L&G 2008 Final Results Part 3

RNS Number : 4204P

Legal & General Group Plc

25 March 2009

 



International Financial Reporting Standards										Page 29
Operating profit income statement
For the year ended 31 December 2008
									2008	2007
							Notes		£m	£m
From continuing operations
Risk							3.01(a)		(603)	104
Savings							3.01(b)		66	112
Investment management							3.02		165	143
International							3.03		59	86
Group capital and financing							3.04		124	213
Operating (loss)/profit									(189)	658
Variation from longer term investment return							3.06		(1,239)	(90)
Release of 1996 Sub-fund									-	321
Property losses attributable to minority interests									(63)	(6)
(Loss)/profit from continuing operations before tax attributable to equity holders of the Company									(1,491)	883
Tax credit/(expense) attributable to equity holders of the Company							3.07		361	(165)
(Loss)/profit from ordinary activities after tax									(1,130)	718
Loss attributable to minority interests							3.15		63	6
(Loss)/profit attributable to equity holders of the Company									(1,067)	724
									p	p
Earnings per share							3.08
Based on operating (loss)/profit from continuing operations after tax attributable to equity holders
of the Company									(2.18)	7.17
Based on (loss)/profit attributable to equity holders of the Company									(17.88)	11.24
Diluted earnings per share							3.08
Based on operating (loss)/profit from continuing operations after tax attributable to equity holders
of the Company									(2.18)	7.13
Based on (loss)/profit attributable to equity holders of the Company									(17.88)	11.18
This supplementary operating profit information provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business. Supplementary IFRS operating profit is one of the Group's key performance indicators. New IFRS 8 segmentation has been adopted for 2008 to further improve shareholders' understanding of the Group's performance. The comparatives have been reclassified to reflect these changes. Appendix I provides a reconciliation of this segmentation basis with that provided in prior periods. Operating profit for the Risk segment represents the net capital invested/released from the non profit Risk businesses (individual and group protection, and individual and bulk purchase annuities) and the operating profit of our General insurance business. This incorporates the total investment return on assets backing the liabilities of the non profit Risk businesses which in 2008 includes £650m of additional reserves for non profit annuity credit default, bringing the total reserve to £1.2bn. General insurance operating profit includes a longer term expected investment return on shareholders' funds. Operating profit for the Savings segment represents the net capital invested/released from the non profit Savings businesses (non profit investment bonds and non profit pensions (including SIPPs)), the with-profits transfer and the operating profit of our core retail investments business.  Operating profit for the Investment management and International segments incorporates a longer term expected investment return on the shareholders' funds within the Investment management and Netherlands' operations. Investment return on Group capital incorporates a longer term expected investment return using longer term investment return assumptions applied to the average balance of Group invested assets (including interest bearing intra-group balances) calculated on a quarterly basis.
International Financial Reporting Standards										Page 30
Consolidated income statement
For the year ended 31 December 2008
									2008	2007
							Notes		£m	£m
Revenue
Gross written premiums							3.09		5,895	4,793
Outward reinsurance premiums									(569)	(517)
Net change in provision for unearned premiums									1	7
Net premiums earned									5,327	4,283
Fees from fund management and investment contracts									740	640
Investment return									(37,749)	13,225
Operational income									38	54
Total revenue									(31,644)	18,202
Expenses
Claims and change in insurance liabilities									3,287	4,467
Reinsurance recoveries									(587)	(345)
Net claims and change in insurance liabilities									2,700	4,122
Change in provisions for investment contract liabilities									(33,313)	11,999
Acquisition costs									776	848
Finance costs									379	214
Other expenses									773	662
Transfers from unallocated divisible surplus1									(806)	(438)
Total expenses									(29,491)	17,407
(Loss)/profit before income tax									(2,153)	795
Income tax credit attributable to policyholder returns									662	88
(Loss)/profit from continuing operations before income tax attributable to equity holders of the Company									(1,491)	883
Total income tax credit/(expense)									1,023	(77)
Income tax credit attributable to policyholder returns									(662)	(88)
Income tax credit/(expense) attributable to equity holders							3.07		361	(165)
(Loss)/profit from ordinary activities after income tax									(1,130)	718
Attributable to:
Minority interests									(63)	(6)
Equity holders of the Company									(1,067)	724
Dividend distributions to equity holders of the Company during the year									367	369
Dividend distributions to equity holders of the Company proposed after the year end									120	247
									p	p
Earnings per share
Based on (loss)/profit attributable to equity holders of the Company							3.08		(17.88)	11.24
Diluted earnings per share
Based on (loss)/profit attributable to equity holders of the Company							3.08		(17.88)	11.18
1. 2007 includes £321m release of 1996 Sub-fund.
International Financial Reporting Standards										Page 31
Consolidated balance sheet
As at 31 December 2008
									2008	2007
							Notes		£m	£m
Assets
Investment in associates									14	14
Plant and equipment									75	79
Investment property									3,969	5,969
Financial investments							3.11		234,514	261,718
Reinsurers' share of contract liabilities									1,997	1,530
Purchased interest in long term businesses and other intangible assets									227	19
Deferred acquisition costs									2,112	1,696
Deferred tax asset									988	-
Income tax recoverable									8	4
Other assets									2,135	1,519
Cash and cash equivalents									10,688	8,737
Total assets									256,727	281,285
Equity
Share capital									147	157
Share premium account									936	927
Employee scheme shares									(46)	(42)
Capital redemption and other reserves									(42)	59
Retained earnings									2,593	4,345
Shareholders' equity							3.13		3,588	5,446
Minority interests							3.15		144	178
Total equity							3.16		3,732	5,624
Liabilities
Subordinated borrowings							3.14		1,657	1,461
Participating insurance contracts							3.17		9,384	11,663
Participating investment contracts							3.18		6,992	7,462
Unallocated divisible surplus									913	1,721
Value of in-force non-participating contracts									(171)	(276)
Participating contract liabilities									17,118	20,570
Non-participating insurance contracts							3.17		25,841	22,873
Non-participating investment contracts							3.18		196,698	224,906
Non-participating contract liabilities									222,539	247,779
Senior borrowings							3.14		2,314	1,327
Provisions									741	742
Deferred tax liabilities									259	296
Income tax liabilities									5	113
Payables and other financial liabilities									6,613	1,609
Other liabilities									997	852
Net asset value attributable to unit holders									752	912
Total liabilities									252,995	275,661
Total equity and liabilities									256,727	281,285
International Financial Reporting Standards										Page 32
Consolidated statement of recognised income and expense
For the year ended 31 December 2008
									2008	2007
									£m	£m
Exchange differences on translation of overseas operations									139	4
Actuarial gains/(losses) on defined benefit pension schemes									18	(40)
Actuarial (gains)/losses on defined benefit pension schemes transferred to unallocated divisible surplus									(8)	16
Net change in financial investments designated as available-for-sale									(56)	1
Income/(expense) recognised directly in equity, net of tax									93	(19)
(Loss)/profit from ordinary activities after income tax									(1,130)	718
Total recognised income and expense									(1,037)	699
Attributable to:
Minority interests									(63)	(6)
Equity holders of the Company									(974)	705
International Financial Reporting Standards										Page 33
Consolidated cash flow statement
For the year ended 31 December 2008
									2008	2007
							Notes		£m	£m
Cash flows from operating activities
(Loss)/profit from ordinary activities after income tax									(1,130)	718
Adjustments for non cash movements in net (loss)/profit for the period
Realised and unrealised losses/(gains) on financial investments and investment properties									48,376	(4,862)
Investment income									(10,086)	(7,797)
Interest expense									379	214
Income tax (credit)/expense									(1,023)	77
Other adjustments									77	46
Net decrease/(increase) in operational assets
Investments designated as held for trading or fair value through profit or loss									2,161	(8,322)
Investments designated as available-for-sale									(93)	(98)
Other assets									(1,702)	(230)
Net (decrease)/increase in operational liabilities
Insurance contracts									(1,479)	152
Transfer from unallocated divisible surplus									(798)	(455)
Investment contracts									(43,485)	17,686
Value of in-force non-participating contracts									105	115
Other liabilities									541	(73)
Cash used in operations									(8,157)	(2,829)
Interest paid									(377)	(214)
Interest received									5,214	4,202
Income tax paid									(208)	(244)
Dividends received									4,614	3,312
Net cash flows from operating activities									1,086	4,227
Cash flows from investing activities
Net acquisition of plant and equipment									(14)	(58)
Acquisitions (net of cash acquired)							3.10		1,004	-
Net cash flows from investing activities									990	(58)
Cash flows from financing activities
Dividend distributions to ordinary equity holders of the Company during the year									(367)	(369)
Proceeds from issue of ordinary share capital									10	4
Purchase of employee scheme shares									(9)	(5)
Purchase of shares under share buyback programme							3.12		(523)	(320)
Proceeds from borrowings									3,568	1,948
Repayment of borrowings									(2,960)	(1,637)
Net cash flows from financing activities									(281)	(379)
Net increase in cash and cash equivalents									1,795	3,790
Exchange gains on cash and cash equivalents									156	17
Cash and cash equivalents at 1 January									8,737	4,930
Cash and cash equivalents at 31 December									10,688	8,737
The Group's consolidated cash flow statement includes all cash and cash equivalent flows, including those relating to the UK long term funds.
International Financial Reporting Standards										Page 34
Notes to the Financial Statements
3.01  Risk and Savings operating profit
(a)  Risk operating profit									2008	2007
									£m	£m
Non profit Risk1									(602)	184
General insurance									(2)	(67)
Other2									1	(13)
Total Risk operating (loss)/profit									(603)	104
1. Includes £650m of additional reserves for non profit annuity credit default, bringing the total reserve to £1.2bn. Non profit Risk includes individual and group protection, and individual and bulk purchase annuities.
2. Other comprises estate agencies and housing related business conducted through our regulated mortgage network. It also includes Nationwide Life Risk business and business unit costs of £3m (2007: £4m) allocated to the Risk business.
(b)  Savings operating profit									2008	2007
									£m	£m
Non profit Savings1									(20)	7
With-profits business2									107	106
									87	113
Core retail investments									-	12
Other3									(21)	(13)
Total Savings operating profit									66	112
1. Non profit Savings businesses includes non profit investment bonds and non profit pensions (including SIPPs).
2. With-profits business operating profit is the shareholders' share of policyholder bonuses.
3. Other includes Suffolk Life, operations in Ireland, Nationwide Life Savings business and business unit costs of £3m (2007: £4m), allocated to the Savings business.
(c)  Analysis of net capital released from Society non profit business
									2008	2007
							Notes		£m	£m
Non profit business operating (loss)/profit comprises:
	Expected capital release on existing business								453	406
	New business strain								(334)	(344)
	Experience variances						3.01(d)		(315)	115
	Changes to non-economic assumptions						3.01(e)		(660)	(137)
	Changes to FSA reporting and capital rules								-	37
	Movements in non-cash items						3.01(f)		380	61
	Other								31	(4)
									(445)	134
	Tax gross-up								(177)	57
									(622)	191
Attributable to:
Non profit Risk businesses									(602)	184
Non profit Savings businesses									(20)	7
Non profit business operating (loss)/profit represents the capital and profit generated in the period from the in-force non profit business if the embedded value assumptions are borne out in practice. The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model.   Both new business strain and expected capital release exclude required solvency margin from the liability calculation as is required by the ABI SORP. On average, the capital invested in new non profit business, including solvency margin, is repaid from product cash flows in approximately 7 years.
International Financial Reporting Standards										Page 35
Notes to the Financial Statements
3.01  Risk and savings operating profit (continued)
An analysis of the experience variances, valuation assumption changes and non-cash items, all net of tax, is provided below:
(d)  Experience variances
									2008	2007
									£m	£m
Persistency									7	10
Mortality/morbidity									25	22
Expenses									11	(13)
BPA data loading									22	3
Project and development costs1									(95)	(44)
Investment2									(296)	134
Other									11	3
									(315)	115
1. 2008 includes project and development costs of £95m relating to continued investment in internal and other customer facing systems.
2. 2008 includes £296m of negative investment variances, of which more than half arises from the deferral of tax relief on expenses as a result of movements in investment markets and is fully offset by a movement in the deferred tax asset element of non cash items. The remainder relates to the annuity business where the valuation basis was strengthened due to the reduction in gilt yields.
(e)  Changes to valuation assumptions
									2008	2007
									£m	£m
Persistency									12	-
Mortality/morbidity1									(26)	(121)
Expenses									(57)	(37)
Short term default allowance2									(650)	-
Other									61	21
									(660)	(137)
1. 2007 includes £(214)m relating to the strengthening of assumptions for annuitant longevity on existing business, offset by £64m relating to changes to the assumptions for the proportions married.
2. 2008 includes a £650m increase in the non profit annuity credit default reserve. The tax effect of the short term default allowance is included in the deferred tax element of non-cash items.
(f)  Movements in non-cash items
									2008	2007
									£m	£m
Deferred tax									413	(30)
Deferred acquisition costs									20	114
Deferred income liabilities									30	(72)
Other									(83)	49
									380	61
International Financial Reporting Standards										Page 36
Notes to the Financial Statements
3.02  Investment management operating profit
									2008	2007
									£m	£m
Managed pension funds									117	103
Private equity									(1)	-
Property									4	6
Other income1									52	38
Legal & General Investment Management									172	147
Institutional unit trusts2									(7)	(4)
Total Investment management operating profit									165	143
1. Other income includes £35m of profits arising from the provision of investment management services charged to the Group's Risk and
Savings businesses (2007: £23m).
2. Investment management operating profit excludes core retail investments, of £nil (2007: £12m), which has been disclosed as part of
Savings. The comparatives have been reclassified accordingly.
3.03  International operating profit
									2008	2007
									£m	£m
USA									39	59
Netherlands									6	11
France									14	16
Total International operating profit									59	86
Exchange rates are provided in Note 3.24.
3.04  Group capital and financing operating profit
									2008	2007
									£m	£m
Investment return1									351	387
Interest expense2									(198)	(179)
Investment expenses									(5)	(5)
Unallocated corporate expenses									(9)	(11)
Defined benefit pension scheme3									(15)	21
Total Group capital and financing operating profit									124	213
1. The longer term expected investment return of £351m (2007: £387m) reflects an average return of 7% (2007: 7%) on the average balance of invested assets held within Group capital and financing (including interest bearing intra-group balances) calculated on a quarterly basis. The invested assets (including interest bearing intra-group balances) held within Group capital and financing amounted to £4.8bn at 31 December 2008 (2007: £5.7bn).
2. Interest expense excludes interest on non recourse financing (see Note 3.14).
3. The defined benefit pension scheme (expense)/income includes the actuarial gains and losses arising on annuity assets held by the schemes that have been purchased from Legal & General Assurance Society Limited. Under IFRS, these annuity assets cannot be classified as plan assets in accordance with IAS 19 and so the associated actuarial gains and losses cannot be taken to the statement of recognised income and expense (2008 expense: £15m; 2007 income: £4m). The 2007 comparative also includes income of £17m arising from a pension deficit reduction payment which was charged to the operating segments in 2008.
International Financial Reporting Standards										Page 37
Notes to the Financial Statements
3.05  General insurance operating profit, underwriting result and combined operating ratios
					Operating	Under-	Combined	Operating	Under-	Combined
					(loss)/	writing	operating	(loss)/	writing	operating
					profit	result	ratio	profit	result	ratio
					2008	2008	2008	2007	2007	2007
					£m	£m	%	£m	£m	%
From continuing operations
Household1					(12)	(26)	110	(86)	(101)	145
Other business2					10	8	86	19	15	74
					(2)	(18)	108	(67)	(86)	131
1. Household business in 2007 includes a loss of £76m net of reinsurance as a result of flood related claims in June and July 2007.
2. Other business in 2007 includes £6m profit following the withdrawal from the healthcare business in the first quarter.
The combined operating ratio is:
	Net incurred claims + Expenses + Net commission x 100 Net earned premiums Net written premiums
3.06  Variation from longer term investment return
									2008	2007
									£m	£m
General insurance									(29)	(9)
Investment management									7	4
Netherlands									4	(11)
Group capital and financing1									(1,221)	(74)
Total variation from longer term investment return									(1,239)	(90)
Investment return is allocated to operating profit by reference to a longer term rate of investment return for the respective invested funds. The difference between the amount allocated to operating profit and actual investment return is the variation from longer term investment return analysed above.
1. Comprises £(1,096)m (2007: £(75)m) relating to Society shareholder capital and £(125)m (2007: £1m) predominantly relating to the Group's treasury function.
International Financial Reporting Standards										Page 38
Notes to the Financial Statements
3.07  Analysis of tax
							Profit/(loss)	Tax	Profit/(loss)	Tax
							before tax	(expense)/	before tax	(expense)/
								credit		credit
							2008	2008	2007	2007
							£m	£m	£m	£m
From continuing operations
Risk							(603)	164	104	(34)
Savings							66	(7)	112	(33)
Investment management							165	(50)	143	(43)
International							59	(20)	86	(25)
Group capital and financing							124	(28)	213	(61)
Operating (loss)/profit							(189)	59	658	(196)
Variation from longer term investment return							(1,239)	302	(90)	31
Release of 1996 Sub-fund							-	-	321	-
Property losses attributable to minority interests							(63)	-	(6)	-
(Loss)/profit from continuing operations before tax/Tax							(1,491)	361	883	(165)
Only the element of total tax attributable to equity holders' profit/loss is shown explicitly in the analysis above; the tax attributable to policyholder returns is included within expenses in the operating profit income statement. No deferred tax is provided at the incremental rate on the undeclared surplus of £527m (2007: £2,047m) in Society's LTF represented by the Shareholder Retained Capital (SRC), on the grounds that, at the balance sheet date, no obligation to make a declaration of surplus actually exists and there is no expectation that such a declaration will occur. The maximum amount of incremental tax which would crystallise on such a declaration of surplus is estimated to be £nil (2007: £nil).
International Financial Reporting Standards										Page 39
Notes to the Financial Statements
3.08  Earnings per share
(a)  Earnings per share
			Loss	Tax	Loss	Earnings	Profit	Tax	Profit	Earnings
			before tax	credit	after tax	per share	before tax	(expense)/	after tax	per share
								credit
			2008	2008	2008	2008	2007	2007	2007	2007
			£m	£m	£m	p	£m	£m	£m	p
Operating (loss)/profit from continuing
operations			(189)	59	(130)	(2.18)	658	(196)	462	7.17
Variation from longer term investment return			(1,239)	302	(937)	(15.70)	(90)	31	(59)	(0.91)
Release of 1996 Sub-fund			-	-	-	-	321	-	321	4.98
Earnings per share based on (loss)/profit
attributable to equity holders			(1,428)	361	(1,067)	(17.88)	889	(165)	724	11.24
(b)  Diluted earnings per share
(i)  Based on operating (loss)/profit from continuing operations after tax
					Loss	Number	Earnings	Profit	Number	Earnings
					after tax	of shares1	per share	after tax	of shares1	per share
					2008	2008	2008	2007	2007	2007
					£m	m	p	£m	m	p
Operating (loss)/profit from continuing operations after tax					(130)	5,968	(2.18)	462	6,444	7.17
Net shares under options allocable for no further consideration2					-	22	-	-	34	(0.04)
Diluted earnings per share					(130)	5,990	(2.18)	462	6,478	7.13
(ii)  Based on (loss)/profit attributable to equity holders
					Loss	Number	Earnings	Profit	Number	Earnings
					after tax	of shares1	per share	after tax	of shares1	per share
					2008	2008	2008	2007	2007	2007
					£m	m	p	£m	m	p
(Loss)/profit attributable to equity holders of the Company					(1,067)	5,968	(17.88)	724	6,444	11.24
Net shares under options allocable for no further consideration2					-	22	-	-	34	(0.06)
Diluted earnings per share					(1,067)	5,990	(17.88)	724	6,478	11.18
The number of shares in issue at 31 December 2008 was 5,861,627,994 (2007: 6,296,321,160).
1. Weighted average number of shares.   2. Net shares under options allocable for no further consideration are anti-dilutive and have therefore been excluded from the diluted earnings per share calculation.
International Financial Reporting Standards										Page 40
Notes to the Financial Statements
3.09  Gross written premiums
									2008	2007
									£m	£m
From continuing operations
Risk
Non-participating Risk business									4,038	3,105
General insurance
- Household									267	255
- Other business									29	52
Total Risk									4,334	3,412
Savings
Non-participating Savings business									49	47
Participating business									551	382
Total Savings									600	429
International
USA									397	345
Netherlands									278	259
France									286	348
Total International									961	952
Total gross written premiums									5,895	4,793
3.10  Acquisitions
										Total net
						Date of	Cash	Transaction	Total	assets
						acquisition	paid	costs	cost	acquired
Company name					Notes		£m	£m	£m	£m
Nationwide Life Limited					(i)	31/01/08	250	2	252	252
Nationwide Unit Trust Managers Limited					(ii)	31/01/08	49	1	50	50
Suffolk Life Group Plc					(iii)	06/05/08	62	1	63	63
The Group has acquired 100% of the shares of each company. No goodwill has arisen in respect of these acquisitions.
(i) Nationwide Life Limited The values of the purchased interest in long term business on acquired insurance and investment contracts have been calculated using discounted cash flow methodology. These were recognised on the balance sheet at £127m and £2m gross of tax respectively (with corresponding deferred tax liabilities of £19m and £1m). These intangible assets will be amortised in line with the expected emergence of profit from the business (over 12 years). Since 31 January 2008, Nationwide Life Limited has contributed a profit of £26m to consolidated loss before tax before amortisation of the purchased interest in long term business. (ii) Nationwide Unit Trust Managers Limited The value of the purchased interest in long term business on acquired investment contracts has been calculated using discounted cash flow methodology and recognised on the balance sheet at £29m gross of tax, with a corresponding deferred tax liability of £8m. This intangible asset will be amortised in line with the expected emergence of profit from the business (over 10 years). Since 31 January 2008, Nationwide Unit Trust Managers Limited has contributed a loss of £3m to consolidated loss before tax before amortisation of the purchased interest in long term business. (iii) Suffolk Life Group Plc The value of the purchased interest in long term business on acquired investment contracts has been calculated using discounted cash flow methodology and recognised on the balance sheet at £47m gross of tax, with a corresponding deferred tax liability of £13m. The value of the acquired customer relationship intangible has been calculated using the discounted cash flow methodology and recognised on the balance sheet at £15m gross of tax, with a corresponding deferred tax liability of £3m. The intangible assets will be amortised in line with the expected emergence of profit from the business (over 15 years). Since 6 May 2008, Suffolk Life Group Plc has contributed a profit of £2m to consolidated loss before tax before amortisation of the purchased intangibles.
International Financial Reporting Standards										Page 41
Notes to the Financial Statements
3.10  Acquisitions (continued)
(i) Nationwide Life Limited - Assets and liabilities at date of acquisition
								Book value	Adjustments	Fair value
								£m	£m	£m
Assets
Purchased interest in long term businesses and other intangible assets								-	129	129
Financial investments								1,276	-	1,276
Reinsurers' share of contract liabilities								286	-	286
Deferred acquisition costs								15	(15)	-
Income tax recoverable								15	(15)	-
Other assets								4	-	4
Cash and cash equivalents								599	-	599
Total assets								2,195	99	2,294
Liabilities
Non-participating contract liabilities								1,221	-	1,221
Tax liabilities								8	15	23
Other liabilities								801	(3)	798
Total liabilities								2,030	12	2,042
Net assets								165	87	252
Adjustments include the recognition of acquired intangibles and application of consistent Group accounting policies.
(ii) Nationwide Unit Trust Managers Limited - Assets and liabilities at date of acquisition
								Book value	Adjustments	Fair value
								£m	£m	£m
Assets
Purchased interest in long term businesses and other intangible assets								-	29	29
Deferred acquisition costs								29	(29)	-
Other assets								70	-	70
Cash and cash equivalents								30	-	30
Total assets								129	-	129
Liabilities
Provisions								14	-	14
Deferred income liabilities								1	(1)	-
Tax liabilities								5	5	10
Other liabilities								55	-	55
Total liabilities								75	4	79
Net assets								54	(4)	50
Adjustments include the recognition of acquired intangibles and application of consistent Group accounting policies.
International Financial Reporting Standards										Page 42
Notes to the Financial Statements
3.10  Acquisitions (continued)
(iii) Suffolk Life Group Plc - Assets and liabilities at date of acquisition
								Book value	Adjustments	Fair value
								£m	£m	£m
Assets
Purchased interest in long term businesses and other intangible assets								-	62	62
Plant and equipment								1	-	1
Investment property								503	-	503
Financial investments								1,763	(2)	1,761
Income tax recoverable								1	-	1
Other assets								60	-	60
Cash and cash equivalents								738	2	740
Total assets								3,066	62	3,128
Liabilities
Non-participating contract liabilities								2,893	-	2,893
Senior borrowings								153	-	153
Tax liabilities								-	16	16
Other liabilities								3	-	3
Total liabilities								3,049	16	3,065
Net assets								17	46	63
Adjustments include the recognition of acquired intangibles and application of consistent Group accounting policies.
International Financial Reporting Standards										Page 43
Notes to the Financial Statements
3.11  Financial investments
									2008	2007
									£m	£m
Equities									107,408	149,567
Unit trusts									5,456	4,659
Debt securities									112,013	104,087
Accrued interest									1,607	1,363
Derivative assets1									6,130	694
Loans and receivables									1,900	1,348
									234,514	261,718
1. Derivative assets include £3,765m (2007: £455m) held on behalf of unit linked policyholders. Non unit linked derivative assets have increased, primarily as a result of sterling interest rate hedging and the acquisition of assets backing guaranteed equity bond contacts with Nationwide Life.
3.12  Share capital and share premium
								2008
								Number of	2008	2007
Authorised share capital								shares	£m	£m
At 31 December: ordinary shares of 2.5p each							9,200,000,000		230	230
									Share	Share
								Number of	capital	premium
Issued share capital, fully paid								shares	£m	£m
As at 1 January 2008							6,296,321,160		157	927
Shares cancelled under share buyback programme1							(449,891,914)		(11)	-
Options exercised under share option schemes
- Executive share option scheme								640,846	-	1
- Savings related share option scheme							14,557,902		1	8
As at 31 December 2008							5,861,627,994		147	936
									Share	Share
								Number of	capital	premium
Issued share capital, fully paid								shares	£m	£m
As at 1 January 2007							6,532,261,961		163	923
Shares cancelled under share buyback programme1							(241,207,267)		(6)	-
Options exercised under share option schemes
- Executive share option scheme								1,961,215	-	2
- Savings related share option scheme								3,305,251	-	2
As at 31 December 2007							6,296,321,160		157	927
1. During the year, 449,891,914 shares (2007: 241,207,267 shares) were repurchased and cancelled under the share buyback programme
representing 7.1% (2007: 3.7%) of opening issued share capital, at a cost of £523m including expenses (2007: £320m).
There is one class of ordinary shares. All shares issued carry equal voting rights. The holders of the Company's ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings of the Company.
International Financial Reporting Standards										Page 44
Notes to the Financial Statements
3.13  Segmental analysis of shareholders' equity
									2008	2007
									£m	£m
Risk
General insurance									99	114
Other									2	(1)
Total Risk									101	113
Savings
Core retail investments									59	39
Other									14	14
Total Savings									73	53
Investment management									322	310
International
USA									932	643
Netherlands									135	112
France									193	130
Emerging markets									12	3
Total International									1,272	888
Group capital and financing									1,820	4,082
Shareholders' equity									3,588	5,446
At 31 December 2008, the Group adopted IFRS 8, 'Operating Segments'. The Group has five reporting segments comprising Risk, Savings, Investment management, International, and Group capital and financing.   The Risk segment comprises individual and group protection, individual and bulk purchase annuities, and general insurance, together with estate agencies and the housing related business conducted through our regulated mortgage network.   The Savings segment comprises non profit investment bonds, non profit pensions (including SIPPs), ISAs, retail unit trusts, and all with-profits products. 'Other' principally comprises the Group's interest in Cofunds. The Investment management segment comprises institutional fund management and institutional unit trust business.  The International segment comprises businesses in the United States, France, the Netherlands and emerging markets.   Shareholders' equity supporting the non profit Risk and Savings businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within Group capital and financing. This also includes capital within the Group's treasury function and unit trust funds and property partnerships, which are managed on behalf of clients but are required to be consolidated under IFRS, which do not constitute a separately reportable segment.  Transactions between reportable segments are on normal commercial terms, and are included within the reported segments. The Group assesses performance and allocates resources on the basis of IFRS operating profit before tax, (set out in the Operating profit income statement). Segmental IFRS operating profit before tax is reconciled to the consolidated profit from continuing operations before tax attributable to equity holders and consolidated profit from ordinary activities after income tax.  The Group considers additional performance measures in assessing the performance of the segments. These include new business levels (Notes 2.01-2.12) and EEV Reporting (Notes 4.01-4.17).
International Financial Reporting Standards										Page 45
Notes to the Financial Statements
3.14  Analysis of borrowings
									2008	2007
									£m	£m
Subordinated borrowings
6.385% Sterling perpetual capital securities									692	620
5.875% Sterling undated subordinated notes									426	427
4.0% Euro subordinated notes 2025									539	414
Total subordinated borrowings									1,657	1,461
Senior borrowings
Sterling medium term notes 2031-2041									608	608
Euro commercial paper 2009									609	118
Bank loans 2009									160	13
Non recourse financing
- US Dollar Triple X securitisation 2025									369	266
- US Dollar Triple X securitisation 2037									308	223
- Sterling property partnership loans 2011									101	99
- Suffolk Life unit linked borrowings									159	-
Total senior borrowings									2,314	1,327
Total borrowings									3,971	2,788
Total borrowings (excluding non recourse financing)									3,034	2,200
Subordinated borrowings 6.385% Sterling perpetual capital securities In 2007, Legal & General Group Plc issued £600m of 6.385% sterling perpetual capital securities. Simultaneous with the issuance, the fixed coupon was swapped into six month LIBOR plus 0.94% per annum. These securities are callable at par on 2 May 2017 and every three months thereafter. If not called, the coupon from 2 May 2017 will be reset to three month LIBOR plus 1.93% per annum. For regulatory purposes these securities are treated as innovative tier I capital. These securities have been classified as liabilities as the interest payments become mandatory in certain circumstances. 5.875% Sterling undated subordinated notes In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% per annum. These notes are treated as upper tier II capital for regulatory purposes. These securities have been classified as liabilities as the interest payments become mandatory in certain circumstances. 4.0% Euro subordinated notes 2025 In 2005, Legal & General Group Plc issued €600m of 4.0% Euro dated subordinated notes. The proceeds were swapped into sterling. The notes are callable at par on 8 June 2015 and each year thereafter. If not called, the coupon from 8 June 2015 will reset to a floating rate of interest based on prevailing three month Euribor plus 1.7% per annum. These notes mature on 8 June 2025 and are treated as lower tier II capital for regulatory purposes. Non recourse financing US Dollar Triple X securitisation 2025 In 2004, a subsidiary of Legal & General America Inc issued US$550m of non recourse debt in the US capital markets to meet the Triple X reserve requirements of part of the US term insurance written up to 2005. It is secured on the cash flows related to that tranche of business. US Dollar Triple X securitisation 2037 In 2006, a subsidiary of Legal & General America Inc issued US$450m of non recourse debt in the US capital markets to meet the Triple X reserve requirements of part of the US term insurance written after 2005 and 2006. It is secured on the cash flows related to that tranche of business. Sterling property partnership loans 2011 The property partnership loans are secured on specific properties.  Suffolk Life unit linked borrowings These borrowings relate solely to client investments. As at 31 December 2008, the Group had in place a £960m syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2012. Short term assets available at the holding company level exceeded the amount of non-unit linked short term borrowings of £763m (Euro Commercial Paper and Bank Loans). 2008 finance costs include £34m of interest payable on cash collateral lodged by counterpartiers in respect of certain derivative assets (2007: £nil).
3.15  Minority interests
Minority interests represent third party interests in property investment entities which are consolidated in the Group's results.
International Financial Reporting Standards										Page 46
Notes to the Financial Statements
3.16  Total equity
									2008	2007
									£m	£m
As at 1 January									5,624	5,839
Total recognised income and expense									(1,037)	699
Issue of share capital									10	4
Share buyback									(523)	(320)
Net movements in employee scheme shares									(4)	1
Dividend distributions to equity holders of the Company during the year									(367)	(369)
Movements in minority interests including disposals									29	(230)
As at 31 December									3,732	5,624
3.17  Insurance contract liabilities
(a)   Analysis of insurance contract liabilities
							Gross	Reinsurance	Gross	Reinsurance
							2008	2008	2007	2007
						Notes	£m	£m	£m	£m
Life and pensions participating insurance contracts						3.17(b)	9,384	(1)	11,663	(1)
Life and pensions non-participating insurance contracts						3.17(c)	25,582	(1,847)	22,568	(1,302)
General insurance contracts						3.17(d)	259	(11)	305	(19)
Insurance contract liabilities							35,225	(1,859)	34,536	(1,322)
(b)   Movement in participating insurance contract liabilities
							Gross	Reinsurance	Gross	Reinsurance
							2008	2008	2007	2007
							£m	£m	£m	£m
As at 1 January							11,663	(1)	12,660	(1)
New liabilities in the year							333	-	219	-
Liabilities discharged in the year							(1,628)	-	(1,684)	-
Unwinding of discount rates							383	-	520	-
Effect of change in non-economic assumptions							58	-	(102)	-
Effect of change in economic assumptions							(1,348)	-	50	-
Other							(77)	-	-	-
As at 31 December							9,384	(1)	11,663	(1)
(c)   Movement in non-participating insurance contract liabilities
							Gross	Reinsurance	Gross	Reinsurance
							2008	2008	2007	2007
							£m	£m	£m	£m
As at 1 January							22,568	(1,302)	21,321	(1,237)
New liabilities in the year							3,020	(262)	2,463	(286)
Liabilities discharged in the year							(1,493)	79	(1,108)	78
Unwinding of discount rates							1,022	(88)	876	(126)
Effect of change in non-economic assumptions1							(87)	121	1	179
Effect of change in economic assumptions2							(1,366)	(26)	(902)	-
Foreign exchange adjustments							946	(82)	109	2
Acquisitions							1,172	(286)	-	-
Other							(200)	(1)	(192)	88
As at 31 December							25,582	(1,847)	22,568	(1,302)
1. In 2007, the Effect of change in non-economic assumptions includes an increase of approximately £214m relating to the strengthening of assumptions for annuitant longevity on existing business. This was largely offset by mortality and changes to expense assumptions on term business (on a gross of reassurance basis), which reflected improved experience.  2. In 2008, the Effect of changes in economic assumptions includes the impact arising from the current interest rate environment and increased credit spreads reducing liabilities, partially offset by the £650m of additional reserves for non profit annuity credit default, bringing the total reserve to £1.2bn.
International Financial Reporting Standards										Page 47
Notes to the Financial Statements
3.17  Insurance contract liabilities (continued)
(d)   Analysis of General insurance contract liabilities
							Gross	Reinsurance	Gross	Reinsurance
							2008	2008	2007	2007
							£m	£m	£m	£m
Outstanding claims							99	(4)	132	(12)
Claims incurred but not reported							29	-	40	-
Unearned premiums							131	(7)	133	(7)
General insurance contract liabilities							259	(11)	305	(19)
(e)   Movement in General insurance claim liabilities
							Gross	Reinsurance	Gross	Reinsurance
							2008	2008	2007	2007
							£m	£m	£m	£m
As at 1 January							172	(12)	137	(5)
Claims arising							231	(4)	323	(6)
Claims paid							(235)	6	(255)	(2)
Adjustments to prior year liabilities							(40)	6	(33)	1
As at 31 December							128	(4)	172	(12)
3.18  Investment contract liabilities
(a)   Analysis of investment contract liabilities
							Gross	Reinsurance	Gross	Reinsurance
							2008	2008	2007	2007
							£m	£m	£m	£m
Participating investment contracts							6,992	(12)	7,462	(74)
Non-participating investment contracts							196,698	(126)	224,906	(134)
Investment contract liabilities							203,690	(138)	232,368	(208)
(b)   Movement in investment contract liabilities
							Gross	Reinsurance	Gross	Reinsurance
							2008	2008	2007	2007
							£m	£m	£m	£m
As at 1 January							232,368	(208)	169,517	(227)
Reserves in respect of new business							38,583	(741)	75,969	(412)
Amounts paid on surrenders and maturities during the year							(36,852)	504	(24,706)	262
Investment return and related benefits							(33,500)	307	11,854	169
Management charges							(378)	-	(399)	-
Foreign exchange adjustments							527	-	133	-
Acquisitions							2,942	-	-	-
As at 31 December							203,690	(138)	232,368	(208)
International Financial Reporting Standards										Page 48
Notes to the Financial Statements
3.19  Value of policyholder assets held in Society and LGPL
									2008	2007
									£bn	£bn
With-profits business									24.0	29.5
Non profit business									30.4	30.7
									54.4	60.2
3.20  Non-linked business and Society shareholder capital invested asset mix and investment return
					Investment	With-profits	With-profits	With-profits	Non profit	Society
					return	asset share	non par	other		shareholder
										capital
As at 31 December 2008					%	%	%	%	%	%
Equities					(25)	39	3	(51)	-	43
Bonds					(5)	40	83	121	97	24
Property					(27)	16	1	-	-	6
Cash					4	5	13	30	3	27
						100	100	100	100	100
Investment return (% pa)					(11)	(18)	(2)	27	(7)	(23)
Invested assets (£bn) net of derivative liabilities						12.5	2.3	2.1	18.8	2.9
Invested assets (£bn) gross of derivative liabilities						12.6	2.3	2.1	20.6	2.9
As at 31 December 2007
Equities					9	45	4	(43)	-	69
Bonds					1	35	83	129	99	12
Property					(5)	17	2	-	-	12
Cash					5	3	11	14	1	7
						100	100	100	100	100
Investment return (% pa)					3	4	3	6	-	6
Invested assets (£bn) net of derivative liabilities						17.1	2.4	1.8	16.6	4.0
Invested assets (£bn) gross of derivative liabilities						17.1	2.4	1.8	17.1	4.0
All investment return percentages reflect average returns for the period.
In 2008, the percentage of Group capital invested in equities and property was 25% and 4% respectively (2007: 47% and 8%). An analysis
of Group capital can be found in Note 6.05.
International Financial Reporting Standards										Page 49
3.21  Sensitivities
General insurance sensitivity analysis
									Impact on	Impact on
									pre-tax profit	equity
									net of	net of
									reinsurance	reinsurance
									2008	2008
									£m	£m
Sensitivity test
Single storm event with 1 in 200 year probability									(50)	(36)
Subsidence event - worst claims ratio in last 30 years									(46)	(33)
Repeat of 1990 recession on ASU/DMI1/Household accounts									(39)	(28)
5% decrease in overall claims ratio									10	7
5% surplus over claims liabilities									6	4
1. Accident, sickness and unemployment (ASU)/Domestic mortgage indemnity (DMI)
3.22  Pension cost
The Legal & General Group UK Pension and Assurance Fund and the Legal & General Group UK Senior Pension Scheme are defined benefit pension arrangements and account for all UK and the majority of worldwide assets of, and contributions to, such arrangements. At 31 December 2008, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at £101m (2007: £130m). These amounts have been recognised in the financial statements with £59m charged against shareholder equity (2007: £77m) and £42m against the unallocated divisible surplus (2007: £53m).
International Financial Reporting Standards										Page 50
Notes to the Financial Statements
3.23  Contingent liabilities, guarantees and indemnities
Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance of actual experience from that assumed may result in such liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of such contracts, or the circumstances in which policyholders have entered into them (together in this paragraph 'liabilities'). The extent of such liabilities is influenced by a number of factors including the actions and requirements of the FSA, ombudsman rulings, industry compensation schemes and court judgments. The continuing general profile and emphasis being given by the FSA and other bodies to the suitability of the past sales of endowment policies, in the context of some mortgage transactions, has led to the continuing receipt of claims from holders of endowment policies. Various Group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. Provision for liabilities continues to be made and is regularly reviewed. However, it is not possible to predict, with certainty, the extent and the timing of the financial impact to which these claims, litigation or issues may arise. The relevant members of the Group nevertheless ensure that each makes prudent provision, as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet all reasonably foreseeable eventualities.    In 1975, Legal & General Assurance Society Limited (the Society) was required by the Institute of London Underwriters (ILU) to execute the ILU form of guarantee in respect of policies issued through the ILU's Policy Signing Office on behalf of NRG Victory Reinsurance Company Ltd (Victory), a company which was then a subsidiary of the Society. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to the Society against any liability the Society may have as a result of the ILU's requirement, and the ILU agreed that its requirement of the Society would not apply to policies written or renewed after the acquisition. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary of Berkshire Hathaway Inc. Whether the Society has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability, is uncertain. The Society has made no payment or provision in respect of this matter. Group companies have given indemnities and guarantees as a normal part of their operating activities or in relation to capital market transactions.
3.24  Foreign exchange rates
Principal rates of exchange used for translation are:
							01.01.08-		01.01.07-
							31.12.08	2008	31.12.07	2007
							Average	Year end	Average	Year end
United States Dollar							1.85	1.44	2.00	1.99
Euro							1.26	1.03	1.46	1.36

 

END

 

 

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