L&G Half-year Report 2017 Part 3

RNS Number : 4602N

Legal & General Group Plc

09 August 2017

Legal & General Group Plc

Half-year Results 2017 Part 3

Asset and premium flows Page 65

3.01 Legal & General investment management total assets

		Active
		fixed	Solu-	Real	Active	Total
For the six months	Index	income	tions¹	assets	equities	AUM
ended 30 June 2017	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2017	319.8	134.8	411.9	19.6	8.1	894.2
External inflows	25.4	8.3	16.0	0.8	0.1	50.6
External outflows	(29.7)	(3.0)	(9.0)	(0.5)	(0.1)	(42.3)
Overlay/advisory net flows	-	-	13.4	-	-	13.4


External net flows²	(4.3)	5.3	20.4	0.3	-	21.7
Internal net flows	(0.3)	(0.4)	0.4	0.5	(1.3)	(1.1)
Disposal of LGN⁵	(0.3)	(0.5)	-	-	-	(0.8)


Total net flows	(4.9)	4.4	20.8	0.8	(1.3)	19.8
Cash management movements³	-	4.1	-	-	-	4.1
Market and other movements²	16.6	1.7	13.4	0.8	0.5	33.0



At 30 June 2017⁴	331.5	145.0	446.1	21.2	7.3	951.1

Assets attributable to:
External						853.2
Internal						97.9


Assets attributable to:
UK						752.8
International						198.3

		Active
		fixed	Solu-	Real	Active	Total
For the six months	Index	income	tions¹	assets	equities	AUM
ended 30 June 2016	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2016	274.3	106.8	338.2	18.3	8.5	746.1
External inflows	17.6	4.8	9.3	0.8	-	32.5
External outflows	(20.0)	(2.2)	(6.6)	(0.7)	(0.1)	(29.6)
Overlay/advisory net flows	-	-	6.7	-	-	6.7


External net flows²	(2.4)	2.6	9.4	0.1	(0.1)	9.6
Internal net flows	(0.4)	0.7	(0.1)	0.1	-	0.3


Total net flows	(2.8)	3.3	9.3	0.2	(0.1)	9.9

Cash management movements³	-	(0.6)	-	-	-	(0.6)
Market and other movements²	28.9	16.3	41.6	(0.1)	(0.6)	86.1


At 30 June 2016⁴	300.4	125.8	389.1	18.4	7.8	841.5


Assets attributable to:
External						749.8
Internal						91.7


Assets attributable to:
UK						689.6
International						151.9


1. Solutions include liability driven investments, multi-asset funds, and include £280.8bn at 30 June 2017 (30 June 2016: £244.0bn) of derivative notionals associated with the Solutions business.
2. External net flows exclude movements in short-term solutions assets, with maturity as determined by client agreements and are subject to a higher degree of variability. The total value of these assets at 30 June 2017 was £81.7bn (30 June 2016: £71.0bn) and the movement in these assets is included in market and other movements for Solutions assets.
3. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.
4. Total assets under management have been reconciled to the financial investments and investment property held on the Consolidated Balance Sheet in note 3.04.
5. L&G Netherlands was sold on 6 April 2017 to Chesnara Plc.

Asset and premium flows Page 66

3.01 Legal & General investment management total assets (continued)

		Active
		fixed	Solu-	Real	Active	Total
For the year ended	Index	income	tions¹	assets	equities	AUM
31 December 2016	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2016	274.3	106.8	338.2	18.3	8.5	746.1
External inflows⁵	35.2	10.8	19.9	1.4	-	67.3
External outflows⁵	(45.0)	(6.5)	(12.4)	(1.2)	(0.2)	(65.3)
Overlay/advisory net flows	-	-	27.2	-	-	27.2


External net flows²	(9.8)	4.3	34.7	0.2	(0.2)	29.2
Internal net flows	(0.3)	1.5	-	0.7	0.1	2.0


Total net flows	(10.1)	5.8	34.7	0.9	(0.1)	31.2

Cash management movements³	-	(0.7)	-	-	-	(0.7)
Market and other movements^2,5	55.6	22.9	39.0	0.4	(0.3)	117.6



At 31 December 2016⁴	319.8	134.8	411.9	19.6	8.1	894.2


Assets attributable to:
External						796.7
Internal						97.5


Assets attributable to:
UK						716.8
International						177.4


1. Solutions include liability driven investments, multi-asset funds and included £251.8bn at 31 December 2016 of derivative notionals associated with the Solutions business.
2. External net flows exclude movements in short-term solutions assets, with maturity as determined by client agreements and are subject to a higher degree of variability. The total value of these assets at 31 December 2016 was £52.6bn, and the movement in these assets is included in Market and other movements for Solutions assets.
3. Cash management movements include external holdings in money market funds and other cash mandares held for clients' liquidity management purposes.
4. Total assets under management have been reconciled to the financial investments and investment property held on the Consolidated Balance Sheet in note 3.04.
5. Switches between asset classes are included in the gross inflows and outflows, and moved out of Market and other movements.

Asset and premium flows Page 67

3.02 Legal & General investment management total assets half-yearly progression

		Active
		fixed	Solu-	Real	Active	Total
For the year ended	Index	income	tions¹	assets	equities	AUM
31 December 2016	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2016	274.3	106.8	338.2	18.3	8.5	746.1
External inflows⁵	17.6	4.8	9.3	0.8	-	32.5
External outflows⁵	(20.0)	(2.2)	(6.6)	(0.7)	(0.1)	(29.6)
Overlay/ advisory net flows	-	-	6.7	-	-	6.7


External net flows²	(2.4)	2.6	9.4	0.1	(0.1)	9.6
Internal net flows	(0.4)	0.7	(0.1)	0.1	-	0.3


Total net flows	(2.8)	3.3	9.3	0.2	(0.1)	9.9
Cash management movements³	-	(0.6)	-	-	-	(0.6)
Market and other movements⁵	28.9	16.3	41.6	(0.1)	(0.6)	86.1


At 30 June 2016	300.4	125.8	389.1	18.4	7.8	841.5


External inflows⁵	17.6	6.0	10.6	0.6	-	34.8
External outflows⁵	(25.0)	(4.3)	(5.8)	(0.5)	(0.1)	(35.7)
Overlay / advisory net flows	-	-	20.5	-	-	20.5


External net flows²	(7.4)	1.7	25.3	0.1	(0.1)	19.6
Internal net flows	0.1	0.8	0.1	0.6	0.1	1.7


Total net flows	(7.3)	2.5	25.4	0.7	-	21.3
Cash management movements³	-	(0.1)	-	-	-	(0.1)
Market and other movements⁵	26.7	6.6	(2.6)	0.5	0.3	31.5


At 31 December 2016⁴	319.8	134.8	411.9	19.6	8.1	894.2

1. Solutions include liability driven investments, multi-asset funds, and include £251.8bn at 31 December 2016 of derivative notionals associated with the Solutions business.
2. External net flows exclude movements in short term solutions assets, with maturity as determined by client agreements and are subject to a higher degree of variability. The total value of these assets at 31 December 2016 was £52.6bn and the movement in these assets is included in Market and other movements for Solutions assets.
3. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.
4. Total assets under management have been reconciled to the financial investments and investment property on the Consolidated Balance Sheet in note 3.04.
5. Switches between asset classes are included in the gross inflows and outflows, and moved out of Market and other movements.



	As at	As at	As at
	30.06.17	30.06.16	31.12.16
	£bn	£bn	£bn


Total assets attributable to:
External	853.2	749.8	796.7
Internal	97.9	91.7	97.5


Total assets attributable to:
UK	752.8	689.6	716.8
International	198.3	151.9	177.4

Asset and premium flows Page 68

3.03 Legal & General investment management total external assets under management net flows

	6	6	6
	months	months	months
	to	to	to
	30.06.17	31.12.16	30.06.16
	£bn	£bn	£bn


LGIM total external AUM net flows¹	21.7	19.5	9.6
Attributable to:
International	17.9	7.8	6.7

UK Institutional
- Defined contribution	1.7	1.2	0.8
- Defined benefit	0.4	9.8	1.4

UK Retail	1.7	0.7	0.7


1. External net flows exclude movements in short term overlay assets, with maturity as determined by client agreements and cash management movements.

3.04 Assets under management reconciliation to Consolidated Balance Sheet financial assets

	As at	As at¹	As at¹
	30.06.17	31.12.16	30.06.16
	£bn	£bn	£bn


Assets under management	951.1	894.2	841.5
Derivative notionals²	(280.8)	(251.8)	(244.0)
Third party assets³	(225.1)	(234.7)	(202.3)
Derivative liabilities	7.4	9.0	15.4
Other⁴	(8.0)	20.0	0.9


Total group financial investments and investment property	444.6	436.7	411.5


1. H1 16 and FY16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. Derivative notionals are included in the assets under management but not for IFRS reporting and are thus removed.
3. Third party assets are those that LGIM manage on behalf of others, for which the group does not have the risks or rewards and thus are not included on the IFRS balance sheet.
4. Other includes assets that are managed by third parties on behalf of the group and cash and broker balances.

Asset and premium flows Page 69

3.05 Assets under administration

							LGIM


				Consol-
			Mature	idation				Retail
		Suffolk	Retail	adjust-	Total	Nethe-	Work-	Invest-
For the six months ended	Platforms¹	Life	Savings²	ment³	Savings	rlands	place	ments⁴	Annuities⁵
30 June 2017	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2017	83.6	-	30.7	(4.9)	109.4	1.8	20.8	25.4	54.4
Gross inflows	-	-	0.4	-	0.4	-	3.4	2.4	2.0
Gross outflows	-	-	(1.9)	-	(1.9)	-	(0.6)	(1.6)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(1.6)

Net flows	-	-	(1.5)	-	(1.5)	-	2.8	0.8	0.4
Market and other movements	-	-	1.0	-	1.0	-	1.3	1.3	0.8
Disposals^1,7	(83.6)	-	-	4.9	(78.7)	(1.8)	-	-	-



At 30 June 2017	-	-	30.2	-	30.2	-	24.9	27.5	55.6



							LGIM


				Consol-
			Mature	idation				Retail
		Suffolk	Retail	adjust-	Total	Nethe-	Work-	Invest-
For the six months	Platforms¹	Life	Savings²	ment³	Savings	rlands	place	ments⁴	Annuities⁵
ended 30 June 2016	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn

As at 1 January 2016	76.9	8.6	29.6	(6.8)	108.3	1.6	14.7	22.6	43.4
Gross inflows¹	2.2	0.5	0.5	(0.2)	3.0	0.1	2.3	3.0	4.0
Gross outflows	(2.9)	(0.3)	(1.8)	0.3	(4.7)	(0.1)	(0.5)	(3.2)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(1.4)

Net flows	(0.7)	0.2	(1.3)	0.1	(1.7)	-	1.8	(0.2)	2.6
Market and other
movements	1.3	-	1.1	-	2.4	0.2	0.8	0.9	5.0
Disposals⁶	-	(8.8)	-	1.8	(7.0)	-	-	-	-

At 30 June 2016	77.5	-	29.4	(4.9)	102.0	1.8	17.3	23.3	51.0


							LGIM


				Consol-
			Mature	idation				Retail
		Suffolk	Retail	adjust-	Total	Nethe-	Work-	Invest-
For the year ended	Platforms¹	Life	Savings²	ment³	Savings	rlands	place	ments⁴	Annuities⁵
31 December 2016	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2016	76.9	8.6	29.6	(6.8)	108.3	1.6	14.7	22.6	43.4
Gross inflows¹	24.2	0.5	0.8	(0.1)	25.4	0.2	4.4	6.7	7.3
Gross outflows	(25.5)	(0.3)	(3.8)	0.5	(29.1)	(0.2)	(1.1)	(6.7)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(3.0)


Net flows	(1.3)	0.2	(3.0)	0.4	(3.7)	-	3.3	-	4.3
Market and other movements	8.0	-	4.1	(0.3)	11.8	0.2	2.8	2.8	6.7
Disposals⁶	-	(8.8)	-	1.8	(7.0)	-	-	-	-


At 31 December 2016	83.6	-	30.7	(4.9)	109.4	1.8	20.8	25.4	54.4


1. Prior period platforms gross inflows included Cofunds institutional net flows. At 31 December 2016 Platforms comprised £39.4bn (30 June 2016: £37.2bn) of retail assets and £44.2bn (30 June 2016: £40.3bn) of assets held on behalf of institutional clients. At 31 December 2016 platforms AUA comprised ISAs: £21.4bn (30 June 2016: £20.1bn); onshore bonds £2.8bn (30 June 2016 £2.8bn); offshore bonds £0.1bn (30 June 2016 £0.1bn); platform SIPPs £3.9bn (30 June 2016 £3.6bn) and non-wrapped funds £54.0bn (30 June 2016 £49.5bn). Platforms was sold in January 2017 to Aegon as part of the sale of Cofunds.
2. Mature Retail Savings products include with-profits products, bonds and retail pensions.
3. Consolidation adjustment represents Suffolk Life and Mature Retail Savings assets included in the Platforms column.
4. Retail Investments include £2.4bn (30 June 2016: £1.8bn) of LGIM unit trust assets held on the Cofunds platform and £3.7bn (30 June 2016: £3.4bn) of LGIM unit trust assets held on the IPS platform. The Cofunds and IPS platforms were sold in January 2017.
5. Annuities exclude LGRe and LGA assets.
6. Suffolk Life was sold on 25 May 2016 to Curtis Banks Group plc.
7. Legal & General Netherlands was sold on 6 April 2017 to Chesnara Plc.

Asset and premium flows Page 70

3.06 Assets under administration half-yearly progression

							LGIM

				Consol-
			Mature	idation				Retail
		Suffolk	Retail	adjust-	Total	Nether-	Work-	Invest-
For the year ended	Platforms^1,2	Life	Savings³	ment⁴	Savings	lands	place	ments⁵	Annuities⁶
31 December 2016	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2016	76.9	8.6	29.6	(6.8)	108.3	1.6	14.7	22.6	43.4
Gross inflows¹	2.2	0.5	0.5	(0.2)	3.0	0.1	2.3	3.0	4.0
Gross outflows	(2.9)	(0.3)	(1.8)	0.3	(4.7)	(0.1)	(0.5)	(3.2)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(1.4)


Net flows	(0.7)	0.2	(1.3)	0.1	(1.7)	-	1.8	(0.2)	2.6
Market and other movements	1.3	-	1.1	-	2.4	0.2	0.8	0.9	5.0
Disposals⁷	-	(8.8)	-	1.8	(7.0)	-	-	-	-


At 30 June 2016	77.5	-	29.4	(4.9)	102.0	1.8	17.3	23.3	51.0


Gross inflows¹	22.0	-	0.3	0.1	22.4	0.1	2.1	3.7	3.3
Gross outflows	(22.6)	-	(2.0)	0.2	(24.4)	(0.1)	(0.6)	(3.5)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(1.6)


Net flows	(0.6)	-	(1.7)	0.3	(2.0)	-	1.5	0.2	1.7
Market and other movements	6.7	-	3.0	(0.3)	9.4	-	2.0	1.9	1.7


At 31 December 2016	83.6	-	30.7	(4.9)	109.4	1.8	20.8	25.4	54.4


1. Platforms gross inflows include Cofunds institutional net flows. Total 2016 Platforms comprise £39.4bn (30 June 2016: £37.2bn) of retail assets and £44.2bn (30 June 2016: £40.3bn) of assets held on behalf of institutional clients.
2. Platforms AUA comprise ISAs: £21.4bn (30 June 2016: £20.1bn); onshore bonds £2.8bn (30 June 2016 £2.8bn); offshore bonds £0.1bn (30 June 2016 £0.1bn); platform SIPPs £3.9bn (30 June 2016 £3.6bn) and non-wrapped funds £54.0bn (30 June 2016 £49.5bn).
3. Mature Retail Savings products include with-profits products, bonds and retail pensions.
4. Consolidation adjustment represents Suffolk Life (until disposal) and Mature Retail Savings assets included in the Platforms column.
5. At 31 December 2016 Retail Investments included £2.4bn (30 June 2016: £1.8bn) of LGIM unit trust assets held on our Cofunds platform and £3.7bn (30 June 2016: £3.4bn) of LGIM unit trust assets held on our IPS platform.
6. Annuities exclude LGRe and LGI US assets.
7. Suffolk Life was sold on 25 May 2016 to Curtis Banks Group plc.

Asset and premium flows Page 71

3.07 LGR new business

	6	6	6
	months	months	months
	to	to	to
	30.06.17	31.12.16	30.06.16
	£m	£m	£m


Backbook acquisitions	-	-	2,945
Pension risk transfer
- UK	1,504	2,698	640
- USA	115	302	45
Individual Annuities	345	220	158
Lifetime Mortgage Advances	424	389	231
Longevity Insurance¹	800	900	-


Total LGR new business	3,188	4,509	4,019

1. The H1 17 value represents a reinsured longevity insurance deal transacted in June 2017. The figure quoted represents the notional size of the transaction and is based on the present value of the fixed leg cash flows discounted at the LIBOR curve. The first year's fixed cash flow is £33.8m.

3.08 Insurance new business

	6	6	6
	months	months	months
	to	to	to
	30.06.17	31.12.16	30.06.16
	£m	£m	£m


UK Retail Protection	86	88	82
UK Group Protection	28	22	36
Netherlands Protection	1	2	2
US Protection	38	34	28

Total Insurance new business	153	146	148

3.09 Gross written premiums on Insurance business

	6	6	6
	months	months	months
	to	to	to
	30.06.17	31.12.16	30.06.16
	£m	£m	£m


UK Retail Protection	609	597	582
UK Group Protection	224	100	233
General Insurance	173	170	156
Netherlands Protection	14	27	25
US Protection	491	477	420
Longevity Insurance	175	160	161


Total gross written premiums on insurance business	1,686	1,531	1,577

Asset and premium flows Page 72

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Capital and Investments Page 73

4.01 Group regulatory capital - Solvency II Directive

From 1 January 2016, the group has been required to comply with the requirements established by the Solvency II Framework Directive, as adopted by the Prudential Regulation Authority (PRA) in the UK and to measure and monitor its capital resources on this basis.

The Solvency II results are estimated. Further explanation of the underlying methodology and assumptions is set out in the sections below.

In December 2015, the group received approval to calculate its Solvency II capital requirements using a Partial Internal Model (together with the approval by the PRA in December 2016 of an application for major model change). The vast majority of the risk to which the group is exposed is assessed on the Internal Model basis approved by the PRA. Capital requirements for a handful of smaller entities are assessed using the Standard Formula basis on materiality grounds. The group's US insurance businesses are valued on a local statutory basis, following the PRA's approval of the group's application to use the Deduction and Aggregation method of including these businesses in the group solvency calculation.

The table below shows the estimated group Own Funds, Solvency Capital Requirement and Surplus Own Funds of the group, based on the Partial Internal Model, Matching Adjustment and Transitional Measures on Technical Provisions, including a management estimate of the recalculated Transitional Measures for Technical Provisions (Estimated TMTP) at end June 2017 as we believe this provides the most up to date and meaningful view of our Solvency II position. In line with PRA guidance, a formal recalculation of the Group's TMTP will take place no later than 1 January 2018.

(a) Capital position

As at 30 June 2017 the group had a Solvency II surplus of £6.7bn (FY 16: £5.7bn) over its Solvency Capital Requirement, corresponding to a coverage ratio on a "shareholder view" basis of 186% (31 December 2016: 171%). The shareholder view of the Solvency II capital position is as follows:

	30.06.17	31.12.16
	£bn	£bn


Core tier 1 Own Funds	11.6	11.0
Tier 1 subordinated liabilities¹	-	0.6
Tier 2 subordinated liabilities²	3.1	2.1
Eligibility restrictions	(0.2)	(0.1)
Own Funds^3,4	14.5	13.6
Solvency Capital Requirement (SCR)	(7.8)	(7.9)


Solvency II surplus	6.7	5.7


SCR coverage ratio⁵	186%	171%

1. Tier 1 subordinated liabilities of £0.6bn were repaid on 2 May 2017.
2. Tier 2 subordinated liabilities include $1.35bn of USD subordinated notes issued in 2017.
3. Own Funds do not include an accrual for the dividend of £256m (FY 16: £616m) declared after the balance sheet date.
4. Own Funds include risk margin of £6.1bn (FY 16: £6.4bn) and Estimated TMTP of £6.3bn (FY 16: £7bn).
5. Coverage ratio uses unrounded inputs.

The "shareholder view" basis excludes the SCR for the with-profits fund and the final salary pension schemes from both Own Funds and SCR. On a proforma basis the coverage ratio at 30 June 2017 would have been 180% (31 December 2016: 165%).

(b) Methodology

Own Funds comprise the excess of the value of assets over the liabilities, as valued on a Solvency II basis. Subordinated debt issued by the group is considered to be part of available capital, rather than a liability, as it is subordinate to policyholder claims. Own Funds include deductions in relation to fundability and transferability restrictions, where the surplus Own Funds of a specific group entity cannot be freely transferred around the group due to local legal or regulatory constraints.

Assets are valued at IFRS fair value with adjustments to remove intangibles and deferred acquisition costs, and to value reassurers' share of technical provisions on a basis consistent with the liabilities on the Solvency II balance sheet.

Liabilities are valued on a best estimate market consistent basis, with the application of a Solvency II Matching Adjustment for valuing annuity liabilities. This incorporates changes to the Internal Model and Matching Adjustment between June 2016 and June 2017 and the estimated impacts of a recalculation of the TMTP (Estimated TMTP) recalculated based on end June 2017 economic conditions as we believe this provides the most up to date and meaningful view of our Solvency II position. The Estimated TMTP of £6.3bn (FY 16: £7.0bn) has been amortised to 30 June 2017.

The liabilities include a Risk Margin of £6.1bn (FY 16: £6.4bn) which represents an allowance for the cost of capital for a purchasing insurer taking on the portfolio of liabilities and residual risks that are deemed to be not hedgeable under Solvency II, following the 1-in-200 stress event. This is calculated using a cost of capital of 6% as prescribed by the European Insurance and Occupational Pensions Authority (EIOPA).

The Solvency Capital Requirement is the amount of capital required to cover the 1-in-200 worst projected future outcome in the year following the valuation, allowing for realistic management and policyholder actions and the impact of the stress on the tax position of the group. This allows for diversification between the different firms within the group and between the risks to which they are exposed.

Capital and Investments Page 74

4.01 Group regulatory capital - Solvency II Directive (continued)

(b) Methodology (continued)

All material EEA insurance firms, including Legal & General Assurance Society Limited (the Society), Legal & General Insurance Limited, and Legal & General Assurance (Pensions Management) Limited (LGIM's insurance subsidiary) are incorporated into the group's Solvency II Internal Model assessment of required capital, assuming diversification of the risks between and within those firms. These firms, as well as the non-EEA insurance firm (Legal & General Reinsurance Company Limited (LGRe) based in Bermuda) contribute over 96% of the group's SCR.

Firms for which the capital requirements are less material are valued on a Solvency II Standard Formula basis. Firms which are not regulated but which carry material risks to group solvency are modelled in the Internal Model on the basis of applying an appropriate stress to their net asset value.

Legal & General America's Banner Life and its subsidiaries are incorporated into the calculation of group solvency using a Deduction and Aggregation basis. All risk exposure in these firms is valued on a local statutory basis, with capital requirements set to a multiple of local statutory Risk Based Capital (RBC) and further restrictions on the surplus contribution to the group. The US regulatory regime is considered to be equivalent to Solvency II by the European Commission. The contribution to group SCR is 150% of the local RBC Capital Adequacy Level (CAL). The contribution to group's Own Funds is the SCR together with any surplus capital in excess of 250% of RBC CAL.

All non-insurance regulated firms are included using their current regulatory surplus.

Allowance is made within the Solvency II balance sheet for the group's defined benefit pension schemes using results on an IFRS basis. Within the SCR an allowance is made by stressing the IFRS result position using the same Internal Model basis as for the insurance firms.

The calculation of the Solvency II balance sheet and associated capital requirements requires a number of assumptions, including:

(i) assumptions required to derive the present value of best estimate liability cash flows. Non-market assumptions are consistent with those underlying the group's IFRS disclosures, but with the removal of any prudence margins. Future investment returns and discount rates are those defined by EIOPA, which means that the risk free rates used to discount liabilities are market swap rates, with a 16 basis points (FY 16: 17 basis points) deduction to allow for a credit risk adjustment for sterling denominated liabilities. For annuities that are eligible, the liability discount rate includes a Matching Adjustment. This Matching Adjustment varies between the Society and LGRe and by the currency of the relevant liabilities.

At 30 June 2017 the Matching Adjustment for UK GBP was 115 basis points (31 December 2016: 124 basis points) after deducting an allowance for the EIOPA fundamental spread equivalent to 54 basis points (31 December 2016: 58 basis points).

(ii) assumptions regarding management actions and policyholder behaviour across the full range of scenarios. The only management actions allowed for are those that have been approved by the Board and are in place at the balance sheet date;

(iii) assumptions regarding the volatility of the risks to which the group is exposed. Assumptions have been set using a combination of historic market, demographic and operating experience data. In areas where data is not considered robust, expert judgement has been used; and

(iv) assumptions on the dependencies between risks, which are calibrated using a combination of historic data and expert judgement.

Capital and Investments Page 75

4.01 Group regulatory capital - Solvency II Directive (continued)

(d) Analysis of change

The table below shows the movement (net of tax) during the financial year in the group's Solvency II surplus.

	30.06.17	31.12.16
	surplus	surplus
	£bn	£bn


Surplus arising from back-book (including release of SCR)	0.6	1.2
Release of Risk Margin¹	0.2	0.3
Amortisation of TMTP²	(0.2)	(0.3)
Operational Surplus Generation³	0.6	1.2
New Business Strain	(0.1)	(0.1)
Net Surplus Generation	0.5	1.1
Dividends paid⁴	(0.6)	(0.8)
Operating variances⁵	0.4	0.2
M&A⁶	0.1	-
Market movements⁷	0.1	(0.3)
Subordinated debt⁸	0.5	-

Total Surplus movement (after dividends paid in the period)	1.0	0.2

1. Based on the risk margin in force at end 2016 and does not include the release of any risk margin added by new business written in 2017.
2. TMTP amortisation based on a linear run down of the end-2016 TMTP of £5.9bn (net of tax, £7bn before tax) which was management's estimate of the TMTP on end-2016 market conditions.
3. Release of surplus generated by in-force business and includes management actions which at the start of the year could have been reasonably expected to take place. For H1 17 these are to deliver further eligible assets and liabilities into the Matching Adjustment portfolio in respect of a small amount of pension risk transfer business, an increase in direct investments allocation to the annuity back-book and amendments of certain FX hedging activities in the LGR portfolio.
4. Dividends paid are the amounts from the 2016 final dividend declaration paid in H1 17 (FY 16: 2015 final and 2016 interim dividend declarations).
5. Operating variances include the impact of experience variances, changes to valuation and capital calibration assumptions, changes to planned volumes of new business, tax rate changes, PRA approval of changes to the Internal Model and Matching Adjustment and other management actions including changes in asset mix, hedging strategies, Matching Adjustment optimisation and update to the longevity assumptions.
6. M&A reflects sale of Cofunds and LGN.
7. Market Movements is the impact of changes in investment market conditions over the period and changes to future economic assumptions. It also includes the capital impact of investment portfolio changes implemented by LGC. Market movements for June 2017 include a reduction to the Risk Margin of £0.2bn (net of tax), offset by management's estimate of a decrease in the Estimated TMTP of £0.2bn (net of tax). FY 16 included an increase to the risk margin of £1.1bn (net of tax) offset by an increase in the Estimated TMTP of £1.0bn (net of tax).
8. Movement in subordinated debt includes $1.35bn US Dollar subordinated notes issued and £0.6bn of sub-debt redeemed.

Operational Surplus Generation is the expected surplus generated from the assets and liabilities in-force at the start of the year. It is based on real world assumed returns and best estimate non-market assumptions. It includes the impact of management actions to the extent that, at the start of the year, these were reasonably expected to be implemented over the year.

New Business Strain/Surplus is the cost of acquiring, and setting up Technical Provisions and SCR capital, on actual new business written over the year. It is based on economic conditions at the point of sale.

Capital and Investments Page 76

4.01 Group regulatory capital - Solvency II Directive (continued)

(e) Reconciliation of IFRS Net Release from Operations to Solvency II Net Surplus Generation


Reconciliation of the group's IFRS Release from Operations to Solvency II Operational Surplus Generation.

	30.06.17	31.12.16
	£bn	£bn


IFRS Release from Operations	0.7	1.3
Expected release of IFRS prudential margins	(0.3)	(0.5)
Releases of IFRS specific reserves¹	-	(0.1)
Solvency II investment margin^2,3	0.1	0.2
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation⁴	0.2	0.4
Other Solvency II items and presentational differences	(0.1)	(0.1)

Solvency II Operational Surplus Generation	0.6	1.2

1. Release of prudence from IFRS specific reserves which are not included in Solvency II (e.g. long term expense margin or new business closure reserves).
2. Release of prudence related to differences between the EIOPA-defined Fundamental Spread and Legal & General's best estimate default assumption.
3. Expected market returns earned on LGR's free assets in excess of risk free rates over the period.
4. Solvency II Operational Surplus Generation includes management actions which at the start of 2017 were expected to take place within the group plan. These were limited to actions by LGR to deliver further eligible assets into the Matching Adjustment portfolio and other asset based management actions.

(ii) Reconciliation of the group's IFRS New Business Surplus to Solvency II New Business Strain.
	30.06.17	31.12.16
	£bn	£bn
IFRS New Business Surplus	-	0.2
Removal of requirement to set up prudential margins above best estimate on New Business	0.2	0.5
Set up of Solvency II Capital Requirement on New Business	(0.2)	(0.7)
Set up of Risk Margin on New Business	(0.1)	(0.1)
Solvency II New Business Strain	(0.1)	(0.1)

(f) Reconciliation of IFRS shareholders' equity to Solvency II Own Funds

	30.06.17	31.12.16
	£bn	£bn
IFRS shareholders' equity	7.2	6.9
Remove DAC, goodwill and other intangible assets and liabilities	(1.9)	(2.1)
Add subordinated debt treated as available capital¹	2.9	2.5
Insurance contract valuation differences²	7.1	7.9
Difference in value of net deferred tax liabilities	(0.3)	(0.5)
SCR for with-profits fund and final salary pension schemes	(0.7)	(0.7)
Other³	0.4	(0.3)
Eligibility restrictions⁴	(0.2)	(0.1)
Own Funds⁵	14.5	13.6
1. Treated as available capital on the Solvency II balance sheet as the liabilities are subordinate to policyholder claims.
2. Differences in the measurement of liabilities between IFRS and Solvency II. This includes value of shareholder transfers of £0.3bn at H1 17 (FY 16: £0.2bn).
3. Reflects valuation differences on other assets and liabilities, predominately in respect of borrowings measured at fair value under Solvency II.
4. Relating to the surplus of with-profits fund and Own Funds of non-insurance regulated entities, subject to local regulatory rules.
5. Own Funds do not include an accrual for the dividend of £256m (FY 16: £616m) declared after the balance sheet date.

Capital and Investments Page 77

4.01 Group regulatory capital - Solvency II Directive (continued)

(g) Sensitivity analysis

The following sensitivities are provided to give an indication of how the group's Solvency II surplus as at 30 June 2017 would have changed in a variety of adverse events. These are all independent stresses to a single risk. In practice, the balance sheet is impacted by combinations of stresses and the combined impact can be larger than adding together the impacts of the same stresses in isolation. It is expected that, particularly for market risks, adverse stresses will happen together.

	Impact on	Impact on	Impact on	Impact on
	net of tax	net of tax	net of tax	net of tax
	Solvency II	Solvency II	Solvency II	Solvency II
	capital	coverage	capital	coverage
	surplus	ratio	surplus	ratio
	30.06.17	30.06.17	31.12.16	31.12.16
	£bn	%	£bn	%


Credit spreads widen by 100bps assuming an escalating addition to ratings^1,2	0.3	8	0.2	7
Credit migration³	(0.6)	(8)	(0.6)	(8)
15% fall in property markets	(0.3)	(3)	(0.2)	(3)
100bps increase in risk free rates	1.0	24	1.0	22
50bps fall in risk free rates⁴	(0.5)	(11)	(0.5)	(10)
1. The spread sensitivity applies to Legal & General's corporate bond (and similar) holdings, with no change in the firm's long term default expectations.
2. The stress for AA bonds is twice that for AAA bonds, for A bonds it is three times, for BBB four times and so on, such that the weighted average spread stress for the portfolio is 100 basis points.
3. Credit migration stress covers the cost of an immediate big letter downgrade on c.20% of annuity portfolio bonds, or 3 times level expected in the next 12 months.
4. In the interest rate down stress negative rates are allowed, i.e. there is no floor at zero rates.


The above sensitivity analysis does not reflect all management actions which could be taken to reduce the impacts. In practice, the group actively manages its asset and liability positions to respond to market movements. These results all allow (on an approximate basis) for the recalculation of Estimated TMTP as at 30 June 2017 where the impact of the stress would cause this to change materially. The impacts of these stresses are not linear therefore these results should not be used to interpolate or extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.

Capital and Investments Page 78

4.02 Estimated Solvency II new business contribution

(a) New business by product¹

		Contri-
		bution
		from new
	PVNBP	business²	Margin³
For the six months ended 30 June 2017	£m	£m	%


LGR - UK annuity business	1,859	166	8.9

UK Protection Total	754	69	9.1
- Retail protection	632	61	9.6
- Group protection	122	8	6.5

US Protection⁴	376	48	12.8



1. Selected lines of business only.
2. The contribution from new business is defined as the present value at the point of sale of expected future Solvency II surplus emerging from new business written in the period using the risk discount rate applicable at the end of the reporting period.
3. Margin uses unrounded inputs.
4. In local currency, US Protection reflects PVNBP of $489m and a contribution from new business of $62m.


		Contri-
		bution
		from new
	PVNBP	business²	Margin
For the year ended 31 December 2016¹	£m	£m	%


LGR - UK annuity business	6,661	693	10.4

UK Protection Total	1,466	153	10.4
- Retail protection	1,255	139	11.1
- Group protection	211	14	6.6

US Protection³	631	78	12.4



1. Selected lines of business only.
2. The contribution from new business is defined as the present value at the point of sale of expected future Solvency II surplus emerging from new business written in the period using the risk discount rate applicable at the end of the reporting period.
3. In local currency, US Protection reflects PVNBP of $855m and a contribution from new business of $106m.

Capital and Investments Page 79

4.02 Estimated Solvency II new business contribution (continued)

(b) Assumptions

The key economic assumptions as at 30 June 2017 are as follows:

Risk Margin		3.1
Risk free rate
- UK		1.7
- US		2.1
Risk discount rate (net of tax)
- UK		4.8
- US		5.2

Long-term rate of return on non-profit annuities in LGR		3.1

The cashflows are discounted using duration-based discount rates, which is the sum of a duration-based risk free rate and a flat Risk Margin. The risk free rates have been based on a swap curve net of the EIOPA-specified Credit Risk Adjustment. The risk free rate shown above is a weighted average based on the projected cash flows.

All other economic and non-economic assumptions and methodologies that would have a material impact on the margin for these contracts are unchanged from those used for the European Embedded Value reporting at end 2015 other than the cost of currency hedging which has been updated to reflect current market conditions and hedging activity in light of Solvency II. In particular:

· 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. The returns on fixed and index-linked assets are calculated net of an allowance for default risk which takes account of the credit rating and the outstanding term of the assets. The allowance for corporate and other unapproved credit asset defaults within the new business contribution is based on a level rate deduction from the expected returns for the overall annuities portfolio of 18 basis points.

· Non-economic assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses (excluding development costs). An allowance is made for future mortality improvement. For new business, mortality assumptions may be modified to take certain scheme specific features into account. These are normally reviewed annually.

Tax

The profits on the new business are calculated on an after tax basis and are grossed up by the notional attributed tax rate. For the UK, the after tax basis assumes the annualised current rate of 19.25% and subsequent enacted future reductions in corporation tax to 19% from 1 April 2017 and 17% from 1 April 2020 onwards. The tax rate used for grossing up is the long term corporate tax rate in the territory concerned, which for the UK is 17%.

US covered business profits are also grossed up using the long term corporate tax rate of 35%.

Capital and Investments Page 80

4.02 Estimated Solvency II new business contribution (continued)

Basis of preparation

The group is required to comply with the requirements established by the EU Solvency II Directive. Consequently, a Solvency II value reporting framework, which incorporates a best estimate of cash flows in relation to insurance assets and liabilities, has replaced EEV reporting in the management information used internally to measure and monitor capital resources. Solvency II new business contribution reflects the portion of Solvency II value added by new business written in the period, recognising that the statutory solvency in the UK is now on a Solvency II basis. It has been calculated in a manner consistent with European Embedded Value (EEV) principles.

Solvency II new business contribution has been calculated for the group's most material insurance-related businesses, namely, LGR, UK Insurance and LGI US.

Description of methodology

The objective of the Solvency II new business contribution is to provide shareholders with information on the long term contribution of new business written in H1 17.

With the exception of the discount rate, cost of currency hedging and the statutory solvency basis, new business contribution arising from the new business premiums written during the reporting period has been calculated on the same economic and operating assumptions as would have been used under the EEV methodology.

The PVNBP is equivalent to total single premiums plus the discounted value of annual premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the calculation of the new business contribution for the financial period.

The new business margin is defined as new business contribution divided by the PVNBP. The premium volumes used to calculate the PVNBP are the same as those used to calculate new business contribution.

LGI US is consolidated into the group solvency balance sheet on a US Statutory solvency basis. 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. LGI US new business premiums and contribution reflect the groupwide expected impact of LGI US directly-written business (i.e. looks through any intra-group reinsurance arrangements).

Comparison to EEV new business contribution

The key difference between Solvency II and EEV new business contribution is the Statutory solvency basis used for UK business. Due to the different reserving and capital bases under Solvency II compared to Solvency I, the timing of profit emergence changes. The impact on new business contribution therefore largely reflects the cost of capital effect of this change in profit timing. The impact on new business contribution of moving to a Solvency II basis will differ by type of business. Products which are more capital consumptive under Solvency II will have a lower new business value and vice versa for less capital consumptive products.

Projection assumptions

Cash flow projections are determined using best estimate assumptions for each component of cash flow for each line of business. Future economic and investment return assumptions are based on conditions at the end of the financial period.

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 new business, even if incurred elsewhere in the group, are allocated to the new 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 substantively enacted future changes.

Risk discount rate

The risk discount rate (RDR) is duration-based and is a combination of the risk free curve and a flat Risk Margin, which reflects the residual risks inherent in the group's businesses, after taking account of margins in the statutory technical provisions, the required capital and the specific allowance for financial options and guarantees.

The risk free rates have been based on a swap curve net of the EIOPA-specified Credit Risk Adjustment 16 basis points for UK and 15basis points for US (FY 16: 17 basis points for UK and 15 basis points for US).

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.

Capital and Investments Page 81

4.02 Estimated Solvency II new business contribution (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 time adjusted rate of 17.5% (FY 16: 17.7%).

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.

(d) PVNBP to gross written premiums reconciliation
		30.06.17	31.12.16
	Notes	£bn	£bn


PVNBP	4.02(a)	3.0	8.8
Effect of capitalisation factor		(1.0)	(1.8)


New business premiums from selected lines		2.0	7.0
Other¹		1.3	1.9


Total LGR, Insurance and LGI US new business	3.07/3.08	3.3	8.9
Annualisation impact of regular premium long-term business		(0.1)	(0.1)
IFRS gross written premiums from existing long-term insurance business		1.4	2.5
IFRS gross written premiums from Savings business		0.1	0.2
Deposit accounting for lifetime mortgage advances		(0.4)	(0.6)
General Insurance gross written premiums	3.09	0.2	0.3
Future premiums on longevity swap new business		(0.8)	(0.9)


Total gross written premiums		3.7	10.3


1. Other principally includes annuity sales in the US, lifetime mortgage advances and discounted future cash flows on longevity swap new business.

Capital and Investments Page 82

4.03 Group Economic Capital

Legal & General defines Economic Capital to be the amount of capital that the Board believes the group needs to hold, over and above its liabilities, in order to meet its strategic objectives. This is not the same as regulatory capital which reflects regulatory rules and constraints. The group's objectives include being able to meet its liabilities as they fall due whilst maintaining the confidence of our investors, rating agencies, customers and intermediaries.

The Economic Capital results are estimated.

The table below shows the estimated group Own Funds, Economic Capital Requirement and Surplus Own Funds based on group's Economic Capital model.

(a) Capital position

As at 30 June 2017, the group had an estimated Economic Capital surplus of £9.2bn (FY 16: £8.3bn), corresponding to an Economic Capital coverage ratio of 247% (31 December 2016: 230%). The Economic Capital position is as follows:
	30.06.17	31.12.16
	£bn	£bn


Core tier 1 Own Funds	12.2	11.9
Tier 1 subordinated liabilities¹	-	0.6
Tier 2 subordinated liabilities²	3.2	2.1
Own Funds³	15.4	14.6
Economic Capital Requirement (ECR)⁴	(6.2)	(6.3)


Surplus Own Funds	9.2	8.3


ECR coverage ratio⁵	247%	230%


1. Tier 1 subordinated liabilities of £0.6bn were repaid on 2 May 2017.
2. Tier 2 subordinated liabilities include $1.35bn of USD subordinated notes issued in 2017.
3. Economic Capital Own Funds do not include an accrual for the dividend of £256m (FY 16: £616m) declared after the balance sheet date.
4. The EC balance sheet and ECR are not subject to audit.
5. Coverage ratio uses unrounded inputs.

The Economic Capital position does not exclude the ECR for with-profits fund and the final salary pension schemes for both Own Funds and ECR.

(b) Methodology

Own Funds are defined to be the excess of the value of assets over the liabilities. Subordinated debt issued by the group is considered to be part of available capital, rather than a liability, as it is subordinate to policyholder claims.

Liabilities are valued on a best estimate market consistent basis, with the application of an Economic Matching Adjustment for valuing annuity liabilities.

The Economic Capital Requirement is the amount of capital required to cover the 1-in-200 worst projected future outcome in the year following the valuation, allowing for realistic management and policyholder actions and the impact of the stress on the tax position of the group. This allows for diversification between the different firms within the group and between the risks that they are exposed to.

The liabilities include a Recapitalisation Cost to allow for the cost of recapitalising the balance sheet following the 1-in-200 stress in order to maintain confidence that our future liabilities will be met. This is calculated using a cost of capital that reflects the long term average rates at which it is expected that the group could raise debt and allowing for diversification between all group entities.

All material insurance firms, including Legal & General Assurance Society Limited, Legal & General Insurance Limited and Legal & General Assurance (Pensions Management) Limited (LGIM's insurance subsidiary) are incorporated into the group's Economic Capital model assessment of required capital, assuming diversification of the risks between the different firms within the group and between the risks to which they are exposed. These firms, as well as the non-EEA insurance firms (Legal & General America (LGI US) and Legal & General Reinsurance Company Limited based in Bermuda) contribute over 98% of the group's ECR.

Firms for which the capital requirements are less material, are valued on the Solvency II Standard Formula basis. Non-insurance firms are included using their current regulatory surplus, without allowing for any diversification with the rest of the group.

Allowance is made within the Economic Capital balance sheet for the group's defined benefit pension schemes based upon the scheme's funding basis, and allowance is made within the capital requirement by stressing the funding position, using the same Economic Capital basis as for the insurance firms.

Capital and Investments Page 83

4.04 Investment portfolio

	Market	Market¹	Market¹
	value	value	value
	30.06.17	30.06.16	31.12.16
	£m	£m	£m


Worldwide total assets	952,100	846,140	903,886
Client and policyholder assets¹	(864,740)	(766,397)	(821,978)
Non-unit linked with-profits assets	(11,551)	(12,478)	(11,924)


Investments to which shareholders are directly exposed	75,809	67,265	69,984

Analysed by investment class:

			Other
			non profit		Other
		LGR	insurance	LGC	shareholder
		investments	investments	investments	investments	Total	Total¹	Total¹
		30.06.17	30.06.17	30.06.17	30.06.17	30.06.17	30.06.16	31.12.16
	Notes	£m	£m	£m	£m	£m	£m	£m


Equities²		268	-	2,473	135	2,876	2,594	2,558
Bonds	4.06	51,536	1,717	2,347	493	56,093	53,436	54,852
Derivative assets³		3,773	-	47	3	3,823	5,723	4,693
Property	4.07	2,687	-	175	25	2,887	2,457	2,604
Cash, cash equivalents, loans & receivables		1,823	458	1,286	326	3,893	2,545	3,362


Financial investments		60,087	2,175	6,328	982	69,572	66,755	68,069


Other assets⁴		5,859	-	364	14	6,237	510	1,915


Total investments		65,946	2,175	6,692	996	75,809	67,265	69,984


1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. Equity investments include a total of £256m in respect of CALA Group Limited, Peel Media Holdings Limited (MediaCityUK), NTR Wind Management Ltd and Access Development Partnership (H1 16: £207m; FY 16: £237m).
3. Derivative assets are shown gross of derivative liabilities of £2.4bn (H1 16: £5.0bn; FY 16: £2.9bn). Exposures arise from 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.
4. Other assets include reverse repurchase agreements of £6,202m (H1 16: £464m; FY 16: £1,883m).

Capital and Investments Page 84

4.05 Direct Investments
(a) Analysed by asset class


	Direct¹	Traded²		Direct¹	Traded^2,3		Direct¹	Traded^2,3
	Investments	securities	Total	Investments	securities	Total³	Investments	securities	Total³
	30.06.17	30.06.17	30.06.17	30.06.16	30.06.16	30.06.16	31.12.16	31.12.16	31.12.16
	£m	£m	£m	£m	£m	£m	£m	£m	£m


Equities	650	2,226	2,876	508	2,086	2,594	595	1,963	2,558
Bonds⁴	7,722	48,371	56,093	4,914	48,522	53,436	6,256	48,596	54,852
Derivative assets	-	3,823	3,823	-	5,723	5,723	-	4,693	4,693
Property⁵	2,887	-	2,887	2,457	-	2,457	2,604	-	2,604
Cash, cash equivalents, loans & receivables	496	3,397	3,893	466	2,079	2,545	518	2,844	3,362
Other assets	35	6,202	6,237	46	464	510	32	1,883	1,915


	11,790	64,019	75,809	8,391	58,874	67,265	10,005	59,979	69,984


1. Direct Investments, which generally constitute an agreement with another party, represent an exposure to untraded and often less volatile asset classes. Direct Investments also include physical assets, bilateral loans and private equity, but exclude hedge funds.
2. Traded securities are defined by exclusion. If an instrument is not a Direct Investment, then it is classed as a traded security.
3. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
4. Direct Investment bonds include lifetime mortgages of £1,433m (H1 16: £440m; FY 16: £852m).
5. A further breakdown of property is provided in note 4.07.

(b) Analysed by segment
					LGI
				LGI	(UK and
		LGR	LGC	(US)	Other)	Total
		30.06.17	30.06.17	30.06.17	30.06.17	30.06.17
		£m	£m	£m	£m	£m
	-

Equities		-	650	-	-	650
Bonds¹		7,094	267	361	-	7,722
Property²		2,687	200³	-	-	2,887
Cash, cash equivalents, loans & receivables⁴		31	123	342	-	496
Other assets		-	35	-	-	35


		9,812	1,275	703	-	11,790


1. Direct Investment bonds include lifetime mortgages of £1,433m (H1 16: £440m; FY 16: £852m).
2. A further breakdown of property is provided in note 4.07.
3. Included in LGC property is £25m of shareholder investment property as noted in note 4.04.
4. Cash, cash equivalents, loans & receivables only include loans and receivables.


				LGI
			LGI	(UK and
	LGR	LGC	(US)	Other)	Total
	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16
	£m	£m	£m	£m	£m


Equities	-	508	-	-	508
Bonds¹	4,372	197	345	-	4,914
Property²	2,257	196	-	4	2,457
Cash, cash equivalents, loans & receivables³	20	117	329	-	466
Other assets	-	46	-	-	46


	6,649	1,064	674	4	8,391


1. Direct Investments bonds include lifetime mortgages of £440m.
2. A further breakdown of property is provided in note 4.07.
3. Cash, cash equivalents, loans & receivables only include loans and receivables.

Capital and Investments Page 85

4.05 Direct Investments (continued)
(b) Analysed by segment (continued)
				LGI
			LGI	(UK and
	LGR	LGC	(US)	Other)	Total
	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16
	£m	£m	£m	£m	£m


Equities	-	595	-	-	595
Bonds¹	5,655	228	373	-	6,256
Property²	2,442	162	-	-	2,604
Cash, cash equivalents, loans & receivables³	33	120	365	-	518
Other assets	-	32	-	-	32


	8,130	1,137	738	-	10,005


1. Direct Investments bonds include lifetime mortgages of £852m.
2. A further breakdown of property is provided in note 4.07.
3. Cash, cash equivalents, loans & receivables only include loans and receivables.

(c) Movement in the period

	Carrying			Change in	Carrying
	value			market	value
	01.01.17	Additions	Disposals	value	30.06.17
	£m	£m	£m	£m	£m


Equities	595	35	-	20	650
Bonds¹	6,256	1,345	(15)	136	7,722
Property	2,604	377	(198)	104	2,887
Cash, cash equivalents, loans & receivables²	518	-	(6)	(16)	496
Other assets	32	2	-	1	35


	10,005	1,759	(219)	245	11,790


1. Direct Investment bonds include lifetime mortgages of £1,433m (H1 16: £440m; FY 16: £852m).
2. Cash, cash equivalents, loans & receivables only include loans and receivables.

Capital and Investments Page 86

4.06 Bond portfolio summary
(a) LGR analysed by sector
Sectors analysed by credit rating

					BB or
	AAA	AA	A	BBB	below	LGR	LGR
	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17
	£m	£m	£m	£m	£m	£m	%


Sovereigns, Supras and Sub-Sovereigns	1,058	9,718	297	230	31	11,334	23
Banks:
- Tier 1	-	-	-	-	-	-	-
- Tier 2 and other subordinated	211	49	58	35	-	353	1
- Senior	3	363	1,227	34	-	1,627	3
- Covered	254	-	-	-	-	254	-
Financial Services:
- Tier 1	-	-	-	-	-	-	-
- Tier 2 and other subordinated	-	129	109	58	-	296	1
- Senior	-	580	66	114	-	760	1
Insurance:
- Tier 1	-	-	-	-	-	-	-
- Tier 2 and other subordinated	-	110	-	52	-	162	-
- Senior	-	55	487	76	-	618	1
Consumer Services and Goods:
- Cyclical	-	335	1,071	1,676	160	3,242	6
- Non-cyclical	177	558	1,329	2,050	97	4,211	8
- Health care	3	32	195	155	-	385	1
Infrastructure:
- Social	86	841	3,380	1,005	20	5,332	10
- Economic	-	29	913	1,402	43	2,387	5
Technology and Telecoms	56	139	724	2,014	86	3,019	6
Industrials	-	148	705	381	12	1,246	2
Utilities	-	80	4,867	3,370	16	8,333	16
Energy	-	-	102	482	16	600	1
Commodities	-	-	302	523	20	845	2
Oil and Gas	-	278	481	670	163	1,592	3
Property	-	-	-	-	-	-	-
Real estate	-	369	482	1,199	53	2,103	4
Structured finance ABS / RMBS / CMBS / Other	134	588	485	47	55	1,309	3
Lifetime mortgage loans¹	721	522	99	91	-	1,433	3
CDOs	-	21	60	14	-	95	-


Total £m	2,703	14,944	17,439	15,678	772	51,536	100


Total %	5	30	34	30	1	100



1. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal matching adjustment structuring.

Capital and Investments Page 87

4.06 Bond portfolio summary (continued)
(a) LGR analysed by sector (continued)
Sectors analysed by credit rating (continued)
					BB or
	AAA¹	AA¹	A¹	BBB¹	below¹	LGR¹	LGR¹
	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16
	£m	£m	£m	£m	£m	£m	%


Sovereigns, Supras and Sub-Sovereigns	1,032	8,618	329	233	29	10,241	21
Banks:
- Tier 1	-	-	-	-	6	6	-
- Tier 2 and other subordinated	-	-	159	242	15	416	1
- Senior	2	496	1,155	82	-	1,735	4
- Covered	250	2	-	16	-	268	1
Financial Services:
- Tier 1	-	-	-	-	-	-	-
- Tier 2 and other subordinated	-	86	49	64	3	202	-
- Senior	6	363	144	128	11	652	1
Insurance:
- Tier 1	-	-	-	1	-	1	-
- Tier 2 and other subordinated	-	32	136	78	26	272	1
- Senior	8	44	538	136	-	726	2
Consumer Services and Goods
- Cyclical	-	337	912	1,788	148	3,185	7
- Non-cyclical	149	423	1,371	1,069	101	3,113	6
- Health care	3	-	175	138	-	316	1
Infrastructure:
- Social	96	971	3,102	679	240	5,088	11
- Economic	-	28	806	1,037	30	1,901	4
Technology and Telecoms	46	156	535	2,269	92	3,098	6
Industrials	-	94	685	373	53	1,205	3
Utilities	-	99	4,746	2,957	24	7,826	15
Energy	-	-	107	544	31	682	1
Commodities	-	-	294	454	91	839	2
Oil and Gas	-	169	578	612	261	1,620	3
Property	-	-	-	-	-	-	-
Real estate	-	436	349	689	435	1,909	4
Structured finance ABS / RMBS / CMBS / Other	135	761	271	89	48	1,304	3
Lifetime mortgage loans²	-	-	-	440	-	440	1
CDOs³	-	722	366	14	-	1,102	2


Total £m¹	1,727	13,837	16,807	14,132	1,644	48,147	100


Total %	4	29	35	29	3	100


1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. Lifetime mortgage loans have increased in value since inception predominantly due to the accrual of interest on the loans.
3. The underlying reference portfolio has had no reference entity defaults during the period. The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.5%, on average across the reference portfolio, 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. The CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the market valuation.

Capital and Investments Page 88

4.06 Bond portfolio summary (continued)
(a) LGR analysed by sector (continued)
Sectors analysed by credit rating (continued)

					BB or
	AAA¹	AA¹	A¹	BBB¹	below¹	LGR¹	LGR¹
	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16
	£m	£m	£m	£m	£m	£m	%


Sovereigns, Supras and Sub-Sovereigns	912	9,961	285	229	34	11,421	24
Banks:
- Tier 1	-	-	-	-	12	12	-
- Tier 2 and other subordinated	211	49	62	41	-	363	1
- Senior	8	436	1,201	59	-	1,704	3
- Covered	259	-	16	-	-	275	1
Financial Services:
- Tier 1	-	-	-	-	-	-	-
- Tier 2 and other subordinated	-	87	59	56	-	202	-
- Senior	-	371	125	110	-	606	1
Insurance:
- Tier 1	-	-	-	1	-	1	-
- Tier 2 and other subordinated	-	45	3	68	-	116	-
- Senior	8	88	485	76	-	657	1
Consumer Services and Goods:
- Cyclical	-	389	1,088	1,755	165	3,397	7
- Non-cyclical	260	647	1,380	1,373	115	3,775	8
- Health care	3	13	15	10	1	42	-
Infrastructure:
- Social	-	624	3,259	926	148	4,957	10
- Economic	-	-	873	1,313	44	2,230	4
Technology and Telecoms	57	203	610	2,104	84	3,058	6
Industrials	-	142	741	362	37	1,282	3
Utilities	-	101	4,903	3,142	12	8,158	16
Energy	-	-	106	554	31	691	1
Commodities	-	-	304	475	77	856	2
Oil and Gas	-	281	544	633	180	1,638	3
Property	-	-	1	6	-	7	-
Real estate	-	305	628	1,063	48	2,044	4
Structured finance ABS / RMBS / CMBS / Other	121	671	572	46	49	1,459	3
Lifetime mortgage loans²	388	322	91	51	-	852	2
CDOs	-	-	59	14	-	73	-


Total £m	2,227	14,735	17,410	14,467	1,037	49,876	100


Total %	4	30	35	29	2	100


1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal matching adjustment structuring.

Capital and Investments Page 89

4.06 Bond portfolio summary (continued)
(a) LGR analysed by sector (continued)
Sectors analysed by domicile
			EU	Rest of
	UK	US	excluding UK	the World	LGR
	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17
	£m	£m	£m	£m	£m


Sovereigns, Supras and Sub-Sovereigns	9,024	704	1,105	501	11,334
Banks	931	688	497	118	2,234
Financial Services	383	68	605	-	1,056
Insurance	154	555	16	55	780
Consumer Services and Goods:
- Cyclical	772	2,049	290	131	3,242
- Non-cyclical	1,359	2,564	279	9	4,211
- Health care	1	384	-	-	385
Infrastructure:
- Social	5,012	284	-	36	5,332
- Economic	1,917	205	29	236	2,387
Technology and Telecoms	591	1,356	659	413	3,019
Industrials	204	568	335	139	1,246
Utilities	3,862	1,237	2,322	912	8,333
Energy	-	498	6	96	600
Commodities	8	290	22	525	845
Oil and Gas	187	396	465	544	1,592
Property	-	-	-	-	-
Real estate	1,686	379	10	28	2,103
Structured finance ABS / RMBS / CMBS / Other	947	42	302	18	1,309
Lifetime mortgages	1,433	-	-	-	1,433
CDOs	-	21	-	74	95


Total	28,471	12,288	6,942	3,835	51,536

Capital and Investments Page 90

4.06 Bond portfolio summary (continued)
(a) LGR analysed by sector (continued)			EU	Rest of
Sectors analysed by domicile (continued)	UK¹	US¹	excluding UK¹	the World¹	LGR¹
	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16
	£m	£m	£m	£m	£m


Sovereigns, Supras and Sub-Sovereigns	7,909	680	982	670	10,241
Banks	1,050	752	420	203	2,425
Financial Services	419	109	315	11	854
Insurance	276	597	46	80	999
Consumer Services and Goods:
- Cyclical	604	2,207	216	158	3,185
- Non-cyclical	1,131	1,735	177	70	3,113
- Health care	37	270	9	-	316
Infrastructure:
- Social	4,800	251	-	37	5,088
- Economic	1,688	71	28	114	1,901
Technology and Telecoms	553	1,282	869	394	3,098
Industrials	171	583	281	170	1,205
Utilities	3,437	1,181	2,348	860	7,826
Energy	-	571	10	101	682
Commodities	19	282	24	514	839
Oil and Gas	183	520	338	579	1,620
Property	-	-	-	-	-
Real estate	1,448	391	12	58	1,909
Structured finance ABS / RMBS / CMBS / Other	1,051	33	201	19	1,304
Lifetime mortgages	440	-	-	-	440
CDOs²	-	-	1,031	71	1,102


Total	25,216	11,515	7,307	4,109	48,147



1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. The underlying reference portfolio has had no reference entity defaults during the period. The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.5%, on average across the reference portfolio, 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. The CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the counterparty valuation.

Capital and Investments Page 91

4.06 Bond portfolio summary (continued)
(a) LGR analysed by sector (continued)
Sectors analysed by domicile (continued)
			EU	Rest of
	UK¹	US¹	excluding UK¹	the World¹	LGR¹
	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16
	£m	£m	£m	£m	£m


Sovereigns, Supras and Sub-Sovereigns	9,128	782	1,003	508	11,421
Banks	948	680	537	189	2,354
Financial Services	389	76	342	1	808
Insurance	176	528	15	55	774
Consumer Services and Goods:
- Cyclical	783	2,229	255	130	3,397
- Non-cyclical	1,142	2,419	201	13	3,775
- Health care	4	37	1	-	42
Infrastructure:
- Social	4,785	137	-	35	4,957
- Economic	1,934	74	-	222	2,230
Technology and Telecoms	582	1,305	746	425	3,058
Industrials	148	656	301	177	1,282
Utilities	3,673	1,191	2,387	907	8,158
Energy	-	589	6	96	691
Commodities	16	290	27	523	856
Oil and Gas	183	485	417	553	1,638
Property	-	7	-	-	7
Real estates	1,629	340	17	58	2,044
Structured finance ABS / RMBS / CMBS / Other	1,016	50	375	18	1,459
Lifetime mortgages²	852	-	-	-	852
CDOs	-	-	-	73	73


Total	27,388	11,875	6,630	3,983	49,876


1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal matching adjustment structuring.

Capital and Investments Page 92

4.06 Bond portfolio summary (continued)
(b) Total group analysed by sector
Sectors analysed by credit rating

					BB or
	AAA	AA	A	BBB	below	Other	Total	Total
	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17
	£m	£m	£m	£m	£m	£m	£m	%


Sovereigns, Supras and Sub-Sovereigns	1,334	10,381	322	314	81	-	12,432	22
Banks:
- Tier 1	-	-	-	1	1	-	2	-
- Tier 2 and other subordinated	211	49	70	46	4	-	380	1
- Senior	11	992	2,233	51	1	-	3,288	6
- Covered	310	-	-	-	-	-	310	-
Financial Services:
- Tier 1	2	-	-	-	-	-	2	-
- Tier 2 and other subordinated	-	129	109	64	-	-	302	1
- Senior	-	591	100	132	11	-	834	1
Insurance:
- Tier 1	-	-	-	1	-	-	1	-
- Tier 2 and other subordinated	-	113	4	56	-	-	173	-
- Senior	-	71	493	80	-	-	644	1
Consumer Services and Goods:
- Cyclical	-	358	1,124	1,698	230	-	3,410	6
- Non-cyclical	191	591	1,398	2,143	134	-	4,457	7
- Health Care	3	31	222	172	6	-	434	1
Infrastructure:
- Social	86	841	3,383	1,005	20	-	5,335	10
- Economic	-	29	940	1,405	43	-	2,417	4
Technology and Telecoms	71	158	779	2,062	122	-	3,192	6
Industrials	-	151	786	482	68	-	1,487	3
Utilities	-	87	4,931	3,428	34	-	8,480	15
Energy	-	-	102	515	31	-	648	1
Commodities	-	-	312	537	41	-	890	2
Oil and Gas	-	287	514	695	204	-	1,700	3
Property	-	-	-	-	-	-	-	-
Real estate	-	369	491	1,254	63	-	2,177	4
Structured finance ABS / RMBS / CMBS / Other	305	620	531	59	55	-	1,570	3
Lifetime mortgage loans¹	721	522	99	91	-	-	1,433	3
CDOs	-	21	60	14	-	-	95	-


Total £m	3,245	16,391	19,003	16,305	1,149	-	56,093	100


Total %	6	29	34	29	2	-	100


1. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal matching adjustment structuring.

Capital and Investments Page 93

4.06 Bond portfolio summary (continued)
(b) Total Group analysed by sector (continued)

					BB or
	AAA¹	AA¹	A¹	BBB¹	below¹	Other¹	Total¹	Total¹
	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16
	£m	£m	£m	£m	£m	£m	£m	%


Sovereigns, Supras and Sub-Sovereigns	1,747	9,427	405	458	83	1	12,121	22
Banks:
- Tier 1	-	-	-	1	6	-	7	-
- Tier 2 and other subordinated	-	-	172	256	15	1	444	1
- Senior	6	1,000	1,635	104	1	1	2,747	5
- Covered	303	2	-	16	-	-	321	1
Financial Services:
- Tier 1	-	-	-	-	-	-	-	-
- Tier 2 and other subordinated	-	86	50	70	3	3	212	-
- Senior	6	381	169	157	22	163	898	2
Insurance:
- Tier 1	-	-	1	1	-	-	2	-
- Tier 2 and other subordinated	-	35	140	89	26	1	291	1
- Senior	23	46	547	143	-	-	759	1
Consumer Services and Goods & Health Care
- Cyclical	-	350	1,018	1,922	204	9	3,503	7
- Non-cyclical	159	439	1,439	1,162	123	-	3,322	6
- Health Care	3	8	208	161	8	1	389	1
Infrastructure:
- Social	122	971	3,105	679	240	-	5,117	10
- Economic	-	28	807	1,041	30	37	1,943	4
Technology and Telecoms	58	185	599	2,391	119	3	3,355	6
Industrials	-	106	779	505	98	5	1,493	2
Utilities	-	108	4,813	3,056	36	3	8,016	15
Energy	-	-	107	576	42	-	725	1
Commodities	-	-	314	472	104	-	890	2
Oil and Gas	-	197	631	676	301	2	1,807	3
Property	-	-	3	7	2	3	15	-
Real estate	-	436	358	739	442	-	1,975	4
Structured finance ABS / RMBS / CMBS / Other	337	785	282	90	48	-	1,542	3
Lifetime mortgage loans²	-	-	-	440	-	-	440	1
CDOs³	-	722	366	14	-	-	1,102	2


Total £m	2,764	15,312	17,948	15,226	1,953	233	53,436	100


Total %	5	29	34	28	4	-	100


1. H1 16 and FY 16 Cash Equivalents and Bond values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. Lifetime mortgage loans have increased in value since inception predominantly due to the accrual of interest on the loans.
3. The underlying reference portfolio has had no reference entity defaults during the period. The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.5%, on average across the reference portfolio, 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. The CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the market valuation.

Capital and Investments Page 94

4.06 Bond portfolio summary (continued)
(b) Total group analysed by sector (continued)
Sectors analysed by credit rating (continued)

					BB or
	AAA¹	AA¹	A¹	BBB¹	below¹	Other¹	Total¹	Total¹
	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16
	£m	£m	£m	£m	£m	£m	£m	%


Sovereigns, Supras and Sub-Sovereigns	1,206	10,535	370	387	102	-	12,600	24
Banks:
- Tier 1	-	-	-	1	12	-	13	-
- Tier 2 and other subordinated	211	49	73	54	-	-	387	1
- Senior	16	1,076	2,067	133	12	-	3,304	6
- Covered	259	-	16	-	-	-	275	1
Financial Services:
- Tier 1	-	-	-	-	-	-	-	-
- Tier 2 and other subordinated	-	87	59	63	-	-	209	-
- Senior	-	381	147	129	3	112	772	1
Insurance:
- Tier 1	-	-	2	4	-	-	6	-
- Tier 2 and other subordinated	-	48	8	72	1	-	129	-
- Senior	29	88	495	80	-	-	692	1
Consumer Services and Goods:
- Cyclical	-	409	1,167	1,809	244	-	3,629	7
- Non-cyclical	300	665	1,454	1,474	148	-	4,041	7
- Health care	3	30	45	44	8	-	130	-
Infrastructure:
- Social	-	624	3,262	926	148	-	4,960	9
- Economic	-	-	903	1,318	44	-	2,265	4
Technology and Telecoms	73	238	662	2,162	123	-	3,258	6
Industrials	-	146	840	487	107	-	1,580	3
Utilities	-	108	4,967	3,193	28	-	8,296	15
Energy	-	5	106	575	44	-	730	1
Commodities	-	-	313	478	98	-	889	2
Oil and Gas	-	290	582	692	236	-	1,800	3
Property	-	-	12	60	6	-	78	-
Real estate	-	305	629	1,067	53	-	2,054	4
Structured finance ABS / RMBS / CMBS / Other	341	729	617	90	53	-	1,830	3
Lifetime mortgage loans²	388	322	91	51	-	-	852	2
CDOs	-	-	59	14	-	-	73	-


Total £m	2,826	16,135	18,946	15,363	1,470	112	54,852	100


Total %	5	29	35	28	3	-	100


1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal matching adjustment structuring.

Capital and Investments Page 95

4.06 Bond portfolio summary (continued)
(b) Total group analysed by sector (continued)
Sectors analysed by domicile
			EU
			excluding	Rest of
	UK	US	UK	the World	Total
	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17
	£m	£m	£m	£m	£m


Sovereigns, Supras and Sub-Sovereigns	9,600	965	1,236	631	12,432
Banks	1,858	793	920	409	3,980
Financial Services	384	124	630	-	1,138
Insurance	161	583	19	55	818
Consumer Services and Goods:
- Cyclical	782	2,153	336	139	3,410
- Non-cyclical	1,374	2,769	291	23	4,457
- Health care	10	424	-	-	434
Infrastructure:
- Social	5,015	283	-	37	5,335
- Economic	1,920	232	29	236	2,417
Technology and Telecoms	597	1,499	668	428	3,192
Industrials	218	775	345	149	1,487
Utilities	3,874	1,344	2,341	921	8,480
Energy	-	546	6	96	648
Commodities	10	313	27	540	890
Oil and Gas	193	436	496	575	1,700
Property	-	-	-	-	-
Real estate	1,687	444	14	32	2,177
Structured Finance ABS / RMBS / CMBS / Other	950	246	349	25	1,570
Lifetime mortgages	1,433	-	-	-	1,433
CDOs	-	21	-	74	95


Total	30,066	13,950	7,707	4,370	56,093

Capital and Investments Page 96

4.06 Bond portfolio summary (continued)			EU
(b) Total group analysed by sector (continued)			excluding	Rest of
Sectors analysed by domicile (continued)	UK¹	US¹	UK¹	the World¹	Total¹
	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16
	£m	£m	£m	£m	£m


Sovereigns, Supras and Sub-Sovereigns	8,421	991	1,862	847	12,121
Banks	1,408	876	737	498	3,519
Financial Services	588	162	349	11	1,110
Insurance	286	629	57	80	1,052
Consumer Services and Goods:
- Cyclical	638	2,402	284	179	3,503
- Non-cyclical	1,141	1,917	181	83	3,322
- Health care	47	332	10	-	389
Infrastructure:
- Social	4,802	277	1	37	5,117
- Economic	1,730	70	29	114	1,943
Technology and Telecoms	566	1,435	932	422	3,355
Industrials	195	787	329	182	1,493
Utilities	3,450	1,268	2,432	866	8,016
Energy	-	613	10	102	725
Commodities	21	302	26	541	890
Oil and Gas	209	571	396	631	1,807
Property	5	3	6	1	15
Real estate	1,449	449	17	60	1,975
Structured Finance ABS / RMBS / CMBS / Other	1,055	267	201	19	1,542
Lifetime mortgages	440	-	-	-	440
CDOs	-	-	1,031	71	1,102


Total	26,451	13,351	8,890	4,744	53,436


1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.

Capital and Investments Page 97

4.06 Bond portfolio summary (continued)
(b) Total group analysed by sector (continued)
Sectors analysed by domicile (continued)

			EU
			excluding	Rest of
	UK¹	US¹	UK¹	the World¹	Total¹
	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16
	£m	£m	£m	£m	£m


Sovereigns, Supras and Sub-Sovereigns	9,569	1,038	1,264	729	12,600
Banks	1,625	803	1,005	546	3,979
Financial Services	500	124	355	2	981
Insurance	189	566	17	55	827
Consumer Services and Goods
- Cyclical	794	2,410	272	153	3,629
- Non-cyclical	1,155	2,650	208	28	4,041
- Health care	18	106	6	-	130
Infrastructure
- Social	4,788	137	-	35	4,960
- Economic	1,937	102	1	225	2,265
Technology and Telecoms	589	1,467	753	449	3,258
Industrials	166	904	312	198	1,580
Utilities	3,687	1,293	2,401	915	8,296
Energy	1	598	14	117	730
Commodities	16	292	33	548	889
Oil and Gas	190	574	450	586	1,800
Property	-	71	4	3	78
Real estate	1,631	345	17	61	2,054
Structured finance ABS / RMBS / CMBS / Other	1,020	323	469	18	1,830
Lifetime mortgage loans	852	-	-	-	852
CDOs	-	-	-	73	73


Total	28,727	13,803	7,581	4,741	54,852


1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.

Capital and Investments Page 98

4.06 Bond portfolio summary (continued)
(c) LGR and total group analysed by credit rating
	Externally	Internally		Externally	Internally	Total
	rated	rated²	LGR	rated	rated²	Group
	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17	30.06.17
	£m	£m	£m	£m	£m	£m


AAA	1,573	1,130	2,703	2,115	1,130	3,245
AA	13,205	1,739	14,944	14,579	1,812	16,391
A	14,511	2,928	17,439	15,971	3,032	19,003
BBB	13,103	2,575	15,678	13,516	2,789	16,305
BB or below	691	81	772	989	160	1,149
Other	-	-	-	-	-	-


	43,083	8,453	51,536	47,170	8,923	56,093




	Externally	Internally		Externally	Internally
	rated¹	rated^{1, 2}	LGR¹	rated¹	rated^{1, 2}	Total¹
	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16	30.06.16
	£m	£m	£m	£m	£m	£m


AAA	1,719	8	1,727	2,756	8	2,764
AA	12,136	1,701	13,837	13,606	1,706	15,312
A	14,506	2,301	16,807	15,570	2,378	17,948
BBB	12,497	1,635	14,132	13,375	1,851	15,226
BB or below	1,102	542	1,644	1,348	605	1,953
Other	-	-	-	233	-	233


	41,960	6,187	48,147	46,888	6,548	53,436





	Externally	Internally		Externally	Internally	Total
	rated¹	rated^{1, 2}	LGR¹	rated¹	rated^{1, 2}	Group ¹
	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16	31.12.16
	£m	£m	£m	£m	£m	£m


AAA	1,839	388	2,227	2,438	388	2,826
AA	13,499	1,236	14,735	14,632	1,503	16,135
A	14,637	2,773	17,410	16,063	2,883	18,946
BBB	12,405	2,062	14,467	13,068	2,295	15,363
BB or below	960	77	1,037	1,322	148	1,470
Other	-	-	-	-	112	112


	43,340	6,536	49,876	47,523	7,329	54,852


1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement
2. Where external ratings are not available an internal rating has been used where it is practicable to do so.

Capital and Investments Page 99

4.07 Property analysis
(a) Property exposure within Direct Investments


(i) Group property Direct Investments by status



			LGI
			(UK and
	LGR¹	LGC	Other)	Total
	At	At	At	At
	30.06.17	30.06.17	30.06.17	30.06.17
	£m	£m	£m	£m	%


Fully let	2,687	8	-	2,695	93
Development	-	144²	-	144	5
Land	-	48	-	48	2


	2,687	200	-	2,887	100


1. The fully let LGR property includes £2.3bn let to investment grade tenants.
2. Included in LGC Development is £25m of Other shareholder investment property as noted in note 4.04.
			LGI
			(UK and
	LGR¹	LGC	Other)	Total
	At	At	At	At
	30.06.16	30.06.16	30.06.16	30.06.16
	£m	£m	£m	£m	%


Fully let	2,257	58	4	2,319	94
Development	-	95	-	95	4
Land	-	43	-	43	2


	2,257	196	4	2,457	100

1. The fully let LGR property includes £1.9bn let to investment grade tenants.

			LGI
			(UK and
	LGR¹	LGC	Other)	Total
	At	At	At	At
	31.12.16	31.12.16	31.12.16	31.12.16
	£m	£m	£m	£m	%


Fully let	2,442	16	-	2,458	94
Development	-	101	-	101	4
Land	-	45	-	45	2


	2,442	162	-	2,604	100

1. The fully let LGR property includes £2.1bn let to investment grade tenants.

Capital and Investments Page 100

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Glossary Page 101

* These items represent an alternative performance measure.

Adjusted earnings per share*

Calculated by dividing profit after tax from continuing operations, attributable to equity holders of the company, excluding recognised gains and losses associated with held for sale and completed business disposals, by the weighted average number of ordinary shares in issue during the period, excluding employee scheme treasury shares. Excluding the impact of anticipated and completed disposals provides an indication of the earnings per share from on-going operations.

Ad valorem fees

On-going Management fees earned on assets under management, overly assets and advisory assets as defined below

Adjusted return on equity*

ROE measures the return earned by shareholders on shareholder capital retained within the business. Adjusted ROE is calculated as IFRS proﬁt after tax divided by average IFRS shareholders' funds excluding recognised gains and losses associated with held for sale and completed business disposals. Excluding the impact of anticipated and completed disposals provides an indication of the return on equity from on-going operations.

Adjusted operating profit*

Operating proﬁt measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Adjusted operating profit further removes exceptional restructuring costs to demonstrate the profitability before these costs which are non-recurring in nature.

Advisory assets

These are assets on which Global Index Advisors (GIA) provide advisory services. Advisory assets are beneﬁcially owned by GIA's clients and all investment decisions pertaining to these assets are also made by the clients. These are different from Assets under Management (AUM) deﬁned below.

Alternative performance measures (APMs)

An alternative performance measure is a financial measure of historic or future financial performance, financial position, or cash flows, other than a financial measure defined under IFRS or the regulations of Solvency II. The group uses a range of these metrics to provide a better understanding of the underlying performance of the group. Where appropriate, reconciliations of alternative performance measures to IFRS measures are provided. All APMs defined within this glossary are marked with an asterisk.

Annuity

Regular payments from an insurance company made for an agreed period of time (usually up to the depth of the recipient) in return for either cash lump sum or a series of premiums which the policyholder has paid to the insurance company during their working lifetime.

Annual premium

Premiums that are paid regularly over the duration of the contract such as protection policies.

Assets under administration (AUA)*

Assets administered by Legal & General which are beneﬁcially owned by clients. Services provided in respect of assets under administration are of an administrative nature, including safekeeping, collecting investment income, settling purchase and sales transactions and record keeping.

Assets under management (AUM)*

The total amount of money investors have trusted to our fund managers to invest across our investment products i.e. these are funds which are managed by our fund managers on behalf of investors.

Back book acquisition

New business transacted with an insurance company which allows the business to continue to utilise solvency II transitional measures associated with the business.

Bundled DC solution

Where investment and administration services are provided to a scheme by the same service provider. Typically, all investment and administration costs are passed onto the scheme members.

Glossary Page 102

Bundled pension schemes

Where the fund manager bundles together the investment provider role and third-party administrator role, together with the role of selecting funds and providing investment education, into one proposition.

Deduction and aggregation (D&A)

A method of calculating group solvency on a Solvency II basis, whereby the assets and liabilities of certain entities are excluded from the group consolidation. The net contribution from those entities to group own funds is included as an asset on the group's Solvency II balance sheet. Regulatory approval has been provided to recognise the (re)insurance subsidiaries of LGI US on this basis.

Direct investments

Direct investments, which generally constitute an agreement with another party and represent an exposure to untraded and often less volatile asset classes. Direct investments also include physical assets, bilateral loans and private equity, but exclude hedge funds.

Earnings per share (EPS)

EPS is a common ﬁnancial metric which can be used to measure the proﬁtability and strength of a company over time. It is the total shareholder proﬁt after tax divided by the number of shares outstanding. EPS uses a weighted average number of shares outstanding during the year.

Economic capital*

Economic capital is the capital that an insurer holds internally as a result of its own assessment of risk. It differs from regulatory capital, which is determined by regulators. It represents an estimate of the amount of economic losses an insurer could withstand and still remain solvent with a target level of conﬁdence over a speciﬁed time horizon.

Economic Capital Requirement (ECR)

The amount of Economic Capital required to cover the losses occurring in a 1-in-200 year risk event.

Economic Capital Surplus*

The excess of Eligible Own Funds on an economic basis over the Economic Capital Requirement. This represents the amount of capital available to the company in excess of that required to sustain it in a 1-in-200 year risk event.

ECR coverage ratio*

The Eligible Own Funds on an economic basis divided by the Economic Capital Requirement (ECR). This represents the number of times that the ECR is covered by Eligible Own Funds.

Eligible Own Funds

Eligible Own Funds represents the capital available to cover the group's Economic or Solvency II Capital Requirement. Eligible Own Funds comprise the excess of the value of assets over liabilities, as valued on an Economic Capital or Solvency II basis, plus high quality hybrid capital instruments, which are freely available (fungible and transferable) to absorb losses wherever they occur across the group. Eligible own funds (shareholder view basis) excludes the contribution to the groups solvency capital requirement of with-profits fund and final salary pension schemes.

Escape of Water

Escape of water is a type of home insurance claim relating to leakage from fixed water tanks, apparatus (e.g. washing machine) or pipes.

Euro Commercial paper

Short term borrowings with maturities of up to 1 year typically issued for working capital purposes.

General insurance combined operating ratio

The combined ratio is calculated as the sum of incurred losses and expenses divided by earned premium.

Gross written premiums (GWP)

GWP is an industry measure of the life insurance premiums due and the general insurance premiums underwritten in the reporting period, before any deductions for reinsurance.

Index tracker

Index tracker funds invest in most or all of the same shares, and in a similar proportion, as the index they are tracking, for example the FTSE 100 index. Index tracker funds aim to produce a return in line with a particular market sector, for example, Europe or technology. They are also sometimes known as 'tracker funds'.

Glossary Page 103

ICAV - Irish Collective Asset-Management Vehicle

A legal structure investment funds, based in Ireland and aimed at European investment funds looking for a simple, tax-efficient investment vehicle.

IFRS proﬁt before tax (PBT)

PBT measures proﬁt attributable to shareholders incorporating actual investment returns experienced during the year but before the payment of tax.

Key performance indicators (KPIs)

These are measures by which the development, performance or position of the business can be measured effectively. The group Board reviews the KPIs annually and updates them where appropriate.

Lifetime mortgages

An equity release product aimed at people aged 60 years and over. It is a mortgage loan secured against the customer's house. Customers do not make any monthly payments and continue to own and live in their house until they move into long term care or on death. A no negative equity guarantee exists such that if the house value on repayment is insufficient to cover the outstanding loan, any shortfall is borne by the lender.

Long dated debt

Debt issued in either subordinated or senior format which forms part of the Group's core borrowings.

Matching adjustment

An adjustment to the discount rate used for annuity liabilities in Economic Capital and Solvency II balance sheets. This adjustment reflects the fact that the profile of assets held is sufficiently well-matched to the profile of the liabilities, that those assets can be held to maturity, and that any excess return over risk-free (that is not related to defaults) can be earned regardless of asset value fluctuations after purchase.

Net release from operations*

Net release from operations is deﬁned as release from operations plus new business surplus/(strain). Net release from operations was previously referred to as Net Cash and provides information on the underlying release of prudent margins from the back book.

New business surplus/(strain)*

The net impact of writing new business on the IFRS position, including the benefit/cost of acquiring new business and the setting up of reserves, for UK non profit annuities, workplace savings, protection and savings, net of tax. This metric provides an understanding of the impact of new contracts on the IFRS profit for the year.

Operating proﬁt*

Operating proﬁt measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Operating proﬁt therefore reﬂects longer-term economic assumptions and changes in insurance risks such as mortality and longevity for the group's insurance business and shareholder funds, except for LGI US which excludes unrealised investment returns to align with the liability measurement under US GAAP. Variances between actual and smoothed assumptions are reported below operating proﬁt. Exceptional income and expenses which arise outside the normal course of business in the period, such as merger and acquisition and start-up costs are excluded from operating proﬁt.

Overlay assets

Overlay assets are derivative assets that are managed alongside the physical assets held by LGIM. These instruments include interest rate swaps, inﬂation swaps, equity futures and options. These are typically used to hedge risks associated with pension scheme assets during the derisking stage of the pension life cycle.

Platform

Online Services used by intermediaries and consumers to view and administer their investment portfolios. Platforms usually provide facilities for buying and selling investments (including, in the UK products such as Individual Savings Accounts(ISAs), Self-Invested Personal Pensions (SIPPs) and life insurance) and for viewing and individual's entire portfolio to assess asset allocation and risk exposure.

Pension risk transfer (PRT)

PRT represents bulk annuities bought by entities that run ﬁnal salary pension schemes to reduce their responsibilities by closing the schemes to new members and passing the assets and obligations to insurance providers.

Glossary Page 104

Present value of future new business premiums (PVNBP)*

PVNBP is equivalent to total single premiums plus the discounted value of annual premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the new business value at the end of the financial period. The discounted value of longevity insurance regular premiums and quota share reinsurance single premiums are calculated on a net of reinsurance basis to enable a more representative margin figure. PVNBP therefore provides an estimate of the present value of the premiums associated with new business written in the year.

Recapitalisation Cost*

An additional liability required in the L&G Economic Capital balance sheet, to allow for the cost of recapitalising the balance sheet following a 1-in-200 year risk event, in order to maintain confidence that our future liabilities will be met. This is calculated using a cost of capital that reflects the long term average rates at which it is expected that the group could raise debt and allows for diversification between all group entities.

Real assets

Real assets encompass a wide variety of tangible debt and equity investments, primarily real estate, infrastructure and energy. They have the ability to serve as stable sources of long term income in weak markets, while also providing capital appreciation opportunities in strong markets.

Release from operations*

The expected release of IFRS surplus from in-force business for the UK non-profit Insurance and Savings and LGR businesses, the shareholder's share of bonuses on with-profits business, the post-tax operating profit on other UK businesses, including the medium term expected investment return on LGC invested assets, and dividends remitted from LGI US and Legal & General Netherlands. 2015 included dividends remitted from Legal & General France, which was disposed of on 31 December 2015. Release from operations was previously referred to as operational cash generation.

Return on equity (ROE)*

ROE measures the return earned by shareholders on shareholder capital retained within the business. ROE is calculated as IFRS proﬁt after tax divided by average IFRS shareholders' funds.

Single premiums*

Single premiums arise on the sale of new contracts where the terms of the policy do not anticipate more than one premium being paid over its lifetime, such as in individual and bulk annuity deals.

Solvency II

Taking effect from 1 January 2016, the Solvency II regulatory regime is a harmonised prudential framework for insurance ﬁrms in the EEA. This single market approach is based on economic principles that measure assets and liabilities to appropriately align insurers' risk with the capital they hold to safeguard policyholder.

Solvency II new business contribution

Reflects present value at the point of sale of expected future Solvency II surplus emerging from new business written in the period using the risk discount rate applicable at the end of the reporting period.

Solvency II Risk Margin

An additional liability required in the Solvency II balance sheet, to ensure the total value of technical provisions is equal to the current amount a (re)insurer would have to pay if it were to transfer its insurance and reinsurance obligations immediately to another (re)insurer. The value of the risk margin represents the cost of providing an amount of Eligible Own Funds equal to the Solvency Capital Requirement (relating to non-market risks) necessary to support the insurance and reinsurance obligations over the lifetime thereof.

Solvency II Surplus

The excess of Eligible Own Funds on a regulatory basis over the Solvency Capital Requirement. This represents the amount of capital available to the company in excess of that required to sustain it in a 1-in-200 year risk event.

Solvency Capital Requirement (SCR)

The amount of Solvency II capital required to cover the losses occurring in a 1-in-200 year risk event.

SCR (shareholder view basis)

In order to present a shareholder view of group SCR the Solvency capital requirement of the Society's with-profits fund and defined benefit final salary pension scheme is excluded from SCR.

Glossary Page 105

SCR coverage ratio

The Eligible Own Funds on a regulatory basis divided by the Solvency Capital Requirement (SCR). This represents the number of times that the SCR is covered by Eligible Own Funds.

SCR coverage ratio (proforma basis)*

The proforma basis solvency II coverage incorporates the estimated impacts of a recalculation of the Transitional Measures for Technical Provisions recalculated based on end of period economic conditions, changes to the Internal Model and Matching Adjustment and management's updated Solvency I basis. This includes the solvency capital requirement in relation to the Society's ring-fenced with-profits fund and our defined benefit pension schemes in both Eligible Own Funds and the SCR in the calculation of the SCR coverage ratio.

SCR coverage ratio (shareholder view basis)*

In order to represent a shareholder view of group solvency position, the solvency capital requirement in relation to the Society's ring-fenced with-profits fund and our defined benefit pension schemes is excluded from both Eligible Own Funds and the SCR in the calculation of the SCR coverage ratio. This incorporates the estimated impacts of a recalculation of the Transitional Measures for Technical Provisions based on end of period economic conditions.

Total shareholder return (TSR)

TSR is a measure used to compare the performance of different companies' stocks and shares over time. It combines the share price appreciation and dividends paid to show the total return to the shareholder.

Transitional Measures on Technical Provisions (TMTP)

This is an adjustment to Solvency II technical provisions to bring them into line with the pre-Solvency II equivalent as at 1 January 2016 when the regulatory basis switched over, to smooth the introduction of the new regime. This will decrease linearly over the 16 years following Solvency II implementation but may be recalculated to allow for changes impacting the relevant business, subject to agreement with the PRA.

Unbundled DC solution

When investment services and administration services are supplied by separate providers. Typically the sponsoring employer will cover administration costs and scheme members the investment costs.

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