L&G 2009 Final Results Part 4

RNS Number : 9822I

Legal & General Group Plc

23 March 2010

 



Asset Disclosures								Page 57
4.01 Investment portfolio
							Market	Market
							value	value
							2009	2008
						Notes	£bn	£bn
Worldwide funds under management							334	280
Client and policyholder assets							(284)	(233)
Non-unit linked with-profits assets1							(20)	(19)
Assets to which shareholders are directly exposed							30	28
Comprising:
Assets held to back the UK non-linked non profit business:
Legal & General Pensions Limited (LGPL)							22.5	18.7
Other UK non profit insurance business							1.2	1.9
							23.7	20.6
Assets held to back other insurance businesses (including Triple-X reserves)							2.4	2.5
Society shareholder capital						4.05	2.3	2.9
Other Group capital						4.05	1.9	2.3
							30.3	28.3
1. Includes assets backing participating business in France of £2bn (2008: £2bn).
Analysed by asset class:
		LGPL	Other UK	Other	Society	Other	Total	Total
			non profit	Insurance	shareholder	Group
			insurance	business	capital	capital
			business
		2009	2009	2009	2009	2009	2009	2008
	Notes	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Equities		-	-	-	0.9	-	0.9	1.4
Bonds	4.02	21.4	0.4	2.0	0.8	1.1	25.7	21.4
Derivative assets1		0.8	0.5	-	-	0.2	1.5	2.3
Property		-	-	-	0.1	-	0.1	0.2
Cash ( including cash equivalents )		0.3	0.3	0.4	0.5	0.6	2.1	3.0
		22.5	1.2	2.4	2.3	1.9	30.3	28.3
1. Derivative assets are shown gross of derivative liabilities.  Exposures arise from:
a. The use of derivatives for efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management.
b. Derivatives matching Guaranteed Equity Bonds within the Nationwide Life portfolio.
Asset Disclosures								Page 58
4.02 Bond portfolio summary
(i) Analysed by sector
			LGPL	LGPL	Total	Total	Total	Total
			2009	2009	2009	2009	2008	2008
		Notes	£m	%	£m	%	£m	%
Sovereigns, Supras and Sub-Sovereigns			1,241	6	2,382	9	2,517	12
Banks - Tier 11		4.04	459	2	508	2	650	3
- Tier 2 and other subordinated		4.04	1,854	9	2,041	8	2,410	11
- Senior			1,539	7	2,191	9	1,815	8
Utilities			2,811	13	2,985	12	2,291	11
Consumer Services & Goods			2,286	11	2,606	10	1,829	8
Financial Services			906	4	1,111	4	989	5
Technology & Telecoms			1,463	7	1,639	6	1,172	5
Insurance			1,067	5	1,192	5	904	4
Industrials			893	4	1,072	4	784	4
Oil & Gas			984	5	1,151	5	611	3
Health Care			590	3	605	2	541	3
Property			509	2	582	2	516	2
ABS		4.03	3,546	16	4,441	17	3,389	16
CDO			1,205	6	1,212	5	1,004	5
Total			21,353	100	25,718	100	21,422	100
1. Tier 1 holdings include £45m (2008: £75m) of preference shares.
(ii) Analysed by domicile
			LGPL	LGPL	Total	Total	Total	Total
			2009	2009	2009	2009	2008	2008
			£m	%	£m	%	£m	%
United Kingdom			7,825	36	9,150	36	8,996	42
North America			6,958	33	8,931	35	6,833	32
Europe			5,361	25	6,313	24	4,821	22
Other			1,209	6	1,324	5	772	4
Total			21,353	100	25,718	100	21,422	100
Within the UK non profit annuity business all non-sterling denominated bonds are currency hedged back to sterling.
(iii) Analysed by credit rating
			LGPL	LGPL	Total	Total	Total	Total
			2009	2009	2009	2009	2008	2008
			£m	%	£m	%	£m	%
AAA			2,324	11	4,282	17	4,616	22
AA			1,867	9	2,312	9	2,359	11
A			8,312	38	9,395	36	8,180	38
BBB			6,397	30	7,093	28	4,385	20
BB or below			591	3	680	3	183	1
Unrated: Bespoke CDOs			1,104	5	1,104	4	878	4
Other			758	4	852	3	821	4
			21,353	100	25,718	100	21,422	100
Other unrated bonds have been assessed and rated internally and are all assessed as investment grade.
Credit ratings have been presented using the lowest of the available agency ratings.
Asset Disclosures								Page 59
4.02 Bond portfolio summary (continued)
(iv) CDOs
The Group holds collateralised debt obligations (CDO) with a market value of £1,212m at 2009 (2008: £1,004m).
These holdings include £108m (2008: £126m) in traded CDOs and £41m (2008: £34m) exposure to an equity tranche of a bespoke CDO.
The balance of £1,063m (2008: £844m) relates to a further four CDOs that were constructed in 2007 and 2008 in accordance with terms specified by Legal & General as part of a strategic review of the assets backing the annuity portfolio.  These CDOs mature in 2017 and 2018.  The Group selected at outset and manages the reference portfolios underlying the CDOs to give exposure to globally diversified portfolios of investment grade corporate bonds.  The Group is able to substitute the constituents of the original reference portfolios with new reference assets, allowing the management of the underlying credit risk although substitutions in 2009 were limited. A breakdown of the underlying CDO reference portfolio by sector is provided below:
Sector
							2009	2008
							%	%
Banks							14	13
Utilities							10	10
Consumer Services & Goods							26	27
Financial Services							6	6
Technology & Telecoms							9	9
Insurance							6	6
Industrials							20	20
Oil & Gas							6	6
Health Care							3	3
							100	100
The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27%, on average across the four CDOs, before the CDOs incur any default losses. Assuming an average recovery rate of 30%, then over 39% of the reference names would have to default before the CDOs incur any default losses.
Beyond 27% of default losses on the reference portfolio, losses to the CDO would occur at a rate that is a multiple of the loss rate on the reference portfolio.  For illustration a £200m loss could be incurred if default losses to the reference portfolios exceeded 30% or if 43% of the names in the diversified global investment grade portfolio defaulted, with an average 30% recovery rate.  (All figures are averages across the four CDOs.)
Despite the difficult financial conditions in early 2009, the underlying reference portfolio has had no reference entity defaults in 2009.
Losses are limited under the terms of the CDOs to assets and collateral invested.
These CDOs also incorporate features under which, in certain circumstances, the Group can choose either to post additional cash collateral or to allow wind up of the structures.  These features are dependant on the portfolios' weighted average spreads, default experience to date and time to maturity.  No additional collateral was posted to any of the CDOs in 2009 (2008: £155m).
These CDOs are valued using an internal valuation which is based on observable market inputs.  This is then validated against the counterparty valuation and, at the year end, validated by independent external consultants.
For the purposes of valuing the non profit annuity regulatory and IFRS liabilities the yield on the CDOs is included within the calculation of the yield used to calculate the valuation discount rate for the annuity liabilities.  An allowance for the risks, including default, is also made.  For EEV purposes, the yield on the CDOs, reduced by the realistic default assumption, is similarly included in assumed future investment returns.
Asset Disclosures								Page 60
4.03 Asset backed securities summary
(i) By security
			LGPL	LGPL	Total	Total	Total	Total
			2009	2009	2009	2009	2008	2008
			£m	%	£m	%	£m	%
Traditional ABS:
RMBS - Prime1			365	11	646	15	593	17
RMBS - Sub-prime2			-	-	22	-	30	1
CMBS			230	7	376	8	284	8
Credit Card			17	-	297	7	267	8
Auto			2	-	83	2	82	2
Consumer Loans			47	1	56	1	-	-
Student Loan			31	1	51	1	30	1
			692	20	1,531	34	1,286	37
Other:
Secured Bond			1,413	39	1,431	32	1,068	31
Commercial Property Backed Bonds			211	6	211	5	155	5
Infrastructure / PFI / Social housing			945	27	946	21	641	19
Whole Business Securitisation			250	7	250	6	221	7
Other secured holdings3			35	1	72	2	18	1
			2,854	80	2,910	66	2,103	63
Total			3,546	100	4,441	100	3,389	100
1. 64% (2008: 87%) of Prime RMBS holdings relate to UK mortgages.
2. 43% (2008: 90%) of Sub-prime RMBS holdings have a credit rating of AAA and 57% (2008: 49%) relate to the UK.
3. Other secured holdings include covered bonds of £11m (2008: £9m).
(ii) By credit rating
			LGPL	LGPL	Total	Total	Total	Total
			2009	2009	2009	2009	2008	2008
			£m	%	£m	%	£m	%
AAA			1,129	32	1,821	41	1,703	51
AA			636	18	675	15	581	17
A			1,047	29	1,120	25	721	21
BBB			528	15	563	13	359	11
BB or below			79	2	107	2	16	-
Unrated			127	4	155	4	9	-
Total			3,546	100	4,441	100	3,389	100
Of the £839m of traditional ABS holdings held outside of LGPL, 79% are rated AAA (2008: £801m of which 93% are rated AAA).
The credit ratings of monoline wrapped bonds are based on the rating of the underlying securities.
Asset Disclosures								Page 61
4.04 Group subordinated bank exposures
					Market	Total	Market	Total
					value		value
					2009	2009	2008	2008
					£m	%	£m	%
Tier 1
United Kingdom1					220	9	448	15
North America					101	4	102	3
Europe					158	6	88	3
Others					29	1	12	-
Total tier 1					508	20	650	21
Lower tier 2
United Kingdom					846	33	760	25
North America					561	22	668	22
Europe					292	11	255	8
Others					79	3	71	2
Upper tier 2
United Kingdom					89	4	474	16
North America					24	1	3	-
Europe					70	3	142	5
Others					4	-	9	-
Other subordinated
United Kingdom					3	-	10	-
North America					72	3	18	1
Europe					1	-	-	-
Others					-	-	-	-
Total tier 2 and other subordinated					2,041	80	2,410	79
Total					2,549	100	3,060	100
1. The exposure to UK tier 1 debt includes issuances from the UK subsidiaries of European banks where there is no explicit parental guarantee.
In 2009, the Group has taken advantage of the favourable terms on which some banks exchanged junior subordinated debt for more senior debt and this has contributed to the reduction in the holdings of junior subordinated bank debt.
4.05 Group capital asset mix
				Other			Other
			Society	Group		Society	Group
			shareholder	shareholder		shareholder	shareholder
			capital	assets	Total	capital	assets	Total
			2009	2009	2009	2008	2008	2008
			%	%	%	%	%	%
Equities			39	-	21	43	2	25
Bonds			35	58	46	23	50	35
Derivative assets			-	11	5	1	12	6
Property			4	-	2	6	-	4
Cash (including cash equivalents)			22	31	26	27	36	30
			100	100	100	100	100	100
Invested assets (£bn)			2.3	1.9	4.2	2.9	2.3	5.2
Asset Disclosures								Page 62
4.06 Value of policyholder assets held in Society and LGPL
							2009	2008
							£bn	£bn
With-profits business							25.6	24.0
Non profit business							35.9	30.4
							61.5	54.4
4.07 Non-linked business invested asset mix and investment return
				Investment	UK	UK	UK	UK
				return	With-profits	With-profits	With-profits	non linked
					asset share	non par	other	non profit
								business
As at 31 December 2009				%	%	%	%	%
Equities				19	37	4	(68)	-
Bonds				13	42	87	161	98
Property				3	13	1	-	-
Cash				2	8	8	7	2
					100	100	100	100
Investment return (% pa)				12	14	10	(19)	15
Invested assets (£bn):
Net of derivative liabilities					13.6	2.3	1.4	22.4
Gross of derivative liabilities					13.7	2.3	1.4	23.7
As at 31 December 2008
Equities				(25)	39	3	(51)	-
Bonds				(5)	40	83	121	97
Property				(27)	16	1	-	-
Cash				4	5	13	30	3
					100	100	100	100
Investment return (% pa)				(11)	(18)	(2)	27	(7)
Invested assets (£bn):
Net of derivative liabilities					12.5	2.3	2.1	18.8
Gross of derivative liabilities					12.6	2.3	2.1	20.6
All investment return percentages reflect actual investment returns on average asset holdings for the period.
Asset Disclosures								Page 63
4.08 Analysis of fair value measurement bases
					Fair value measurement at the
					end of the reporting period based on:
					Level 1	Level 2	Level 3	Total
As at 31 December 2009					£bn	£bn	£bn	£bn
Group capital and other insurance business
Equities					0.7	0.1	0.1	0.9
Bonds					0.9	3.0	-	3.9
Derivative assets					-	0.2	-	0.2
					1.6	3.3	0.1	5.0
Non profit non-unit linked
Equities					-	-	-	-
Bonds					1.0	20.8	-	21.8
Derivative assets					-	1.3	-	1.3
					1.0	22.1	-	23.1
Consolidated CDO holdings have been presented on a net basis within level 2.
					Fair value measurement at the
					end of the reporting period based on:
					Level 1	Level 2	Level 3	Total
As at 31 December 2008					£bn	£bn	£bn	£bn
Group capital and other insurance business
Equities					1.1	-	0.2	1.3
Bonds					1.2	2.6	-	3.8
Derivative assets					-	0.3	-	0.3
					2.3	2.9	0.2	5.4
Non profit non-unit linked
Equities					0.1	-	-	0.1
Bonds					1.1	16.5	-	17.6
Derivative assets					-	2.0	-	2.0
					1.2	18.5	-	19.7
The analysis excludes cash, loans and receivables and property investments of £2.2bn (2008: £3.2bn) (Note 4.01).
Asset Disclosures								Page 64
4.08 Analysis of fair value measurement bases (continued)
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arms length transaction.
Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflects the Group's view of market assumptions in the absence of observable market information. The Group utilises techniques that maximise the use of observable inputs and minimise the use of unobservable inputs.
The levels of fair value measurement bases are defined as follows:
Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 : fair values measured using valuation techniques for all inputs significant to the measurement other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: fair values measured using valuation techniques for any input for the asset or liability significant to the measurement that is not based on observable market data (unobservable inputs).
In current market conditions, the liquidity of financial instruments is less than it has been in the past. All of the Group's level 2 assets have been valued using standard market pricing sources, such as iBoxx, IDC and Bloomberg except for bespoke CDO and swaps holdings (see below). In normal market conditions, we would consider these market prices to be observable market prices. However, following consultation with our pricing providers and a number of their contributing brokers, we have considered that these prices are not from a suitably active market and have prudently classified them as level 2.
Our holdings in bespoke CDOs and swaps are priced using industry standard internal models which utilise market assumptions. The CDO valuations have also been verified using externally provided prices. Accordingly, these assets have also been classified in level 2.
Level 3 assets, where internal models are used to represent a small proportion of assets to which shareholders are exposed and reflect unquoted equities including investments in private equity, property vehicles and suspended securities.
In many situations, inputs used to measure the fair value of an asset or liability may fall into different levels  of the fair value hierarchy. In these situations, the Group determines the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. As a result, both observable and unobservable inputs may be used in the determination of fair values that the Group has classified with level 3.
The Group determines the fair values of certain financial assets and liabilities based on quoted market prices, where available. The Group also determines fair value based on estimated future cash flows discounted at the appropriate current market rate. As appropriate, fair values reflect adjustments for counterparty credit quality, the Group's credit standing, liquidity and risk margins on unobservable inputs.
Where quoted market prices are not available, fair value estimates are made at a point in time, based on relevant market data, as well as the best information about the individual financial instrument. Illiquid market conditions have resulted in inactive markets for certain of the Group's financial instruments. As a result, there is generally no or limited observable market data for these assets and liabilities. Fair value estimates for financial instruments deemed to be in an illiquid market are based on judgments regarding current economic conditions, liquidity discounts, currency, credit and interest rate risks, loss experience and other factors. These fair values are estimates and involve considerable uncertainty and variability as a result of the inputs selected and may differ significantly from the values that would have been used had a ready market existed, and the differences could be material. As a result, such calculated fair value estimates may not be realisable in an immediate sale or settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique could significantly affect these fair value estimates.
Fair values are subject to a control framework designed to ensure that input variables and outputs are assessed independent of the risk taker. These inputs and outputs are reviewed and approved by a valuation committee.

 

END

 

 

FR PGURCWUPUGMP