L&G 2008 Final Results Part 5

RNS Number : 4205P

Legal & General Group Plc

25 March 2009

 



Capital and Cash Flow										Page 67
5.01  Regulatory capital resources
(a)  Insurance Group's Directive (IGD)
The Group is required to measure and monitor its capital resources on a regulatory basis and to comply with the minimum capital requirements of regulators in each territory in which it operates. At Group level, Legal & General must comply with the requirements of the IGD. The table below shows the estimated total Group capital resources, Group capital resources requirement and the surplus based on unaudited regulatory returns.
									2008	2007
									£bn	£bn
Core tier I									3.9	7.6
Innovative tier I									0.6	0.6
Upper tier II									0.4	0.4
Lower tier II1									0.6	0.4
Deductions2									(1.1)	(0.7)
Group capital resources									4.4	8.3
Group capital resources requirement3									2.6	4.2
IGD surplus4									1.8	4.1
Coverage ratio (Group capital resources / Group capital resources requirement)									1.69 times	1.98   times
1. The increase in Tier II capital reflects favourable foreign exchange rates. 2. Deductions of inadmissible assets have been reclassified from 2007 year end in line with FSA rules. They now comprise deductions made for L&G America of £0.8bn (2007: £0.5bn) which were previously deducted from Core tier I capital resources. The 2007 figures reflect this reclassification. Other deductions comprise inadmissible assets in Society of £0.2bn and other subsidiaries of £0.1bn.   3. Group capital resources requirement includes a reduced With-Profits Insurance Capital Component (WPICC) of £0.2bn (2007: £2.0bn). The decrease reflects the convergence of the peak 1 and peak 2 surpluses in the with-profits part of the LTF due to the impact of adverse economic conditions during 2008. 4. IGD surplus after accruing for the final dividend of £120m (2007: £248m).
A segmental analysis is given below.									2008	2007
									£bn	£bn
Society long term fund1									1.9	3.9
Society shareholder capital									1.6	3.1
General insurance									0.1	0.1
France									0.2	0.1
Netherlands									0.2	0.1
Nationwide Life									0.1	-
USA									0.1	0.1
Investment management									0.3	0.3
Other2									1.3	1.4
Innovative tier I									0.6	0.6
Tier II									1.0	0.8
Debt									(3.0)	(2.2)
Group capital resources									4.4	8.3
Society long term fund1									2.1	3.9
Other									0.5	0.3
Group capital resources requirement									2.6	4.2
1. The Society long term fund (LTF) capital requirement of £2.1bn is met by £1.9bn of capital resources in the LTF and £0.2bn from other Society shareholder capital. 2. Other includes corporate assets held within the Group's Treasury function.
A reconciliation of the Group capital resources on an IGD basis to the capital and reserves attributable to the equity holders of the Company on an IFRS basis is given below.
									2008	2007
									£bn	£bn
Capital and reserves attributable to equity holders on an IFRS basis									3.6	5.4
Innovative tier I									0.6	0.6
Tier II									1.0	0.8
Proposed final dividend									(0.1)	(0.2)
Additional capital available from Society									0.3	2.2
Adjustment to reflect regulatory value of the USA operation									(0.8)	(0.5)
Other regulatory adjustments									(0.2)	-
Group capital resources									4.4	8.3
Capital and Cash Flow										Page 68
5.01  Regulatory capital resources (continued)
(b)  With-profits realistic balance sheet
The table below summarises the realistic position of the with-profits part of Society's LTF:
									2008	2007
									£m	£m
With-profits surplus									641	1,047
Risk capital margin									373	262
Surplus									268	785
Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis (peak 2). The risk capital margin is calculated based on the most onerous capital requirement calculated after performing five stresses specified by the FSA. After applying this stress the surplus includes the present value of future shareholder transfers of £212m (2007: £396m) as a liability in the calculation.
(c)  Society capital surplus
Society is required to measure and monitor its capital resources on a regulatory basis.
							2008	2008	2007	2007
							Long term	General	Long term	General
							business	insurance	business	insurance
							£bn	£bn	£bn	£bn
Available capital resources - Tier 1							4.0	0.1	8.4	0.1
Insurance capital requirement							1.9	0.1	1.9	0.1
Capital requirements of regulated related undertakings							0.3	-	0.1	-
With-Profits Insurance Capital Component							0.2	-	2.0	-
Capital resources requirement							2.4	0.1	4.0	0.1
Regulatory capital surplus							1.6	-	4.4	-
On a regulatory basis (peak 1), Society regulatory capital surplus of £1.6bn (2007: £4.4bn) comprises capital resources within the long term fund of £1.9bn (2007: £5.0bn) and capital resources outside the long term fund of £2.1bn (2007: £3.4bn) less the capital resource requirement of £2.4bn (2007: £4.0bn).   The reduction in capital resources was primarily caused by adverse investment markets throughout 2008. The largest impact was incurred in the with-profits part of the long term fund, although the capital resources outside of the long term fund were also impacted. In addition, the short term default allowance of £650m has reduced the regulatory value of L&G Pensions Limited (LGPL) which is included in the capital resources held outside of the long term fund.  The capital resources requirement of £2.4bn (2007: £4.0bn) comprises the long term insurance capital requirement which is unchanged at £1.9bn, capital requirements of regulated undertakings which have increased to £0.3bn due to the acquisition of Nationwide Life and foreign exchange movements in the overseas subsidiaries of Society and the With-Profits Insurance Capital Component (WPICC) of £0.2bn (2007: £2.0bn).   The WPICC is an additional capital requirement calculated if the surplus in the with-profits fund on a peak 2 basis is lower than on a peak 1 basis and represents the difference in the surplus between the two bases. It is calculated based on the most onerous risk capital margin stress described above. A further adjustment is made to the WPICC to remove the present value of future shareholder transfers which is treated as a liability in Society's with-profits realistic surplus. At 31 December 2008, this adjustment reduced the WPICC by £212m (2007: £396m). The overall decrease in the WPICC during 2008 reflects adverse economic conditions throughout the year.
Capital and Cash Flow										Page 69
5.02  Operational cash generation1
The table below provides an analysis of the operational cash generated by each of the Group's business segments in 2008, together with a reconciliation to IFRS profit after tax.
				Operational	New	Inter-	Variances3	Investment	Other	IFRS
				Cash	business	national2		gains and		Profit
				Generation	strain			losses4		after Tax
				£m	£m	£m	£m	£m	£m	£m
Total Risk operating profit				379	(173)	-	(645)	-	-	(439)
Total Savings operating profit				138	(161)	-	82	-	-	59
Investment management operating profit				115	-	-	-	-	-	115
International				-	-	39	-	-	-	39
Group capital and financing				22	-	-	-	74	-	96
Variation from longer term investment return				-	-	-	-	(937)	-	(937)
Property losses attributable to minority interests				-	-	-	-	-	(63)	(63)
Total				654	(334)	39	(563)	(863)	(63)	(1,130)
1. The operational cash generation analysed above forms a key component of the dividend decision process each year. The core flow of operational cash generated by the business is available to replenish the capital stock, reinvest back into the business and finance the dividend. In 2008, the business generated operational cashflow of £654m before investing £334m in non profit new business strain, resulting in net cash generated of £320m. In 2008, £119m has been used to pay the interim dividend, £120m the final dividend and £81m has been retained as capital within the IGD surplus. 2. Profits arising in the international businesses are retained locally to support growth and are treated as not being available for distribution. 3. Includes non-recurring experience variances, assumption changes and non-cash items from the Risk and Savings businesses. Non-recurring experience variances and assumption changes are absorbed directly by the Group's IGD surplus. Movements in non-cash items do not generate cash in the period and are therefore not available for distribution. 4. Investment gains and losses have been excluded in order to reflect a net of tax income on shareholders' investments.

 

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