L&G 2008 Final Results Part 4

RNS Number : 4209P

Legal & General Group Plc

25 March 2009

 



European Embedded Value											Page 51
Consolidated income statement
For the year ended 31 December 2008
										2008	2007
											Restated5,6
								Notes		£m	£m
From continuing operations1
Risk								4.01		439	219
Savings								4.01		50	146
Investment management								4.02		130	120
International								4.03		100	136
Group capital and financing2								4.04		151	227
Operating profit										870	848
Variation from longer term investment return								4.07		(1,579)	116
Effect of economic assumption changes3,4								4.08		(609)	52
Property losses attributable to minority interests										(63)	(6)
Corporate restructure										-	161
(Loss)/profit from continuing operations before tax attributable to equity holders of the Company										(1,381)	1,171
Tax credit/(expense) on (loss)/profit from ordinary activities								4.10		327	(310)
Effect of UK Budget tax changes										-	86
Tax impact of corporate restructure										81	206
(Loss)/profit from ordinary activities after tax										(973)	1,153
Loss attributable to minority interests								3.15		63	6
(Loss)/profit attributable to equity holders of the Company										(910)	1,159
											Restated
										p	p
Earnings per share								4.11
Based on operating profit from continuing operations after tax attributable to equity holders
of the Company										10.66	9.06
Based on (loss)/profit attributable to equity holders of the Company										(15.25)	17.99
Diluted earnings per share								4.11
Based on operating profit from continuing operations after tax attributable to equity holders
of the Company										10.62	9.02
Based on (loss)/profit attributable to equity holders of the Company										(15.25)	17.89
For 2008 embedded value reporting:
1.     New IFRS 8 segmentation has been adopted for 2008 to further improve shareholders' understanding of the Group's performance (see Note 3.13). The comparatives have been reclassified to reflect these changes.
2.     Group capital and financing represents operating profit on the shareholder assets held within the covered business, reported on an embedded value basis, and operating profit on the shareholder assets held outside the covered business reported on an IFRS basis.
3.     In 2008, on a best estimate basis, Legal & General Pensions Limited has reserved an additional £313m to allow for credit defaults over the next four years. Economic assumption changes include £272m to reflect the present value and cost of capital of the in-force element of the additional reserve. New business contribution includes the remaining present value and cost of capital impact of £50m.
4.     Economic assumption changes also includes -£361m relating to the 0.8% increase in the UK risk discount rate from 7.5% to 8.3% during the year.
5.     A contingent loan has been advanced by Legal & General Assurance Society Limited to Legal & General Pensions Limited (LGPL) to finance the business that is reinsured to LGPL. For 2008 the loan asset has been treated as part of the value of in-force business and offsets LGPL's liability. Previously the value of the loan (2008: £786m; 2007: £614m) was included in free surplus, and the expected return on the loan (2008: £64m; 2007: £51m) included in contribution from shareholder net worth. 2007 comparatives have been restated accordingly.
6.     For 2008 the managed pension funds business within Investment management has been reported on an IFRS basis, as management believe IFRS to be the most appropriate reporting basis for the investment management business. Investment management operating profit excludes £35m (2007: £23m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis within Risk, Savings and Group capital and financing covered business on an EEV basis. This change has reduced 2007 operating profit before tax by £64m, profit after tax by £59m and shareholders' equity by £340m. 2007 comparatives have been restated accordingly.
European Embedded Value											Page 52
Consolidated balance sheet
As at 31 December 2008
										2008	2007
											Restated
								Notes		£m	£m
Assets
Investments										249,185	276,438
Long term in-force business asset										3,160	2,701
Other assets										7,315	4,828
										259,660	283,967
Equity and liabilities
Shareholders' equity								4.13/4.14		6,521	8,128
Minority interests								3.15		144	178
Total equity										6,665	8,306
Subordinated borrowings								3.14		1,657	1,461
Unallocated divisible surplus										913	1,721
Participating contract liabilities										16,205	18,849
Non-participating contract liabilities										222,539	247,779
Senior borrowings								3.14		2,314	1,327
Other liabilities and provisions										9,367	4,524
										259,660	283,967
Consolidated statement of recognised income and expense
For the year ended 31 December 2008
										2008	2007
											Restated
										£m	£m
Exchange differences on translation of overseas operations										196	18
Actuarial gains/(losses) on defined benefit pension schemes										12	(23)
Actuarial (gains)/losses on defined benefit pension schemes transferred to unallocated divisible surplus										(8)	16
Income recognised directly in equity, net of tax										200	11
(Loss)/profit from ordinary activities after tax										(973)	1,153
Total recognised income and expense										(773)	1,164
Attributable to:
Minority interests										(63)	(6)
Equity holders of the Company										(710)	1,170
European Embedded Value											Page 53
Notes to the Financial Statements
4.01  (Loss)/profit from continuing operations after tax
							Risk and	Investment	Inter-	Group	Total
							Savings	manage-	national	capital and
								ment		financing
For the year ended 31 December 2008					Notes		£m	£m	£m	£m	£m
Business reported on an EEV basis:
Contribution from new business after cost of capital							265		32		297
Contribution from in-force business:
- expected return1							370		100		470
- experience variances					4.05		12		(34)		(22)
- operating assumption changes					4.06		(100)		(15)		(115)
Development costs							(51)		-		(51)
Contribution from shareholder net worth2									17	256	273
Operating profit on covered business							496	-	100	256	852
Business reported on an IFRS basis:
General insurance					3.05		(2)				(2)
Core retail investments							-				-
Investment management3					4.02			130			130
Group capital and financing					4.04					(105)	(105)
Other4							(5)				(5)
Total operating profit							489	130	100	151	870
Variation from longer term investment return					4.07		(175)	7	(110)	(1,301)	(1,579)
Effect of economic assumption changes					4.08		(505)	-	(110)	6	(609)
Property losses attributable to minority interests							-	-	-	(63)	(63)
(Loss)/profit from continuing operations before tax							(191)	137	(120)	(1,207)	(1,381)
Tax credit/(expense) on (loss)/profit from ordinary activities							54	(42)	37	278	327
Tax impact of corporate restructure5							53	-	-	28	81
(Loss)/profit from ordinary activities after tax							(84)	95	(83)	(901)	(973)
Operating profit attributable to:
Risk							439
Savings							50
1. The expected return on in-force is based on the unwind of the discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the Risk and Savings business was £3,460m in 2008. This is adjusted for the effects of opening model changes (-£18m) to give an adjusted opening base VIF of £3,442m. This is then multiplied by the opening risk discount rate of 7.5% and the result grossed up at the notional attributed tax rate of 28% to give a return of £359m. This is added to the expected return on the in-force of businesses acquired in the year (£11m) to give a total UK expected return of £370m.
2. The 2008 Group capital and financing contribution from shareholder net worth (SNW) of £256m reflects an average return on the average balance of invested assets. This is offset by pre-tax corporate expenses charged to shareholders' funds of £12m, and an adjustment for opening tax and other modelling changes of £10m.
3. Investment management operating profit excludes £35m (2007: £23m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Risk, Savings and Group capital and financing covered business on an EEV basis.
4. On an EEV basis Nationwide Life, Suffolk Life, operations in Ireland and business unit costs allocated to the Risk and Savings business are included in the covered business operating profit. These are included within Other Risk and Other Savings operating profit on an IFRS basis.
5. In 2008 £0.9bn was transferred from Shareholder Retained Capital to shareholder capital held outside Society's long term fund. This transfer did not give rise to any incremental tax and therefore resulted in an £81m benefit to embedded value.
European Embedded Value											Page 54
Notes to the Financial Statements
4.01  (Loss)/profit from continuing operations after tax (continued)
							Risk and	Investment	Inter-	Group	Total
							Savings	manage-	national	capital and
								ment		financing
							Restated	Restated		Restated	Restated
For the year ended 31 December 2007					Notes		£m	£m	£m	£m	£m
Business reported on an EEV basis:
Contribution from new business after cost of capital							321		38		359
Contribution from in-force business:
- expected return							314		80		394
- experience variances					4.05		108		3		111
- operating assumption changes					4.06		(275)		2		(273)
Development costs							(44)		-		(44)
Contribution from shareholder net worth									13	296	309
Operating profit on covered business							424	-	136	296	856
Business reported on an IFRS basis:
General insurance					3.05		(67)				(67)
Core retail investments							12				12
Investment management1					4.02			120			120
Group capital and financing					4.04					(69)	(69)
Other							(4)				(4)
Total operating profit							365	120	136	227	848
Variation from longer term investment return					4.07		274	4	(8)	(154)	116
Effect of economic assumption changes					4.08		44	-	(18)	26	52
Property losses attributable to minority interests							-	-	-	(6)	(6)
Corporate restructure							37	-	-	124	161
Profit from continuing operations before tax							720	124	110	217	1,171
Tax expense on profit from ordinary activities							(202)	(39)	(32)	(37)	(310)
Effect of UK Budget tax changes							48	-	-	38	86
Tax impact of corporate restructure2							-	-	-	206	206
Profit from ordinary activities after tax							566	85	78	424	1,153
Operating profit attributable to:
Risk							219
Savings							146
1. 2007 investment management operating profit excludes £23m of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Risk, Savings and Group capital and financing covered business on an EEV basis.
2. In 2007 £1.7bn was transferred from Shareholder Retained Capital to shareholder capital held outside the long term fund. This transfer did not give rise to any incremental tax and therefore resulted in a £206m benefit to embedded value.
European Embedded Value											Page 55
Notes to the Financial Statements
4.02  Investment management operating profit
										2008	2007
											Restated
										£m	£m
Managed pension funds1										117	103
Private equity										(1)	-
Property										4	6
Other income2										17	15
Legal & General Investment Management										137	124
Institutional unit trusts3										(7)	(4)
Total Investment management operating profit										130	120
1. The managed pension funds business within Investment management has been reported on an IFRS basis as management believe IFRS to be the most appropriate reporting basis for the investment management business. 2007 comparatives have been restated accordingly.
2. Other income excludes £35m (2007: £23m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis within the Risk, Savings and Group capital and financing covered business on an EEV basis.
3. Investment management operating profit excludes core retail investments, of £nil (2007: £12m), which has been disclosed as part of Savings. The comparatives have been restated accordingly.
4.03  International operating profit
										2008	2007
										£m	£m
USA										70	75
Netherlands										8	32
France										22	29
										100	136
4.04  Group capital and financing operating profit1
										2008	2007
										£m	£m
Business reported on an EEV basis										256	296
Business reported on an IFRS basis:
Investment return										47	51
Interest expense2										(138)	(114)
Unallocated corporate expenses										(9)	(11)
Defined benefit pension scheme3										(5)	5
										(105)	(69)
Total Group capital and financing operating profit										151	227
1. Group capital and financing represents operating profit on the shareholder assets held within the covered business, reported on an embedded value basis, and operating profit on the shareholder assets held outside the covered business reported on an IFRS basis.
2. Interest expense excludes 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 relating to the non-covered business. 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. The 2007 comparative also includes income arising from a pension deficit reduction payment which was charged to the operating segments in 2008.
European Embedded Value											Page 56
Notes to the Financial Statements
4.05  Analysis of experience variances
									Risk and	Inter-	Total
									Savings	national
For the year ended 31 December 2008									£m	£m	£m
Persistency									(12)	(5)	(17)
Mortality/morbidity									27	(12)	15
Expenses									(9)	1	(8)
Other									6	(18)	(12)
									12	(34)	(22)
									Risk and	Inter-	Total
									Savings	national
									Restated		Restated
For the year ended 31 December 2007									£m	£m	£m
Persistency									(24)	(1)	(25)
Mortality/morbidity									38	16	54
Expenses									(14)	1	(13)
Other									108	(13)	95
									108	3	111
2007 Risk and Savings other experience variances of £108m (restated) principally comprise the impact of introducing market referenced fees for the investment management services provided to Society's with-profits business by Legal & General Investment Management (£83m), which are recognised on a look through basis.
4.06  Analysis of operating assumption changes
									Risk and	Inter-	Total
									Savings	national
For the year ended 31 December 2008									£m	£m	£m
Persistency									(114)	(2)	(116)
Mortality/morbidity									(49)	8	(41)
Expenses									35	(9)	26
Other									28	(12)	16
									(100)	(15)	(115)
2008 Risk and Savings persistency operating assumption changes of -£114m relate primarily to the strengthening of lapse assumptions for unit linked bond policies.
2008 Risk and Savings mortality assumption changes relate primarily to annuitant mortality where the assumption has been updated to reflect the latest three year average experience where lighter 2008 experience replaced heavier 2005 experience in the calculation.
									Risk and	Inter-	Total
									Savings	national
									Restated		Restated
For the year ended 31 December 2007									£m	£m	£m
Persistency									(41)	(4)	(45)
Mortality/morbidity									(213)	21	(192)
Expenses									(48)	(4)	(52)
Other									27	(11)	16
									(275)	2	(273)
2007 Risk and Savings mortality/morbidity operating assumption changes of -£213m (restated) relate primarily to the strengthening of assumptions for annuitant mortality (-£295m restated) offset by a change in assumptions for the proportion of annuitants married (£46m restated) and improved mortality on individual protection and other products (£36m). The restated figures reflect the reclassification of the contingent loan from SNW to VIF.
European Embedded Value											Page 57
Notes to the Financial Statements
4.07  Variation from longer term investment return
										2008	2007
											Restated
										£m	£m
Business reported on an EEV basis:
Risk and Savings										(146)	283
International										(110)	(8)
Group capital and financing										(1,176)	(155)
										(1,432)	120
Business reported on an IFRS basis:
General insurance										(29)	(9)
Investment management										7	4
Group capital and financing										(125)	1
										(1,579)	116
4.08  Effect of economic assumption changes
										2008	2007
											Restated
										£m	£m
Business reported on an EEV basis:
Risk and Savings1										(505)	44
International										(110)	(18)
Group capital and financing										6	26
										(609)	52
1. In 2008, on a best estimate basis, Legal & General Pensions Limited has reserved an additional £313m to allow for credit defaults over the next four years. Risk and Savings economic assumption changes include £272m to reflect the present value and cost of capital of the in-force element of the additional reserve.
Economic assumption changes also includes -£361m relating to the 0.8% increase in the UK risk discount rate from 7.5% to 8.3% during the year.
4.09  Time value of options and guarantees
										2008	2007
										£m	£m
Risk and Savings1										46	5
International										13	13
										59	18
1. Includes £21m (2007: £1m) relating to UK with-profits business, reflecting the impact of falling investment markets, and £25m (2007: £4m) relating to UK non profit business, due to the current low inflation environment and its impact on the allowance for negative inflation within the annuity business.
4.10  Tax
Analysis of tax
								Profit/(loss)	Tax	Profit/(loss)	Tax
								before	(expense)/	before	(expense)/
								tax	credit	tax	credit
								2008	2008	2007	2007
										Restated	Restated
								£m	£m	£m	£m
From continuing operations
Risk								439	(125)	219	(61)
Savings								50	(11)	146	(46)
Investment management								130	(40)	120	(38)
International								100	(35)	136	(40)
Group capital and financing								151	(23)	227	(79)
Operating profit								870	(234)	848	(264)
Variation from longer term investment return								(1,579)	385	116	12
Effect of economic assumption changes								(609)	176	52	(13)
Property losses attributable to minority interests								(63)	-	(6)	-
Corporate restructure								-	-	161	(45)
(Loss)/profit from continuing operations before tax / Tax								(1,381)	327	1,171	(310)
European Embedded Value											Page 58
Notes to the Financial Statements
4.11  Earnings per share
(a)  Earnings per share
				Profit/(loss)	Tax	Profit/(loss)	Per share	Profit	Tax	Profit	Per share
				before tax	(expense)/	after tax		before tax	(expense)/	after tax
					credit				credit
				2008	2008	2008	2008	2007	2007	2007	2007
								Restated	Restated	Restated	Restated
				£m	£m	£m	p	£m	£m	£m	p
Operating profit from continuing operations				870	(234)	636	10.66	848	(264)	584	9.06
Variation from longer term investment return				(1,579)	385	(1,194)	(20.01)	116	12	128	1.99
Effect of economic assumption changes				(609)	176	(433)	(7.26)	52	(13)	39	0.61
Corporate restructure				-	-	-	-	161	(45)	116	1.80
Effect of UK Budget tax changes				-	-	-	-	-	86	86	1.34
Tax impact of corporate restructure				-	81	81	1.36	-	206	206	3.19
Earnings per share based on (loss)/profit
attributable to equity holders				(1,318)	408	(910)	(15.25)	1,177	(18)	1,159	17.99
(b)  Diluted earnings per share
(i)  Based on operating profit from continuing operations after tax
						Profit	Number	Per share	Profit	Number	Per share
						after tax	of shares1		after tax	of shares1
						2008	2008	2008	2007	2007	2007
									Restated		Restated
						£m	m	p	£m	m	p
Operating profit from continuing operations after tax						636	5,968	10.66	584	6,444	9.06
Net shares under options allocable for no further consideration						-	22	(0.04)	-	34	(0.04)
Diluted earnings per share						636	5,990	10.62	584	6,478	9.02
(ii)  Based on (loss)/profit attributable to equity holders of the Company
						Loss	Number	Per share	Profit	Number	Per share
						after tax	of shares1		after tax	of shares1
						2008	2008	2008	2007	2007	2007
									Restated		Restated
						£m	m	p	£m	m	p
(Loss)/profit attributable to equity holders of the Company						(910)	5,968	(15.25)	1,159	6,444	17.99
Net shares under options allocable for no further consideration2						-	22	-	-	34	(0.10)
Diluted earnings per share						(910)	5,990	(15.25)	1,159	6,478	17.89
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.
European Embedded Value											Page 59
Notes to the Financial Statements
4.12  Embedded value reconciliation
						UK	UK	UK	Total	Inter-	Total
						free	required	value of	UK	national
						surplus	capital	in-force
For the year ended 31 December 2008						£m	£m	£m	£m	£m	£m
At 1 January
Value of in-force business (VIF)								3,460	3,460	782	4,242
Shareholder net worth (SNW)						2,639	1,198		3,837	324	4,161
						2,639	1,198	3,460	7,297	1,106	8,403
Exchange rate movements						-	-	-	-	386	386
Opening adjustment						27	-	(27)	-	-	-
						2,666	1,198	3,433	7,297	1,492	8,789
Loss for the period:
- New business contribution (including short term default reserve)1						(661)	232	620	191
- Expected return on VIF						-	-	267	267
- Expected transfer from VIF and required capital to free surplus						565	(115)	(450)	-
- Experience variances						39	3	(38)	4
- Operating assumption changes						(31)	1	(38)	(68)
- Development costs						(37)	-	-	(37)
- Expected return on SNW						140	51	-	191
- Investment variances						(1,092)	(83)	189	(986)
- Economic assumption changes						(531)	(3)	175	(359)
- Tax impact of corporate restructure						28	-	53	81
Loss for the period2						(1,580)	86	778	(716)	(83)	(799)
Capital movements3						(260)	-	-	(260)	60	(200)
Embedded value of businesses acquired						71	85	143	299	-	299
Distributions:
- With-profits transfer						77	-	(77)	-
- Dividend to Group						(405)	-	-	(405)
Distributions						(328)	-	(77)	(405)	(6)	(411)
Other reserve movements including pension deficit						(35)	-	(9)	(44)	-	(44)
Transfer to non-covered business4						(25)	-	-	(25)	-	(25)
Embedded value						509	1,369	4,268	6,146	1,463	7,609
Represented by:
Non profit								3,845
With-profits								423
Value of in-force business								4,268	4,268	1,059	5,327
Shareholder net worth						509	1,369		1,878	404	2,282
1. The free surplus reduction of £661m to finance new business includes £101m of the short term default allowance, as well as £334m IFRS new business strain (note 3.01 (c)) and £232m additional required capital. Other items have a net positive impact of £6m.
2. Included in the loss for the period is a non profit inter-fund transfer from free surplus to VIF of £710m.
3. Capital movements within the UK comprise the £252m cost of acquiring Nationwide Life and £8m (€10m) of capital injected from Society into France. The acquisition of Suffolk Life (£63m) was funded from the non-covered business element of Group capital and financing. Further information on the acquisitions can be found in Note 3.10. The International capital movements comprise £52m ($96m) of capital injected into the USA and the £8m (€10m) of capital injected into France.
4. The transfer to non-covered business represents the IFRS profits arising in the period from the provision of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
European Embedded Value											Page 60
Notes to the Financial Statements
4.12  Embedded value reconciliation (continued)
						UK	UK	UK	Total	Inter-	Total
						free	required	value of	UK	national
						surplus	capital	in-force
						Restated	Restated	Restated	Restated	Restated	Restated
For the year ended 31 December 2007						£m	£m	£m	£m	£m	£m
At 1 January
Value of in-force business (VIF)								2,909	2,909	652	3,561
Shareholder net worth (SNW)						655	2,696		3,351	266	3,617
						655	2,696	2,909	6,260	918	7,178
Exchange rate movements						-	-	-	-	28	28
						655	2,696	2,909	6,260	946	7,206
Profit for the period:
- New business contribution						(470)	191	510	231
- Expected return on VIF						-	-	226	226
- Expected transfer from VIF and required capital to free surplus						450	(119)	(331)	-
- Experience variances						4	7	60	71
- Operating assumption changes						(155)	3	(50)	(202)
- Development costs						(34)	-	-	(34)
- Expected return on SNW						16	180	-	196
- Investment variances						(90)	6	222	138
- Economic assumption changes						176	(30)	(96)	50
- Effect of UK Budget tax changes						38	-	48	86
- Corporate restructure						1,812	(1,741)	45	116
- Tax impact of corporate restructure						206	-	-	206
Profit for the period1						1,953	(1,503)	634	1,084	78	1,162
Capital movements2						(595)	5	-	(590)	84	(506)
Other capital movements3						1,307	-	-	1,307	-	1,307
Distributions:
- With-profits transfer						74	-	(74)	-
- Dividend to Group						(728)	-	-	(728)
Distributions						(654)	-	(74)	(728)	(2)	(730)
Other reserve movements including pension deficit						(11)	-	(9)	(20)	-	(20)
Transfer to non-covered business4						(16)	-	-	(16)	-	(16)
Embedded value						2,639	1,198	3,460	7,297	1,106	8,403
Represented by:
Non profit								2,670
With-profits								790
Value of in-force business								3,460	3,460	782	4,242
Shareholder net worth						2,639	1,198		3,837	324	4,161
1. Included in the profit for the period is an inter-fund transfer from non profit (included in VIF) to SSC (included in free surplus) of £60m.
2. Capital movements comprise the repayment of £602m of intra-group subordinated debt; offset by £57m ($114m) of capital injected into the USA and £39m injected into Legal & General International (Ireland) from Group, together with £27m (€40m) injected into France from Society.
3. In previous periods, UK SNW represented the amounts in the Society long term fund and LGPL shareholder capital which were regarded as either required capital or free surplus held within the covered business. As a consequence of the 2007 Capital review all shareholder capital in Society and LGPL is included as SNW within the covered business. This notional transfer of the previously excluded Society Shareholder Capital (SSC) into UK SNW is included as Other capital movements.
4. The transfer to non-covered business represents the IFRS profits arising in the period from the provision of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
European Embedded Value											Page 61
Notes to the Financial Statements
4.13  Analysis of shareholders' equity
							Risk and	Investment	Inter-	Group	Total
							Savings	manage-	national	capital and
								ment		financing
As at 31 December 2008							£m	£m	£m	£m	£m
Analysed as:
IFRS basis shareholders' equity1							174	322	1,272	1,820	3,588
Additional retained profit/(loss) on an EEV basis							4,268	-	203	(1,538)	2,933
Shareholders' equity on an EEV basis							4,442	322	1,475	282	6,521
Comprising:
Business reported on an IFRS basis							174	322	12	(1,596)	(1,088)
Business reported on an EEV basis:
Shareholder net worth
- Free surplus2									144	509	653
- Required capital to cover solvency margin									260	1,369	1,629
Value of in-force
- Value of in-force business							4,576		1,156		5,732
- Cost of capital3							(308)		(97)		(405)
							Risk and	Investment	Inter-	Group	Total
							Savings	manage-	national	capital and
								ment		financing
								Restated			Restated
As at 31 December 2007							£m	£m	£m	£m	£m
Analysed as:
IFRS basis shareholders' equity1							166	310	888	4,082	5,446
Additional retained profit/(loss) on an EEV basis							3,460	-	221	(999)	2,682
Shareholders' equity on an EEV basis							3,626	310	1,109	3,083	8,128
Comprising:
Business reported on an IFRS basis							166	310	3	(754)	(275)
Business reported on an EEV basis:
Shareholder net worth
- Free surplus2									145	2,639	2,784
- Required capital to cover solvency margin									179	1,198	1,377
Value of in-force
- Value of in-force business							3,558		840		4,398
- Cost of capital3							(98)		(58)		(156)
1. 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 the Group capital and financing segment.
2. Free surplus is the value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date.
3. For 2008 the cost of capital reflects a risk margin of 4.5% in the risk discount rate and an equity backing ratio for the assets backing the solvency capital of 55% (2007 risk margin of 3.0% and equity backing ratio of 79%).
Further analysis of shareholders' equity is included in Note 4.14.
European Embedded Value											Page 62
Notes to the Financial Statements
4.14  Segmental analysis of shareholders' equity
						Covered	Other	Total	Covered	Other	Total
						business	business		business	business
						EEV basis	IFRS basis		EEV basis	IFRS basis
						2008	2008	2008	2007	2007	2007
									Restated	Restated	Restated
						£m	£m	£m	£m	£m	£m
Risk
- Risk reported on an EEV basis						3,138	-	3,138	1,914	-	1,914
- General insurance						-	99	99	-	114	114
- Other						-	2	2	-	(1)	(1)
Total Risk						3,138	101	3,239	1,914	113	2,027
Savings
- Savings reported on an EEV basis						1,130	-	1,130	1,546	-	1,546
- Core retail investments						-	59	59	-	39	39
- Other						-	14	14	-	14	14
Total Savings						1,130	73	1,203	1,546	53	1,599
Investment management						-	322	322	-	310	310
International
- USA						937	-	937	645	-	645
- Netherlands						305	-	305	275	-	275
- France						221	-	221	186	-	186
- Emerging markets						-	12	12	-	3	3
Total International						1,463	12	1,475	1,106	3	1,109
Group capital and financing						1,878	(1,596)	282	3,837	(754)	3,083
						7,609	(1,088)	6,521	8,403	(275)	8,128
										2008	2007
											Restated
										£m	£m
Movement
As at 1 January										8,128	7,650
Total recognised income and expense										(710)	1,170
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)
Other reserve movements including pension deficit										(13)	(8)
As at 31 December										6,521	8,128
European Embedded Value											Page 63
Notes to the Financial Statements
4.15  Reconciliation of shareholder net worth
								UK covered	Total	UK covered	Total
								business		business
								2008	2008	2007	2007
										Restated	Restated
								£m	£m	£m	£m
SNW of long term operations (IFRS basis)								3,415	4,676	4,836	5,721
Other liabilities (IFRS basis)								-	(1,088)	-	(275)
Shareholders' equity on the IFRS basis								3,415	3,588	4,836	5,446
Purchased interests in long term business								(171)	(202)	(5)	(19)
Deferred acquisition costs/deferred income liabilities								(233)	(1,160)	(139)	(751)
Contingent loan1								(786)	(786)	(614)	(614)
Deferred tax2								(354)	(51)	(363)	(172)
Other3								7	(195)	122	(4)
Shareholder net worth on the EEV basis								1,878	1,194	3,837	3,886
1. On an EEV basis the contingent loan (between Society and LGPL) is modelled within the VIF. On an IFRS basis the contingent loan asset is included within the Group capital and financing net assets.
2. Deferred tax represents all tax which is expected to be paid under current legislation.
3. Other in the UK covered business relates primarily to the different treatment of sterling reserves, other long term reserves and the non profit result of LGPL under EEV compared with IFRS. Total business also includes the different treatment of the US Triple X securitisation on an EEV and IFRS basis.
4.16  Sensitivities
In accordance with the guidance issued by the CFO Forum in October 2005 the table below shows the effect of alternative assumptions on the long term embedded value and new business contribution.
Effect on embedded value as at 31 December 2008
						As published	1% lower	1% higher	1% lower	1% higher	1% higher
							risk discount	risk discount	interest	interest	equity/
							rate	rate	rate	rate	property
											yields
						£m	£m	£m	£m	£m	£m
UK						6,146	384	(336)	(73)	5	110
International						1,463	126	(109)	17	(23)	3
Total covered business						7,609	510	(445)	(56)	(18)	113
						As published	10% lower	10%	10%	5%	5%
							equity/	lower	lower	lower	lower
							property	maintenance	lapse	mortality	mortality
							values	expenses	rates	(UK	(other
										annuities)	business)
						£m	£m	£m	£m	£m	£m
UK						6,146	(248)	68	66	(111)	40
International						1,463	(6)	12	59	n/a	95
Total covered business						7,609	(254)	80	125	(111)	135
Effect on new business contribution for the year
						As published	1% lower	1% higher	1% lower	1% higher	1% higher
							risk discount	risk discount	interest	interest	equity/
							rate	rate	rate	rate	property
											yields
						£m	£m	£m	£m	£m	£m
UK						265	82	(72)	(7)	(13)	14
International						32	17	(15)	2	(1)	-
Total covered business						297	99	(87)	(5)	(14)	14
						As published	10% lower	10%	10%	5%	5%
							equity/	lower	lower	lower	lower
							property	maintenance	lapse	mortality	mortality
							values	expenses	rates	(UK	(other
										annuities)	business)
						£m	£m	£m	£m	£m	£m
UK						265	(32)	13	16	(20)	7
International						32	-	1	7	n/a	12
Total covered business						297	(32)	14	23	(20)	19
Opposite sensitivities are broadly symmetrical.

European Embedded Value

Page 64

Notes to the Financial Statements

4.17 Assumptions

UK assumptions

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. 

For annuities, separate returns are calculated for new and existing business.  This reflects a change in investment policy applicable to the 2007 and later business, which has the aim of increasing the expected return whilst not increasing the level of asset risk compared with the historic policy. This has been achieved through improved investment efficiency and increased diversification through use of additional asset classes. The calculated return takes account of derivatives and other credit instruments in the investment portfolio.  From the second half of 2007, some aspects of this revised strategy were also applied to the assets backing the in-force annuity business.

Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the proceeds reinvested in corporate bonds with a redemption yield 0.70% p.a. (0.50% p.a. at 31.12.07) greater than the swap rate at that time.  

The returns on fixed and index-linked securities are calculated net of an allowance for long term default risk which takes account of the outstanding term of the securities. These allowances for default risk are set separately for the asset portfolios supporting fixed and index-linked securities, and average 0.11% p.a. and 0.12% p.a. respectively across the portfolios as a whole (0.11% p.a. and 0.10% p.a. at 31.12.2007).   In 2008 Legal & General Pensions Limited has reserved an additional £313m before discounting to allow for our best estimate of the credit defaults over the next four years.  

Economic assumptions

		31.12.08	31.12.07	31.12.06
		% p.a.	% p.a.	% p.a.
Equity risk premium		3.5	3.0	3.0
Property risk premium		2.0	2.0	2.0
Investment return
- Gilts:
- Fixed interest		3.8	4.5	4.6
- RPI linked		3.7	4.5	4.7
- Non gilts:
- Fixed interest		4.2 - 8.2	4.9 - 6.1	4.9 - 5.3
- RPI linked		4.7 - 5.9	4.9 - 5.3	4.6 - 5.1
- Equities		7.3	7.5	7.6
- Property		5.8	6.5	6.6
Risk margin		4.5	3.0	3.0
Risk discount rate (net of tax)		8.3	7.5	7.6
Inflation
- Expenses/earnings		3.6	4.4	4.2
- Indexation		2.6	3.4	3.2

UK covered business

i.     Assets are valued at market value.

ii.     Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders' portion of the  

       with-profits business. The proportion of profits derived from with-profits business allocated to shareholders has been assumed

       to be 10% throughout.

iii.    The value of in-force business reflects the cost, including administration expenses, of providing for benefit enhancement or

       compensation in relation to certain products.

iv.   Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for

        mortality, morbidity, persistency and maintenance expenses (excluding the development costs referred to below). These

        are normally reviewed annually.

European Embedded Value

Page 65

Notes to the Financial Statements

4.17 Assumptions (continued)

       An allowance is made for future improvements in annuitant mortality based on experience and externally published data.

       Male annuitant mortality is assumed to improve in accordance with CMI Working Paper 30, projection MC, with a minimum

       annual improvement of 1.5% for future experience, and 2.0% for statutory reserving. Female annuitant mortality is assumed to

       improve in accordance with 75% of projection MC, with a minimum annual improvement of 1.0% for future experience

       and 1.5% for statutory reserving. In each case, the annual improvement is assumed to reduce linearly after age 89 to zero at

       age 120.

       On this basis, the best estimate of the expectation of life for a new 65 year old Male CPA annuitant is 25.2 years (31.12.07: 25.1

        years). The expectation of life on the regulatory reserving basis is 26.4 years (31.12.07: 26.2 years).

v.    Development costs relate to investment in strategic systems and development capability.

International

vi.    Key assumptions:

		31.12.08	31.12.07	31.12.06
		% p.a.	% p.a.	% p.a.
USA
Reinvestment rate		5.4	5.4	5.4
Risk margin		4.5	3.0	3.0
Risk discount rate (net of tax)		6.8	7.1	7.8
Europe
Government bond return		3.5	4.4	4.0
Risk margin		4.5	3.0	3.0
Risk discount rate (net of tax)		8.0	7.4	7.0

vii.   Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for

         mortality, morbidity, persistency and maintenance expenses.

Tax

viii.  The profits on the covered business, except for the profits on the Society Shareholder Capital held outside the long

        term fund, are calculated on an after tax basis and are grossed up by the notional attributed tax rate for presentation in

        the income statement.  The tax rate used for grossing up is the corporate tax rate in the territory concerned which for

        the UK was 28% (2007: 28%).  The profits on the Society Shareholder Capital held outside the long term fund are calculated

        before tax and therefore tax is calculated on an actual basis. 

Stochastic calculations

ix.    The time value of options and guarantees is calculated using economic and non-economic assumptions consistent with

        those used for the deterministic embedded value calculations.

        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

        each territory.

        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 the risk-free rates, transition matrices and default recovery rates. The real yield curve model

         assumes that the real short rate follows a mean-reverting process subject to two normally distributed random shocks.

         Asset classes

         The significant asset classes are for:

         -  UK with-profits business - equities, property and fixed rate bonds of various durations;

         -  UK annuity business - fixed rate and index-linked bonds of various durations; and

         -  International business - fixed rate bonds of various durations.

European Embedded Value

Page 66

Notes to the Financial Statements

4.17 Assumptions (continued)

         Summary statistics:

         The following table sets out means and standard deviations (StDev) of future returns as at 31 December 2008 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	3.5%	3.4%	4.4%	3.4%
Corporate bonds	7.1%	3.8%	7.1%	3.9%
Property (excess returns)	2.0%	15.1%	2.0%	14.8%
Equities (excess returns)	3.5%	20.1%	3.6%	20.3%
European Business (Euro)
Long Government bonds3	3.5%	4.3%	4.3%	4.5%
Short Government bonds4	3.5%	3.6%	4.3%	7.6%
US Business (US Dollar)
Long Government bonds3	2.9%	4.9%	3.5%	4.3%

1. For asset classes other than for equities and property, mean returns are calculated as the mean return in excess of 1 year goverment bonds plus the mean return on 1 year government bonds. Mean excess returns for the equities and property are calculated as the mean return in excess of 1 year government bonds. Each mean return 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 par-coupon bonds.

4. Short term bonds are defined to be 1 year duration bonds.

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 

x.      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 would result in a 5.5% risk margin).

          -    1% variation in interest rate environment - a one percentage point increased/decreased parallel shift in the risk-free

               curve with consequential impacts on fixed asset market values, investment return assumptions, risk discount rate,

                including consequential changes to valuation bases.

          -    1% higher equity/property yields - a one percentage point increase in the assumed equity/property investment returns,

               excluding any consequential changes, for example, to risk discount rates or valuation bases, has been assumed in each

               case (for example a 1% increase in equity returns would increase assumed total equity returns from 7.3% to 8.3%).

          -    10% lower equity/property market values - an immediate 10% reduction in equity and property asset values.

          -    10% lower maintenance expenses, excluding any consequential changes, for example, to valuation expense bases or

               potentially reviewable policy fees (a 10% decrease on a base assumption of £10 per annum would result in an £9 per

               annum expense assumption).

          -    10% lower assumed persistency experience rates, excluding any consequential changes to valuation bases,

               incorporating a 10% decrease in lapse, surrender and premium cessation assumptions (a 10% decrease on a base

               assumption of 7% would result in a 6.3% lapse assumption).

          -    5% lower mortality and morbidity rates, excluding any consequential changes to valuation bases but including

               assumed product repricing action where appropriate (for example if base experienced mortality is 90% of a standard

               mortality table then, for this sensitivity, the assumption is set to 85.5% of the standard table).

         The sensitivities for life and pensions business allow for any material changes to the cost of financial options and guarantees

         but do not allow for any changes to reserving bases or capital requirements within the sensitivity calculation, unless

         indicated otherwise above.

 

END

 

 

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