European Embedded Value |
Page 51 |
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Consolidated income statement |
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For the six months ended 30 June 2009 |
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Full year |
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30.06.09 |
30.06.08 |
31.12.08 |
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Restated5,6 |
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Notes |
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£m |
£m |
£m |
From continuing operations1 |
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Risk |
4.01 |
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460 |
267 |
439 |
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Savings |
4.01 |
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28 |
87 |
50 |
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Investment management |
4.02 |
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58 |
72 |
130 |
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International |
4.03 |
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87 |
58 |
100 |
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Group capital and financing2 |
4.04 |
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24 |
105 |
151 |
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Operating profit |
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657 |
589 |
870 |
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Variation from longer term investment return3 |
4.07 |
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(1,019) |
(474) |
(1,579) |
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Effect of economic assumption changes4 |
4.08 |
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(630) |
(12) |
(609) |
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Property losses attributable to minority interests |
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(20) |
(13) |
(63) |
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(Loss)/profit from continuing operations before tax attributable to equity holders of |
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the Company |
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(1,012) |
90 |
(1,381) |
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Tax credit/(expense) on (loss)/profit from ordinary activities |
4.10 |
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292 |
(17) |
327 |
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Tax impact of corporate restructure |
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- |
- |
81 |
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(Loss)/profit from ordinary activities after tax |
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(720) |
73 |
(973) |
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Loss attributable to minority interests |
3.15 |
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20 |
13 |
63 |
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(Loss)/profit attributable to equity holders of the Company |
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(700) |
86 |
(910) |
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Restated |
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p |
p |
p |
Earnings per share |
4.11 |
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Based on operating profit from continuing operations after tax attributable to |
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equity holders of the Company |
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8.28 |
6.87 |
10.66 |
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Based on (loss)/profit attributable to equity holders of the Company |
(12.02) |
1.42 |
(15.25) |
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Diluted earnings per share |
4.11 |
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Based on operating profit from continuing operations after tax attributable to |
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equity holders of the Company |
8.27 |
6.84 |
10.62 |
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Based on (loss)/profit attributable to equity holders of the Company |
(12.02) |
1.41 |
(15.25) |
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1. IFRS 8 segmentation was adopted for 2008 year end reporting to further improve shareholders' understanding of the Group's performance. The H1 08 comparatives have been reclassified to reflect these changes. |
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2. Group capital and financing includes operating profit on the shareholder assets held within the covered business, reported on an embedded value basis, and operating profit on the shareholder assets held outside the covered business reported on an IFRS basis. |
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3. The H1 09 variation from longer term investment return includes a £(511)m variance reflecting the EEV impact of asset allocation decisions made during the period. Of this amount, £(335)m is the EEV impact of swap transactions undertaken to improve the IFRS matching of annuity business which reduced the assumed future yield on the annuity assets for EEV purposes, £(96)m is due to an increased cost of capital arising from de-risking activity to reduce the equity ratio for assets backing solvency capital and £(80)m is the EEV impact of holding additional cash balances, largely to back the short term default provision. The remaining amount reflects the EEV impact of investment performance relative to assumptions, including £(228)m due to the impact of action taken to sell a number of credits and the impact on investment performance of the holdings in cash during a period when credit spreads have narrowed, £(117)m for Group capital and financing and £(103)m for with-profit business. |
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4. H1 09 economic assumption changes include £(221)m relating to the increase in the UK risk discount rate in the first half of 2009 from 8.3% to 8.8%, £(129)m reflecting the increase in the US risk discount rate from 6.8% to 8.0% and £(119)m as a result of the higher cost of capital on increased annuity reserves. In addition, further increases in the realistic and statutory long term default provisions for the assets backing annuity business had an EEV impact of £(179)m. |
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FY 08 economic assumption changes includes £(361)m relating to the 0.8% increase in the UK risk discount rate from 7.5% to 8.3% during the period. It also includes £(272)m to reflect the in-force element of an additional reserve for non profit annuity credit default. |
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5. A contingent loan has been advanced within the Group to finance the non profit pensions and annuity business subject to an internal reinsurance arrangement. From FY 08 the loan asset has been treated as part of the value of in-force business in order to directly offset the liability. Previously the loan asset had been included in free surplus, and the expected return on the loan included in contribution from shareholder net worth. H1 08 comparatives have been restated accordingly. |
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6. From FY 08 the managed pension funds business within Investment management has been reported on an IFRS basis, as management believe IFRS to be the most appropriate reporting basis for the investment management business. Investment management operating profit excludes £12m (H1 08: £19m; FY 08: £35m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis within Risk, Savings and Group capital and financing covered business on an EEV basis. H1 08 comparatives have been restated accordingly. This change has reduced H1 08 operating profit before tax by £37m, shareholders' equity by £323m and increased profit after tax by £17m. |
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European Embedded Value |
Page 52 |
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Consolidated statement of comprehensive income |
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For the six months ended 30 June 2009 |
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Full year |
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30.06.09 |
30.06.08 |
31.12.08 |
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Restated |
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£m |
£m |
£m |
(Loss)/profit from ordinary activities after tax |
(720) |
73 |
(973) |
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Other comprehensive income, after tax |
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Exchange differences on translation of overseas operations |
(93) |
19 |
196 |
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Actuarial (losses)/gains on defined benefit pension schemes |
(52) |
12 |
12 |
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Actuarial losses/(gains) on defined benefit pension schemes transferred to unallocated divisible surplus |
36 |
(8) |
(8) |
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Total comprehensive (expense)/income |
(829) |
96 |
(773) |
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Total comprehensive (expense)/income attributable to: |
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Minority interests |
(20) |
(13) |
(63) |
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Equity holders of the Company |
(809) |
109 |
(710) |
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Consolidated balance sheet |
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As at 30 June 2009 |
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At 30.06.09 |
At 30.06.08 |
At 31.12.08 |
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Restated |
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Notes |
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£m |
£m |
£m |
Assets |
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Investments |
252,431 |
267,674 |
249,185 |
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Long term in-force business asset |
2,466 |
3,008 |
3,160 |
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Other assets |
7,671 |
6,567 |
7,315 |
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262,568 |
277,249 |
259,660 |
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Equity and liabilities |
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Shareholders' equity |
4.13/4.14 |
|
5,556 |
7,458 |
6,521 |
|||||
Minority interests |
3.15 |
|
149 |
175 |
144 |
|||||
Total equity |
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5,705 |
7,633 |
6,665 |
|||||
Subordinated borrowings |
3.14 |
|
1,552 |
1,444 |
1,657 |
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Unallocated divisible surplus |
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902 |
1,411 |
913 |
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Participating contract liabilities |
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15,302 |
17,230 |
16,205 |
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Non-participating contract liabilities |
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227,752 |
241,284 |
222,539 |
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Senior borrowings |
3.14 |
|
1,933 |
1,742 |
2,314 |
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Other liabilities and provisions |
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9,422 |
6,505 |
9,367 |
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262,568 |
277,249 |
259,660 |
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European Embedded Value |
Page 53 |
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Notes to the Financial Statements |
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4.01 (Loss)/profit from ordinary activities after tax |
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Risk and |
Investment |
Inter- |
Group |
Total |
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Savings |
manage- |
national |
capital and |
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ment |
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financing |
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For the six months ended 30 June 2009 |
Notes |
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£m |
£m |
£m |
£m |
£m |
|||
Business reported on an EEV basis: |
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||||
Contribution from new business after cost of capital |
185 |
|
11 |
|
196 |
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Contribution from in-force business: |
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- expected return1 |
244 |
|
60 |
|
304 |
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- experience variances |
4.05 |
|
114 |
|
3 |
|
117 |
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- operating assumption changes |
4.06 |
|
(37) |
|
5 |
|
(32) |
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Development costs |
|
(18) |
|
- |
|
(18) |
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Contribution from shareholder net worth2 |
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8 |
61 |
69 |
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Operating profit on covered business |
|
488 |
- |
87 |
61 |
636 |
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Business reported on an IFRS basis: |
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General insurance |
3.05 |
|
6 |
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6 |
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Core retail investments |
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(1) |
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(1) |
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Investment management3 |
4.02 |
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|
58 |
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58 |
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Group capital and financing |
4.04 |
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(37) |
(37) |
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Other4 |
|
(5) |
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|
(5) |
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Total operating profit |
|
488 |
58 |
87 |
24 |
657 |
||||
Variation from longer term investment return |
4.07 |
|
(885) |
(1) |
(16) |
(117) |
(1,019) |
|||
Effect of economic assumption changes |
4.08 |
|
(515) |
- |
(112) |
(3) |
(630) |
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Property losses attributable to minority interests |
|
- |
- |
- |
(20) |
(20) |
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(Loss)/profit from continuing operations before tax |
|
|
(912) |
57 |
(41) |
(116) |
(1,012) |
|||
Tax credit/(expense) on (loss)/profit from ordinary activities |
|
254 |
(16) |
15 |
39 |
292 |
||||
(Loss)/profit from ordinary activities after tax |
|
|
(658) |
41 |
(26) |
(77) |
(720) |
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Operating profit attributable to: |
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Risk |
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460 |
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Savings |
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28 |
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1. The expected return on in-force is based on the unwind of the discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the Risk and Savings business was £4,268m in 2009. This is adjusted for the effects of opening model changes of £41m to give an adjusted opening base VIF of £4,309m. This is then multiplied by the opening risk discount rate of 8.3% for half a year and the result grossed up at the notional attributed tax rate of 28% to give a return of £244m. |
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2. The H1 09 Group capital and financing contribution from shareholder net worth (SNW) of £61m comprises of the average return of 3% on the average balance of invested assets of £2.2bn (£65m) and an adjustment for opening tax and other modelling changes of £1m, less pre-tax corporate expenses charged to shareholders' funds of £(5)m. |
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3. H1 09 Investment management operating profit excludes £12m (H1 08: £19m; FY 08: £35m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Risk, Savings and Group capital and financing covered business on an EEV basis. |
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4. On an EEV basis Nationwide Life, Suffolk Life, operations in Ireland and business unit costs allocated to the Risk and Savings business are included in the covered business operating profit. These are included within Other Risk and Other Savings within IFRS operating profit. |
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European Embedded Value |
Page 54 |
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Notes to the Financial Statements |
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4.01 (Loss)/profit from ordinary activities after tax (continued) |
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Risk and |
Investment |
Inter- |
Group |
Total |
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Savings |
manage- |
national |
capital and |
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ment |
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financing |
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Restated |
Restated |
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Restated |
Restated |
For the six months ended 30 June 2008 |
Notes |
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£m |
£m |
£m |
£m |
£m |
|||
Business reported on an EEV basis: |
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Contribution from new business after cost of capital |
|
178 |
|
16 |
|
194 |
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Contribution from in-force business: |
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- expected return |
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180 |
|
47 |
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227 |
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- experience variances |
4.05 |
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- |
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(13) |
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(13) |
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- operating assumption changes |
4.06 |
|
18 |
|
- |
|
18 |
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Development costs |
|
(22) |
|
- |
|
(22) |
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Contribution from shareholder net worth |
|
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|
8 |
152 |
160 |
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Operating profit on covered business |
|
354 |
- |
58 |
152 |
564 |
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Business reported on an IFRS basis: |
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General insurance |
3.05 |
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(4) |
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(4) |
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Core retail investments |
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2 |
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2 |
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Investment management1 |
4.02 |
|
|
72 |
|
|
72 |
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Group capital and financing |
4.04 |
|
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(47) |
(47) |
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Other2 |
|
|
2 |
|
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|
2 |
|||
Total operating profit |
|
354 |
72 |
58 |
105 |
589 |
||||
Variation from longer term investment return |
4.07 |
|
13 |
(4) |
(48) |
(435) |
(474) |
|||
Effect of economic assumption changes |
4.08 |
|
- |
- |
(16) |
4 |
(12) |
|||
Property losses attributable to minority interests |
|
- |
- |
- |
(13) |
(13) |
||||
Profit/(loss) from continuing operations before tax |
|
367 |
68 |
(6) |
(339) |
90 |
||||
Tax (expense)/credit on profit/(loss) from ordinary activities |
|
(99) |
(19) |
3 |
98 |
(17) |
||||
Profit/(loss) from ordinary activities after tax |
|
268 |
49 |
(3) |
(241) |
73 |
||||
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|
Operating profit attributable to: |
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||||
Risk |
|
267 |
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Savings |
|
87 |
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1. H1 09 Investment management operating profit excludes £12m (H1 08: £19m; FY 08: £35m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Risk, Savings and Group capital and financing covered business on an EEV basis. |
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2. On an EEV basis Nationwide Life, Suffolk Life, operations in Ireland and business unit costs allocated to the Risk and Savings business are included in the covered business operating profit. These are included within Other Risk and Other Savings within IFRS operating profit. |
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European Embedded Value |
Page 55 |
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Notes to the Financial Statements |
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4.01 (Loss)/profit from ordinary activities after tax (continued) |
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Risk and |
Investment |
Inter- |
Group |
Total |
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Savings |
manage- |
national |
capital and |
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|
ment |
|
financing |
|
For the year ended 31 December 2008 |
Notes |
|
£m |
£m |
£m |
£m |
£m |
|||
Business reported on an EEV basis: |
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|
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|
||||
Contribution from new business after cost of capital |
|
265 |
|
32 |
|
297 |
||||
Contribution from in-force business: |
|
|
|
|
|
|
||||
- expected return |
|
370 |
|
100 |
|
470 |
||||
- experience variances |
4.05 |
|
12 |
|
(34) |
|
(22) |
|||
- operating assumption changes |
4.06 |
|
(100) |
|
(15) |
|
(115) |
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Development costs |
|
(51) |
|
- |
|
(51) |
||||
Contribution from shareholder net worth |
|
|
|
17 |
256 |
273 |
||||
Operating profit on covered business |
|
496 |
- |
100 |
256 |
852 |
||||
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|
|
Business reported on an IFRS basis: |
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General insurance |
3.05 |
|
(2) |
|
|
|
(2) |
|||
Core retail investments |
|
|
- |
|
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|
- |
|||
Investment management1 |
4.02 |
|
|
130 |
|
|
130 |
|||
Group capital and financing |
4.04 |
|
|
|
|
(105) |
(105) |
|||
Other2 |
|
(5) |
|
|
|
(5) |
||||
Total operating profit |
|
489 |
130 |
100 |
151 |
870 |
||||
Variation from longer term investment return |
4.07 |
|
(175) |
7 |
(110) |
(1,301) |
(1,579) |
|||
Effect of economic assumption changes |
4.08 |
|
(505) |
- |
(110) |
6 |
(609) |
|||
Property losses attributable to minority interests |
|
- |
- |
- |
(63) |
(63) |
||||
(Loss)/profit from continuing operations before tax |
|
(191) |
137 |
(120) |
(1,207) |
(1,381) |
||||
Tax credit/(expense) on (loss)/profit from ordinary activities |
54 |
(42) |
37 |
278 |
327 |
|||||
Tax impact of corporate restructure3 |
53 |
- |
- |
28 |
81 |
|||||
(Loss)/profit from ordinary activities after tax |
(84) |
95 |
(83) |
(901) |
(973) |
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|
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Operating profit attributable to: |
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|||||
Risk |
439 |
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|||||
Savings |
50 |
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1. H1 09 Investment management operating profit excludes £12m (H1 08: £19m; FY 08: £35m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Risk, Savings and Group capital and financing covered business on an EEV basis. |
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2. On an EEV basis Nationwide Life, Suffolk Life, operations in Ireland and business unit costs allocated to the Risk and Savings business are included in the covered business operating profit. These are included within Other Risk and Other Savings within IFRS operating profit. |
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3. In 2008 £0.9bn was transferred from Shareholder Retained Capital to shareholder capital held outside Society's long term fund. This transfer did not give rise to any incremental tax and therefore resulted in an £81m benefit to embedded value. |
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European Embedded Value |
Page 56 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.02 Investment management operating profit |
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Full year |
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30.06.09 |
30.06.08 |
31.12.08 |
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Restated |
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|
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|
|
|
|
|
|
£m |
£m |
£m |
Managed pension funds1 |
55 |
63 |
117 |
|||||||
Private equity |
(1) |
- |
(1) |
|||||||
Property |
1 |
4 |
4 |
|||||||
Other income2 |
7 |
8 |
17 |
|||||||
Legal & General Investment Management |
62 |
75 |
137 |
|||||||
Institutional unit trusts3 |
(4) |
(3) |
(7) |
|||||||
Total Investment management operating profit |
58 |
72 |
130 |
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1. The managed pension funds business within Investment management has been reported on an IFRS basis as management believe IFRS to be the most appropriate reporting basis for the investment management business. H1 08 comparatives have been restated accordingly. |
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2. Other income excludes £12m (H1 08: £19m; FY 08: £35m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis within the Risk, Savings and Group capital and financing covered business on an EEV basis. |
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3. Investment management operating profit excludes core retail investments, of £(1)m (H1 08: £2m; FY 08: £nil), which has been disclosed as part of Savings. The H1 08 comparatives have been reclassified accordingly. |
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4.03 International operating profit |
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Full year |
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|
|
|
|
|
30.06.09 |
30.06.08 |
31.12.08 |
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|
|
|
|
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£m |
£m |
£m |
USA |
58 |
26 |
70 |
|||||||
Netherlands |
9 |
17 |
8 |
|||||||
France |
20 |
15 |
22 |
|||||||
Total International operating profit |
87 |
58 |
100 |
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4.04 Group capital and financing operating profit1 |
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Full year |
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30.06.09 |
30.06.08 |
31.12.08 |
|
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Restated |
|
|
|
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|
|
|
|
|
£m |
£m |
£m |
Business reported on an EEV basis |
61 |
152 |
256 |
|||||||
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Business reported on an IFRS basis: |
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|
|||||||
Investment return |
30 |
29 |
47 |
|||||||
Interest expense2 |
(65) |
(66) |
(138) |
|||||||
Unallocated corporate expenses |
(3) |
(6) |
(9) |
|||||||
Defined benefit pension scheme3 |
1 |
(4) |
(5) |
|||||||
|
|
|
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|
|
|
|
(37) |
(47) |
(105) |
Total Group capital and financing operating profit |
24 |
105 |
151 |
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1. Group capital and financing represents operating profit on the shareholder assets held within the covered business, reported on an embedded value basis, and operating profit on the shareholder assets held outside the covered business reported on an IFRS basis. |
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2. Interest expense excludes non recourse financing (see Note 3.14). |
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3. The defined benefit pension scheme income/(expense) includes the actuarial gains and losses arising on annuity assets held by the schemes that have been purchased from Legal & General Assurance Society Limited relating to the non-covered business. Under IFRS, these annuity assets cannot be classified as plan assets in accordance with IAS 19 and so the associated actuarial gains and losses cannot be taken to the statement of comprehensive income. |
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European Embedded Value |
Page 57 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.05 Analysis of experience variances |
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Risk and |
Inter- |
Total |
|
|
|
|
|
|
|
|
Savings |
national |
|
For the six months ended 30 June 2009 |
£m |
£m |
£m |
|||||||
Persistency |
(4) |
1 |
(3) |
|||||||
Mortality/morbidity |
5 |
4 |
9 |
|||||||
Expenses |
(5) |
(1) |
(6) |
|||||||
Other |
118 |
(1) |
117 |
|||||||
|
|
|
|
|
|
|
|
114 |
3 |
117 |
|
|
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|
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|
|
|
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|
|
Full experience investigations are not undertaken at the half-year. A conservative estimate is made of both positive and negative variances. |
||||||||||
|
|
|
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|
|
|
|
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|
|
Risk and Savings other experience variances principally include £57m relating to one off modelling improvements and £39m reflecting a reassessment of future reserve releases as data is loaded onto the BPA system and other reserve releases. |
||||||||||
|
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|
Risk and |
Inter- |
Total |
|
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|
|
|
|
|
Savings |
national |
|
|
|
|
|
|
|
|
|
Restated |
|
Restated |
For the six months ended 30 June 2008 |
£m |
£m |
£m |
|||||||
Persistency |
3 |
1 |
4 |
|||||||
Mortality/morbidity |
11 |
(1) |
10 |
|||||||
Expenses |
(3) |
(1) |
(4) |
|||||||
Other |
(11) |
(12) |
(23) |
|||||||
|
|
|
|
|
|
|
|
- |
(13) |
(13) |
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|
Risk and |
Inter- |
Total |
|
|
|
|
|
|
|
|
Savings |
national |
|
For the year ended 31 December 2008 |
£m |
£m |
£m |
|||||||
Persistency |
(12) |
(5) |
(17) |
|||||||
Mortality/morbidity |
27 |
(12) |
15 |
|||||||
Expenses |
(9) |
1 |
(8) |
|||||||
Other |
6 |
(18) |
(12) |
|||||||
|
|
|
|
|
|
|
|
12 |
(34) |
(22) |
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|
European Embedded Value |
Page 58 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.06 Analysis of operating assumption changes |
||||||||||
|
|
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|
|
|
|
Risk and |
Inter- |
Total |
|
|
|
|
|
|
|
|
Savings |
national |
|
For the six months ended 30 June 2009 |
£m |
£m |
£m |
|||||||
Persistency |
(1) |
- |
(1) |
|||||||
Mortality/morbidity |
- |
6 |
6 |
|||||||
Expenses |
(31) |
(4) |
(35) |
|||||||
Other |
(5) |
3 |
(2) |
|||||||
|
|
|
|
|
|
|
|
(37) |
5 |
(32) |
|
|
|
|
|
|
|
|
|
|
|
Full experience investigations are not undertaken at the half-year. A conservative approach is taken when revising any future operating assumptions. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
Risk and Savings expense assumption changes primarily reflect assumed higher future investment expenses. |
||||||||||
|
|
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|
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|
|
Risk and |
Inter- |
Total |
|
|
|
|
|
|
|
|
Savings |
national |
|
For the six months ended 30 June 2008 |
£m |
£m |
£m |
|||||||
Persistency |
(14) |
- |
(14) |
|||||||
Mortality/morbidity |
- |
- |
- |
|||||||
Expenses |
43 |
- |
43 |
|||||||
Other |
(11) |
- |
(11) |
|||||||
|
|
|
|
|
|
|
|
18 |
- |
18 |
|
|
|
|
|
|
|
|
|
|
|
Risk and Savings expense assumption changes primarily reflect unit cost efficiencies in the individual protection business. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk and |
Inter- |
Total |
|
|
|
|
|
|
|
|
Savings |
national |
|
For the year ended 31 December 2008 |
£m |
£m |
£m |
|||||||
Persistency |
(114) |
(2) |
(116) |
|||||||
Mortality/morbidity |
(49) |
8 |
(41) |
|||||||
Expenses |
35 |
(9) |
26 |
|||||||
Other |
28 |
(12) |
16 |
|||||||
|
|
|
|
|
|
|
|
(100) |
(15) |
(115) |
|
|
|
|
|
|
|
|
|
|
|
Risk and Savings persistency operating assumption changes of £(114)m relate primarily to the strengthening of lapse assumptions for unit linked bond policies. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
Risk and Savings mortality assumption changes relate primarily to annuitant mortality where the assumption has been updated to reflect the latest three year average experience where lighter 2008 experience replaced heavier 2005 experience in the calculation. |
||||||||||
|
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|
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|
|
|
|
|
|
4.07 Variation from longer term investment return |
||||||||||
|
|
|
|
|
|
|
|
|
|
Full year |
|
|
|
|
|
|
|
|
30.06.09 |
30.06.08 |
31.12.08 |
|
|
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
|
|
£m |
£m |
£m |
Business reported on an EEV basis: |
||||||||||
Risk and Savings1 |
(875) |
24 |
(146) |
|||||||
International |
(16) |
(48) |
(110) |
|||||||
Group capital and financing |
(141) |
(466) |
(1,176) |
|||||||
|
|
|
|
|
|
|
|
(1,032) |
(490) |
(1,432) |
Business reported on an IFRS basis: |
||||||||||
General insurance |
(10) |
(11) |
(29) |
|||||||
Investment management |
(1) |
(4) |
7 |
|||||||
Group capital and financing |
24 |
31 |
(125) |
|||||||
|
|
|
|
|
|
|
|
(1,019) |
(474) |
(1,579) |
|
|
|
|
|
|
|
|
|
|
|
1. Risk and Savings H1 09 variation from longer term investment return includes a £(511)m variance reflecting the EEV impact of asset allocation decisions made during the period. Of this amount, £(335)m is the EEV impact of swap transactions undertaken to improve the IFRS matching of annuity business which reduced the assumed future yield on the annuity assets for EEV purposes, £(96)m is due to an increased cost of capital arising from de-risking activity to reduce the equity ratio for assets backing solvency capital and £(80)m is the EEV impact of holding additional cash balances, largely to back the short term default provision. |
||||||||||
The remaining amount reflects the EEV impact of investment performance relative to assumptions, including £(228)m due to the impact of action taken to sell a number of credits and the impact on investment performance of the holdings in cash during a period when credit spreads have narrowed and £(103)m for with-profits business. |
||||||||||
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|
European Embedded Value |
Page 59 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.08 Effect of economic assumption changes |
||||||||||
|
|
|
|
|
|
|
|
|
|
Full year |
|
|
|
|
|
|
|
|
30.06.09 |
30.06.08 |
31.12.08 |
|
|
|
|
|
|
|
|
|
Restated |
|
|
|
|
|
|
|
|
|
£m |
£m |
£m |
Business reported on an EEV basis: |
|
|
|
|||||||
Risk and Savings1 |
(515) |
- |
(505) |
|||||||
International |
(112) |
(16) |
(110) |
|||||||
Group capital and financing |
(3) |
4 |
6 |
|||||||
|
|
|
|
|
|
|
|
(630) |
(12) |
(609) |
|
|
|
|
|
|
|
|
|
|
|
1. H1 09 economic assumption changes include £(221)m relating to the increase in the UK risk discount rate in the first half of 2009 from 8.3% to 8.8%, £(129)m reflecting the increase in the US risk discount rate from 6.8% to 8.0% and £(119)m as a result of the higher cost of capital on increased annuity reserves. In addition, further increases in the realistic and statutory long term default provisions for the assets backing annuity business had an EEV impact of £(179)m. |
||||||||||
FY 08 economic assumption changes includes £(361)m relating to the 0.8% increase in the UK risk discount rate from 7.5% to 8.3% during the period. It also includes £(272)m to reflect the in-force element of an additional reserve for non profit annuity credit default. |
||||||||||
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|
|
4.09 Time value of options and guarantees |
||||||||||
|
|
|
|
|
|
|
|
|
|
Full year |
|
|
|
|
|
|
|
|
30.06.09 |
30.06.08 |
31.12.08 |
|
|
|
|
|
|
|
|
£m |
£m |
£m |
Risk and Savings1 |
27 |
1 |
46 |
|||||||
International |
12 |
11 |
13 |
|||||||
|
|
|
|
|
|
|
|
39 |
12 |
59 |
|
|
|
|
|
|
|
|
|
|
|
1. Includes £23m (H1 08: £1m; FY 08: £21m) relating to the cost of guarantees on UK with-profits business, and £4m (H1 08: £nil; FY 08: £25m) relating to UK non profit business, due to the allowance for negative inflation within the annuity business. |
||||||||||
|
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|
|
4.10 Tax |
||||||||||
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Profit/(loss) |
Tax |
Profit/(loss) |
Tax |
Profit/(loss) |
Tax |
|
|
|
|
|
before |
(expense)/ |
before |
(expense)/ |
before |
(expense)/ |
|
|
|
|
|
tax |
credit |
tax |
credit |
tax |
credit |
|
|
|
|
|
|
|
|
|
Full year |
Full year |
|
|
|
|
|
30.06.09 |
30.06.09 |
30.06.08 |
30.06.08 |
31.12.08 |
31.12.08 |
|
|
|
|
|
|
|
Restated |
Restated |
|
|
|
|
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
From continuing operations |
|
|
|
|
|
|
||||
Risk |
460 |
(129) |
267 |
(74) |
439 |
(125) |
||||
Savings |
28 |
(8) |
87 |
(21) |
50 |
(11) |
||||
Investment management |
58 |
(16) |
72 |
(20) |
130 |
(40) |
||||
International |
87 |
(29) |
58 |
(18) |
100 |
(35) |
||||
Group capital and financing |
24 |
7 |
105 |
(39) |
151 |
(23) |
||||
Operating profit |
657 |
(175) |
589 |
(172) |
870 |
(234) |
||||
Variation from longer term investment return |
(1,019) |
282 |
(474) |
150 |
(1,579) |
385 |
||||
Effect of economic assumption changes |
(630) |
185 |
(12) |
5 |
(609) |
176 |
||||
Property losses attributable to minority interests |
(20) |
- |
(13) |
- |
(63) |
- |
||||
(Loss)/profit from continuing operations before tax / Tax |
(1,012) |
292 |
90 |
(17) |
(1,381) |
327 |
||||
|
|
|
|
|
|
|
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|
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|
|
European Embedded Value |
Page 60 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.11 Earnings per share |
||||||||||
(a) Earnings per share |
||||||||||
|
|
|
Profit/(loss) |
Tax |
Profit/(loss) |
Per share |
Profit/(loss) |
Tax |
Profit/(loss) |
Per share |
|
|
|
before tax |
(expense)/ |
after tax |
|
before tax |
(expense)/ |
after tax |
|
|
|
|
|
credit |
|
|
|
credit |
|
|
|
|
|
30.06.09 |
30.06.09 |
30.06.09 |
30.06.09 |
30.06.08 |
30.06.08 |
30.06.08 |
30.06.08 |
|
|
|
|
|
|
|
Restated |
Restated |
Restated |
Restated |
|
|
|
£m |
£m |
£m |
p |
£m |
£m |
£m |
p |
Operating profit from continuing operations |
657 |
(175) |
482 |
8.28 |
589 |
(172) |
417 |
6.87 |
||
Variation from longer term investment return |
(1,019) |
282 |
(737) |
(12.66) |
(474) |
150 |
(324) |
(5.33) |
||
Effect of economic assumption changes |
(630) |
185 |
(445) |
(7.64) |
(12) |
5 |
(7) |
(0.12) |
||
Earnings per share based on (loss)/profit |
||||||||||
attributable to equity holders |
(992) |
292 |
(700) |
(12.02) |
103 |
(17) |
86 |
1.42 |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit/(loss) |
Tax |
Profit/(loss) |
Per share |
|
|
|
|
|
|
|
before tax |
(expense)/ |
after tax |
|
|
|
|
|
|
|
|
|
credit |
|
|
|
|
|
|
|
|
|
Full year |
Full year |
Full year |
Full year |
|
|
|
|
|
|
|
31.12.08 |
31.12.08 |
31.12.08 |
31.12.08 |
|
|
|
|
|
|
|
£m |
£m |
£m |
p |
Operating profit from continuing operations |
870 |
(234) |
636 |
10.66 |
||||||
Variation from longer term investment return |
(1,579) |
385 |
(1,194) |
(20.01) |
||||||
Effect of economic assumption changes |
(609) |
176 |
(433) |
(7.26) |
||||||
Tax impact of corporate restructure |
- |
81 |
81 |
1.36 |
||||||
Earnings per share based on loss |
|
|
|
|
||||||
attributable to equity holders |
(1,318) |
408 |
(910) |
(15.25) |
||||||
|
|
|
|
|
|
|
|
|
|
|
(b) Diluted earnings per share |
||||||||||
(i) Based on operating profit from continuing operations after tax |
||||||||||
|
|
|
|
|
Profit |
Number |
Per share |
Profit |
Number |
Per share |
|
|
|
|
|
after tax |
of shares1 |
|
after tax |
of shares1 |
|
|
|
|
|
|
30.06.09 |
30.06.09 |
30.06.09 |
30.06.08 |
30.06.08 |
30.06.08 |
|
|
|
|
|
|
|
|
Restated |
|
Restated |
|
|
|
|
|
£m |
m |
p |
£m |
m |
p |
Operating profit from continuing operations after tax |
482 |
5,822 |
8.28 |
417 |
6,073 |
6.87 |
||||
Net shares under options allocable for no further consideration |
- |
8 |
(0.01) |
- |
22 |
(0.03) |
||||
Diluted earnings per share |
482 |
5,830 |
8.27 |
417 |
6,095 |
6.84 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit |
Number |
Per share |
|
|
|
|
|
|
|
|
after tax |
of shares1 |
|
|
|
|
|
|
|
|
|
Full year |
Full year |
Full year |
|
|
|
|
|
|
|
|
31.12.08 |
31.12.08 |
31.12.08 |
|
|
|
|
|
|
|
|
£m |
m |
p |
Operating profit from continuing operations after tax |
636 |
5,968 |
10.66 |
|||||||
Net shares under options allocable for no further consideration |
- |
22 |
(0.04) |
|||||||
Diluted earnings per share |
636 |
5,990 |
10.62 |
|||||||
|
|
|
|
|
|
|
|
|
|
|
(ii) Based on (loss)/profit attributable to equity holders of the Company |
||||||||||
|
|
|
|
|
Loss |
Number |
Per share |
Profit |
Number |
Per share |
|
|
|
|
|
after tax |
of shares1 |
|
after tax |
of shares1 |
|
|
|
|
|
|
30.06.09 |
30.06.09 |
30.06.09 |
30.06.08 |
30.06.08 |
30.06.08 |
|
|
|
|
|
|
|
|
Restated |
|
Restated |
|
|
|
|
|
£m |
m |
p |
£m |
m |
p |
(Loss)/profit attributable to equity holders of the Company |
(700) |
5,822 |
(12.02) |
86 |
6,073 |
1.42 |
||||
Net shares under options allocable for no further consideration2 |
- |
8 |
- |
- |
22 |
(0.01) |
||||
Diluted earnings per share |
(700) |
5,830 |
(12.02) |
86 |
6,095 |
1.41 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
Number |
Per share |
|
|
|
|
|
|
|
|
after tax |
of shares1 |
|
|
|
|
|
|
|
|
|
Full year |
Full year |
Full year |
|
|
|
|
|
|
|
|
31.12.08 |
31.12.08 |
31.12.08 |
|
|
|
|
|
|
|
|
£m |
m |
p |
Loss attributable to equity holders of the Company |
(910) |
5,968 |
(15.25) |
|||||||
Net shares under options allocable for no further consideration2 |
- |
22 |
- |
|||||||
Diluted earnings per share |
(910) |
5,990 |
(15.25) |
|||||||
|
|
|
|
|
|
|
|
|
|
|
The number of shares in issue at 30 June 2009 was 5,861,679,365 (30.06.08: 5,979,009,914; 31.12.08: 5,861,627,994). |
||||||||||
1. Weighted average number of shares. |
||||||||||
2. For H1 09 and FY 08 net shares under options allocable for no further consideration are anti-dilutive and have therefore been excluded from the diluted earnings per share calculation. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Embedded Value |
Page 61 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.12 Group embedded value reconciliation |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered business |
|
|
||||
|
|
|
|
UK |
UK |
UK |
Total |
Inter- |
Non- |
Total |
|
|
|
|
free |
required |
value of |
UK |
national |
covered |
|
|
|
|
|
surplus |
capital |
in-force |
|
|
business |
|
For the six months ended 30 June 2009 |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|||
At 1 January |
|
|
|
|
|
|
|
|||
Value of in-force business (VIF) |
- |
- |
4,268 |
4,268 |
1,059 |
- |
5,327 |
|||
Shareholder net worth (SNW) |
509 |
1,369 |
- |
1,878 |
404 |
(1,088) |
1,194 |
|||
|
|
|
|
509 |
1,369 |
4,268 |
6,146 |
1,463 |
(1,088) |
6,521 |
Exchange rate movements |
- |
- |
- |
- |
(177) |
84 |
(93) |
|||
|
|
|
|
509 |
1,369 |
4,268 |
6,146 |
1,286 |
(1,004) |
6,428 |
Operating profit for the period: |
|
|
|
|
|
|
|
|||
- New business contribution1 |
(119) |
95 |
157 |
133 |
|
|
|
|||
- Expected return on VIF |
- |
- |
175 |
175 |
|
|
|
|||
- Expected transfer from Non profit VIF to SNW2 |
304 |
(61) |
(243) |
- |
|
|
|
|||
- With-profits transfer |
21 |
- |
(21) |
- |
|
|
|
|||
- Experience variances |
(54) |
(4) |
133 |
75 |
|
|
|
|||
- Operating assumption changes |
49 |
4 |
(75) |
(22) |
|
|
|
|||
- Development costs |
(13) |
- |
- |
(13) |
|
|
|
|||
- Expected return on SNW |
20 |
25 |
- |
45 |
|
|
|
|||
Operating profit |
208 |
59 |
126 |
393 |
58 |
31 |
482 |
|||
Non-operating (loss)/profit: |
|
|
|
|
|
|
|
|||
- Investment variances |
(588) |
(4) |
(144) |
(736) |
|
|
|
|||
- Economic assumption changes |
123 |
24 |
(521) |
(374) |
|
|
|
|||
Non-operating (loss)/profit for the period |
(465) |
20 |
(665) |
(1,110) |
(84) |
(8) |
(1,202) |
|||
(Loss)/profit for the period3 |
(257) |
79 |
(539) |
(717) |
(26) |
23 |
(720) |
|||
Intra-group dividends |
- |
- |
- |
- |
(2) |
2 |
- |
|||
Dividends to equity holders of the Company |
- |
- |
- |
- |
- |
(120) |
(120) |
|||
Net movements in employee share schemes |
- |
- |
- |
- |
- |
6 |
6 |
|||
Loss attributable to minority interests |
- |
- |
- |
- |
- |
20 |
20 |
|||
Transfer to non-covered business4 |
(8) |
- |
- |
(8) |
- |
8 |
- |
|||
Other reserve movements including pension deficit |
(36) |
- |
(6) |
(42) |
- |
(16) |
(58) |
|||
Embedded value |
208 |
1,448 |
3,723 |
5,379 |
1,258 |
(1,081) |
5,556 |
|||
|
|
|
|
|
|
|
|
|
|
|
Represented by: |
|
|
|
|
|
|
|
|||
Non profit |
|
|
|
|
3,386 |
|
|
|
|
|
With-profits |
|
|
337 |
|
|
|
|
|||
Value of in-force business |
- |
- |
3,723 |
3,723 |
935 |
- |
4,658 |
|||
Shareholder net worth |
208 |
1,448 |
- |
1,656 |
323 |
(1,081) |
898 |
|||
|
|
|
|
|
|
|
|
|
|
|
1. The free surplus reduction of £119m to finance new business includes £31m IFRS new business strain (Note 3.01 (c)) and £95m additional required capital. Other items have a net positive impact of £7m. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
2. The increase in free surplus of £304m from the expected return on the in-force non profit business includes £238m of IFRS operational cash generation (Note 3.01 (c)) and a £61m reduction in required capital. Other items have a net positive impact of £5m. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
3. Included in the loss for the period is a non profit inter-fund transfer from free surplus to VIF of £127m. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
4. 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. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Embedded Value |
Page 62 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.12 Group embedded value reconciliation (continued) |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered business |
|
|
||||
|
|
|
|
UK |
UK |
UK |
Total |
Inter- |
Non- |
Total |
|
|
|
|
free |
required |
value of |
UK |
national |
covered |
|
|
|
|
|
surplus |
capital |
in-force |
|
|
business |
|
|
|
|
|
Restated |
Restated |
Restated |
Restated |
|
|
|
For the six months ended 30 June 2008 |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|||
At 1 January |
|
|
|
|
|
|
|
|||
Value of in-force business (VIF) |
- |
- |
3,460 |
3,460 |
782 |
- |
4,242 |
|||
Shareholder net worth (SNW) |
2,639 |
1,198 |
- |
3,837 |
324 |
(275) |
3,886 |
|||
|
|
|
|
2,639 |
1,198 |
3,460 |
7,297 |
1,106 |
(275) |
8,128 |
Exchange rate movements |
- |
- |
- |
- |
34 |
(15) |
19 |
|||
Opening adjustment |
27 |
- |
(27) |
- |
- |
- |
- |
|||
|
|
|
|
2,666 |
1,198 |
3,433 |
7,297 |
1,140 |
(290) |
8,147 |
Operating profit for the period: |
|
|
|
|
|
|
|
|||
- New business contribution |
(304) |
98 |
334 |
128 |
|
|
|
|||
- Expected return on VIF |
- |
- |
130 |
130 |
|
|
|
|||
- Expected transfer from Non profit VIF to SNW |
264 |
(47) |
(217) |
- |
|
|
|
|||
- With-profits transfer |
43 |
- |
(43) |
- |
|
|
|
|||
- Experience variances |
(10) |
(11) |
38 |
17 |
|
|
|
|||
- Operating assumption changes |
(13) |
4 |
19 |
10 |
|
|
|
|||
- Development costs |
(16) |
- |
- |
(16) |
|
|
|
|||
- Expected return on SNW |
69 |
16 |
- |
85 |
|
|
|
|||
Operating profit |
33 |
60 |
261 |
354 |
40 |
23 |
417 |
|||
Non-operating (loss)/profit: |
|
|
|
|
|
|
|
|||
- Investment variances |
(375) |
(5) |
79 |
(301) |
|
|
|
|||
- Economic assumption changes |
37 |
- |
(34) |
3 |
|
|
|
|||
Non-operating (loss)/profit for the period |
(338) |
(5) |
45 |
(298) |
(43) |
(3) |
(344) |
|||
(Loss)/profit for the period1 |
(305) |
55 |
306 |
56 |
(3) |
20 |
73 |
|||
Capital movements2 |
(252) |
- |
- |
(252) |
- |
(63) |
(315) |
|||
Embedded value of business acquired3 |
71 |
85 |
143 |
299 |
- |
- |
299 |
|||
Intra-group dividends |
- |
- |
- |
- |
(3) |
3 |
- |
|||
Dividends to equity holders of the Company |
- |
- |
- |
- |
- |
(248) |
(248) |
|||
Issue of share capital |
- |
- |
- |
- |
- |
7 |
7 |
|||
Share buyback |
- |
- |
- |
- |
- |
(508) |
(508) |
|||
Net movements in employee share schemes |
- |
- |
- |
- |
- |
(9) |
(9) |
|||
Loss attributable to minority interests |
- |
- |
- |
- |
- |
13 |
13 |
|||
Transfer to non-covered business4 |
(14) |
- |
- |
(14) |
- |
14 |
- |
|||
Other reserve movements including pension deficit |
(2) |
- |
- |
(2) |
- |
1 |
(1) |
|||
Embedded value |
2,164 |
1,338 |
3,882 |
7,384 |
1,134 |
(1,060) |
7,458 |
|||
|
|
|
|
|
|
|
|
|
|
|
Represented by: |
|
|
|
|
|
|
|
|||
Non profit |
|
|
3,201 |
|
|
|
|
|||
With-profits |
|
|
681 |
|
|
|
|
|||
Value of in-force business |
- |
- |
3,882 |
3,882 |
838 |
- |
4,720 |
|||
Shareholder net worth |
2,164 |
1,338 |
- |
3,502 |
296 |
(1,060) |
2,738 |
|||
|
|
|
|
|
|
|
|
|
|
|
1. Included in the profit for the period is a non profit inter-fund transfer from free surplus to VIF of £44m. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
2. Capital movements comprise the £252m cost of acquiring Nationwide Life by the UK SNW and the £63m cost of acquiring Suffolk Life by the non-covered business element of Group capital and financing. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
3. The embedded value of business acquired on the date of acquisition comprises £235m from the acquisition of Nationwide Life on 31 January 2008 and £64m from the acquisition of Suffolk Life on 6 May 2008. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
4. 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. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Embedded Value |
Page 63 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.12 Group embedded value reconciliation (continued) |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered business |
|
|
||||
|
|
|
|
UK |
UK |
UK |
Total |
Inter- |
Non- |
Total |
|
|
|
|
free |
required |
value of |
UK |
national |
covered |
|
|
|
|
|
surplus |
capital |
in-force |
|
|
business |
|
For the year ended 31 December 2008 |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|||
At 1 January |
|
|
|
|
|
|
|
|||
Value of in-force business (VIF) |
- |
- |
3,460 |
3,460 |
782 |
- |
4,242 |
|||
Shareholder net worth (SNW) |
2,639 |
1,198 |
- |
3,837 |
324 |
(275) |
3,886 |
|||
|
|
|
|
2,639 |
1,198 |
3,460 |
7,297 |
1,106 |
(275) |
8,128 |
Exchange rate movements |
- |
- |
- |
- |
386 |
(190) |
196 |
|||
Opening adjustment |
27 |
- |
(27) |
- |
- |
- |
- |
|||
|
|
|
|
2,666 |
1,198 |
3,433 |
7,297 |
1,492 |
(465) |
8,324 |
Operating profit for the period: |
|
|
|
|
|
|
|
|||
- New business contribution1 |
(661) |
232 |
620 |
191 |
|
|
|
|||
- Expected return on VIF |
- |
- |
267 |
267 |
|
|
|
|||
- Expected transfer from Non profit VIF to SNW |
565 |
(115) |
(450) |
- |
|
|
|
|||
- With-profits transfer |
77 |
- |
(77) |
- |
|
|
|
|||
- Experience variances |
39 |
3 |
(38) |
4 |
|
|
|
|||
- Operating assumption changes |
(31) |
1 |
(38) |
(68) |
|
|
|
|||
- Development costs |
(37) |
- |
- |
(37) |
|
|
|
|||
- Expected return on SNW |
140 |
51 |
- |
191 |
|
|
|
|||
Operating profit |
92 |
172 |
284 |
548 |
65 |
23 |
636 |
|||
Non-operating (loss)/profit: |
|
|
|
|
|
|
|
|||
- Investment variances |
(1,092) |
(83) |
189 |
(986) |
|
|
|
|||
- Economic assumption changes |
(531) |
(3) |
175 |
(359) |
|
|
|
|||
- Tax impact of corporate restructure |
28 |
- |
53 |
81 |
|
|
|
|||
Non-operating (loss)/profit for the period |
(1,595) |
(86) |
417 |
(1,264) |
(148) |
(197) |
(1,609) |
|||
(Loss)/profit for the period2 |
(1,503) |
86 |
701 |
(716) |
(83) |
(174) |
(973) |
|||
Capital movements3 |
(260) |
- |
- |
(260) |
60 |
(115) |
(315) |
|||
Embedded value of business acquired |
71 |
85 |
143 |
299 |
- |
- |
299 |
|||
Intra-group dividends |
(405) |
- |
- |
(405) |
(6) |
411 |
- |
|||
Dividends to equity holders of the Company |
- |
- |
- |
- |
- |
(367) |
(367) |
|||
Issue of share capital |
- |
- |
- |
- |
- |
10 |
10 |
|||
Share buyback |
- |
- |
- |
- |
- |
(523) |
(523) |
|||
Net movements in employee share schemes |
- |
- |
- |
- |
- |
(4) |
(4) |
|||
Loss attributable to minority interests |
- |
- |
- |
- |
- |
63 |
63 |
|||
Transfer to non-covered business4 |
(25) |
- |
- |
(25) |
- |
25 |
- |
|||
Other reserve movements including pension deficit |
(35) |
- |
(9) |
(44) |
- |
51 |
7 |
|||
Embedded value |
509 |
1,369 |
4,268 |
6,146 |
1,463 |
(1,088) |
6,521 |
|||
|
|
|
|
|
|
|
|
|
|
|
Represented by: |
|
|
|
|
|
|
|
|||
Non profit |
|
|
3,845 |
|
|
|
|
|||
With-profits |
|
|
423 |
|
|
|
|
|||
Value of in-force business |
- |
- |
4,268 |
4,268 |
1,059 |
- |
5,327 |
|||
Shareholder net worth |
509 |
1,369 |
- |
1,878 |
404 |
(1,088) |
1,194 |
|||
|
|
|
|
|
|
|
|
|
|
|
1. The free surplus reduction of £661m to finance new business includes £101m of the short term default allowance, as well as £334m IFRS new business strain (Note 3.01 (c)) and £232m additional required capital. Other items have a net positive impact of £6m. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
2. Included in the loss for the period is a non profit inter-fund transfer from free surplus to VIF of £710m. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
3. Capital movements within the UK comprise the £252m cost of acquiring Nationwide Life and £8m (€10m) of capital injected from Society into France. The acquisition of Suffolk Life (£63m) was funded from the non-covered business element of Group capital and financing. The International capital movements comprise £52m ($96m) of capital injected into the USA and the £8m (€10m) of capital injected into France. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
4. 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. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Embedded Value |
Page 64 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.13 Analysis of shareholders' equity |
||||||||||
|
|
|
|
|
|
Risk and |
Investment |
Inter- |
Group |
Total |
|
|
|
|
|
|
Savings |
manage- |
national |
capital and |
|
|
|
|
|
|
|
|
ment |
|
financing |
|
As at 30 June 2009 |
£m |
£m |
£m |
£m |
£m |
|||||
Analysed as: |
|
|
|
|
|
|||||
IFRS basis shareholders' equity1 |
164 |
369 |
1,163 |
1,599 |
3,295 |
|||||
Additional retained profit/(loss) on an EEV basis |
3,723 |
- |
105 |
(1,567) |
2,261 |
|||||
Shareholders' equity on an EEV basis |
3,887 |
369 |
1,268 |
32 |
5,556 |
|||||
Comprising: |
|
|
|
|
|
|||||
Business reported on an IFRS basis |
164 |
369 |
10 |
(1,624) |
(1,081) |
|||||
|
|
|
|
|
|
|
|
|
|
|
Business reported on an EEV basis: |
|
|
|
|
|
|||||
Shareholder net worth |
|
|
|
|
|
|||||
- Free surplus2 |
|
|
84 |
208 |
292 |
|||||
- Required capital to cover solvency margin |
|
|
239 |
1,448 |
1,687 |
|||||
Value of in-force |
|
|
|
|
|
|||||
- Value of in-force business |
4,128 |
|
1,028 |
|
5,156 |
|||||
- Cost of capital3 |
(405) |
|
(93) |
|
(498) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk and |
Investment |
Inter- |
Group |
Total |
|
|
|
|
|
|
Savings |
manage- |
national |
capital and |
|
|
|
|
|
|
|
|
ment |
|
financing |
|
|
|
|
|
|
|
|
Restated |
|
|
Restated |
As at 30 June 2008 |
£m |
£m |
£m |
£m |
£m |
|||||
Analysed as: |
|
|
|
|
|
|
|
|
|
|
IFRS basis shareholders' equity1 |
187 |
397 |
908 |
3,183 |
4,675 |
|||||
Additional retained profit/(loss) on an EEV basis |
3,882 |
- |
228 |
(1,327) |
2,783 |
|||||
Shareholders' equity on an EEV basis |
|
|
|
4,069 |
397 |
1,136 |
1,856 |
7,458 |
||
Comprising: |
|
|
|
|
|
|||||
Business reported on an IFRS basis |
187 |
397 |
2 |
(1,646) |
(1,060) |
|||||
|
|
|
|
|
|
|
|
|
|
|
Business reported on an EEV basis: |
|
|
|
|
|
|||||
Shareholder net worth |
|
|
|
|
|
|||||
- Free surplus2 |
|
|
95 |
2,164 |
2,259 |
|||||
- Required capital to cover solvency margin |
|
|
201 |
1,338 |
1,539 |
|||||
Value of in-force |
|
|
|
|
|
|
|
|
|
|
- Value of in-force business |
4,002 |
|
903 |
|
4,905 |
|||||
- Cost of capital3 |
(120) |
|
(65) |
|
(185) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk and |
Investment |
Inter- |
Group |
Total |
|
|
|
|
|
|
Savings |
manage- |
national |
capital and |
|
|
|
|
|
|
|
|
ment |
|
financing |
|
As at 31 December 2008 |
£m |
£m |
£m |
£m |
£m |
|||||
Analysed as: |
|
|
|
|
|
|||||
IFRS basis shareholders' equity1 |
174 |
322 |
1,272 |
1,820 |
3,588 |
|||||
Additional retained profit/(loss) on an EEV basis |
4,268 |
- |
203 |
(1,538) |
2,933 |
|||||
Shareholders' equity on an EEV basis |
4,442 |
322 |
1,475 |
282 |
6,521 |
|||||
Comprising: |
|
|
|
|
|
|||||
Business reported on an IFRS basis |
174 |
322 |
12 |
(1,596) |
(1,088) |
|||||
|
|
|
|
|
|
|
|
|
|
|
Business reported on an EEV basis: |
|
|
|
|
|
|||||
Shareholder net worth |
|
|
|
|
|
|||||
- Free surplus2 |
|
|
144 |
509 |
653 |
|||||
- Required capital to cover solvency margin |
|
|
260 |
1,369 |
1,629 |
|||||
Value of in-force |
|
|
|
|
|
|||||
- Value of in-force business |
4,576 |
|
1,156 |
|
5,732 |
|||||
- Cost of capital3 |
(308) |
|
(97) |
|
(405) |
|||||
|
|
|
|
|
|
|
|
|
|
|
1. Shareholders' equity supporting the non profit Risk and Savings businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within the Group capital and financing segment. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
2. Free surplus is the value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
3. For H1 09 the cost of capital reflects a risk margin of 4.5% (H1 08: 3.0%; FY 08: 4.5%) in the risk discount rate and an equity backing ratio for the assets backing the solvency capital of 41% (H1 08: 77%; FY 08: 55%). |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
Further analysis of shareholders' equity is included in Note 4.14. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Embedded Value |
Page 65 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.14 Segmental analysis of shareholders' equity |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered |
Other |
Total |
Covered |
Other |
Total |
|
|
|
|
|
business |
business |
|
business |
business |
|
|
|
|
|
|
EEV basis |
IFRS basis |
|
EEV basis |
IFRS basis |
|
|
|
|
|
|
At 30.06.09 |
At 30.06.09 |
At 30.06.09 |
At 30.06.08 |
At 30.06.08 |
At 30.06.08 |
|
|
|
|
|
|
|
|
Restated |
Restated |
Restated |
|
|
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
Risk |
|
|
|
|
|
|
||||
- Risk reported on an EEV basis |
2,688 |
- |
2,688 |
2,327 |
- |
2,327 |
||||
- General insurance |
- |
95 |
95 |
- |
98 |
98 |
||||
- Other |
- |
(1) |
(1) |
- |
3 |
3 |
||||
Total Risk |
2,688 |
94 |
2,782 |
2,327 |
101 |
2,428 |
||||
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
|
|
|
|
|
||||
- Savings reported on an EEV basis |
1,035 |
- |
1,035 |
1,555 |
- |
1,555 |
||||
- Core retail investments |
- |
57 |
57 |
- |
72 |
72 |
||||
- Other |
- |
13 |
13 |
- |
14 |
14 |
||||
Total Savings |
1,035 |
70 |
1,105 |
1,555 |
86 |
1,641 |
||||
|
|
|
|
|
|
|
|
|
|
|
Investment management |
- |
369 |
369 |
- |
397 |
397 |
||||
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|
|
|
||||
- USA |
777 |
- |
777 |
647 |
- |
647 |
||||
- Netherlands |
278 |
- |
278 |
291 |
- |
291 |
||||
- France |
203 |
- |
203 |
196 |
- |
196 |
||||
- Emerging markets |
- |
10 |
10 |
- |
2 |
2 |
||||
Total International |
1,258 |
10 |
1,268 |
1,134 |
2 |
1,136 |
||||
|
|
|
|
|
|
|
|
|
|
|
Group capital and financing |
1,656 |
(1,624) |
32 |
3,502 |
(1,646) |
1,856 |
||||
|
|
|
|
|
6,637 |
(1,081) |
5,556 |
8,518 |
(1,060) |
7,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered |
Other |
Total |
|
|
|
|
|
|
|
|
business |
business |
|
|
|
|
|
|
|
|
|
EEV basis |
IFRS basis |
|
|
|
|
|
|
|
|
|
At 31.12.08 |
At 31.12.08 |
At 31.12.08 |
|
|
|
|
|
|
|
|
£m |
£m |
£m |
Risk |
|
|
|
|||||||
- Risk reported on an EEV basis |
3,138 |
- |
3,138 |
|||||||
- General insurance |
- |
99 |
99 |
|||||||
- Other |
- |
2 |
2 |
|||||||
Total Risk |
3,138 |
101 |
3,239 |
|||||||
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
|
|
|||||||
- Savings reported on an EEV basis |
1,130 |
- |
1,130 |
|||||||
- Core retail investments |
- |
59 |
59 |
|||||||
- Other |
- |
14 |
14 |
|||||||
Total Savings |
1,130 |
73 |
1,203 |
|||||||
|
|
|
|
|
|
|
|
|
|
|
Investment management |
- |
322 |
322 |
|||||||
|
|
|
|
|
|
|
|
|
|
|
International |
|
|
|
|||||||
- USA |
937 |
- |
937 |
|||||||
- Netherlands |
305 |
- |
305 |
|||||||
- France |
221 |
- |
221 |
|||||||
- Emerging markets |
- |
12 |
12 |
|||||||
Total International |
1,463 |
12 |
1,475 |
|||||||
|
|
|
|
|
|
|
|
|
|
|
Group capital and financing |
1,878 |
(1,596) |
282 |
|||||||
|
|
|
|
|
|
|
|
7,609 |
(1,088) |
6,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Embedded Value |
Page 66 |
|||||||||
Notes to the Financial Statements |
||||||||||
4.15 Reconciliation of shareholder net worth |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK covered |
Total |
UK covered |
Total |
UK covered |
Total |
|
|
|
|
|
business |
|
business |
|
business |
|
|
|
|
|
|
At 30.06.09 |
At 30.06.09 |
At 30.06.08 |
At 30.06.08 |
At 31.12.08 |
At 31.12.08 |
|
|
|
|
|
|
|
Restated |
Restated |
|
|
|
|
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
SNW of long term operations (IFRS basis) |
3,223 |
4,376 |
4,829 |
5,735 |
3,415 |
4,676 |
||||
Other liabilities (IFRS basis) |
- |
(1,081) |
- |
(1,060) |
- |
(1,088) |
||||
Shareholders' equity on the IFRS basis |
3,223 |
3,295 |
4,829 |
4,675 |
3,415 |
3,588 |
||||
Purchased interests in long term business |
(161) |
(183) |
(183) |
(198) |
(171) |
(202) |
||||
Deferred acquisition costs/deferred income liabilities |
(246) |
(1,089) |
(221) |
(871) |
(233) |
(1,160) |
||||
Contingent loan1 |
(692) |
(692) |
(670) |
(670) |
(786) |
(786) |
||||
Deferred tax2 |
(391) |
(112) |
(467) |
(257) |
(354) |
(51) |
||||
Other3 |
(77) |
(321) |
214 |
59 |
7 |
(195) |
||||
Shareholder net worth on the EEV basis |
1,656 |
898 |
3,502 |
2,738 |
1,878 |
1,194 |
||||
|
|
|
|
|
|
|
|
|
|
|
1. On an EEV basis the contingent loan advanced within the Group to finance non profit pensions and annuity business subject to an internal reinsurance arrangement is modelled within the VIF. On an IFRS basis the contingent loan asset is included within the Group capital and financing net assets. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
2. Deferred tax represents all tax which is expected to be paid under current legislation. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
3. Other in the UK covered business relates primarily to the different treatment of sterling reserves, other long term reserves and the annuities and non profit pensions results under EEV compared with IFRS. Total business also includes the different treatment of the US Triple X securitisations on an EEV and IFRS basis. |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
European Embedded Value Page 67
Notes to the Financial Statements
4.16 Assumptions
UK assumptions
The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to redemption yields available in the market at the end of the reporting period.
For annuities, separate returns are calculated for new and existing business. This reflects a change in investment policy applicable to the 2007 and later business, which has the aim of increasing the expected return whilst not increasing the level of asset risk compared with the historic policy. This has been achieved through improved investment efficiency and increased diversification through use of additional asset classes. The calculated return takes account of derivatives and other credit instruments in the investment portfolio. From the second half of 2007, the revised strategy was also applied to the assets backing the in-force annuity business.
Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the proceeds reinvested in corporate bonds with a redemption yield 0.70% p.a. (0.70% p.a. at 30.06.08 and 0.70% at 31.12.08) greater than the swap rate at that time.
The returns on fixed and index-linked securities are calculated net of an allowance for long term default risk which takes account of the outstanding term of the securities. These allowances for default risk are set separately for the asset portfolios supporting fixed and index-linked securities, and average 0.19% p.a. and 0.15% p.a. respectively across the portfolios as a whole (0.12% and 0.09% at 30.06.08 and; 0.11% p.a. and 0.12% p.a. at 31.12.2008). At the 2008 year-end Legal & General Pensions Limited reserved an additional £313m before discounting to allow for our best estimate of the credit defaults over the following four years. At H1 09 this reserve was increased to £352m.
Economic assumptions
|
30.06.09 |
30.06.08 |
31.12.08 |
31.12.07 |
|
% p.a. |
% p.a. |
% p.a. |
% p.a. |
|
|
|
|
|
Equity risk premium |
3.5 |
3.0 |
3.5 |
3.0 |
Property risk premium |
2.0 |
2.0 |
2.0 |
2.0 |
|
|
|
|
|
Investment return |
|
|
|
|
- Gilts: |
|
|
|
|
- Fixed interest |
4.3 |
4.9 |
3.8 |
4.5 |
- RPI linked |
4.2 |
5.1 |
3.7 |
4.5 |
- Non gilts: |
|
|
|
|
- Fixed interest |
4.4 - 7.6 |
5.4 - 7.1 |
4.2 - 8.2 |
4.9 - 6.1 |
- RPI linked |
4.9 - 6.1 |
5.8 - 6.8 |
4.7 - 5.9 |
4.9 - 5.3 |
- Equities |
7.8 |
7.9 |
7.3 |
7.5 |
- Property |
6.3 |
6.9 |
5.8 |
6.5 |
|
|
|
|
|
Risk margin |
4.5 |
3.0 |
4.5 |
3.0 |
Risk discount rate (net of tax) |
8.8 |
7.9 |
8.3 |
7.5 |
|
|
|
|
|
Inflation |
|
|
|
|
- Expenses/earnings |
4.2 |
5.2 |
3.6 |
4.4 |
- Indexation |
3.2 |
4.2 |
2.6 |
3.4 |
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. The proportion of profits derived from with-profits business allocated to shareholders has been assumed to be 10% throughout.
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.
European Embedded Value Page 68
Notes to the Financial Statements
4.16 Assumptions (continued)
An allowance is made for future improvements in annuitant mortality based on experience and externally published data. Male annuitant mortality is assumed to improve in accordance with CMI Working Paper 30, projection MC, with a minimum annual improvement of 1.5% for future experience, and 2.0% for statutory reserving. Female annuitant mortality is assumed to improve in accordance with 75% of projection MC, with a minimum annual improvement of 1.0% for future experience and 1.5% for statutory reserving. In each case, the annual improvement is assumed to reduce linearly after age 89 to zero at age 120.
On this basis, the best estimate of the expectation of life for a new 65 year old Male CPA annuitant is 25.2 years (30.06.08: 25.1 years and 31.12.08: 25.2 years). The expectation of life on the regulatory reserving basis is 26.4 years (30.06.08: 26.2 years; 31.12.08: 26.4 years).
v. Development costs relate to investment in strategic systems and development capability.
International
vi. Key assumptions:
|
30.06.09 |
30.06.08 |
31.12.08 |
31.12.07 |
|
% p.a. |
% p.a. |
% p.a. |
% p.a. |
USA |
|
|
|
|
Reinvestment rate |
5.3 |
5.6 |
5.4 |
5.4 |
Risk margin |
4.5 |
3.0 |
4.5 |
3.0 |
Risk discount rate (net of tax) |
8.0 |
7.1 |
6.8 |
7.1 |
|
|
|
|
|
Europe |
|
|
|
|
Government bond return |
3.8 |
4.8 |
3.5 |
4.4 |
Risk margin |
4.5 |
3.0 |
4.5 |
3.0 |
Risk discount rate (net of tax) |
8.3 |
7.8 |
8.0 |
7.4 |
vii. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses.
Tax
viii. 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 corporate tax rate in the territory concerned, which for the UK was 28% (H1 08: 28%; FY 08: 28%). 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.
Stochastic calculations
ix. The time value of options and guarantees is calculated using economic and non-economic assumptions consistent with those used for the deterministic embedded value calculations.
This section describes the models used to generate future investment simulations, and gives some sample statistics for the simulations used. A single model has been used for UK and international business, with different economic assumptions for each territory.
Government nominal interest rates are generated using a LIBOR Money Market Model projecting full yield curves at annual intervals. The model provides a good fit to the initial yield curve.
The total annual returns on equities and property are calculated as the return on 1 year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. Corporate bonds are modelled separately by credit rating using stochastic credit spreads over the risk-free rates, transition matrices and default recovery rates. The real yield curve model assumes that the real short rate follows a mean-reverting process subject to two normally distributed random shocks.
Asset classes
The significant asset classes are for:
- 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
European Embedded Value Page 69
Notes to the Financial Statements
4.16 Assumptions (continued)
Summary statistics:
The following table sets out means and standard deviations (StDev) of future returns as at 30 June 2009 for the most significant asset classes. Correlations between asset classes have been set based on an internal assessment of historical data.
|
10-year return |
20-year return |
||
|
Mean1 |
StDev2 |
Mean1 |
StDev2 |
UK Business (Sterling) |
|
|
|
|
Government bonds |
3.9% |
4.3% |
5.2% |
4.8% |
Corporate bonds |
6.3% |
4.5% |
7.0% |
5.2% |
Property (excess returns) |
1.9% |
14.6% |
2.1% |
15.0% |
Equities (excess returns) |
3.5% |
20.2% |
3.6% |
19.9% |
|
|
|
|
|
European Business (Euro) |
|
|
|
|
Long Government bonds3 |
4.2% |
5.2% |
5.1% |
5.3% |
Short Government bonds4 |
4.2% |
4.6% |
5.2% |
9.2% |
|
|
|
|
|
US Business (US Dollar) |
|
|
|
|
Long Government bonds3 |
4.1% |
6.3% |
5.0% |
5.9% |
|
|
|
|
|
1. For asset classes other than for equities and property, mean returns are calculated as the mean return in excess of 1 year government bonds plus the mean return on 1 year government bonds. Mean excess returns for the equities and property are calculated as the mean return in excess of 1 year government bonds. Each mean return is derived by calculating the accumulated value of a unit asset invested to time n years for each simulation, averaging the resultant values across all simulations, then calculating the equivalent annual return required to give this average accumulation (by taking the nth root of the average accumulation and deducting 1).
2. Standard deviations are calculated by accumulating a unit investment for n years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by n and taking the square root. Equities and property values use excess returns. The results are comparable to implied volatilities quoted in investment markets.
3. Long term bonds are defined to be 10-year par-coupon bonds.
4. Short term bonds are defined to be 1 year duration bonds.
Risk discount rate:
The risk discount rate is scenario dependent within the stochastic projection. It is calculated by applying the deterministic risk margin to the risk free rate in each stochastic projection.