L&G Half-year results 2015 Part 3

RNS Number : 1058V

Legal & General Group Plc

05 August 2015

Capital and Investments 71

4.01 Group regulatory capital - Insurance Group's Directive (IGD)

The Group is required to measure and monitor its capital resources on a regulatory basis and to comply with the minimum capital requirements of regulators in each territory in which it operates. At a Group level, Legal & General must comply with the requirements of the IGD. The table below shows the estimated total Group capital resources, Group capital resources requirement and the Group surplus.

	At	At	At
	30.06.15	30.06.14	31.12.14
	£bn	£bn	£bn


Core tier 1	6.9	6.7	6.4
Innovative tier 1	0.6	0.6	0.6
Tier 2¹	1.2	1.8	1.7
Deductions	(1.0)	(0.9)	(1.0)


Group capital resources	7.7	8.2	7.7


Group capital resources requirement²	3.9	3.5	3.8


IGD surplus	3.8	4.7	3.9


Group capital resources requirement coverage ratio³	198%	236%	201%


1. In June 2015, the Group redeemed €0.6bn Euro subordinated notes, constituting Lower Tier 2 capital.
2. Group capital resources requirement includes a With-profits Insurance Capital Component (WPICC) of £0.4bn (H1 14: £0.3bn; FY 14: £0.4bn).
3. Coverage ratio is calculated on unrounded values.

A reconciliation of the capital and reserves attributable to the equity holders of the Company on an IFRS basis to the Group capital resources on an IGD basis is given below.


	At	At	At
	30.06.15	30.06.14	31.12.14
	£bn	£bn	£bn


Capital and reserves attributable to equity holders on an IFRS basis	6.0	5.7	6.0
Innovative tier 1	0.6	0.6	0.6
Tier 2	1.2	1.8	1.7
UK unallocated divisible surplus	0.6	1.0	0.7
Proposed dividends	(0.2)	(0.2)	(0.5)
Intangibles	(0.4)	(0.4)	(0.4)
Other regulatory adjustments¹	(0.1)	(0.3)	(0.4)


Group capital resources	7.7	8.2	7.7


1. Other regulatory adjustments include differences between accounting and regulatory bases.
The table below demonstrates how the Group's net cash generation reconciles to the IGD capital surplus position.¹

				At
				30.06.15
				£bn


IGD surplus at 1 January				3.9
Net cash generation				0.6
Dividends				(0.2)
New business capital deployed				(0.1)
Existing business capital release				0.1
Repayment of subordinated debt				(0.5)


IGD surplus at 30 June				3.8



1. All IGD amounts are estimated, unaudited and after accrual of the interim dividend of £205m.

Capital and Investments 72

4.02 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.

Legal & General has invested considerable time and resource in developing a risk based capital model that is used to calculate the Group's Economic Capital Balance Sheet and support the management of risk within the Group. The Group continues to develop the economic capital model in light of developments in the Group's business model, refinements in modelling and the analysis of experience, emerging market practice and feedback from independent reviewers. The Group's economic capital position will reflect these changes as they are implemented. It is intended that this modelling framework, suitably adjusted for regulatory constraints, should also meet the needs of the Solvency II regime, due to come in to force on 1 January 2016. Our Economic Capital model has not been reviewed by the Prudential Regulatory Authority (PRA), nor will it be.

The economic capital numbers presented here do not represent our view of the Solvency II outcome for the Group. Solvency II has elements which are considered to be inconsistent with the Group's definition of economic capital, so there will be differences between the two balance sheets. Legal & General is engaged in discussions with the PRA and in 2015 we made a formal application for approval of an internal model for use under Solvency II. Our Solvency II internal model is being reviewed by the PRA.

(a) Capital position

As at 30 June 2015 the Group had an economic capital surplus of £6.4bn (FY 14: £7.0bn), corresponding to an economic capital coverage ratio of 220% (FY 14: 229%). The economic capital position is as follows:
	At	At
	30.06.15	31.12.14
	£bn	£bn


Eligible own funds	11.8	12.5
Economic capital requirement	5.4	5.5


Surplus	6.4	7.0


1-in-200 coverage ratio¹	220%	229%


1. Coverage ratio is calculated on unrounded values.

Further explanation of the underlying methodology and assumptions is set out in the sections below.

(b) Methodology

Eligible 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.

Assets are valued at IFRS fair value with adjustments to remove intangibles, deferred acquisition costs and to value reassurers' share of technical provisions on a basis consistent with the liabilities on the Economic Capital Balance Sheet. The economic value of assets excluded from the IFRS Balance Sheet (e.g. present value of future With-profits transfers) is also included.

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, Legal & General Insurance, Legal & General Pensions Management Company (PMC) (LGIM's insurance subsidiary) and Legal & General America (LGA) are incorporated into the Group's Economic Capital model assessment of required capital, assuming diversification of the risks between those firms.

Firms for which the capital requirements are less material, for example Legal & General Netherlands and Suffolk Life, are valued on the firm's latest interpretation of the Solvency II Standard Formula basis. The business retained within Legal & General Pensions Limited, an internal Insurance Special Purpose Vehicle, has been valued on a "look through" basis and capital requirements calculated as if the business was not internally reassured. 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 scheme 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.

The results and the model are unaudited but certain elements of the methodology, assumptions and processes have been reviewed by PwC.

Capital and Investments 73

4.02 Group Economic Capital (continued)

The calculation of the Economic Capital Balance Sheet and associated capital requirement requires a number of assumptions, including:

(i) assumptions required to derive the present value of best estimate liability cash flows. Non market assumptions are broadly the same as those used to derive the Group's EEV disclosures. Future investment returns and discount rates are based on market data where a deep and liquid market exists or using appropriate estimation techniques where this is not the case. The risk-free rates used to discount liabilities are market swap rates, with a 10 basis point deduction to allow for a credit risk adjustment;

(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 are used to calculate Economic Capital Requirement. 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.

For annuities business the liability discount rate includes an Economic Matching Adjustment. The Economic Matching Adjustment is derived using the same approach as the Solvency II matching adjustment, but any constraints we consider economically artificial, such as capping the yield on assets with a credit rating below BBB and any ineligibility of certain assets, have not been applied.

The other key assumption relating to the annuity business is the assumption of longevity. As for IFRS and EEV, Legal & General models base mortality and future improvement of mortality separately. For our Economic Capital assessment we believe it is appropriate to ensure that the balance sheet makes sufficient allowance to meet the 1-in-200 stress to longevity over the run off of the liabilities rather than just over a 1 year timeframe.

(d) Analysis of change

The table below shows the movement (net of tax) during the financial year in the Group's Economic Capital surplus.


								Economic
								Capital
								surplus
Analysis of movement from 1 January to 30 June 2015								£bn


Economic solvency position as at 1 January 2015								7.0
New business surplus								0.1
Existing business expected release								0.4
Subordinated debt redemption								(0.5)
Dividends declared in the period								(0.5)
Other capital movements¹								(0.1)

Economic solvency position as at 30 June 2015								6.4


1. Other capital movements includes operating and non-operating experience items other than the expected release from existing business.

Capital and Investments 74

4.02 Group Economic Capital (continued)
(e) Reconciliation of IFRS Shareholders' Equity to Economic Capital Eligible Own Funds

The table below gives a reconciliation of the Eligible Own Funds on an Economic Capital basis and the Group IFRS shareholders' equity.


	At	At
	30.06.15	31.12.14
	£bn	£bn


IFRS shareholders' equity at 30 June / 31 December	6.0	6.0
Remove DAC, goodwill and other intangible assets and liabilities	(2.0)	(2.0)
Add subordinated debt treated as economic available capital¹	1.9	2.4
Insurance contract valuation differences²	6.2	6.6
Add value of shareholder transfers	0.3	0.3
Increase in value of net deferred tax liabilities (resulting from valuation differences)	(0.5)	(0.6)
Other³	0.2	0.1
Adjustment - Basic own funds to Eligible own funds⁴	(0.3)	(0.3)


Eligible Own Funds at 30 June / 31 December	11.8	12.5


1. Treated as available capital on the Economic Capital Balance Sheet as the liabilities are subordinate to policyholder claims. 2. Differences in the measurement of liabilities between IFRS and Economic Capital, offset by the inclusion of the recapitalisation cost. 3. Primarily valuation differences between the IFRS carrying value and the fair value of financial assets and liabilities. 4. Eligibility restrictions relating to the own funds of US captive reassurers.

Capital and Investments 75


4.02 Group Economic Capital (continued)
(f) Analysis of Group Economic Capital Requirement

The table below shows a breakdown of the Group's Economic Capital Requirement by risk type. The split is shown after the effects of diversification.

	At	At
	30.06.15	31.12.14
	%	%


Interest Rate	6	6
Equity	14	15
Credit¹	44	44
Property	4	4
Currency	2	3
Inflation	(1)	(2)
Total Market Risk²	69	70
Counterparty Risk	2	1
Life Mortality	-	-
Life Longevity³	9	10
Life Lapse⁴	5	5
Life Catastrophe	3	3
Non-life underwriting	1	1
Health underwriting	1	1
Expense	1	1
Total Insurance Risk	20	21
Operational Risk	7	7
Miscellaneous	2	1


Total Economic Capital Requirement	100	100


1. Credit risk is Legal & General's most significant exposure, arising predominantly from the c£40bn portfolio of corporate bond (or similar) exposure backing the Group's annuity portfolio. 2. The Group also has significant exposure to other market risks, primarily due to the investment holdings within the shareholder funds but also the risk to fee income from assets backing unit linked and with-profit Savings businesses. 3. Longevity risk is Legal & General's most significant insurance risk exposure, arising from the annuity book on which the majority of the longevity risk is retained. 4. Lapse risk is also a significant risk, primarily through the risk of mass lapse on investment management and savings businesses and the risk of non-renewal on the Group's protection businesses.

(g) Solvency II

The Economic Capital results set out above do not reflect the Solvency II regime. They have however, been derived using the same modelling framework that Legal & General intend to use for Solvency II. It is anticipated that our Solvency II internal model will be approved in Q4 2015, ready for use on the Solvency II go live date - 1 January 2016. We expect the final outcome on Solvency II to result in a lower Group solvency ratio than the Economic Capital Coverage Ratio shown above.

Capital and Investments 76


4.03 Investment portfolio

	Market	Market	Market
	value	value	value
	At	At	At
	30.06.15	30.06.14	31.12.14
	£m	£m	£m


Worldwide total assets	717,034	642,076	710,554
Client and policyholder assets	(649,882)	(576,774)	(638,117)
Non-unit linked with-profits assets	(12,216)	(17,061)	(15,242)


Investments to which shareholders are directly exposed	54,936	48,241	57,195

Analysed by investment class:

			Other
			non profit		Other
		LGR	insurance	LGC	shareholder
		investments¹	investments	investments	investments	Total	Total	Total
		At	At	At	At	At	At	At
		30.06.15	30.06.15	30.06.15	30.06.15	30.06.15	30.06.14	31.12.14
	Note	£m	£m	£m	£m	£m	£m	£m


Equities²		307	-	2,023	79	2,409	1,685	2,265
Bonds	4.05	39,317	2,410	1,480	710	43,917	39,242	45,811
Derivative assets³		3,643	13	74	-	3,730	2,337	3,940
Property		2,037	-	180	3	2,220	2,020	2,030
Cash, cash equivalents,
loans & receivables		528	432	1,009	558	2,527	2,802	3,018


Financial investments		45,832	2,855	4,766	1,350	54,803	48,086	57,064


Other assets⁴		118	-	15	-	133	155	131


Total investments		45,950	2,855	4,781	1,350	54,936	48,241	57,195


1. LGR investments include all business written in LGPL, including £0.5bn of non annuity assets held in LGPL.
2. Equity investments include CALA Group Limited and MediaCity Limited.
3. Derivative assets are shown gross of derivative liabilities of £2.0bn (H1 14: £1.7bn; FY 14: £2.7bn). 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 finance lease debtors.

Capital and Investments 77


4.04 Direct Investments
(a) Analysed by asset class

	Direct¹	Traded²		Direct¹	Traded²		Direct¹	Traded²
	Investments	securities	Total	Investments	securities	Total	Investments	securities	Total
	At	At	At	At	At	At	At	At	At
	30.06.15	30.06.15	30.06.15	30.06.14	30.06.14	30.06.14	31.12.14	31.12.14	31.12.14
	£m	£m	£m	£m	£m	£m	£m	£m	£m


Equities	410	1,999	2,409	298	1,387	1,685	318	1,947	2,265
Bonds	3,050	40,867	43,917	2,036	37,206	39,242	2,983	42,828	45,811
Derivative assets	-	3,730	3,730	-	2,337	2,337	-	3,940	3,940
Property	2,220	-	2,220	2,020	-	2,020	2,030	-	2,030
Cash, cash equivalents,
loans & receivables	380	2,147	2,527	75	2,727	2,802	241	2,777	3,018
Other assets	133	-	133	155	-	155	131	-	131


	6,193	48,743	54,936	4,584	43,657	48,241	5,703	51,492	57,195


1. Direct Investments constitute an agreement with another party and represent an exposure to untraded and often less volatile assets. Direct Investments 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.

(b) Analysed by segment
	LGR	LGC	LGA	Insurance	Total
	At	At	At	At	At
	30.06.15	30.06.15	30.06.15	30.06.15	30.06.15
	£m	£m	£m	£m	£m


Equities	-	410	-	-	410
Bonds	2,737	61	252	-	3,050
Property	2,037	180	-	3	2,220
Cash, cash equivalents,
loans & receivables	-	112	268	-	380
Other assets	118	15	-	-	133


	4,892	778	520	3	6,193

	LGR	LGC	LGA	Insurance	Total
	At	At	At	At	At
	30.06.14	30.06.14	30.06.14	30.06.14	30.06.14
	£m	£m	£m	£m	£m


Equities	-	298	-	-	298
Bonds	1,885	-	151	-	2,036
Property	1,692	324	-	4	2,020
Cash, cash equivalents,
loans & receivables	-	-	75	-	75
Other assets	155	-	-	-	155


	3,732	622	226	4	4,584

Capital and Investments 78


4.04 Direct Investments (continued)
(b) Analysed by segment (continued)

	LGR	LGC	LGA	Insurance	Total
	At	At	At	At	At
	31.12.14	31.12.14	31.12.14	31.12.14	31.12.14
	£m	£m	£m	£m	£m


Equities	-	318	-	-	318
Bonds	2,586	168	229	-	2,983
Property	1,879	147	-	4	2,030
Cash, cash equivalents,
loans & receivables	-	54	187	-	241
Other assets	118	13	-	-	131


	4,583	700	416	4	5,703

(c) Movement in the period

	Carrying			Change in	Carrying
	value			market	value
	01.01.15	Additions	Disposals	value	30.06.15
	£m	£m	£m	£m	£m


Equities	318	86	(18)	24	410
Bonds	2,983	246	(149)	(30)	3,050
Property	2,030	154	-	36	2,220
Cash, cash equivalents,
loans & receivables	241	140	(1)	-	380
Other assets	131	-	-	2	133


	5,703	626	(168)	32	6,193

Capital and Investments 79


4.05 Bond portfolio summary
(a) Analysed by sector
		LGR	LGR	Total	Total
		At	At	At	At
		30.06.15	30.06.15	30.06.15	30.06.15
	Note	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.05(b)	6,722	17	8,043	18
Banks:
- Tier 1		94	-	97	-
- Tier 2 and other subordinated		434	1	583	1
- Senior		1,487	4	1,990	5
Financial Services:
- Tier 1		4	-	4	-
- Tier 2 and other subordinated		56	-	81	-
- Senior		649	2	860	3
Insurance:
- Tier 1		85	-	86	-
- Tier 2 and other subordinated		295	1	326	1
- Senior		533	1	595	1
Utilities		4,515	11	4,718	11
Consumer Services and Goods & Health Care		3,989	10	4,592	10
Technology and Telecoms		2,386	6	2,640	6
Industrials & Oil and Gas		3,909	10	4,484	10
Property		1,446	4	1,588	4
Asset backed securities:¹
- Traditional		617	2	1,033	2
- Securitisations and debentures		10,994	28	11,095	25
CDOs²		1,102	3	1,102	3


Total		39,317	100	43,917	100


1. Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies and debentures are securities with fixed redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio has had no reference entity defaults during the period ended 30 June 2015. 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 80


4.05 Bond portfolio summary (continued)
(a) Analysed by sector (continued)
		LGR	LGR	Total	Total
		At	At	At	At
		30.06.14	30.06.14	30.06.14	30.06.14
	Note	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.05(b)	6,578	19	8,257	21
Banks:
- Tier 1		60	-	66	-
- Tier 2 and other subordinated		590	2	649	2
- Senior		1,359	4	1,901	5
Financial Services:
- Tier 1		4	-	6	-
- Tier 2 and other subordinated		136	-	174	1
- Senior		882	3	1,153	3
Insurance:
- Tier 1		146	-	156	-
- Tier 2 and other subordinated		544	2	581	2
- Senior		493	2	565	2
Utilities		4,456	13	4,764	12
Consumer Services and Goods & Health Care		3,246	10	3,795	10
Technology and Telecoms		2,099	6	2,382	6
Industrials & Oil and Gas		3,333	10	3,879	10
Property		998	3	1,073	3
Asset backed securities:¹
- Traditional		703	2	1,222	3
- Securitisations and debentures		7,337	21	7,521	18
CDOs²		1,098	3	1,098	2


Total		34,062	100	39,242	100


1. Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies and Debentures are securities with fixed redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio had no reference entity defaults during the period ended 30 June 2014. 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 81


4.05 Bond portfolio summary (continued)
(a) Analysed by sector (continued)
		LGR	LGR	Total	Total
		At	At	At	At
		31.12.14	31.12.14	31.12.14	31.12.14
	Note	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.05(b)	7,760	19	9,249	20
Banks:
- Tier 1		24	-	26	-
- Tier 2 and other subordinated		559	1	621	1
- Senior		1,667	4	2,221	5
Financial Services:
- Tier 1		-	-	-	-
- Tier 2 and other subordinated		96	-	132	-
- Senior		946	2	1,138	3
Insurance:
- Tier 1		128	-	129	-
- Tier 2 and other subordinated		363	1	375	1
- Senior		624	2	704	2
Utilities		5,561	14	5,824	13
Consumer Services and Goods & Health Care		4,126	10	4,726	10
Technology and Telecoms		2,548	6	2,836	6
Industrials & Oil and Gas		4,306	11	4,928	11
Property		1,882	5	2,126	5
Asset backed securities:¹
- Traditional		722	2	1,234	3
- Securitisations and debentures		8,305	20	8,422	18
CDOs²		1,120	3	1,120	2


Total		40,737	100	45,811	100


1. Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies and debentures are securities with fixed redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio had no reference entity defaults in 2014. 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 82


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

The tables below are based on the legal domicile of the security:
	LGR	Total	LGR	Total	LGR	Total
	At	At	At	At	At	At
	30.06.15	30.06.15	30.06.14	30.06.14	31.12.14	31.12.14
	£m	£m	£m	£m	£m	£m


Market value by region:
United Kingdom	20,261	21,048	16,299	17,224	20,055	21,021
USA	9,231	11,365	7,747	10,034	9,515	11,839
Netherlands	1,686	1,944	1,778	2,119	1,910	2,182
France	1,290	1,522	1,289	1,642	1,412	1,726
Germany	264	575	378	737	378	682
Greece	-	-	-	5	-	-
Ireland	307	335	225	264	276	303
Italy	236	342	485	636	301	429
Portugal	-	4	3	14	1	11
Spain	156	210	158	224	212	260
Russia	9	18	1	2	19	37
Ukraine	-	-	-	4	-	-
Rest of Europe	1,776	2,076	1,642	2,007	1,857	2,164
Brazil	50	61	114	116	139	157
Rest of World	2,949	3,315	2,845	3,116	3,542	3,880
CDOs	1,102	1,102	1,098	1,098	1,120	1,120


Total	39,317	43,917	34,062	39,242	40,737	45,811

Additional analysis of sovereign debt exposures:

	Sovereigns, Supras and Sub-Sovereigns

	LGR	Total	LGR	Total	LGR	Total
	At	At	At	At	At	At
	30.06.15	30.06.15	30.06.14	30.06.14	31.12.14	31.12.14
	£m	£m	£m	£m	£m	£m


Market value by region:
United Kingdom	4,963	5,309	4,768	5,102	5,946	6,267
USA	519	745	407	830	536	772
Netherlands	1	139	13	167	5	153
France	5	78	118	246	1	138
Germany	151	346	195	437	204	417
Greece	-	-	-	5	-	-
Ireland	-	7	-	12	-	8
Italy	1	85	109	192	2	96
Portugal	-	4	-	6	-	9
Spain	1	23	-	6	-	10
Russia	9	18	-	-	19	28
Ukraine	-	-	-	4	-	-
Rest of Europe	629	750	793	985	765	922
Brazil	50	60	38	38	55	64
Rest of World	393	479	137	227	227	365


Total	6,722	8,043	6,578	8,257	7,760	9,249

Capital and Investments 83


4.05 Bond portfolio summary (continued)
(c) Analysed by credit rating

	LGR	LGR	Total	Total
	At	At	At	At
	30.06.15	30.06.15	30.06.15	30.06.15
	£m	%	£m	%


AAA	1,870	5	3,149	7
AA	9,763	25	10,632	24
A	11,996	31	12,943	30
BBB	10,268	26	11,305	26
BB or below	1,008	3	1,262	3
Unrated: Bespoke CDOs¹	979	2	979	2
Other	3,433	8	3,647	8


	39,317	100	43,917	100




	LGR	LGR	Total	Total
	At	At	At	At
	30.06.14	30.06.14	30.06.14	30.06.14
	£m	%	£m	%


AAA	1,711	5	3,376	9
AA	8,471	25	9,217	23
A	11,082	32	12,333	31
BBB	8,716	26	9,891	25
BB or below	566	2	761	2
Unrated: Bespoke CDOs¹	983	3	983	3
Other	2,533	7	2,681	7


	34,062	100	39,242	100



	LGR	LGR	Total	Total
	At	At	At	At
	31.12.14	31.12.14	31.12.14	31.12.14
	£m	%	£m	%


AAA	1,936	5	3,451	8
AA	10,357	25	11,190	24
A	13,231	33	14,420	31
BBB	10,360	25	11,441	25
BB or below	630	2	853	2
Unrated: Bespoke CDOs¹	994	2	994	2
Other	3,229	8	3,462	8


	40,737	100	45,811	100


1. The CDOs are termed as super senior since default losses have to exceed 27.5%, on average across the reference portfolio, before the CDOs incur any default losses. The underlying reference portfolio had no reference entity defaults in 2014 or 2015. Losses are limited under the terms of the CDOs to assets and collateral invested.

Capital and Investments 84

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European Embedded Value 85

Group embedded value - summary

	Covered business
		Insurance		Non-
	UK	overseas		covered
	business	business	LGA	business	Total
For the six months ended 30 June 2015	£m	£m	£m	£m	£m


At 1 January 2015
Value of in-force business (VIF)	6,118	147	518	-	6,783
Shareholder net worth (SNW)	3,519	325	209	139	4,192


Embedded value at 1 January 2015	9,637	472	727	139	10,975
Exchange rate movements	-	(38)	(6)	13	(31)

Operating profit after tax for the period	416	3	55	62	536
Non-operating profit/(loss) after tax for the period	48	(50)	(5)	(9)	(16)


Profit/(loss) for the period	464	(47)	50	53	520
Intra-group distributions¹	(282)	(19)	(52)	353	-
Dividends to equity holders of the Company	-	-	-	(496)	(496)
Transfer to non-covered business²	(17)	-	-	17	-
Other reserve movements including pension deficit³	13	-	-	(36)	(23)


Embedded value at 30 June 2015	9,815	368	719	43	10,945


Value of in-force business^4,5	6,024	79	565	-	6,668
Shareholder net worth^6,7	3,791	289	154	43	4,277


Embedded value per share (p)⁸					184



Additional value of LGIM

				30.06.15	30.06.15
Indicative valuation including LGIM				p per share	£bn


EEV as reported				184	10.9
LGIM VIF				27	1.6


Total including LGIM				211	12.5




				30.06.15	30.06.15
Estimated LGIM discounted cash flow valuation				p per share	£bn


Look through value of profits on covered business				6	0.4
Net asset value				11	0.7


Current value of LGIM in Group embedded value				17	1.1


LGIM VIF				27	1.6


Alternative discounted value of LGIM future cash flows				44	2.7


1. UK intra-group distributions primarily reflect a £300m (H1 14: £nil; FY 14: £675m) declared dividend from Society to Group, and dividends of €23m (H1 14: €18m; FY 14: €35m) from LGN paid to Society. Dividends of $80m (H1 14:$73m; FY 14: $76m) from LGA and €1m (H1 14: €2m; FY 14: €2m) from LGF were paid to Group.
2. The transfer to non-covered business represents the IFRS profits arising in the year from the provision of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look-through basis.
3. The other reserve movements primarily reflect movement in the pension deficit and movements in the share options scheme and employee scheme treasury shares.
4. Value of inforce business is shown net of cost of capital, which consists of £567m (H1 14: £449m; FY 14: £545m) from UK covered business; £57m (H1 14: £66m; FY 14: £60m) from Insurance overseas covered business and £12m (H1 14: £12m; FY 14: £11m) from LGA.
5. The time value of options and guarantees deduction included in value of inforce business is £28m (H1 14: £14m; FY 14: £43m).
6. Shareholder net worth of Insurance overseas covered business is made up of £62m (H1 14: £74m ; FY 14: £90m) of free surplus and £227m (H1 14: £251m ; FY 14: £235m) of required capital.
7. Shareholder net worth of LGA is made up of £104m (H1 14: £139m ; FY 14: £161m) of free surplus and £50m (H1 14: £49m ; FY 14: £48m) of required capital.
8. The number of shares in issue at 30 June 2015 was 5,945,774,722 (H1 14: 5,935,497,507; FY 14: 5,942,070,229).

Further analysis of the UK covered business can be found in Note 5.01.

European Embedded Value 86


Group embedded value - summary (continued)

	Covered business
		Insurance		Non-
	UK	overseas		covered
	business	business	LGA	business	Total
For the six months ended 30 June 2014	£m	£m	£m	£m	£m


At 1 January 2014
Value of in-force business (VIF)	4,693	197	699	-	5,589
Shareholder net worth (SNW)	3,249	315	234	199	3,997


Embedded value at 1 January 2014	7,942	512	933	199	9,586
Exchange rate movements	-	(19)	(30)	12	(37)

Operating profit after tax for the period	539	11	47	68	665
Non-operating profit/(loss) for the period	59	3	(1)	(7)	54


Profit for the period	598	14	46	61	719
Intra-group distributions¹	18	(15)	(44)	41	-
Dividends to equity holders of the Company	-	-	-	(408)	(408)
Transfer to non-covered business²	(15)	-	-	15	-
Other reserve movements including pension deficit³	12	-	-	(29)	(17)


Embedded value at 30 June 2014	8,555	492	905	(109)	9,843


Value of in-force business^4,5	4,928	167	717	-	5,812
Shareholder net worth^6,7	3,627	325	188	(109)	4,031


Embedded value per share (p)⁸					166



Additional value of LGIM

				30.06.14	30.06.14
Indicative valuation including LGIM				p per share	£bn


EEV as reported				166	9.9
LGIM VIF				30	1.7


Total including LGIM				196	11.6



				30.06.14	30.06.14
Estimated LGIM discounted cash flow valuation				p per share	£bn


Look through value of profits on covered business				5	0.3
Net asset value				10	0.6


Current value of LGIM in Group embedded value				15	0.9


LGIM VIF				30	1.7


Alternative discounted value of LGIM future cash flows				45	2.6


1. UK intra-group distributions primarily reflect €18m dividend from LGN and £4m dividend from Nationwide Life paid to Society. Dividends of $73m from LGA and €2m from LGF were paid to the group.
2. The transfer to non-covered business represents the IFRS profits arising in the period from the provision of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
3. The other reserve movements reflect the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.
4. Value of inforce business are shown net of cost of capital, which consists of £449m from UK covered business; £66m from Insurance overseas covered business and £12m from LGA.
5. The time value of options and guarantees deduction included in value of inforce business is £14m.
6. Shareholder net worth of Insurance overseas is made up of £74m of free surplus and £251m of required capital.
7. Shareholder net worth of LGA is made up of £139m of free surplus and £49m of required capital.
8. The number of shares in issue at 30 June 2014 was 5,935,497,507.

Further analysis of the UK covered business can be found in Note 5.01.

European Embedded Value 87


Group embedded value - summary (continued)
	Covered business
		Insurance		Non-
	UK	overseas		covered
	business	business	LGA	business	Total
For the year ended 31 December 2014	£m	£m	£m	£m	£m


At 1 January 2014
Value of in-force business (VIF)	4,693	197	699	-	5,589
Shareholder net worth (SNW)	3,249	315	234	199	3,997


Embedded value at 1 January 2014	7,942	512	933	199	9,586
Exchange rate movements	-	(30)	44	(16)	(2)

Operating profit after tax for the year	1,264	31	(68)	107	1,334
Non-operating profit/(loss) for the year	709	(11)	(11)	(5)	682


Profit for the year	1,973	20	(79)	102	2,016
Intra-group distributions¹	(641)	(30)	(46)	717	-
Dividends to equity holders of the Company	-	-	-	(580)	(580)
Transfer to non-covered business²	(26)	-	-	26	-
Other reserve movements including pension deficit³	389	-	(125)	(309)	(45)


Embedded value at 31 December 2014	9,637	472	727	139	10,975


Value of in-force business^4,5	6,118	147	518	-	6,783
Shareholder net worth^6,7	3,519	325	209	139	4,192


Embedded value per share (p)⁸					185


Additional value of LGIM

				31.12.14	31.12.14
Indicative valuation including LGIM				p per share	£bn


EEV as reported				185	11
LGIM VIF				27	1.6


Total including LGIM				212	12.6



				31.12.14	31.12.14
Estimated LGIM discounted cash flow valuation				p per share	£bn


Look through value of profits on covered business				6	0.4
Net asset value				8	0.5


Current value of LGIM in Group embedded value				14	0.9


LGIM VIF				27	1.6


Alternative discounted value of LGIM future cash flows				41	2.5


1. UK intra-group distributions primarily reflect a £675m dividend paid from Society to Group, and dividends of €35m from LGN and £5m from Nationwide Life paid to Society. Dividends of $76m from LGA and €2m from LGF were paid to Group.
2. The transfer to non-covered business represents the IFRS profits arising in the year from the provision of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
3. The other reserve movements primarily reflect the effect of reinsurance arrangement transactions between UK and US covered business, pension deficit movement, movement in the savings related share options scheme and intragroup capital contribution.
4. Value of inforce business are shown net of cost of capital, which consists of £545m from UK covered business; £60m from Insurance overseas covered business and £11m from LGA.
5. The time value of options and guarantees deduction included in value of inforce business is £43m.
6. Shareholder net worth of Insurance overseas is made up of £90m of free surplus and £235m of required capital.
7. Shareholder net worth of LGA is made up of £161m of free surplus and £48m of required capital.
8. The number of shares in issue at 31 December 2014 was 5,942,070,229.

Further analysis of the UK covered business can be found in Note 5.01.

European Embedded Value 88

5.01 UK covered business embedded value reconciliation

	Shareholder net worth				Total
	Free	Required		Value of	embedded
	surplus	capital	Total	in-force	value
For the six months ended 30 June 2015	£m	£m	£m	£m	£m


At 1 January 2015	887	2,632	3,519	6,118	9,637

Operating profit/(loss) after tax:
- New business contribution¹	(67)	72	5	119	124
- Expected return on VIF	-	-	-	185	185
- Expected transfer from VIF to SNW²	463	(108)	355	(355)	-
- Expected return on SNW	10	73	83	-	83
Generation of embedded value	406	37	443	(51)	392
- Experience variances	52	-	52	(62)	(10)
- Operating assumption changes	28	4	32	9	41
- Development costs	(7)	-	(7)	-	(7)
Variances	73	4	77	(53)	24


Operating profit after tax	479	41	520	(104)	416
Non-operating profit/(loss) after tax:
- Economic variances	64	4	68	(20)	48
- Other taxation impacts³	-	-	-	-	-

Non-operating profit/(loss) after tax	64	4	68	(20)	48


Profit for the period	543	45	588	(124)	464
Intra-group distributions⁴	(282)	-	(282)	-	(282)
Transfer to non-covered business⁵	(17)	-	(17)	-	(17)
Other reserve movements including pension deficit	(13)	(4)	(17)	30	13


Embedded value at 30 June 2015	1,118	2,673	3,791	6,024	9,815


1. The UK free surplus reduction of £67m to finance new business primarily reflects £72m additional required capital in relation to new business.
2. The increase in UK free surplus of £463m from the expected transfer from the in-force non profit business includes £355m of operational cash generation and a £108m reduction in required capital. The £549m operational cash generation from Insurance, Savings, LGR and LGIM per Note 2.01 also includes an £18m dividend from LGN, £1m dividend from LGF and £175m primarily reflecting profit from non-covered business.
3. The impact of the further corporation tax reductions announced on 8 July 2015 have not been included in the H1 15 results as they were not known at the reporting date. The impact will be included in the FY 15 results.
4. Intra-group distributions primarily reflect a £300m declared dividend from Society to Group and dividends of €23m from LGN to Society.
5. The transfer to non-covered business represents the IFRS profits arising in the year from the provision of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look-through basis.

The value of in-force business of £6,024m is comprised of £5,685m of non profit business and £339m of with-profits business.

European Embedded Value 89

5.01 UK covered business embedded value reconciliation (continued)

	Shareholder net worth				Total
	Free	Required		Value of	embedded
	surplus	capital	Total	in-force	value
For the six months ended 30 June 2014	£m	£m	£m	£m	£m


At 1 January 2014	1,107	2,142	3,249	4,693	7,942

Operating profit/(loss) after tax:
- New business contribution¹	(195)	184	(11)	305	294
- Expected return on VIF	-	-	-	157	157
- Expected transfer from VIF to SNW²	457	(113)	344	(344)	-
- Expected return on SNW	26	62	88	-	88
Generation of embedded value	288	133	421	118	539
- Experience variances	(6)	3	(3)	34	31
- Operating assumption changes	11	-	11	(31)	(20)
- Development costs	(11)	-	(11)	-	(11)
Variances	(6)	3	(3)	3	-


Operating profit after tax	282	136	418	121	539
Non-operating profit/(loss) after tax - UK business:
- Economic variances	(30)	42	12	26	38
- Effect of tax rate changes and other taxation impacts³	(12)	-	(12)	33	21

Non-operating profit/(loss) after tax	(42)	42	-	59	59


Profit for the period	240	178	418	180	598
Intra-group distributions⁴	18	-	18	-	18
Transfer to non-covered business⁵	(15)	-	(15)	-	(15)
Other reserve movements including pension deficit⁶	(56)	13	(43)	55	12


Embedded value at 30 June 2014	1,294	2,333	3,627	4,928	8,555


1. The free surplus reduction of £195m to finance new business includes £11m new business strain and £184m additional required capital.
2. The increase in free surplus of £457m from the expected transfer from the in-force covered business includes £344m of operational cash generation and a £113m reduction in required capital. The £508m operational cash generation from Insurance, Savings, LGR and LGIM per Note 2.01 also includes a £14m dividend from LGN, £1m dividend from LGF and £149m primarily reflecting profit from non-covered business.
3. Reflects the implementation of the UK reductions in corporation tax to 20% on 1 April 2015.
4. Intra-group distributions primarily reflect £4m dividends from the non-covered subsidiary, Nationwide Life, to Society.
5. The transfer to non-covered business represents the IFRS profits arising in the period from the provision of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
6. The other reserve movements reflects the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.

The UK value of in-force business of £4,928m is comprised of £4,510m of non profit business and £419m of with-profits business.

European Embedded Value 90

5.01 UK covered business embedded value reconciliation (continued)

	Shareholder net worth				Total
	Free	Required		Value of	embedded
	surplus	capital	Total	in-force	value
For the year ended 31 December 2014	£m	£m	£m	£m	£m


At 1 January 2014	1,107	2,142	3,249	4,693	7,942

Operating profit/(loss) after tax:
Contribution from new risks after cost of capital
- New business contribution¹	(340)	343	3	607	610
- Intragroup transfer from With-Profit to Non Profit Fund	-	-	-	80	80
- Expected return on VIF	-	-	-	317	317
- Expected transfer from VIF to SNW²	901	(213)	688	(688)	-
- Expected return on SNW	55	116	171	-	171
Generation of embedded value	616	246	862	316	1,178
- Experience variances	175	(83)	92	(6)	86
- Operating assumption changes	171	(109)	62	(36)	26
- Development costs	(26)	-	(26)	-	(26)
Variances	320	(192)	128	(42)	86


Operating profit after tax	936	54	990	274	1,264
Non-operating profit/(loss) after tax:
- Economic variances	(359)	219	(140)	851	711
- Effect of tax rate changes and other taxation impacts³	(12)	-	(12)	10	(2)

Non-operating profit/(loss) after tax	(371)	219	(152)	861	709


Profit for the year	565	273	838	1,135	1,973
Intra-group distributions⁴	(641)	-	(641)	-	(641)
Transfer to non-covered business⁵	(26)	-	(26)	-	(26)
Other reserve movements including pension deficit⁶	(118)	217	99	290	389


Embedded value at 31 December 2014	887	2,632	3,519	6,118	9,637


1. The UK free surplus reduction of £340m to finance new business reflects £343m additional required capital in relation to new business.
2. The increase in UK free surplus of £901m from the expected transfer from the in-force covered business includes £688m of operational cash generation and a £213m reduction in required capital. The £1,026m operational cash generation from Insurance, Savings, LGR and LGIM per Note 2.01 also includes £29m dividend from LGN, £2m dividend from LGF and £307m primarily reflecting profit from non-covered business.
3. Reflects the implementation of the UK planned future reductions in corporation tax to 20% on 1 April 2015.
4. Intra-group distributions primarily reflect £675m dividends paid from Society to Group and dividends of €35m from LGN and £5m from Nationwide to Society.
5. The transfer to non-covered business represents the IFRS profits arising in the year from the provision of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
6. The other reserve movements reflect the pension deficit movement, the effect of reinsurance arrangement transactions between UK and US covered business and intragroup capital contribution.

The value of in-force business of £6,118m is comprised of £5,778m of non profit business and £340m of with-profits business.

European Embedded Value 91

5.02 Reconciliation of shareholder net worth

	UK		UK		UK
	covered		covered		covered
	business	Total	business	Total	business	Total
	30.06.15	30.06.15	30.06.14	30.06.14	31.12.14	31.12.14
	£m	£m	£m	£m	£m	£m


SNW of long term operations (IFRS basis)	4,700	5,989	4,645	5,820	4,693	5,889
Other assets/(liabilities) (IFRS basis)	-	43	-	(109)	-	139


Shareholders' equity on the IFRS basis	4,700	6,032	4,645	5,711	4,693	6,028
Purchased interest in long term business	(42)	(48)	(51)	(54)	(46)	(49)
Deferred acquisition costs/deferred income liabilities	(189)	(1,217)	(212)	(1,140)	(201)	(1,255)
Deferred tax¹	(36)	399	(123)	282	(16)	444
Other²	(642)	(889)	(632)	(768)	(911)	(976)


Shareholder net worth on the EEV basis	3,791	4,277	3,627	4,031	3,519	4,192


1. Deferred tax represents all tax which is expected to be paid under legislation in force at the balance sheet date. 2. Other primarily relates to the different treatment of annuities and LGA Triple X securitisation between the EEV and IFRS basis.

European Embedded Value 92

5.03 Profit/(loss) for the period

		Covered business
			Insurance		Non-
		UK	overseas		covered
		business	business	LGA	business	Total
For the six months ended 30 June 2015	Note	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new business after cost of capital	5.04	155	-	41	-	196
Contribution from in-force business:
- expected return¹		205	4	29	-	238
- experience variances ²		(22)	(2)	12	-	(12)
- operating assumption changes³		50	1	(1)	-	50
Development costs		(9)	-	-	-	(9)
Contribution from shareholder net worth⁴		98	1	3	-	102


Operating profit/(loss) on covered business		477	4	84	-	565

Business reported on an IFRS basis⁵		-	-	-	107	107


Total operating profit/(loss)		477	4	84	107	672
Economic variances⁶		57	1	(7)	(55)	(4)
Other variances⁷		-	(51)	-	-	(51)
Gains on non-controlling interests		-	-	-	8	8


Profit/(loss) before tax		534	(46)	77	60	625
Tax (expense)/credit on profit from ordinary activities		(70)	(1)	(27)	(7)	(105)
Other taxation impacts⁸		-	-	-	-	-


Profit/(loss) for the period		464	(47)	50	53	520



Operating profit on covered business before tax attributable to:
Insurance		150
Savings		40
LGR		178
LGIM⁹		11
LGC		98


Total		477



						p


Earnings per share
Based on profit attributable to equity holders of the Company						8.66

Diluted earnings per share
Based on profit attributable to equity holders of the Company						8.60


1. The expected return on in-force for UK covered business is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK covered business was £6,118m in 2015 (2014: £4,693m). This is adjusted for the effects of opening model changes of £(15)m (H1 14: £4m; FY 14: £(30)m) to give an adjusted opening base VIF of £6,103m (H1 14: £4,697m; FY 14: £4,663m). This is then multiplied by the opening risk discount rate of 5.5% (2014: 6.8%) and the result grossed up at the notional attributed tax rate of 20% (2014: 20%) to give a return of £205m (H1 14: £196m; FY 14: £397m). The same approach has been applied for the Insurance overseas businesses.
2. UK covered business variance primarily reflects the impact from annuities expense experience and selective longevity and asset reinsurance related to bulk annuity transactions.
3. UK covered business operating assumption change primarily reflects a change in mortality reserving assumptions in relation to unreported deaths of deferred annuitants.
4. Contribution from shareholder net worth reflects the returns on shareholder funds' assets of covered business.
5. Non-covered business operating profit primarily reflects: LGIM business excluding Workplace savings, GI and LGC non-covered business, which comprises of Group debt costs, investment projects and expenses, partly offset by investment returns from non-covered shareholder assets.
6. The UK covered positive variance has resulted from a number of factors including favourable default experience, enhanced yield on annuity assets offset by a higher risk free rate.
7. Other variances primarily reflect the recognition of impairment losses arising on the classification of LGF as Held for Sale.
8. The impact of the further corporation tax rate reductions announced on 8 July 2015 has not been included in the H1 15 results as they were not known at the reporting date. The impact will be included in the FY 15 results.
9. LGIM figures are the Workplace Savings results, other areas of LGIM are not included in covered business.

European Embedded Value 93

5.03 Profit/(loss) for the period (continued)

		Covered business
			Insurance		Non-
		UK	overseas		covered
		business	business	LGA	business	Total
For the six months ended 30 June 2014	Note	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new business after cost of capital	5.04	368	2	51	-	421
Contribution from in-force business:
- expected return¹		196	14	28	-	238
- experience variances ²		46	(4)	(10)	-	32
- operating assumption changes³		(24)	1	-	-	(23)
Development costs		(14)	-	-	-	(14)
Contribution from shareholder net worth		87	3	3	-	93


Operating profit on covered business		659	16	72	-	747

Business reported on an IFRS basis⁴		-	-	-	103	103


Total operating profit		659	16	72	103	850
Economic variances⁵		68	2	(2)	(60)	8
Gains on non-controlling interests		-	-	-	6	6


Profit before tax		727	18	70	49	864
Tax (expense)/credit on profit from ordinary activities		(150)	(4)	(24)	12	(166)
Effect of tax rate changes and other taxation impacts⁶		21	-	-	-	21


Profit for the period		598	14	46	61	719



Operating profit on covered business before tax attributable to:
Insurance		88
Savings		44
LGR		430
LGIM⁷		10
LGC		87


Total		659



						p


Earnings per share
Based on profit attributable to equity holders of the Company						12.12

Diluted earnings per share
Based on profit attributable to equity holders of the Company						11.99


1.The expected return on in-force for UK covered business is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK covered business was £4,693m in 2014. This is adjusted for the effects of opening model changes of £4m to give an adjusted opening base VIF of £4,697m. This is then multiplied by the opening risk discount rate of 6.8% and the result grossed up at the notional attributed tax rate of 20% to give a return of £196m. The same approach has been applied for the Insurance overseas businesses.
2. UK covered business variance primarily reflects cost of capital unwind, bulk purchase annuity data loading and fewer retail protection lapses. LGA experience variance primarily relates to adverse mortality experience within term assurance and universal life products.
3. UK covered business assumption changes primarily reflect mortality reserves strengthening partly offset by a reduction in prudence margin in the regulatory morbidity reserves within retail protection.
4. Non covered business operating profit primarily reflect LGIM business excluding Workplace savings, GI and LGC non covered business.
5. The UK covered business positive variance has resulted from a number of factors including lower risk discount rate and enhanced yield on annuity assets offset by a lower risk free rate and a narrowing credit spread. Non covered business variance primarily reflects lower equity return from shareholder funds.
6. Other taxation impacts reflects the change in the treatment of deferred tax on in-force business to align with IFRS by removing the effect of discounting.
7. LGIM figures are the Workplace Savings results, other areas of LGIM are not included in covered business.

European Embedded Value 94

5.03 Profit/(loss) for the year (continued)

		Covered business
			Insurance		Non-
		UK	overseas		covered
		business	business	LGA	business	Total
For the year ended 31 December 2014	Note	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new risks after cost of capital:
- contribution from new business	5.04	753	7	90	-	850
- intra-group transfer from With-Profit to Non Profit Fund		100				100
Contribution from in-force business:
- expected return¹		397	27	66	-	490
- experience variances²		32	(11)	(23)	-	(2)
- operating assumption changes³		42	16	(241)	-	(183)
Development costs		(32)	-	-	-	(32)
Contribution from shareholder net worth		184	7	3	-	194


Operating profit on covered business		1,476	46	(105)	-	1,417

Business reported on an IFRS basis⁴		-	-	-	164	164


Total operating profit		1,476	46	(105)	164	1,581
Economic variances⁵		863	(18)	(17)	(38)	790
Gains on non-controlling interests		-	-	-	7	7


Profit before tax		2,339	28	(122)	133	2,378
Tax (expense)/credit on profit from ordinary activities		(364)	(8)	43	(31)	(360)
Effect of tax rate changes and other taxation impacts⁶		(2)	-	-	-	(2)


Profit for the year		1,973	20	(79)	102	2,016



Operating profit on covered business before tax attributable to:
Insurance		232
Savings		22
LGR		1,011
LGIM⁷		27
LGC		184


Total		1,476



						p


Earnings per share
Based on profit attributable to equity holders of the Company						34.07

Diluted earnings per share
Based on profit attributable to equity holders of the Company						33.73


1. The expected return on in-force for UK covered business is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK covered business was £4,693m in 2014. This is adjusted for the effects of opening model changes of £(30)m to give an adjusted opening base VIF of £4,663m. This is then multiplied by the opening risk discount rate of 6.8% and the result grossed up at the notional attributed tax rate of 20% to give a return of £397m. The same approach has been applied for the Insurance overseas businesses.
2. UK covered business variance primarily reflects UK cost of capital unwind and favourable mortality experience for bulk annuities. LGA experience variance primarily relates to adverse mortality experience within term assurance and universal life products respectively.
3. UK covered operating assumption change primarily reflects mortality assumptions changes for non-profit annuities. LGA operating assumption change primarily incorporates an adjustment to our mortality assumptions to reflect the changes in industry wide mortality tables (which were issued in the second half of 2014).
4. Non covered business operating profit primarily reflect LGIM business excluding Workplace savings, GI and LGC non covered business.
5. The UK covered business positive variance has resulted from a number of factors including lower risk discount rate, favourable default experience and enhanced yield on annuity assets offset by a lower risk free rate. Non covered variance primarily reflects lower equity return from shareholder funds.
6. Other taxation impacts reflects the change in the treatment of deferred tax on in-force business to align with IFRS by removing the effect of discounting.
7. LGIM figures are the Workplace Savings results, other areas of LGIM are not included in covered business.

European Embedded Value 95

5.04 New business by product¹

		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the six months ended 30 June 2015	£m	£m		£m	£m	£m	%


UK Insurance	119	638	5.4	-	638	54	8.5
Overseas Insurance	37	69	1.9	195	264	-	-


Insurance	156	707	4.5	195	902	54	6.0


Savings	26	78	3.0	786	864	5	0.6


LGR⁴	n/a	-	n/a	1,292	1,292	93	7.2


LGIM⁵	324	1,286	4.0	277	1,563	3	0.2


LGA	41	404	9.9	-	404	41	10.1


Total new business	547	2,475	4.5	2,550	5,025	196	3.9
Cost of capital						40


Contribution from new business before cost of capital						236




		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the six months ended 30 June 2014	£m	£m		£m	£m	£m	%


UK Insurance	123	668	5.4	-	668	62	9.3
Overseas Insurance	38	266	7.0	180	446	2	0.4


Insurance	161	934	5.8	180	1,114	64	5.7


Savings	36	89	2.4	862	951	6	0.6


LGR	n/a	-	n/a	3,518	3,518	295	8.4


LGIM⁵	305	1,123	3.7	558	1,681	5	0.3


LGA	47	474	10.1	-	474	51	10.8


Total new business	549	2,620	4.8	5,118	7,738	421	5.4
Cost of capital						82


Contribution from new business before cost of capital						503


1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at the point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.
4. LGR for H1 15 includes bulk annuities' single premiums and contribution from new business on a net of quota share reinsurance basis to provide a more representative margin figure.
5. LGIM figures are the Workplace Savings results, other areas of LGIM are not included in covered business.

European Embedded Value 96

5.04 New business by product (continued)¹

		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the year ended 31 December 2014	£m	£m		£m	£m	£m	%


UK Insurance	230	1,336	5.8	-	1,336	112	8.4
Overseas Insurance	41	300	7.3	394	694	7	1.0


Insurance	271	1,636	6.0	394	2,030	119	5.9


Savings	63	171	2.7	1,678	1,849	9	0.5


LGR	n/a	-	n/a	6,578	6,578	614	9.3


LGIM⁴	591	2,277	3.9	1,060	3,337	18	0.5


LGA	91	907	10.0	-	907	90	9.9


Total new business	1,016	4,991	4.9	9,710	14,701	850	5.8
Cost of capital						108


Contribution from new business before cost of capital						958


1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at the point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.
4. LGIM figures are the Workplace Savings results, other areas of LGIM are not included in covered business.

European Embedded Value 97

5.05 Assumptions

UK assumptions

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

For LGR, separate returns are calculated for new and existing business. An indicative combined yield, after allowance for long term default risk and the following additional assumptions, is also shown below. These additional assumptions are:

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

ii. Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the proceeds reinvested in corporate bonds with a redemption yield of 0.70% p.a. (0.70% p.a. at 30 June 2014; 0.70% p.a. at 31 December 2014) greater than the swap rate at that time (i.e. the long term credit rate).

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

The returns on fixed and index-linked securities are calculated net of an allowance for default risk which takes account of the credit rating, outstanding term of the securities. The allowance for corporate securities expressed as a level rate deduction from the expected returns for annuities was 21bps at 30 June 2015 (26bps at 30 June 2014; 21bps at 31 December 2014).

UK covered business

i. Assets are valued at market value.

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

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

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

An allowance is made for future mortality improvement. For new business, mortality assumptions may be modified to take certain scheme specific features into account.

v. Development costs relate to investment in strategic systems and development capability that are charged to the covered business.

Overseas covered business

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

European Embedded Value 98

5.05 Assumptions (continued)

Economic assumptions


		As at	As at	As at
		30.06.2015	30.06.2014	2014
		% p.a.	% p.a.	% p.a.
	Risk margin	3.3	3.3	3.3
	Risk free rate¹
	- UK	2.5	3.2	2.2
	- Europe	1.0	1.4	0.6
	- US	2.4	2.5	2.2
	Risk discount rate (net of tax)
	- UK	5.8	6.5	5.5
	- Europe	4.3	4.7	3.9
	- US	5.7	5.8	5.5
	Reinvestment rate (US)	5.6	5.0	5.0
Other UK business assumptions
	Equity risk premium	3.3	3.3	3.3
	Property risk premium	2.0	2.0	2.0

Investment return (excluding annuities in LGR )
	- Fixed interest:
	-Gilts & non gilts	2.0 - 2.7	2.2 - 3.3	1.7 - 2.4
	- Equities	5.8	6.5	5.5
	- Property	4.5	5.2	4.2

	Long-term rate of return on non profit annuities in LGR	4.0	4.3	3.6

	Inflation²
	- Expenses/earnings	3.9	3.9	3.7
	- Indexation	3.4	3.4	3.2

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

2. The LGR inflation rate has been set with reference to a curve.

Tax

vii. The profits on the covered business, except for the profits on the Society shareholder capital held outside the long term fund, are calculated on an after tax basis and are grossed up by the notional attributed tax rate for presentation in the income statement. The tax rate used for grossing up is the long term corporate tax rate in the territory concerned, which for the UK is 20% (30 June 2014: 20%; 31 December 2014: 20%). The impact of the further corporation tax reductions from the Budget announcement on 8 July 2015 has not been included in the H1 15 results as they were not known at the reporting date. The impact will be included in the FY 15 results. The profits on the Society shareholder capital held outside the long term fund are calculated before tax and therefore tax is calculated on an actual basis.

US, Netherlands and France covered business profits are also grossed up using the long term corporate tax rates of the respective territories i.e. US is 35% (30 June 2014: 35%; 31 December 2014: 35%), France is 34.43% (30 June 2014: 34.43%; 31 December 2014: 34.43%) and Netherlands is 25% (30 June 2014: 25%; 31 December 2014: 25%).

European Embedded Value 99

5.05 Assumptions (continued)

Stochastic calculations

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

A single model has been used for UK and international business, with different economic assumptions for each territory reflecting the significant asset classes in each territory.

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

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

The significant asset classes are:

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

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

- International business - fixed rate bonds of various durations.

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

European Embedded Value 100

5.06 Methodology

Basis of preparation

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

Due to the current uncertainty surrounding the final Solvency II outcome, the Group has not reflected Solvency II requirements within the EEV results.

The supplementary financial information has been reviewed by PricewaterhouseCoopers LLP.

Covered business

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

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

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

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

European Embedded Value 101

5.06 Methodology (continued)

Description of methodology

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

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

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

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

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

Embedded value

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

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

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

Service companies

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

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

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

New business

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

In-force business comprises previously written single premium, regular premium, recurrent single premium contracts and payments in relation to existing longevity insurance. Longevity insurance product comprises the exchange of a stream of fixed leg payments for a stream of floating payments, with the value of the income stream being the difference between the two legs. New business annual premiums have been excluded for longevity insurance due to the unpredictable deal flow from this type of business.

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

The present value of future new business premiums (PVNBP) has been calculated and expressed at the point of sale. The PVNBP is equivalent to total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end of the financial period. 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.

The new business margin is defined as new business contribution at the end of the reporting period divided by the PVNBP. The premium volumes and projection assumptions used to calculate the PVNBP are the same as those used to calculate new business contribution.

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

European Embedded Value 102

5.06 Methodology (continued)

Projection assumptions

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

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

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

Tax

The projections take into account all tax which is expected to be paid, based on best estimate assumptions, applying current legislation and practice together with known future changes. The impact of the further corporation tax reductions from Budget announcement on 8 July 2015 have not been included in the H1 15 results as they were not known at the reporting date. The impact will be included in the FY15 results.

Allowance for risk

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

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

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

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

Required capital and free surplus

Due to the current uncertainty surrounding the final Solvency II outcome, the Group has not reflected Solvency II requirements within the EEV results.

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

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

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

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

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

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

For LGN, required capital has been set at 104% of EU minimum solvency margin for all products without FOGs. For those products with FOGs, capital of between 104% and 563% of the EU minimum solvency margin has been used. These capital requirements have been scaled up by a factor of 1.0 at the total level to ensure the total requirement meets the 160% Solvency I from the capital policy for the EEV, for the NBVA no scaling is applied. The level of capital has been determined using risk based capital techniques.

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

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

European Embedded Value 103

5.06 Methodology (continued)

Financial options and guarantees

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

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

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

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

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

LGA FOGs relate to guaranteed minimum crediting rates and surrender values on a range of contracts, as well as impacts on no-lapse guarantees (NLG). The guaranteed surrender value of the contract is based on the accumulated value of the contract including accrued interest. The crediting rates are discretionary but related to the accounting income for the amortising bond portfolio. The majority of the guaranteed minimum crediting rates are between 3% and 4%. The assets backing these contracts are invested in US Dollar denominated fixed interest securities.

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

For LGF, FOGs which have been separately provided for relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the contract including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios plus income and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed surrender values. In general, the guaranteed annual bonus rates are between 0% and 4.5%.

Risk free rate

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

European Embedded Value 104

5.06 Methodology (continued)

Risk discount rate

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

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

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

The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and subordinated long term debt. All debt interest attracts tax relief at a rate of 20.0% (2014: 20.1%).

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

Analysis of profit

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

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

i. new business;

ii. the management of in-force business;

iii. development costs; and

iv. return on shareholder net worth.

Further profit contributions arise from actual investment return differing from the assumed long term investment return, and from the effect of economic assumption changes. These are shown below operating profit.

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

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

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

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

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

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

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

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

Economic variances represent:

i. the effect of actual investment performance and changes to investment policy on SNW and VIF business from that assumed at the beginning of the period; and

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

European Embedded Value 105

Independent review report to Legal & General Group Plc - EEV

Report on the supplementary interim financial information

Our conclusion

We have reviewed the supplementary interim financial information in the interim management report of Legal & General Group Plc for the six months ended 30 June 2015 (the "supplementary interim financial information). Based on our review, nothing has come to our attention that causes us to believe that the supplementary interim financial information is not prepared, in all material respects, in accordance with the European Embedded Value ("EEV") basis set out in Note 5.06.

What we have reviewed

Legal & General Group Plc's supplementary interim financial information comprises:

· the Group embedded value summary as at 30 June 2015 and

· the explanatory notes to the supplementary interim financial information.

As disclosed in Note 5.06 the supplementary interim financial information has been prepared on the European Embedded Value ("EEV") basis.

Responsibilities for the supplementary interim financial information and the review

Our responsibilities and those of the directors

The interim management report, including the supplementary interim financial information, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the supplementary interim financial information in accordance with the EEV basis set out in Note 5.06.

Our responsibility is to express to the company a conclusion on the supplementary interim financial information in the interim management report based on our review. This report, including the conclusion, has been prepared for and only for the company and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of supplementary interim financial information involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of supplementary interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the interim management report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the supplementary interim financial information.

PricewaterhouseCoopers LLP

Chartered Accountants

4 August 2015

London

Notes:

(a) The maintenance and integrity of the Legal & General Group Plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial information since it was initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions.

This information is provided by RNS

The company news service from the London Stock Exchange

END

IR PKQDNABKDPFK

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