L&G Interim Results 2001-Pt.3
Legal & General Group PLC
25 July 2001
Part 3
P1
Legal & General Group Plc
Supplementary financial statements on the Achieved Profits basis
Six months ended 30 June 2001
A description of the Achieved Profits methodology was provided in the
2000 Report and Accounts. The principal activities which are not
affected by the use of Achieved Profits are considered in Parts 1 and 2
of this release.
2001 Interim results
The Group's operating profit before tax grew to £351m (1H00: £339m).
The 2001 result was driven by the strong growth in the profits of the
life and pensions businesses, which in total increased by 16% to £319m,
with the contribution from new business up 41% to £97m (1H00: £69m).
The profit before tax of £193m (1H00: £256m) included the impact of a
negative investment return variance of £199m (1H00: £90m negative).
Shareholders' funds were £5,318m (31.12.00: £5,274m), which represented
an annualised after-tax return of 5%, before dividends of £83m.
UK life and pensions
The operating profit before tax increased by 23% to £265m
(1H00: £216m). The contribution from new business was up 57% to £77m
(1H00: £49m), reflecting strong sales growth, associated unit cost
benefits and a favourable mix. The new business contribution as a
percentage of APE increased to 29% from 27% for full year 2000. We have
again written new business which delivers significant value to
shareholders. Further contributions to operating profit will arise from
the subsequent management of this business.
The contribution from in-force business increased by 25% to £127m
(1H00: £102m), exceeding the anticipated return. The contribution from
shareholder net worth of £61m (1H00: £65m) reflected the impact of a
lower anticipated rate of return.
Profit before tax of £155m (1H00: £131m) includes the impact of both
variances from the assumed investment return and economic assumption
changes. Weak investment markets gave rise to a combined investment
return from equities and property 8.1% lower (1H00: 4.3% lower) than
the assumption for the six months period. These market conditions
generated a negative investment variance of £154m (1H00: £82m
negative). The effect of economic assumption changes resulted in a
positive contribution of £44m (1H00: £3m negative), reflecting the
increase in interest rates particularly at longer durations.
Investment management
The operating profit from Investment management was £31m (1H00: £40m).
This included a profit of £28m (1H00: £36m) from the UK Managed Funds
business which no longer benefits from double tax relief (1H00: £7m
benefit). New Managed Funds business, which included one particularly
large mandate, increased by 14% to £6.0bn (1H00: £5.3bn). The
contribution from new business was £17m (1H00: £18m).
The result of the UK unit trust and ISA/PEP business, previously
included within the Investment management result, is now included in
Other operational income.
P2
Legal & General Group Plc
Supplementary financial statements on the Achieved Profits basis
Six months ended 30 June 2001
International life and pensions
Operating profit from international businesses was £54m (1H00: £58m),
with a new business contribution of £20m (1H00: £20m).
USA
The operating profit was £33m (1H00: £35m). The contribution from new
business was £12m (1H00: £14m).
Volumes decreased by 35% to £26m APE compared with the first half of
2000 when exceptional volumes were generated relating to the
introduction of Triple X. The impact of these lower volumes in the
first half was partly offset by higher margins on post-Triple X
business, with the new business contribution as a percentage of APE
being 47%. The in-force business contributed £16m (1H00: £18m),
primarily reflecting the impact of a lower anticipated rate of return.
Europe
The operating profits of the Dutch and French businesses were £12m
(1H00: £8m) and £9m (1H00: £15m) respectively. The combined
contribution from new business was £8m (1H00: £6m).
Embedded values
The embedded value of the UK life and pensions business was £3,866m
(31.12.00: £3,868m). The growth in the UK embedded value, before
capital movements and the distributions, represented an annualised
return of 4% after tax. The embedded value of the UK Managed Funds
business was £128m (31.12.00: £134m) and the embedded value of the
international businesses grew to £615m (31.12.00: £578m), representing
annualised returns after tax of 12% and 7% respectively, before
distributions and exchange movements.
Legal & General Group Plc P3
Consolidated Profit & Loss Account - Achieved Profits basis
Six months ended 30 June 2001
----------------------------------------------------------------------
Six Six
months months Full
to to year
30.6.01 30.6.00 2000
£m £m £m
Profit from continuing operations
UK life and pensions (Note 1) 265 216 454
International life and pensions (Note 1) ------ ------ ------
- USA : 33: : 35: : 45:
- Netherlands : 12: : 8: : 17:
- France : 9: : 15: : 24:
------ ------ ------
54 58 86
------ ------ ------
319 274 540
Investment management 31 40 82
General insurance 16 9 20
Other operational income (15) 15 34
------ ------ ------
351 338 676
Profit from discontinued operations
Other operational income - Fairmount Group 0 1 2
------ ------ ------
Operating profit before tax 351 339 678
Variation from longer term investment return (199) (90) (306)
Change in equalisation provision (3) (3) (6)
Effect of economic assumption changes 36 10 26
Profit on sale of Fairmount Group 8 - -
------ ------ ------
Profit on ordinary activities before tax 193 256 392
Tax on profit on ordinary activities (88) (97) (149)
------ ------ ------
Profit for the financial period 105 159 243
====== ====== ======
Dividends payable 83 77 243
Earnings per share
- based on operating profit from
continuing operations after tax 4.81p 4.66p 9.49p
- based on profit for the financial period 2.05p 3.10p 4.74p
Diluted earnings per share
- based on operating profit from
continuing operations after tax 4.80p 4.65p 9.47p
- based on profit for the financial period 2.04p 3.09p 4.73p
Dividend per share 1.63p 1.48p 4.71p
======================================================================
The results for the six months ended 30 June 2001 and 30 June 2000 are
unaudited, but have been subject to a review by the auditors.
Other operational income includes the results of Legal & General (Unit
Trust Managers) Ltd and Legal & General (Portfolio Management
Services) Ltd previously reported within Investment management.
Legal & General Group Plc P4
Consolidated Balance Sheet - Achieved Profits basis
As at 30 June 2001
----------------------------------------------------------------------
As at As at As at
31.6.01 30.6.0031.12.00
£m £m £m
Assets
Investments 34,011 34,350 35,077
Assets held to cover linked liabilities 70,692 68,618 70,678
Other assets 5,177 4,460 4,626
------- ------- -------
109,880 107,428 110,381
======= ======= =======
Liabilities
Shareholders' funds (Note 4) 5,318 5,356 5,274
Fund for future appropriations 2,940 5,147 4,331
Technical provisions ------- ------- -------
- Technical provisions for linked liabilities :70,592::68,529::70,566:
- Other long term business provisions :27,551::25,023::26,692:
- General insurance provisions : 329:: 333:: 350:
------- ------- -------
98,472 93,885 97,608
Borrowings 773 395 571
Bank customer deposits 1,186 1,245 1,307
Other creditors 1,191 1,400 1,290
------- ------- -------
109,880 107,428 110,381
======================================================================
Legal & General Group Plc P5
Notes to Financial Statements - Achieved Profits basis
Six months ended 30 June 2001
----------------------------------------------------------------------
1. Profit from long term business
Six months to Six months to Full year
30.6.01 30.6.00 2000
UK UK UK UK UK UK
Life Man- Life Man- Life Man-
and aged and aged and aged
Pensions Funds*Pensions Funds*Pensions Funds*
£m £m £m £m £m £m
Contribution from
- New business 77 17 49 18 118 35
- In-force business 127 11 102 18 209 40
- Shareholder net worth 61 - 65 - 127 -
------ ------ ------ ------ ------ ------
Operating profit 265 28 216 36 454 75
Variation from longer
term investment return** (154) (16) (82) (7) (274) (18)
Effect of economic
assumption changes 44 (1) (3) 0 10 2
------ ------ ------ ------ ------ ------
Profit before tax 155 11 131 29 190 59
Tax (69) (3) (50) (9) (75) (18)
------ ------ ------ ------ ------ ------
Profit after tax 86 8 81 20 115 41
====== ====== ====== ====== ====== ======
Intern- Intern- Intern-
ational Total ational Total ational Total
£m £m £m £m £m £m
Contribution from
- New business 20 114 20 87 43 196
- In-force business 27 165 28 148 25 274
- Shareholder net worth 7 68 10 75 18 145
------ ------ ------ ------ ------ ------
Operating profit 54 347 58 310 86 615
Variation from longer
term investment return** (15) (185) 3 (86) (9) (301)
Effect of economic
assumption changes (7) 36 13 10 14 26
------ ------ ------ ------ ------ ------
Profit before tax 32 198 74 234 91 340
Tax (12) (84) (26) (85) (32) (125)
------ ------ ------ ------ ------ ------
Profit after tax 20 114 48 149 59 215
====== ====== ====== ====== ====== ======
* Included in the Investment management result of £31m (1H00: £40m;
FY00: £82m)
** The variation from longer term investment return represents the
excess/(deficit) of the investment performance in respect of
shareholder net worth and in-force business, compared with embedded
value assumptions at the beginning of the period.
======================================================================
Legal & General Group Plc P6
Notes to Financial Statements - Achieved Profits basis
Six months ended 30 June 2001
----------------------------------------------------------------------
2. Embedded value
As at 30.6.01 As at 30.6.00 As at 31.12.00
UK UK UK UK UK UK
Life Man- Life Man- Life Man-
and aged and aged and aged
Pensions FundsPensions FundsPensions Funds
£m £m £m £m £m £m
Value of in-force
business 2,457 128 2,345 133 2,334 134
Shareholder net worth 1,409 - 1,451 - 1,534 -
------ ------ ------ ------ ------ ------
Embedded value 3,866 128 3,796 133 3,868 134
====== ====== ====== ====== ====== ======
Intern- Intern- Intern-
ational Total ational Total ational Total
£m £m £m £m £m £m
Value of in-force
business 369 2,954 403 2,881 356 2,824
Shareholder net worth 246 1,655 131 1,582 222 1,756
------ ------ ------ ------ ------ ------
Embedded value 615 4,609 534 4,463 578 4,580
====== ====== ====== ====== ====== ======
These embedded values have been reviewed by the Group's consulting
actuaries.
For the UK life and pensions business, shareholder net worth comprises
the Shareholder Retained Capital (SRC) on the MSS basis, adjusted for
deferred acquisition costs and the sub-fund, both net of allowance for
tax. It includes intra-group subordinated debt capital of £197m
(30.6.00: £nil; 31.12.00: £147m), but excludes the net assets of £228m
(30.6.00: £182m; 31.12.00: £201m) of Long Term Fund operational
subsidiaries.
======================================================================
3. Movement in embedded value
Six months to Six months to Full year
30.6.01 30.6.00 2000
UK UK UK UK UK UK
Life Man- Life Mana- Life Mana-
and aged and aged and aged
Pensions FundsPensions FundsPensions Funds
£m £m £m £m £m £m
At 1 January 3,868 134 3,824 130 3,824 130
Profit after tax 86 8 81 20 115 41
Capital movements 35 - - - 147 -
Distributions (123) (14) (109) (17) (218) (37)
------ ------ ------ ------ ------ ------
At end of period 3,866 128 3,796 133 3,868 134
====== ====== ====== ====== ====== ======
Intern- Intern- Intern-
ational Total ational Total ational Total
£m £m £m £m £m £m
At 1 January 578 4,580 461 4,415 461 4,415
Exchange rate movement 18 18 25 25 28 28
------ ------ ------ ------ ------ ------
596 4,598 486 4,440 489 4,443
Profit after tax 20 114 48 149 59 215
Capital movements - 35 - - 34 181
Distributions (1) (138) 0 (126) (4) (259)
------ ------ ------ ------ ------ ------
At end of period 615 4,609 534 4,463 578 4,580
======================================================================
Legal & General Group Plc P7
Notes to Financial Statements - Achieved Profits basis
Six months ended 30 June 2001
----------------------------------------------------------------------
4. Segmental analysis of shareholders' funds
As at As at As at
30.6.01 30.6.0031.12.00
Embedded value of life and pension businesses £m £m £m
- UK* 3,866 3,796 3,868
- USA 481 397 443
- Netherlands 70 68 67
- France 64 69 68
------ ------ ------
4,481 4,330 4,446
Investment management** 261 231 251
General insurance 88 73 76
Banking 93 94 92
Corporate funds*** 395 628 409
------ ------ ------
5,318 5,356 5,274
====== ====== ======
* Includes £197m (30.6.00: £nil; 31.12.00: £147m) of intra-group
subordinated debt capital attributed to the SRC previously reported
within Corporate funds.
** Includes £128m (30.6.00: £133m; 31.12.00: £134m) embedded value of
UK Managed Funds business. All other Investment management
subsidiaries are included at net asset value.
*** The net assets of the other UK Long Term Fund operational
subsidiaries, including Legal & General (Unit Trust Managers) Ltd
and Legal & General (Portfolio Management Services) Ltd which were
previously reported within Investment management, are included in
Corporate funds.
======================================================================
Legal & General Group Plc P8
Notes to Financial Statements - Achieved Profits basis
Six months ended 30 June 2001
----------------------------------------------------------------------
5. Assumptions
Key economic assumptions are set out below and should be read in
conjunction with the notes to the supplementary financial statements in
the 2000 Report and Accounts. The assumed future pre-tax return on
fixed interest securities is set by reference to redemption yields
available in the market at the end of the reporting period. The
corresponding return on equities and property and the risk discount
rate have been set by reference to the gilt assumption.
UK
As at As at As at As at
30.6.01 30.6.00 31.12.00 31.12.99
% p.a. % p.a. % p.a. % p.a.
Type of investment
Gilts
- Fixed interest and RPI linked 5.3 4.9 4.7 5.1
Non-gilts
- Fixed interest 5.8-6.9 6.6 5.3-6.5 6.4
- RPI linked 5.4-6.3 4.9 5.0-6.0 5.1
Equities and property 7.9 7.5 7.3 7.7
Risk discount rate (after tax) 7.8 7.4 7.2 7.6
Inflation
Expenses/earnings 3.7 4.0 3.6 4.2
Indexation 2.7 3.0 2.6 3.2
USA
Reinvestment rate 8.0 7.6 7.0 7.6
Risk discount rate (after tax) 9.0 8.6 7.7 9.0
Operational assumptions, which are reviewed annually to reflect recent
operating experience, are largely unchanged from those made at the end
of 2000. The value of new business has been calculated using actual
acquisition costs.
======================================================================
6. Alternative assumptions
The discount rate appropriate to any investor will depend on the
investor's circumstances, tax position and perception of the risks
associated with the anticipated cash flows to shareholders.
The table below shows the effect on UK life and pensions embedded value
of calculations at alternative discount rates and equities and property
yields.
1% lower 1% higher 1% higher
risk risk equities/
As discount discount property
published rate rate yields
Effect on embedded value
at 30 June 2001 £3,866m +£330m -£290m +£300m
It should be noted that, in calculating the alternative values, all other
assumptions are left unchanged.
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