L&G 2000 Results - Part 3

Legal & General Group PLC 27 February 2001 Part 3 Legal & General Group Plc Summary of audited results on the Achieved Profits basis For the year ended 31 December 2000 CONTENTS P1 Overview P3 Consolidated profit and loss account P4 Consolidated balance sheet P5 Contribution from long term business P6 Embedded value P6 Movement in embedded value P7 Segmental analysis of shareholders' funds P8 Embedded value assumptions P10 Alternative assumptions P1 Legal & General Group Plc Supplementary financial statements on the Achieved Profits basis For the year to 31 December 2000 The Group's current primary 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 fully recognise the fair value of the shareholders' interest in a portfolio of in-force long term business. The Association of British Insurers is continuing to develop the Achieved Profits reporting basis as a more realistic method of accounting for long term business. Achieved Profits reporting 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 2000 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. 2000 Results The Group's operating profit was £678m compared with £652m in 1999, with the contribution from worldwide new business up 10% to £196m. 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. Profit on ordinary activities before tax was £392m (1999: £1,294m), which includes a negative investment return variance of £306m (1999: positive variance of £670m). Shareholders' funds were £5,274m (1999: £5,250m), after the dividend to shareholders of £243m. UK life and pensions Operating profit was £454m, compared with £412m for 1999. The contribution before tax from new business was up 19% to £118m. In an increasingly competitive market, we have again written new business which delivers significant value for our shareholders. As a percentage of EPI, the contribution increased from 23% in 1999 to 27%. Product margins have been maintained in 2000 and there has been a particularly favourable mix of new business. The contribution from the in-force business was £209m (1999: £194m). This reflects the growth in the business portfolio in recent years and the impact of unwinding a higher risk discount rate in 2000. In 1999 variances in operating experience and net releases of reserves and provisions virtually offset expenditure on strategic systems. However, in 2000, despite lower investment in strategic systems (2000: £15m; 1999: £50m), the overall variance was negative as a result of amended product charge assumptions and other experience items. The contribution from shareholders' net worth of £127m (1999: £119m) reflects both the increased expected rate of return and a higher opening net worth. 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. There was a negative investment variance of £274m (1999: positive variance of £663m) in 2000. The investment return on the equity and property portfolio was 9.0% p.a. below the assumption for the period (1999: 15.4% p.a. above assumption). The effect of economic assumption changes resulted in an increase of £10m, compared with a reduction of £26m in 1999. P2 Legal & General Group Plc Supplementary financial statements on the Achieved Profits basis For the year to 31 December 2000 Investment management The operating profit from investment management was £85m compared with £99m in 1999. The profit from the UK Managed Funds business was £75m (1999: £96m). The contribution from new business declined from £50m in 1999 to £35m as volumes of new funds under management reduced from the exceptional £12.8bn achieved in 1999 to £11.4bn in 2000. Incurred and assumed expenses have increased to provide enhanced levels of service to a customer base which has greatly enlarged over recent years. The investment management operating profit also includes £3m (1999: £3m) from the Ventures operation and a profit of £2m (1999: £4m loss) from the unit trust and ISA/PEP business. International life and pensions Operating profit from international business was £86m in 2000 (1999: £87m), including a strong new business contribution of £43m (1999: £29m). USA The largest contributor to international profits is the highly successful US operation where the contribution from new business increased by 37% (at constant exchange rates) to £34m. Its business environment has been complicated by the introduction of the Triple X regulations for establishing statutory solvency provisions for business written from 2000 onwards. Capital management and re-pricing measures continue to be taken as the market evolves. The embedded value model has been developed to reflect the complexity of this changing environment, resulting in a reduction of £26m in the reported in-force contribution. Europe The operating profits of the Dutch and French businesses were £17m (1999: £14m) and £24m (1999: £15m) respectively. The combined contribution from new business was £9m (1999: £6m). Embedded values During 2000, the embedded value of the UK life and pensions business (excluding operational investments) grew by 3% from £3,824m to £3,939m, before the transfer from the UK Long Term Fund (LTF) of £218m. The increased new business contribution and good operating performance more than offset the underperformance of equity markets. The embedded value of the UK Managed Funds, as a subsidiary activity of the LTF, is the value of the in-force business in excess of the net assets included in the MSS accounts. This value grew strongly from £130m at the end of 1999 to £171m at the end of 2000, before the distribution of £37m included in the profit reported on the MSS basis. A corresponding embedded value for the unit trust and ISA/PEP operations is not included. The embedded value of the international businesses grew from £489m to £578m, after net capital movements of £30m. Legal & General Group Plc P3 Consolidated Profit and Loss Account - Achieved Profits basis Year ended 31 December 2000 ---------------------------------------------------------------------- 2000 1999 £m £m UK life and pensions (Note 1) 454 412 International life and pensions (Note 1) -------- -------- - USA : 45: : 58: - Netherlands : 17: : 14: - France : 24: : 15: -------- -------- 86 87 -------- -------- 540 499 Investment management 85 99 General insurance 20 25 Other income 33 29 -------- -------- Operating profit 678 652 Variation from longer term investment return (306) 670 Change in equalisation provision (6) (5) Effect of economic assumption changes 26 (23) -------- -------- Profit on ordinary activities before tax 392 1,294 Tax on profit on ordinary activities (149) (295) -------- -------- Profit for the financial period 243 999 ======== ======== Dividends payable 243 212 Earnings per share - based on operating profit 9.49p 9.56p - based on profit for the financial period 4.74p 19.57p Diluted earnings per share - based on operating profit 9.47p 9.52p - based on profit for the financial period 4.73p 19.47p Dividend per share 4.71p 4.13p ====================================================================== Legal & General Group Plc P4 Consolidated Balance Sheet - Achieved Profits basis As at 31 December 2000 ---------------------------------------------------------------------- 2000 1999 £m £m Assets Investments 35,077 34,143 Assets held to cover linked liabilities 70,678 65,928 Long term in-force business 2,135 2,216 Other assets 2,491 2,084 --------- --------- 110,381 104,371 ========= ========= Liabilities Shareholders' funds (Note 4) 5,274 5,250 Fund for future appropriations 4,331 5,814 Technical provisions --------- --------- Technical provisions for linked liabilities: 70,566: : 65,742: Other long term business provisions : 26,692: : 24,538: General insurance provisions : 350: : 365: --------- --------- 97,608 90,645 Borrowings 571 426 Bank customer deposits 1,307 1,031 Other creditors 1,290 1,205 --------- --------- 110,381 104,371 ====================================================================== Legal & General Group Plc P5 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 2000 ---------------------------------------------------------------------- 1.Contribution from long term business 2000 1999 UK UK UK UK Life and Managed Life and Managed Pensions Funds+ Pensions Funds+ £m £m £m £m Contribution from new business 118 35 99 50 Contribution from in-force business 209 40 194 46 Contribution from shareholders' net worth 127 - 119 - ------- ------- ------- ------- Operating profit 454 75 412 96 Variation from longer term investment return* (274) (18) 663 17 Effect of economic assumption changes 10 2 (26) 3 ------- ------- ------- ------- Profit before tax 190 59 1,049 116 Tax (75) (18) (243) (35) ------- ------- ------- ------- Profit after tax 115 41 806 81 ======= ======= ======= ======= International Total International Total £m £m £m £m Contribution from new business 43 196 29 178 Contribution from in-force business 25 274 49 289 Contribution from shareholders' net worth 18 145 9 128 ------- ------- ------- ------- Operating profit 86 615 87 595 Variation from longer term investment return* (9) (301) (13) 667 Effect of economic assumption changes 14 26 0 (23) ------- ------- ------- ------- Profit before tax 91 340 74 1,239 Tax (32) (125) (26) (304) ------- ------- ------- ------- Profit after tax 59 215 48 935 ======= ======= ======= ======= + Included in the Investment management result of £85m (1999: £99m). * 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 2000 ---------------------------------------------------------------------- 2.Embedded value As at 31.12.00 As at 31.12.99 UK UK UK UK Life and Managed Life and Managed Pensions Funds Pensions Funds £m £m £m £m Shareholders' net worth 1,387 - 1,457 - Value of in-force business 2,334 134 2,367 130 ------- ------- ------- ------- Embedded value 3,721 134 3,824 130 ======= ======= ======= ======= International Total International Total £m £m £m £m Shareholders' net worth 222 1,609 135 1,592 Value of in-force business 356 2,824 326 2,823 ------- ------- ------- ------- Embedded value 578 4,433 461 4,415 ======= ======= ======= ======= For the UK life and pensions business, shareholders' net worth comprises the Shareholders' Retained Capital (SRC) on the MSS basis, adjusted for deferred acquisition costs, and the sub-fund, both net of allowance for tax; but excludes net assets of £201m (1999: £163m) of long term fund operational subsidiaries. ====================================================================== 3.Movement in embedded value 2000 1999 UK UK UK UK Life and Managed Life and Managed Pensions Funds Pensions Funds £m £m £m £m At 1 January 3,824 130 3,237 77 Profit after tax 115 41 806 81 Capital movements - - (21) - Distributions (218) (37) (198) (28) ------- ------- ------- ------- At 31 December 3,721 134 3,824 130 ======= ======= ======= ======= International Total International Total £m £m £m £m At 1 January 461 4,415 376 3,690 Exchange rate movement 28 28 (4) (4) ------- ------- ------- ------- 489 4,443 372 3,686 Profit after tax 59 215 48 935 Capital movements 34 34 45 24 Distributions (4) (259) (4) (230) ------- ------- ------- ------- At 31 December 578 4,433 461 4,415 ====================================================================== Legal & General Group Plc P7 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 2000 ---------------------------------------------------------------------- 4.Segmental analysis of shareholders' funds 2000 1999 £m £m Embedded value of life and pensions businesses: - UK 3,721 3,824 - USA 443 344 - Netherlands 67 62 - France 68 55 --------- --------- 4,299 4,285 Investment management* 268 222 General insurance 76 69 Banking 92 96 Corporate funds 539 578 --------- --------- 5,274 5,250 ========= ========= * Including £134m (1999: £130m) 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 includes the value of its in-force business 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 2000 ---------------------------------------------------------------------- 5.Embedded value assumptions UK life & 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 set by reference to the gilt assumption. As at 31.12.00 As at 31.12.99 % p.a. % p.a. Type of investment Gilts: Fixed interest 4.7 5.1 : RPI linked 4.7 5.1 Non-gilts: Fixed interest 5.3 - 6.5 6.4 : RPI linked 5.0 - 6.0 5.1 Equities and property 7.3 7.7 Risk discount rate (after tax) 7.2 7.6 Inflation Expenses/earnings 3.6 4.2 Indexation 2.6 3.2 The assumed returns on non-gilt securities are net of an allowance for default risk of 0.05% p.a.. ii) Assets are attributed to the with-profits fund, the statutory long term business provision for contracts not written in the with-profits fund, the SRC and the sub-fund. iii) The risk discount rate is 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. Assets retained in the long term fund (including those attributed to the SRC) to support the business are assumed not to be immediately available for distribution; and their value is the discounted value of future assumed distributions. iv) The value of the in-force business is 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 business not written in the with-profits fund whilst the solvency capital is provided by the SRC. v) Assets are valued at their 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. vi) The value of the sub-fund is the discounted value of projected investment returns for a period of 20 years. vii) The contribution from new business is calculated using actual acquisition costs. It reflects the profit arising at the time of sale and differences between actual and expected experience (except for investment return variance) on these policies during the year accumulated to the year end. viii) The cost of investment in the development of certain strategic systems is charged against in-force business at the beginning of the year. Legal & General Group Plc P9 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 2000 ---------------------------------------------------------------------- 5.Embedded value assumptions (continued) ix) Future bonus rates are 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 is assumed to be 10% throughout. x) The value of the in-force business reflects a prudent allowance for compensation and administration expenses in relation to pension transfers, opt-outs and FSAVCs. xi) Other actuarial assumptions are 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 by taking into account the improvement factors contained in CMI Report No.17. xii) Business in force comprises previously written single premium, regular premium and recurrent single premium contracts. For this purpose, DSS rebates are not treated as recurrent and the value arising therefrom is included in the value of new business as the premiums are received. xiii) Projected tax is determined assuming current tax legislation and rates, except where future changes have been announced. xiv) 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. The profit before tax is calculated by grossing up the after-tax profit by the corporation tax rate of 30% (1999: 30.25%), except for the contribution from shareholders' net worth. The grossing up rate for this contribution is derived from the tax attributed to the corresponding contribution on the MSS basis. To arrive at the operating profit, the contribution from shareholders' net worth is grossed up at a rate of 10% (1999: 10%) to reflect the tax associated with a longer term investment return. UK Managed Funds The value of the Managed Funds in-force business is based on a cashflow projection limited to 10 years. Where appropriate, the UK life & pensions assumptions are used. Fees are projected on rates which reflect current charges and, if less, anticipated trends. New business consists of monies received from new clients and incremental receipts from existing clients, but excludes the roll up of the investment returns. Legal & General Group Plc P10 Notes to Financial Statements - Achieved Profits basis Year ended 31 December 2000 ---------------------------------------------------------------------- 5.Embedded value assumptions (continued) International Key assumptions for the USA are: As at 31.12.00 As at 31.12.99 % p.a. % p.a. Reinvestment rate 7.0 7.6 Risk discount rate (after tax) 7.7 9.0 The assumed pre-tax return is projected from the actual investment portfolio less specific margins for the risks associated with the investments. 6.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 effect on the UK life and pensions embedded value of calculations at alternative discount rates and equities and property yields. As published 1% 1% 1% lower higher higher risk risk equities/ discount discount property rate rate yields Effect on embedded value at 31 December 2000 £3,721m +£310m -£270m +£300m It should be noted that in calculating the alternative values all other assumptions are left unchanged. ======================================================================

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