L&G FY 2005 Results Part 5

Legal & General Group PLC
17 March 2006

Part 5

Capital and Cashflow
====================

5.1   Group capital resources
-----------------------------

The Group's total capital resources of £7.0bn on an IFRS basis, comprise ordinary equity holders' capital (£4.3bn), 
subordinated debt (£0.4bn), subordinated debt designated as equity (£0.4bn) and unallocated divisible surplus (£1.9bn, 
including £0.3bn of Sub-fund).

In 2005, the Group established a Group Capital Committee as a sub-committee of the Group Risk and Compliance Committee.
The Group Capital Committee focuses on actively managing capital resources and the Group's balance sheet.


5.2   Insurance Groups Directive surplus
----------------------------------------

The Group is required to measure and monitor its capital resources on a regulatory, as well as an IFRS, basis and to 
comply with the minimum capital requirements of regulators in each territory in which it operates. At a Group level, 
Legal & General must comply with the requirements of the Insurance Groups Directive (IGD). This is a very prudent 
measure of capital resources as it excludes any amount of surplus capital within a long term fund (£2.2bn for Legal & 
General). The table below shows the unaudited total Group capital resources, Group capital resources requirement and 
the surplus.

                                                                                                    2005          2004
                                                                                                      £m            £m
----------------------------------------------------------------------------------------------------------------------
Tier I                                                                                             6,035         4,483
Upper tier II                                                                                        394           394
Lower tier II                                                                                        415             -
Deductions                                                                                           (62)          (28)
----------------------------------------------------------------------------------------------------------------------
Group capital resources                                                                            6,782         4,849
----------------------------------------------------------------------------------------------------------------------
Group capital resources requirement                                                                4,352         3,171
----------------------------------------------------------------------------------------------------------------------
Insurance Groups Directive surplus                                                                 2,430         1,678
======================================================================================================================

The surplus has increased in 2005 due primarily to two factors. Under FRS 21, final dividends are only accrued when 
approved by the Company in general meeting. The proposed 2005 final dividend to shareholders of £236m has therefore not
been accrued for. In addition, €600m (£415m) of lower tier II capital was raised in June 2005.

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.

                                                                                                                  2005
                                                                                                                    £m
----------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to equity holders on an IFRS basis                                             4,651
Qualifying lower tier II capital                                                                                   415
UK long term fund capital resources (restricted to amount of capital resources requirement)                      4,142
Shareholder retained capital on an IFRS basis                                                                   (2,560)
Other adjustments to restate from IFRS to IGD basis                                                                134
----------------------------------------------------------------------------------------------------------------------
Group capital resources                                                                                          6,782
======================================================================================================================


5.3   Society capital resources
-------------------------------

(a)   Analysis of Society capital on an IFRS basis

Legal & General Assurance Society Limited (Society), the Group's principal operating subsidiary, has been allocated 
capital of £4.5bn, reflecting the significance of this operation and the importance of ensuring financial strength to 
support long term growth of the business. Of this total, £1.9bn is held outside the long term fund as Society 
Shareholder Capital (SSC), and the remainder of £2.6bn is held within the UK long term fund as Shareholder Retained
Capital (SRC). An analysis of the movement in total Society capital on the IFRS basis is provided in the table below:

                                                                                       2005     2005     2004     2004
                                                                                        SSC      SRC      SSC      SRC
                                                             Note                        £m       £m       £m       £m
----------------------------------------------------------------------------------------------------------------------
SSC/SRC as at 1 January                                                               1,973    2,196    1,953    2,214
Investment return                                                                       250               144
Transfer from long term fund                                                            265               248
Dividends from subsidiaries                                                             105                 -
Distribution to shareholders                                                           (638)             (327)
Tax                                                                                     (57)              (39)
Other                                                                                    (2)               (6)        
----------------------------------------------------------------------------------------------------------------------
SSC at end of period                                                                  1,896             1,973         

Investment return                                                                                387               209
Net capital released from non profit business               5.3(b)                               478                95
Distribution of operating profit from non profit business                                       (349)             (324)
Tax (charge)/credit                                                                             (148)               19
SRC movement included in total recognised income and expense                                      (4)              (17)
----------------------------------------------------------------------------------------------------------------------
SRC at end of period                                                                           2,560             2,196
----------------------------------------------------------------------------------------------------------------------
Society capital at end of period                                                      1,896    2,560    1,973    2,196
======================================================================================================================

(b)   Analysis of net capital released from non profit business
                                                                                                2005              2004
                                                                                                  £m                £m
----------------------------------------------------------------------------------------------------------------------
Net capital released from non profit business comprises:
     New business:
     - Strain arising in the year, before financing arrangements                                (466)             (373)
     - Financing arrangements                                                                    125                15
     Expected capital release                                                                    499               329
     Experience variances                                                                        274               290
     Changes to non-economic assumptions                                                         (35)             (197)
     Movements in non-cash items                                                                 (67)               10
     Other                                                                                         5                (8)
----------------------------------------------------------------------------------------------------------------------
                                                                                                 335                66
     Tax gross-up                                                                                143                29
----------------------------------------------------------------------------------------------------------------------
                                                                                                 478                95
======================================================================================================================

For 2005, financing arrangements comprise the financial reinsurance for new term assurance business which was finalised
in the last quarter of 2005. The reinsurance contract has a beneficial impact of £125m (net of tax) on the financing of
new business for regulatory purposes. Under IFRS, the impact is neutral and there is an equal and opposite impact 
reported through non-cash items. The financing will unwind as surplus emerges over an expected period of three years. 
The Group has financing arrangements on the same terms in place for term assurance new business written in 2006.

Expected capital release 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. The release 
figure of £499m reflects the substantial growth in non profit business in recent years.

On average, the capital invested in new non profit business is repaid from product cashflows in approximately 5 years if
required solvency margin is excluded, and approximately 6 years when required solvency margin is included. Both new 
business strain and expected capital release exclude required solvency margin, as this is not accounted for under IFRS.

An analysis of the experience variances, non-economic assumption changes and non-cash items, all net of tax, is provided
below:

Experience variances                                                                                              2005
                                                                                                                    £m
----------------------------------------------------------------------------------------------------------------------
Persistency                                                                                                         13
Mortality / Morbidity                                                                                               15
Expenses                                                                                                            (8)
Bulk Purchase Annuity data loading                                                                                  78
Investment                                                                                                         121
Allocated tax and other                                                                                             55
----------------------------------------------------------------------------------------------------------------------
                                                                                                                   274
======================================================================================================================

Experience variances of £274m comprises investment return outperformance in the non profit fund, the impact from loading
data onto the new administration system for Bulk Purchase Annuity business, and favourable variances between actual and
modelled allocated tax.

Changes to non-economic assumptions                                                                               2005
                                                                                                                    £m
----------------------------------------------------------------------------------------------------------------------
Mortality / Morbidity                                                                                               33
Expenses                                                                                                           (19)
Negative inflation                                                                                                 (33)
Other                                                                                                              (16)
----------------------------------------------------------------------------------------------------------------------
                                                                                                                   (35)
======================================================================================================================

Movements in non-cash items                                                                                       2005
                                                                                                                    £m
----------------------------------------------------------------------------------------------------------------------
Deferred tax                                                                                                        34
Deferred acquisition costs                                                                                         160
Deferred income liabilities                                                                                       (110)
IFRS adjustment for financial reinsurance                                                                         (125)
Other                                                                                                              (26)
----------------------------------------------------------------------------------------------------------------------
                                                                                                                   (67)
======================================================================================================================

(c)   Regulatory capital surplus

Society is required to measure and monitor its capital resources on a regulatory basis. The primary requirement is for 
Society to maintain capital resources in excess of its capital resources requirement and the table below shows a strong
regulatory surplus at the end of 2005. The figures in the table are unaudited.

                                                                     2005           2005           2004           2004
                                                                Long term        General      Long term        General
                                                                 business      insurance       business      insurance
                                                                       £m             £m             £m             £m
----------------------------------------------------------------------------------------------------------------------
Tier I                                                              7,944             55          6,368             75
Upper tier II                                                         602              -            602              -
----------------------------------------------------------------------------------------------------------------------
Available capital resources                                         8,546             55          6,970             75
----------------------------------------------------------------------------------------------------------------------
Capital resources requirement                                       4,142             53          2,960             73
----------------------------------------------------------------------------------------------------------------------
Regulatory capital surplus                                          4,404              2          4,010              2
======================================================================================================================

Tier I resources include an implicit item relating to non profit business of £540m (2004: £755m).

Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis. If the surplus on a
realistic basis is lower than the surplus using Peak 1 solvency rules, then a further capital requirement is included in
the capital resources requirement. This additional capital requirement is the With-Profits Insurance Capital Component 
and amounts to £1,503m in 2005 (2004: £995m) of the total capital resources requirement of £4,142m (2004: £2,960m).

The table below summarises the realistic position of the with-profits part of the fund:

                                                                                                 2005             2004
                                                                                                   £m               £m
----------------------------------------------------------------------------------------------------------------------
With-profits surplus                                                                              842              864
Risk capital margin (RCM)                                                                         327              643
----------------------------------------------------------------------------------------------------------------------
Surplus                                                                                           515              221
======================================================================================================================

The RCM has fallen significantly, as a result of management actions taken during 2005 to reduce the with-profits part of
the fund's exposure to financial risks. These actions include the provision for a charge for guarantees and improved
asset matching by product and duration.

(d)  Society financial strength ratings

Society continues to be one of the two highest rated European life assurers. As at March 2006, our financial strength 
ratings from Standard & Poor's, Moody's and A.M.Best were maintained at AA+, Aa1 and A+ respectively, all with a stable
outlook.


5.4   Distributions to shareholders from the UK long term fund
--------------------------------------------------------------

The transfer to shareholders from the long term fund is limited by a formula agreed with our regulator. The formula is 
the aggregate of the shareholders' share of the with-profits surplus, a smoothed investment return of 7% on the
embedded value of the SRC and Sub-fund and 5% on the embedded value of the non profit business.


5.5   Group cashflow statement
------------------------------

The table below shows the cashflows in the year relating to the Group's parent company, which Legal & General believes 
gives a clearer presentation of cashflows than the format prescribed by IFRS.

                                                                                                     2005         2004
                                                                                                       £m           £m
Dividends received:
     UK life and pensions                                                                             533          327
     General insurance                                                                                105            -
     Investment management                                                                             69           22
     Other                                                                                              2            4
----------------------------------------------------------------------------------------------------------------------
                                                                                                      709          353
Dividend distributions to ordinary equity holders of the company during the year                     (331)        (321)
Distributions during the year on subordinated borrowings designated as equity                         (16)         (12)
Proceeds from issue of equity                                                                           1            1
Proceeds from issue of subordinated borrowings                                                        397            -
Proceeds from issue of subordinated borrowings designated as equity                                     -          394
Working capital movements                                                                            (136)         (17)
----------------------------------------------------------------------------------------------------------------------
Net cash inflow                                                                                       624          398
======================================================================================================================

As a result of the implementation of FRS 21 'Events after the balance sheet date', an additional dividend was paid from 
UK life and pensions in 2005 to ensure sufficient distributable reserves were in place in Legal & General Group Plc at 
31 December 2005 to pay both the 2005 final and 2006 interim dividends to shareholders.





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