L&G FY 2012 Preliminary Results - Part 3

RNS Number : 3194Z

Legal & General Group Plc

06 March 2013

European Embedded Value Page 77

Consolidated Income Statement

For the year ended 31 December 2012

		2012	2011
	Notes	£m	£m


From continuing operations
Protection and Annuities	5.01	668	808
Savings	5.01	89	226
Investment management	5.06	216	210
US Protection	5.01	98	238
Group capital and financing	5.07	20	43
Investment projects¹		(50)	(56)


Operating profit		1,041	1,469
Investment variances²	5.01	(32)	(111)
Effect of economic assumption changes	5.08	(162)	(21)
Losses attributable to non-controlling interests		(12)	(3)


Profit before tax		835	1,334
Tax expense attributable to equity holders of the Company	5.10	(168)	(259)
Effect of tax rate changes and other taxation impacts	5.10	67	156


Profit for the year		734	1,231
Losses attributable to non-controlling interests		12	3


Profit attributable to equity holders of the Company		746	1,234




		p	p


Earnings per share	5.11

Based on operating profit after tax attributable to equity holders of the Company		14.01	19.08
Based on profit attributable to equity holders of the Company		12.75	21.17

Diluted earnings per share	5.11

Based on operating profit after tax attributable to equity holders of the Company		13.78	18.77
Based on profit attributable to equity holders of the Company		12.54	20.83


1. Investment projects predominately relates to Solvency II and other strategic investments.
2. Investment variances include £18m of restructuring costs relating to a number of reorganisation initiatives around the Group, including the restructuring of the International segment.

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 in Note 2.19. The prior period segmental information has been restated accordingly.

European Embedded Value Page 78

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2012

	2012	2011
	£m	£m


Profit for the year	734	1,231

Other comprehensive income after tax
Exchange differences on translation of overseas operations	(22)	(1)
Actuarial (losses) on defined benefit pension schemes	(59)	(70)
Actuarial losses on defined benefit pension schemes transferred to unallocated divisible surplus	41	48


Total comprehensive income for the year	694	1,208



Total comprehensive income/(expense) attributable to:
Non-controlling interests	(12)	(3)
Equity holders of the Company	706	1,211

Consolidated Balance Sheet

As at 31 December 2012

		2012	2011
			Restated¹
	Notes	£m	£m


Assets
Investments		338,630	319,671
Long term in-force business asset		3,670	3,700
Other assets		7,460	6,680


Total assets		349,760	330,051




Equity
Shareholders' equity	5.14/5.15	8,900	8,608
Non-controlling interests		39	66


Total equity		8,939	8,674



Liabilities
Subordinated borrowings	2.12	1,890	1,921
Unallocated divisible surplus		1,153	1,038
Participating contract liabilities		15,277	15,784
Non-participating contract liabilities		302,686	285,351
Senior borrowings	2.12	1,475	1,329
Other liabilities and provisions		18,340	15,954


Total liabilities		340,821	321,377


Total equity and liabilities		349,760	330,051


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 restatement are outlined in Note 5.19.

European Embedded Value Page 79

Notes to the Financial Statements

5.01 Profit/(loss) for the year
			Invest-		Group
			ment		capital
		P&A and	manage-	US	and
		Savings	ment	Protection	financing	Total
For the year ended 31 December 2012	Notes	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new business after cost of capital	5.03	377		98		475
Contribution from in-force business:
- expected return¹		372		76		448
- experience variances	5.05	12		(59)		(47)
- operating assumption changes	5.05	(11)		(18)		(29)
Development costs		(37)		-		(37)
Contribution from shareholder net worth		6		5	134	145


Operating profit on covered business		719	-	102	134	955

Business reported on an IFRS basis:
Protection and Annuities non-covered business²		27				27
Savings non-covered business³		11				11
Investment management⁴	5.06		216			216
Group capital and financing	5.07				(114)	(114)
Investment projects⁵					(50)	(50)
US Protection non-covered business⁶				(4)		(4)


Total operating profit		757	216	98	(30)	1,041
Investment variances⁷		7	(5)	6	(40)	(32)
Effect of economic assumption changes	5.08	(164)	-	2	-	(162)
Losses attributable to non-controlling interests		-	-	-	(12)	(12)


Profit/(loss) before tax		600	211	106	(82)	835
Tax (expense)/credit on profit from ordinary activities	5.10	(128)	(39)	(28)	27	(168)
Effect of tax rate changes and other taxation impacts⁸	5.10	89	-	(22)	-	67


Profit/(loss) for the year		561	172	56	(55)	734



Operating profit attributable to:
Protection and Annuities		668
Savings		89


1. The expected return on in-force is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK Protection and Annuities and Savings business was £4,247m in 2012 (2011: £3,886m). This is adjusted for the effects of opening model changes of £86m (2011: £200m) to give an adjusted opening base VIF of £4,333m (2011: £4,086m). This is then multiplied by the opening risk discount rate of 6.2% (2011: 7.3%) and the result grossed up at the notional attributed tax rate of 21% (2011: 23%) to give a return of £340m (2011: £387m). The same approach has been applied for the overseas Protection and Annuities businesses.
2. Protection and Annuities non-covered business primarily reflects GI operating profit of £30m (2011: £42m). See Note 2.01(f).
3. Savings non-covered business mainly comprises Savings investments on an IFRS basis, adjusted for Suffolk Life, International (Ireland), Nationwide and our joint venture operation in India.
4. Investment management operating profit excludes £27m (2011: £24m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Protection and Annuities, Savings and Group capital and financing covered business on an EEV basis.
5. Investment projects predominately relates to Solvency II and other strategic investments.
6. US Protection non-covered business includes business unit costs of £4m (2011: £4m) allocated to the US Protection segment.
7. Investment variances include £18m of restructuring costs relating to a number of reorganisation initiatives around the Group, including the restructuring of the International segment.
8. Primarily reflects the implementation of the UK planned future reductions in corporation tax to 21% on 1 April 2014, and improvements in the US to the recognition of tax losses and DAC tax assets.

European Embedded Value Page 80

Notes to the Financial Statements

5.01 Profit/(loss) for the year (continued)
			Invest-		Group
			ment		capital
		P&A and	manage-	US	and
		Savings	ment	Protection	financing	Total
For the year ended 31 December 2011	Notes	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new business after cost of capital	5.03	372		69		441
Contribution from in-force business:
- expected return¹		421		73		494
- experience variances	5.05	87		150		237
- operating assumption changes	5.05	95		(62)		33
Development costs		(10)		-		(10)
Contribution from shareholder net worth		9		12	157	178


Operating profit on covered business		974	-	242	157	1,373

Business reported on an IFRS basis:
Protection and Annuities non-covered business²		35				35
Savings non-covered business³		25				25
Investment management⁴	5.06		210			210
Group capital and financing	5.07				(114)	(114)
Investment projects⁵					(56)	(56)
US Protection non-covered business⁶				(4)		(4)


Total operating profit		1,034	210	238	(13)	1,469
Investment variances		102	(7)	16	(222)	(111)
Effect of economic assumption changes	5.08	16	-	(37)	-	(21)
Losses attributable to non-controlling interests		-	-	-	(3)	(3)


Profit/(loss) before tax		1,152	203	217	(238)	1,334
Tax (expense)/credit on profit from ordinary activities	5.10	(266)	(38)	(76)	121	(259)
Effect of tax rate changes and other taxation impacts⁷	5.10	156	-	-	-	156


Profit/(loss) for the year		1,042	165	141	(117)	1,231



Operating profit attributable to:
Protection and Annuities		808
Savings		226


1. The expected return on in-force is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK Protection and Annuities and Savings business was £3,886m. This is adjusted for the effects of opening model changes of £200m to give an adjusted opening base VIF of £4,086m. This is then multiplied by the opening risk discount rate of 7.3% and the result grossed up at the notional attributed tax rate of 23% to give a return of £387m. The same approach has been applied for the overseas Protection and Annuities businesses.
2. Protection and Annuities non-covered business primarily reflects GI operating profit of £42m (see Note 2.01(f)).
3. Savings non-covered business mainly comprises Savings investments on an IFRS basis, adjusted for Suffolk Life, International (Ireland), Nationwide and our joint venture operation in India.
4. Investment management operating profit excludes £24m of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Protection and Annuities, Savings and Group capital and financing covered business on an EEV basis.
5. Investment projects predominately relates to Solvency II and other strategic investments.
6. US Protection non-covered business includes business unit costs of £4m allocated to the US Protection segment.
7. Primarily reflects the implementation of the UK planned future reductions in corporation tax to 23% on 1 April 2014.

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Notes to the Financial Statements

5.02 New business summary¹
		APE²	PVNBP³	Margin⁴	APE	PVNBP	Margin
		2012	2012	2012	2011	2011	2011
	Notes	£m	£m	%	£m	£m	%


Protection and Annuities⁵	5.03	537	4,239	8.3	490	3,983	8.4
Savings	5.03	877	5,119	0.5	590	3,896	0.8
US Protection	5.03	90	830	11.8	69	637	10.7


		1,504	10,188	4.7	1,149	8,516	5.1


1. Covered business only.
2. Annual Premium Equivalent (APE) comprises the new annual premiums together with 10% of single premiums.
3. The present value of new business premiums (PVNBP) on the EEV basis is defined as the present value of annual premiums plus single premiums for any given period. It is calculated using the same assumptions as for the contribution from new business but determined as at the point of sale.
4. The new business margin is defined as the contribution from new business (including the cost of solvency capital) divided by the PVNBP.
5. Longevity insurance has been excluded from the Protection and Annuities new business measures as outlined in Note 6.07.

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Notes to the Financial Statements

5.03 New business by product¹
		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the year ended 31 December 2012	£m	£m		£m	£m	£m	%


Protection	221	1,176	5.3	-	1,176	139	11.8
Annuities	-	-	-	2,339	2,339	206	8.8
Longevity insurance⁴	n/a	n/a	n/a	n/a	n/a	-	n/a
Netherlands (LGN)	13	106	7.7	82	188	2	0.9
France (LGF)	38	303	8.1	233	536	3	0.6


Total Protection and Annuities	272	1,585	5.8	2,654	4,239	350	8.3


Unit linked bonds	-	-	-	525	525	3	0.5
Pensions, stakeholder and other non profit	519	1,951	3.8	2,135	4,086	18	0.4
With-profits savings	58	166	2.9	342	508	6	1.2


Total Savings	577	2,117	3.7	3,002	5,119	27	0.5


US Protection	90	830	9.2	-	830	98	11.8


Total new business	939	4,532	4.8	5,656	10,188	475	4.7
Cost of capital						60


Contribution from new business before cost of capital						535



		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the year ended 31 December 2011	£m	£m		£m	£m	£m	%


Protection	177	931	5.3	-	931	86	9.3
Annuities	-	-	-	2,515	2,515	252	10.0
Longevity insurance⁴	n/a	n/a	n/a	n/a	n/a	7	n/a
Netherlands (LGN)	5	35	6.7	95	130	(2)	(1.3)
France (LGF)	24	175	7.5	232	407	(2)	(0.4)


Total Protection and Annuities	206	1,141	5.5	2,842	3,983	341	8.4


Unit linked bonds	-	-	-	623	623	8	1.3
Pensions, stakeholder and other non profit	244	902	3.7	1,620	2,522	10	0.4
With-profits savings	69	226	3.3	525	751	13	1.8


Total Savings	313	1,128	3.6	2,768	3,896	31	0.8


US Protection	69	637	9.3	-	637	69	10.7


Total new business	588	2,906	4.9	5,610	8,516	441	5.1
Cost of capital						59


Contribution from new business before cost of capital						500


1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.
4. Annual premium and PVNBP measures are not applicable.

European Embedded Value Page 83

Notes to the Financial Statements

5.04 UK non profit internal rate of return (IRR) and payback period¹by product

		Payback		Payback
	IRR	period	IRR	period
	2012	2012	2011	2011
	%	years	%	years


Protection	>15	3	>15	4
Annuities²	>30	<0	>30	<0
Unit linked bonds	7	9	10	7
Pensions, stakeholder and other non profit	9	12	8	12


1. The payback period is calculated on an undiscounted basis.
2. Given negative strain on annuity business and an immediate IFRS payback, the IRR calculation is infinite.

European Embedded Value Page 84

Notes to the Financial Statements

5.05 Analysis of experience variances and operating assumption changes
	P&A and Savings			US Protection
		Operating			Operating
	Experience	assumption		Experience	assumption
	variances	changes	Total	variances	changes	Total
For the year ended 31 December 2012	£m	£m	£m	£m	£m	£m


Persistency	(18)	(6)	(24)	(14)	-	(14)
Mortality/morbidity	12	(15)	(3)	(4)	(18)	(22)
Expenses	(11)	(17)	(28)	-	-	-
Other	29	27	56	(41)	-	(41)


	12	(11)	1	(59)	(18)	(77)


2012 P&A and Savings negative persistency experience reflects higher than expected lapses in unit linked bonds.

2012 operating assumption changes in P&A and Savings have been driven by negative mortality and demographic assumption changes in the annuity business and higher investment expense assumptions, largely offset by positive impacts reflecting changes in UK tax legislation.

2012 US Protection modelling and other experience variances mostly relate to additional reserving associated with the introduction of AG38 regulatory requirements.

2012 operating assumption changes in US Protection mostly relate to higher mortality assumptions on unit linked secondary guarantee business.

	P&A and Savings			US Protection
		Operating			Operating
	Experience	assumption		Experience	assumption
	variances	changes	Total	variances	changes	Total
For the year ended 31 December 2011	£m	£m	£m	£m	£m	£m


Persistency	(1)	6	5	9	(21)	(12)
Mortality/morbidity	(35)	(10)	(45)	(17)	(52)	(69)
Expenses	(7)	56	49	-	-	-
Other	130	43	173	158	11	169


	87	95	182	150	(62)	88


2011 P&A and Savings mortality experience variances primarily relates to our group protection business which was impacted by a number of high value claims which predominately occurred during H1 11. 2011 P&A and Savings expense operating assumption changes reflects the change in long term expense assumptions in protection business and changes in the modelled long term unit cost and investment expenses assumptions in non profit savings and pensions.
Adverse US Protection persistency and mortality operating assumptions changes mainly relate to term assurances in the period after the end of the guaranteed level premium period when premiums increase. The domicile of a US captive structure was moved from Bermuda to Vermont which results in an acceleration of the emergence of surplus, and as a consequence increases the present value of the in-force business.

European Embedded Value Page 85

Notes to the Financial Statements

5.06 Investment management operating profit
	2012	2011
	£m	£m


Pension funds (managed and segregated)¹	181	172
Other non-pension²	22	25
Investment management services for internal funds³	13	13


Total Investment management operating profit	216	210


1. The managed pension funds business within Investment management has been reported on an IFRS basis as is consistent with prior years.
2. 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.
3. Investment management services for internal funds excludes £27m (2011: £24m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis within the Protection and Annuities and Savings covered business on an EEV basis.

5.07 Group capital and financing operating profit¹
	2012	2011
	£m	£m


Investment return	168	191
Interest expense²	(127)	(123)
Investment expenses	(5)	(5)
Unallocated corporate expenses³	(14)	(12)
Other	(2)	(8)


Total Group capital and financing operating profit	20	43

Analysed as:
On an EEV basis	134	157
On an IFRS basis	(114)	(114)


1. Group capital and financing represents operating profit on the shareholder assets held within the covered business, reported on an embedded value basis, and operating profit on the shareholder assets held outside the covered business reported on an IFRS basis.
2. Interest expense excludes non recourse financing (see Note 2.12).
3. Unallocated corporate expenses includes the operating profit/(loss) attributable to our joint venture operations in Egypt and the Gulf.

5.08 Effect of economic assumption changes
	2012	2011
	£m	£m


Business reported on an EEV basis:
Protection and Annuities and Savings¹	(164)	16
US Protection	2	(37)


	(162)	(21)


1. Protection and Annuities and Savings primarily reflect the impact of changes in reinvestment and disinvestment rates, higher costs of capital on increasing reserves mainly due to narrowing credit spreads, and other consequential impacts within lower yielding environments, partially offset by a lower risk discount rate.

5.09 Time value of financial options and guarantees
	2012	2011
	£m	£m


Protection and Annuities and Savings¹	30	27
US Protection	-	4


	30	31


1. Includes £18m (2011: £16m) relating to UK with-profits business, and £5m (2011: £5m) relating to UK non profit business.

European Embedded Value Page 86

Notes to the Financial Statements

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


From continuing operations
Protection and Annuities	668	(145)	808	(189)
Savings	89	(19)	226	(54)
Investment management	216	(40)	210	(40)
US Protection	98	(25)	238	(83)
Group capital and financing	20	(4)	43	(6)
Investment projects	(50)	12	(56)	15


Operating profit	1,041	(221)	1,469	(357)
Variation from longer term investment return	(32)	14	(111)	87
Effect of economic assumption changes	(162)	39	(21)	11
Losses attributable to non-controlling interests	(12)	-	(3)	-
Effect of tax rate changes and other taxation impacts¹	-	67	-	156


Profit/(loss) before tax / Tax	835	(101)	1,334	(103)


1. Primarily reflects the implementation of the UK planned future reductions in corporation tax to 21% on 1 April 2014, and improvements in the US to the recognition of tax losses and DAC tax assets.

The UK EEV calculations assume a tax basis which reflects the annualised current tax rate of 24.5% and the planned future reductions in corporation tax to 23% from 1 April 2013, and 21% from 1 April 2014. The tax rate used for grossing up in the income statement is based on a UK corporation tax rate of 21% (2011: 23%).
US, Netherlands and France covered business profits are also grossed up using the long term corporate tax rates of the respective territories i.e. US is 35% (2011: 35%), France is 34.3% (2011: 34.3%) and Netherlands is 25% (2011: 25%).

European Embedded Value Page 87

Notes to the Financial Statements

5.11 Earnings per share

(a) Earnings per share

		Tax				Tax
		(exp-				(exp-
	Profit	ense)/	Profit	Per	Profit	ense)/	Profit	Per
	before tax	credit	after tax	share	before tax	credit	after tax	share
	2012	2012	2012	2012	2011	2011	2011	2011
	£m	£m	£m	p	£m	£m	£m	p


Operating profit	1,041	(221)	820	14.01	1,469	(357)	1,112	19.08
Investment variances	(32)	14	(18)	(0.30)	(111)	87	(24)	(0.41)
Effect of economic assumption changes	(162)	39	(123)	(2.11)	(21)	11	(10)	(0.17)
Effect of tax rate changes and other taxation
impacts	-	67	67	1.15	-	156	156	2.67


Earnings per share based on profit
attributable to equity holders	847	(101)	746	12.75	1,337	(103)	1,234	21.17

(b) Diluted earnings per share

(i) Based on operating profit after tax


	Profit	Number	Per	Profit	Number	Per
	after tax	of shares¹	share	after tax	of shares¹	share
	2012	2012	2012	2011	2011	2011
	£m	m	p	£m	m	p


Operating profit after tax	820	5,851	14.01	1,112	5,828	19.08
Net shares under options allocable for no further consideration	-	99	(0.23)	-	97	(0.31)


Diluted earnings per share	820	5,950	13.78	1,112	5,925	18.77

(b) Diluted earnings per share

(ii) Based on profit attributable to equity holders of the Company


		Number			Number
	Profit	of	Per	Profit	of	Per
	after tax	shares¹	share	after tax	shares¹	share
	2012	2012	2012	2011	2011	2011
	£m	m	p	£m	m	p


Profit attributable to equity holders of the Company	746	5,851	12.75	1,234	5,828	21.17
Net shares under options allocable for no further consideration	-	99	(0.21)	-	97	(0.34)


Diluted earnings per share	746	5,950	12.54	1,234	5,925	20.83


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).

European Embedded Value Page 88

Notes to the Financial Statements

5.12 Group embedded value reconciliation - summary
	Covered business
		P&A	US	Non-	Total
	UK	overseas	Prote-	covered
	business	business	ction	business
For the year ended 31 December 2012	£m	£m	£m	£m	£m


At 1 January
Value of in-force business (VIF)	4,247	217	913	-	5,377
Shareholder net worth (SNW)	3,218	252	149	(388)	3,231


	7,465	469	1,062	(388)	8,608
Exchange rate movements	-	(12)	(50)	40	(22)
Operating profit after tax for the year	653	19	77	71	820
Non-operating (loss)/profit for the year	(23)	(20)	(18)	(25)	(86)


Profit for the year	630	(1)	59	46	734
Capital movements	-	-	-	-	-
Intra-group distributions²	(473)	(14)	(40)	527	-
Dividends to equity holders of the Company	-	-	-	(394)	(394)
Transfer to non-covered business³	(22)	-	-	22	-
Other reserve movements including pension deficit⁴	(20)	-	(57)	51	(26)


Embedded value	7,580	442	974	(96)	8,900


Value of in-force business	4,402	146	735	-	5,283
Shareholder net worth	3,178	296	239	(96)	3,617

	Covered business
		P&A	US	Non-
	UK	overseas	Prote-	covered
	business	business	ction	business	Total
For the year ended 31 December 2011	£m	£m	£m	£m	£m


At 1 January
Value of in-force business (VIF)	3,886	253	762	-	4,901
Shareholder net worth (SNW)	3,035	290	458	(954)	2,829


	6,921	543	1,220	(954)	7,730
Exchange rate movements	-	(13)	9	3	(1)
Operating profit after tax for the year	859	8	156	89	1,112
Non-operating profit/(loss) for the year:	222	(33)	(15)	(55)	119


Profit for the year	1,081	(25)	141	34	1,231
Capital movements¹	-	9	(271)	262	-
Intra-group distributions²	(437)	(45)	(37)	519	-
Dividends to equity holders of the Company	-	-	-	(298)	(298)
Transfer to non-covered business³	(19)	-	-	19	-
Other reserve movements including pension deficit⁴	(81)	-	-	27	(54)


Embedded value	7,465	469	1,062	(388)	8,608


Value of in-force business	4,247	217	913	-	5,377
Shareholder net worth	3,218	252	149	(388)	3,231


1. The 2011 capital movement of £262m primarily reflects the capital contribution made to LGA to enable the repurchase of Potomac securities of £271m. There is no corresponding movement in 2012.
2. UK intra-group distributions reflect a £525m (2011: £500m) dividend paid from Society to Group and dividends of £40m (2011: £20m) paid to Society from subsidiaries (primarily Nationwide Life). Dividends of $63m from LGA, €15m from LGN and €3m from LGF were also paid to the group (2011: $57m from LGA, €50m from LGN and €2m from LGF).
3. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
4. The other reserve movements reflects the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.

Further analysis of the Protection and Annuities and Savings UK covered business can be found in Note 5.13.

European Embedded Value Page 89

Notes to the Financial Statements

5.13 UK embedded value reconciliation

	Free	Required	Shareholder	Value of	Total
	surplus	capital	net worth	in-force
For the year ended 31 December 2012	£m	£m	£m	£m	£m


At 1 January
Value of in-force business (VIF)	-	-	-	4,247	4,247
Shareholder net worth (SNW)	1,461	1,757	3,218	-	3,218


	1,461	1,757	3,218	4,247	7,465
Operating profit/(loss) for the year:
- New business contribution¹	(275)	182	(93)	386	293
- Expected return on VIF	-	-	-	270	270
- Expected transfer from Non profit VIF to SNW²	762	(171)	591	(591)	-
- With-profits transfer	52	-	52	(52)	-
- Expected return on SNW	53	63	116	-	116
Generation of embedded value	592	74	666	13	679
- Experience variances	(26)	18	(8)	20	12
- Operating assumption changes	13	1	14	(23)	(9)
- Development costs	(29)	-	(29)	-	(29)
Variances	(42)	19	(23)	(3)	(26)


Operating profit after tax for the year	550	93	643	10	653
Non-operating profit/(loss) for the year:
- Investment variances	(72)	11	(61)	3	(58)
- Economic assumption changes	(110)	96	(14)	(40)	(54)
- Effect of tax rate changes and other taxation impacts	-	-	-	89	89
Non-operating (loss)/profit for the year:	(182)	107	(75)	52	(23)


Profit for the year	368	200	568	62	630
Intra-group distributions³	(473)	-	(473)	-	(473)
Transfer to non-covered business⁴	(22)	-	(22)	-	(22)
Other reserve movements including pension deficit⁵	(124)	11	(113)	93	(20)


Embedded value	1,210	1,968	3,178	4,402	7,580


Represented by:
- Non profit				4,008
- With-profits				394


Value of in-force business	-	-	-	4,402	4,402
Shareholder net worth	1,210	1,968	3,178	-	3,178


1. The free surplus reduction of £275m to finance new business includes £93m IFRS new business strain and £182m additional required capital.
2. The increase in free surplus of £762m from the expected transfer from the in-force non profit business includes £591m of IFRS operational cash generation and a £171m reduction in required capital.
3. UK intra-group dividends reflect a £525m dividend paid from Society to Group and dividends of £40m paid to Society from subsidiaries (primarily Nationwide Life). Dividends of €15m from LGN were also paid to Society (2011: €50m from LGN).
4. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
5. The other reserve movements reflects the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.

European Embedded Value Page 90

Notes to the Financial Statements

5.13 UK embedded value reconciliation (continued)

	Free	Required	Shareholder	Value of	Total
	surplus	capital	net worth	in-force
For the year ended 31 December 2011	£m	£m	£m	£m	£m


At 1 January
Value of in-force business (VIF)	-	-	-	3,886	3,886
Shareholder net worth (SNW)	1,395	1,640	3,035	-	3,035


	1,395	1,640	3,035	3,886	6,921
Operating profit/(loss) for the year:
- New business contribution¹	(258)	167	(91)	381	290
- Expected return on VIF	-	-	-	298	298
- Expected transfer from Non profit VIF to SNW²	745	(185)	560	(560)	-
- With-profits transfer	51	-	51	(51)	-
- Expected return on SNW	58	67	125	-	125
Generation of embedded value	596	49	645	68	713
- Experience variances	(52)	20	(32)	108	76
- Operating assumption changes	34	3	37	41	78
- Development costs	(8)	-	(8)	-	(8)
Variances	(26)	23	(3)	149	146


Operating profit after tax for the year	570	72	642	217	859
Non-operating profit/(loss) for the year:
- Investment variances	81	-	81	(47)	34
- Economic assumption changes	(65)	45	(20)	53	33
- Effect of tax rate changes and other taxation impacts	-	-	-	155	155
Non-operating profit/(loss) for the year:	16	45	61	161	222


Profit for the year	586	117	703	378	1,081
Intra-group distributions³	(437)	-	(437)	-	(437)
Transfer to non-covered business⁴	(19)	-	(19)	-	(19)
Other reserve movements including pension deficit⁵	(64)	-	(64)	(17)	(81)


Embedded value	1,461	1,757	3,218	4,247	7,465


Represented by:
- Non profit				3,808
- With-profits				439


Value of in-force business	-	-	-	4,247	4,247
Shareholder net worth	1,461	1,757	3,218	-	3,218


1. The free surplus reduction of £258m to finance new business includes £94m IFRS new business strain and £167m additional required capital. Other items have a net negative impact of £3m.
2. The increase in free surplus of £745m from the expected transfer from the in-force non profit business includes £560m of IFRS operational cash generation and a £185m reduction in required capital.
3. UK intra-group distributions reflect a £500m dividend paid from Society to Group and dividends of £20m paid to Society from subsidiaries (primarily Nationwide Life). Dividends of €50m from LGN were also paid to Society.
4. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
5. The other reserve movements reflects the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.

European Embedded Value Page 91

Notes to the Financial Statements

5.14 Analysis of shareholders' equity
		Invest-		Group
		ment		capital
	P&A and	manage-	US	and
	Savings	ment	Protection	financing	Total
As at 31 December 2012	£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity¹	740	360	919	3,422	5,441
Additional retained profit/(loss) on an EEV basis	4,484	-	55	(1,080)	3,459


Shareholders' equity on an EEV basis	5,224	360	974	2,342	8,900


Comprising:
Business reported on an IFRS basis	380	360	-	(836)	(96)

Business reported on an EEV basis:
Shareholder net worth
- Free surplus²	57		206	1,210	1,473
- Required capital to cover solvency margin	239		33	1,968	2,240
Value of in-force
- Value of in-force business	5,054		745		5,799
- Cost of capital	(506)		(10)		(516)



		Invest-		Group
		ment		capital
	P&A and	manage-	US	and
	Savings	ment	Protection	financing	Total
As at 31 December 2011 (Restated)	£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity¹	652	351	910	3,143	5,056
Additional retained profit/(loss) on an EEV basis	4,402	-	152	(1,002)	3,552


Shareholders' equity on an EEV basis	5,054	351	1,062	2,141	8,608


Comprising:
Business reported on an IFRS basis	338	351	-	(1,077)	(388)

Business reported on an EEV basis:
Shareholder net worth
- Free surplus²	37		111	1,461	1,609
- Required capital to cover solvency margin	215		38	1,757	2,010
Value of in-force
- Value of in-force business	4,907		924		5,831
- Cost of capital	(443)		(11)		(454)


1. Shareholders' equity supporting the UK 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 the Group capital and financing segment.
2. Free surplus is the value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date.

Further analysis of shareholders' equity is included in Note 5.15.

European Embedded Value Page 92

Notes to the Financial Statements

5.15 Segmental analysis of shareholders' equity
	Covered	Other		Covered	Other
	business	business		business	business
	EEV	IFRS		EEV	IFRS
	basis	basis	Total	basis	basis	Total
	2012	2012	2012	2011	2011	2011
	£m	£m	£m	£m	£m	£m


Protection and Annuities
- P&A reported on an EEV basis	3,131	-	3,131	2,995	-	2,995
- General insurance	-	180	180	-	148	148
- Netherlands (LGN)	248	-	248	271	-	271
- France (LGF)	194	-	194	198	-	198
- Other	-	10	10	-	6	6


Total Protection and Annuities	3,573	190	3,763	3,464	154	3,618



Savings
- Savings reported on an EEV basis	1,271	-	1,271	1,252	-	1,252
- Savings investments	-	138	138	-	136	136
- Other	-	52	52	-	48	48


Total Savings	1,271	190	1,461	1,252	184	1,436



Investment management	-	360	360	-	351	351



US Protection	974	-	974	1,062	-	1,062



Group capital and financing	3,178	(836)	2,342	3,218	(1,077)	2,141


	8,996	(96)	8,900	8,996	(388)	8,608

5.16 Reconciliation of shareholder net worth

	UK		UK
	covered		covered
	business	Total	business	Total
	2012	2012	2011	2011
				Restated
	£m	£m	£m	£m


SNW of long term operations (IFRS basis)	4,294	5,537	4,209	5,444
Other liabilities (IFRS basis)	-	(96)	-	(388)


Shareholders' equity on the IFRS basis	4,294	5,441	4,209	5,056
Purchased interest in long term business	(63)	(64)	(76)	(77)
Deferred acquisition costs/deferred income liabilities	(235)	(1,093)	(252)	(1,071)
Contingent loan¹	-	-	(210)	(210)
Deferred tax²	(253)	74	(235)	87
Other³	(565)	(741)	(218)	(554)


Shareholder net worth on the EEV basis	3,178	3,617	3,218	3,231


1. During H1 12, the contingent loan was settled between Society and LGPL. On an EEV basis, the contingent loan was modelled within the VIF. On an IFRS basis, the contingent loan asset was included within the Group capital and financing net assets. 2. Deferred tax represents all tax which is expected to be paid under current legislation. 3. Other in the P&A and Savings covered business relates primarily to the different treatment of annuities and non profit pension results under EEV compared with IFRS. Other total business also includes the different treatment of the LGA Triple X securitisation on an EEV and IFRS basis.

European Embedded Value Page 93

Notes to the Financial Statements

5.17 Sensitivities
In accordance with the guidance issued by the European Insurance CFO Forum in October 2005 the table below shows the effect of alternative assumptions on the long term embedded value and new business contribution.

Effect on embedded value as at 31 December 2012

		1%	1%			1%
		lower	higher	1%	1%	higher
	As	risk	risk	lower	higher	equity/
	pub-	discount	discount	interest	interest	property
	lished	rate	rate	rate	rate	yields
	£m	£m	£m	£m	£m	£m


Protection and Annuities and Savings¹	8,022	595	(507)	230	(191)	109
US Protection	974	119	(99)	40	(41)	-


Total covered business	8,996	714	(606)	270	(232)	109




					5%	5%
		10%	10%		lower	lower
		lower	lower	10%	mortality	mortality
	As	equity/	main-	lower	(UK	(other
	pub-	property	tenance	lapse	annu-	busi-
	lished	values	expenses	rates	ities)	ness)
	£m	£m	£m	£m	£m	£m


Protection and Annuities and Savings¹	8,022	(240)	106	83	(260)	83
US Protection	974	-	9	1	n/a	137


Total covered business	8,996	(240)	115	84	(260)	220



Effect on new business contribution for the year

		1%	1%			1%
		lower	higher	1%	1%	higher
	As	risk	risk	lower	higher	equity/
	pub-	discount	discount	interest	interest	property
	lished	rate	rate	rate	rate	yields
	£m	£m	£m	£m	£m	£m


Protection and Annuities and Savings¹	377	59	(49)	1	2	12
US Protection	98	19	(16)	1	(3)	-


Total covered business	475	78	(65)	2	(1)	12




					5%	5%
		10%	10%		lower	lower
		lower	lower	10%	mortality	mortality
	As	equity/	main-	lower	(UK	(other
	pub-	property	tenance	lapse	annu-	busi-
	lished	values	expenses	rates	ities)	ness)
	£m	£m	£m	£m	£m	£m


Protection and Annuities and Savings¹	377	(6)	16	18	(14)	14
US Protection	98	-	1	3	n/a	17


Total covered business	475	(6)	17	21	(14)	31


1. Includes Group capital and financing.

Opposite sensitivities are broadly symmetrical.

Sensitivity to changes in assumptions may not be linear, and as such, they should not be extrapolated to changes of a much larger order. A 2% higher risk discount rate would result in a £888m negative impact on UK embedded value and a £82m negative impact on UK new business contribution for the year.

European Embedded Value Page 94

Notes to the Financial Statements

5.18 Assumptions

UK assumptions

The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to the portfolio yield on the relevant backing assets held at market value at the end of the reporting period. The calculated return takes account of derivatives and other credit instruments in the investment portfolio. Indicative yields on the portfolio, excluding annuities within Legal & General Pensions Limited (LGPL), but after allowance for long term default risk, are shown below.

For LGPL annuities, separate returns are calculated for new and existing business. Indicative combined yields, after allowance for long term default risk and the following additional assumptions, are also shown below. These additional assumptions are:

i. Where cash balances and debt securities are held at the reporting date in excess of, or below strategic investment guidelines, then it is assumed that these cash balances or debt securities are immediately invested or disinvested at current yields.

ii. Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the proceeds reinvested in corporate bonds with a redemption yield 0.70% p.a. (0.70% p.a. at 31 December 2011) greater than the swap rate at that time (i.e. the long term credit rate).

iii. Where reinvestment or disinvestment is necessary to rebalance the asset portfolio in line with projected outgo, this is also assumed to take place at the long term credit rate above the swap rate at that time.

The returns on fixed and index-linked securities are calculated net of an allowance for default risk which takes account of the credit rating, outstanding term of the securities, and increase in the expectation of credit defaults over the economic cycle. The allowance for corporate securities expressed as a level rate deduction from the expected returns for annuities was 26bps at 31 December 2012 (26bps at 31 December 2011).

UK covered business

i. Assets are valued at market value.

ii. Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders' portion of the with-profits business in accordance with established practice. The proportion of profits derived from with-profits business allocated to shareholders amounts to almost 10% throughout the projection.

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

iv. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses (excluding the development costs referred to below). These are normally reviewed annually.

An allowance is made for future mortality improvement, commencing 1 January 2009 as per CMIB's mortality improvement model (CMI 2011) with the following parameters:

Males: Long Term Rate of 1.5% p.a. for future experience and 2.0% p.a. for statutory reserving, up to age 85 tapering to 0% at 120;

Females: Long Term Rate of 1.0% p.a. for future experience and 1.5% p.a. for statutory reserving, up to age 85 tapering to 0% at 120.

Future improvements are generally assumed to converge to the long term rate in 2026.

On this basis, the best estimate of the expectation of life for a new 65 year old Male CPA annuitant is 24.1 years (31 December 2011: 24.2 years). The expectation of life on the regulatory reserving basis is 25.7 years (31 December 2011: 25.8 years).

v. Development costs relate to investment in strategic systems and development capability that are charged to the covered business. Projects charged to the non-covered business are included within Investment projects in Group capital and financing.

Overseas covered business

vi. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses.

European Embedded Value Page 95

Notes to the Financial Statements

5.18 Assumptions (continued)

Economic assumptions


As at 31 December	2012	2011	2010
	% p.a.	% p.a.	% p.a.
Risk Margin	3.7	3.7	3.3
Risk free rate¹
- UK	2.3	2.5	4.0
- Europe	1.7	2.6	3.2
- US	1.8	1.9	3.3
Risk discount rate (net of tax)
- UK	6.0	6.2	7.3
- Europe	5.4	6.3	6.5
- US	5.5	5.6	6.6
Reinvestment rate (US)	4.3	4.2	5.5
Other UK business assumptions
Equity risk premium	3.3	3.3	3.5
Property risk premium	2.0	2.0	2.0

Investment return (excluding annuities in LGPL)
- Gilts:
- Fixed interest	1.9 - 2.3	1.8 - 2.5	3.4 - 4.0
- RPI linked	2.7	2.6	4.1
- Non gilts:
- Fixed interest	1.9 - 2.9	3.0 - 4.6	3.6 - 5.0
- Equities	5.6	5.8	7.5
- Property	4.3	4.5	6.0

Long-term rate of return on non profit annuities in LGPL	4.3	5.0	5.5

Inflation
- Expenses/earnings	3.4	3.5	4.1
- Indexation	2.9	3.0	3.6

1. The risk free rate is the gross redemption yield on the 15 year gilt index. The Europe risk free rate is the 10 year ECB AAA-rated euro area central government bond par yield. The LGA risk free rate is the 10 year US Treasury effective yield.

Tax

vii. The profits on the covered business, except for the profits on the Society shareholder capital held outside the long term fund, are calculated on an after tax basis and are grossed up by the notional attributed tax rate for presentation in the income statement. For the UK, the after tax basis assumes the annualised current tax rate of 24.5% and the subsequent planned future reductions in corporation tax to 23% from 1 April 2013, and 21% from 1 April 2014. The tax rate used for grossing up is the long term corporate tax rate in the territory concerned, which for the UK is 21% (31 December 2011: 23%) taking into account the expected further rate reductions to 21% by 1 April 2014. The profits on the Society shareholder capital held outside the long term fund are calculated before tax and therefore tax is calculated on an actual basis.

US, Netherlands and France covered business profits are also grossed up using the long term corporate tax rates of the respective territories i.e. US is 35% (2011: 35%), France is 34.3% (34.3%) and Netherlands is 25% (25%).

European Embedded Value Page 96

Notes to the Financial Statements

5.18 Assumptions (continued)

Stochastic calculations

viii. The time value of options and guarantees is calculated using economic and non-economic assumptions consistent with those used for the deterministic embedded value calculations.

This section describes the models used to generate future investment simulations, and gives some sample statistics for the simulations used. A single model has been used for UK and international business, with different economic assumptions for each territory.

Government nominal interest rates are generated using a LIBOR Market Model projecting full yield curves at annual intervals. The model provides a good fit to the initial yield curve.

The total annual returns on equities and property are calculated as the return on 1 year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. Corporate bonds are modelled separately by credit rating using stochastic credit spreads over the risk free rates, transition matrices and default recovery rates. The real yield curve model assumes that the real short rate follows a mean-reverting process subject to two normally distributed random shocks.

Asset classes

The significant asset classes are:

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

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

- International business - fixed rate bonds of various durations.

Summary statistics:

The following table sets out means and standard deviations (StDev) of future returns as at 31 December 2012 for the most significant asset classes. Correlations between asset classes have been set based on an internal assessment of historical data.

	10-year return		20-year return
	Mean¹	StDev²	Mean¹	StDev²
UK Business (Sterling)
Government bonds	1.9%	3.2%	3.3%	3.6%
Corporate bonds	3.5%	3.7%	4.6%	4.0%
Property (excess returns)	2.0%	14.9%	2.1%	15.1%
Equities (excess returns)	3.2%	20.0%	3.4%	20.5%

European Business (Euro)
Long Government bonds³	1.8%	3.2%	2.7%	3.3%
Short Government bonds⁴	1.8%	2.3%	2.7%	5.3%

US Business (US Dollar)
Long Government bonds³	1.9%	4.3%	3.0%	4.5%

1. For asset classes other than for equities and property, mean returns are calculated as the mean return in excess of 1 year government bonds plus the mean return on 1 year government bonds. Mean excess returns for the equities and property are calculated as the mean return in excess of 1 year government bonds. Each mean return is derived by calculating the accumulated value of a unit asset invested to time n years for each simulation, averaging the resultant values across all simulations, then calculating the equivalent annual return required to give this average accumulation (by taking the nth root of the average accumulation and deducting 1).

2. Standard deviations are calculated by accumulating a unit investment for n years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by n and taking the square root. Equities and property values use excess returns. The results are comparable to implied volatilities quoted in investment markets.

3. Long term bonds are defined to be 10 year par-coupon bonds.

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

Risk discount rate:

The risk discount rate is scenario dependent within the stochastic projection. It is calculated by applying the deterministic risk margin to the risk free rate in each stochastic projection.

European Embedded Value Page 97

Notes to the Financial Statements

5.18 Assumptions (continued)

Sensitivity calculations

ix. A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the embedded value and the new business contribution to changes in key assumptions. Relevant details relating to each sensitivity are:

· 1% variation in discount rate - a one percentage point increase/decrease in the risk margin has been assumed in each case (for example a 1% increase in the risk margin would result in a 4.7% risk margin).

· 1% variation in interest rate environment - a one percentage point increased/decreased parallel shift in the risk free curve with consequential impacts on fixed asset market values, investment return assumptions, risk discount rate, including consequential changes to valuation bases.

· 1% higher equity/property yields - a one percentage point increase in the assumed equity/property investment returns, excluding any consequential changes, for example, to risk discount rates or valuation bases, has been assumed in each case (for example a 1% increase in equity returns would increase assumed total equity returns from 5.6% to 6.6%).

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

· 10% lower maintenance expenses, excluding any consequential changes, for example, to valuation expense bases or potentially reviewable policy fees (a 10% decrease on a base assumption of £10 per annum would result in a £9 per annum expense assumption).

· 10% lower assumed persistency experience rates, excluding any consequential changes to valuation bases, incorporating a 10% decrease in lapse, surrender and premium cessation assumptions (a 10% decrease on a base assumption of 7% would result in a 6.3% lapse assumption).

· 5% lower mortality and morbidity rates, excluding any consequential changes to valuation bases but including assumed product repricing action where appropriate (for example if base experienced mortality is 90% of a standard mortality table then, for this sensitivity, the assumption is set to 85.5% of the standard table).

The sensitivities for covered business allow for any material changes to the cost of financial options and guarantees but do not allow for any changes to reserving bases or capital requirements within the sensitivity calculation, unless indicated otherwise above.

European Embedded Value Page 98

Notes to the Financial Statements

5.19 Methodology

Basis of preparation

The supplementary financial statements have been prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 by the European Insurance CFO Forum.

The supplementary financial statements have been audited by PricewaterhouseCoopers LLP and prepared with assistance from our consulting actuaries; Towers Watson in the UK and Milliman in the USA.

Change to accounting policy - US deferred acquisition costs

During 2012 the Group has changed its accounting policy for deferred acquisition costs in the US, details of which can be found within Note 2.19. There is no impact on European embedded value reported profit resulting from this change. The impact on the Consolidated Balance Sheet is outlined below for 2011:

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


Assets
Long term in-force business asset	3,556	144	3,700
Other assets (Deferred acquisition costs)	6,900	(220)	6,680
Liabilities
Other liabilities and provisions (Deferred tax)	16,030	(76)	15,954
Total equity	8,674	-	8,674

Covered business

The Group uses EEV methodology to value individual and group life assurance, pensions and annuity business written in the UK, Continental Europe and the US. The UK covered business also includes non-insured self invested personal pension (SIPP) business.

The managed pension funds business has been excluded from covered business and is reported on an IFRS basis.

All other businesses are accounted for on the IFRS basis adopted in the primary financial statements.

There is no distinction made between insurance and investment contracts in our covered business as there is under IFRS.

Description of methodology

The objective of EEV is to provide shareholders with realistic information on the financial position and current performance of the Group.

The methodology requires assets of an insurance company, as reported in the primary financial statements, to be attributed between those supporting the covered business and the remainder. The method accounts for assets in the covered business on an EEV basis and the remainder of the Group's assets on the IFRS basis adopted in the primary financial statements.

The EEV methodology recognises profit from the covered business as the total of:

i. cash transfers during the relevant period from the covered business to the remainder of the Group's assets; and

ii. the movement in the present value of future distributable profits to shareholders arising from the covered business over the relevant reporting period.

Embedded value

Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the shareholders' equity of other businesses, less the value included for purchased interests in long term business.

The embedded value is the sum of the shareholder net worth (SNW) and the value of the in-force business (VIF). SNW is defined as those amounts, within covered business (both within the long term fund and held outside the long term fund but used to support long term business), which are regarded either as required capital or which represent free surplus.

The VIF is the present value of future shareholder profits arising from the covered business, projected using best estimate assumptions, less an appropriate deduction for the cost of holding the required level of capital and the time value of financial options and guarantees (FOGs).

European Embedded Value Page 99

Notes to the Financial Statements

5.19 Methodology (continued)

Service companies

All services relating to the UK covered business are charged on a cost recovery basis, with the exception of investment management services provided to Legal & General Pensions Limited (LGPL) and to Legal & General Assurance Society Limited (Society). Profits arising on the provision of these services are valued on a look through basis.

As the EEV methodology incorporates the future capitalised cost of these internal investment management services, the equivalent IFRS profits have been removed from the Investment management segment and are instead included in the results of the Protection and Annuities and Savings segments on an EEV basis.

The capitalised value of future profits emerging from internal investment management services are therefore included in the embedded value and new business contribution calculations for the Protection and Annuities and Savings segments. However, the historical profits which have emerged continue to be reported in the shareholders' equity of the Investment management segment on an IFRS basis. Since the look through into service companies includes only future profits and losses, current intra-group profits or losses must be eliminated from the closing embedded value and in order to reconcile the profits arising in the financial period within each segment with the net assets on the opening and closing balance sheet, a transfer of IFRS profits for the period from the UK SNW is deemed to occur.

New business

New business premiums reflect income arising from the sale of new contracts during the reporting period and any changes to existing contracts, which were not anticipated at the outset of the contract.

In-force business comprises previously written single premium, regular premium, recurrent single premium contracts and payments in relation to existing longevity insurance. Department of Work and Pensions rebates have not been treated as recurring and are included in single premium new business when received. Longevity insurance product comprises the exchange of a stream of fixed leg payments for a stream of floating payments, with the value of the income stream being the difference between the two legs. New business annual premiums have been excluded for longevity insurance due to the unpredictable deal flow from this type of business.

New business contribution arising from the new business premiums written during the reporting period has been calculated on the same economic and operating assumptions used in the embedded value at the end of the financial period. This has then been rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.

The present value of future new business premiums (PVNBP) has been calculated and expressed at the point of sale. The PVNBP is equivalent to the total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end of the financial period, with the exception of longevity insurance. For longevity insurance, PVNBP is not an appropriate measure of expected income stream and as such, the PVNBP has not been applied for this product.

The new business margin is defined as new business contribution at the end of the reporting period divided by the PVNBP, with the exception of longevity insurance. The new business margin has not been applied to longevity insurance for the reason above. The premium volumes and projection assumptions used to calculate the PVNBP are the same as those used to calculate new business contribution.

Intra-group reinsurance arrangements are in place between the US and UK businesses, and it is expected that these arrangements will be periodically extended to cover recent new business. US new business premiums and contribution reflect the groupwide expected impact of US directly-written business.

Projection assumptions

Cash flow projections are determined using best estimate assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on conditions at the end of the financial period. Future investment returns are projected by one of two methods. The first method is based on an assumed investment return attributed to assets at their market value. The second, which is used by US Protection, where the investments of that subsidiary are substantially all fixed interest, projects the cash flows from the current portfolio of assets and assumes an investment return on reinvestment of surplus cash flows. The assumed discount and inflation rates are consistent with the investment return assumptions.

Detailed projection assumptions including mortality, morbidity, persistency and expenses reflect recent operating experience and are normally reviewed annually. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favourable changes in operating experience are not anticipated until the improvement in experience has been observed.

All costs relating to the covered business, whether incurred in the covered business or elsewhere in the Group, are allocated to that business. The expense assumptions used for the cash flow projections therefore include the full cost of servicing this business.

Tax

The projections take into account all tax which is expected to be paid, based on best estimate assumptions, applying current legislation and practice together with known future changes. The impact of the changes to the UK taxation regime for life assurance companies has been calculated to increase embedded value by £14m.

European Embedded Value Page 100

Notes to the Financial Statements

5.19 Methodology (continued)

Allowance for risk

Aggregate risks within the covered business are allowed for through the following principal mechanisms:

i. setting required capital levels with reference to both the Group's internal risk based capital models, and an assessment of the strength of regulatory reserves in the covered business;

ii. allowing explicitly for the time value of financial options and guarantees within the Group's products; and

iii. setting risk discount rates by deriving a Group level risk margin to be applied consistently to local risk free rates.

Required capital and free surplus

Regulatory capital for the UK Protection and Annuities and Savings businesses is provided by assets backing the with-profits business or by the SNW. The SNW comprises all shareholders' capital within Society, including those funds retained within the long term fund and the excess assets in LGPL (collectively Society shareholder capital).

Society shareholder capital is either required to cover EU solvency margin or is free surplus as its distribution to shareholders is not restricted.

For UK with-profits business, the required capital is covered by the surplus within the with-profits part of the fund and no effect is attributed to shareholders except for the burn-through cost, which is described later. This treatment is consistent with the Principles and Practices of Financial Management for this part of the fund.

For UK non profit business, the required capital will be maintained at no less than the level of the EU minimum solvency requirement. This level, together with the margins for adverse deviation in the regulatory reserves, is, in aggregate, in excess of internal capital targets assessed in conjunction with the Individual Capital Assessment (ICA) and the with-profits support account.

The initial strains relating to new non profit business, together with the related EU solvency margin, are supported by releases from existing non profit business and the Society shareholder capital. As a consequence, the writing of new business defers the release of capital to free surplus. The cost of holding required capital is defined as the difference between the value of the required capital and the present value of future releases of that capital. For new business, the cost of capital is taken as the difference in the value of that capital assuming it was available for release immediately and the present value of the future releases of that capital. As the investment return, net of tax, on that capital is less than the risk discount rate, there is a resulting cost of capital which is reflected in the value of new business.

For US Protection, the Company Action Level (CAL) of capital has been treated as required capital for modelling purposes. The CAL is the regulatory capital level at which the company would have to take prescribed action, such as submission of plans to the State insurance regulator, but would be able to continue operating on the existing basis. The CAL is currently twice the level of capital at which the regulator is permitted to take control of the business.

For LGN, required capital has been set at 100% of EU minimum solvency margin for all products without FOGs. For those products with FOGs, capital of between 100% and 281% of the EU minimum solvency margin has been used. The level of capital has been determined using risk based capital techniques.

For LGF, 100% of EU minimum solvency margin has been used for EV modelling purposes for all products both with and without FOGs. The level of capital has been determined using risk based capital techniques.

The contribution from new business for our International businesses reflects an appropriate allowance for the cost of holding the required capital.

Financial options and guarantees

Under the EEV Principles an allowance for time value of FOGs is required where a financial option exists which is exercisable at the discretion of the policyholder. These types of option principally arise within the with-profits part of the fund and their time value is recognised within the with-profits burn-through cost described below. Additional financial options for non profit business exist only for a small amount of deferred annuity business where guaranteed early retirement and cash commutation terms apply when the policyholders choose their actual retirement date.

Further financial guarantees exist for non profit business, in relation to index-linked annuities where capped or collared restrictions apply. Due to the nature of these restrictions and the manner in which they vary depending on the prevailing inflation conditions, they are also treated as FOGs and a time value cost recognised accordingly.

The time value of FOGs has been calculated stochastically using a large number of real world economic scenarios derived from assumptions consistent with the deterministic EEV assumptions and allowing for appropriate management actions where applicable. The management action primarily relates to the setting of bonus rates. Future regular and terminal bonuses on participating business within the projections are set in a manner consistent with expected future returns available on assets deemed to back the policies within the stochastic scenarios.

European Embedded Value Page 101

Notes to the Financial Statements

5.19 Methodology (continued)

In recognising the residual value of any projected surplus assets within the with-profits part of the fund in the deterministic projection, it is assumed that terminal bonuses are increased to exhaust all of the assets in the part of the fund over the future lifetime of the in-force with-profits policies. However, under stochastic modelling, there may be some extreme economic scenarios when the total projected assets within the with-profits part of the fund are insufficient to pay all projected policyholder claims and associated costs. The average additional shareholder cost arising from this shortfall has been included in the time value cost of financial options and guarantees and is referred to as the with-profits burn-through cost.

Economic scenarios have been used to assess the time value of the financial guarantees for non profit business by using the inflation rate generated in each scenario. The inflation rate used to project index-linked annuities will be constrained in certain real world scenarios, for example, where negative inflation occurs but the annuity payments do not reduce below pre-existing levels. The time value cost of FOGs allows for the projected average cost of these constrained payments for the index-linked annuities. It also allows for the small additional cost of the guaranteed early retirement and cash commutation terms for the minority of deferred annuity business where such guarantees have been written.

US Protection FOGs relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is based on the accumulated value of the contract including accrued interest. The crediting rates are discretionary but related to the accounting income for the amortising bond portfolio. The majority of the guaranteed minimum crediting rates are between 3% and 4%. The assets backing these contracts are invested in US Dollar denominated fixed interest securities.

LGN separately provides for two types of guarantees: interest rate guarantees and maturity guarantees. Certain contracts provide an interest rate guarantee where there is a minimum crediting rate based on the higher of 1-year Euribor and the policy guarantee rate. This guarantee applies on a monthly basis. Certain unit linked contracts provide a guaranteed minimum value at maturity where the maturity amount is the higher of the fund value and a guarantee amount. The fund values for both these contracts are invested in Euro denominated fixed interest securities.

For LGF, FOGs which have been separately provided for relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the contract including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios plus income and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed surrender values. Local statutory accounting rules require the establishment of a specific liability when the accounting income for a company is less than 125% of the guaranteed minimum credited returns, although this has never been required. In general, the guaranteed annual bonus rates are between 0% and 4.5%.

Risk free rate

The risk free rate is set to reflect both the pattern of the emerging profits under EEV and the relevant duration of the liabilities where backing assets reflect this assumption (e.g. equity returns). For the UK, it is set by reference to the gross redemption yield on the 15 year gilt index. For LGA, the risk free rate is the 10 year US Treasury effective yield, while the 10 year ECB AAA-rated Euro area central government bond par yield is used for LGN and LGF.

Risk discount rate

The risk discount rate (RDR) is a combination of the risk free rate and a risk margin, which reflects the residual risks inherent in the Group's covered businesses, after taking account of prudential margins in the statutory provisions, the required capital and the specific allowance for FOGs.

The risk margin has been determined based on an assessment of the Group's weighted average cost of capital (WACC). This assessment incorporates a beta for the Group, which measures the correlation of movements in the Group's share price to movements in a relevant index. Beta values therefore allow for the market's assessment of the risks inherent in the business relative to other companies in the chosen index.

The WACC is derived from the Group's cost of equity and debt, and the proportion of equity to debt in the Group's capital structure measured using market values. Each of these three parameters is forward looking, although informed by historic information and appropriate judgements where necessary. The cost of equity is calculated as the risk free rate plus the equity risk premium for the chosen index multiplied by the Company's beta. Forward-looking or adjusted betas make allowance for the observed tendency for betas to revert to 1 and therefore a weighted average of the historic beta and 1 tends to be a better estimate of the Company's beta for the future period. We have computed the WACC using an arithmetical average of forward-looking betas against the FTSE 100 index.

European Embedded Value Page 102

Notes to the Financial Statements

5.19 Methodology (continued)

The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and subordinated long term debt. All debt interest attracts tax relief at a rate of 21.3%.

Whilst the WACC approach is a relatively simple and transparent calculation to apply, subjectivity remains within a number of the assumptions. Management believes that the chosen margin, together with the levels of required capital, the inherent strength of the Group's regulatory reserves and the explicit deduction for the cost of options and guarantees, is appropriate to reflect the risks within the covered business.

Analysis of profit

Operating profit is identified at a level which reflects an assumed longer term level of investment return.

The contribution to operating profit in a period is attributed to four sources:

i. new business;

ii. the management of in-force business;

iii. development costs; and

iv. return on shareholder net worth.

Further profit contributions arise from actual investment return differing from the assumed long term investment return (investment return variances), and from the effect of economic assumption changes.

The contribution from new business represents the value recognised at the end of each period from new business written in that period, after allowing for the actual cost of acquiring the business and of establishing the required technical provisions and reserves and after making allowance for the cost of capital. New business contributions are calculated using closing assumptions.

The contribution from in-force business is calculated using opening assumptions and comprises:

i. expected return - the discount earned from the value of business in-force at the start of the year;

ii. experience variances - the variance in the actual experience over the reporting period from that assumed in the value of business in-force as at the start of the year; and

iii. operating assumption changes - the effects of changes in future assumptions, other than changes in economic assumptions from those used in valuing the business at the start of the year. These changes are made prospectively from the end of the year.

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

The contribution from shareholder net worth comprises the increase in embedded value based on assumptions at the start of the year in respect of the expected investment return on the Society shareholder capital.

Further profit contributions arise from investment return variances and the effect of economic assumption changes.

Investment return variances represent the effect of actual investment performance and changes to investment policy on SNW and VIF business from that assumed at the beginning of the period.

Economic assumption changes comprise the effect of changes in economic variables on SNW and VIF business from that assumed at the beginning of the period, which are beyond the control of management, including associated changes to valuation bases to the extent that they are reflected in revised assumptions.

New Business Page 103

6.01 Investment management new business
								Increase/
						2012	2011	(decrease)
						£m	£m	%


Index funds						22,400	22,182	1
Liability driven investments						5,678	5,809	(2)
Active
- Active fixed income						6,042	4,580	32
- Property						125	265	(53)
- Equity						1	8	(88)


Total LGIM new funds						34,246	32,844	4
Institutional unit trust						424	637	(33)


Total new funds¹						34,670	33,481	4


Attributable to:
LGIM UK customers						25,096	26,305	(5)
LGIM International customers						9,150	6,539	40
Legal & General Retail Investments						424	637	(33)





LGIM net flows						7,144	2,983	139


1. New monies from Legal & General Investment Management (LGIM) exclude £4.8bn (2011: £4.1bn) received during the year on a temporary basis, generally as part of portfolio reconstructions.
New Business Page 104 6.02 Investment management new business quarterly progression

	3	3	3	3	3	3	3	3
	months to	months to	months to	months to	months to	months to	months to	months to
	31.12.12	30.09.12	30.06.12	31.03.12	31.12.11	30.09.11	30.06.11	31.03.11
	£m	£m	£m	£m	£m	£m	£m	£m



Index funds	7,762	6,473	3,979	4,186	4,555	4,691	6,067	6,869
Liability driven investments	1,946	432	1,620	1,680	1,085	1,985	780	1,959
Active
- Active fixed income	1,288	1,299	1,838	1,617	2,014	505	900	1,161
- Property	69	11	11	34	87	63	17	98
- Equity	-	-	1	-	-	7	-	1


Total LGIM new funds	11,065	8,215	7,449	7,517	7,741	7,251	7,764	10,088
Institutional unit trust	47	266	48	63	123	109	123	282

Total new funds	11,112	8,481	7,497	7,580	7,864	7,360	7,887	10,370


Attributable to:
LGIM UK customers	8,562	4,628	5,859	6,047	4,745	6,935	6,904	7,721
LGIM International customers	2,503	3,587	1,590	1,470	2,996	316	860	2,367
Legal & General Retail Investments	47	266	48	63	123	109	123	282





LGIM net flows	2,563	618	1,376	2,587	(607)	586	1,005	1,999

6.03 Legal & General Investment Management new business by investment approach

	2012	2011
	%	%


Indexed equities	40	44
Indexed bonds (including index linked funds and cash)	26	23
Active bonds (including index linked funds and cash)	18	14
Liability driven investments	16	18
Property	-	1


Total	100	100

New Business Page 105

6.04 Assets under management


	At	At
	2012	2011
	£m	£m


Legal & General Investment Management assets under management	405,972	371,211
Other assets under management¹	7,180	7,362


Worldwide assets under management	413,152	378,573


1. Other assets under management comprises retail investments and additional funds managed overseas.



Legal & General Investment Management's assets under management are analysed below:

Represented by
Index tracking funds:
- UK equities	64,159	63,228
- Overseas equities	98,775	82,200
- Fixed interest	43,758	37,515
- Index linked	35,679	40,554
- Cash/deposits	814	671


Total index tracking funds	243,185	224,168
Actively managed funds	98,830	88,684
Liability driven investments	63,957	58,359


	405,972	371,211



By investment approach
Index equities	162,934	145,428
Index bonds (including index linked funds and cash)	80,251	78,740
Active bonds (including index linked funds and cash)	82,170	72,355
Liability driven investments	63,957	58,359
Active equities	7,698	7,229
Property	8,625	8,757
Private equity	337	343


	405,972	371,211



By source of business
Institutional assets under management¹:
- Managed pension funds pooled	216,979	205,174
- Liability driven investments	63,968	58,367
- Other	26,793	16,920
- Managed pension funds segregated	8,548	5,136


Total institutional assets under management	316,288	285,597
UK businesses (life and general insurance funds)	74,346	70,630
UK businesses (unit trusts - excluding life fund investment)	15,338	14,984


	405,972	371,211


1. Excludes institutional investments in unit trust funds.

New Business Page 106

6.05 Savings net flows

	2012	2011
	£m	£m


Investments¹	916	2,490
Insured²	601	424
With-profits	(2,163)	(1,736)


Total Savings net flows	(646)	1,178


1. Savings investments products include unwrapped unit trusts, ISAs, SIPPs through Suffolk Life and structured deposit and investment products.
2. Insured savings products include bonds, retail and workplace non profit pensions and insured SIPPs.

6.06 Savings net flows quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.12	30.09.12	30.06.12	31.03.12	31.12.11	30.09.11	30.06.11	31.03.11
	£m	£m	£m	£m	£m	£m	£m	£m


Investments¹	257	104	571	(16)	165	622	804	899
Insured²	287	160	56	98	200	4	107	113
With-profits	(690)	(644)	(358)	(471)	(381)	(568)	(387)	(400)


Total Savings net flows	(146)	(380)	269	(389)	(16)	58	524	612


1. Savings investments products include unwrapped unit trusts, ISAs, SIPPs through Suffolk Life and structured deposit and investment products.
2. Insured savings products include bonds, retail and workplace non profit pensions and insured SIPPs.

New Business Page 107

6.07 Worldwide new business

	Annual	Single		Annual	Single
	premiums	premiums	APE	premiums	premiums	APE	Increase/
	2012	2012	2012	2011	2011	2011	(decrease)
	£m	£m	£m	£m	£m	£m	%


Protection
- Retail¹	151	-	151	131	-	131	15
- Group	70	-	70	46	-	46	52


	221	-	221	177	-	177	25
Annuities
- Individual (non profit)	-	1,308	131	-	1,030	103	27
- Individual (with-profits)	-	12	1	-	24	2	(50)
- Bulk purchase	-	1,019	102	-	1,461	146	(30)


	-	2,339	234	-	2,515	251	(7)


Netherlands (LGN)	13	82	21	5	95	15	40
France (LGF)	38	233	61	24	232	47	30
France (LGF) retail investment business	-	105	11	-	46	5	120


Total Protection and Annuities²	272	2,759	548	206	2,888	495	11



Investments³	69	5,285	598	68	6,200	688	(13)
Insured business	519	2,383	757	244	2,015	445	70
With-profits	58	342	92	69	525	122	(25)
India (26% share)	7	24	9	5	22	7	29


Total Savings	653	8,034	1,456	386	8,762	1,262	15




US Protection	90	-	90	69	-	69	30



Egypt (55% share)	14	-	14	9	-	9	56
Gulf (50% share)	4	6	5	2	5	2	150


Total Other worldwide new business	18	6	19	11	5	11	73




Total worldwide new business	1,033	10,799	2,113	672	11,655	1,837	15


1. In previous periods, Retail Protection was named Individual Protection. This is purely a change in name rather than any change to classification.
2. Total Protection and Annuities new business excludes £nil (2011: £70m) of APE in relation to longevity insurance transactions. It has been excluded due to the unpredictable deal flow from this type of business.
3. Investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business (see Note 6.01).

New Business Page 108

6.08 Worldwide new business APE quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.12	30.09.12	30.06.12	31.03.12	31.12.11	30.09.11	30.06.11	31.03.11
	£m	£m	£m	£m	£m	£m	£m	£m


Protection
- Retail	43	36	36	36	33	33	32	33
- Group	13	20	25	12	7	10	14	15


	56	56	61	48	40	43	46	48
Annuities
- Individual (non profit)	45	35	25	26	21	31	30	21
- Individual (with-profits)	-	-	1	-	-	1	-	1
- Bulk purchase	54	41	3	4	119	3	22	2


	99	76	29	30	140	35	52	24



Netherlands (LGN)	5	5	5	6	4	3	3	5
France (LGF)	19	4	18	20	5	6	21	15
France (LGF) retail investment business	11	-	-	-	2	1	1	1


Total Protection and Annuities	190	141	113	104	191	88	123	93



Investments¹	137	147	174	140	133	184	195	176
Insured business	318	197	110	132	128	97	112	108
With-profits	16	18	30	28	26	25	35	36
India (26% share)	2	1	1	5	1	2	1	3


Total Savings	473	363	315	305	288	308	343	323



US Protection	24	24	22	20	19	18	16	16



Egypt (55% share)	3	3	4	4	3	3	2	1
Gulf (50% share)	1	2	1	1	-	1	1	-


Total Other worldwide new business	4	5	5	5	3	4	3	1




Total worldwide new business	691	533	455	434	501	418	485	433


1. Investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business (see Note 6.01).

New Business Page 109

6.09 Worldwide new business annual premium quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.12	30.09.12	30.06.12	31.03.12	31.12.11	30.09.11	30.06.11	31.03.11
	£m	£m	£m	£m	£m	£m	£m	£m


Protection
- Retail	43	36	36	36	33	33	32	33
- Group	13	20	25	12	7	10	14	15


	56	56	61	48	40	43	46	48
Annuities
- Individual (non profit)	-	-	-	-	-	-	-	-
- Individual (with-profits)	-	-	-	-	-	-	-	-
- Bulk purchase	-	-	-	-	-	-	-	-


	-	-	-	-	-	-	-	-



Netherlands (LGN)	4	3	3	3	1	2	1	1
France (LGF)	12	-	11	15	-	-	15	9
France (LGF) retail investment business	-	-	-	-	-	-	-	-


Total Protection and Annuities	72	59	75	66	41	45	62	58



Investments¹	13	18	25	13	18	20	19	11
Insured business	248	132	64	75	72	51	62	59
With-profits	12	11	17	18	14	16	17	22
India (26% share)	2	1	1	3	1	1	1	2


Total Savings	275	162	107	109	105	88	99	94



US Protection	24	24	22	20	19	18	16	16



Egypt (55% share)	3	3	4	4	3	3	2	1
Gulf (50% share)	1	1	1	1	1	-	1	-


Total Other worldwide new business	4	4	5	5	4	3	3	1




Total worldwide new business	375	249	209	200	169	154	180	169


1. Investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business (see Note 6.01).

New Business Page 110

6.10 Worldwide new business single premium quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.12	30.09.12	30.06.12	31.03.12	31.12.11	30.09.11	30.06.11	31.03.11
	£m	£m	£m	£m	£m	£m	£m	£m


Protection
- Retail	-	-	-	-	-	-	-	-
- Group	-	-	-	-	-	-	-	-


	-	-	-	-	-	-	-	-
Annuities
- Individual (non profit)	446	348	250	264	212	313	293	212
- Individual (with-profits)	2	2	4	4	7	6	5	6
- Bulk purchase	544	408	31	36	1,190	31	217	23


	992	758	285	304	1,409	350	515	241


Netherlands (LGN)	15	22	16	29	20	17	19	39
France (LGF)	69	41	71	52	51	56	69	56
France (LGF) retail investment business	102	-	2	1	13	15	9	9


Total Protection and Annuities	1,178	821	374	386	1,493	438	612	345



Investments¹	1,235	1,294	1,487	1,269	1,153	1,632	1,761	1,654
Insured business	699	650	461	573	568	456	502	489
With-profits	42	73	129	98	112	96	177	140
India (26% share)	5	2	2	15	5	4	2	11


Total Savings	1,981	2,019	2,079	1,955	1,838	2,188	2,442	2,294



US Protection	-	-	-	-	-	-	-	-



Egypt (55% share)	-	-	-	-	-	-	-	-
Gulf (50% share)	-	4	1	1	-	5	-	-


Total Other worldwide new business	-	4	1	1	-	5	-	-




Total worldwide new business	3,159	2,844	2,454	2,342	3,331	2,631	3,054	2,639


1. Investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business (see Note 6.01).

New Business Page 111

6.11 Overseas new business in local currency

	Annual	Single		Annual	Single		Increase/
	premiums	premiums	APE	premiums	premiums	APE	(decrease)
	2012	2012	2012	2011	2011	2011	%


US Protection ($m)	142	-	142	111	-	111	28

Netherlands (LGN) (€m)	17	101	27	6	109	17	59

France (LGF) (€m)	46	287	75	27	267	54	39

France (LGF) retail investment business (€m)	-	129	13	-	53	5	160

India (Rs m) - Group's 26% interest	564	2,264	790	373	1,629	536	47

Egypt (Pounds m) - Group's 55% interest	134	-	134	87	-	87	54

Gulf (US$m) - Group's 50% interest	6	10	7	3	9	4	75

6.12 Worldwide APE by channel

	Annual	Single
	premiums	premiums	APE	% of
For the year ended 31 December 2012	£m	£m	£m	total


Retail IFA	198	5,010	699	33
Employee benefit consultants	662	2,242	886	42
Tied agents	27	109	38	2
Bancassurance	126	2,895	416	20
Direct	20	543	74	3


Total	1,033	10,799	2,113	100



	Annual	Single
	premiums	premiums	APE	% of
For the year ended 31 December 2011	£m	£m	£m	total


Retail IFA	155	5,744	729	40
Employee benefit consultants	348	2,140	562	31
Tied agents	30	77	38	2
Bancassurance	113	3,222	435	23
Direct	26	472	73	4


Total	672	11,655	1,837	100

6.13 Worldwide APE by channel quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.12	30.09.12	30.06.12	31.03.12	31.12.11	30.09.11	30.06.11	31.03.11
	£m	£m	£m	£m	£m	£m	£m	£m


Retail IFA	188	166	176	169	160	194	188	187
Employee benefit consultants	377	232	131	146	230	84	135	113
Tied agents	9	10	11	8	8	9	13	8
Bancassurance	94	108	119	95	91	113	127	104
Direct	23	17	18	16	12	18	22	21


Total	691	533	455	434	501	418	485	433

This information is provided by RNS

The company news service from the London Stock Exchange

END

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