L&G FY 2012 Preliminary Results - Part 2

RNS Number : 3193Z

Legal & General Group Plc

06 March 2013

International Financial Reporting Standards Page 31

Supplementary operating profit information

For the year ended 31 December 2012

		2012	2011 ¹
	Notes	£m	£m


From continuing operations
Protection and Annuities	2.01(a)	640	601
Savings	2.02(a)	133	126
Investment management	2.03	243	234
US Protection		99	97
Group capital and financing	2.04	22	51
Investment projects²		(50)	(56)


Operating profit		1,087	1,053
Investment variances³		(39)	(97)
Losses attributable to non-controlling interests		(12)	(3)


Profit before income tax attributable to equity holders of the Company		1,036	953
Tax expense attributable to equity holders of the Company	2.05	(235)	(232)


Profit for the year		801	721


Attributable to:
Non-controlling interests		(12)	(3)
Equity holders of the Company		813	724



		p	p¹


Earnings per share	2.07
Based on operating profit from continuing operations after tax attributable to equity holders
of the Company		14.01	13.47
Based on profit attributable to equity holders of the Company		13.90	12.42

Diluted earnings per share	2.07
Based on operating profit from continuing operations after tax attributable to equity holders
of the Company		13.78	13.25
Based on profit attributable to equity holders of the Company		13.66	12.22


1. Supplementary operating profit has been adjusted to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this adjustment are outlined in Note 2.19. The impact is to reduce US Protection operating profit by £3m for 2011.
2. Investment projects predominantly relate to Solvency II and other strategic investments.
3. Investment variances include £18m of restructuring costs relating to a number of reorganisation initiatives around the Group, including the restructure of the International segment.

This supplementary operating profit information (one of the Group's key performance indicators) provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business.

During the year, the Group has changed the management lines of the international subsidiaries to reflect the development of our international strategy. This has had the consequence of changing the reportable segments of the Group as outlined below. In accordance with the requirements of IFRS 8, 'Operating Segments', the prior period segmental information has been restated to reflect these changes.

Operating profit for the Protection and Annuities segment represents the profit from the annuities business (individual and bulk purchase annuities and longevity insurance) and the profit from the housing and protection businesses (general insurance, and individual and group protection business). It also includes Legal & General France (LGF) and Legal & General Netherlands (LGN). Operating profit reflects the investment returns that the business expects to make on the financial investments that back this business and on shareholder funds retained within our general insurance business. LGN operating profit reflects a longer term expected return on shareholders' funds and index linked policies.

Operating profit for the Savings segment represents the profit from the insured savings businesses (non profit investment bonds and non profit pensions (including SIPPs)), the with-profits transfer, the profit of our savings investments business, and our joint venture operation in India. Operating profit for the insured savings business reflects the investment returns that the business expects to make on the financial investments that back this business.

Operating profit for the Investment management segment includes a longer term expected investment return on the shareholders' funds within the segment, and operating profit for the US Protection segment comprises the profit before tax from Legal & General America (LGA).

Investment return on Group capital incorporates a longer term expected investment return using longer term investment return assumptions applied to the average balance of Group invested assets (including interest bearing intra-group balances) calculated on a monthly basis. Profits or losses arising from actuarial movements on annuities held by the Group's defined benefit pension schemes are excluded from operating profit. Profits or losses arising on the elimination of own debt holdings are also excluded from operating profit. The Group capital and financing segment also includes our joint ventures in Egypt and Gulf.

International Financial Reporting Standards Page 32

Supplementary operating profit information

2.01 Protection and Annuities

(a) Protection and Annuities operating profit
		2012	2011
	Notes	£m	£m


Annuities		281	287


Protection		289	242
General insurance	2.01(f)	30	42
Other		(3)	(10)


Total UK Housing and Protection operating profit		316	274


Total UK Protection and Annuities operating profit	2.01(b)	597	561


Netherlands		28	20
France		15	20


Total Protection and Annuities operating profit		640	601

(b) Analysis of UK Protection and Annuities operating profit
			Housing			Housing
			and			and
		Annui-	Protec-		Annui-	Protec-
		ties	tion	Total	ties	tion	Total
		2012	2012	2012	2011	2011	2011
	Notes	£m	£m	£m	£m	£m	£m


UK Protection and Annuities business segment operating profit comprises:
Operational cash generation		243	265	508	227	255	482
New business strain		14	(45)	(31)	35	(66)	(31)


Net cash generation		257	220	477	262	189	451
Experience variances	2.01(c)			14			22
Changes to valuation assumptions	2.01(d)			(2)			24
Movements in non-cash items	2.01(e)			(41)			(86)
Other				2			-


				450			411
Tax gross up				147			150


Total UK Protection and Annuities operating profit				597			561



During the year, Netherlands and France paid £14m (2011: £16m) of sustainable dividends to the Group, which has been included in net cash generation for the Protection and Annuities segment. The UK protection and annuities (non profit business) operational cash generation represents the expected surplus to be generated in the period from the in-force non profit business which is broadly equivalent to the expected release of profit from the non profit UK protection and annuities business using best estimate assumptions. The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model. Both new business strain and operational cash generation exclude required solvency margin from the liability calculation.

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

International Financial Reporting Standards Page 33

Supplementary operating profit information

2.01 Protection and Annuities (continued)

(c) Experience variances

	2012	2011
	£m	£m


Persistency	(4)	(4)
Mortality/morbidity¹	3	(32)
Expenses	2	(2)
Bulk purchase annuity data loading	37	42
Project and development costs	(10)	(7)
Tax²	(14)	33
Other	-	(8)


	14	22


1. Mortality/morbidity in 2011 relates to a number of high value claims in group protection. This has trended back to assumptions in 2012.
2. This relates to 2012 unrelieved expenses carried forward for tax purposes. In 2011 there was a net utilisation of brought forward expenses.

(d) Changes to valuation assumptions

	2012	2011
	£m	£m


Persistency	(8)	(1)
Mortality/morbidity¹	(14)	(1)
Expenses²	(2)	28
Other³	22	(2)


	(2)	24


1. This primarily relates to the update of assumptions in the annuities business.
2. Prior year expenses relate to efficiency improvements in Protection and Annuities.
3. Other valuation assumption changes primarily relates to a reduction to the retail protection reserve for reinsurance default and a reduction in reserves applying PS06/14 to a retail protection product.

(e) Movements in non-cash items

	2012	2011
	£m	£m


Deferred tax¹	(32)	(77)
Other	(9)	(9)


	(41)	(86)


1. This amount includes £(72)m (2011: £(80)m) for the utilisation of trading losses within net cash generation. The offsetting items comprise movements in deferred tax from creation of carried forward unrelieved expenses for tax purposes.

(f) General insurance operating profit
	Net cash		Oper-	Net cash		Oper-
	gener-		ating	gener-		ating
	ation	Tax	profit	ation	Tax	profit
	2012	2012	2012	2011	2011	2011
	£m	£m	£m	£m	£m	£m


Household	22	7	29	27	10	37
Other business	1	-	1	4	1	5


	23	7	30	31	11	42

International Financial Reporting Standards Page 34

Supplementary operating profit information

2.01 Protection and Annuities (continued)

(g) General insurance underwriting result
	2012	2011
	£m	£m


Household¹	16	23
Other business	1	4


	17	27


1. The 2012 household underwriting result reflects weather experience consistent with our assumptions. The 2011 result reflects the benign weather experienced during the year.

(h) General insurance combined operating ratio¹
	2012	2011
	%	%


Household	95	91
Other business	95	78


	95	90


1. The calculation of the general insurance combined operating ratio has been amended to incorporate commission and expenses as a percentage of earned premiums, as opposed to premium written. Prior year comparatives have been amended accordingly.

International Financial Reporting Standards Page 35

Supplementary operating profit information

2.02 Savings

(a) Savings operating profit
		2012	2011
	Note	£m	£m


Savings investments¹		16	23
Insured savings²		48	34
With-profits³		69	69


Total Savings operating profit	2.02(b)	133	126



1. Savings investments operating profit includes retail and institutional unit trusts and Suffolk Life.
2. Insured savings includes non profit investment bonds and pensions (including workplace savings and SIPPs), Nationwide Life savings business, International (Ireland) and our joint venture operation in India.
3. With-profits business operating profit is the shareholders' share of total with-profits bonuses.

(b) Analysis of Savings operating profit
				Savings
		Insured	With-	invest-
		savings	profits	ments	Total
		2012	2012	2012	2012
	Notes	£m	£m	£m	£m


Savings business segment operating profit comprises:
Operational cash generation		108	52	19	179
New business strain		(62)	-	-	(62)


Net cash generation		46	52	19	117
Insured savings
Experience variances	2.02(c)				(39)
Changes to valuation assumptions	2.02(d)				20
Movements in non-cash items and other	2.02(e)				11
Savings investments
Movements in non-cash items and other					(9)


					100
Tax gross up					33


Total Savings operating profit					133

International Financial Reporting Standards Page 36

Supplementary operating profit information

2.02 Savings (continued)

(b) Analysis of Savings operating profit (continued)

				Savings
		Insured	With-	invest-
		savings	profits	ments	Total
		2011	2011	2011	2011
	Notes	£m	£m	£m	£m


Savings business segment operating profit comprises:
Operational cash generation		101	51	22	174
New business strain		(63)	-	-	(63)


Net cash generation		38	51	22	111
Insured savings
Experience variances	2.02(c)				(12)
Changes to valuation assumptions	2.02(d)				(5)
Movements in non-cash items and other	2.02(e)				4
Savings investments
Movements in non-cash items and other					(6)


					92
Tax gross up					34


Total Savings operating profit					126



The insured savings operational cash generation represents the expected surplus generated in the period from the in-force investment bonds and pensions business (non profit savings) which is broadly equivalent to the expected release of profit from non profit savings business using best estimate assumptions and the IFRS profit after tax of the Nationwide Life savings business and International (Ireland). The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model. Both new business strain and operational cash generation exclude required solvency margin from the liability calculation.

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

(c) Experience variances
	2012	2011
	£m	£m


Persistency	(3)	(1)
Mortality/morbidity	-	2
Expenses	(1)	1
Project and development costs¹	(33)	(12)
Tax	1	(4)
Other	(3)	2


	(39)	(12)


1. The 2012 project and development costs are primarily driven by the Retail Distribution Review £18m (2011: £3m) with additional expenditure on our workplace proposition (including auto-enrolment) of £12m (2011: £7m). Other costs are £3m (2011: £2m).

International Financial Reporting Standards Page 37

Supplementary operating profit information

2.02 Savings (continued)

(d) Changes to valuation assumptions
	2012	2011
	£m	£m


Persistency	-	(2)
Mortality/morbidity	-	1
Expenses¹	17	(2)
Other	3	(2)


	20	(5)


1. Expense valuation assumptions relate to efficiency improvements in workplace pensions.

(e) Movements in non-cash items and other
		2012	2011
	Note	£m	£m


Deferred tax		(6)	(6)
Deferred acquisition costs (DAC)¹	2.02(f)	(9)	(20)
Deferred income liabilities (DIL)¹		14	27
Other²		12	3


		11	4


1. Fluctuations to the DAC and DIL movement are caused by changes to economic assumptions and the associated impact on the trail commission asset within the DAC balance and the trail commission liability in the DIL balance.
2. Other includes the operating profit/(loss) attributable to our joint venture in India.

(f) Deferred acquisition cost movement, net of associated deferred tax
	2012	2011
	£m	£m


As at 1 January	592	612
Amortisation through income¹	(28)	(74)
Acquisition costs deferred	42	54


As at 31 December	606	592


1. The DAC amortisation incorporates a one-off increase of £23m relating to the accounting for Trail Commission DOC where estimation techniques used to determine the amortisation profile has been revised and strengthened.


The Group's balance sheet deferred acquisition costs of £1.9bn (2011: £1.8bn) is presented gross of associated deferred tax. The main contributors to the balance are LGA £0.8bn (2011: £0.7bn), non profit savings of £0.7bn (2011: £0.7bn), retail investments £0.1bn (2011: £0.1bn), savings with-profits £0.1bn (2011: £0.1bn) and other business totalling £0.2bn (2011: £0.2bn).

Expected amortisation profile:
	2012	2011
	£m	£m


Expected to be amortised within one year	76	65
Expected to be amortised between one year and five years	305	271
Expected to be amortised in over five years	225	256


	606	592

International Financial Reporting Standards Page 38

Supplementary operating profit information

2.03 Investment management

	2012	2011
	£m	£m


Pension funds (managed and segregated)	181	172
Other non-pension¹	22	25
Investment management services for internal funds	40	37


Total Investment management operating profit	243	234


1. Other non-pension includes institutional segregated mandates, private equity and property (both in the UK and overseas). Interest income on shareholder funds of £6m (2011: £9m) on an average asset balance of £0.4bn (2011: £0.4bn) has been included within other non-pension operating profit.

2.04 Group capital and financing

	2012	2011
	£m	£m


Investment return	168	191
Interest expense¹	(127)	(123)
Investment expenses	(5)	(5)
Unallocated corporate expenses²	(14)	(12)


Total Group capital and financing operating profit	22	51


1. Interest expense excludes interest on non recourse financing (see Note 2.12).
2. Unallocated corporate expenses includes the operating profit/(loss) attributable to our joint venture operations in Egypt and the Gulf.

2.05 Analysis of tax attributable to equity holders


	Profit/	Tax		Profit/		Tax
	(loss)	(exp-		(loss)		(exp-
	before	ense)/		before		ense)/
	tax	credit		tax		credit
	2012	2012		2011		2011
				Restated¹		Restated¹
	£m	£m		£m		£m


Protection and Annuities	640	(159)		601		(162)
Savings	133	(33)		126		(34)
Investment management	243	(46)		234		(45)
US Protection	99	(37)		97		(34)
Group capital and financing	22	(4)		51		(8)
Investment projects	(50)	12		(56)		15


Operating profit/Tax expense	1,087	(267)		1,053		(268)
Investment variances	(39)	39		(97)		42
Impact of change in UK tax rates	-	(7)		-		(6)
Losses attributable to non-controlling interests	(12)	-		(3)		-


Profit for the year/Tax expense for the year	1,036	(235)		953		(232)


1. Operating profit/Tax expense has been restated to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this restatement are outlined in Note 2.19.

The equity holders' effective tax rate for the period is 22.7% (2011: 24.4%). The Group's effective tax rate remains slightly below the UK corporation tax rate due to a number of differences between the measurement of accounting and taxable profits. International Financial Reporting Standards Page 39 Consolidated Income Statement For the year ended 31 December 2012
			2012		2011
					Restated¹
	Notes		£m		£m


Revenue
Gross written premiums	2.06		5,668		5,719
Outward reinsurance premiums			(718)		(620)
Net change in provision for unearned premiums			(25)		(18)


Net premiums earned			4,925		5,081
Fees from fund management and investment contracts			875		897
Investment return			28,834		12,143
Operational income			342		196


Total revenue			34,976		18,317


Expenses
Claims and change in insurance liabilities			8,588		7,173
Reinsurance recoveries			(779)		(493)


Net claims and change in insurance liabilities			7,809		6,680
Change in provisions for investment contract liabilities			23,656		9,306
Acquisition costs			784		783
Finance costs			165		165
Other expenses			1,194		1,010
Transfers to/(from) unallocated divisible surplus			158		(402)


Total expenses			33,766		17,542


Profit before tax			1,210		775
Tax (expense)/income attributable to policyholder returns			(174)		178


Profit before tax attributable to equity holders of the Company			1,036		953


Total tax expense			(409)		(54)
Tax expense/(income) attributable to policyholder returns			174		(178)


Tax expense attributable to equity holders	2.05		(235)		(232)


Profit for the year			801		721



Attributable to:
Non-controlling interests			(12)		(3)
Equity holders of the Company			813		724



Dividend distributions to equity holders of the Company during the year	2.08		394		298
Dividend distributions to equity holders of the Company proposed after the year end	2.08		336		279



					Restated¹
			p		p


Earnings per share
Based on profit attributable to equity holders of the Company	2.07		13.90		12.42


Diluted earnings per share
Based on profit attributable to equity holders of the Company	2.07		13.66		12.22

1. The Consolidated Income Statement has been restated to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this adjustment are outlined in Note 2.19.

This financial information was approved by the Board on 5 March 2013.

International Financial Reporting Standards Page 40

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2012

	2012	2011
		Restated
	£m	£m


Profit for the year	801	721

Other comprehensive income after tax
Exchange differences on translation of overseas operations	(13)	-
Actuarial (losses) on defined benefit pension schemes	(107)	(121)
Actuarial losses on defined benefit pension schemes transferred to unallocated divisible surplus	41	48
Net change in financial investments designated as available-for-sale	32	15


Total comprehensive income for the year	754	663



Total comprehensive income attributable to:
Non-controlling interests	(12)	(3)
Equity holders of the Company	766	666

International Financial Reporting Standards Page 41

Consolidated Balance Sheet

As at 31 December 2012

		2012	2011
			Restated¹
	Notes	£m	£m


Assets
Purchased interest in long term businesses and other intangible assets		211	148
Deferred acquisition costs		1,904	1,833
Investment in associates		87	60
Property, plant and equipment		92	78
Investment property		5,143	4,894
Financial investments	2.09	316,748	300,604
Reinsurers' share of contract liabilities		2,499	2,289
Deferred tax asset		316	493
Current tax recoverable		194	94
Other assets		1,564	1,893
Assets of operations classified as held for sale²		891	-
Cash and cash equivalents		16,652	14,113


Total assets		346,301	326,499



Equity
Share capital	2.10	148	147
Share premium	2.10	956	941
Employee scheme treasury shares		(43)	(48)
Capital redemption and other reserves		153	117
Retained earnings		4,227	3,899


Shareholders' equity		5,441	5,056
Non-controlling interests		39	66


Total equity		5,480	5,122



Liabilities
Subordinated borrowings	2.12	1,890	1,921

Participating insurance contracts	2.13	8,116	8,750
Participating investment contracts	2.14	7,403	7,276
Unallocated divisible surplus		1,153	1,038
Value of in-force non-participating contracts		(242)	(242)


Participating contract liabilities		16,430	16,822



Non-participating insurance contracts	2.13	37,728	34,006
Non-participating investment contracts	2.14	264,958	251,345


Non-participating contract liabilities		302,686	285,351


Senior borrowings	2.12	1,475	1,329
Provisions	2.17	983	891
Deferred tax liabilities		382	327
Current tax liabilities		68	1
Payables and other financial liabilities		8,083	7,643
Other liabilities		959	933
Net asset value attributable to unit holders		7,702	6,159
Liabilities of operations classified as held for sale²		163	-


Total liabilities		340,821	321,377


Total equity and liabilities		346,301	326,499

1. The consolidated balance sheet has been restated to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this adjustment are outlined in Note 2.19.

2. Assets and liabilities of operations classified as held for sale relate to seed capital the Group has invested into newly established funds. They are classified as held for sale as the Group expects it's ownership to reduce below the level for control within 12 months of classification.

International Financial Reporting Standards Page 42

Consolidated Statement of Changes in Equity

			Employee	Capital
			scheme	redemption			Non-
	Share	Share	treasury	and other	Retained		controlling	Total
	capital	premium	shares	reserves	earnings	Total	interests	equity
For the year ended 31 December 2012	£m	£m	£m	£m	£m	£m	£m	£m


As at 1 January 2012	147	941	(48)	117	3,899	5,056	66	5,122
Profit for the year	-	-	-	-	813	813	(12)	801
Exchange differences on translation of
overseas operations	-	-	-	(13)	-	(13)	-	(13)
Actuarial (losses) on defined benefit
pension schemes	-	-	-	-	(107)	(107)	-	(107)
Actuarial losses on defined benefit
pension schemes transferred to
unallocated divisible surplus	-	-	-	-	41	41	-	41
Net change in financial investments
designated as available-for-sale	-	-	-	32	-	32	-	32


Total comprehensive income/(expense)
for the year	-	-	-	19	747	766	(12)	754
Options exercised under
share option schemes:
- Executive share option schemes	-	1	-	-	-	1	-	1
- Savings related share option scheme	1	14	-	-	-	15	-	15
Shares purchased	-	-	(3)	-	-	(3)	-	(3)
Shares vested	-	-	8	(21)	-	(13)	-	(13)
Employee scheme treasury shares:
- Value of employee services	-	-	-	19	-	19	-	19
Share scheme transfers
to retained earnings	-	-	-	-	(6)	(6)	-	(6)
Dividends	-	-	-	-	(394)	(394)	-	(394)
Movement in third party interests	-	-	-	-	-	-	(15)	(15)
Currency translation differences	-	-	-	19	(19)	-	-	-


As at 31 December 2012	148	956	(43)	153	4,227	5,441	39	5,480

International Financial Reporting Standards Page 43

Consolidated Statement of Changes in Equity (continued)

			Employee	Capital
			scheme	redemption			Non-
	Share	Share	treasury	and other	Retained		controlling	Total
For the year ended 31 December 2011	capital	premium	shares	reserves	earnings	Total	interests	equity
(Restated)	£m	£m	£m	£m	£m	£m	£m	£m


As at 1 January 2011	147	938	(41)	91	3,546	4,681	47	4,728
Profit for the year	-	-	-	-	724	724	(3)	721
Exchange differences on translation of
overseas operations	-	-	-	-	-	-	-	-
Actuarial (losses) on defined benefit
pension schemes	-	-	-	-	(121)	(121)	-	(121)
Actuarial losses on defined benefit
pension schemes transferred to
unallocated divisible surplus	-	-	-	-	48	48	-	48
Net change in financial investments
designated as available-for-sale	-	-	-	15	-	15	-	15


Total comprehensive income/(expense)
for the year	-	-	-	15	651	666	(3)	663
Options exercised under
share option schemes:
- Executive share option schemes	-	1	-	-	-	1	-	1
- Savings related share option scheme	-	2	-	-	-	2	-	2
Shares purchased	-	-	(15)	-	-	(15)	-	(15)
Shares vested	-	-	8	(19)	-	(11)	-	(11)
Employee scheme treasury shares:
- Value of employee services	-	-	-	27	-	27	-	27
Share scheme transfers
to retained earnings	-	-	-	-	3	3	-	3
Dividends	-	-	-	-	(298)	(298)	-	(298)
Movement in third party interests	-	-	-	-	-	-	22	22
Currency translation differences	-	-	-	3	(3)	-	-	-


As at 31 December 2011	147	941	(48)	117	3,899	5,056	66	5,122

International Financial Reporting Standards Page 44

Consolidated Cash Flow Statement

For the year ended 31 December 2012

	2012	2011
		Restated
	£m	£m


Cash flows from operating activities
Profit for the year	801	721
Adjustments for non cash movements in net profit for the year
Realised and unrealised gains on financial investments and investment properties	(18,429)	(3,014)
Investment income	(9,470)	(8,971)
Interest expense	165	165
Tax expense	409	54
Other adjustments	67	68
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss	(1,118)	3,736
Investments designated as available-for-sale	30	(29)
Other assets	(3,008)	(1,678)
Net increase in operational liabilities
Insurance contracts	3,221	2,075
Transfer from unallocated divisible surplus	115	(431)
Investment contracts	13,795	(2,068)
Value of in-force non-participating contracts	-	135
Other liabilities	7,026	2,258


Cash used in operations	(6,396)	(6,979)
Interest paid	(164)	(164)
Interest received	5,013	5,021
Tax paid¹	(193)	(193)
Dividends received	4,539	3,872


Net cash flows from operating activities	2,799	1,557


Cash flows from investing activities
Net acquisition of plant, equipment and intangibles	(59)	(41)
Acquisitions (net of cash acquired)²	(27)	(11)
Capital injection into overseas joint ventures	-	(5)


Net cash flows from investing activities	(86)	(57)


Cash flows from financing activities
Dividend distributions to ordinary equity holders of the Company during the year	(394)	(298)
Proceeds from issue of ordinary share capital	16	3
Purchase of employee scheme shares	(3)	(15)
Proceeds from borrowings	1,318	1,327
Repayment of borrowings	(1,105)	(1,428)


Net cash flows from financing activities	(168)	(411)


Net increase in cash and cash equivalents	2,545	1,089
Exchange (losses) on cash and cash equivalents	(6)	(12)
Cash and cash equivalents at 1 January	14,113	13,036


Cash and cash equivalents at 31 December	16,652	14,113


1. Tax comprises UK corporation tax paid of £60m (2011: £80m), overseas corporate taxes of £8m (2011: £8m) and withholding tax of £125m (2011: £105m).
2. Net cash flows from acquisitions include total net identifiable assets acquired of £33m (2011: £15m) less cash and cash equivalents acquired of £6m (2011: £4m).

The Group's consolidated cash flow statement includes all cash and cash equivalent flows, including those relating to the UK long term fund policyholders.

International Financial Reporting Standards Page 45

Notes to the Financial Statements

2.06 Gross written premiums on insurance contracts


	2012	2011
	£m	£m


From continuing operations
Protection and Annuities
Non-participating UK business	3,782	3,778
Netherlands (LGN)	172	194
France (LGF)	406	393
General insurance
- Household	327	283
- Other business	22	21


Total Protection and Annuities	4,709	4,669

Savings
Non-participating Savings business	39	40
Participating business	336	488


Total Savings	375	528

US Protection	584	522


Total gross written premiums	5,668	5,719

2.07 Earnings per share

(a) Earnings per share


	Profit	Tax	Profit	Earnings	Profit	Tax	Profit	Earnings
	before tax	expense	after tax	per share	before tax	expense	after tax	per share
	2012	2012	2012	2012	2011	2011	2011	2011
					Restated	Restated	Restated	Restated
	£m	£m	£m	p	£m	£m	£m	p


Operating profit	1,087	(267)	820	14.01	1,053	(268)	785	13.47
Investment variances	(39)	39	-	0.01	(97)	42	(55)	(0.94)
Impact of change in UK tax rates	-	(7)	(7)	(0.12)	-	(6)	(6)	(0.11)


Earnings per share based on profit
attributable to equity holders	1,048	(235)	813	13.90	956	(232)	724	12.42

(b) Diluted earnings per share
(i) Based on operating profit after tax


	Profit	Number	Earnings	Profit	Number	Earnings
	after tax	of shares¹	per share	after tax	of shares¹	per share
	2012	2012	2012	2011	2011	2011
				Restated		Restated
	£m	m	p	£m	m	p


Operating profit after tax	820	5,851	14.01	785	5,828	13.47
Net shares under options allocable for no further consideration	-	99	(0.23)	-	97	(0.22)


Diluted earnings per share	820	5,950	13.78	785	5,925	13.25

International Financial Reporting Standards Page 46

Notes to the Financial Statements

2.07 Earnings per share (continued)

(b) Diluted earnings per share (continued)

(ii) Based on profit attributable to equity holders


	Profit	Number	Earnings	Profit	Number	Earnings
	after tax	of shares¹	per share	after tax	of shares¹	per share
	2012	2012	2012	2011	2011	2011
				Restated		Restated
	£m	m	p	£m	m	p


Profit attributable to equity holders of the Company	813	5,851	13.90	724	5,828	12.42
Net shares under options allocable for no further consideration	-	99	(0.24)	-	97	(0.20)


Diluted earnings per share	813	5,950	13.66	724	5,925	12.22


1. Weighted average number of shares.

The number of shares in issue at 31 December 2012 was 5,912,782,826 (31 December 2011: 5,872,166,893).

2.08 Dividends


	Per		Per
	share	Total	share	Total
	2012	2012	2011	2011
	p	£m	p	£m


Ordinary share dividends paid in the year
- Prior year final dividend	4.74	278	3.42	201
- Current year interim dividend	1.96	116	1.66	97


	6.70	394	5.08	298


Ordinary share dividend proposed¹	5.69	336	4.74	279


1. The dividend proposed has not been included as a liability in the balance sheet.

2.09 Financial investments

	2012	2011
	£m	£m


Equities	148,488	134,594
Unit trusts	7,238	7,487
Debt securities¹	152,526	149,711
Accrued interest	1,669	1,705
Derivative assets²	6,445	6,756
Loans and receivables	382	351


	316,748	300,604


1. Detailed analysis of debt securities which shareholders are directly exposed to are disclosed in Note 4.02.
2. Derivative exposures arise from efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps, foreign exchange forward contracts for asset and liability management and the matching of Guaranteed Equity Bonds within the Nationwide portfolio. Derivative assets are shown gross of derivative liabilities and include £3,296m (2011: £3,174m) held on behalf of unit linked policyholders.

There have been no significant transfers between levels 1, 2 and 3 of the fair value hierarchy (as prescribed in IFRS 7 'Financial Instruments: Disclosures') for the year ended 31 December 2012. Further details are provided in Note 4.07.

International Financial Reporting Standards Page 47

Notes to the Financial Statements

2.10 Share capital and share premium

		2012			2011
		Number of	2012		Number of	2011
Authorised share capital		shares	£m		shares	£m


At 31 December: ordinary shares of 2.5p each	9,200,000,000		230	9,200,000,000		230



					Share	Share
				Number of	capital	premium
Issued share capital, fully paid				shares	£m	£m


As at 1 January 2012			5,872,166,893		147	941
Options exercised under share option schemes
- Executive share option scheme				1,626,478	-	1
- Savings related share option scheme			38,989,455		1	14


As at 31 December 2012			5,912,782,826		148	956


					Share	Share
				Number of	capital	premium
Issued share capital, fully paid				shares	£m	£m


As at 1 January 2011			5,866,669,323		147	938
Options exercised under share option schemes
- Executive share option scheme				1,736,890	-	1
- Savings related share option scheme			3,760,680		-	2


As at 31 December 2011			5,872,166,893		147	941


There is one class of ordinary shares of 2.5p each. All shares issued carry equal voting rights.

The holders of the Company's ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings of the Company.

International Financial Reporting Standards Page 48

Notes to the Financial Statements

2.11 Segmental analysis of shareholders' equity

	2012	2011
		Restated
	£m	£m


Protection and Annuities
General insurance	180	148
Netherlands (LGN)	156	118
France (LGF)	204	196
Other	10	6


Total Protection and Annuities	550	468



Savings
Savings investments	138	136
Other	52	48


Total Savings	190	184



Investment management	360	351



US Protection	919	910



Group capital and financing	3,422	3,143


Shareholders' equity	5,441	5,056



Overseas shareholder equity is presented on a legal entity basis, whereas UK shareholder equity is based on a management assessment of this business.

The Group has five reporting segments comprising Protection and Annuities, Savings, Investment management, US Protection, and Group capital and financing. The Protection and Annuities segment comprises individual and group protection, individual and bulk purchase annuities, longevity and general insurance, together with estate agencies and the housing related business conducted through our regulated mortgage network. It also includes Legal & General France (LGF) and Legal & General Netherlands (LGN). The Savings segment comprises non profit investment bonds, non profit pensions (including SIPPs), ISAs, retail unit trusts, retail platform businesses, all with-profits products, and our joint venture operation in India. The Investment management segment comprises institutional fund management and LGIM America (LGIMA). The US Protection segment comprises individual protection and universal life contracts written by Legal & General America (LGA). Shareholders' equity supporting the non profit Protection and Annuities and Savings businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within Group capital and financing. This also includes capital within the Group's treasury function and unit trust funds and property partnerships, which are managed on behalf of clients but are required to be consolidated under IFRS, which do not constitute a separately reportable segment. The Group capital and financing segment also includes our joint ventures in Egypt and the Gulf.

International Financial Reporting Standards Page 49

Notes to the Financial Statements

2.12 Borrowings

	2012	2011
	£m	£m


Subordinated borrowings
6.385% Sterling perpetual capital securities (Tier 1)	700	721
5.875% Sterling undated subordinated notes (Tier 2)	419	421
4.0% Euro subordinated notes 2025 (Tier 2)	479	483
10% Sterling subordinated notes 2041 (Tier 2)	309	309
Client fund holdings of Group debt¹	(17)	(13)


Total subordinated borrowings	1,890	1,921



Senior borrowings
Sterling medium term notes 2031-2041	608	608
Euro Commercial paper	333	246
Bank loans/other	6	8
Client fund holdings of Group debt¹	(53)	(51)


Total senior borrowings (excluding non recourse)	894	811


Total borrowings (excluding non recourse)	2,784	2,732



Non recourse
- US Dollar Triple X securitisation 2037	272	286
- Suffolk Life unit linked borrowings	123	136
- LGV 6/LGV 7 Private Equity Fund Limited Partnership	128	96
- Consolidated Property Limited Partnerships	58	-


Total senior borrowings (including non recourse)	1,475	1,329


Total borrowings	3,365	3,250


1. £70m (2011: £64m) of the Group's subordinated and senior debt is currently held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total borrowings in the table above.

International Financial Reporting Standards Page 50

Notes to the Financial Statements

2.12 Borrowings (continued)

Subordinated borrowings

6.385% Sterling perpetual capital securities

In 2007, Legal & General Group Plc issued £600m of 6.385% Sterling perpetual capital securities. Simultaneous with the issuance, the fixed coupon was swapped into six month LIBOR plus 0.94% pa. These securities are callable at par on 2 May 2017 and every three months thereafter. If not called, the coupon from 2 May 2017 will be reset to three month LIBOR plus 1.93% pa. For regulatory purposes these securities are treated as innovative tier 1 capital. These securities have been classified as liabilities as the interest payments become mandatory in certain circumstances.

5.875% Sterling undated subordinated notes

In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% pa. These notes are treated as upper tier 2 capital for regulatory purposes. These securities have been classified as liabilities as the interest payments become mandatory in certain circumstances.

4.0% Euro subordinated notes 2025

In 2005, Legal & General Group Plc issued €600m of 4.0% Euro dated subordinated notes. The proceeds were swapped into sterling. The notes are callable at par on 8 June 2015 and each year thereafter. If not called, the coupon from 8 June 2015 will reset to a floating rate of interest based on prevailing three month Euribor plus 1.7% pa. These notes mature on 8 June 2025 and are treated as lower tier 2 capital for regulatory purposes.

10% Sterling subordinated notes 2041

On 16 July 2009, Legal & General Group Plc issued £300m of 10% dated subordinated notes. The notes are callable at par on 23 July 2021 and every five years thereafter. If not called, the coupon from 23 July 2021 will be reset to the prevailing five year benchmark gilt yield plus 9.325% pa. These notes mature on 23 July 2041 and are treated as lower tier 2 capital for regulatory purposes.

Non recourse financing

US Dollar Triple X securitisation 2037

In 2006, a subsidiary of LGA issued US$450m of non recourse debt in the US capital markets to meet the Triple X reserve requirements of part of the US term insurance written after 2005 and 2006. It is secured on the cash flows related to that tranche of business.

Suffolk Life unit linked borrowings

All of these non recourse borrowings are in relation to commercial properties held within SIPP plans and the borrowings solely relate to client investments.

LGV6/LGV7 Private Equity Fund Limited Partnerships

These borrowings are non recourse bank borrowings.

Consolidated Property Limited Partnerships

These borrowings are non recourse bank borrowings.

Syndicated credit facility

As at 31 December 2012, the Group had in place a £1.00bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in October 2017. No drawings were made under this facility during 2012.

Holding company short term assets

Short term assets available at the holding company level exceeded the amount of non-unit linked short term borrowings of £337m (2011: £254m). They comprise Euro Commercial paper and bank loans.

International Financial Reporting Standards Page 51

Notes to the Financial Statements

2.13 Insurance contract liabilities

(a) Analysis of insurance contract liabilities


			Re-		Re-
		Gross	insurance	Gross	insurance
		2012	2012	2011	2011
	Notes	£m	£m	£m	£m


Participating insurance contracts	2.13(b)	8,116	(1)	8,750	(1)
Non-participating insurance contracts¹	2.13(c)	37,445	(2,277)	33,761	(2,110)
General insurance contracts	2.13(d)	283	(8)	245	(6)


Insurance contract liabilities		45,844	(2,286)	42,756	(2,117)


1. Excluding General insurance contracts.

(b) Movement in participating insurance contract liabilities


		Re-		Re-
	Gross	insurance	Gross	insurance
	2012	2012	2011	2011
	£m	£m	£m	£m


As at 1 January	8,750	(1)	9,383	(1)
New liabilities in the year	262	-	374	-
Liabilities discharged in the year	(1,413)	-	(1,435)	-
Unwinding of discount rates	78	-	85	-
Effect of change in non-economic assumptions	4	-	(26)	-
Effect of change in economic assumptions	329	-	357	-
Other	106	-	12	-


As at 31 December	8,116	(1)	8,750	(1)

International Financial Reporting Standards Page 52

Notes to the Financial Statements

2.13 Insurance contract liabilities (continued)


		Re-		Re-
	Gross	insurance	Gross	insurance
	2012	2012	2011	2011
	£m	£m	£m	£m


As at 1 January	33,761	(2,110)	31,064	(2,096)
New liabilities in the year	2,667	(392)	2,687	(309)
Liabilities discharged in the year	(2,271)	213	(2,018)	144
Unwinding of discount rates	1,311	(118)	1,321	(123)
Effect of change in non-economic assumptions	(124)	132	(403)	389
Effect of change in economic assumptions¹	2,229	(17)	1,133	(111)
Foreign exchange adjustments	(128)	15	(23)	(4)


As at 31 December	37,445	(2,277)	33,761	(2,110)


1. The economic assumptions changes in 2012 principally reflect the narrowing of credit spreads. Movements in credit spreads also increased the value of the corresponding backing assets.

(d) Analysis of General insurance contract liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2012	2012	2011	2011
	£m	£m	£m	£m


Outstanding claims	74	-	76	(1)
Claims incurred but not reported	30	-	17	-
Unearned premiums	179	(8)	152	(5)


General insurance contract liabilities	283	(8)	245	(6)

(e) Movement in General insurance claim liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2012	2012	2011	2011
	£m	£m	£m	£m


As at 1 January	93	(1)	127	(1)
Claims arising	181	-	172	-
Claims paid	(172)	1	(207)	-
Adjustments to prior year liabilities	2	-	1	-


As at 31 December	104	-	93	(1)

International Financial Reporting Standards Page 53

Notes to the Financial Statements

2.14 Investment contract liabilities

(a) Analysis of investment contract liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2012	2012	2011	2011
	£m	£m	£m	£m


Participating investment contracts	7,403	(2)	7,276	-
Non-participating investment contracts	264,958	(211)	251,345	(172)


Investment contract liabilities	272,361	(213)	258,621	(172)

(b) Movement in investment contract liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2012	2012	2011	2011
	£m	£m	£m	£m


As at 1 January	258,621	(172)	260,749	(233)
Reserves in respect of new business¹	28,347	(2,045)	28,500	(1,431)
Amounts paid on surrenders and maturities during the year¹	(37,699)	704	(39,419)	744
Investment return and related benefits	23,469	1,300	9,168	748
Management charges	(300)	-	(315)	-
Foreign exchange adjustments	(55)	-	(59)	-
Other	(22)	-	(3)	-


As at 31 December	272,361	(213)	258,621	(172)


1. Reserves in respect of new business and surrenders and maturities exclude £16.0bn (2011: £13.6bn) net inflows from investment products that are not consolidated into the Group's results, £1.5bn (2011: £3.1bn) held on a temporary basis, generally as part of portfolio reconstructions, £(1.1)bn (2011: £(0.9)bn) of general insurance products flows and £(0.5)bn (2011: £(0.7)bn) of other movements, which contribute towards Investment Management and Savings new business flows disclosed in our new business section.

Fair value movements of £(16,305)m (2011: £(9,813)m) are included within the income statement arising from movements in investment contract liabilities designated as FVTPL.

2.15 Sensitivity analysis

(a) UK long term business

	Impact on		Impact on
	pre-tax	Impact on	pre-tax	Impact on
	Group profit	Group equity	Group profit	Group equity
	net of	net of	net of	net of
	re-	re-	re-	re-
	insurance	insurance	insurance	insurance
	2012	2012	2011	2011
	£m	£m	£m	£m


Sensitivity test
1% increase in interest rates	47	36	49	36
1% decrease in interest rates	(85)	(64)	(142)	(104)
Credit spread widens by 100bps with no change in expected defaults	(79)	(59)	(52)	(38)
1% increase in inflation	(17)	(13)	37	28
Default of largest reinsurer	(676)	(511)	(694)	(510)
1% decrease in annuitant mortality	(96)	(73)	(76)	(55)


The table above shows the impact on Group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario for the non-participating business written in the non profit part of the UK LTF.

International Financial Reporting Standards Page 54

Notes to the Financial Statements

2.15 Sensitivity analysis (continued)

The interest rate sensitivities reflect the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the UK long term business. This scenario does not reflect management action which could be taken to reduce the impact of a decrease in interest rates.

* In calculating the alternative values, all other assumptions are left unchanged. In practice, items of the Group's experience may be correlated.
* The Group seeks to actively manage its asset and liability position. A change in market conditions may lead to changes in the asset allocation or charging structure which may have a more, or less, significant impact on the value of the liabilities. The analysis also ignores any second order effects of the assumption change, including the potential impact on the Group asset and liability position and any second order tax effects.
* These stresses use the assets that back the liabilities. Any excess assets have not been stressed in these calculations.
* The sensitivity of the profit to changes in assumptions may not be linear. They should not be extrapolated to changes of a much larger order.
* The change in interest rate test assumes a 100 basis point change in the gross redemption yield on fixed interest securities together with a 100 basis point change in the real yields on variable securities. Valuation interest rates are assumed to move in line with market yields adjusted to allow for the impact of FSA regulations.
* In the sensitivity for credit spreads corporate bond yields have increased by 100bps, gilt and approved security yields unchanged, and there has been no adjustment to the default assumptions.
* The inflation stress adopted is a 1% pa increase in inflation resulting in a 1% pa reduction in real yield and no change to the nominal yield. In addition the expense inflation rate is increased by 1% pa.
* The reinsurer stress shown is equal to the technical provisions ceded to that insurer.
* The annuitant mortality stress is a 1% reduction in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates.
* Default of largest reinsurer: The largest reinsurer was deduced at an entity level by mathematical reserves ceded. The largest reinsurer is Swiss Re. The increase in reserves is consistent with the reinsured reserves.


(b) General insurance

	Impact on		Impact on
	pre-tax	Impact on	pre-tax	Impact on
	profit	equity	profit	equity
	net of	net of	net of	net of
	re-	re-	re-	re-
	insurance	insurance	insurance	insurance
	2012	2012	2011	2011
	£m	£m	£m	£m


Sensitivity test
Single storm event with 1 in 200 year probability	(63)	(47)	(90)	(66)
Subsidence event - worst claims ratio in last 30 years	(50)	(37)	(41)	(30)
Economic downturn	(41)	(31)	(43)	(32)
5% decrease in overall claims ratio	8	6	9	7
5% surplus over claims liabilities	5	4	5	3

2.16 Foreign exchange rates

Principal rates of exchange used for translation are:

Year end exchange rates	At 31.12.12	At 31.12.11


United States Dollar	1.63	1.55
Euro	1.23	1.20



	01.01.12 -	01.01.11 -
Average exchange rates	31.12.12	31.12.11


United States Dollar	1.58	1.60
Euro	1.23	1.15

International Financial Reporting Standards Page 55

Notes to the Financial Statements

2.17 Provisions

(a) Analysis of provisions
			2012	2011
		Note	£m	£m


Retirement benefit obligations		2.17(b)	969	871
Other provisions			14	20


			983	891




(b) Retirement benefit obligations
	Fund and		Fund and
	Scheme	Overseas	Scheme	Overseas
	2012	2012	2011	2011
	£m	£m	£m	£m


Gross pension obligations included in provisions	(967)	(2)	(870)	(1)
Annuity obligations insured by Society	636	-	583	-


Gross defined benefit pension deficit	(331)	(2)	(287)	(1)
Deferred tax on defined benefit pension deficit	76	-	72	-


Net defined benefit pension deficit	(255)	(2)	(215)	(1)

The Legal & General Group UK Pension and Assurance Fund and the Legal & General Group UK Senior Pension Scheme are defined benefit pension arrangements and account for all UK and the majority of worldwide assets of, and contributions to, such arrangements. At 31 December 2012, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at £255m (2011: £215m). These amounts have been recognised in the financial statements with £152m charged against shareholder equity (2011: £128m) and £103m against the unallocated divisible surplus (2011: £87m).

2.18 Contingent liabilities, guarantees and indemnities

Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance between actual experience from that assumed may result in those liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of policyholder contracts, or the circumstances in which policyholders have entered into them. The extent of these liabilities is influenced by a number of factors including the actions and requirements of the FSA, ombudsman rulings, industry compensation schemes and court judgments.

Various Group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. The relevant members of the Group ensure that they make prudent provision as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet reasonably foreseeable eventualities. The provisions made are regularly reviewed. It is not possible to predict, with certainty, the extent and the timing of the financial impact of these claims, litigation or issues.

In 1975, Legal & General Assurance Society Limited (the Society) was required by the Institute of London Underwriters (ILU) to execute the ILU form of guarantee in respect of policies issued through the ILU's Policy Signing Office on behalf of NRG Victory Reinsurance Company Ltd (Victory), a company which was then a subsidiary of the Society. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to the Society against any liability the Society may have as a result of the ILU's requirement, and the ILU agreed that its requirement of the Society would not apply to policies written or renewed after the acquisition. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary of Berkshire Hathaway Inc. Whether the Society has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability is uncertain. The Society has made no payment or provision in respect of this matter.

Group companies have given indemnities and guarantees as a normal part of their business and operating activities or in relation to capital market transactions. Legal & General Group Plc has provided indemnities and guarantees in respect of the liabilities of Group companies in support of their business activities, including Pension Protection Fund compliant guarantees in respect of certain Group companies' liabilities under the Group pension fund and scheme.

International Financial Reporting Standards Page 56

Notes to the Financial Statements

2.19 Basis of preparation

The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union, and with those parts of the UK Companies Act 2006 applicable to companies reporting under IFRS. The Group's financial statements also comply with IFRS and interpretations by the IFRS Interpretations Committee as issued by the IASB. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss.

The Group has selected accounting policies which state fairly its financial position, financial performance and cash flows for a reporting period. The accounting policies have been consistently applied to all years presented, unless otherwise stated.

The Group presents its balance sheet in order of liquidity. This is considered to be more relevant than a before and after 12 months presentation, given the long term nature of the Group's core business. However, for each asset and liability line item which combines amounts expected to be recovered or settled before and after 12 months from the balance sheet date, disclosure of the split is made by way of a note.

Financial assets and financial liabilities are disclosed gross in the balance sheet unless a legally enforceable right of offset exists and there is an intention to settle recognised amounts on a net basis. Income and expenses are not offset in the income statement unless required or permitted by any accounting standard or interpretations by the IFRS Interpretations Committee.

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. The functional currency of the Group's foreign operations is the currency of the primary economic environment in which the entity operates. The assets and liabilities of all of the Group's foreign operations are translated into sterling, the Group's presentational currency, at the closing rate at the date of the balance sheet. The income and expenses for each income statement are translated at average exchange rates. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate component of shareholders' equity.

Use of estimates

The preparation of the financial statements includes the use of estimates and assumptions which affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant for the determination of fair values of investment property and unquoted and illiquid financial investments; the estimation of deferred acquisition costs; tax balances; and the estimation of insurance and investment contract liabilities. The basis of accounting for these areas, and the significant judgements used in determining them, are outlined in the respective notes to the financial statements.

Reportable segments

Under the requirements of IFRS 8, 'Operating segments', operating and reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker, which has been identified as the Board of Legal & General Group Plc.

The Group has five reporting segments comprising Protection and Annuities (P&A), Savings, Investment management, US Protection, and Group capital and financing.

The Protection and Annuities segment comprises individual and group protection, individual and bulk purchase annuities, longevity and general insurance, together with estate agencies and the housing related business conducted through our regulated mortgage network. It also includes Legal & General France (LGF) and Legal & General Netherlands (LGN).

The Savings segment comprises non profit investment bonds, non profit pensions (including SIPPs), ISAs, retail unit trusts, retail platform businesses, all with-profits products, and our joint venture operation in India.

The Investment management segment comprises institutional fund management and LGIM America (LGIMA).

The US Protection segment comprises individual protection and universal life contracts written by Legal & General America (LGA).

Shareholders' equity supporting the non profit Protection and Annuities and Savings businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within Group capital and financing. This also includes capital within the Group's treasury function and unit trust funds and property partnerships, which are managed on behalf of clients but are required to be consolidated under IFRS, which do not constitute a separately reportable segment. The Group capital and financing segment also includes our joint ventures in Egypt and the Gulf.

Transactions between reportable segments are on normal commercial terms, and are included within the reported segments.

The Group assesses performance and allocates resources on the basis of IFRS supplementary operating profit before tax. Segmental IFRS supplementary operating profit before tax is reconciled to the consolidated profit from continuing operations before tax attributable to equity holders and consolidated profit from ordinary activities after income tax.

International Financial Reporting Standards Page 57

Notes to the Financial Statements

2.19 Basis of preparation (continued)

Change to accounting policy - US Deferred Acquisition Costs

During 2012, the Group has changed its accounting policy for deferred acquisition costs in the US. This follows the FASB's pronouncement on deferral methodology, applying to reporting periods starting after 15 December 2011. This has been applied to IFRS as an improvement in accounting policy, as allowed under IFRS 4, 'Insurance contracts'.

In October 2010, the Emerging Issues Task Force of the US Financial Accounting Standards Board issued Update 2010-26 on 'Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts'. Under US GAAP, costs that can be deferred and amortised are those that 'vary with and are primarily related to the acquisition of insurance contracts'. The Update requires insurers to capitalise only those incremental costs directly related to acquiring a contract, charging all other indirect acquisition expenses to the income statement as incurred. The main impact of the update is therefore to disallow insurers from deferring indirect acquisition costs and those costs relating to unsuccessful sales.

We currently apply US GAAP to value the insurance assets and liabilities of our US operations, as allowed under IFRS 4 'Insurance contracts'. As a result of the FASB's pronouncement we are applying the change in deferral methodology for our US business for deferred acquisition costs retrospectively, restating the comparatives as required under IAS 8, 'Accounting policies, changes in accounting estimates and errors'.

The impact of the restatement on 2012 was to reduce operating profit and profit before tax by £8m and profit after tax by £5m.

The impact of this change upon the 2011 annual income statement, statement of comprehensive income and earnings per share, together with the balance sheet at 31 December 2011 and 31 December 2010 is shown below.

		Change in US
	As reported	DAC treatment	Restated
	2011	2011	2011
Consolidated Income Statement	£m	£m	£m


Acquisition costs	780	3	783
Profit before tax	778	(3)	775
Tax expense	(55)	1	(54)
Profit for the period	723	(2)	721


Consolidated Statement of Comprehensive Income

Exchange differences on translation of overseas operations	1	(1)	-
Net change in financial investments designated as available-for-sale	10	5	15
Total comprehensive income for the period	661	2	663

The restatement of US DAC reduces operating profit by £3m for the 12 months ended 31 December 2011.

		Change in US
	As reported	DAC treatment	Restated
	2011	2011	2011
Earnings per share	p	p	p


Based on profit attributable to equity holders of the Company	12.46	(0.04)	12.42


Diluted earnings per share


Based on profit attributable to equity holders of the Company	12.25	(0.03)	12.22

		Change in US			Change in US
	As reported	DAC treatment	Restated	As reported	DAC treatment	Restated
	2011	2011	2011	2010	2010	2010
Consolidated Balance Sheet	£m	£m	£m	£m	£m	£m


Assets
Deferred acquisition costs	2,053	(220)	1,833	2,000	(225)	1,775
Equity
Capital redemption and other reserves	101	16	117	79	12	91
Retained earnings	4,059	(160)	3,899	3,704	(158)	3,546
Liabilities
Deferred tax liabilities	403	(76)	327	356	(79)	277

International Financial Reporting Standards Page 58

Notes to the Financial Statements

Net Cash and Capital Page 59

3.01 Operational cash generation

The table below provides an analysis of the operational cash generated by each of the Group's business segments, together with a reconciliation to profit after tax.

							Investment
	Opera-				Changes	Non-	gains and			IFRS
	tional	New		Exper-	in	cash	losses,	IFRS	Tax	profit/
	cash	busi-		ience	valuation	items	inter-	profit/	exp-	(loss)
	gene-	ness	Net	var-	assump-	and	national	(loss)	ense/	before
For the year ended	ration	strain	cash	iances	tions	other	and other	after tax	(credit)	tax
31 December 2012	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m


UK Protection and Annuities
operating profit	508	(31)	477	14	(2)	(41)	2	450	147	597
Netherlands and France¹	14	-	14	-	-	-	17	31	12	43


Total Protection and
Annuities operating profit	522	(31)	491	14	(2)	(41)	19	481	159	640


Total Savings
operating profit	179	(62)	117	(39)	20	2	-	100	33	133
Investment management
operating profit	197	-	197	-	-	-	-	197	46	243
US Protection¹	40	-	40	-	-	-	22	62	37	99
Group capital and financing	20	-	20	-	-	-	(2)	18	4	22
Investment projects	-	-	-	-	-	-	(38)	(38)	(12)	(50)


Operating profit	958	(93)	865	(25)	18	(39)	1	820	267	1,087


Investment variances	-	-	-	-	-	-	-	-	(39)	(39)
Impact of change
in UK tax rates	-	-	-	-	-	-	(7)	(7)	7	-
Losses attributable to
non-controlling interests	-	-	-	-	-	-	(12)	(12)	-	(12)


Total	958	(93)	865	(25)	18	(39)	(18)	801	235	1,036

1. During the year, Netherlands and France paid £14m and the US Protection division paid £40m of sustainable dividends to the Group, which has been included in net cash generation.

Operational cash generation represents the expected surplus from in-force business for the UK non profit Protection and Annuities and Savings businesses, the shareholders' share of bonuses on with-profits businesses, including an expected investment return on Group capital and financing invested assets, and dividends remitted from our international businesses from sustainable cash generation.

Net cash generation is defined as operational cash generation less new business strain for the UK non profit Protection and Annuities and Savings businesses.

Net Cash and Capital Page 60

3.01 Operational cash generation (continued)

							Investment
	Opera-				Changes	Non-	gains and			IFRS
	tional	New		Exper-	in	cash	losses,	IFRS	Tax	profit/
	cash	busi-		ience	valuation	items	inter-	profit/	exp-	(loss)
For the year ended	gene-	ness	Net	var-	assump-	and	national	(loss)	ense/	before
31 December 2011	ration	strain	cash	iances	tions	other	and other	after tax	(credit)	tax
(Restated)	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m


UK Protection and Annuities
operating profit	482	(31)	451	22	24	(86)	-	411	150	561
Netherlands and France¹	16	-	16	-	-	-	12	28	12	40


Total Protection and Annuities
operating profit	498	(31)	467	22	24	(86)	12	439	162	601


Total Savings
operating profit	174	(63)	111	(12)	(5)	(2)	-	92	34	126
Investment management
operating profit	189	-	189	-	-	-	-	189	45	234
US Protection¹	35	-	35	-	-	-	28	63	34	97
Group capital and financing	44	-	44	-	-	-	(1)	43	8	51
Investment projects	-	-	-	-	-	-	(41)	(41)	(15)	(56)


Operating profit	940	(94)	846	10	19	(88)	(2)	785	268	1,053


Investment variances	-	-	-	-	-	-	(55)	(55)	(42)	(97)
Impact of change
in UK tax rates	-	-	-	-	-	-	(6)	(6)	6	-
Losses attributable to
non-controlling interests	-	-	-	-	-	-	(3)	(3)	-	(3)


Total	940	(94)	846	10	19	(88)	(66)	721	232	953


1. During the year, Netherlands and France paid £16m and the US Protection division paid £35m of sustainable dividends to the Group, which has been included in net cash generation.

Net Cash and Capital Page 61

3.02 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 Group surplus.

	At	At
	31.12.12	31.12.11
		Restated¹
	£bn	£bn


Core tier 1	6.2	5.9
Innovative tier 1	0.6	0.6
Upper tier 2	0.4	0.4
Lower tier 2	0.8	0.8
Deductions²	(0.8)	(0.8)


Group capital resources	7.2	6.9


Group capital resources requirement³	3.1	3.1


IGD surplus	4.1	3.8



Coverage ratio (Group capital resources /	2.34	2.20
Group capital resources requirement)⁴	times	times


1. Group capital resources has been restated to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this restatement are outlined in Note 2.19. There is no impact on total Group capital resources as a result of this change.
2. Deductions comprises inadmissible assets in LGA of £0.6bn (2011: £0.6bn), in Society of £0.1bn (2011: £0.1bn) and in other Group companies of £0.1bn (2011: £0.1bn).
3. The Group capital resources requirement includes a With-profits Insurance Capital Component (WPICC) of £0.1bn (2011: £0.4bn). 4. Coverage ratio is calculated on unrounded values.

A segmental analysis is given below.
	At	At
	31.12.12	31.12.11
	£bn	£bn


Society long term fund¹	2.7	2.8
Society shareholder capital	2.3	2.4
General insurance	0.2	0.1
France (LGF)	0.3	0.2
Netherlands (LGN)	0.2	0.1
Nationwide Life	-	0.1
USA (LGA)	0.3	0.2
Investment management	0.4	0.3
Other²	1.7	1.5
Innovative tier 1	0.6	0.6
Tier 2	1.2	1.2
Debt	(2.7)	(2.6)


Group capital resources	7.2	6.9


Society long term fund¹	2.7	2.8
Other	0.4	0.3


Group capital resources requirement	3.1	3.1


1. The Society LTF capital requirement of £2.7bn (2011: £2.8bn) is met by £2.7bn (2011: £2.8bn) of capital resources in the LTF and £nil (2011: £nil) of capital outside the LTF. 2. Other includes corporate assets held within the Group's treasury function.

Net Cash and Capital Page 62

3.02 Regulatory capital resources (continued)
(a) Insurance Group's Directive (IGD) (continued)
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.

			At	At
			31.12.12	31.12.11
				Restated
			£bn	£bn


Capital and reserves attributable to equity holders on an IFRS basis			5.4	5.1
Innovative tier 1			0.6	0.6
Tier 2			1.2	1.2
Proposed dividends			(0.3)	(0.3)
Additional capital available from Society			0.9	0.9
Adjustment to reflect regulatory value of the LGA operation			(0.6)	(0.6)
Other regulatory adjustments			-	-


Group capital resources			7.2	6.9




(b) With-profits realistic balance sheet
The table below summarises the realistic position of the with-profits part of Society's LTF:

			At	At
			31.12.12	31.12.11
			£bn	£bn


With-profits surplus			0.7	0.7
Risk capital margin			0.1	0.1


Surplus			0.6	0.6


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. The surplus includes the present value of future shareholder transfers of £0.3bn (2011: £0.2bn) as a liability in the calculation.


(c) Society capital surplus
Society is required to measure and monitor its capital resources on a regulatory basis.

	At	At	At	At
	31.12.12	31.12.12	31.12.11	31.12.11
	Long	General	Long	General
	term	insu-	term	insu-
	business	rance	business	rance
	£bn	£bn	£bn	£bn


Available capital resources - Tier 1	5.5	0.2	5.6	0.1


Insurance capital requirement	2.6	0.1	2.4	0.1
Capital requirements of regulated related undertakings	0.2	-	0.2	-
With-profits Insurance Capital Component	0.1	-	0.4	-


Capital resources requirement	2.9	0.1	3.0	0.1


Regulatory capital surplus	2.6	0.1	2.6	-

Net Cash and Capital Page 63

3.02 Regulatory capital resources (continued)
(c) Society capital surplus (continued)
Movement in Society long term insurance capital requirement
	At	At
	31.12.12	31.12.11
Pillar 1 capital requirement	£bn	£bn


Protection	0.7	0.7
Annuities	1.2	1.0
Non profit pensions and unit linked bonds	0.1	0.1


Non profit	2.0	1.8
With-profits	0.6	0.6


Long term insurance capital requirement	2.6	2.4


On a regulatory basis (Peak 1), Society long term business regulatory capital surplus of £2.6bn (2011: £2.6bn) comprises capital resources within the long term fund of £2.7bn (2011: £2.8bn) and capital resources outside the long term fund of £2.8bn (2011: £2.8bn) less the capital resources requirement of £2.9bn (2011: £3.0bn).

The With-profits Insurance Capital Component (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 referred to in 3.02 (b).

Net Cash and Capital Page 64

Asset Disclosures Page 65

4.01 Investment portfolio

	Market	Market
	value	value
	2012	2011
	£m	£m


Worldwide assets under management	413,152	378,573
Client and policyholder assets	(351,663)	(320,228)
Non-unit linked with-profits assets¹	(18,605)	(18,927)


Assets to which shareholders are directly exposed	42,884	39,418



Comprising:
Assets held to back the UK non-linked non profit business:
Legal & General Pensions Limited (LGPL)²	33,289	30,029
Other UK non profit insurance business	76	285
	33,365	30,314
Assets held to back other insurance businesses (including Triple-X reserves)	2,993	3,172
Group capital and financing assets	4,741	4,344
Other shareholder assets	1,785	1,588


	42,884	39,418


1. Includes assets backing participating business in LGF of £2,304m (2011: £2,277m).
2. LGPL is the main operating subsidiary for the UK's annuity business.

Analysed by asset class:
					Group
			Other UK		capital	Other
			non profit	Other	and	share-
			insurance	insurance	financing	holder
		LGPL	business	business	assets	assets	Total	Total
		2012	2012	2012	2012	2012	2012	2011
	Note	£m	£m	£m	£m	£m	£m	£m


Equities¹		-	-	-	1,426	6	1,432	913
Bonds	4.02	29,254	-	2,781	1,727	1,161	34,923	32,228
Derivative assets²		2,891	22	30	160	-	3,103	3,415
Property		656	-	-	104	13	773	606
Cash (including cash
equivalents)		488	54	182	1,324	605	2,653	2,256


		33,289	76	2,993	4,741	1,785	42,884	39,418


1. Group capital and financing equity investments includes £197m of seed capital, invested into newly established funds, with underlying exposure in global corporate bonds. These have been categorised as held for sale operations in the Group's consolidated balance sheet as the Group expects its level of ownership to reduce below the level of control within 12 months of classification.
2. 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 66

4.02 Bond portfolio summary
(a) Analysed by sector
		LGPL	LGPL	Total	Total
		2012	2012	2012	2012
	Notes	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.02(b)	4,543	16	6,328	18
Banks:
- Tier 1¹	4.04	212	1	223	1
- Tier 2 and other subordinated	4.04	707	2	776	2
- Senior		1,399	5	2,243	6
Utilities		3,928	13	4,177	12
Consumer Services and Goods		2,624	9	3,040	9
Financial Services		980	3	1,198	3
Technology and Telecoms		2,010	7	2,337	7
Insurance		1,225	4	1,362	4
Industrials		1,512	5	1,816	5
Oil and Gas		1,782	6	2,009	6
Health Care		860	3	926	3
Property		628	2	698	2
Traditional and secured asset backed securities	4.03	5,747	20	6,693	19
CDO	4.02(d)	1,097	4	1,097	3


Total		29,254	100	34,923	100

		LGPL	LGPL	Total	Total
		2011	2011	2011	2011
	Notes	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.02(b)	4,072	15	6,188	19
Banks:
- Tier 1¹	4.04	236	1	259	1
- Tier 2 and other subordinated	4.04	1,177	4	1,338	4
- Senior		1,463	5	2,234	7
Utilities		3,457	13	3,722	12
Consumer Services and Goods		2,557	10	2,928	9
Financial Services		941	4	1,179	4
Technology and Telecoms		1,902	7	2,209	7
Insurance		968	4	1,120	3
Industrials		1,265	5	1,515	5
Oil and Gas		1,614	6	1,837	6
Health Care		748	3	786	2
Property		577	2	640	2
Traditional and secured asset backed securities	4.03	4,344	17	5,275	16
CDO	4.02(d)	998	4	998	3


Total		26,319	100	32,228	100


1. Tier 1 holdings include £56m (2011: £49m) of preference shares.

Asset Disclosures Page 67

4.02 Bond portfolio summary (continued)
(b) Analysed by domicile

The tables below are based on the legal domicile of the security.

		LGPL	Total	LGPL	Total
		2012	2012	2011	2011
	Note	£m	£m	£m	£m


Market value by region
United Kingdom		11,569	12,578	10,387	11,758
USA		8,394	10,856	8,040	10,548
Netherlands		1,661	2,267	1,226	1,830
France		1,313	1,742	1,124	1,523
Italy		636	744	543	652
Germany		316	651	445	761
Ireland¹		271	289	213	225
Spain		192	260	187	236
Belgium		27	84	23	79
Portugal		13	16	41	45
Greece		-	-	-	-
Europe - Other		1,164	1,552	994	1,324
Rest of World		2,601	2,787	2,098	2,249
CDO	4.02(d)	1,097	1,097	998	998


Total		29,254	34,923	26,319	32,228


1. Within LGPL, out of the £271m of bonds domiciled in Ireland, £239m relate to financing vehicles where the underlying exposure lies outside Ireland.

Additional analysis of sovereign debt exposures

	Sovereigns, Supras and Sub-Sovereigns
	LGPL	Total	LGPL	Total
	2012	2012	2011	2011
	£m	£m	£m	£m


Market value by region
United Kingdom¹	3,158	3,552	2,694	3,205
USA	323	470	380	782
Netherlands	1	423	15	468
France	80	299	119	317
Italy	240	312	201	281
Germany	165	380	143	386
Ireland	-	6	-	4
Spain	-	47	-	29
Belgium	-	38	-	40
Portugal	-	4	-	3
Greece	-	-	-	-
Europe - Other	459	631	448	602
Rest of World	117	166	72	71


Total	4,543	6,328	4,072	6,188


1. LGPL holds liquidity in the form of cash and cash equivalents of £488m (2011: £285m) and gilts of £3,158m (2011: £2,694m).

Asset Disclosures Page 68

4.02 Bond portfolio summary (continued)
(c) Analysed by credit rating
	LGPL	LGPL	Total	Total
	2012	2012	2012	2012
	£m	%	£m	%


AAA	4,899	17	6,892	20
AA	3,240	11	4,087	12
A	9,810	34	11,466	33
BBB	8,625	29	9,595	27
BB or below	467	2	521	1
Unrated: Bespoke CDOs	975	3	975	3
Other¹	1,238	4	1,387	4


	29,254	100	34,923	100




	LGPL	LGPL	Total	Total
	2011	2011	2011	2011
	£m	%	£m	%


AAA	4,685	18	7,328	23
AA	2,896	11	3,657	11
A	9,710	37	11,290	35
BBB	6,876	26	7,721	24
BB or below	417	2	481	1
Unrated: Bespoke CDOs	872	3	872	3
Other¹	863	3	879	3


	26,319	100	32,228	100


1. Other unrated bonds have been assessed and rated internally and are all assessed as investment grade.

Asset Disclosures Page 69

4.02 Bond portfolio summary (continued)
(d) CDOs

The Group holds collateralised debt obligations (CDOs) with a market value of £1,097m at 31 December 2012 (2011: £998m).

These holdings include £948m (2011: £846m) relating to 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 2011 were limited and there have been no substitutions in 2012. A breakdown of the underlying CDO reference portfolio by sector is provided below:

Sector
	2012	2011
	%	%


Banks	14	14
Utilities	10	10
Consumer Services & Goods	25	25
Financial Services	6	6
Technology & Telecoms	9	9
Insurance	6	6
Industrials	20	20
Oil & Gas	6	6
Health Care	4	4


	100	100



The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.6%, 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 27.6% 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 30.5% or if 43.6% 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.)

The underlying reference portfolio has had no reference entity defaults in 2011 or 2012.

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 during the year ended 31 December 2012 (2011: £nil). During the period, the Group received £nil (2011: £nil) of previously posted collateral.

These CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the internal valuation.

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.

The balance of £149m (2011: £152m) of CDO holdings includes a £27m (2011: £26m) exposure to an equity tranche of a bespoke CDO.

Asset Disclosures Page 70

4.03 Traditional and secured asset backed securities summary
(a) By security
	LGPL	LGPL	Total	Total
	2012	2012	2012	2012
	£m	%	£m	%


Traditional asset backed securities:
Residential Mortgage-Backed Securities - Prime¹	469	8	674	10
Residential Mortgage-Backed Securities - Sub-prime²	-	-	17	-
Commercial Mortgage-Backed Securities	213	4	457	7
Credit Card	11	-	162	2
Auto	2	-	113	2
Consumer Loans	30	1	30	-
Student Loans	17	-	59	1


	742	13	1,512	22


Securitisations and debentures:
Secured Bond	2,230	39	2,294	34
Commercial Property Backed Bonds	573	10	575	9
Infrastructure / Private Finance Initiative / Social housing	1,559	27	1,570	24
Whole Business Securitisation	425	7	431	6
Other secured holdings³	218	4	311	5


	5,005	87	5,181	78


Total traditional and secured asset backed securities	5,747	100	6,693	100


The two categories above are based on the following definitions: Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Debentures are securities with fixed redemption profiles issues by firms typically secured on property and Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies.

	LGPL	LGPL	Total	Total
	2011	2011	2011	2011
	£m	%	£m	%


Traditional asset backed securities:
Residential Mortgage-Backed Securities - Prime¹	416	10	680	13
Residential Mortgage-Backed Securities - Sub-prime²	-	-	20	-
Commercial Mortgage-Backed Securities	245	6	450	9
Credit Card	2	-	134	3
Auto	11	-	113	2
Consumer Loans	37	1	40	1
Student Loans	20	-	26	-


	731	17	1,463	28


Securitisations and debentures:
Secured Bond	1,935	45	1,975	37
Commercial Property Backed Bonds	236	5	236	5
Infrastructure / Private Finance Initiative / Social housing	1,104	25	1,168	22
Whole Business Securitisation	299	7	302	6
Other secured holdings³	39	1	131	2


	3,613	83	3,812	72


Total traditional and secured asset backed securities	4,344	100	5,275	100


1. 54% (2011: 56%) of Prime RMBS holdings relate to UK mortgages. 2. 60% (2011: 55%) of Sub-prime RMBS holdings have a credit rating of AAA and 94% (2011: 71%) relate to the UK. 3. Other secured holdings in LGPL include covered bonds of £207m (2011: £29m).

Of the £770m (2011: £733m) of traditional ABS holdings held outside of LGPL, 72% are rated AAA (2011: 65%).

Asset Disclosures Page 71

4.03 Traditional and secured asset backed securities summary (continued)
(b) By credit rating
	LGPL	LGPL	Total	Total
	2012	2012	2012	2012
	£m	%	£m	%


AAA	908	16	1,587	24
AA	1,327	23	1,456	22
A	1,851	32	1,927	29
BBB	998	17	1,039	16
BB or below	144	3	150	2
Unrated¹	519	9	534	7


Total	5,747	100	6,693	100


1. The rise in unrated asset backed securities predominantly relates to an increase in commercial backed property and social housing assets.


	LGPL	LGPL	Total	Total
	2011	2011	2011	2011
	£m	%	£m	%


AAA	802	18	1,411	27
AA	1,077	25	1,202	23
A	1,604	37	1,661	31
BBB	634	15	739	14
BB or below	81	2	114	2
Unrated	146	3	148	3


Total	4,344	100	5,275	100



The credit ratings of monoline wrapped bonds are based on the rating of the underlying securities.

Asset Disclosures Page 72

4.04 Group subordinated bank exposures

	Total	Total	Total	Total
	2012	2012	2011	2011
	£m	%	£m	%


Tier 1
United Kingdom¹	161	16	139	9
USA	10	1	47	3
Europe	52	5	61	4
Others	-	-	12	1


Total tier 1	223	22	259	17

Lower tier 2
United Kingdom	235	24	586	36
USA	312	31	394	25
Europe	100	10	142	9
Others	26	3	68	4

Upper tier 2
United Kingdom	66	7	63	4
USA	2	-	1	-
Europe	-	-	39	2
Others	-	-	2	-

Other subordinated
United Kingdom	1	-	-	-
USA	32	3	43	3
Europe	2	-	-	-
Others	-	-	-	-


Total tier 2 and other subordinated	776	78	1,338	83


Total	999	100	1,597	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.

4.05 Value of policyholder assets held in Society and LGPL

	2012	2011
	£m	£m


With-profits business	24,656	24,862
Non profit business	46,869	42,516


	71,525	67,378

Asset Disclosures Page 73

4.06 With-profits non-linked business invested asset mix and investment return


	Fund level	UK with-
	invest-	profits	UK with-	UK with-
	ment	asset	profits	profits
	return	share	non par	other
As at 31 December 2012	%	%	%	%


Equities	11	41	3	(53)
Bonds	10	37	82	143
Property	2	13	-	-
Cash	1	9	15	10


		100	100	100


Investment return (% pa)	9	10	12	-



Invested assets (£bn):
Net of derivative liabilities		12.0	2.6	1.8
Gross of derivative liabilities		12.0	2.6	1.8




As at 31 December 2011


Equities	(8)	38	3	(47)
Bonds	9	40	88	139
Property	5	15	-	-
Cash	1	7	9	8


		100	100	100


Investment return (% pa)	4	2	8	19



Invested assets (£bn):
Net of derivative liabilities		12.4	2.4	1.8
Gross of derivative liabilities		12.5	2.4	1.8


Investment return percentages reflect the actual investment return by asset class over the average assets held in that asset class over the year. Each sub fund may however have different underlying assets, and hence returns from the fund average.

Asset Disclosures Page 74

4.07 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 2012	£m	£m	£m	£m


Group capital and other insurance business
Equities	1,169	162	101	1,432
Bonds¹	2,661	3,007	1	5,669
Derivative assets	44	146	-	190


	3,874	3,315	102	7,291


Non profit non-unit linked
Bonds¹	4,002	25,160	92	29,254
Derivative assets	111	2,802	-	2,913


	4,113	27,962	92	32,167




	Fair value measurement at the
	end of the reporting period based on:


	Level 1	Level 2	Level 3	Total
As at 31 December 2011	£m	£m	£m	£m


Group capital and other insurance business
Equities	564	221	128	913
Bonds¹	2,058	3,783	6	5,847
Derivative assets	13	295	-	308


	2,635	4,299	134	7,068


Non profit non-unit linked
Bonds¹	3,440	22,941	-	26,381
Derivative assets	255	2,820	32	3,107


	3,695	25,761	32	29,488


1. Consolidated CDO holdings have been presented on a net basis within level 2. The analysis excludes cash, loans and receivables and property investments of £3,426m (2011: £2,862m), as disclosed in Note 4.01.

Asset Disclosures Page 75

4.07 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 arm's 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).

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. 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.

These CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the internal valuation. 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 within 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.

Significant transfers between levels

There have been no significant transfers between levels 1, 2 and 3 for the year ended 31 December 2012 (2011: No significant transfers between levels 1, 2 and 3).

Asset Disclosures Page 76

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