Final Results - Year Ended 31 Dec 1999, Part 3

Legal & General Group PLC 29 February 2000 Part 3 P1 Legal & General Group Plc Supplementary financial statements on the Achieved Profits basis For the year to 31 December 1999 The Group's current external reporting for long term business described in Parts 1 and 2 of the Stock Exchange announcement is based upon statutory requirements designed to demonstrate solvency. It defers the recognition of profit and does not recognise the shareholders' interest in our portfolio of in-force long term business. The Association of British Insurers (ABI) is continuing to develop the Achieved Profits reporting basis as a more realistic method of accounting for long term business. The Achieved Profits basis reflects the development of the embedded value of long term business. A description of Achieved Profits methodology is given in the Report and Accounts. A discussion of the Achieved Profits results for long term business for the year to 31 December 1999 is provided below. Other businesses, including general insurance, which are not affected by the use of Achieved Profits, are discussed in Part 1 of the Stock Exchange announcement. These supplementary financial statements have been reviewed and reported on by the auditors. 1999 Results The Group's operating profit from continuing operations was £647 million compared with £522 million in 1998, with the contribution from worldwide new business up 32% to £178 million. Profit on ordinary activities before tax, which includes investment returns in excess of assumptions, was £1,294 million (1998: £543 million before exceptional items). Shareholders' funds grew to £5,250 million (1998: £4,465 million), an increase of 22% before the dividend. UK life and pensions Operating profit was £412 million, compared with £352 million for 1998. The contribution before tax from new business was up 38% to £99 million. In an increasingly competitive market, we have again written new business which delivers significant value for our shareholders. As a proportion of EPI, the contribution increased from 21% to 23%, reflecting a favourable mix of new business and control of acquisition expenses. The contribution from new business reflects the degree to which its anticipated profitability exceeds the target rate of return. Further contributions to operating profit will arise from the management of this business in future years. The contribution from the in-force business was £194 million (1998: £113 million). This benefited from strong growth in the business portfolio in recent years and positive experience variances, which more than offset the impact of the lower risk discount rate used for 1999. This result is after the cost of the investment in strategic systems of £50 million (1998: £55 million). The 1998 contribution was depressed by the effect of anticipating lighter annuitant mortality. The contribution from shareholders' net worth of £119 million (1998: £167 million) reflects both the reduced expected rate of return and a lower opening net worth, following the allocation of significant additional capital to the business portfolio during 1998. Profit before tax includes the effect of variances in investment return from those assumed at the end of the previous year, together with economic assumption changes. The investment variance was £663 million (1998: £78 million); in 1999 the excess investment return on the equity and property portfolio over the assumption for the period was 15.4% (1998: 4.5%). The effect of economic assumption changes was a small reduction of £26 million, compared to a reduction of £103 million in 1998, when interest rates fell sharply. P2 Investment management The long term UK Managed Funds business generated an operating profit of £96 million (1998: £70 million), of which new business contributed £50 million (1998: £43 million). This reflects the continuing strong growth in new business and funds under management in recent years. Together with the results of the Ventures operation and the unit trust and PEP/ISA business, which are not included on an Achieved Profits basis, this gave a total investment management operating profit of £99 million (1998: £65 million). International life and pensions Operating profit from continuing international business grew from £61 million to £87 million in 1999, including a strong new business contribution of £29 million (1998: £20 million). USA The highly successful US business is the largest component of international profits and provided a contribution from new business up 77% at £23 million which, as a percentage of EPI, was 36% (1998: 37%). In force business contributed £31 million (1998: £21 million), reflecting strong growth in the business in recent years, to give an operating profit of £58 million (1998: £38 million). Profit before tax was £47 million (1998: £47 million), after an increase in the risk discount rate following the rise in bond rates, resulted in an £11 million charge. Europe The Dutch business had an operating profit of £14 million (1998: £9 million), with a contribution from new business of £4 million (1998: £4 million); whilst the French operation had an operating profit of £15 million (1998: £14 million), with a contribution from new business of £2 million (1998: £3 million). Embedded values During 1999, the embedded value of the UK life and pensions business grew by 24% from £3,237 million (excluding operational investments), to £4,022 million, before the transfer from the UK long term fund of £198 million. This increase reflects new business growth, good operating performance and strong investment markets. The embedded value of the UK Managed Funds, as a subsidiary activity of the Society LTF, is the value of the in-force business in excess of the net assets included in the MSS accounts. This value grew very strongly from £77 million at the end of 1998 to £158 million at the end of 1999, before the distribution of £28 million which is included in the profit reported on the MSS basis. A corresponding embedded value for the unit trust and PEP/ISA operations is not included. The embedded value of the international businesses grew from £376 million to £461 million, including capital injections of £45 million. The changes in the embedded values of these long term businesses underlay a post tax return on shareholders' funds of 18% to £5,250 million, after a dividend to shareholders of £212 million. Legal & General Group Plc P3 Consolidated Profit & Loss Account - Achieved Profits basis Year ended 31 December 1999 ----------------------------------------------------------------------- Notes 1999 1998 Profit from continuing operations £m £m - UK Life and Pensions 1 412 352 -------- -------- - USA : 58 : : 38 : - Netherlands : 14 : : 9 : - France : 15 : : 14 : -------- -------- 1 87 61 -------- -------- 499 413 Investment management 99 65 General insurance 20 14 Other income 29 30 -------- -------- 647 522 Profit from discontinued operations Australian business - 13 -------- -------- Operating profit 647 535 Variation from longer term investment return 670 103 Effect of economic assumption changes (23) (95) -------- -------- 1,294 543 Profit on sale of Australian business 4 - 180 Premium on repurchase of Euroconvertible bonds - (92) -------- -------- Profit on ordinary activities before tax 1,294 631 Tax on profit on ordinary activities (295) (127) -------- -------- Profit for the financial period 999 504 ======== ======== Accrued transfer from UK long term fund (net) 198 180 Dividends payable 212 185 Earnings per share - based on operating profit from continuing operations after tax 9.51p 7.47p - based on profit for the financial period 19.57p 9.94p Diluted earnings per share - based on operating profit from continuing operations after tax 9.46p 7.42p - based on profit for the financial period 19.47p 9.88p Dividend per share 4.13p 3.62p ======================================================================= Legal & General Group Plc P4 Consolidated Balance Sheet - Achieved Profits basis As at 31 December 1999 ----------------------------------------------------------------------- Notes 1999 1998 £m £m Assets Investments 34,143 31,526 Assets held to cover linked liabilities 65,928 45,253 Long term in-force business 2,216 1,806 Other assets 2,084 1,768 ----------- ----------- 104,371 80,353 =========== =========== Liabilities Shareholders' funds 5 5,250 4,465 Fund for future appropriations 5,814 4,240 Technical provisions ----------- ----------- Technical provisions for : : : : linked liabilities : 65,742 : : 45,196 : Other long term business provisions : 24,538 : : 23,319 : General insurance provisions : 365 : : 401 : ----------- ----------- 90,645 68,916 Borrowings ----------- ----------- Borrowings for financing operations : 141 : : 105 : Mortgage related borrowings : 285 : : 355 : ----------- ----------- 426 460 Bank customer deposits 1,031 942 Other creditors 1,205 1,330 ----------- ----------- 104,371 80,353 ======================================================================= Legal & General Group Plc P5 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 1999 ----------------------------------------------------------------------- 1. Contribution from continuing long term business 1999 1998 UK UK UK UK Life and Managed Life and Managed Pensions Funds + Pensions Funds + £m £m £m £m Contribution from new business 99 50 72 43 Contribution from in-force business * 194 46 113 27 Contribution from shareholders' net worth 119 - 167 - ------ ------ ------ ------ Operating profit 412 96 352 70 Variation from longer term investment return** 663 17 78 5 Effect of economic assumption changes (26) 3 (103) 2 ------ ------ ------ ------ Profit before tax 1,049 116 327 77 Tax (243) (35) (77) (24) ------ ------ ------ ------ Profit after tax 806 81 250 53 ====== ====== ====== ====== Intern- Total Intern- Total ational ational £m £m £m £m Contribution from new business 29 178 20 135 Contribution from in-force business * 49 289 32 172 Contribution from shareholders' net worth 9 128 9 176 ------ ------ ------ ------ Operating profit 87 595 61 483 Variation from longer term investment return** (13) 667 10 93 Effect of economic assumption changes 0 (23) 6 (95) ------ ------ ------ ------ Profit before tax 74 1,239 77 481 Tax (26) (304) (29) (130) ------ ------ ------ ------ Profit after tax 48 935 48 351 ====== ====== ====== ====== + Included in the Investment management result. * The UK life and pensions contribution from in-force business reflects a charge of £50m (1998: £55m), relating, primarily, to the cost of investment in strategic systems. ** The variation from longer term investment return represents the effect of the investment performance in respect of shareholders' net worth and in-force business, compared with embedded value assumptions at the beginning of the period. ======================================================================= Legal & General Group Plc P6 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 1999 ----------------------------------------------------------------------- 2. Embedded value from continuing operations As at 31.12.99 As at 31.12.98 UK UK UK UK Life and Managed Life and Managed Pensions Funds Pensions Funds £m £m £m £m Shareholders' net worth 1,457 - 1,287 - Value of in-force business 2,367 130 1,950 77 ------ ------ ------ ------ Embedded value 3,824 130 3,237 77 ====== ====== ====== ====== Intern- Total Intern- Total ational ational £m £m £m £m Shareholders' net worth 135 1,592 128 1,415 Value of in-force business 326 2,823 248 2,275 ------ ------ ------ ------ Embedded value 461 4,415 376 3,690 ====== ====== ====== ====== For the UK life and pensions business, shareholders' net worth comprises the Shareholders' Retained Capital on the MSS basis, adjusted for deferred acquisition costs, and the sub-fund, both net of allowance for tax; but excludes net assets of £163m (1998: £116m) of long term fund operational subsidiaries. For other life and pensions operations, the shareholders' net worth comprises the shareholders' capital associated with the long term business. This is adjusted, where applicable, for an amount locked in to satisfy solvency requirements. ======================================================================= 3. Movement in embedded value 1999 1998 UK UK UK UK Life and Managed Life and Managed Pensions Funds Pensions Funds £m £m £m £m At 1 January 3,237 77 3,190 49 Profit after tax 806 81 250 53 Capital movements (21) - (23) - Distributions (198) (28) (180) (25) ------ ------ ------ ------ At 31 December 3,824 130 3,237 77 ====== ====== ====== ====== Intern- Total Intern- Total ational ational £m £m £m £m At 1 January 376 3,690 327 3,566 Exchange rate movement (4) (4) 5 5 ------ ------ ------ ------ 372 3,686 332 3,571 Profit after tax 48 935 48 351 Capital movements 45 24 - (23) Distributions (4) (230) (4) (209) ------ ------ ------ ------ At 31 December 461 4,415 376 3,690 ======================================================================= 4. Sale of Legal & General Australia Legal & General Australia was sold to Colonial Limited on 1 July 1998, resulting in an exceptional pre-tax profit of £180m (£165m after tax). ======================================================================= Legal & General Group Plc P7 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 1999 ----------------------------------------------------------------------- 5. Segmental analysis of shareholders' funds 1999 1998 Embedded value of £m £m life and pension businesses: - UK 3,824 3,237 - USA 344 271 - Netherlands 62 60 - France 55 45 -------- -------- 4,285 3,613 Investment management* 222 137 General insurance 69 67 Banking 96 87 Corporate funds 578 561 -------- -------- 5,250 4,465 ======== ======== * Including £130m (1998: £77m) embedded value of UK Managed Funds business. All Investment management subsidiaries are included at net asset value, except for the UK Managed Funds business of Legal & General Assurance (Pensions Management) Ltd, a long term insurance company, which is included on the Achieved Profits basis. The net assets of these UK long term fund subsidiaries and the value of the in-force UK Managed Funds business, are attributed to the investment management business. The net assets of the other UK long term fund operating subsidiaries are included in Banking and Corporate funds. ======================================================================= Legal & General Group Plc P8 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 1999 ----------------------------------------------------------------------- 6. Assumptions UK i) The assumed future pre-tax return on fixed interest securities is set by reference to redemption yields available in the market at the end of the reporting period. The corresponding return on equities and property is set by reference to the gilt assumption As at 31.12.99 As at 31.12.98 Investment return (pre-tax) % p.a. % p.a. Gilts and RPI-linked 5.1 4.5 Other fixed interest 6.4 5.7 Equities and property 7.7 7.1 Risk discount rate (net of tax) 7.6 7.0 Inflation Expenses/earnings 4.2 3.4 Indexation 3.2 2.4 The assumed return on other fixed interest securities is net of an allowance for default risk of 0.05% p.a. (1998, 0.1% p.a.). ii) The methodology requires an attribution of assets identified as backing the long term contracts and the residual assets. Assets have in particular been attributed to the with-profits fund. The residual assets represent the balance of the long term fund, excluding the with-profits fund and the assets backing the statutory long term business provisions for contracts not written in the with-profits fund. iii) The risk discount rate has been set by reference to the assumed future investment returns and is net of tax. Potential transfers are discounted from the time at which they are assumed to become available for distribution to shareholders. Thus, residual assets retained in the long term fund to support the business are assumed not to be immediately available for distributions; and their value is the discounted value of future assumed distributions. iv) The value of the in-force business has been calculated after allowing for the additional cost, if any, of holding solvency capital. No such additional cost exists for business written within the with-profits fund whilst the solvency capital for that business is met by that fund; nor is there any additional cost to shareholders in respect of non profit business whilst the solvency capital is provided by the residual assets. v) Assets are valued at their market value. For the projection of investment returns, asset values are adjusted in the case of fixed interest and RPI linked investments to reflect the assumed interest and inflation rates. vi) The value of the subfund is the discounted value of projected investment return for a period of 20 years (1998: 20 years). vii) The contribution from new business has been calculated using actual acquisition costs. It reflects the profit arising at the time of sale and the profit arising from differences between actual and expected experience on these policies during the year accumulated to the year end. Legal & General Group Plc P9 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 1999 ----------------------------------------------------------------------- 6. Assumptions continued viii) The costs of investment in strategic systems, which will also be used for the acquisition and administration of future new business, have all been charged against in-force business at the beginning of the year. ix) Future bonus rates have been set at levels which would fully utilise the assets supporting with-profits business. The proportion of profits derived from with-profits business allocated to shareholders has been assumed to be 10% throughout. x) The value reflects a prudent allowance for compensation in relation to pension transfers and opt-outs. xi) The value of the Managed Funds in-force business limits the cashflow projection to ten years. xii) Other actuarial assumptions have been set at levels which have regard to recent operating performance and experience, including those for mortality, persistency and maintenance expenses (excluding non-recurring costs). These are reviewed annually. An allowance is made for secular trends in annuitant mortality based on externally published data, with the end 1999 assumptions taking into account the publication of the improvement factors contained in CMI Report No.17. xiii) Business in force comprises previously written single premium, regular premium and recurrent single premium contracts. For this purpose, DSS rebates have not been treated as recurrent and the value arising therefrom is included in the value of new business as the premiums are received. For Managed Funds, new business consists of monies received from new clients and incremental receipts from existing clients, and excludes the roll-up of the investment returns. xiv) Projected tax has been determined assuming current tax legislation and rates, except where future changes have been announced. xv) Achieved Profits are computed on an after tax basis and are grossed up to the pre-tax level for presentation in the profit and loss account. This tax on shareholders' profit is notional. The tax rate used for grossing-up results is the full rate of corporation tax of 30.25% (1998: 31%), except for the contribution from shareholders' net worth, which has been grossed up at a longer term rate of tax of 10% (1998: 20%). The total investment return on shareholders' net worth bore tax at a rate of 5% (1998: 16%). Legal & General Group Plc P10 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 1999 ----------------------------------------------------------------------- 6. Assumptions continued International Key assumptions for the USA are: As at 31.12.99 As at 31.12.98 % p.a. % p.a. Reinvestment rate 7.6 5.8 Risk discount rate (net of tax) 9.0 7.8 The assumed pre-tax return is projected from the actual investment portfolio less specific margins for the risks associated with the investments. 7. Alternative assumptions The discount rate appropriate to any investor will depend on the investor's own circumstances, tax and perception of the risks associated with the anticipated cash flows to shareholders. The table below shows the UK life and pensions embedded values calculated at alternative discount rates and equity/property yields. As published 1% lower 1% higher 1% higher risk risk equity/ discount discount property rate rate yields Effect on embedded value at 31 December 1999 £3,824m +£310m -£270m +£310m It should be noted that in calculating each of these values all other assumptions have been left unchanged.

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