IFRS & EEV Restatement 311204

Legal & General Group PLC 24 May 2005 Part C Legal & General Group Plc EEV financial information ------------------------------------------------------------------------------- Index Consolidated Income Statement 1 Consolidated Balance Sheet 2 Statement of Recognised Income and Expense 2 Methodology Basis of preparation 3 Covered business 3 Description of methodology 3 Embedded value 3 Service companies 4 New business 4 Projection assumptions 4 Tax 5 Allowance for risk 5 Required capital and free surplus 5 Financial options and guarantees 6 Risk discount rate 7 Analysis of profit 8 Notes to Financial Statements 10 Assumptions 16 Reconciliations Reconciliation of shareholders' equity 20 Reconciliations from AP to EEV 21 Audit Report 22 =============================================================================== Legal & General Group Plc P1 Consolidated Income Statement - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- Notes EEV AP Â£m Â£m Profit on continuing operations Life and pensions - UK 1 474 494 - USA 72 73 - Netherlands 30 32 - France 11 14 -------- -------- 587 613 Institutional fund management 104 103 General insurance 32 32 Other operational income 22 34 -------- -------- Operating profit on continuing operations 745 782 Profit on discontinuing operations 7 7 -------- -------- Operating profit 752 789 Variation from longer term investment return 2 414 408 Change in equalisation provision - (7) Effect of economic assumption changes 1 34 32 Property income attributable to minorities 32 - -------- -------- Profit before tax 1,232 1,222 Tax (351) (352) -------- -------- Profit for the period 881 870 Minority interests 3 (32) - -------- -------- Profit attributable to equity holders 849 870 ======== ======== Basic earnings per share p p Based on operating profit after tax 8.35 8.80 Based on profit for the financial period 13.10 13.40 Diluted earnings per share Based on operating profit after tax 8.19 8.57 Based on profit for the financial period 12.72 12.97 =============================================================================== Legal & General Group Plc P2 Consolidated Balance Sheet - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- Notes EEV AP Â£m Â£m Assets Investments 7 147,761 146,700 Reinsurers' share of contract provisions 2,977 2,977 Long term in-force business asset 2,535 2,764 Other debtors 2,111 1,934 Non-current assets held for sale 733 - -------- -------- 156,117 154,375 ======== ======== Liabilities Shareholders' equity 9 6,182 6,116 Minority interests 214 - Technical provisions 144,569 141,990 -------- -------- 150,965 148,106 Borrowings 8 1,846 1,788 Other creditors 2,672 4,481 Non-current liabilities held for sale 634 - -------- -------- 156,117 154,375 ======== ======== Statement of Recognised Income and Expense Year ended 31 December 2004 ------------------------------------------------------------------------------- EEV AP Â£m Â£m Fair value losses on cash flow hedges (4) - Exchange differences on translation of foreign operations (8) (9) Pension fund actuarial losses (26) - Net change in available for sale investments (2) - -------- -------- Net income recognised directly in equity (40) (9) Profit for the year 881 870 Dividends (321) (329) -------- -------- Total recognised income and expense for the year 520 532 Minority interests (32) - -------- -------- Attributable to equity holders of the company 488 532 =============================================================================== Legal & General Group Plc P3 Methodology Year ended 31 December 2004 ------------------------------------------------------------------------------- Basis of Preparation The purpose of this section is to set out the detailed methodology for producing the Group's supplementary financial statements. The statements have been prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 by the European CFO Forum. Due to the continuing work of the CFO Forum and the IASB, and the possible amendment to the interpretive guidance, the Group's accounting policies and consequently, the information presented may change prior to the publication of the Group's first published Interim EEV and IFRS results in July 2005. These supplementary financial statements have been audited by PricewaterhouseCoopers LLP and prepared in conjunction with our consulting actuaries - Tillinghast Towers-Perrin and, in the US, Milliman USA. Covered Business The Group uses EEV methodology to value Individual and Group life assurance, pensions and annuity business written in the UK, Continental Europe and the US and our UK managed funds business. All other business units are accounted for on the IFRS basis adopted in the primary financial statements. Under EEV, there is no distinction made between insurance and investment contracts in our life and pensions businesses as there is under IFRS. Description of Methodology The objective of EEV is to provide shareholders with more realistic information on the financial position and current performance of the Group than is provided within the primary financial statements. The methodology requires assets of an insurance company as reported in the primary financial statements to be attributed between those supporting the covered business (restricted assets) and the remainder (residual assets). The method accounts for assets as follows: i. restricted assets on an EEV basis; and ii. residual assets on the IFRS basis adopted in the primary financial statements. The EEV methodology recognises as profit from the covered business the total of: i. cash transfers during the relevant period from the covered business to the residual assets, as determined following a statutory valuation; and ii. the movement in the present value of the expected future cash flows from the covered business to the residual assets over the relevant period. Embedded Value Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the balance of shareholders' equity on the IFRS basis, 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, held either in the UK Long Term Fund (LTF) or by other companies writing long term business, which are regarded either as required capital for the covered business or which represent surplus assets within those companies. =============================================================================== Legal & General Group Plc P4 Methodology Year ended 31 December 2004 ------------------------------------------------------------------------------- The VIF is the present value of the distributable profits to shareholders 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. Service Companies All services relating to the UK life and pensions business, including investment management services, are charged on a cost recovery basis. 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 and recurrent single premium contracts. DWP rebates have not been treated as recurrent and they are included in new business when received. 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. Traditionally, new business margins have been defined as new business contribution at the end of the reporting period divided by the annual premium equivalent. Under EEV a new measure, the present value of future new business premiums (PVNBP), has been calculated and expressed at the point of sale. The PVNBP is equivalent to the total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end of the financial period. A revised new business margin has been defined under EEV 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. Projection Assumptions Cash flow projections are determined using realistic assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on year end conditions. 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 in the US, 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, persistency, morbidity and expenses reflect recent operating experience and are 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. =============================================================================== Legal & General Group Plc P5 Methodology Year ended 31 December 2004 ------------------------------------------------------------------------------- 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 cashflow projections therefore include the full cost of servicing this business. Tax The projections take into account all tax which is expected to be paid under current legislation, including tax which would arise if surplus assets within the covered business were eventually to be distributed. 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 (FOGs) within the Group's products; and iii. Setting risk discount rates by deriving a Group level risk margin to be applied consistently to local risk free rates. Required Capital and Free Surplus Regulatory capital for UK life and pensions business is provided by assets backing the with-profits sub-fund or by the SNW. The SNW comprises the Shareholder Retained Capital (SRC) and the Sub-Fund. For the UK with-profits sub-fund, the required capital will be covered by the surplus within the fund and no effect will be 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 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) exercise. The SRC is either required to cover EU solvency margin or is encumbered because its distribution to shareholders is restricted due to previous understandings with the FSA. It is therefore classified as required capital. SRC is valued by assuming it is distributed from the LTF over a 20 year period with allowance for tax payable on distribution. For this purpose, distribution of the SRC is restricted such that there is always sufficient SRC and subordinated debt left to cover the EU solvency margin for non profit business. 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 SRC. As a consequence, the writing of new business defers the release of capital from the SRC to free surplus. 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. 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. =============================================================================== Legal & General Group Plc P6 Methodology Year ended 31 December 2004 ------------------------------------------------------------------------------- The Sub-Fund is also treated as required capital, because its distribution to shareholders is restricted by Legal & General Assurance Society's Articles of Association. For our UK managed pension funds business, risk based capital has been used to model required capital. The balance of net assets within the UK Managed Funds business is treated as free surplus. For L&G America, 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 L&G Netherlands (LGN), required capital has been set at 100% of EU minimum solvency for all products which do not have any related FOGs. For those products with FOGs, capital of between 112.5% and 175% of the EU minimum solvency margin has been used. The level of capital has been determined using risk based capital techniques. In France (LGF), 100% of EU minimum solvency margin has been used for EV modelling purposes for all products without FOGs. For those products with FOGs, 200% of EU minimum solvency margin has been used. The level of capital has been determined using risk based capital techniques. The contribution from new business for our Overseas businesses reflects an appropriate allowance for the cost of holding the required capital. Financial Options and Guarantees In the UK, all financial options and guarantees (FOGs) are within the UK Life & Pensions business. 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 sub-fund and their time value is recognised within the with-profits burn-through cost described below. Additional financial options within the non profit fund exist only for a small amount of deferred annuity business where guaranteed early retirement and cash commutation terms apply when the policyholder chooses their actual retirement date. Further financial guarantees exist within the non profit fund, in relation to index-linked annuities where capped or collared restrictions apply. Due to the nature of these restrictions and how they vary depending on the prevailing inflation conditions we have also treated these as FOGs and recognised a time value cost of FOG 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 where for example 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 sub-fund in the deterministic projection, it is assumed that terminal bonuses are increased to exhaust all of the assets in 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 sub-fund are insufficient to pay all projected policyholder claims and associated costs. =============================================================================== Legal & General Group Plc P7 Methodology Year ended 31 December 2004 ------------------------------------------------------------------------------ The average additional shareholder cost arising from this shortfall has been included in the time value cost of options and guarantees and is referred to as the with-profits burn-through cost. The same economic scenarios have been used to assess the time value of the financial guarantees within the non profit fund 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. The time value cost of FOGs 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. In the US, financial options and guarantees relate to guaranteed minimum crediting rates and surrender values on a range of contracts. 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 4% and 5%. The assets backing these contracts are invested in US dollar denominated fixed interest securities. In the Netherlands, there are 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. In accordance with market practice, it is expected that guarantees will be financed from unrealised gains on assets. This guarantee applies on a monthly basis. Certain unit 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. In France, financial options and guarantees relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the contract including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios plus income and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed surrender values. Local statutory accounting rules require the establishment of a specific liability when the accounting income for a company is less than 125% of the guaranteed minimum credited returns however this has never been required. In general, the guaranteed annual bonus rates are between 2% and 4.5%. 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 financial options and guarantees. 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 should be forward looking, although informed by historic information. 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. =============================================================================== Legal & General Group Plc P8 Methodology Year ended 31 December 2004 ------------------------------------------------------------------------------- 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. For the Group's convertible debt, which matures in 2006, the probability of conversion is considered low given current market conditions. The cost of debt therefore assumes an equivalent long term market cost for this debt based on 5-year swap rates rather than the actual rate of 2.75%. All debt attracts tax relief at a rate of 30%. Whilst the WACC approach is a relatively simple and transparent calculation to apply, subjectivity remains within a number of the assumptions. Management believe 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. A similar approach will be adopted when risk margins are reassessed in future periods. Currently, we do not expect the risk margin to change significantly during 2005. Key assumptions are set out below: Risk free rate: Derived from gross redemption yields on relevant gilt portfolio Equity risk premium 3.0% (UK only) Property risk premium 2.0% (UK only) Risk margin 3.0% The risk margin has been calculated by assuming a debt ratio of 20%, a net cost of debt of 3.9% p.a. and an average beta of 1.35. In addition, the margin allows specifically for the risks covered by the time value of financial options and guarantees (deduction of 0.1%). Analysis of Profit Operating profit is identified at a level which reflects an assumed longer term level of investment return. The contribution to operating profit in a period is attributed to four sources: i. new business; ii. the management of in-force business; iii. development costs; and iv. return on shareholder net worth. Further profit contributions arise from actual investment return differing from the assumed long term investment return (investment return variances), and from the effect of economic assumption changes. The contribution from new business represents the value recognised at the end of each period from new business written in that period, after allowing for the actual cost of acquiring the business and of establishing the required technical provisions and reserves and after making allowance for the cost of capital. New business contributions are calculated using closing assumptions. =============================================================================== Legal & General Group Plc P9 Methodology Year ended 31 December 2004 ------------------------------------------------------------------------------- The contribution from in-force business is calculated using opening assumptions and comprises: i. expected return - the discount earned from the value of business in-force at the start of the year; ii. experience variances - the variance in the actual experience over the reporting period from that assumed in the value of business in-force as at the start of the year; and iii. operating assumption changes - the effects of changes in future assumptions, other than changes in economic assumptions from those used in valuing the business at the start of the year. These changes are made prospectively from the end of the year. Development costs are associated with investment in building a new enterprise or exceptional development activity over a defined period. The contribution from shareholder net worth comprises the increase in embedded value based on assumptions at the start of the year in respect of: i. encumbered assets within the covered business - principally the unwind of the discount rate; and ii. residual assets - the expected investment return. Investment return variances represent the effect of actual investment performance and changes to investment policy on shareholder net worth and in-force business from that assumed at the beginning of the period. Economic assumption changes comprise the effect of changes in economic variables, beyond the control of management, including associated changes to valuation bases to the extent that they are reflected in revised assumptions. =============================================================================== Legal & General Group Plc P10 Notes to Financial Statements - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- 1. Profit for the period from covered business Life and pensions Managed Intern- pension UK ational Total funds Total Â£m Â£m Â£m Â£m Â£m 2004 - EEV Contribution from: New business after cost of capital 241 35 276 36 312 In-force business - expected return 273 49 322 18 340 - experience variances 46 17 63 15 78 - operating assumption changes (221) 1 (220) 18 (202) Development costs - - - (1) (1) Shareholder net worth 135 11 146 6 152 -------- -------- -------- -------- -------- Operating profit 474 113 587 92 679 Variation from longer term investment return 363 3 366 11 377 Effect of economic assumption changes 15 19 34 0 34 -------- -------- -------- -------- -------- Profit before tax 852 135 987 103 1,090 Tax (238) (46) (284) (31) (315) -------- -------- -------- -------- -------- Profit for the period 614 89 703 72 775 ======== ======== ======== ======== ======== 2004 - AP Contribution from: New business 272 45 317 36 353 In-force business - expected return 267 50 317 17 334 - experience variances 43 14 57 16 73 - operating assumption changes (219) 1 (218) 17 (201) Development costs - - - (1) (1) Shareholder net worth 131 9 140 6 146 -------- -------- -------- -------- -------- Operating profit 494 119 613 91 704 Variation from longer term investment return 364 0 364 12 376 Effect of economic assumption changes 15 17 32 0 32 -------- -------- -------- -------- -------- Profit before tax 873 136 1,009 103 1,112 Tax (244) (46) (290) (31) (321) -------- -------- -------- -------- -------- Profit for the period 629 90 719 72 791 =============================================================================== Legal & General Group Plc P11 Notes to Financial Statements - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- 2. Variation from longer term investment return EEV AP Â£m Â£m Total covered business 377 376 ####### ####### Institutional fund management : 0 : : 0 : General insurance : (3): : (3) : Other operational income : 40 : : 35 : ####### ####### 37 32 -------- -------- 414 408 ======== ======== Investment return variances represent the effect of actual investment performance and changes to investment policy in respect of shareholder net worth and in-force business compared with assumptions at the beginning of the period. 3. Minority interests Minority interests represents the share of profit relating to investments included in the consolidated balance sheet that are owned by third parties. 4. Present value of new business premiums (PVNBP) Capital- New Single Regular isation business premiums premiums factor PVNBP margin Â£m Â£m Â£m % UK 3,740 348 4.3 5,255 4.6 International 272 77 6.9 802 4.4 -------- -------- -------- -------- 4,012 425 6,057 4.6 ======== ======== ======== ======== The PVNBP on the EEV basis is defined as the present value of regular premiums plus single premiums for any given year. It is calculated using the same assumptions as for the new business contribution. There are no equivalent figures on the AP basis. The capitalisation factor represents the PVNBP minus single premiums divided by the annualised amount of new regular premiums. =============================================================================== Legal & General Group Plc P12 Notes to Financial Statements - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- 5. Time value of options and guarantees EEV Â£m Life and pensions - UK - With-profits guarantees 8 - Non profit guarantees 24 -------- 32 - International 8 -------- Total time value of options and guarantees 40 ======== 6. Embedded value Life and pensions Managed Intern- pension UK ational Total funds Total Â£m Â£m Â£m Â£m Â£m Year ended 31.12.04 - EEV At 1 January Value of in-force busines 2,552 377 2,929 158 3,087 Shareholder net worth * 1,569 245 1,814 143 1,957 -------- -------- -------- -------- -------- 4,121 622 4,743 301 5,044 Exchange rate movements - (28) (28) - (28) -------- -------- -------- -------- -------- 4,121 594 4,715 301 5,016 Profit for the period 614 89 703 72 775 Capital movements - 25 25 - 25 Distributions (274) (1) (275) (20) (295) Movement in pension deficit (16) - (16) - (16) ###### ###### ###### ###### ###### Value of in-force business :2,885: : 431: :3,316: : 191 : : 3,507: Shareholder net worth * :1,560: : 276: :1,836: : 162 : : 1,998: ###### ###### ###### ###### ###### At 31 December 4,445 707 5,152 353 5,505 ======== ======== ======== ======== ======== Year ended 31.12.04 - AP At 1 January 4,253 657 4,910 305 5,215 Exchange rate movements - (29) (29) - (29) -------- -------- -------- -------- -------- 4,253 628 4,881 305 5,186 Profit for the period 629 90 719 72 791 Capital movements - 25 25 - 25 Distributions (274) (1) (275) (20) (295) -------- -------- -------- -------- -------- At 31 December 4,608 742 5,350 357 5,707 ======== ======== ======== ======== ======== comprising: Value of in-force business 3,007 499 3,506 194 3,700 Shareholder net worth * 1,601 243 1,844 163 2,007 -------- -------- -------- -------- -------- 4,608 742 5,350 357 5,707 ======== ======== ======== ======== ======== * For the UK life and pensions business, shareholder net worth comprises the shareholder retained capital (SRC) on the IFRS basis for EEV and MSS basis for AP, adjusted for deferred acquisition costs, deferred tax and sterling reserves, and the Sub-Fund, both net of an appropriate allowance for tax. It also includes intra-group subordinated debt capital at its face value of Â£602m. Shareholder net worth comprises both required capital and free surplus. Free surplus amounted to Â£310m at 31 December 2004 (2003: Â£245m) comprising UK life and pensions, Â£nil (2003: Â£nil); International life and pensions, Â£166m (2003: Â£120m); Managed Pension Funds, Â£144m (2003: Â£125m). Value of in-force business reflects a cost for holding capital of Â£58m at 31 December 2004 (2003: Â£55m) comprising UK life and pensions, Â£8m (2003: Â£8m); International life and pensions, Â£48m (2003: Â£45m); Managed Pension Funds, Â£2m (2003: Â£2m). =============================================================================== Legal & General Group Plc P13 Notes to Financial Statements - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- 7. Funds under management EEV AP Â£m Â£m Investment property 4,903 3,741 Shares, variable yield securities and unit trusts - 11,529 Equities 78,322 - Unit trusts 1,875 - Debt and other fixed income securities - 21,677 Debt securities 58,604 - Accrued interest 753 - Derivative assets 23 - Deposits with credit institutions - 941 Loans and receivables 289 567 Assets held to cover linked liabilities - 108,297 Amounts payable under a margining arrangement - (119) Cash and cash equivalents 2,992 67 -------- -------- 147,761 146,700 Other funds 447 - -------- -------- Funds included in the consolidated balance sheet 148,208 146,700 Segregated funds 11,098 11,098 Unit trusts, ISAs and PEPs 7,919 7,949 -------- -------- Total funds under management 167,225 165,747 ======== ======== IAS32 and 39, 'Financial Instruments' require that all investments are split into their respective asset classes. 8. Borrowings EEV AP Â£m Â£m 2.75% Convertible bond 2006 493 521 Undated subordinated notes 394 394 Medium Term Notes 2031-2041 597 597 Bank loans 2005 2 1 Accrued interest 17 - -------- -------- Core debt 1,503 1,513 Non recourse financing - Triple X 2025 275 275 - Property Partnership loans 2011 68 - -------- -------- Total borrowings 1,846 1,788 ======== ======== The convertible bond matures in 2006 and is convertible into ordinary shares of the Company at 184p per share. If converted, this bond would give rise to the issue of 285.3m new ordinary shares which represents approximately 4.4% of the current issued share capital. On conversion, the bonds may be settled in shares or in cash at the option of the Company. The fair value of the conversion option was calculated on issue using an option pricing model. This is recognised as a derivative liability and is revalued to fair value at each reporting period. Fair value gains and losses are taken through the income statement. The remainder of the proceeds less attributable expenses were allocated to the value of the debt portion of the convertible bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bond. In November 2004 a subsidiary of Legal & General America issued US$550m of non-recourse debt in the US domestic capital markets as floating rate Dutch Auction Market Securities due 2025. The transaction provides capital to meet the Regulation Triple X reserve requirements on the US term insurance business without affecting the Group's debt capacity or financial gearing. =============================================================================== Legal & General Group Plc P14 Notes to Financial Statements - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- 9. Shareholders' equity segmental analysis EEV AP Â£m Â£m Embedded value of life and pensions businesses: - UK * 4,445 4,608 - USA 489 504 - Netherlands 139 144 - France 79 94 -------- -------- 5,152 5,350 Institutional fund management ** 390 393 -------- -------- 5,542 5,743 General insurance 149 149 Corporate funds *** 491 224 -------- -------- 6,182 6,116 ======== ======== Movement At 1 January 5,680 5,584 Fair value losses on cash flow hedges (4) - Exchange differences on translation of foreign operations (8) (9) Pension fund actuarial losses (26) - Net change in available for sale investments (2) - -------- -------- Net income recognised directly in equity 5,640 5,575 Profit for the year 881 870 less: Minority interests (32) - -------- -------- Total recognised income and expense for the year 6,489 6,445 Dividends (321) (329) Employee share schemes costs 9 - Increase in share capital/share premium 1 1 Allocation of Treasury shares 4 (1) -------- -------- At 31 December 6,182 6,116 ======== ======== * Includes Â£602m of intra-group subordinated debt capital attributed to the SRC. ** Includes Â£353m net assets of managed pension funds business. *** Includes Â£493m of convertible debt, Â£602m of senior debt which has been onlent to the Long Term Fund, Â£788m representing the net proceeds from the 2002 Rights Issue and Â£188m representing the aggregate investment returns. =============================================================================== Legal & General Group Plc P15 Notes to Financial Statements - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- 10. Alternative assumptions The discount rate appropriate to any investor will depend on the investor's own requirements, tax and perception of the risks associated with the anticipated cash flows to shareholders. The table below shows the effect of alternative economic and non-economic assumptions on the long term embedded value and new business contribution. Effect on embedded value at 31 December 2004 Sensitivity to economic assumptions: 1% lower 1% higher 1% higher 1% lower risk risk equities/ equities/ As discount discount property property published rate rate yields yields Â£m Â£m Â£m Â£m Â£m Life and pensions - UK 4,445 288 (250) 220 (221) - International 707 52 (45) 6 (8) -------- -------- -------- -------- -------- Total life and pensions 5,152 340 (295) 226 (229) Managed pension funds 353 8 (8) n/a n/a -------- -------- -------- -------- -------- Total covered business 5,505 348 (303) 226 (229) ======== ======== ======== ======== ======== Sensitivity to 10% dec- 10% dec- 10% dec- 10% dec- non-economic assumptions: rease in rease in rease in rease in maint- lapse mortality mortality As enance rates (UK (other published expenses Annuities) business) Â£m Â£m Â£m Â£m Â£m Life and pensions - UK 4,445 31 40 (215) 59 - International 707 9 27 - 97 -------- -------- -------- -------- -------- Total life and pensions 5,152 40 67 (215) 156 Managed pension funds 353 10 8 n/a n/a -------- -------- -------- -------- -------- Total covered business 5,505 50 75 (215) 156 ======== ======== ======== ======== ======== Effect on new business contribution for the period Sensitivity to 1% lower 1% higher 1% higher 1% lower economic assumptions: risk risk equities/ equities/ As discount discount property property published rate rate yields yields Â£m Â£m Â£m Â£m Â£m Life and pensions - UK 241 51 (45) 29 (29) - International 35 17 (14) 0 0 -------- -------- -------- -------- -------- Total life and pensions 276 68 (59) 29 (29) Managed pension funds 36 2 (2) n/a n/a -------- -------- -------- -------- -------- Total covered business 312 70 (61) 29 (29) ======== ======== ======== ======== ======== Sensitivity to 10% dec- 10% dec- 10% dec- 10% dec- non-economic assumptions: rease in rease in rease in rease in maint- lapse mortality mortality As enance rates (UK (other published expenses Annuities) business) Â£m Â£m Â£m Â£m Â£m Life and pensions - UK 241 10 20 (17) 23 - International 35 2 5 - 21 -------- -------- -------- -------- -------- Total life and pensions 276 12 25 (17) 44 Managed pension funds 36 2 2 n/a n/a -------- -------- -------- -------- -------- Total covered business 312 14 27 (17) 44 ======== ======== ======== ======== ======= In calculating the alternative values all other assumptions are left unchanged. =============================================================================== Legal & General Group Plc P16 Assumptions Year ended 31 December 2004 ------------------------------------------------------------------------------- 11. Assumptions UK life and pensions i. The assumed future pre-tax returns on fixed interest and RPI linked securities are 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 equal to the fixed interest gilt assumption plus the appropriate risk premium. An asset mix consistent with the current investment policy and future management intentions has been assumed within the projections. The economic assumptions were: EEV AP EEV AP 2004 2004 2003 2003 Equity risk premium 3.0% 2.6% 3.0% 2.6% Property risk premium 2.0% 2.6% 2.0% 2.6% Investment return - Gilts: - Fixed interest 4.5% 4.5% 4.7% 4.7% - RPI linked 4.5% 4.5% 4.6% 4.6% - Non Gilts: - Fixed interest 4.9% - 5.3% 4.9% - 5.3% 5.1% - 5.5% 5.1% - 5.5% - RPI linked 4.7% - 5.1% 4.7% - 5.1% 5.1% - 5.4% 5.1% - 5.4% - Equities 7.5% 7.1% 7.7% 7.3% - Property 6.5% 7.1% 6.7% 7.3% Risk margin 3.0% 2.5% 3.0% 2.5% Risk discount rate (net of tax) 7.5% 7.0% 7.7% 7.2% Inflation - Expenses/earnings 3.8% 3.8% 3.8% 3.8% - Indexation 2.8% 2.8% 2.8% 2.8% The assumed returns on non-gilt securities are net of an allowance for default risk of 0.2% p.a. (2003: 0.2% p.a.), other than for certain government-supported securities where no such allowance is made. ii. Assets are valued at market value. For the projection of fixed interest and RPI linked investment returns, asset values are adjusted to reflect the assumed interest and inflation rates. iii. The value of the Sub-Fund is the discounted value of total projected investment returns over its lifetime. iv. Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders' portion of the with-profits business. The proportion of profits derived from with-profits business allocated to shareholders has been assumed to be 10% throughout. v. The value of in-force business reflects the cost of providing for benefit enhancement or compensation in relation to certain products including administration expenses. =============================================================================== Legal & General Group Plc P17 Assumptions Year ended 31 December 2004 ------------------------------------------------------------------------------- vi. 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 above). These are reviewed annually. An allowance is made for future improvements in annuitant mortality based on experience and externally published data. For end 2004, male annuitant mortality is assumed to improve in accordance with CMI Working Paper 1, projection MC for experience and the average of projections MC and LC for statutory reserving. Female annuitant mortality is assumed to improve in accordance with the MC projection from CMI Working Paper 1 for statutory reserving and at 70% of this rate for experience. vii. The subordinated debt capital has been included in the embedded value at the face value of Â£602m. viii. Projected tax has been determined assuming current tax legislation and rates. ix. EEV results are computed on an after tax basis and are grossed up to the pre-tax level for presentation in the profit and loss account. The tax rate used for grossing-up is the corporation tax rate of 30% (2003: 30%), except for the profit attributable to shareholder net worth, where the rate used is derived from the tax attributed to the contribution from shareholder net worth in the MSS accounts. To arrive at operating profit, the contribution from shareholder net worth is grossed up at a rate to reflect the tax associated with a longer term investment return. UK managed pension funds x. The UK life and pensions economic assumptions are used. All contracts are assumed to lapse after 10 years. Fees are projected on a basis, which reflects current charges or, if less, anticipated charges. New business consists of monies received from new clients and incremental receipts from existing clients, and excludes the roll-up of the investment returns. Development costs relate to strategic systems. International xi. Key assumptions are: EEV AP EEV AP 2004 2004 2003 2003 % % % % USA Reinvestment rate 4.9 4.9 4.8 4.8 Risk margin 3.0 2.5 3.0 2.5 Risk discount rate (net of tax) 7.3 6.8 7.3 6.8 Europe Government bond return 3.8 3.8 4.5 4.5 Risk margin 3.0 3.5 3.0 3.5 Risk discount rate (net of tax) 6.8 7.3 7.5 8.0 Stochastic calculations xii. The time value of options and guarantees is calculated using consistent economic and non-economic assumptions to those used for the deterministic embedded value calculations. =============================================================================== Legal & General Group Plc P18 Assumptions Year ended 31 December 2004 ------------------------------------------------------------------------------- This section describes the models used to generate future investment simulations, and gives some sample statistics for the simulations used. A single model has been used for UK and international business, with different economic assumptions for the various economies. Model Government nominal interest rates are generated using a LIBOR Money 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 risk-free, 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. Asset Classes The significant asset classes are for: â€¢ UK with-profits business - equities, property and fixed rate bonds of various durations; â€¢ UK annuity business - fixed rate and index-linked bonds of various durations; and â€¢ International business - fixed rate bonds of various durations. Summary Statistics The following tables set out means and standard deviations (StDev) of future returns as at 31 December 2004 for the most significant asset classes. Correlations between asset classes have been set based on an internal assessment of historical data. 10-year return 20-year return Mean1 StDev2 Mean1 StDev2 UK Business (Sterling) Government bonds 4.7% 4.9% 4.7% 3.5% Corporate bonds 5.3% 3.4% 5.4% 3.8% Property (excess returns) 2.0% 14.9% 2.1% 15.3% Equities (excess returns) 3.1% 20.4% 2.9% 19.6% European Business (Euro) Long Government bonds3 3.9% 6.7% 4.6% 7.6% Short Government bonds4 3.9% 3.8% 4.6% 7.8% US Business (US Dollar) Long Government bonds3 4.6% 7.8% 5.5% 8.7% 1 Other than for equities and property, means calculated as excess of 1 year bond asset return means plus 1 year bond means. Mean equity and property excess returns calculated as excess of 1 year bond asset return means. Each mean is derived by calculating the accumulated value of a unit asset invested to time n years for each simulation, averaging the resultant values across all simulations, then calculating the equivalent annual return required to give this average accumulation (by taking the nth root of the average accumulation and deducting 1). 2 Standard deviations are calculated by accumulating a unit investment for n years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by n and taking the square root. Equities and property values use excess returns. The results are comparable to implied volatilities quoted in investment markets. 3 Long-term bonds are defined to be 10-year zero-coupon bonds. 4 Short-term bonds defined to be 1 year duration. =============================================================================== Legal & General Group Plc P19 Assumptions Year ended 31 December 2004 ------------------------------------------------------------------------------- Risk discount rate The risk discount rate is scenario-dependent within the stochastic projection. It is calculated by applying the deterministic risk margin to the risk-free rate in each stochastic projection. Sensitivity calculations vi. A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the embedded value and the new business contribution to changes in key assumptions. Relevant details relating to each sensitivity are: - 1% variation in discount rate - a one percentage point increase /decrease in the risk margin has been assumed in each case (for example a 1% increase in the risk margin at end 2004 would result in a 4% risk margin). - 1% variation in equity/property yields - a one percentage point increasedecrease in the equity/property assumed investment returns, excluding any consequential changes for example to risk discount rates or valuation bases, has been assumed in each case (meaning for example a 1% increase in equity returns would increase assumed total equity returns from 7.5% to 8.5%). - 10% decrease in maintenance expenses, excluding any consequential changes for example to valuation expense bases or potentially reviewable policy fees (meaning a 10% reduction on a base assumption of Â£10 per annum would result in a Â£9 per annum expense assumption). - 10% decrease in assumed lapse rates, incorporating a 10% reduction in lapse, surrender and premium cessation assumptions (meaning a 10% reduction on a base assumption of 7% would result in a 6.3% lapse assumption). - 10% decrease in both mortality and morbidity rates, excluding any consequential changes for example to valuation bases or potentially reviewable risk charging bases (meaning for example if base experienced mortality is 90% of a standard mortality table then for this sensitivity the assumption is set to 81% of the standard table). The sensitivities for UK life and pensions allow for any material changes to the cost of financial options and guarantees but, as indicated above, do not allow for any changes to reserving bases or capital requirements within the sensitivity calculation. The sensitivities in our International businesses do not allow for changes to financial options and guarantees. =============================================================================== Legal & General Group Plc P20 Notes to Financial Statements - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- 12. Embedded value Reconciliation of in-force business EEV AP Â£m Â£m Long term in-force business asset included in the balance sheet 2,535 2,764 Sub-Fund (245) (245) Deferred acquisition costs 731 742 Deferred tax on contribution * 358 397 Other miscellaneous adjustments ** 128 42 -------- -------- Value of in-force business 3,507 3,700 ======== ======== Reconciliation of shareholder net worth - UK (SRC) 2,196 2,233 - USA 488 475 - Netherlands 84 48 - France 64 48 - Managed pension funds 162 163 - Other assets (on the IFRS / MSS basis) 677 409 -------- -------- Shareholders' equity on the IFRS / MSS basis 3,671 3,376 Purchased interests in long term business (24) (24) Sub-Fund 245 245 Deferred acquisition costs (731) (742) Deferred tax on contribution * (358) (397) Other miscellaneous adjustments (128) (42) ######## ######## Shareholder net worth of long term business : : : : operations on the EEV / AP basis : 1,998: : 2,007: Other assets on the IFRS / MSS basis : 677: : 409: ######## ######## Shareholder net worth on the EEV / AP basis 2,675 2,416 ======== ======== Reconciliation of shareholders' equity Shareholders' equity on the IFRS / MSS basis 3,671 3,376 Less: Purchased interests in long term business (24) (24) EEV / AP long term in-force business asset 2,535 2,764 -------- -------- Shareholders' equity on the EEV / AP basis 6,182 6,116 ======== ======== * Deferred tax represents all tax which is expected to be paid under current legislation, including tax which would arise if shareholders' backing assets were eventually distributed. ** The increase in other miscellaneous adjustments is primarily due to the different treatment of sterling reserves under EEV compared with IFRS. =============================================================================== Legal & General Group Plc P21 Notes to Financial Statements - EEV Basis Year ended 31 December 2004 ------------------------------------------------------------------------------- 13a. Reconciliation of embedded value on the AP basis to the EEV basis Life and pensions Managed Intern- pension UK ational Total funds Total Â£m Â£m Â£m Â£m Â£m AP basis 4,608 742 5,350 357 5,707 Required capital (8) (19) (27) (2) (29) Time value of FOGs (32) (8) (40) - (40) Valuation of Sub-Fund 34 - 34 - 34 Economic assumptions (125) (8) (133) (2) (135) Pension deficit (45) - (45) - (45) Other 13 - 13 - 13 -------- -------- -------- -------- -------- EEV basis 4,445 707 5,152 353 5,505 ======== ======== ======== ======== ======== 13b. Reconciliation of new business contribution on the AP basis to the EEV basis after cost of capital Life and pensions Managed Intern- pension UK ational Total funds Total Â£m Â£m Â£m Â£m Â£m AP basis 272 45 317 36 353 Required capital (8) (5) (13) - (13) Time value of FOGs (3) (1) (4) - (4) Economic assumptions (20) (4) (24) - (24) -------- -------- -------- -------- -------- EEV basis 241 35 276 36 312 ======== ======== ======== ======== ======== 13c. Reconciliation of operating profit on the AP basis to the EEV basis Life and pensions Managed Intern- pension UK ational Total funds Total Â£m Â£m Â£m Â£m Â£m AP basis 494 119 613 91 704 Value added from new business (31) (10) (41) - (41) Effect of unwind of discount rate - Value of in-force business 5 (1) 4 1 5 - Shareholder net worth 4 2 6 0 6 Other 2 3 5 0 5 -------- -------- -------- -------- -------- EEV basis 474 113 587 92 679 ======== ======== ======== ======== ======== =============================================================================== Legal & General Group Plc P22 Special Purpose Audit Report Year ended 31 December 2004 ------------------------------------------------------------------------------- Special Purpose Audit Report of PricewaterhouseCoopers LLP to the directors of Legal & General Group Plc ('the Group') on its European Embedded Value ('EEV') Supplementary Financial Information. We have audited the accompanying consolidated EEV balance sheet of Legal & General Group Plc ('the Group') as at 31 December 2004, the related consolidated EEV profit and loss account for the year then ended and the related notes (hereinafter referred to as 'the EEV supplementary financial information') set out on pages 1 to 21. Respective responsibilities of directors and PricewaterhouseCoopers The directors of the Group are responsible for the preparation of the EEV supplementary financial information which have been prepared as part of the Group's conversion to EEV. Our responsibilities, as independent auditors, are established in the United Kingdom by the Auditing Practices Board, our profession's ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report to you our opinion as to whether the EEV supplementary financial information have been prepared, in all material respects, in accordance with the basis of preparation set out in the Methodology section on pages 3 to 9 of the EEV supplementary financial information. This report, including the opinion, has been prepared for and only for the Group for the purposes of assisting with the Company's conversion of the supplementary financial information to EEV and for no other purpose. We do not, in giving this opinion, accept or resume 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. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the UK Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the EEV supplementary financial information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the EEV supplementary financial information, and of whether the accounting policies are appropriate to the Group's circumstances and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the EEV supplementary financial information are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation in the EEV supplementary financial information. Emphasis of matter Without qualifying our opinion, we draw your attention to the fact that the Methodology section on pages 3 to 9, which sets out the accounting policies used in the preparation of the EEV supplementary financial information, explains why there is a possibility that the EEV supplementary financial information may require adjustment before their inclusion as comparative information in the Group's first set of financial statements prepared on an EEV basis for the year ended 31 December 2005. This is because International Accounting Standards currently in issue and adopted by the EU are subject to interpretation issued from time to time by the International Financial Reporting Interpretations Committee and further standards may be issued by the International Accounting Standards Board that will be adopted for financial years beginning on or after 1 January 2005. Additionally, IFRS is currently being applied in the United Kingdom and in a large number of other countries simultaneously for the first time. Furthermore, due to a number of new and revised Standards included within the body of Standards that comprise IFRS, there is not yet a significant body of established practice on which to draw in forming opinions regarding interpretation and application. Accordingly, practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reporting under IFRS as it will be applied and reported on in the Group's first IFRS financial statements for the year ended 31 December 2005 may be subject to change. Opinion In our opinion, the accompanying EEV supplementary financial information for the year ended 31 December 2004 have been prepared, in all material respects, in accordance with the basis set out in the Methodology section on pages 3 to 9, which describes that the supplementary financial information have been prepared in accordance with the twelve European Embedded Value principles as set out in 'European Embedded Value Principles'. The note includes the assumptions made by the directors of the Group about the standards and interpretations expected to be effective, and the policies expected to be adopted, when they prepare the first complete set of supplementary financial statements of the Group on an EEV basis for the year to 31 December 2005. PricewaterhouseCoopers LLP Chartered Accountants London 23 May 2005 This information is provided by RNS The company news service from the London Stock Exchange

Companies

Legal & General Group (LGEN)

Wednesday, 18th September 2024

COMPANIES COVERED:

LGEN PZC AMS

PZ Cussons shares slump as profit decline underscores impact of Nigerian currency devaluation, L&G investors give news of CALA disposal a tepid response and Advance Medical Solutions advances on upbeat outlook.

Full Archive

UK 100

Latest directors dealings

1 hour ago HGCapital Trust
2 hours ago NCC Group
2 hours ago Barclays
3 hours ago Pearson
3 hours ago Coca-Cola Europacific Partners (DI)

All directors dealings today