L&G HY 09 Results Part 6

RNS Number : 8051W

Legal & General Group Plc

04 August 2009

 



Asset Disclosures										Page 75
6.01 Investment portfolio
									Market	Market
									value	value
									At 30.06.09	At 31.12.08
								Notes	£bn	£bn
Worldwide funds under management									287	280
Client and policyholder assets									(241)	(233)
Non-unit linked with-profits assets1									(18)	(19)
Assets to which shareholders are directly exposed									28	28
Comprising:
Assets held to back the UK non-linked non profit business:
Legal & General Pensions Limited (LGPL)									20.2	18.7
Other UK non profit insurance business									1.5	1.9
								3.17	21.7	20.6
Assets held to back other insurance businesses (including Triple-X reserves)									2.2	2.5
Society shareholder capital								3.17/6.05	2.2	2.9
Other Group capital								6.05	1.9	2.3
									28.0	28.3
1. Includes assets backing participating business in France of £2bn (FY 08: £2bn).
Analysed by asset class:
					Other UK
					non profit	Other	Society	Other
					insurance	insurance	shareholder	Group
				LGPL	business	business	capital	capital	Total	Total
				At 30.06.09	At 30.06.09	At 30.06.09	At 30.06.09	At 30.06.09	At 30.06.09	At 31.12.08
			Notes	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Equities				-	0.1	-	0.7	-	0.8	1.4
Bonds			6.02	18.1	0.5	1.9	0.7	1.0	22.2	21.4
Derivative assets1				0.8	0.6	-	-	0.3	1.7	2.3
Property				-	-	-	0.2	-	0.2	0.2
Cash (including cash equivalents)				1.3	0.3	0.3	0.6	0.6	3.1	3.0
				20.2	1.5	2.2	2.2	1.9	28.0	28.3
1. Derivative assets are shown gross of derivative liabilities. Exposures arise from:
a. The use of derivatives for efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management.
b. Derivatives matching Guaranteed Equity Bonds within the Nationwide Life portfolio.
Asset Disclosures										Page 76
6.02 Bond portfolio summary
(i) Analysed by sector
					LGPL	LGPL	Total	Total	Total	Total
					At 30.06.09	At 30.06.09	At 30.06.09	At 30.06.09	At 31.12.08	At 31.12.08
				Notes	£m	%	£m	%	£m	%
Sovereigns, Supras and Sub-Sovereigns					1,422	8	2,456	11	2,517	12
Banks - Tier 11				6.04	358	2	401	2	650	3
- Tier 2 and other subordinated				6.04	1,641	9	1,791	8	2,410	11
- Senior					1,319	7	1,972	9	1,815	8
Utilities					2,259	12	2,419	11	2,291	11
Consumer Services & Goods					1,913	11	2,051	9	1,829	8
Financial Services					673	4	884	4	989	5
Technology & Telecoms					1,199	7	1,426	7	1,172	5
Insurance					818	4	917	4	904	4
Industrials					701	4	923	4	784	4
Oil & Gas					754	4	921	4	611	3
Health Care					652	4	730	3	541	3
Property					375	2	430	2	516	2
ABS				6.03	2,965	16	3,775	17	3,389	16
CDO					1,072	6	1,080	5	1,004	5
Total					18,121	100	22,176	100	21,422	100
1. Tier 1 holdings include £65m (FY 08: £75m) of preference shares.
(ii) Analysed by domicile
					LGPL	LGPL	Total	Total	Total	Total
					At 30.06.09	At 30.06.09	At 30.06.09	At 30.06.09	At 31.12.08	At 31.12.08
					£m	%	£m	%	£m	%
United Kingdom					7,363	41	8,585	39	8,996	42
North America					5,785	32	7,674	35	6,833	32
Europe					4,289	23	5,146	23	4,821	22
Other					684	4	771	3	772	4
Total					18,121	100	22,176	100	21,422	100
Within the UK non profit annuity business all non-sterling denominated bonds are currency hedged back to sterling.
(iii) Analysed by credit rating
					LGPL	LGPL	Total	Total	Total	Total
					At 30.06.09	At 30.06.09	At 30.06.09	At 30.06.09	At 31.12.08	At 31.12.08
					£m	%	£m	%	£m	%
AAA					2,571	14	4,469	20	4,616	22
AA					1,833	10	2,322	11	2,359	11
A					6,664	37	7,678	35	8,180	38
BBB					4,908	27	5,449	25	4,385	20
BB or below					512	3	551	2	183	1
Unrated: Bespoke CDOs					974	5	974	4	878	4
Other					659	4	733	3	821	4
					18,121	100	22,176	100	21,422	100
Other unrated bonds have been assessed and rated internally and are all assessed as investment grade.
Asset Disclosures										Page 77
6.02 Bond portfolio summary (continued)
(iv) CDOs
The Group holds collateralised debt obligations (CDO) with a market value of £1,080m at 30 June 2009 (31 December 2008: £1,004m).
These holdings include £106m (FY 08: £126m) in traded CDOs and £40m (FY 08: £34m) exposure to an equity tranche of a bespoke CDO. The current market value of the equity tranche is approximately equal to the present value of future interest payable on the notes.
The balance of £934m (FY 08: £844m) relates to a further four CDOs that were constructed in 2007 and 2008 in accordance with terms specified by Legal & General. These CDOs mature in 2017 and 2018. The Group selects the reference portfolios underlying the CDOs to give exposure to globally diversified portfolios of investment grade corporate bonds.
The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27%, on average across the four CDOs, before the CDOs incur any default losses. Assuming an average recovery rate of 30%, then over 39% of the reference names would have to default before the CDOs incur any default losses.
Beyond 27% of default losses on the reference portfolio, losses to the CDO would occur at a rate that is a multiple of the loss rate on the reference portfolio. For illustration a £200m loss could be reached if default losses to the reference portfolios exceeded 30% or if 44% of the names in the diversified global investment grade portfolio defaulted, with an average 30% recovery rate. (All figures are averages across the four CDOs.)
Losses are limited under the terms of the CDOs to assets and collateral invested.
These CDOs are valued using an internal valuation which is based on market inputs. This is then validated against the counterparty valuation and, at the year end, validated by independent external consultants.
For the purposes of valuing the non profit annuity regulatory and IFRS liabilities the yield on the CDOs is included within the calculation of the yield used to calculate the valuation discount rate for the annuity liabilities. An allowance for the risks, including default, is also made. For EEV purposes, the yield on the CDOs, reduced by the realistic default assumption, is similarly included in assumed future investment returns.
Asset Disclosures										Page 78
6.03 Asset backed securities summary
(i) By security
					LGPL	LGPL	Total	Total	Total	Total
					At 30.06.09	At 30.06.09	At 30.06.09	At 30.06.09	At 31.12.08	At 31.12.08
					£m	%	£m	%	£m	%
Traditional ABS:
RMBS - Prime1					286	10	549	15	593	17
RMBS - Sub-prime2					-	-	21	1	30	1
CMBS					144	5	273	7	284	8
Credit Card					34	1	287	8	267	8
Auto					-	-	84	2	82	2
Consumer Loans					42	1	50	1	-	-
Student Loan					19	1	38	1	30	1
					525	18	1,302	35	1,286	37
Other:
Secured Bond					1,107	37	1,113	29	1,068	31
Commercial Property Backed Bonds					175	6	175	5	155	5
Infrastructure / PFI / Social housing					939	32	942	25	641	19
Whole Business Securitisation					191	6	191	5	221	7
Other secured holdings3					28	1	52	1	18	1
					2,440	82	2,473	65	2,103	63
Total					2,965	100	3,775	100	3,389	100
1. 78% (FY 08: 87%) of Prime RMBS holdings relate to UK mortgages.
2. 81% (FY 08: 90%) of Sub-prime RMBS holdings have a credit rating of AAA and 53% (FY 08: 49%) relate to the UK.
3. Other includes covered bonds of £11m (FY 08: £9m).
(ii) By credit rating
					LGPL	LGPL	Total	Total	Total	Total
					At 30.06.09	At 30.06.09	At 30.06.09	At 30.06.09	At 31.12.08	At 31.12.08
					£m	%	£m	%	£m	%
AAA					1,031	35	1,746	46	1,703	51
AA					568	19	581	16	581	17
A					718	24	765	20	721	21
BBB					549	19	575	15	359	11
BB or below					12	-	17	1	16	-
Unrated					87	3	91	2	9	-
Total					2,965	100	3,775	100	3,389	100
Of the £777m of traditional ABS holdings held outside of LGPL, 91% are rated AAA (FY 08: £801m of which 93% are rated AAA).
The credit ratings of monoline wrapped bonds are based on the rating of the underlying securities. No credit is taken for the wrap.
Asset Disclosures										Page 79
6.04 Group subordinated bank exposures
							Market		Market
							value	Total	value	Total
							At 30.06.09	At 30.06.09	At 31.12.08	At 31.12.08
							£m	%	£m	%
Tier 1
United Kingdom1							242	11	448	15
North America							66	3	102	3
Europe							84	4	88	3
Others							9	-	12	-
Total tier 1							401	18	650	21
Lower tier 2
United Kingdom							737	33	760	25
North America							541	25	668	22
Europe							280	13	255	8
Others							81	4	71	2
Upper tier 2
United Kingdom							101	5	474	16
North America							-	-	3	-
Europe							46	2	142	5
Others							5	-	9	-
Other subordinated
United Kingdom							-	-	10	-
North America							-	-	18	1
Europe							-	-	-	-
Others							-	-	-	-
Total tier 2 and other subordinated							1,791	82	2,410	79
Total							2,192	100	3,060	100
1. The exposure to UK tier 1 debt includes issuances from the UK subsidiaries of European banks where there is no explicit parental guarantee.
Over the period, the Group has taken advantage of the favourable terms on which some banks exchanged junior subordinated debt for more senior debt and this has contributed to the reduction in the holdings of junior subordinated bank debt.
Asset Disclosures										Page 80
6.05 Group capital asset mix
					Society	Other		Society	Other
					shareholder	Group		shareholder	Group
					capital	capital	Total	capital	capital	Total
					At 30.06.09	At 30.06.09	At 30.06.09	At 31.12.08	At 31.12.08	At 31.12.08
					%	%	%	%	%	%
Equities					32	3	19	43	2	25
Bonds					30	56	42	23	50	35
Derivative assets					1	15	8	1	12	6
Property					7	-	4	6	-	4
Cash (including cash equivalents)					30	26	27	27	36	30
					100	100	100	100	100	100
Invested assets (£bn)					2.2	1.9	4.1	2.9	2.3	5.2
6.06 Analysis of fair value measurement bases
							Fair value measurement at the
							end of the reporting period based on:
							Level 1	Level 2	Level 3	Total
As at 30 June 2009							£bn	£bn	£bn	£bn
Group capital and other insurance business
Equities							0.6	0.1	-	0.7
Bonds							1.0	2.6	-	3.6
Derivative assets							-	0.3	-	0.3
							1.6	3.0	-	4.6
Non profit non-unit linked
Equities							0.1	-	-	0.1
Bonds							1.4	17.2	-	18.6
Derivative assets							0.2	1.2	-	1.4
							1.7	18.4	-	20.1
							Fair value measurement at the
							end of the reporting period based on:
							Level 1	Level 2	Level 3	Total
As at 31 December 2008							£bn	£bn	£bn	£bn
Group capital and other insurance business
Equities							1.1	-	0.2	1.3
Bonds							1.2	2.6	-	3.8
Derivative assets							-	0.3	-	0.3
							2.3	2.9	0.2	5.4
Non profit non-unit linked
Equities							0.1	-	-	0.1
Bonds							1.1	16.5	-	17.6
Derivative assets							-	2.0	-	2.0
							1.2	18.5	-	19.7
The analysis excludes cash and property investments of £3.3bn (FY 08: £3.2bn) (Note 6.01).
Asset Disclosures										Page 81
6.06 Analysis of fair value measurement bases (continued)
The levels of fair value measurement bases are defined as follows:
Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: fair values measured using valuation techniques for all inputs significant to the measurement other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: fair values measured using valuation techniques for any input for the asset or liability significant to the measurement that is not based on observable market data (unobservable inputs).
Level 1 financial instruments principally include listed equity instruments, government and certain supranational institution bonds and exchange traded futures and options.
Level 2 financial instruments principally include listed corporate bonds, commercial paper, and derivative instruments which are not exchange traded.
Level 3 financial instruments principally include unquoted equities, including investments in venture capital, and suspended securities.
In current market conditions, the liquidity of financial instruments is less than it has been in the past. All of the Group's level 2 assets have been valued using standard market pricing sources, such as iBoxx, IDC and Bloomberg except for bespoke CDO and swaps holdings (see below). In normal market conditions we would consider these prices to be observable market prices. However, following consultation with our pricing providers and a number of their contributing brokers we have considered that these prices are not from a suitably active market and have prudently classified them as level 2.
Our holdings in bespoke CDOs and swaps are priced using industry standard internal models which utilise market assumptions. The CDO valuations have also been verified using externally provided prices. Accordingly these assets have also been classified in level 2.
Level 3 assets, where internal models are used represent a small proportion of assets to which shareholders are exposed and reflect unquoted equities including investments in venture capital, and suspended securities.

 

END

 

 

IR SSAFWDSUSELA