalising the balance sheet following the 1-in-200
stress in order to maintain confidence that our future liabilities
will be met. This is calculated using a cost of capital that
reflects the long term average rates at which it is expected that
the Group could raise debt and allowing for diversification between
all Group entities.
All material insurance firms, including Legal & General
Assurance Society, Legal & General Insurance, Legal &
General Pensions Management Company (PMC) (LGIM's insurance
subsidiary) and Legal & General America (LGA) are incorporated
into the Group's Economic Capital model assessment of required
capital, assuming diversification of the risks between those
firms.
Firms for which the capital requirements are less material, for
example Legal & General Netherlands and Suffolk Life, are
valued on the firm's latest interpretation of the Solvency II
Standard Formula basis. The business retained within Legal &
General Pensions Limited, an internal Insurance Special Purpose
Vehicle, has been valued on a "look through" basis and capital
requirements calculated as if the business was not internally
reassured. Non-insurance firms are included using their current
regulatory surplus, without allowing for any diversification with
the rest of the Group.
Allowance is made within the Economic Capital Balance Sheet for
the Group's defined benefit pension scheme based upon the scheme's
funding basis, and allowance is made within the capital requirement
by stressing the funding position using the same economic capital
basis as for the insurance firms.
The results and the model are unaudited but certain elements of
the methodology, assumptions and processes have been reviewed by
PwC.
Capital and Investments 73
4.02 Group Economic Capital (continued)
(c) Assumptions
The calculation of the Economic Capital Balance Sheet and
associated capital requirement requires a number of assumptions,
including:
(i) assumptions required to derive the present value of best
estimate liability cash flows. Non market assumptions are broadly
the same as those used to derive the Group's EEV disclosures.
Future investment returns and discount rates are based on market
data where a deep and liquid market exists or using appropriate
estimation techniques where this is not the case. The risk-free
rates used to discount liabilities are market swap rates, with a 10
basis point deduction to allow for a credit risk adjustment;
(ii) assumptions regarding management actions and policyholder
behaviour across the full range of scenarios. The only management
actions allowed for are those that have been approved by the Board
and are in place at the balance sheet date;
(iii) assumptions regarding the volatility of the risks to which
the Group is exposed are used to calculate Economic Capital
Requirement. Assumptions have been set using a combination of
historic market, demographic and operating experience data. In
areas where data is not considered robust, expert judgement has
been used; and
(iv) assumptions on the dependencies between risks, which are
calibrated using a combination of historic data and expert
judgement.
For annuities business the liability discount rate includes an
Economic Matching Adjustment. The Economic Matching Adjustment is
derived using the same approach as the Solvency II matching
adjustment, but any constraints we consider economically
artificial, such as capping the yield on assets with a credit
rating below BBB and any ineligibility of certain assets, have not
been applied.
The other key assumption relating to the annuity business is the
assumption of longevity. As for IFRS and EEV, Legal & General
models base mortality and future improvement of mortality
separately. For our Economic Capital assessment we believe it is
appropriate to ensure that the balance sheet makes sufficient
allowance to meet the 1-in-200 stress to longevity over the run off
of the liabilities rather than just over a 1 year timeframe.
(d) Analysis of change
The table below shows the movement (net of tax) during the financial
year in the Group's Economic Capital surplus.
Economic
Capital
surplus
Analysis of movement from 1 January to 30 June 2015 GBPbn
Economic solvency position as at 1 January
2015 7.0
New business surplus 0.1
Existing business expected
release 0.4
Subordinated debt redemption (0.5)
Dividends declared
in the period (0.5)
Other capital movements(1) (0.1)
====================================================================== ========
Economic solvency position as at 30 June 2015 6.4
1. Other capital movements includes operating and non-operating experience
items other than the expected release from existing business.
Capital and Investments 74
4.02 Group Economic Capital (continued)
(e) Reconciliation of IFRS Shareholders' Equity to Economic Capital
Eligible Own Funds
The table below gives a reconciliation of the Eligible Own Funds on
an Economic Capital basis and the Group IFRS shareholders' equity.
At At
30.06.15 31.12.14
GBPbn GBPbn
IFRS shareholders' equity at 30 June / 31 December 6.0 6.0
Remove DAC, goodwill and other intangible assets
and liabilities (2.0) (2.0)
Add subordinated debt treated as economic available capital(1) 1.9 2.4
Insurance contract valuation differences(2) 6.2 6.6
Add value of shareholder transfers 0.3 0.3
Increase in value of net deferred tax liabilities (resulting
from valuation differences) (0.5) (0.6)
Other(3) 0.2 0.1
Adjustment - Basic own funds to Eligible own funds(4) (0.3) (0.3)
Eligible Own Funds at 30 June / 31 December 11.8 12.5
1. Treated as available capital on the Economic Capital Balance Sheet
as the liabilities are subordinate to policyholder claims.
2. Differences in the measurement of liabilities between IFRS and Economic
Capital, offset by the inclusion of the recapitalisation cost.
3. Primarily valuation differences between the IFRS carrying value and
the fair value of financial assets and liabilities.
4. Eligibility restrictions relating to the own funds of US captive
reassurers.
Capital and Investments 75
4.02 Group Economic Capital (continued)
(f) Analysis of Group Economic Capital Requirement
The table below shows a breakdown of the Group's Economic Capital Requirement
by risk type. The split is shown after the effects of diversification.
At At
30.06.15 31.12.14
% %
Interest Rate 6 6
Equity 14 15
Credit(1) 44 44
Property 4 4
Currency 2 3
Inflation (1) (2)
Total Market Risk(2) 69 70
Counterparty Risk 2 1
Life Mortality - -
Life Longevity(3) 9 10
Life Lapse(4) 5 5
Life Catastrophe 3 3
Non-life underwriting 1 1
Health underwriting 1 1
Expense 1 1
Total Insurance Risk 20 21
Operational Risk 7 7
Miscellaneous 2 1
Total Economic Capital Requirement 100 100
1. Credit risk is Legal & General's most significant exposure, arising
predominantly from the cGBP40bn portfolio of corporate bond (or similar)
exposure backing the Group's annuity portfolio.
2. The Group also has significant exposure to other market risks, primarily
due to the investment holdings within the shareholder funds but also
the risk to fee income from assets backing unit linked and with-profit
Savings businesses.
3. Longevity risk is Legal & General's most significant insurance risk
exposure, arising from the annuity book on which the majority of the
longevity risk is retained.
4. Lapse risk is also a significant risk, primarily through the risk
of mass lapse on investment management and savings businesses and the
risk of non-renewal on the Group's protection businesses.
(g) Solvency II
The Economic Capital results set out above do not reflect the
Solvency II regime. They have however, been derived using the same
modelling framework that Legal & General intend to use for
Solvency II. It is anticipated that our Solvency II internal model
will be approved in Q4 2015, ready for use on the Solvency II go
live date - 1 January 2016. We expect the final outcome on Solvency
II to result in a lower Group solvency ratio than the Economic
Capital Coverage Ratio shown above.
Capital and Investments 76
4.03 Investment portfolio
Market Market Market
value value value
At At At
30.06.15 30.06.14 31.12.14
GBPm GBPm GBPm
Worldwide total assets 717,034 642,076 710,554
Client and policyholder
assets (649,882) (576,774) (638,117)
Non-unit linked with-profits
assets (12,216) (17,061) (15,242)
Investments to which shareholders are directly
exposed 54,936 48,241 57,195
Analysed by investment class:
Other
non profit Other
LGR insurance LGC shareholder
investments(1) investments investments investments Total Total Total
At At At At At At At
30.06.15 30.06.15 30.06.15 30.06.15 30.06.15 30.06.14 31.12.14
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Equities(2) 307 - 2,023 79 2,409 1,685 2,265
Bonds 4.05 39,317 2,410 1,480 710 43,917 39,242 45,811
Derivative assets(3) 3,643 13 74 - 3,730 2,337 3,940
Property 2,037 - 180 3 2,220 2,020 2,030
Cash, cash equivalents,
loans & receivables 528 432 1,009 558 2,527 2,802 3,018
Financial investments 45,832 2,855 4,766 1,350 54,803 48,086 57,064
Other assets(4) 118 - 15 - 133 155 131
Total investments 45,950 2,855 4,781 1,350 54,936 48,241 57,195
1. LGR investments include all business written in LGPL,
including GBP0.5bn of non annuity assets held in LGPL.
2. Equity investments include CALA Group Limited and MediaCity Limited.
3. Derivative assets are shown gross of derivative liabilities of GBP2.0bn
(H1 14: GBP1.7bn; FY 14: GBP2.7bn). 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.
4. Other assets include finance lease debtors.
Capital and Investments 77
4.04 Direct Investments
(a) Analysed by asset class
Direct(1) Traded(2) Direct(1) Traded(2) Direct(1) Traded(2)
Investments securities Total Investments securities Total Investments securities Total
At At At At At At At At At
30.06.15 30.06.15 30.06.15 30.06.14 30.06.14 30.06.14 31.12.14 31.12.14 31.12.14
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Equities 410 1,999 2,409 298 1,387 1,685 318 1,947 2,265
Bonds 3,050 40,867 43,917 2,036 37,206 39,242 2,983 42,828 45,811
Derivative
assets - 3,730 3,730 - 2,337 2,337 - 3,940 3,940
Property 2,220 - 2,220 2,020 - 2,020 2,030 - 2,030
Cash, cash
equivalents,
loans &
receivables 380 2,147 2,527 75 2,727 2,802 241 2,777 3,018
Other assets 133 - 133 155 - 155 131 - 131
6,193 48,743 54,936 4,584 43,657 48,241 5,703 51,492 57,195
1. Direct Investments constitute an agreement with another party
and represent an exposure to untraded and often less volatile
assets. Direct Investments include physical assets, bilateral
loans and private equity but exclude hedge funds.
2. Traded securities are defined by exclusion. If an instrument
is not a Direct Investment, then it is classed as a traded security.
(b) Analysed by segment
LGR LGC LGA Insurance Total
At At At At At
30.06.15 30.06.15 30.06.15 30.06.15 30.06.15
GBPm GBPm GBPm GBPm GBPm
Equities - 410 - - 410
Bonds 2,737 61 252 - 3,050
Property 2,037 180 - 3 2,220
Cash, cash equivalents,
loans & receivables - 112 268 - 380
Other assets 118 15 - - 133
4,892 778 520 3 6,193
LGR LGC LGA Insurance Total
At At At At At
30.06.14 30.06.14 30.06.14 30.06.14 30.06.14
GBPm GBPm GBPm GBPm GBPm
Equities - 298 - - 298
Bonds 1,885 - 151 - 2,036
Property 1,692 324 - 4 2,020
Cash, cash equivalents,
loans & receivables - - 75 - 75
Other assets 155 - - - 155
3,732 622 226 4 4,584
Capital and Investments 78
4.04 Direct Investments (continued)
(b) Analysed by segment (continued)
LGR LGC LGA Insurance Total
At At At At At
31.12.14 31.12.14 31.12.14 31.12.14 31.12.14
GBPm GBPm GBPm GBPm GBPm
Equities - 318 - - 318
Bonds 2,586 168 229 - 2,983
Property 1,879 147 - 4 2,030
Cash, cash equivalents,
loans & receivables - 54 187 - 241
Other assets 118 13 - - 131
4,583 700 416 4 5,703
(c) Movement in the period
Carrying Change Carrying
in
value market value
01.01.15 Additions Disposals value 30.06.15
GBPm GBPm GBPm GBPm GBPm
Equities 318 86 (18) 24 410
Bonds 2,983 246 (149) (30) 3,050
Property 2,030 154 - 36 2,220
Cash, cash equivalents,
loans & receivables 241 140 (1) - 380
Other assets 131 - - 2 133
5,703 626 (168) 32 6,193
Capital and Investments 79
4.05 Bond portfolio summary
(a) Analysed by sector
LGR LGR Total Total
At At At At
30.06.15 30.06.15 30.06.15 30.06.15
Note GBPm % GBPm %
Sovereigns, Supras and
Sub-Sovereigns 4.05(b) 6,722 17 8,043 18
Banks:
- Tier 1 94 - 97 -
- Tier 2 and other subordinated 434 1 583 1
- Senior 1,487 4 1,990 5
Financial Services:
- Tier 1 4 - 4 -
- Tier 2 and other subordinated 56 - 81 -
- Senior 649 2 860 3
Insurance:
- Tier 1 85 - 86 -
- Tier 2 and other subordinated 295 1 326 1
- Senior 533 1 595 1
Utilities 4,515 11 4,718 11
Consumer Services and
Goods & Health Care 3,989 10 4,592 10
Technology and Telecoms 2,386 6 2,640 6
Industrials & Oil and
Gas 3,909 10 4,484 10
Property 1,446 4 1,588 4
Asset backed securities:(1)
- Traditional 617 2 1,033 2
- Securitisations and
debentures 10,994 28 11,095 25
CDOs(2) 1,102 3 1,102 3
Total 39,317 100 43,917 100
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
during the period ended 30 June 2015. 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. The CDOs are valued using an external valuation
which is based on observable market inputs. This is then validated against
the market valuation.
Capital and Investments 80
4.05 Bond portfolio summary (continued)
(a) Analysed by sector
(continued)
LGR LGR Total Total
At At At At
30.06.14 30.06.14 30.06.14 30.06.14
Note GBPm % GBPm %
Sovereigns, Supras and
Sub-Sovereigns 4.05(b) 6,578 19 8,257 21
Banks:
- Tier 1 60 - 66 -
- Tier 2 and other subordinated 590 2 649 2
- Senior 1,359 4 1,901 5
Financial Services:
- Tier 1 4 - 6 -
- Tier 2 and other subordinated 136 - 174 1
- Senior 882 3 1,153 3
Insurance:
- Tier 1 146 - 156 -
- Tier 2 and other subordinated 544 2 581 2
- Senior 493 2 565 2
Utilities 4,456 13 4,764 12
Consumer Services and
Goods & Health Care 3,246 10 3,795 10
Technology and Telecoms 2,099 6 2,382 6
Industrials & Oil and
Gas 3,333 10 3,879 10
Property 998 3 1,073 3
Asset backed securities:(1)
- Traditional 703 2 1,222 3
- Securitisations and
debentures 7,337 21 7,521 18
CDOs(2) 1,098 3 1,098 2
Total 34,062 100 39,242 100
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 had no reference entity defaults
during the period ended 30 June 2014. 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. The CDOs are valued using an external valuation
which is based on observable market inputs. This is then validated against
the market valuation.
Capital and Investments 81
4.05 Bond portfolio summary (continued)
(a) Analysed by sector
(continued)
LGR LGR Total Total
At At At At
31.12.14 31.12.14 31.12.14 31.12.14
Note GBPm % GBPm %
Sovereigns, Supras and Sub-Sovereigns 4.05(b) 7,760 19 9,249 20
Banks:
- Tier 1 24 - 26 -
- Tier 2 and other subordinated 559 1 621 1
- Senior 1,667 4 2,221 5
Financial Services:
- Tier 1 - - - -
- Tier 2 and other subordinated 96 - 132 -
- Senior 946 2 1,138 3
Insurance:
- Tier 1 128 - 129 -
- Tier 2 and other subordinated 363 1 375 1
- Senior 624 2 704 2
Utilities 5,561 14 5,824 13
Consumer Services and
Goods & Health Care 4,126 10 4,726 10
Technology and Telecoms 2,548 6 2,836 6
Industrials & Oil and
Gas 4,306 11 4,928 11
Property 1,882 5 2,126 5
Asset backed securities:(1)
- Traditional 722 2 1,234 3
- Securitisations and
debentures 8,305 20 8,422 18
CDOs(2) 1,120 3 1,120 2
Total 40,737 100 45,811 100
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 had no reference entity defaults
in 2014. 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. The
CDOs are valued using an external valuation which is based on observable
market inputs. This is then validated against the market valuation.
Capital and Investments 82
4.05 Bond portfolio summary (continued)
(b) Analysed by domicile
The tables below are based on the legal domicile of the security:
LGR Total LGR Total LGR Total
At At At At At At
30.06.15 30.06.15 30.06.14 30.06.14 31.12.14 31.12.14
GBPm GBPm GBPm GBPm GBPm GBPm
Market value by region:
United Kingdom 20,261 21,048 16,299 17,224 20,055 21,021
USA 9,231 11,365 7,747 10,034 9,515 11,839
Netherlands 1,686 1,944 1,778 2,119 1,910 2,182
France 1,290 1,522 1,289 1,642 1,412 1,726
Germany 264 575 378 737 378 682
Greece - - - 5 - -
Ireland 307 335 225 264 276 303
Italy 236 342 485 636 301 429
Portugal - 4 3 14 1 11
Spain 156 210 158 224 212 260
Russia 9 18 1 2 19 37
Ukraine - - - 4 - -
Rest of Europe 1,776 2,076 1,642 2,007 1,857 2,164
Brazil 50 61 114 116 139 157
Rest of World 2,949 3,315 2,845 3,116 3,542 3,880
CDOs 1,102 1,102 1,098 1,098 1,120 1,120
Total 39,317 43,917 34,062 39,242 40,737 45,811
Additional analysis of sovereign debt exposures:
Sovereigns, Supras and Sub-Sovereigns
LGR Total LGR Total LGR Total
At At At At At At
30.06.15 30.06.15 30.06.14 30.06.14 31.12.14 31.12.14
GBPm GBPm GBPm GBPm GBPm GBPm
Market value by region:
United Kingdom 4,963 5,309 4,768 5,102 5,946 6,267
USA 519 745 407 830 536 772
Netherlands 1 139 13 167 5 153
France 5 78 118 246 1 138
Germany 151 346 195 437 204 417
Greece - - - 5 - -
Ireland - 7 - 12 - 8
Italy 1 85 109 192 2 96
Portugal - 4 - 6 - 9
Spain 1 23 - 6 - 10
Russia 9 18 - - 19 28
Ukraine - - - 4 - -
Rest of Europe 629 750 793 985 765 922
Brazil 50 60 38 38 55 64
Rest of World 393 479 137 227 227 365
Total 6,722 8,043 6,578 8,257 7,760 9,249
Capital and Investments 83
4.05 Bond portfolio summary (continued)
(c) Analysed by credit rating
LGR LGR Total Total
At At At At
30.06.15 30.06.15 30.06.15 30.06.15
GBPm % GBPm %
AAA 1,870 5 3,149 7
AA 9,763 25 10,632 24
A 11,996 31 12,943 30
BBB 10,268 26 11,305 26
BB or below 1,008 3 1,262 3
Unrated: Bespoke CDOs(1) 979 2 979 2
Other 3,433 8 3,647 8
39,317 100 43,917 100
LGR LGR Total Total
At At At At
30.06.14 30.06.14 30.06.14 30.06.14
GBPm % GBPm %
AAA 1,711 5 3,376 9
AA 8,471 25 9,217 23
A 11,082 32 12,333 31
BBB 8,716 26 9,891 25
BB or below 566 2 761 2
Unrated: Bespoke CDOs(1) 983 3 983 3
Other 2,533 7 2,681 7
34,062 100 39,242 100
LGR LGR Total Total
At At At At
31.12.14 31.12.14 31.12.14 31.12.14
GBPm % GBPm %
AAA 1,936 5 3,451 8
AA 10,357 25 11,190 24
A 13,231 33 14,420 31
BBB 10,360 25 11,441 25
BB or below 630 2 853 2
Unrated: Bespoke CDOs(1) 994 2 994 2
Other 3,229 8 3,462 8
40,737 100 45,811 100
1. 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 had
no reference entity defaults in 2014 or 2015. Losses are limited under
the terms of the CDOs to assets and collateral invested.
Capital and Investments 84
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European Embedded Value 85
Group embedded value - summary
Covered business
==========================
Insurance Non-
UK overseas covered
business business LGA business Total
For the six months ended 30 GBPm GBPm GBPm GBPm GBPm
June 2015
At 1 January 2015
Value of in-force business
(VIF) 6,118 147 518 - 6,783
Shareholder net worth (SNW) 3,519 325 209 139 4,192
Embedded value at 1 January
2015 9,637 472 727 139 10,975
Exchange rate movements - (38) (6) 13 (31)
Operating profit after tax
for the period 416 3 55 62 536
Non-operating profit/(loss)
after tax for the period 48 (50) (5) (9) (16)
Profit/(loss) for the period 464 (47) 50 53 520
Intra-group distributions(1) (282) (19) (52) 353 -
Dividends to equity holders
of the Company - - - (496) (496)
Transfer to non-covered business(2) (17) - - 17 -
Other reserve movements including
pension deficit(3) 13 - - (36) (23)
Embedded value at 30 June 2015 9,815 368 719 43 10,945
Value of in-force business(4,5) 6,024 79 565 - 6,668
Shareholder net worth(6,7) 3,791 289 154 43 4,277
Embedded value per share (p)(8) 184
Additional value of LGIM
30.06.15 30.06.15
Indicative valuation including p per
LGIM share GBPbn
EEV as reported 184 10.9
LGIM VIF 27 1.6
Total including LGIM 211 12.5
30.06.15 30.06.15
p per
Estimated LGIM discounted cash flow valuation share GBPbn
Look through value of profits on covered business 6 0.4
Net asset value 11 0.7
Current value of LGIM in Group embedded value 17 1.1
LGIM VIF 27 1.6
Alternative discounted value of LGIM future cash
flows 44 2.7
1. UK intra-group distributions primarily reflect a GBP300m (H1 14:
GBPnil; FY 14: GBP675m) declared dividend from Society to Group, and
dividends of EUR23m (H1 14: EUR18m; FY 14: EUR35m) from LGN paid to
Society. Dividends of $80m (H1 14:$73m; FY 14: $76m) from LGA and EUR1m
(H1 14: EUR2m; FY 14: EUR2m) from LGF were paid to Group.
2. The transfer to non-covered business represents the IFRS profits
arising in the year from the provision 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 primarily reflect movement in the pension
deficit and movements in the share options scheme and employee scheme
treasury shares.
4. Value of inforce business is shown net of cost of capital, which
consists of GBP567m (H1 14: GBP449m; FY 14: GBP545m) from UK covered
business; GBP57m (H1 14: GBP66m; FY 14: GBP60m) from Insurance overseas
covered business and GBP12m (H1 14: GBP12m; FY 14: GBP11m) from LGA.
5. The time value of options and guarantees deduction included in value
of inforce business is GBP28m (H1 14: GBP14m; FY 14: GBP43m).
6. Shareholder net worth of Insurance overseas covered business is made
up of GBP62m (H1 14: GBP74m ; FY 14: GBP90m) of free surplus and GBP227m
(H1 14: GBP251m ; FY 14: GBP235m) of required capital.
7. Shareholder net worth of LGA is made up of GBP104m (H1 14: GBP139m
; FY 14: GBP161m) of free surplus and GBP50m (H1 14: GBP49m ; FY 14:
GBP48m) of required capital.
8. The number of shares in issue at 30 June 2015 was 5,945,774,722 (H1
14: 5,935,497,507; FY 14: 5,942,070,229).
Further analysis of the UK covered business can be found in Note 5.01.
European Embedded Value 86
Group embedded value - summary (continued)
Covered business
==========================
Insurance Non-
UK overseas covered
business business LGA business Total
For the six months ended GBPm GBPm GBPm GBPm GBPm
30 June 2014
At 1 January 2014
Value of in-force business
(VIF) 4,693 197 699 - 5,589
Shareholder net worth (SNW) 3,249 315 234 199 3,997
Embedded value at 1 January
2014 7,942 512 933 199 9,586
Exchange rate movements - (19) (30) 12 (37)
Operating profit after tax
for the period 539 11 47 68 665
Non-operating profit/(loss)
for the period 59 3 (1) (7) 54
Profit for the period 598 14 46 61 719
Intra-group distributions(1) 18 (15) (44) 41 -
Dividends to equity holders
of the Company - - - (408) (408)
Transfer to non-covered business(2) (15) - - 15 -
Other reserve movements including
pension deficit(3) 12 - - (29) (17)
Embedded value at 30 June
2014 8,555 492 905 (109) 9,843
Value of in-force business(4,5) 4,928 167 717 - 5,812
Shareholder net worth(6,7) 3,627 325 188 (109) 4,031
Embedded value per share
(p)(8) 166
Additional value of LGIM
30.06.14 30.06.14
p per GBPbn
Indicative valuation including LGIM share
EEV as reported 166 9.9
LGIM VIF 30 1.7
Total including LGIM 196 11.6
30.06.14 30.06.14
Estimated LGIM discounted cash p per GBPbn
flow valuation share
Look through value of profits
on covered business 5 0.3
Net asset value 10 0.6
Current value of LGIM in Group
embedded value 15 0.9
LGIM VIF 30 1.7
Alternative discounted value
of LGIM future cash flows 45 2.6
1. UK intra-group distributions primarily reflect EUR18m dividend from
LGN and GBP4m dividend from Nationwide Life paid to Society. Dividends
of $73m from LGA and EUR2m from LGF were paid to the group.
2. The transfer to non-covered business represents the IFRS profits
arising in the period from the provision 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.
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. Value of inforce business are shown net of cost of capital, which
consists of GBP449m from UK covered business; GBP66m from Insurance
overseas covered business and GBP12m from LGA.
5. The time value of options and guarantees deduction included in value
of inforce business is GBP14m.
6. Shareholder net worth of Insurance overseas is made up of GBP74m
of free surplus and GBP251m of required capital.
7. Shareholder net worth of LGA is made up of GBP139m of free surplus
and GBP49m of required capital.
8. The number of shares in issue at 30 June 2014 was 5,935,497,507.
Further analysis of the UK covered business can be found in Note 5.01.
European Embedded Value 87
Group embedded value - summary (continued)
Covered business
==========================
Insurance Non-
UK overseas covered
business business LGA business Total
For the year ended 31 December GBPm GBPm GBPm GBPm GBPm
2014
At 1 January 2014
Value of in-force business
(VIF) 4,693 197 699 - 5,589
Shareholder net worth (SNW) 3,249 315 234 199 3,997
Embedded value at 1 January
2014 7,942 512 933 199 9,586
Exchange rate movements - (30) 44 (16) (2)
Operating profit after tax
for the year 1,264 31 (68) 107 1,334
Non-operating profit/(loss)
for the year 709 (11) (11) (5) 682
Profit for the year 1,973 20 (79) 102 2,016
Intra-group distributions(1) (641) (30) (46) 717 -
Dividends to equity holders
of the Company - - - (580) (580)
Transfer to non-covered business(2) (26) - - 26 -
Other reserve movements including
pension deficit(3) 389 - (125) (309) (45)
Embedded value at 31 December
2014 9,637 472 727 139 10,975
Value of in-force business(4,5) 6,118 147 518 - 6,783
Shareholder net worth(6,7) 3,519 325 209 139 4,192
Embedded value per share
(p)(8) 185
Additional value of LGIM
31.12.14 31.12.14
Indicative valuation including p per GBPbn
LGIM share
EEV as reported 185 11
LGIM VIF 27 1.6
Total including LGIM 212 12.6
31.12.14 31.12.14
Estimated LGIM discounted cash p per GBPbn
flow valuation share
Look through value of profits
on covered business 6 0.4
Net asset value 8 0.5
Current value of LGIM in Group
embedded value 14 0.9
LGIM VIF 27 1.6
Alternative discounted value
of LGIM future cash flows 41 2.5
1. UK intra-group distributions primarily reflect a GBP675m dividend
paid from Society to Group, and dividends of EUR35m from LGN and GBP5m
from Nationwide Life paid to Society. Dividends of $76m from LGA and
EUR2m from LGF were paid to Group.
2. The transfer to non-covered business represents the IFRS profits
arising in the year from the provision 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 primarily reflect the effect of reinsurance
arrangement transactions between UK and US covered business, pension
deficit movement, movement in the savings related share options scheme
and intragroup capital contribution.
4. Value of inforce business are shown net of cost of capital, which
consists of GBP545m from UK covered business; GBP60m from Insurance
overseas covered business and GBP11m from LGA.
5. The time value of options and guarantees deduction included in value
of inforce business is GBP43m.
6. Shareholder net worth of Insurance overseas is made up of GBP90m
of free surplus and GBP235m of required capital.
7. Shareholder net worth of LGA is made up of GBP161m of free surplus
and GBP48m of required capital.
8. The number of shares in issue at 31 December 2014 was 5,942,070,229.
Further analysis of the UK covered business can be found in Note 5.01.
European Embedded Value 88
5.01 UK covered business embedded value reconciliation
Shareholder net Total
worth
==========================
Free Required Value embedded
of
surplus capital Total in-force value
For the six months ended 30 GBPm GBPm GBPm GBPm GBPm
June 2015
At 1 January 2015 887 2,632 3,519 6,118 9,637
Operating profit/(loss) after
tax:
- New business contribution(1) (67) 72 5 119 124
- Expected return on VIF - - - 185 185
- Expected transfer from VIF
to SNW(2) 463 (108) 355 (355) -
- Expected return on SNW 10 73 83 - 83
======== ========= ===== ======== ========
Generation of embedded value 406 37 443 (51) 392
- Experience variances 52 - 52 (62) (10)
- Operating assumption changes 28 4 32 9 41
- Development costs (7) - (7) - (7)
======== ========= ===== ======== ========
Variances 73 4 77 (53) 24
Operating profit after tax 479 41 520 (104) 416
Non-operating profit/(loss)
after tax:
- Economic variances 64 4 68 (20) 48
- Other taxation impacts(3) - - - - -
Non-operating profit/(loss)
after tax 64 4 68 (20) 48
Profit for the period 543 45 588 (124) 464
Intra-group distributions(4) (282) - (282) - (282)
Transfer to non-covered business(5) (17) - (17) - (17)
Other reserve movements including
pension deficit (13) (4) (17) 30 13
Embedded value at 30 June
2015 1,118 2,673 3,791 6,024 9,815
1. The UK free surplus reduction of GBP67m to finance new business primarily
reflects GBP72m additional required capital in relation to new business.
2. The increase in UK free surplus of GBP463m from the expected transfer
from the in-force non profit business includes GBP355m of operational
cash generation and a GBP108m reduction in required capital. The GBP549m
operational cash generation from Insurance, Savings, LGR and LGIM per
Note 2.01 also includes an GBP18m dividend from LGN, GBP1m dividend
from LGF and GBP175m primarily reflecting profit from non-covered business.
3. The impact of the further corporation tax reductions announced on
8 July 2015 have not been included in the H1 15 results as they were
not known at the reporting date. The impact will be included in the
FY 15 results.
4. Intra-group distributions primarily reflect a GBP300m declared dividend
from Society to Group and dividends of EUR23m from LGN to Society.
5. The transfer to non-covered business represents the IFRS profits
arising in the year from the provision 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.
The value of in-force business of GBP6,024m is comprised of GBP5,685m
of non profit business and GBP339m of with-profits business.
European Embedded Value 89
5.01 UK covered business embedded value reconciliation (continued)
Shareholder net worth Total
==========================
Free Required Value embedded
of
surplus capital Total in-force value
For the six months ended 30 GBPm GBPm GBPm GBPm GBPm
June 2014
At 1 January 2014 1,107 2,142 3,249 4,693 7,942
Operating profit/(loss) after
tax:
- New business contribution(1) (195) 184 (11) 305 294
- Expected return on VIF - - - 157 157
- Expected transfer from VIF
to SNW(2) 457 (113) 344 (344) -
- Expected return on SNW 26 62 88 - 88
======== ========= ===== ======== ========
Generation of embedded value 288 133 421 118 539
- Experience variances (6) 3 (3) 34 31
- Operating assumption changes 11 - 11 (31) (20)
- Development costs (11) - (11) - (11)
======== ========= ===== ======== ========
Variances (6) 3 (3) 3 -
Operating profit after tax 282 136 418 121 539
Non-operating profit/(loss)
after tax - UK business:
- Economic variances (30) 42 12 26 38
- Effect of tax rate changes
and other taxation impacts(3) (12) - (12) 33 21
Non-operating profit/(loss)
after tax (42) 42 - 59 59
Profit for the period 240 178 418 180 598
Intra-group distributions(4) 18 - 18 - 18
Transfer to non-covered business(5) (15) - (15) - (15)
Other reserve movements including
pension deficit(6) (56) 13 (43) 55 12
Embedded value at 30 June
2014 1,294 2,333 3,627 4,928 8,555
1. The free surplus reduction of GBP195m to finance new business includes
GBP11m new business strain and GBP184m additional required capital.
2. The increase in free surplus of GBP457m from the expected transfer
from the in-force covered business includes GBP344m of operational cash
generation and a GBP113m reduction in required capital. The GBP508m
operational cash generation from Insurance, Savings, LGR and LGIM per
Note 2.01 also includes a GBP14m dividend from LGN, GBP1m dividend from
LGF and GBP149m primarily reflecting profit from non-covered business.
3. Reflects the implementation of the UK reductions in corporation tax
to 20% on 1 April 2015.
4. Intra-group distributions primarily reflect GBP4m dividends from
the non-covered subsidiary, Nationwide Life, to Society.
5. The transfer to non-covered business represents the IFRS profits
arising in the period from the provision 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.
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 UK value of in-force business of GBP4,928m is comprised of GBP4,510m
of non profit business and GBP419m of with-profits business.
European Embedded Value 90
5.01 UK covered business 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
2014
At 1 January 2014 1,107 2,142 3,249 4,693 7,942
Operating profit/(loss) after
tax:
Contribution from new risks
after cost of capital
- New business contribution(1) (340) 343 3 607 610
- Intragroup transfer from
With-Profit to Non Profit
Fund - - - 80 80
- Expected return on VIF - - - 317 317
- Expected transfer from VIF
to SNW(2) 901 (213) 688 (688) -
- Expected return on SNW 55 116 171 - 171
======== ======== ===== ======== ========
Generation of embedded value 616 246 862 316 1,178
- Experience variances 175 (83) 92 (6) 86
- Operating assumption changes 171 (109) 62 (36) 26
- Development costs (26) - (26) - (26)
======== ======== ===== ======== ========
Variances 320 (192) 128 (42) 86
Operating profit after tax 936 54 990 274 1,264
Non-operating profit/(loss)
after tax:
- Economic variances (359) 219 (140) 851 711
- Effect of tax rate changes
and other taxation impacts(3) (12) - (12) 10 (2)
Non-operating profit/(loss)
after tax (371) 219 (152) 861 709
Profit for the year 565 273 838 1,135 1,973
Intra-group distributions(4) (641) - (641) - (641)
Transfer to non-covered business(5) (26) - (26) - (26)
Other reserve movements including
pension deficit(6) (118) 217 99 290 389
Embedded value at 31 December
2014 887 2,632 3,519 6,118 9,637
1. The UK free surplus reduction of GBP340m to finance new business
reflects GBP343m additional required capital in relation to new business.
2. The increase in UK free surplus of GBP901m from the expected transfer
from the in-force covered business includes GBP688m of operational cash
generation and a GBP213m reduction in required capital. The GBP1,026m
operational cash generation from Insurance, Savings, LGR and LGIM per
Note 2.01 also includes GBP29m dividend from LGN, GBP2m dividend from
LGF and GBP307m primarily reflecting profit from non-covered business.
3. Reflects the implementation of the UK planned future reductions in
corporation tax to 20% on 1 April 2015.
4. Intra-group distributions primarily reflect GBP675m dividends paid
from Society to Group and dividends of EUR35m from LGN and GBP5m from
Nationwide to Society.
5. The transfer to non-covered business represents the IFRS profits
arising in the year from the provision 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 reflect the pension deficit movement,
the effect of reinsurance arrangement transactions between UK and US
covered business and intragroup capital contribution.
The value of in-force business of GBP6,118m is comprised of GBP5,778m
of non profit business and GBP340m of with-profits business.
European Embedded Value 91
5.02 Reconciliation of shareholder net worth
UK UK UK
covered covered covered
business Total business Total business Total
30.06.15 30.06.15 30.06.14 30.06.14 31.12.14 31.12.14
GBPm GBPm GBPm GBPm GBPm GBPm
SNW of long term operations
(IFRS basis) 4,700 5,989 4,645 5,820 4,693 5,889
Other assets/(liabilities)
(IFRS basis) - 43 - (109) - 139
Shareholders' equity on the
IFRS basis 4,700 6,032 4,645 5,711 4,693 6,028
Purchased interest in long
term business (42) (48) (51) (54) (46) (49)
Deferred acquisition costs/deferred
income liabilities (189) (1,217) (212) (1,140) (201) (1,255)
Deferred tax(1) (36) 399 (123) 282 (16) 444
Other(2) (642) (889) (632) (768) (911) (976)
Shareholder net worth on
the EEV basis 3,791 4,277 3,627 4,031 3,519 4,192
1. Deferred tax represents all tax which is expected to be paid under
legislation in force at the balance sheet date.
2. Other primarily relates to the different treatment of annuities and
LGA Triple X securitisation between the EEV and IFRS basis.
European Embedded Value 92
5.03 Profit/(loss) for the
period
Covered business
==========================
Insurance Non-
UK overseas covered
business business LGA business Total
For the six months ended 30 Note GBPm GBPm GBPm GBPm GBPm
June 2015
Business reported on an EEV
basis:
Contribution from new business
after cost of capital 5.04 155 - 41 - 196
Contribution from in-force
business:
- expected return(1) 205 4 29 - 238
- experience variances (2) (22) (2) 12 - (12)
- operating assumption changes(3) 50 1 (1) - 50
Development costs (9) - - - (9)
Contribution from shareholder
net worth(4) 98 1 3 - 102
Operating profit/(loss) on
covered business 477 4 84 - 565
Business reported on an IFRS
basis(5) - - - 107 107
Total operating profit/(loss) 477 4 84 107 672
Economic variances(6) 57 1 (7) (55) (4)
Other variances(7) - (51) - - (51)
Gains on non-controlling interests - - - 8 8
Profit/(loss) before tax 534 (46) 77 60 625
Tax (expense)/credit on profit from
ordinary activities (70) (1) (27) (7) (105)
Other taxation impacts(8) - - - - -
Profit/(loss) for the period 464 (47) 50 53 520
Operating profit on covered business before
tax attributable to:
Insurance 150
Savings 40
LGR 178
LGIM(9) 11
LGC 98
Total 477
p
Earnings per share
Based on profit attributable to equity
holders of the Company 8.66
Diluted earnings per share
Based on profit attributable to equity
holders of the Company 8.60
1. The expected return on in-force for UK covered business 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 covered business
was GBP6,118m in 2015 (2014: GBP4,693m). This is adjusted for the effects
of opening model changes of GBP(15)m (H1 14: GBP4m; FY 14: GBP(30)m)
to give an adjusted opening base VIF of GBP6,103m (H1 14: GBP4,697m;
FY 14: GBP4,663m). This is then multiplied by the opening risk discount
rate of 5.5% (2014: 6.8%) and the result grossed up at the notional
attributed tax rate of 20% (2014: 20%) to give a return of GBP205m (H1
14: GBP196m; FY 14: GBP397m). The same approach has been applied for
the Insurance overseas businesses.
2. UK covered business variance primarily reflects the impact from annuities
expense experience and selective longevity and asset reinsurance related
to bulk annuity transactions.
3. UK covered business operating assumption change primarily reflects
a change in mortality reserving assumptions in relation to unreported
deaths of deferred annuitants.
4. Contribution from shareholder net worth reflects the returns on shareholder
funds' assets of covered business.
5. Non-covered business operating profit primarily reflects: LGIM business
excluding Workplace savings, GI and LGC non-covered business, which
comprises of Group debt costs, investment projects and expenses, partly
offset by investment returns from non-covered shareholder assets.
6. The UK covered positive variance has resulted from a number of factors
including favourable default experience, enhanced yield on annuity assets
offset by a higher risk free rate.
7. Other variances primarily reflect the recognition of impairment losses
arising on the classification of LGF as Held for Sale.
8. The impact of the further corporation tax rate reductions announced
on 8 July 2015 has not been included in the H1 15 results as they were
not known at the reporting date. The impact will be included in the
FY 15 results.
9. LGIM figures are the Workplace Savings results, other areas of LGIM
are not included in covered business.
European Embedded Value 93
5.03 Profit/(loss) for the period
(continued)
Covered business
==========================
Insurance Non-
UK overseas covered
business business LGA business Total
For the six months ended 30 Note GBPm GBPm GBPm GBPm GBPm
June 2014
Business reported on an EEV
basis:
Contribution from new business
after cost of capital 5.04 368 2 51 - 421
Contribution from in-force
business:
- expected return(1) 196 14 28 - 238
- experience variances (2) 46 (4) (10) - 32
- operating assumption changes(3) (24) 1 - - (23)
Development costs (14) - - - (14)
Contribution from shareholder
net worth 87 3 3 - 93
Operating profit on covered
business 659 16 72 - 747
Business reported on an IFRS
basis(4) - - - 103 103
Total operating profit 659 16 72 103 850
Economic variances(5) 68 2 (2) (60) 8
Gains on non-controlling interests - - - 6 6
Profit before tax 727 18 70 49 864
Tax (expense)/credit on profit
from ordinary activities (150) (4) (24) 12 (166)
Effect of tax rate changes
and other taxation impacts(6) 21 - - - 21
Profit for the period 598 14 46 61 719
Operating profit on covered business before tax attributable
to:
Insurance 88
Savings 44
LGR 430
LGIM(7) 10
LGC 87
Total 659
p
Earnings per share
Based on profit attributable to equity
holders of the Company 12.12
Diluted earnings per share
Based on profit attributable to equity
holders of the Company 11.99
1.The expected return on in-force for UK covered business 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 covered business was
GBP4,693m in 2014. This is adjusted for the effects of opening model
changes of GBP4m to give an adjusted opening base VIF of GBP4,697m.
This is then multiplied by the opening risk discount rate of 6.8% and
the result grossed up at the notional attributed tax rate of 20% to
give a return of GBP196m. The same approach has been applied for the
Insurance overseas businesses.
2. UK covered business variance primarily reflects cost of capital unwind,
bulk purchase annuity data loading and fewer retail protection lapses.
LGA experience variance primarily relates to adverse mortality experience
within term assurance and universal life products.
3. UK covered business assumption changes primarily reflect mortality
reserves strengthening partly offset by a reduction in prudence margin
in the regulatory morbidity reserves within retail protection.
4. Non covered business operating profit primarily reflect LGIM business
excluding Workplace savings, GI and LGC non covered business.
5. The UK covered business positive variance has resulted from a number
of factors including lower risk discount rate and enhanced yield on
annuity assets offset by a lower risk free rate and a narrowing credit
spread. Non covered business variance primarily reflects lower equity
return from shareholder funds.
6. Other taxation impacts reflects the change in the treatment of deferred
tax on in-force business to align with IFRS by removing the effect of
discounting.
7. LGIM figures are the Workplace Savings results, other areas of LGIM
are not included in covered business.
European Embedded Value 94
5.03 Profit/(loss) for the year (continued)
Covered business
===========================
Insurance Non-
UK overseas covered
business business LGA business Total
For the year ended 31 December Note GBPm GBPm GBPm GBPm GBPm
2014
Business reported on an EEV
basis:
Contribution from new risks
after cost of capital:
- contribution from new business 5.04 753 7 90 - 850
- intra-group transfer from
With-Profit to Non Profit Fund 100 100
Contribution from in-force
business:
- expected return(1) 397 27 66 - 490
- experience variances(2) 32 (11) (23) - (2)
- operating assumption changes(3) 42 16 (241) - (183)
Development costs (32) - - - (32)
Contribution from shareholder
net worth 184 7 3 - 194
Operating profit on covered
business 1,476 46 (105) - 1,417
Business reported on an IFRS
basis(4) - - - 164 164
Total operating profit 1,476 46 (105) 164 1,581
Economic variances(5) 863 (18) (17) (38) 790
Gains on non-controlling interests - - - 7 7
Profit before tax 2,339 28 (122) 133 2,378
Tax (expense)/credit on profit
from ordinary activities (364) (8) 43 (31) (360)
Effect of tax rate changes
and other taxation impacts(6) (2) - - - (2)
Profit for the year 1,973 20 (79) 102 2,016
Operating profit on covered business before
tax attributable to:
Insurance 232
Savings 22
LGR 1,011
LGIM(7) 27
LGC 184
Total 1,476
p
Earnings per share
Based on profit attributable to equity
holders of the Company 34.07
Diluted earnings per share
Based on profit attributable to equity
holders of the Company 33.73
1. The expected return on in-force for UK covered business 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 covered business
was GBP4,693m in 2014. This is adjusted for the effects of opening model
changes of GBP(30)m to give an adjusted opening base VIF of GBP4,663m.
This is then multiplied by the opening risk discount rate of 6.8% and
the result grossed up at the notional attributed tax rate of 20% to
give a return of GBP397m. The same approach has been applied for the
Insurance overseas businesses.
2. UK covered business variance primarily reflects UK cost of capital
unwind and favourable mortality experience for bulk annuities. LGA experience
variance primarily relates to adverse mortality experience within term
assurance and universal life products respectively.
3. UK covered operating assumption change primarily reflects mortality
assumptions changes for non-profit annuities. LGA operating assumption
change primarily incorporates an adjustment to our mortality assumptions
to reflect the changes in industry wide mortality tables (which were
issued in the second half of 2014).
4. Non covered business operating profit primarily reflect LGIM business
excluding Workplace savings, GI and LGC non covered business.
5. The UK covered business positive variance has resulted from a number
of factors including lower risk discount rate, favourable default experience
and enhanced yield on annuity assets offset by a lower risk free rate.
Non covered variance primarily reflects lower equity return from shareholder
funds.
6. Other taxation impacts reflects the change in the treatment of deferred
tax on in-force business to align with IFRS by removing the effect of
discounting.
7. LGIM figures are the Workplace Savings results, other areas of LGIM
are not included in covered business.
European Embedded Value 95
5.04 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 six months ended GBPm GBPm GBPm GBPm GBPm %
30 June 2015
UK Insurance 119 638 5.4 - 638 54 8.5
Overseas Insurance 37 69 1.9 195 264 - -
Insurance 156 707 4.5 195 902 54 6.0
Savings 26 78 3.0 786 864 5 0.6
LGR(4) n/a - n/a 1,292 1,292 93 7.2
LGIM(5) 324 1,286 4.0 277 1,563 3 0.2
LGA 41 404 9.9 - 404 41 10.1
Total new business 547 2,475 4.5 2,550 5,025 196 3.9
Cost of capital 40
Contribution from new business
before cost of capital 236
Present Contri-
value Capital- bution
of
Annual annual isation Single from new
premiums premiums factor(2) premiums PVNBP business(3) Margin
For the six months ended GBPm GBPm GBPm GBPm GBPm %
30 June 2014
UK Insurance 123 668 5.4 - 668 62 9.3
Overseas Insurance 38 266 7.0 180 446 2 0.4
Insurance 161 934 5.8 180 1,114 64 5.7
Savings 36 89 2.4 862 951 6 0.6
LGR n/a - n/a 3,518 3,518 295 8.4
LGIM(5) 305 1,123 3.7 558 1,681 5 0.3
LGA 47 474 10.1 - 474 51 10.8
Total new business 549 2,620 4.8 5,118 7,738 421 5.4
Cost of capital 82
Contribution from new business
before cost of capital 503
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 the 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 for H1 15 includes bulk annuities' single premiums and contribution
from new business on a net of quota share reinsurance basis to provide
a more representative margin figure.
5. LGIM figures are the Workplace Savings results, other areas of LGIM
are not included in covered business.
European Embedded Value 96
5.04 New business by product (continued)(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 %
2014
UK Insurance 230 1,336 5.8 - 1,336 112 8.4
Overseas Insurance 41 300 7.3 394 694 7 1.0
Insurance 271 1,636 6.0 394 2,030 119 5.9
Savings 63 171 2.7 1,678 1,849 9 0.5
LGR n/a - n/a 6,578 6,578 614 9.3
LGIM(4) 591 2,277 3.9 1,060 3,337 18 0.5
LGA 91 907 10.0 - 907 90 9.9
Total new business 1,016 4,991 4.9 9,710 14,701 850 5.8
Cost of capital 108
Contribution from new business
before cost of capital 958
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 the 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. LGIM figures are the Workplace Savings results, other areas of LGIM
are not included in covered business.
European Embedded Value 97
5.05 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. An indicative combined yield, after allowance for long
term default risk and the following additional assumptions, is 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 of
0.70% p.a. (0.70% p.a. at 30 June 2014; 0.70% p.a. at 31 December
2014) 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. The allowance
for corporate securities expressed as a level rate deduction from
the expected returns for annuities was 21bps at 30 June 2015 (26bps
at 30 June 2014; 21bps at 31 December 2014).
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. For new
business, mortality assumptions may be modified to take certain
scheme specific features into account.
v. Development costs relate to investment in strategic systems
and development capability that are charged to the covered
business.
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 98
5.05 Assumptions (continued)
Economic assumptions
As at As at As at
30.06.2015 30.06.2014 2014
% p.a. % p.a. % p.a.
Risk margin 3.3 3.3 3.3
Risk free rate(1)
- UK 2.5 3.2 2.2
- Europe 1.0 1.4 0.6
- US 2.4 2.5 2.2
Risk discount rate (net of tax)
- UK 5.8 6.5 5.5
- Europe 4.3 4.7 3.9
- US 5.7 5.8 5.5
Reinvestment
rate (US) 5.6 5.0 5.0
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
LGR )
- Fixed interest:
-Gilts & non 2.0 - 2.7 2.2 - 3.3 1.7 - 2.4
gilts
- Equities 5.8 6.5 5.5
- Property 4.5 5.2 4.2
Long-term rate
of return on
non profit annuities
in LGR 4.0 4.3 3.6
Inflation(2)
- Expenses/earnings 3.9 3.9 3.7
- Indexation 3.4 3.4 3.2
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.
2. The LGR inflation rate has been set with reference to a
curve.
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. The tax rate used for grossing up is the long term
corporate tax rate in the territory concerned, which for the UK is
20% (30 June 2014: 20%; 31 December 2014: 20%). The impact of the
further corporation tax reductions from the Budget announcement on
8 July 2015 has not been included in the H1 15 results as they were
not known at the reporting date. The impact will be included in the
FY 15 results. 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% (30 June 2014: 35%; 31
December 2014: 35%), France is 34.43% (30 June 2014: 34.43%; 31
December 2014: 34.43%) and Netherlands is 25% (30 June 2014: 25%;
31 December 2014: 25%).
European Embedded Value 99
5.05 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.
European Embedded Value 100
5.06 Methodology
Basis of preparation
The supplementary financial information has been prepared in
accordance with the European Embedded Value (EEV) Principles issued
in May 2004 by the European Insurance CFO Forum.
Due to the current uncertainty surrounding the final Solvency II
outcome, the Group has not reflected Solvency II requirements
within the EEV results.
The supplementary financial information has been reviewed by
PricewaterhouseCoopers LLP.
Covered business
The Group uses EEV methodology to value individual and group
life assurance, pensions and annuity business written in the UK,
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 101
5.06 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
(LGIM) segment and are instead included in the results of the
Insurance, Savings 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
Insurance, Savings 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. 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 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 and quota
share reinsurance single premiums are 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. LGA new
business premiums and contribution reflect the groupwide expected
impact of LGA directly-written business.
European Embedded Value 102
5.06 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. The
impact of the further corporation tax reductions from Budget
announcement on 8 July 2015 have not been included in the H1 15
results as they were not known at the reporting date. The impact
will be included in the FY15 results.
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
Due to the current uncertainty surrounding the final Solvency II
outcome, the Group has not reflected Solvency II requirements
within the EEV results.
Regulatory capital for the UK covered 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 the 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 104% of EU minimum
solvency margin for all products without FOGs. For those products
with FOGs, capital of between 104% and 563% of the EU minimum
solvency margin has been used. These capital requirements have been
scaled up by a factor of 1.0 at the total level to ensure the total
requirement meets the 160% Solvency I from the capital policy for
the EEV, for the NBVA no scaling is applied. 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 103
5.06 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. 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 104
5.06 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 20.0%
(2014: 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, and from
the effect of economic assumption changes. These are shown below
operating profit.
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 period.
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.
European Embedded Value 105
Independent review report to Legal & General Group Plc -
EEV
Report on the supplementary interim financial information
Our conclusion
We have reviewed the supplementary interim financial information
in the interim management report of Legal & General Group Plc
for the six months ended 30 June 2015 (the "supplementary interim
financial information). Based on our review, nothing has come to
our attention that causes us to believe that the supplementary
interim financial information is not prepared, in all material
respects, in accordance with the European Embedded Value ("EEV")
basis set out in Note 5.06.
What we have reviewed
Legal & General Group Plc's supplementary interim financial
information comprises:
-- the Group embedded value summary as at 30 June 2015 and
-- the explanatory notes to the supplementary interim financial information.
As disclosed in Note 5.06 the supplementary interim financial
information has been prepared on the European Embedded Value
("EEV") basis.
Responsibilities for the supplementary interim financial
information and the review
Our responsibilities and those of the directors
The interim management report, including the supplementary
interim financial information, is the responsibility of, and has
been approved by, the directors. The directors are responsible for
preparing the supplementary interim financial information in
accordance with the EEV basis set out in Note 5.06.
Our responsibility is to express to the company a conclusion on
the supplementary interim financial information in the interim
management report based on our review. This report, including the
conclusion, has been prepared for and only for the company and for
no other purpose. We do not, in giving this conclusion, accept or
assume responsibility for any other purpose or to any other person
to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
What a review of supplementary interim financial information
involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of supplementary interim financial
information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK and
Ireland) and, consequently, does not enable us to obtain assurance
that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
We have read the other information contained in the interim
management report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the supplementary interim financial information.
PricewaterhouseCoopers LLP
Chartered Accountants
4 August 2015
London
Notes:
(a) The maintenance and integrity of the Legal & General
Group Plc website is the responsibility of the directors; the work
carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the financial information
since it was initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation
and dissemination of financial information may differ from
legislation in other jurisdictions.
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR PKQDNABKDPFK
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