L&G Interim Results 2006 PT 5
Legal & General Group PLC
27 July 2006
P57
Capital and Cash Flow
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5.1 Group capital resources
The Group's total capital resources of £7.0bn on an IFRS basis, comprise ordinary equity holders' capital (£4.2bn),
subordinated debt (£0.8bn), and unallocated divisible surplus (£2.0bn, including £0.3bn of Sub-fund).
5.2 Insurance Groups Directive surplus
The Group is required to measure and monitor its capital resources on a regulatory, as well as an IFRS, basis and to
comply with the minimum capital requirements of regulators in each territory in which it operates. At a Group level,
Legal & General must comply with the requirements of the Insurance Groups Directive (IGD). This is a very prudent
measure of capital resources as it excludes any amount of surplus capital within a long term fund (£2.3bn at
30 June 2006). The table below shows the total estimated Group capital resources, Group capital resources requirement
and the surplus.
30.06.06 Full year
31.12.05
£m £m
----------------------------------------------------------------------------------------------------------------------
Tier I 5,399 6,047
Upper tier II 423 394
Lower tier II 411 408
Deductions (67) (62)
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Group capital resources 6,166 6,787
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Group capital resources requirement 3,833 4,376
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Insurance Groups Directive surplus 2,333 2,411
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A reconciliation of the Group capital resources on an IGD basis to the capital and reserves attributable to the equity
holders of the company on an IFRS basis is given below.
30.06.06 Full year
31.12.05
£m £m
----------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to equity holders on an IFRS basis 4,252 4,651
Qualifying tier II capital 834 408
Additional capital available from Legal & General Assurance Society Ltd 1,552 2,148
Adjustment to reflect regulatory value of L&G America (466) (430)
Other adjustments to restate to IGD basis (6) 10
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Group capital resources 6,166 6,787
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P58
5.3 Society capital resources
(a) Analysis of Society capital on an IFRS basis
Legal & General Assurance Society Limited (Society), the Group's principal operating subsidiary, has been allocated
capital of £4.6bn, reflecting the significance of this operation and the importance of ensuring financial strength
to support long term growth of the business. Of this total, £2.0bn is held outside the long term fund as Society
Shareholder Capital (SSC), and the remainder of £2.6bn is held within the UK long term fund as Shareholder Retained
Capital (SRC). An analysis of the movement in total Society capital on the IFRS basis is provided in the table below:
30.06.06 30.06.06 30.06.05 30.06.05 Full year Full year
31.12.05 31.12.05
SSC SRC SSC SRC SSC SRC
Notes £m £m £m £m £m £m
----------------------------------------------------------------------------------------------------------------------
SSC/SRC as at 1 January 1,896 2,560 1,973 2,196 1,973 2,196
Investment return 70 103 250
Transfer from long term fund 5.4(b) 138 115 265
Dividends from subsidiaries 2 105 105
Distribution to shareholders (50) (229) (638)
Tax (11) (22) (57)
Other (3) 3 (2)
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SSC at end of period 2,042 2,048 1,896
Investment return 104 129 387
Net capital released from non profit
business 5.3(b) 110 138 478
Distribution of operating profit from non
profit business (175) (151) (349)
Tax (33) (18) (148)
SRC movement included in total
recognised income and expense 25 7 (4)
----------------------------------------------------------------------------------------------------------------------
SRC at end of period 2,591 2,301 2,560
----------------------------------------------------------------------------------------------------------------------
Society capital at end of period 2,042 2,591 2,048 2,301 1,896 2,560
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(b) Analysis of net capital released from non profit business
30.06.06 30.06.05 Full year
31.12.05
£m £m £m
----------------------------------------------------------------------------------------------------------------------
Net capital released from non profit business comprises:
New business:
- Strain arising in the period, before financing arrangements (279) (207) (466)
- Financing arrangements 94 - 125
Existing business:
- Expected capital release in the period, before financing arrangements 290 198 499
- Financing arrangements (26) - -
Experience variances (45) 127 274
Changes to non-economic assumptions (28) (35) (35)
Movements in non-cash items 58 2 (67)
Other 13 12 5
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77 97 335
Tax gross-up 33 41 143
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110 138 478
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Financing arrangements comprise the financial reinsurance for new term assurance business which was finalised in the
last quarter of 2005. The reinsurance contract has a beneficial impact of £94m (net of tax) on the financing of new
business for regulatory purposes. This has been partially offset by repayments (£26m) relating to the financial
reinsurance on premiums written in 2005. Under IFRS, the impact is neutral and there is an equal and opposite impact
reported through non-cash items.
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P59
5.3 Society capital resources (continued)
Expected capital release represents the capital and profit generated in the period from the in-force non profit
business if the embedded value assumptions are borne out in practice. The experience variances are calculated with
reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model.
The release figure of £290m reflects the substantial growth in non profit business in recent years.
On average, the capital invested in new non profit business is repaid from product cash flows in approximately five
years if required solvency margin is excluded, and approximately six years when required solvency margin is included.
Both new business strain and expected capital release exclude required solvency margin, as this is not accounted for
under IFRS.
An analysis of the experience variances, non-economic assumption changes and non-cash items, all net of tax, is
provided below:
Experience variances 30.06.06 Full year
31.12.05
£m £m
----------------------------------------------------------------------------------------------------------------------
Persistency - 13
Mortality / morbidity (1) 15
Expenses (20) (8)
Bulk Purchase Annuity data loading 43 78
Investment 2 121
Allocated tax and other (69) 55
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(45) 274
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Experience variances of £(45)m comprises principally the impact from loading data onto the new administration system
for Bulk Purchase Annuity business, and variances between actual and modelled allocated tax.
Changes to non-economic assumptions 30.06.06 Full year
31.12.05
£m £m
----------------------------------------------------------------------------------------------------------------------
Mortality / morbidity - 33
Expenses (13) (19)
Negative inflation (15) (33)
Other - (16)
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(28) (35)
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Movements in non-cash items 30.06.06 Full year
31.12.05
£m £m
----------------------------------------------------------------------------------------------------------------------
Deferred tax 37 34
Deferred acquisition costs 130 160
Deferred income liabilities (25) (110)
IFRS adjustment for financial reinsurance (68) (125)
Other (16) (26)
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58 (67)
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(c) Regulatory capital surplus
Society is required to measure and monitor its capital resources on a regulatory basis. The primary requirement is for
Society to maintain capital resources in excess of its capital resources requirement and the table below shows the
estimated regulatory capital surplus as at 30 June 2006.
30.06.06 30.06.06 Full year Full year
31.12.05 31.12.05
Long term General Long term General
business insurance business insurance
£m £m £m £m
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Tier I 7,527 55 7,944 55
Upper tier II 602 - 602 -
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Available capital resources 8,129 55 8,546 55
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Capital resources requirement 3,597 53 4,142 55
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Regulatory capital surplus 4,532 2 4,404 -
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P60
5.3 Society capital resources (continued)
Tier I resources include an implicit item relating to non profit business of £425m (FY05: £540m).
Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis. If the surplus on
a realistic basis is lower than the surplus using Peak 1 solvency rules, then a further capital requirement is
included in the capital resources requirement. This additional capital requirement is the With-Profits Insurance
Capital Component and amounts to £1,192m for 30 June 2006 (FY05: £1,504m) of the total capital resources
requirement of £3,597m (FY05: £4,142m).
The table below summarises the realistic position of the with-profits part of the fund:
30.06.06 Full year
31.12.05
£m £m
----------------------------------------------------------------------------------------------------------------------
With-profits surplus 907 842
Risk capital margin (RCM) 244 327
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Surplus 663 515
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(d) Society financial strength ratings
Society continues to be one of the two highest rated European life assurers. Currently, our financial strength ratings
from Standard & Poor's, Moody's and A.M.Best are AA+, Aa1 and A+ respectively, all with a stable outlook.
5.4 Distributions to shareholders from the UK long term fund
(a) Calculation of distribution relating to non profit and shareholder net worth
The transfer to shareholders from the long term fund is limited by a formula agreed with our regulator. The formula is
the aggregate of the shareholders' share of the with-profits surplus, a smoothed investment return of 7% on the
embedded value of the SRC and Sub-fund, the shareholder net worth (SNW) and 5% on the embedded value of the non profit
business.
30.06.06 30.06.06 30.06.05 30.06.05 Full year Full year
31.12.05 31.12.05
Non profit SNW Non profit SNW Non profit SNW
£m £m £m £m £m £m
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At end of period 2,649 1,714 2,268 1,464 2,387 1,762
Less: subordinated debt capital - (602) - (602) - (602)
Add back: pension deficit attributable to SNW - 38 - 47 - 51
Add back: distributions - 110 - 92 - 219
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2,649 1,260 2,268 1,001 2,387 1,430
Distribution formula - full year 5% 7%
Distribution formula - half year 2.5% 3.5% 2.5% 3.5%
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Distribution after tax 67 43 57 35 119 100
Tax gross up @ 30% 29 18 26 15 51 42
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Distribution before tax 96 61 83 50 170 142
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(b) Analysis of distribution to shareholders
30.06.06 30.06.05 Full year
31.12.05
£m £m £m
----------------------------------------------------------------------------------------------------------------------
With-profits transfer 28 23 46
Non profit transfer 110 92 219
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Transfer from long term fund 138 115 265
Subordinated debt 13 13 26
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Distribution to shareholders after tax 151 128 291
Tax gross up @ 30% 64 55 124
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Distribution to shareholders before tax 215 183 415
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P61
5.5 Group cash flow statement
The table below shows the cash flows relating to the Group's parent company.
30.06.06 30.06.05 Full year
Restated 31.12.05
£m £m £m
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Dividends received:
UK life and pensions 50 124 533
General insurance - 105 105
Investment management - 24 69
Other 2 1 2
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52 254 709
Dividend distributions to
ordinary equity holders of the Company during the period (236) (224) (331)
Distributions during the period on subordinated borrowings designated as equity - (8) (16)
Proceeds from issue of equity 12 - 1
Proceeds from issue of subordinated borrowings - 397 397
Working capital movements (6) (66) (136)
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Net cash (outflow)/inflow (178) 353 624
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Following the implementation of FRS 21 'Events after the balance sheet date', dividends from operating subsidiaries
are paid prior to the year end to fund both the final and interim dividend payments to shareholders. This has
contributed to the net cash outflow in the first half of 2006.
This information is provided by RNS
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