L&G Interim Results Part 2

Legal & General Group PLC 28 July 2005 Part 2 Legal & General Group Plc P1 Consolidated Income Statement - European Embedded Value Basis Six months ended 30 June 2005 ================================================================================ Notes Full year 30.6.05 30.6.04 2004 Restated Restated Â£m Â£m Â£m Profit from continuing operations Life and pensions 1 / 2 385 184 587 Institutional fund management 66 51 104 General insurance 3 4 17 32 Other operational income 4 10 13 22 ------- ------- ------- Operating profit 465 265 745 Variation from longer term investment return 7 206 80 414 Effect of economic assumption changes 1 11 (7) 34 Property income attributable to minority interests 11 8 32 ------- ------- ------- Profit from continuing operations before tax 693 346 1,225 Tax 12 (182) (100) (349) Effect of UK tax changes 13 (276) - - ------- ------- ------- Profit from continuing operations after tax 235 246 876 Profit from discontinued operations 13 2 5 ------- ------- ------- Profit on ordinary activities after tax 248 248 881 Profit attributable to minority interests 8 (11) (8) (32) ------- ------- ------- Profit attributable to equity holders 237 240 849 ================================================================================ Earnings per share 14 p p p Based on operating profit from continuing operations after tax 5.10 3.01 8.27 Based on profit attributable to equity holders 3.67 3.70 13.10 Diluted earnings per share 14 Based on operating profit from continuing operations after tax 4.98 3.00 8.12 Based on profit attributable to equity holders 3.61 3.69 12.72 ================================================================================ This financial information was approved by the Board on 27 July 2005. The results for the six months to 30 June 2005 and 30 June 2004 are unaudited, but have been subject to a review by the independent auditors and constitute non-statutory accounts within the meaning of Section 240 of the Companies Act 1985. They have been prepared on a basis which is consistent with the restated financial information from Achieved Profits (AP) to European Embedded Value (EEV) for the year ended 31 December 2004 published on 24 May 2005. The published 31 December 2004 supplementary financial information includes an independent auditors' report which is unqualified. The original results for the year ended 2004 published on 24 February 2005 have been filed with the Registrar of Companies and include an independent auditors' report which is unqualified and does not contain a statement under either Sections 237(2) or 237(3) of the Companies Act 1985. These figures have been prepared for covered business using the EEV basis. The International Financial Reporting Standards (IFRS) results are included in Part 3. ================================================================================ Legal & General Group Plc P2 Consolidated Balance Sheet - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- Notes At 30.6.05 At 30.6.04 At 31.12.04 Restated Restated Assets Â£m Â£m Â£m Investments 9 163,963 130,731 147,761 Long term in-force business asset 15 2,404 2,324 2,535 Other assets 6,080 6,306 5,088 Non-current assets held for sale - 649 733 --------- --------- --------- 172,447 140,010 156,117 ========= ========= ========= Equity and liabilities Shareholders' equity 17 6,173 5,691 6,182 Minority interests 215 167 214 Subordinated borrowings 16 801 394 394 Unallocated divisible surplus 1,938 1,396 1,559 Participating contract liabilities 19,152 18,056 18,817 Non-participating contract liabilities 138,687 109,523 124,193 Senior borrowings 16 1,573 1,608 1,452 Other creditors and provisions 3,908 2,612 2,672 Non-current liabilities held for sale - 563 634 --------- --------- --------- 172,447 140,010 156,117 ========= ========= ========= ================================================================================ Legal & General Group Plc P3 New business Six months ended 30 June 2005 -------------------------------------------------------------------------------- New Annual Premium Equivalent Full year 30.6.05 30.6.04 2004 Â£m Â£m Â£m Life and pensions business Life 213 197 400 Pensions 213 142 322 ------- ------- ------- UK 426 339 722 ------- ------- ------- USA 19 27 51 Netherlands 14 12 25 France 23 17 29 ------- ------- ------- 56 56 105 ------- ------- ------- Life and pensions total 482 395 827 Retail investment business UK 169 115 179 France 1 1 2 ------- ------- ------- Total new business 652 511 1,008 ======= ======= ======= International life and pensions new business expressed at 30 June 2005 average exchange rates USA 26 50 Netherlands 12 25 France 17 29 ------- ------- 55 104 ======= ======= Annual Premium Equivalent (APE) is calculated for total new business, including unit trusts and ISAs but excluding institutional fund management, and comprises the new annual premiums together with 10% of single premiums. Full year 30.6.05 30.6.04 2004 Institutional fund management Â£m Â£m Â£m Managed pension funds * - Pooled funds 6,710 7,610 13,951 - Segregated funds 105 1,063 1,228 -------- -------- -------- 6,815 8,673 15,179 Other funds 60 70 368 -------- -------- -------- 6,875 8,743 15,547 ======== ======== ======== * New monies from pension fund clients of Legal & General Assurance (Pensions Management) Ltd. excludes Â£1.8bn (1H04: Â£2.2bn; FY04: Â£5.0bn) which was held through the year on a temporary basis, generally as part of a portfolio reconstruction. ================================================================================ Legal & General Group Plc P4 New business Six months ended 30 June 2005 -------------------------------------------------------------------------------- 6 months 3 months 3 months 6 months 3 months 3 months 30.6.05 30.6.05 31.3.05 30.6.04 30.6.04 31.3.04 Â£m Â£m Â£m Â£m Â£m Â£m UK annual premiums Life and pensions business Life - Mortgage-related 43 23 20 53 28 25 - Protection 24 12 12 25 13 12 - Group risk 42 20 22 37 24 13 Pensions - Individual pensions 83 46 37 61 33 28 - Group pensions 2 1 1 2 1 1 ------ ------ ------ ------ ------ ------ 194 102 92 178 99 79 Retail investment business ISAs 9 6 3 13 7 6 Unit trusts 1 1 0 1 0 1 ------ ------ ------ ------ ------ ------ Total 204 109 95 192 106 86 ================================================================================ UK single premiums Life and pensions business Bonds - With-profits 102 45 57 224 101 123 - Unit linked 940 506 434 596 335 261 Pensions - Individual pensions 460 248 212 179 92 87 - Annuities - individual 481 298 183 366 184 182 - Annuities - bulk purchase 329 65 264 230 139 91 - Other group business 4 3 1 2 1 1 - DWP rebates 7 2 5 17 13 4 ------ ------ ------ ------ ------ ------ 2,323 1,167 1,156 1,614 865 749 Retail investment business ISAs 289 205 84 389 267 122 Unit trusts 1,304 670 634 621 420 201 ------ ------ ------ ------ ------ ------ Total 3,916 2,042 1,874 2,624 1,552 1,072 ================================================================================ UK APE Individual life and pensions 349 191 158 277 146 131 Retail investments 169 94 75 115 76 39 ------ ------ ------ ------ ------ ------ by channel - Independent financial advisers 317 180 137 234 133 101 - Single tie 182 95 87 135 77 58 - Direct 19 10 9 23 12 11 ------ ------ ------ ------ ------ ------ Total UK individual 518 285 233 392 222 170 Group 77 27 50 62 39 23 ------ ------ ------ ------ ------ ------ Total 595 312 283 454 261 193 ================================================================================ Legal & General Group Plc P5 New business Six months ended 30 June 2005 -------------------------------------------------------------------------------- 6 months 3 months 3 months 6 months 3 months 3 months 30.6.05 30.6.05 31.3.05 30.6.04 30.6.04 31.3.04 Â£m Â£m Â£m Â£m Â£m Â£m International annual premiums Life and pensions business USA 19 9 10 27 15 12 Netherlands 6 2 4 6 3 3 France 14 13 1 10 10 0 ------ ------ ------ ------ ------ ------ Total 39 24 15 43 28 15 ================================================================================ International single premiums Life and pensions business USA 0 0 0 0 0 0 Netherlands 78 32 46 64 24 40 France 91 44 47 68 38 30 ------ ------ ------ ------ ------ ------ 169 76 93 132 62 70 Retail investment business France 10 5 5 8 5 3 ------ ------ ------ ------ ------ ------ Total 179 81 98 140 67 73 ================================================================================ Legal & General Group Plc P6 New business Six months ended 30 June 2005 -------------------------------------------------------------------------------- Present value of new business premiums (PVNBP) Single Annual Capitalisation New business premiums premiums factor PVNBP margin Â£m Â£m Â£m % Six months ended 30.6.05 UK 2,323 194 4.2 3,141 4.1 International 169 39 7.6 464 2.4 ------- ------ ------- ------ 2,492 233 3,605 3.9 ======= ====== ======= ====== Six months ended 30.6.04 UK 1,614 178 4.3 2,388 5.0 International 132 43 5.8 382 2.6 ------- ------ ------- ------ 1,746 221 2,770 4.7 ======= ======= ======= ====== Full year ended 31.12.04 UK 3,740 348 4.3 5,255 4.6 International 272 77 6.9 802 4.4 ------- ------ ------- ------ 4,012 425 6,057 4.6 ======= ====== ======= ====== The PVNBP on the EEV basis is defined as the present value of regular premiums plus single premiums for any given year. It is calculated using the same assumptions as for the new business contribution but determined as at the point of sale. The capitalisation factor represents the PVNBP minus single premiums divided by the annualised amount of new regular premiums. The new business margin is defined as the contribution from new business divided by the PVNBP. ================================================================================ Legal & General Group Plc P7 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 1. Profit from continuing operations after tax from covered business Life and Managed Inter- pensions pension UK national Total funds* Total Six months ended 30.6.05 Â£m Â£m Â£m Â£m Â£m Contribution from: New business after cost of capital 129 11 140 21 161 In-force business - expected return 145 29 174 10 184 - experience variances 11 0 11 12 23 - operating assumption changes (4) (3) (7) 13 6 Development costs (5) - (5) 0 (5) Shareholder net worth 64 8 72 3 75 ------ ------ ------ ------ ------ Operating profit 340 45 385 59 444 Variation from longer term investment return 135 10 145 11 156 Effect of economic assumption changes 21 (11) 10 1 11 ------ ------ ------ ------ ------ Profit from continuing operations before tax 496 44 540 71 611 Tax (131) (15) (146) (21) (167) Effect of UK tax changes (276) - (276) - (276) ------ ------ ------ ------ ------ Profit from continuing operations after tax 89 29 118 50 168 ====== ====== ====== ====== ====== Six months ended 30.6.04 (Restated) Contribution from: New business after cost of capital 120 10 130 17 147 In-force business - expected return 138 24 162 9 171 - experience variances 43 (9) 34 8 42 - operating assumption changes** (219) (1) (220) 8 (212) Development costs - - - 0 0 Shareholder net worth 71 7 78 3 81 ------ ------ ------ ------ ------ Operating profit 153 31 184 45 229 Variation from longer term investment return 111 (5) 106 0 106 Effect of economic assumption changes (6) 0 (6) (1) (7) ------ ------ ------ ------ ------ Profit from continuing operations before tax 258 26 284 44 328 Tax (70) (9) (79) (13) (92) ------ ------ ------ ------ ------ Profit from continuing operations after tax 188 17 205 31 236 ====== ====== ====== ====== ====== * Included in the Institutional fund management result of Â£66m (1H04: Â£51m; FY04: Â£104m). ** The largest impact on UK life and pensions business in 2004 was from the strengthening of assumptions for annuitant longevity. ================================================================================ Legal & General Group Plc P8 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 1. Profit from continuing operations after tax from covered business (continued) Life and Managed Inter- pensions pension UK national Total funds* Total Full year ended 31.12.04 (Restated) Â£m Â£m Â£m Â£m Â£m Contribution from: New business after cost of capital 241 35 276 36 312 In-force business - expected return 273 49 322 18 340 - experience variances 46 17 63 15 78 - operating assumption changes** (221) 1 (220) 18 (202) Development costs - - - (1) (1) Shareholder net worth 135 11 146 6 152 ------ ------ ------ ------ ------ Operating profit 474 113 587 92 679 Variation from longer term investment return 363 3 366 11 377 Effect of economic assumption changes 15 19 34 0 34 ------ ------ ------ ------ ------ Profit from continuing operations before tax 852 135 987 103 1,090 Tax (238) (46) (284) (31) (315) ------ ------ ------ ------ ------ Profit from continuing operations after tax 614 89 703 72 775 ====== ====== ====== ====== ====== * Included in the Institutional fund management result of Â£66m (1H04: Â£51m; FY04: Â£104m). ** The largest impact on UK life and pensions business in 2004 was from the strengthening of assumptions for annuitant longevity. ================================================================================ 2. Life and pensions operating profit Full year 30.6.05 30.6.04 2004 Restated Restated Â£m Â£m Â£m UK 340 153 474 USA 19 11 72 Netherlands 16 14 30 France 10 6 11 ------ ------ ------ 385 184 587 ====== ====== ===== There are no significant differences in the prior period reported numbers if the international life and pensions operating profits were expressed at 30 June 2005 average exchange rates. ================================================================================ Legal & General Group Plc P9 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 3. General insurance gross premiums and operating profit Full year Full year 30.6.05 30.6.05 30.6.04 30.6.04 2004 2004 Restated Restated Restated Restated Premiums Operating Premiums Operating Premiums Operating written profit written profit written profit Â£m Â£m Â£m Â£m Â£m Â£m Continuing operations Household 115 2 107 11 222 22 Other 55 2 51 6 103 10 ------ ------ ------ ------ ------ ------ 170 4 158 17 325 32 ================================================================================ 4. Other operational income Full year 30.6.05 30.6.04 2004 Restated Restated Â£m Â£m Â£m Shareholders' other income Investment return on shareholders' equity 55 55 109 Interest expense (42) (34) (74) ------ ------ ------ 13 21 35 Retail investments 4 (1) 4 Other operations (3) 1 (4) Unallocated corporate and development expenses (4) (8) (13) ------ ------ ------ 10 13 22 ================================================================================ 5. Exchange rates Period end exchange rates 30.6.05 30.6.04 31.12.04 United States Dollar 1.79 1.81 1.92 Euro 1.48 1.49 1.41 Average exchange rates 1.1.05 - 1.1.04 - 1.7.04 - 30.6.05 30.6.04 31.12.04 United States Dollar 1.87 1.82 1.84 Euro 1.46 1.48 1.46 ================================================================================ Legal & General Group Plc P10 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 6. General insurance and shareholders' investment return Full year 30.6.05 30.6.04 2004 Restated Restated Â£m Â£m Â£m Investment income 61 50 106 Interest expense and charges (43) (34) (76) Realised investment gains 8 8 8 Unrealised investment gains/(losses) 51 (15) 64 ------ ------ ------ 77 9 102 ====== ====== ====== reported within: Institutional fund management 4 4 8 General insurance 10 10 22 Other operational income 13 21 35 Variation from longer term investment return 50 (26) 37 ------ ------ ------ 77 9 102 ====== ====== ====== Shareholders' other income, reported within other operational income, has been determined based on a longer term rate of investment return with the difference between this and the actual return being reported as variation from longer term investment return. ================================================================================ 7. Variation from longer term investment return Full year 30.6.05 30.6.04 2004 Restated Restated Â£m Â£m Â£m Total covered business 156 106 377 Institutional fund management 0 (2) 0 General insurance (2) (6) (3) Other operational income 52 (18) 40 ------ ------ ------ 50 (26) 37 ------ ------ ------ 206 80 414 ====== ====== ====== For covered business, the variation from longer term investment return represents the effect of the investment performance and changes to investment policy 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 P11 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 8. Minority interests In 2005 minority interests represent third party interests in property investment vehicles which are consolidated in the Group's results. The 2004 minority interests also include interests in venture capital subsidiaries. ================================================================================ 9. Investments At 30.6.05 At 30.6.04 At 31.12.04 Restated Restated Â£m Â£m Â£m Investment property 5,322 5,349 4,903 Equities 85,109 69,916 78,322 Unit trusts 2,117 1,015 1,875 Debt securities 65,855 50,933 58,604 Accrued interest 817 692 753 Derivative assets 60 38 23 Loans and receivables 273 347 289 Cash and cash equivalents 4,410 2,441 2,992 --------- --------- --------- 163,963 130,731 147,761 ================================================================================ 10. Time value of options and guarantees Full year 30.6.05 30.6.04 2004 Â£m Â£m Â£m Life and pensions: UK with-profits 4 7 8 UK non profit 25 24 24 International 8 8 8 ------ ------ ----- 37 39 40 ================================================================================ 11. Pension costs The Legal & General Group UK Pension and Assurance Fund and the Legal & General Group UK Senior Pension Scheme are defined benefit pension arrangements and account for all UK and the majority of worldwide assets and contributions to such schemes. At 30 June 2005 the combined after tax deficit of these arrangements has been estimated at Â£132m (1H04: Â£68m; FY04: Â£109m). These amounts have been recognised in the financial information with Â£78m charged against shareholder equity (1H04: Â£40m; FY04: Â£65m) and Â£54m against the unallocated divisible surplus (1H04: Â£28m; FY04: Â£44m). ================================================================================ Legal & General Group Plc P12 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 12. Analysis of tax Full year Full year 30.6.05 30.6.05 30.6.04 30.6.04 2004 2004 Restated Restated Restated Restated Profit Tax Profit Tax Profit Tax before (charge)/ before (charge)/ before (charge)/ tax credit tax credit tax credit Â£m Â£m Â£m Â£m Â£m Â£m Profit from continuing operations UK life and pensions 340 (98) 153 (41) 474 (134) International life and pensions 45 (15) 31 (11) 113 (38) ------ ------ ------ ------ ------ ------ 385 (113) 184 (52) 587 (172) Institutional fund management 66 (20) 51 (15) 104 (32) General insurance 4 (1) 17 (5) 32 (9) Other operational income 10 (1) 13 2 22 4 ------ ------ ------ ------ ------ ------ Operating profit 465 (135) 265 (70) 745 (209) Variation from longer term investment return 206 (43) 80 (32) 414 (129) Effect of economic assumption changes 11 (4) (7) 2 34 (11) Property income attributable to minorities 11 - 8 - 32 - ------- ----- ------ ------ ------ ------ Profit from continuing operations before tax / Tax 693 (182) 346 (100) 1,225 (349) ================================================================================ 13. Effect of UK tax changes This tax charge represents a one-off reduction in the embedded value arising from changes in tax law. The Finance (No. 2) Act 2005, enacted on 20 July 2005, includes provisions which change the way in which investment return is apportioned between categories of business for the purposes of computing taxable profits earned from writing pensions business. These changes will result in significantly larger taxable pensions business profits in the non profit part of the fund from 2005 onwards. ================================================================================ Legal & General Group Plc P13 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 14. Earnings per share (EPS) Weighted average Earnings number Profit/ per of (loss) share shares Â£m p m Six months ended 30.6.05 Operating profit from continuing operations after tax 330 5.10 6,477 Variation from longer term investment return 163 2.52 Effect of economic assumption changes 7 0.11 Profit from discontinued operations 13 0.20 Effect of UK tax changes (276) (4.26) ------ ------ ------- Profit attributable to equity holders/EPS 237 3.67 6,477 Net shares under options allocable for no further consideration - (0.02) 35 Convertible bonds outstanding 8 (0.04) 285 ------ ------ ------- Diluted profit attributable to equity holders/EPS 245 3.61 6,797 ====== ====== ======= Six months ended 30.6.04 (Restated) Operating profit from continuing operations after tax 195 3.01 6,478 Variation from longer term investment return 48 0.74 Effect of economic assumption changes (5) (0.08) Profit from discontinued operations 2 0.03 ------ ------ ------- Profit attributable to equity holders/EPS 240 3.70 6,478 Net shares under options allocable for no further consideration - (0.01) 24 Convertible bonds outstanding * 12 - 285 ------ ------ ------- Diluted profit attributable to equity holders/EPS 252 3.69 6,787 ====== ====== ======= Full year ended 31.12.04 (Restated) Operating profit from continuing operations after tax 536 8.27 6,479 Variation from longer term investment return 285 4.40 Effect of economic assumption changes 23 0.35 Profit from discontinued operations 5 0.08 ------ ------ ------- Profit attributable to equity holders/EPS 849 13.10 6,479 Net shares under options allocable for no further consideration - (0.06) 33 Convertible bonds outstanding 16 (0.32) 285 ------ ------ ------- Diluted profit attributable to equity holders/EPS 865 12.72 6,797 ====== ====== ======= * The shares associated with the convertible bond were antidilutive as they would have increased the net earnings per share and were therefore ignored, along with their associated revenue impact, when calculating the diluted earnings per share. ================================================================================ Legal & General Group Plc P14 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 15. Embedded value Inter- Share- UK national Life and Managed Value of holder Life and Life and pensions pension in-force net worth pensions pensions total funds Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Six months ended 30.6.05 At 1 January Value of in-force business * 2,885 - 2,885 431 3,316 191 3,507 Shareholder net worth ** - 1,560 1,560 276 1,836 162 1,998 ------- ------- ------- ------- ------- ----- ------ 2,885 1,560 4,445 707 5,152 353 5,505 Exchange rate movements - - - 25 25 - 25 ------- ------- ------- ------- ------- ----- ------ 2,885 1,560 4,445 732 5,177 353 5,530 Profit for the period 138 (49) 89 29 118 50 168 Capital movements - - - 5 5 0 5 Distributions (23) (105) (128) 0 (128) - (128) Movement in pension deficit - (7) (7) - (7) - (7) Inter-fund transfer (65) 65 - - - - - ------- ------- ------- ------- ------- ----- ------ 2,935 1,464 4,399 766 5,165 403 5,568 ======= ======= ======= ======= ======= ===== ====== Represented by: Value of in-force business * 2,935 - 2,935 476 3,411 215 3,626 Shareholder net worth ** - 1,464 1,464 290 1,754 188 1,942 ------- ------- ------- ------- ------- ----- ------ At end of period 2,935 1,464 4,399 766 5,165 403 5,568 ======= ======= ======= ======= ======= ===== ====== Six months ended 30.6.04 (Restated) At 1 January Value of in-force business * 2,552 - 2,552 377 2,929 158 3,087 Shareholder net worth ** - 1,569 1,569 245 1,814 143 1,957 ------- ------- ------- ------- ------- ----- ------ 2,552 1,569 4,121 622 4,743 301 5,044 Exchange rate movements - - - (13) (13) - (13) ------- ------- ------- ------- ------- ----- ------ 2,552 1,569 4,121 609 4,730 301 5,031 Profit for the period 124 64 188 17 205 31 236 Capital movements - - - 1 1 - 1 Distributions (22) (102) (124) 0 (124) - (124) Movement in pension deficit - 0 0 - 0 - 0 Inter-fund transfer 80 (80) - - - - - ------- ------- ------- ------- ------- ----- ------ 2,734 1,451 4,185 627 4,812 332 5,144 ======= ======= ======= ======= ======= ===== ====== Represented by: Value of in-force business * 2,734 - 2,734 420 3,154 171 3,325 Shareholder net worth ** - 1,451 1,451 207 1,658 161 1,819 ------- ------- ------- ------- ------- ----- ------ At end of period 2,734 1,451 4,185 627 4,812 332 5,144 ======= ======= ======= ======= ======= ===== ====== * See Page 15 ** See Page 15 ================================================================================ Legal & General Group Plc P15 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 15. Embedded value (continued) Inter- Share- UK national Life and Managed Value of holder Life and Life and pensions pension in-force net worth pensions pensions total funds Total Â£m Â£m Â£m Â£m Â£m Â£m Â£m Full year ended 31.12.04 (Restated) At 1 January Value of in-force business * 2,552 - 2,552 377 2,929 158 3,087 Shareholder net worth ** - 1,569 1,569 245 1,814 143 1,957 ------- ------- ------- ------- ------- ----- ------ 2,552 1,569 4,121 622 4,743 301 5,044 Exchange rate movements - - - (28) (28) - (28) ------- ------- ------- ------- ------- ----- ------ 2,552 1,569 4,121 594 4,715 301 5,016 Profit for the period 423 191 614 89 703 72 775 Capital movements - - - 25 25 - 25 Distributions (47) (227) (274) (1) (275) (20) (295) Movement in pension deficit - (16) (16) - (16) - (16) Inter-fund transfer (43) 43 - - - - - ------- ------- ------- ------- ------- ----- ------ 2,885 1,560 4,445 707 5,152 353 5,505 Represented by: Value of in-force business * 2,885 - 2,885 431 3,316 191 3,507 Shareholder net worth ** - 1,560 1,560 276 1,836 162 1,998 ------- ------- ------- ------- ------- ----- ------ At end of period 2,885 1,560 4,445 707 5,152 353 5,505 ======= ======= ======= ======= ======= ===== ====== For the UK life and pensions business, shareholder net worth comprises the shareholder retained capital (SRC) and the sub fund both net of an appropriate allowance for tax. The principal adjustments to the SRC for EEV purposes are the removal of deferred acquisition costs, deferred income liabilities and deferred tax and the addition of sterling reserves. It also includes intra-group subordinated debt capital at its face value of Â£602m. * Value of in-force business reflects the cost of holding capital of: Inter- UK national Life and Managed Life and Life and pensions pension pensions pensions total funds Total Â£m Â£m Â£m Â£m Â£m Six months ended 30.6.05 5 50 55 2 57 Six months ended 30.6.04 (Restated) 7 47 54 2 56 Full year ended 31.12.04 (Restated) 8 48 56 2 58 ** Shareholder net worth comprises both required capital and free surplus. Free surplus was as follows: Inter- UK national Life and Managed Life and Life and pensions pension pensions pensions total funds Total Â£m Â£m Â£m Â£m Â£m Six months ended 30.6.05 0 174 174 170 344 Six months ended 30.6.04 (Restated) 0 95 95 143 238 Full year ended 31.12.04 (Restated) 0 166 166 144 310 ================================================================================ Legal & General Group Plc P16 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 15. Embedded value (continued) Reconciliations UK Life and UK Life and UK Life and pensions Total pensions Total pensions Total At 30.6.05 At 30.6.05 At 30.6.04 At 30.6.04 At 31.12.04 At 31.12.04 Restated Restated Restated Restated Â£m Â£m Â£m Â£m Â£m Â£m Shareholder net worth (SNW) SNW of long term operations (IFRS basis) 2,301 3,188 2,112 2,851 2,196 2,994 Other assets (IFRS basis) - 605 - 547 - 677 ------- ------- ------- ------- ------- ------- Shareholders' equity on the IFRS basis 2,301 3,793 2,112 3,398 2,196 3,671 Purchased interests in long term business (11) (24) (15) (31) (13) (24) Sub-fund 258 258 227 227 245 245 Deferred acquisition costs / income liabilities (228) (780) (267) (746) (242) (731) Deferred tax * (698) (546) (441) (333) (480) (358) Other ** (158) (154) (165) (149) (146) (128) ------- ------- ------- ------- ------- ------- Shareholder net worth on the EEV basis 1,464 2,547 1,451 2,366 1,560 2,675 ======= ======= ======= ======= ======= ======= Represented by: SNW of long term operations (EEV basis) 1,464 1,942 1,451 1,819 1,560 1,998 Other assets (IFRS basis) - 605 - 547 - 677 ------- ------- ------- ------- ------- ------- 1,464 2,547 1,451 2,366 1,560 2,675 ======= ======= ======= ======= ======= ======= Long term in-force business asset 2,404 2,324 2,535 Sub-fund (258) (227) (245) Deferred acquisition costs / income liabilities 780 746 731 Deferred tax * 546 333 358 Other ** 154 149 128 ------- ------- ------- Value of in-force business 3,626 3,325 3,507 ======= ======= ======= Shareholders' equity Shareholders' equity on the IFRS basis 3,793 3,398 3,671 Purchased interests in long term business (24) (31) (24) Long term in-force business asset 2,404 2,324 2,535 ------- ------- ------- Shareholders' equity on the EEV basis 6,173 5,691 6,182 ======= ======= ======= * Deferred tax represents all tax which is expected to be paid under current legislation, including tax which would arise if shareholders' assets were eventually distributed. ** Other relates primarily to the different treatment of sterling reserves and other long term reserves under EEV compared with IFRS. ================================================================================ Legal & General Group Plc P17 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 16. Borrowings At 30.6.05 At 30.6.04 At 31.12.04 Restated Restated Â£m Â£m Â£m Subordinated borrowings Undated subordinated notes (upper tier 2) 395 394 394 Dated subordinated notes 2025 (lower tier 2) 406 - - ------- ------- ------- Total subordinated borrowings 801 394 394 ======= ======= ======= Senior borrowings 2.75% Convertible bond 2006 501 486 493 Medium term notes 2031-2041 597 597 597 Euro commercial paper 2005 71 - - Bank loans 2005 4 2 2 Accrued interest 12 11 17 Non-recourse financing - Triple X 2025 295 - 275 - Property partnership loans 2011 93 512 68 ------- ------- ------- Total senior borrowings 1,573 1,608 1,452 ======= ======= ======= Total borrowings 2,374 2,002 1,846 ======= ======= ======= Total borrowings (excluding non-recourse financing) 1,986 1,490 1,503 ======= ======= ======= The convertible bond matures in 2006 and is convertible into ordinary shares of the Company at 184p per share. If converted, this bond would give rise to the issue of 285.3m new ordinary shares which represents approximately 4.4% of the current issued share capital. In June 2005 the Group issued â‚¬600m of dated subordinated debt which was swapped into sterling and the proceeds of which are intended to be used to repay part of the convertible bond which matures in 2006. In November 2004 a subsidiary of Legal & General America issued US$550m of non-recourse debt in the US domestic capital markets to meet the Regulation Triple X reserve requirements on the US term insurance business. The property partnership borrowings relate to loans secured on specific properties. The decrease in these loans since 30 June 2004 is due to the conversion of certain property partnership interests into unit trusts which the Group does not control. Consequently there is no longer a requirement to consolidate these borrowings in the Group's results. ================================================================================ Legal & General Group Plc P18 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 17. Shareholders' equity segmental analysis At 30.6.05 At 30.6.04 At 31.12.04 Restated Restated Â£m Â£m Â£m UK* 4,399 4,185 4,445 Society shareholder capital** 2,049 1,877 1,973 ------- ------- ------- Society shareholders' equity on an EEV basis 6,448 6,062 6,418 Embedded value of international life and pensions business - USA 543 444 489 - Netherlands 138 112 139 - France 85 71 79 ------- ------- ------- 7,214 6,689 7,125 Institutional fund management*** 445 367 390 ------- ------- ------- 7,659 7,056 7,515 General insurance 161 227 247 Corporate funds**** (1,647) (1,592) (1,580) ======= ======= ======= 6,173 5,691 6,182 ======= ======= ======= Movement At 1 January 6,182 5,680 5,680 Total recognised income and expense for the year 217 221 809 Dividends (224) (216) (321) Employee share schemes costs 7 4 9 Increase in share capital/share premium 0 0 1 Net (purchase)/allocation of treasury shares (9) 2 4 ------- ------- ------- At end of period 6,173 5,691 6,182 ======= ======= ======= * Includes Â£602m of intra-group subordinated debt capital attributed to the SRC ** Represents surplus capital held outside the UK long term fund, including the rights issue proceeds. *** Includes Â£403m (1H04: Â£332m; FY04: Â£353m) net assets of managed pension funds business. **** Includes the convertible debt of Â£501m (1H04: Â£486m; FY04: Â£493m) and Â£602m of senior debt which has been on lent to the UK long term fund. ================================================================================ Legal & General Group Plc P19 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 18. Sensitivities The discount rate appropriate to any investor will depend on the investor's own requirements, tax and perception of the risks associated with the anticipated cash flows to shareholders. The table below shows the effect of alternative economic and non-economic assumptions on the long term embedded value and new business contribution. Effect on embedded value at 30 June 2005 Sensitivity to economic assumptions: 1% lower 1% higher 1% higher 1% lower 10% lower risk risk equities/ equities/ equities/ As discount discount property property property published rate rate yields yields values Life and pensions Â£m Â£m Â£m Â£m Â£m Â£m - UK 4,399 305 (265) 228 (227) (293) - International 766 60 (53) 7 (6) (14) ------- ------ ------- ------ ------ ------ Total life and pensions 5,165 365 (318) 235 (233) (307) Managed pension funds 403 9 (9) 5 (5) (12) ------- ------ ------- ------ ------ ------ Total covered business 5,568 374 (327) 240 (238) (319) ======= ====== ======= ====== ====== ====== Sensitivity to non-economic assumptions: 10% 10% 10% 10% increase increase increase increase in in in in mortality mortality As maintenance lapse (UK (other published expenses rates annuities) business) Life and pensions Â£m Â£m Â£m Â£m Â£m - UK 4,399 (31) (41) 193 (56) - International 766 (6) (28) n/a (110) ------- ------- ------ ------- ------- Total life and pensions 5,165 (37) (69) 193 (166) Managed pension funds 403 (13) (10) n/a n/a ------- ------- ------ ------- ------- Total covered business 5,568 (50) (79) 193 (166) ======= ======= ====== ======= ======= Effect on new business contribution for the period Sensitivity to economic assumptions: 1% lower 1% higher 1% higher 1% lower 10% lower risk risk equities/ equities/ equities/ As discount discount property property property published rate rate yields yields values Life and pensions Â£m Â£m Â£m Â£m Â£m Â£m - UK 129 29 (25) 16 (16) n/a - International 11 11 (10) 0 0 0 ------- ------ ------- ------ ------- ------- Total life and pensions 140 40 (35) 16 (16) 0 Managed pension funds 21 1 (1) 1 (1) n/a ------- ------ ------- ------ ------- ------- Total covered business 161 41 (36) 17 (17) 0 ======= ====== ======= ====== ======= ======= Sensitivity to non-economic assumptions: 10% 10% 10% 10% increase increase increase increase in in in in mortality mortality As maintenance lapse (UK (other published expenses rates annuities) business) Life and pensions Â£m Â£m Â£m Â£m Â£m - UK 129 (6) (10) 8 (13) - International 11 (1) (3) n/a (14) ------- ------- ------ ------- ------- Total life and pensions 140 (7) (13) 8 (27) Managed pension funds 21 (1) (1) n/a n/a ------- ------- ------ ------- ------- Total covered business 161 (8) (14) 8 (27) ======= ======= ====== ======= ======= In calculating the alternative values all other assumptions are left unchanged. The sensitivities to 10% decreases in non-economic assumptions were disclosed in our announcement on 24 May. These sensitivities are estimated to be of similar relative magnitude and direction as at 30 June 2005. ================================================================================ Legal & General Group Plc P20 Assumptions - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 19. Assumptions UK life and pensions -------------------- i. 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. The corresponding return on equities and property is equal to the fixed interest gilt assumption plus the appropriate risk premium. An asset mix consistent with the current investment policy and future management intentions has been assumed within the projections. The economic assumptions were: 30.6.05 30.6.04 31.12.04 31.12.03 % p.a. % p.a. % p.a. % p.a. Equity risk premium 3.0 3.0 3.0 3.0 Property risk premium 2.0 2.0 2.0 2.0 Investment return - Gilts: - Fixed interest 4.2 5.0 4.5 4.7 - RPI linked 4.2 5.0 4.5 4.6 - Non Gilts: - Fixed interest 4.5 - 5.0 5.4 - 5.8 4.9 - 5.3 5.1 - 5.5 - RPI linked 4.3 - 4.8 5.2 - 5.6 4.7 - 5.1 5.1 - 5.4 - Equities 7.2 8.0 7.5 7.7 - Property 6.2 7.0 6.5 6.7 Risk margin 3.0 3.0 3.0 3.0 Risk discount rate (net of tax) 7.2 8.0 7.5 7.7 Inflation - Expenses/earnings 3.6 4.0 3.8 3.8 - Indexation 2.6 3.0 2.8 2.8 The assumed returns on non-gilt securities are net of an allowance for default risk of 0.2% p.a. (2004: 0.2% p.a.), other than for certain government-supported securities where no such allowance is made. ii. Assets are valued at market value. For the projection of fixed interest and RPI linked investment returns, asset values are adjusted to reflect the assumed interest and inflation rates. iii. The value of the Sub-Fund is the discounted value of total projected investment returns over its lifetime. iv. 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. v. The value of in-force business reflects the cost of providing for benefit enhancement or compensation in relation to certain products including administration expenses. ================================================================================ Legal & General Group Plc P21 Assumptions - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- vi. 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 reviewed annually. 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 1, projection MC for experience and the average of projections MC and LC for statutory reserving. Female annuitant mortality is assumed to improve in accordance with the MC projection from CMI Working Paper 1 for statutory reserving and at 70% of this rate for experience. vii. The subordinated debt capital has been included in the embedded value at the face value of Â£602m. viii. Development costs relate to strategic systems. ix. Projected tax has been determined assuming current tax legislation and rates. x. EEV results are computed on an after tax basis and are grossed up to the pre-tax level for presentation in the profit and loss account. The tax rate used for grossing-up is the corporation tax rate of 30% (2004: 30%), except for the profit attributable to shareholder net worth, where the rate used is derived from the tax attributed to the contribution from shareholder net worth in the IFRS accounts. To arrive at operating profit, the contribution from shareholder net worth is grossed up at a rate to reflect the tax associated with a longer term investment return. UK managed pension funds ------------------------ xi. The UK life and pensions economic assumptions are used. All contracts are assumed to lapse after 10 years. Fees are projected on a basis, which reflects current charges or, if less, anticipated charges. New business consists of monies received from new clients and incremental receipts from existing clients, and excludes the roll-up of the investment returns. Development costs relate to strategic systems. International ------------- xii. Key assumptions are: 30.06.05 30.06.04 31.12.04 31.12.03 % p.a. % p.a. % p.a. % p.a. USA Reinvestment rate 4.7 5.3 4.9 4.8 Risk margin 3.0 3.0 3.0 3.0 Risk discount rate (net of tax) 7.0 7.7 7.3 7.3 Europe Government bond return 3.3 4.5 3.8 4.5 Risk margin 3.0 3.0 3.0 3.0 Risk discount rate (net of tax) 6.3 7.5 6.8 7.5 Stochastic calculations ----------------------- xiii. The time value of options and guarantees is calculated using consistent economic and non-economic assumptions to those used for the deterministic embedded value calculations. ================================================================================ Legal & General Group Plc P22 Assumptions - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 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 the various economies. Model 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. Summary Statistics The following tables set out means and standard deviations (StDev) of future returns as at 30 June 2005 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 Mean* StDev** Mean* StDev** UK Business (Sterling) Government bonds 4.4% 5.0% 4.6% 4.2% Corporate bonds 5.0% 3.4% 5.3% 3.9% Property (excess returns) 2.1% 15.4% 2.0% 15.1% Equities (excess returns) 3.1% 20.1% 3.0% 19.6% European Business (Euro) Long Government bonds*** 3.4% 4.9% 4.9% 5.1% Short Government bonds**** 3.4% 3.3% 4.2% 7.1% US Business (US Dollar) Long Government bonds*** 4.1% 4.8% 4.7% 5.1% * Other than for equities and property, means calculated as excess of 1 year bond asset return means plus 1 year bond means Mean equities and property excess returns calculated as excess of 1 year bond asset return means. Each mean 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). ** 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. *** Long-term bonds are defined to be 10-year par-coupon bonds. **** Short-term bonds defined to be 1 year duration. ================================================================================ Legal & General Group Plc P23 Assumptions - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 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. Sensitivity calculations ------------------------ xiv. A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the embedded value and the new business contribution to changes in key assumptions. Relevant details relating to each sensitivity are: - 1% variation in discount rate - a one percentage point increase/decrease in the risk margin has been assumed in each case (for example a 1% increase in the risk margin at end 2004 would result in a 4% risk margin). - 1% variation in equity/property yields - a one percentage point increase/ decrease in the equity/property assumed investment returns, excluding any consequential changes for example to risk discount rates or valuation bases, has been assumed in each case (meaning for example a 1% increase in equity returns would increase assumed total equity returns from 7.2% to 8.2%). - 10% reduction in equity/property market values - an immediate 10% reduction in equity and property asset values (embedded value sensitivity only). - 10% increase in maintenance expenses, excluding any consequential changes for example to valuation expense bases or potentially reviewable policy fees (meaning a 10% increase on a base assumption of Â£10 per annum would result in an Â£11 per annum expense assumption). - 10% increase in assumed persistency experience rates, incorporating a 10% increase in lapse, surrender and premium cessation assumptions (meaning a 10% increase on a base assumption of 7% would result in a 7.7% lapse assumption). - 10% increase in both mortality and morbidity rates, excluding any consequential changes for example to valuation bases or potentially reviewable risk charging bases (meaning for example if base experienced mortality is 90% of a standard mortality table then for this sensitivity the assumption is set to 99% of the standard table). The sensitivities for UK life and pensions allow for any material changes to the cost of financial options and guarantees but, as indicated above, do not allow for any changes to reserving bases or capital requirements within the sensitivity calculation. The sensitivities in our International businesses do not allow for changes to financial options and guarantees. ================================================================================ Legal & General Group Plc P24 Methodology - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 20. Methodology Basis of Preparation The purpose of this section is to set out the detailed methodology for producing the Group's supplementary financial statements. The statements have been prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 by the European CFO Forum. Covered Business The Group uses EEV methodology to value Individual and Group life assurance, pensions and annuity business written in the UK, Continental Europe and the US and our UK managed pension funds business. All other business units are accounted for on the IFRS basis adopted in the primary financial information. Under EEV, there is no distinction made between insurance and investment contracts in our life and pensions businesses as there is under IFRS. Description of Methodology The objective of EEV is to provide shareholders with more realistic information on the financial position and current performance of the Group than is provided within the primary financial information. The methodology requires assets of an insurance company reported in the primary financial information to be attributed between those supporting the covered business (restricted assets) and the remainder (residual assets). The method accounts for assets as follows: i. restricted assets on an EEV basis; and ii. residual assets on the IFRS basis adopted in the primary financial information. The EEV methodology recognises as profit from the covered business the total of: i. cash transfers during the relevant period from the covered business to the residual assets, as determined following a statutory valuation; and ii. the movement in the present value of the expected future cash flows from the covered business to the residual assets over the relevant period. Embedded Value Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the balance of shareholders' equity on the IFRS basis, less the value included for purchased interests in long term business. The embedded value is the sum of the shareholder net worth (SNW) and the value of the in-force business (VIF). SNW is defined as those amounts, held either in the UK Long Term Fund (LTF) or by other companies writing long term business, which are regarded either as required capital for the covered business or which represent surplus assets within those companies. The VIF is the present value of the distributable profits to shareholders arising from the covered business, projected using best estimate assumptions, less an appropriate deduction for the cost of holding the required level of capital and the time value of financial options and guarantees. ================================================================================ Legal & General Group Plc P25 Methodology - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- Service Companies All services relating to the UK life and pensions business, including investment management services, are charged on a cost recovery basis. New Business New business premiums reflect income arising from the sale of new contracts during the reporting period and any changes to existing contracts which were not anticipated at the outset of the contract. In force business comprises previously written single premium, regular premium and recurrent single premium contracts. DWP rebates have not been treated as recurrent and they are included in new business when received. New business contribution arising from the new business premiums written during the reporting period has been calculated on the same economic and operating assumptions used in the embedded value at the end of the financial period. This has then been rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period. The present value of future new business premiums (PVNBP), has been calculated and expressed at the point of sale. The PVNBP is equivalent to the total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end of the financial period. The new business margin is defined as the new business contribution at the end of the reporting period divided by the PVNBP expressed at the point of sale. The premium volumes and projection assumptions used to calculate the PVNBP are the same as those used to calculate new business contribution. Projection Assumptions Cash flow projections are determined using realistic assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on period end conditions. Future investment returns are projected by one of two methods. The first method is based on an assumed investment return attributed to assets at their market value. The second, which is used in the US, where the investments of that subsidiary are substantially all fixed interest, projects the cash flows from the current portfolio of assets and assumes an investment return on reinvestment of surplus cash flows. The assumed discount and inflation rates are consistent with the investment return assumptions. Detailed projection assumptions including mortality, persistency, morbidity and expenses reflect recent operating experience and are reviewed annually. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favourable changes in operating experience are not anticipated until the improvement in experience has been observed. All costs relating to the covered business, whether incurred in the covered business or elsewhere in the Group, are allocated to that business. The expense assumptions used for the cashflow projections therefore include the full cost of servicing this business. ================================================================================ Legal & General Group Plc P26 Methodology - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- Tax The projections take into account all tax which is expected to be paid under current legislation, including tax which would arise if surplus assets within the covered business were eventually to be distributed. Allowance for Risk Aggregate risks within the covered business are allowed for through the following principal mechanisms: i. Setting required capital levels with reference to both the Group's internal risk based capital models, and an assessment of the strength of regulatory reserves in the covered business; ii. Allowing explicitly for the time value of financial options and guarantees (FOGs) within the Group's products; and iii. Setting risk discount rates by deriving a Group level risk margin to be applied consistently to local risk free rates. Required Capital and Free Surplus Regulatory capital for UK life and pensions business is provided by assets backing the with-profits sub-fund or by the SNW. The SNW comprises the Shareholder Retained Capital (SRC) and the Sub-Fund. For the UK with-profits sub-fund, the required capital will be covered by the surplus within the fund and no effect will be attributed to shareholders except for the burn-through cost. This treatment is consistent with the Principles and Practices of Financial Management for this fund. For UK non profit business, the required capital will be maintained at no less than the level of the EU minimum solvency requirement. This level together with the margins for adverse deviation in the regulatory reserves is currently, in aggregate, in excess of internal capital targets assessed in conjunction with the Individual Capital Assessment exercise. The SRC is either required to cover EU solvency margin or is encumbered because its distribution to shareholders is restricted due to understandings with the FSA dating from 1995/6. It is therefore classified as required capital. SRC is valued by assuming it is distributed from the LTF over a 20 year period with allowance for tax payable on distribution. For this purpose, distribution of the SRC is restricted such that there is always sufficient SRC and subordinated debt left to cover the EU solvency margin for non profit business. The Sub-Fund is also treated as required capital, because its distribution to shareholders is restricted by Legal & General Assurance Society's Articles of Association. For our UK managed pension funds business, risk based capital has been used to model required capital. The balance of net assets within the UK managed pension funds business is treated as free surplus. For L&G America, the Company Action Level (CAL) of capital has been treated as required capital for modelling purposes. The CAL is the regulatory capital level at which the company would have to take prescribed action, such as submission of plans to the state insurance regulator, but would be able to continue operating on the existing basis. The CAL is currently twice the level of capital at which the regulator is permitted to take control of the business. For L&G Netherlands, required capital has been set at 100% of EU minimum solvency for all products which do not have any related FOGs. For those products with FOGs, capital of between 112.5% and 175% of the EU minimum solvency margin has been used. The level of capital has been determined using risk based capital techniques. ================================================================================ Legal & General Group Plc P27 Methodology - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- In France, 100% of EU minimum solvency margin has been used for EV modelling purposes for all products without FOGs. For those products with FOGs, 200% of EU minimum solvency margin has been used. The level of capital has been determined using risk based capital techniques. The contribution from new business for our covered businesses reflects an appropriate allowance for the cost of holding the required capital. Financial Options and Guarantees In the UK, all financial options and guarantees (FOGs) are within the UK Life & Pensions business. Under the EEV Principles an allowance for time value of FOGs is required where a financial option exists which is exercisable at the discretion of the policyholder. These types of option principally arise within the with-profits sub-fund and their time value is recognised within the with-profits burn-through cost. Additional financial options within the non profit fund exist only for a small amount of deferred annuity business where guaranteed early retirement and cash commutation terms apply when the policyholder chooses their actual retirement date. Further financial guarantees exist within the non profit fund, in relation to index-linked annuities where cap or collar restrictions apply. Due to the nature of these restrictions and how they vary depending on the prevailing inflation conditions we have also treated these as FOGs and recognised a time value cost of FOG accordingly. In the US, financial options and guarantees relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is based on the accumulated value of the contract including accrued interest. The crediting rates are discretionary but related to the accounting income for the amortising bond portfolio. The majority of the guaranteed minimum crediting rates are between 4% and 5%. The assets backing these contracts are invested in US dollar denominated fixed interest securities. In the Netherlands, there are two types of guarantees: interest rate guarantees and maturity guarantees. Certain contracts provide an interest rate guarantee where there is a minimum crediting rate based on the higher of 1-year Euribor and the policy guarantee rate. In accordance with market practice, it is expected that guarantees will be financed from unrealised gains on assets. This guarantee applies on a monthly basis. Certain unit linked contracts provide a guaranteed minimum value at maturity where the maturity amount is the higher of the fund value and a guarantee amount. The fund values for both these contracts are invested in Euro denominated fixed interest securities. In France, financial options and guarantees relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the contract including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios plus income and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed surrender values. Local statutory accounting rules require the establishment of a specific liability when the accounting income for a company is less than 125% of the guaranteed minimum credited returns however this has never been required. In general, the guaranteed annual bonus rates are between 2% and 4.5%. Risk Discount Rate The risk discount rate (RDR) is a combination of the risk free rate and a risk margin, which reflects the residual risks inherent in the Group's covered businesses, after taking account of prudential margins in the statutory provisions, the required capital and the specific allowance for financial options and guarantees. ================================================================================ Legal & General Group Plc P28 Methodology - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- The risk margin has been determined based on an assessment of the Group's weighted average cost of capital. This assessment incorporates a beta for the Group which measures the correlation of movements in the Group's share price to movements in a relevant index. Beta values therefore allow for the market's assessment of the risks inherent in the business relative to other companies in the chosen index. Key assumptions are set out below: Risk free rate: Derived from gross redemption yields on relevant gilt portfolio Equity risk premium 3.0% (UK only) Property risk premium 2.0% (UK only) Risk margin 3.0% The risk margin has been calculated by assuming a debt ratio of 20%, a net cost of debt of 3.9% p.a. and an average beta of 1.35. In addition, the margin allows specifically for the risks covered by the time value of financial options and guarantees (deduction of 0.1%). Analysis of Profit Operating profit is identified at a level which reflects an assumed longer term level of investment return. The contribution to operating profit in a period is attributed to four sources: i. new business; ii. the management of in-force business; iii. development costs; and iv. return on shareholder net worth. The contribution from new business represents the value recognised at the end of each period from new business written in that period, after allowing for the actual cost of acquiring the business and of establishing the required technical provisions and reserves and after making allowance for the cost of capital. New business contributions are calculated using closing assumptions. The contribution from in-force business is calculated using opening assumptions and comprises: i. expected return - the discount earned from the value of business in-force at the start of the year; ii. experience variances - the variance in the actual experience over the reporting period from that assumed in the value of business in-force as at the start of the year; and iii. operating assumption changes - the effects of changes in future assumptions, other than changes in economic assumptions from those used in valuing the business at the start of the year. These changes are made prospectively from the end of the year. Development costs are principally associated with exceptional investment or development activity over a defined period. The contribution from shareholder net worth comprises the increase in embedded value based on assumptions at the start of the year in respect of: i. encumbered assets within the covered business - principally the unwind of the discount rate; and ii. residual assets - the expected investment return. ================================================================================ Legal & General Group Plc P29 Methodology - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- Further profit contributions arise from actual investment return differing from the assumed long term investment return (investment return variances), and from the effect of economic assumption changes. Investment return variances represent the effect of actual investment performance and changes to investment policy on shareholder net worth and in-force business from that assumed at the beginning of the period. Economic assumption changes comprise the effect of changes in economic variables, beyond the control of management, including associated changes to valuation bases to the extent that they are reflected in revised assumptions. ================================================================================ Legal & General Group Plc P30 Notes to Financial Information - European Embedded Value Basis Six months ended 30 June 2005 -------------------------------------------------------------------------------- 21. Contingent liabilities, guarantees and indemnities Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance of actual experience from that assumed may result in such liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of such contracts, or the circumstances in which policyholders have entered into them (together in this paragraph 'liabilities'). The extent of such liabilities is influenced by a number of factors including the actions and requirements of the FSA, by ombudsman rulings, by industry compensation schemes and by court judgements. The continuing general profile and emphasis being given by the FSA and other bodies to the suitability of the past sales of endowment policies in the context of some mortgage transactions has led to the continuing receipt of claims from holders of endowment policies. Provision for liabilities continues to be made and is regularly reviewed. However, it is not possible to predict, with certainty, the extent and the timing of the financial impact to which these liabilities may give rise. The relevant members of the Group nevertheless consider that each makes prudent provision for such liabilities, as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet all reasonably foreseeable eventualities. In 1975 the Society was required by the Institute of London Underwriters (ILU) to execute the ILU form of guarantee in respect of policies issued through the ILU's Policy Signing Office on behalf of NRG Victory Reinsurance Company Ltd (Victory), a company which was then a subsidiary of the Society. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to the Society against any liability the Society may have as a result of the ILU's requirement, and the ILU agreed that its requirement of the Society would not apply to policies written or renewed after the acquisition. Whether the Society has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability is uncertain. The Society has made no payment or provision in respect of this matter. Group companies have given indemnities and guarantees, including interest rate guarantees, as a normal part of their operating activities or in relation to capital market transactions. This information is provided by RNS The company news service from the London Stock Exchange

Companies

Legal & General Group (LGEN)

Friday, 20th December 2024

COMPANIES COVERED:

SRP NMT RPI

Serco extends Thursday’s gains as upbeat mood prevails and Raspberry Pi also advances off the back of stake building news, but Neometals under pressure as it plans cancellation of AIM listing to focus on ASX.

Full Archive

UK 100

Latest directors dealings

1 day ago The Renewables Infrastructure Group Limited
1 day ago The Renewables Infrastructure Group Limited
1 day ago Smurfit Westrock (DI)
1 day ago Menhaden Resource Efficiency
1 day ago BP

All directors dealings today