L&G Interim Results - Part 3
Legal & General Group PLC
26 July 2007
European Embedded Value Page 20
=======================
Consolidated income statement
-----------------------------
Six months ended 30 June 2007
Full year
30.06.07 30.06.06 31.12.06
Notes £m £m £m
-----------------------------------------------------------------------------------------------------------------------
From continuing operations
Life and pensions 3.01/3.02 551 456 1,030
Investment management 3.07 90 87 181
General insurance 4.03 (38) 2 9
Other operational income 3.08 (14) 15 13
-----------------------------------------------------------------------------------------------------------------------
Operating profit 589 560 1,233
Variation from longer term investment return 3.05 197 113 460
Effect of economic assumption changes 3.01 (6) (18) 2
Property income attributable to minority interests 17 21 67
Corporate restructure 3.16 - - (216)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax attributable to
equity holders 797 676 1,546
---------------------------------------
Tax charge on operating profit : (159): (159): (361):
Tax charge on other profits and losses : (59): (39): (61):
---------------------------------------
Tax charge on profit from ordinary activities 3.09 (218) (198) (422)
Effect of UK Budget tax changes 3.10 93 - -
Tax impact of corporate restructure 3.16 - - 322
-----------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after tax 672 478 1,446
Profit attributable to minority interests 4.14 (17) (21) (67)
-----------------------------------------------------------------------------------------------------------------------
Profit attributable to equity holders of the Company 655 457 1,379
=======================================================================================================================
p p p
-----------------------------------------------------------------------------------------------------------------------
Earnings per share 3.11
Based on operating profit from continuing operations after tax
attributable to equity holders 6.62 6.19 13.45
Based on profit attributable to equity holders of the Company 10.08 7.05 21.27
Diluted earnings per share 3.11
Based on operating profit from continuing operations after tax
attributable to equity holders 6.59 6.07 13.36
Based on profit attributable to equity holders of the Company 10.03 6.89 21.12
=======================================================================================================================
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European Embedded Value Page 21
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Consolidated balance sheet
--------------------------
As at 30 June 2007
At 30.06.07 At 30.06.06 At 31.12.06
Notes £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Assets
Investments 235,303 193,050 213,228
Long term in-force business asset 2,872 2,943 2,529
Other assets 5,743 6,862 4,614
-----------------------------------------------------------------------------------------------------------------------
243,918 202,855 220,371
=======================================================================================================================
Equity and liabilities
Ordinary shareholders' equity 3.13/3.14 8,365 7,166 7,931
Minority interests 4.14 456 318 414
-----------------------------------------------------------------------------------------------------------------------
Total equity 8,821 7,484 8,345
Subordinated borrowings 4.13 1,371 813 818
Unallocated divisible surplus 2,277 1,982 2,178
Participating contract liabilities 19,231 19,764 19,770
Non-participating contract liabilities 205,771 167,126 183,618
Senior borrowings 4.13 1,332 1,682 1,607
Other liabilities and provisions 5,115 4,004 4,035
-----------------------------------------------------------------------------------------------------------------------
243,918 202,855 220,371
=======================================================================================================================
Consolidated statement of recognised income and expense
-------------------------------------------------------
For the six months ended 30 June 2007
Full year
30.06.07 30.06.06 31.12.06
£m £m £m
Restated(1)
-----------------------------------------------------------------------------------------------------------------------
Fair value losses on cash flow hedges - (3) (3)
Exchange differences on translation of overseas operations (1) (25) (41)
Actuarial gains on defined benefit pension schemes 36 38 3
Actuarial gains on defined benefit pension schemes transferred to unallocated
divisible surplus (25) (28) (1)
-----------------------------------------------------------------------------------------------------------------------
Income/(expense) recognised directly in equity, net of tax 10 (18) (42)
Profit from ordinary activities after tax 672 478 1,446
-----------------------------------------------------------------------------------------------------------------------
Total recognised income and expense 682 460 1,404
=======================================================================================================================
Attributable to:
Minority interests 17 21 67
Equity holders of the Company 665 439 1,337
=======================================================================================================================
1. The consolidated statement of recognised income and expense for the period ended 30 June 2006 has been restated to
reduce the actuarial gains on the defined benefit scheme and therefore the total recognised income and expense by
£26m. This adjustment is in respect of the movement in the pension deficit for the covered business. There is no
impact on the consolidated shareholders' equity.
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European Embedded Value Page 22
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Notes to the Financial Statements
---------------------------------
3.01 Profit from continuing operations after tax from covered business
----------------------------------------------------------------------
UK Interna- Life and Investment Total
tional pensions manage-
total ment(1)
For the six months ended 30 June 2007 Notes £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Contribution from new business after cost of
capital 165 13 178 41 219
Contribution from in-force business:
- expected return 127 40 167 15 182
- experience variances 3.03 74 (6) 68 13 81
- operating assumption changes 3.04 (10) - (10) 3 (7)
Development costs (10) - (10) (1) (11)
Contribution from shareholder net worth(2) 151 7 158 4 162
-----------------------------------------------------------------------------------------------------------------------
Operating profit 497 54 551 75 626
Variation from longer term investment return(3) 191 (15) 176 3 179
Effect of economic assumption changes (12) 3 (9) 3 (6)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax 676 42 718 81 799
Tax(2) (189) (13) (202) (23) (225)
Effect of UK Budget tax changes 3.10 86 - 86 7 93
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 573 29 602 65 667
=======================================================================================================================
For the six months ended 30 June 2006
-----------------------------------------------------------------------------------------------------------------------
Contribution from new business after cost of
capital 179 13 192 27 219
Contribution from in-force business:
- expected return 158 33 191 12 203
- experience variances 3.03 53 (6) 47 12 59
- operating assumption changes 3.04 (7) 3 (4) 17 13
Development costs (10) - (10) (1) (11)
Contribution from shareholder net worth(2) 32 8 40 3 43
-----------------------------------------------------------------------------------------------------------------------
Operating profit 405 51 456 70 526
Variation from longer term investment return(3) 125 (31) 94 (8) 86
Effect of economic assumption changes (2) (16) (18) - (18)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax 528 4 532 62 594
Tax(2) (175) (1) (176) (18) (194)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 353 3 356 44 400
=======================================================================================================================
1. For covered business, Investment management comprises managed pension funds and is included in the total Investment
management result of £90m (H1 06: £87m; FY 06: £181m). See note 3.07.
2. For H1 07 the contribution from shareholder net worth has been grossed up using a notional attributed tax rate of
28% (H1 06: 20%; FY 06: 30%).
3. UK life and pensions variation from longer term investment return comprises £97m (H1 06: £59m; FY 06: £185m)
relating to the value of in-force business and £94m (H1 06: £66m; FY 06: £202m) relating to shareholder net worth.
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European Embedded Value Page 23
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Notes to the Financial Statements
---------------------------------
3.01 Profit from continuing operations after tax from covered business (continued)
----------------------------------------------------------------------------------
UK Interna- Life and Investment Total
tional pensions manage-
total ment(1)
For the year ended 31 December 2006 Notes £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Contribution from new business after cost of
capital 380 38 418 61 479
Contribution from in-force business:
- expected return 323 70 393 24 417
- experience variances 3.03 41 19 60 34 94
- operating assumption changes 3.04 5 17 22 26 48
Development costs (21) - (21) (1) (22)
Contribution from shareholder net worth(2) 146 12 158 7 165
-----------------------------------------------------------------------------------------------------------------------
Operating profit 874 156 1,030 151 1,181
Variation from longer term investment return(3) 387 (21) 366 13 379
Effect of economic assumption changes (5) 7 2 - 2
Corporate restructure (216) - (216) - (216)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax 1,040 142 1,182 164 1,346
Tax(2) (337) (45) (382) (49) (431)
Tax impact of corporate restructure 3.16 322 - 322 - 322
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 1,025 97 1,122 115 1,237
=======================================================================================================================
1. For covered business, Investment management comprises managed pension funds and is included in the total Investment
management result of £90m (H1 06: £87m; FY 06: £181m). See note 3.07.
2. For H1 07 the contribution from shareholder net worth has been grossed up using a notional attributed tax rate of
28% (H1 06: 20%; FY 06: 30%).
3. UK life and pensions variation from longer term investment return comprises £97m (H1 06: £59m; FY 06: £185m)
relating to the value of in-force business and £94m (H1 06: £66m; FY 06: £202m) relating to shareholder net worth.
3.02 Life and pensions operating profit
---------------------------------------
Full year
30.06.07 30.06.06 31.12.06
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK 497 405 874
USA 23 20 89
Netherlands 19 17 45
France 12 14 22
-----------------------------------------------------------------------------------------------------------------------
551 456 1,030
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European Embedded Value Page 24
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Notes to the Financial Statements
---------------------------------
3.03 Analysis of experience variances
-------------------------------------
UK Interna- Life and Investment Total
tional pensions manage-
total ment
For the six months ended 30 June 2007 £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Persistency (3) (2) (5) 6 1
Mortality / morbidity 5 6 11 - 11
Expenses (9) (3) (12) (2) (14)
Other 81 (7) 74 9 83
-----------------------------------------------------------------------------------------------------------------------
74 (6) 68 13 81
=======================================================================================================================
Full experience investigations are not undertaken at the half year. A conservative estimate is made of both positive
and negative variances.
UK other experience variances of £81m principally comprise the impact of introducing market referenced fees for the
investment management services provided to Society and LGPL by Legal & General Investment Management (£88m) which are
recognised on a look through basis.
Investment management other experience variances of £9m includes the effect of higher than assumed 'other income' and
average fees.
For the six months ended 30 June 2006
-----------------------------------------------------------------------------------------------------------------------
Persistency (5) 4 (1) 4 3
Mortality / morbidity 6 (7) (1) - (1)
Expenses (1) - (1) (1) (2)
Other 53 (3) 50 9 59
-----------------------------------------------------------------------------------------------------------------------
53 (6) 47 12 59
=======================================================================================================================
UK other experience variances of £53m principally comprise the impact of the release of prudent margins as more data is
loaded onto the BPA administration system (£17m) and opening adjustments (£39m) primarily to reflect a revision of
assessments of prior and future tax. These opening adjustments had a broadly neutral effect on the embedded value with
the positive variance here being offset by a negative variance in the contribution from shareholder net worth.
Investment management other experience variances of £9m include the effect of higher average fee rates than assumed.
For the year ended 31 December 2006
-----------------------------------------------------------------------------------------------------------------------
Persistency (15) 2 (13) 12 (1)
Mortality / morbidity 10 (9) 1 - 1
Expenses 2 - 2 - 2
Other 44 26 70 22 92
-----------------------------------------------------------------------------------------------------------------------
41 19 60 34 94
=======================================================================================================================
2006 UK other experience variances of £44m principally comprise the impact of the release of prudent margins as more
data is loaded onto the BPA administration system (£33m) and opening adjustments (£34m) primarily to reflect a revision
of assessments of prior and future tax. These opening adjustments had a broadly neutral effect on the embedded value,
with the positive variance here being offset by a negative variance in the contribution from shareholder net worth.
This is partially offset by differences between actual and modelled tax and an increase in deferred tax provisions
(-£21m).
2006 International other experience variances relates primarily to the impact of Triple X financing.
2006 Investment management other experience variances of £22m includes the effect of higher average fee rates than
assumed (£17m).
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European Embedded Value Page 25
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Notes to the Financial Statements
---------------------------------
3.04 Analysis of operating assumption changes
---------------------------------------------
UK Interna- Life and Investment Total
tional pensions manage-
total ment
For the six months ended 30 June 2007 £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Persistency - - - - -
Mortality / morbidity - - - - -
Expenses (6) - (6) (9) (15)
Other (4) - (4) 12 8
-----------------------------------------------------------------------------------------------------------------------
(10) - (10) 3 (7)
=======================================================================================================================
Full experience investigations are not undertaken at the half year. A conservative approach is taken when revising any
future operating assumptions.
Investment management other operating assumption changes of £12m comprise the continuation of the ten year lapse
assumption for all contracts through the extension of the modelling period (£10m) coupled with higher fee and other
income assumptions (£2m).
For the six months ended 30 June 2006
-----------------------------------------------------------------------------------------------------------------------
Persistency (7) 9 2 - 2
Mortality / morbidity - (6) (6) - (6)
Expenses (12) - (12) - (12)
Other 12 - 12 17 29
-----------------------------------------------------------------------------------------------------------------------
(7) 3 (4) 17 13
=======================================================================================================================
UK other operating assumption changes of £12m principally comprise the impact of revisions to the anticipated future
releases of prudent margins as more data is loaded onto the BPA administration system.
Investment management other operating assumption changes of £17m principally arise from the continuation of the ten
year lapse assumption for all contracts through the extension of the modelling period.
For the year ended 31 December 2006
-----------------------------------------------------------------------------------------------------------------------
Persistency (12) 21 9 - 9
Mortality / morbidity (5) (7) (12) - (12)
Expenses (80) 4 (76) (1) (77)
Other 102 (1) 101 27 128
-----------------------------------------------------------------------------------------------------------------------
5 17 22 26 48
=======================================================================================================================
2006 UK expenses of -£80m relate to an assumed increase in future expenses in relation to the management of existing
protection policies (-£33m) and an anticipated rise in investment management costs (-£40m). The latter relates to
the move to new City premises in 2007 and the development of our structured solutions and US based fixed income teams.
2006 UK other operating assumption changes of £102m primarily relate to the impact of PS 06/14 on realistic protection
reserving after the recapture of financial reinsurance (£64m) and changes to annuity investment policy (£19m), together
with a reassessment of future reserve releases as data is loaded onto the BPA administration system (£23m).
2006 Investment management other operating assumption changes of £27m arise from the continuation of the ten year lapse
assumption for all contracts through the extension of the modelling period (£15m) coupled with higher fee and income
assumptions (£12m).
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European Embedded Value Page 26
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Notes to the Financial Statements
---------------------------------
3.05 Variation from longer term investment return
-------------------------------------------------
Full year
30.06.07 30.06.06 31.12.06
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
Total covered business 179 86 379
Investment management(1) (1) - (1)
General insurance (9) (1) (7)
Other operational income(2) 28 28 89
-----------------------------------------------------------------------------------------------------------------------
197 113 460
=======================================================================================================================
1. Non-covered Investment management business.
2. Variation from longer term investment return on shareholders' equity excludes the element relating to LGPL on the
IFRS basis.
3.06 Time value of options and guarantees
-----------------------------------------
At 30.06.07 At 30.06.06 At 31.12.06
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
Life and pensions
UK non profit 4 16 4
UK with-profits 1 2 2
International 11 12 12
-----------------------------------------------------------------------------------------------------------------------
16 30 18
=======================================================================================================================
3.07 Investment management income statement
-------------------------------------------
Full year
30.06.07 30.06.06 31.12.06
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
From continuing operations(1)
Managed pension funds 75 70 151
Ventures - 2 4
Property 5 4 6
Retail investments 6 5 11
Other income(2) 4 6 9
-----------------------------------------------------------------------------------------------------------------------
Operating profit from investment management 90 87 181
Variation from longer term investment return 3 (8) 13
Effect of economic assumption changes 3 - -
-----------------------------------------------------------------------------------------------------------------------
Profit on ordinary activities before tax 96 79 194
Tax (27) (23) (58)
-----------------------------------------------------------------------------------------------------------------------
Profit on ordinary activities after tax 69 56 136
=======================================================================================================================
Investment management comprises the managed pension funds business on an EEV basis and other investment management
business on an IFRS basis.
1. Operating profit in H1 07 excludes £4m of profits arising from the provision of investment management services at
market referenced rates to the covered business which are reported on a look through basis and as a consequence
included in the UK life and pensions covered business on an EEV basis.
2. Other income excludes the element relating to managed pension funds on the IFRS basis.
=======================================================================================================================
European Embedded Value Page 27
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Notes to the Financial Statements
---------------------------------
3.08 Other operational income
-----------------------------
Full year
30.06.07 30.06.06 31.12.06
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
Shareholders' other income
Investment return on shareholders' equity(1) 59 69 134
Interest expense (55) (48) (106)
-----------------------------------------------------------------------------------------------------------------------
4 21 28
Other operations(2) - (1) (2)
Unallocated corporate and development expenses (18) (5) (13)
-----------------------------------------------------------------------------------------------------------------------
(14) 15 13
=======================================================================================================================
1. Investment return on shareholders' equity excludes the element relating to LGPL on the IFRS basis of £31m
(H1 06: £nil; FY 06: £5m).
2. Principally the regulated mortgage network and Cofunds.
3.09 Analysis of tax
--------------------
Profit/ Profit/ Profit/
(loss) Tax (loss) Tax (loss) Tax
before (charge)/ before (charge)/ before (charge)/
tax credit tax credit tax credit
Full year Full year
30.06.07 30.06.07 30.06.06 30.06.06 31.12.06 31.12.06
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
From continuing operations
UK life and pensions 497 (139) 405 (121) 874 (262)
International life and pensions 54 (16) 51 (16) 156 (51)
-----------------------------------------------------------------------------------------------------------------------
551 (155) 456 (137) 1,030 (313)
Investment management 90 (26) 87 (25) 181 (54)
General insurance (38) 12 2 - 9 (2)
Other operational income (14) 10 15 3 13 8
-----------------------------------------------------------------------------------------------------------------------
Operating profit 589 (159) 560 (159) 1,233 (361)
Variation from longer term investment return 197 (61) 113 (45) 460 (128)
Effect of economic assumption changes (6) 2 (18) 6 2 2
Property income attributable to minority
interests 17 - 21 - 67 -
Corporate restructure - - - - (216) 65
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before
tax / Tax 797 (218) 676 (198) 1,546 (422)
=======================================================================================================================
3.10 Effect of UK Budget tax changes
====================================
The Finance Bill 2007 contains two measures which increased the UK embedded value by £93m. The reduction in the UK
corporation tax rate from 30% to 28% with effect from 1 April 2008 increased the post-tax profits from the UK life and
pensions and managed pension funds businesses reported on an EEV basis over the projection period. The effect was to
increase the UK embedded value by £101m. This was offset by a reduction of £8m from the requirement to tax the loan
interest payable by LGPL to the SRC at the full UK corporation tax rate.
For the purposes of grossing up the movement in the UK embedded value to report pre-tax profits, the notional
attributed tax rate was 28% (H1 06: 30%, FY 06: 30%).
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European Embedded Value Page 28
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Notes to the Financial Statements
---------------------------------
3.11 Earnings per share
-----------------------
(a) Earnings per share
Profit/ Profit/ Per share Profit/ Profit/ Per share
(loss) Tax (loss) (loss) Tax (loss)
before (charge)/ after before (charge)/ after
tax credit tax tax credit tax
30.06.07 30.06.07 30.06.07 30.06.07 30.06.06 30.06.06 30.06.06 30.06.06
£m £m £m p £m £m £m p
-----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations 589 (159) 430 6.62 560 (159) 401 6.19
Variation from longer term
investment return 197 (61) 136 2.09 113 (45) 68 1.05
Effect of economic assumption
changes (6) 2 (4) (0.06) (18) 6 (12) (0.19)
Effect of UK Budget tax changes - 93 93 1.43 - - - -
-----------------------------------------------------------------------------------------------------------------------
Earnings per share based on profit
attributable to equity holders 780 (125) 655 10.08 655 (198) 457 7.05
=======================================================================================================================
Profit/ Profit/ Per share
(loss) Tax (loss)
before (charge)/ after
tax credit tax
Full year Full year Full year Full year
31.12.06 31.12.06 31.12.06 31.12.06
£m £m £m p
-----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations 1,233 (361) 872 13.45
Variation from longer term
investment return 460 (128) 332 5.12
Effect of economic assumption
changes 2 2 4 0.06
Corporate restructure (216) 65 (151) (2.33)
Tax impact of corporate restructure - 322 322 4.97
-----------------------------------------------------------------------------------------------------------------------
Earnings per share based on profit
attributable to equity holders 1,479 (100) 1,379 21.27
=======================================================================================================================
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European Embedded Value Page 29
=======================
Notes to the Financial Statements
---------------------------------
3.11 Earnings per share (continued)
-----------------------------------
(b) Diluted earnings per share
(i) Based on operating profit from continuing operations after tax
Profit Number Per share Profit Number Per share
after of after of
tax shares(1) tax shares(1)
30.06.07 30.06.07 30.06.07 30.06.06 30.06.06 30.06.06
£m m p £m m p
-----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing operations after tax 430 6,493 6.62 401 6,478 6.19
Net shares under options allocable for no further
consideration - 37 (0.03) - 41 (0.04)
Convertible bonds outstanding - - - 12 285 (0.08)
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 430 6,530 6.59 413 6,804 6.07
=======================================================================================================================
Profit Number Per share
after of
tax shares(1)
Full year Full year Full year
31.12.06 31.12.06 31.12.06
£m m p
-----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing operations after tax 872 6,483 13.45
Net shares under options allocable for no further
consideration - 46 (0.09)
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 872 6,529 13.36
=======================================================================================================================
(ii) Based on profit attributable to equity holders of the Company
Profit Number Per share Profit Number Per share
after of after of
tax shares(1) tax shares(1)
30.06.07 30.06.07 30.06.07 30.06.06 30.06.06 30.06.06
£m m p £m m p
-----------------------------------------------------------------------------------------------------------------------
Profit attributable to equity holders of the Company 655 6,493 10.08 457 6,478 7.05
Net shares under options allocable for no further
consideration - 37 (0.05) - 41 (0.04)
Convertible bonds outstanding - - - 12 285 (0.12)
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 655 6,530 10.03 469 6,804 6.89
=======================================================================================================================
Profit Number Per share
after of
tax shares(1)
Full year Full year Full year
31.12.06 31.12.06 31.12.06
£m m p
-----------------------------------------------------------------------------------------------------------------------
Profit attributable to equity holders of the Company 1,379 6,483 21.27
Net shares under options allocable for no further
consideration - 46 (0.15)
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 1,379 6,529 21.12
=======================================================================================================================
1. Weighted average number of shares.
=======================================================================================================================
European Embedded Value Page 30
=======================
Notes to the Financial Statements
---------------------------------
3.12 Embedded value reconciliation
----------------------------------
UK share- Inter- Invest-
UK holder UK national Life and ment Total
value of net life and life and pensions manage-
in-force worth(1) pensions pensions total ment(2)
As at 30 June 2007 Notes £m £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
At 1 January
Value of in-force business (VIF) 2,428 - 2,428 652 3,080 281 3,361
Shareholder net worth (SNW) - 3,828 3,828 261 4,089 194 4,283
-----------------------------------------------------------------------------------------------------------------------
2,428 3,828 6,256 913 7,169 475 7,644
Exchange rate movements - - - (18) (18) - (18)
-----------------------------------------------------------------------------------------------------------------------
2,428 3,828 6,256 895 7,151 475 7,626
Profit for the period:
-------------------------------
- New business contribution : 237 : (118): 119 :
- Expected return on VIF : 91 : - : 91 :
- Expected return - transfer to SNW : (172): 172 : - :
- Less: expected movement in contingent : : : :
loan(3) : 29 : (29): - :
- Experience variances : 143 : (99): 44 :
- Operating assumption changes : 3 : (12): (9):
- Development costs : - : (8): (8):
- Expected return on SNW : - : 121 : 121 :
- Investment variances : 24 : 114 : 138 :
- Economic assumption changes : (11): 2 : (9):
- Effect of UK Budget tax changes : 48 : 38 : 86 :
-------------------------------
Profit for the period(4) 392 181 573 29 602 65 667
Capital movements(5) - - - 73 73 - 73
Distributions relating to:
-------------------------------
- Non profit 5.04 (a) : : (61): (61):
- With-profits : (35): : (35):
- Shareholder net worth 5.04 (a) : : (78): (78):
-------------------------------
Distributions (35) (139) (174) - (174) - (174)
Movement in pension deficit - 23 23 - 23 - 23
Transfer to non-covered business(6) - (3) (3) - (3) - (3)
-----------------------------------------------------------------------------------------------------------------------
Embedded value 3.13/3.14 2,785 3,890 6,675 997 7,672 540 8,212
=======================================================================================================================
Represented by:
Non profit 1,902 1,902
With-profits 883 883
-----------------------------------------------------------------------------------------------------------------------
Value of in-force business 2,785 - 2,785 707 3,492 310 3,802
Shareholder net worth - 3,890 3,890 290 4,180 230 4,410
=======================================================================================================================
1. UK SNW represents the amounts in the Society long term fund and LGPL shareholder capital which are regarded as
either required capital or free surplus held within the covered business.
2. Investment management covered business comprises managed pension funds and is included in the total Investment
management shareholders' equity of £671m.
3. On an EEV basis, the contingent loan (between SRC and LGPL) is modelled as an asset of SNW. As profits from the
in-force business of LGPL are earned, cash is realised and transferred to SNW and the contingent loan asset is
reduced accordingly. The expected movement includes both repayment of capital relating to in-force business and
drawdown of loan relating to new business written in the period.
4. Included in the profit for the period is an inter-fund transfer from SRC (included in SNW) to non profit (included
in VIF) of £35m.
5. Capital movements comprise £46m ($90m) of capital injected into the USA operation and £27m (€40m) injected into the
French operation.
6. The transfer to non-covered business represents the IFRS profits arising in the period from the provision of
investment management services by Legal & General Investment Management to the UK life and pensions covered
business, which have been included in the operating profit of the covered business on a look through basis.
=======================================================================================================================
European Embedded Value Page 31
=======================
Notes to the Financial Statements
---------------------------------
3.12 Embedded value reconciliation (continued)
----------------------------------------------
UK share- Inter- Invest-
UK holder UK national Life and ment Total
value of net life and life and pensions manage-
in-force worth(1) pensions pensions total ment(2)
As at 30 June 2006 Notes £m £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
At 1 January
Value of in-force business (VIF) 3,142 - 3,142 570 3,712 238 3,950
Shareholder net worth (SNW) - 1,762 1,762 298 2,060 184 2,244
-----------------------------------------------------------------------------------------------------------------------
3,142 1,762 4,904 868 5,772 422 6,194
Exchange rate movements - - - (39) (39) - (39)
-----------------------------------------------------------------------------------------------------------------------
3,142 1,762 4,904 829 5,733 422 6,155
Profit for the period:
-------------------------------
- New business contribution : 248 : (123): 125 :
- Expected return on VIF : 111 : - : 111 :
- Expected return - transfer to SNW : (180): 180 : - :
- Experience variances : 62 : (58): 4 :
- Operating assumption changes : 13 : (18): (5):
- Development costs : - : (7): (7):
- Expected return on SNW : - : 56 : 56 :
- Investment variances : 40 : 31 : 71 :
- Economic assumption changes : (3): 1 : (2):
- Effect of UK Budget tax changes : - : - : - :
-------------------------------
Profit for the period(3) 291 62 353 3 356 44 400
Capital movements - - - 17 17 - 17
Distributions relating to:
-------------------------------
- Non profit 5.04 (a) : : (67): (67):
- With-profits : (28): : (28):
- Shareholder net worth 5.04 (a) : : (43): (43):
- Subordinated debt : : (13): (13):
-------------------------------
Distributions (28) (123) (151) (151) (151)
Movement in pension deficit - 13 13 - 13 - 13
-----------------------------------------------------------------------------------------------------------------------
Embedded value 3.13/3.14 3,405 1,714 5,119 849 5,968 466 6,434
=======================================================================================================================
Represented by:
Non profit 756 756
With-profits 2,649 2,649
-----------------------------------------------------------------------------------------------------------------------
Value of in-force business 3,405 - 3,405 601 4,006 250 4,256
Shareholder net worth - 1,714 1,714 248 1,962 216 2,178
=======================================================================================================================
1. UK SNW represents the amounts in the Society long term fund which are regarded as either required capital or free
surplus held within the covered business.
2. Investment management covered business comprises managed pension funds and is included in the total Investment
management shareholders' equity of £564m.
3. Included in the profit for the period is an inter-fund transfer from non profit (included in VIF) to SRC (included
in SNW) of £7m.
=======================================================================================================================
European Embedded Value Page 32
=======================
Notes to the Financial Statements
---------------------------------
3.12 Embedded value reconciliation (continued)
----------------------------------------------
UK share- Inter- Invest-
UK holder UK national Life and ment Total
value of net life and life and pensions manage-
in-force worth(1) pensions pensions total ment(2)
As at 31 December 2006 Notes £m £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
At 1 January
Value of in-force business (VIF) 3,142 - 3,142 570 3,712 238 3,950
Shareholder net worth (SNW) - 1,762 1,762 298 2,060 184 2,244
-----------------------------------------------------------------------------------------------------------------------
3,142 1,762 4,904 868 5,772 422 6,194
Exchange rate movements - - - (78) (78) - (78)
-----------------------------------------------------------------------------------------------------------------------
3,142 1,762 4,904 790 5,694 422 6,116
Profit for the period:
-------------------------------
- New business contribution : 485 : (219): 266 :
- Expected return on VIF : 226 : - : 226 :
- Expected return - transfer to SNW : (293): 293 : - :
- Experience variances : (160): 161 : 1 :
- Operating assumption changes : (284): 286 : 2 :
- Development costs : - : (14): (14):
- Expected return on SNW : - : 112 : 112 :
- Investment variances : (56): 320 : 264 :
- Economic assumption changes : (5): 2 : (3):
- Corporate restructure : (561): 410 : (151):
- Tax impact of Corporate restructure : - : 322 : 322 :
-------------------------------
Profit for the period(3) (648) 1,673 1,025 97 1,122 115 1,237
Capital movements(4) - 698 698 31 729 - 729
Distributions relating to:
-------------------------------
- Non profit 5.04 (a) : : (110): (110):
- With-profits : (66): : (66):
- Shareholder net worth 5.04 (a) : : (162): (162):
- Subordinated debt : : (24): (24):
-------------------------------
Distributions (66) (296) (362) (5) (367) (62) (429)
Movement in pension deficit - (9) (9) - (9) - (9)
-----------------------------------------------------------------------------------------------------------------------
Embedded value 3.13/3.14 2,428 3,828 6,256 913 7,169 475 7,644
=======================================================================================================================
Represented by:
Non profit 1,643 1,643
With-profits 785 785
-----------------------------------------------------------------------------------------------------------------------
Value of in-force business 2,428 - 2,428 652 3,080 281 3,361
Shareholder net worth - 3,828 3,828 261 4,089 194 4,283
=======================================================================================================================
1. UK SNW represents the amounts in the Society long term fund and LGPL shareholder capital which are regarded as
either required capital or free surplus held within the covered business.
2. Investment management covered business comprises managed pension funds and is included in the total Investment
management shareholders' equity of £592m.
3. Included in the profit for the period is an inter-fund transfer from non profit (included in VIF) to SRC (included
in SNW) of £1,222m.
4. Capital movements comprise £300m equity capital, £600m capital contribution and £400m of intra-group subordinated
debt attributed to LGPL, less the repayment of £602m of intra-group subordinated debt previously attributed to the
SRC.
=======================================================================================================================
European Embedded Value Page 33
=======================
Notes to the Financial Statements
---------------------------------
3.13 Analysis of ordinary shareholders' equity
----------------------------------------------
UK Inter- Life and Investment Other Total
national pensions manage- opera-
total ment(1) tions(2)
As at 30 June 2007 £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Analysed as:
IFRS basis shareholders' equity 4,329 803 5,132 230 153 5,515
Additional retained profit on an EEV basis 2,346 194 2,540 310 - 2,850
-----------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity on an EEV basis 6,675 997 7,672 540 153 8,365
=======================================================================================================================
Comprising:
Shareholder net worth
- Free surplus 691 106 797 206
- Required capital to cover solvency margin 1,402 184 1,586 24
- Other required capital 1,797 - 1,797 -
Value of in-force
- Value of in-force business 2,926 759 3,685 316
- Cost of capital (141) (52) (193) (6)
=======================================================================================================================
As at 30 June 2006
-----------------------------------------------------------------------------------------------------------------------
Analysed as:
IFRS basis shareholders' equity 2,591 713 3,304 216 732 4,252
Additional retained profit on an EEV basis 2,528 136 2,664 250 - 2,914
-----------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity on an EEV basis 5,119 849 5,968 466 732 7,166
=======================================================================================================================
Comprising:
Shareholder net worth
- Free surplus - 96 96 198
- Required capital to cover solvency margin 689 152 841 18
- Other required capital 1,025 - 1,025 -
Value of in-force
- Value of in-force business 3,415 656 4,071 254
- Cost of capital (10) (55) (65) (4)
=======================================================================================================================
As at 31 December 2006
-----------------------------------------------------------------------------------------------------------------------
Analysed as:
IFRS basis shareholders' equity 4,213 731 4,944 194 287 5,425
Additional retained profit on an EEV basis 2,043 182 2,225 281 - 2,506
-----------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity on an EEV basis 6,256 913 7,169 475 287 7,931
=======================================================================================================================
Comprising:
Shareholder net worth
- Free surplus 652 110 762 176
- Required capital to cover solvency margin 1,362 151 1,513 18
- Other required capital 1,814 - 1,814 -
Value of in-force
- Value of in-force business 2,572 703 3,275 286
- Cost of capital (144) (51) (195) (5)
=======================================================================================================================
Free surplus is the market value of any capital and surplus allocated to, but not required to support, the in-force
covered business at the valuation date.
Total required capital includes any amount of assets attributed to the covered business, over and above that required
to back liabilities, where distribution to shareholders is restricted.
1. Investment management comprises managed pension funds and is included in the total Investment management
shareholders' equity of £671m (H1 06: £564m, FY 06: £592m).
2. Other Investment management businesses included on an IFRS basis of £131m (H1 06: £98m, FY 06: £117m) are included
in other operations.
=======================================================================================================================
European Embedded Value Page 34
=======================
Notes to the Financial Statements
---------------------------------
3.14 Segmental analysis of shareholders' equity
-----------------------------------------------
Covered Other Total Covered Other Total
business business business business
EEV basis IFRS basis EEV basis IFRS basis
At 30.06.07 At 30.06.07 At 30.06.07 At 30.06.06 At 30.06.06 At 30.06.06
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK(1) 6,675 - 6,675 5,119 - 5,119
Society shareholder capital (excluding LGPL)(2) - 501 501 - 2,042 2,042
-----------------------------------------------------------------------------------------------------------------------
6,675 501 7,176 5,119 2,042 7,161
Embedded value of international life and
pensions business
- USA(3) 595 - 595 537 - 537
- Netherlands 236 - 236 197 - 197
- France(3) 166 - 166 115 - 115
-----------------------------------------------------------------------------------------------------------------------
7,672 501 8,173 5,968 2,042 8,010
Investment management 540 131 671 466 98 564
-----------------------------------------------------------------------------------------------------------------------
8,212 632 8,844 6,434 2,140 8,574
General insurance - 136 136 - 164 164
Corporate funds(4) - (615) (615) - (1,572) (1,572)
-----------------------------------------------------------------------------------------------------------------------
8,212 153 8,365 6,434 732 7,166
=======================================================================================================================
Covered Other Total
business business
EEV basis IFRS basis
At 31.12.06 At 31.12.06 At 31.12.06
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK(1) 6,256 - 6,256
Society shareholder capital (excluding LGPL)(2) - 1,307 1,307
-----------------------------------------------------------------------------------------------------------------------
6,256 1,307 7,563
Embedded value of international life and pensions business
- USA 552 - 552
- Netherlands 228 - 228
- France 133 - 133
-----------------------------------------------------------------------------------------------------------------------
7,169 1,307 8,476
Investment management 475 117 592
-----------------------------------------------------------------------------------------------------------------------
7,644 1,424 9,068
General insurance - 169 169
Corporate funds(4) - (1,306) (1,306)
-----------------------------------------------------------------------------------------------------------------------
7,644 287 7,931
=======================================================================================================================
Further analysis of the covered business is included in note 3.12.
Full year
30.06.07 30.06.06 31.12.06
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
Movement
At 1 January 7,931 6,970 6,970
Total recognised income and expense 665 439 1,337
Issue of ordinary share capital 3 12 15
Net movements in employee share schemes and treasury shares (9) (4) (5)
Dividend distributions to ordinary equity holders of the Company during the period (248) (236) (349)
Other reserve movements including pension deficit 23 13 (9)
Fair value loss after tax on reclassification of subordinated borrowings as debt - (28) (28)
-----------------------------------------------------------------------------------------------------------------------
At 30 June / 31 December 8,365 7,166 7,931
=======================================================================================================================
1. At 30 June 2006, Legal & General Group Plc (Group Plc) had lent £602m of subordinated debt to the SRC. In H2 06,
this debt was repaid, then re-lent to Society shareholder capital, and £400m of this was lent to LGPL on similar
terms. As part of ongoing capital restructuring work, Society repaid the subordinated debt to Group Plc in H1 07.
The £400m lent to LGPL remains in place.
2. Represents surplus capital held outside Society's LTF, excluding LGPL shareholder capital, which is regarded as
either required capital or free surplus held within the covered business.
3. Capital movements comprise £46m ($90m) of capital injected into the USA operation and £27m (€40m) injected into the
French operation.
4. Corporate funds includes investments, subordinated borrowings and senior borrowings.
=======================================================================================================================
European Embedded Value Page 35
=======================
Notes to the Financial Statements
---------------------------------
3.15 Reconciliation of shareholder net worth
--------------------------------------------
UK life Total UK life Total UK life Total
and and and
pensions pensions pensions
At 30.06.07 At 30.06.07 At 30.06.06 At 30.06.06 At 31.12.06 At 31.12.06
Restated
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
SNW of long term operations (IFRS basis) 3,285 5,362 2,591 3,520 3,263 5,138
Other assets (IFRS basis) 1,044 153 - 732 950 287
-----------------------------------------------------------------------------------------------------------------------
Shareholders' equity on the IFRS basis 4,329 5,515 2,591 4,252 4,213 5,425
Purchased interests in long term business (6) (24) (9) (29) (7) (25)
Sub-fund 326 326 292 292 313 313
Deferred acquisition costs / deferred income
liabilities (127) (703) (360) (927) (115) (677)
Deferred tax (1) (642) (460) (850) (686) (693) (520)
Other (2) 10 (91) 50 8 117 54
-----------------------------------------------------------------------------------------------------------------------
Shareholder net worth on the EEV basis 3,890 4,563 1,714 2,910 3,828 4,570
-----------------------------------------------------------------------------------------------------------------------
Represented by:
SNW of long term operations (EEV basis) 2,577 4,410 1,714 2,178 2,548 4,283
LGPL shareholder capital (EEV basis) 1,313 - - - 1,280 -
Other assets (IFRS basis) - 153 - 732 - 287
=======================================================================================================================
1. Deferred tax represents all tax which is expected to be paid under current legislation, including tax which would
arise if shareholders' assets were distributed.
2. Other relates primarily to the different treatment of sterling reserves, other long term reserves and the non profit
result of LGPL under EEV compared with IFRS.
3.16 Corporate restructure
--------------------------
On 31 December 2006, the non-linked non profit pensions and annuity business of Society was ceded to a new, wholly
owned, reinsurance company, LGPL. Full details of the restructuring are included in the 2006 Annual Report and
Accounts.
=======================================================================================================================
European Embedded Value Page 36
=======================
Notes to the Financial Statements
---------------------------------
3.17 Assumptions
----------------
UK assumptions
--------------
The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to redemption
yields available in the market at the end of the reporting period.
For annuities, a separate return is calculated for business sold before or after December 2006. This reflects a change
in investment policy applicable to the 2007 business which has the aim of increasing the expected return whilst not
increasing the level of asset risk compared with the historic policy. This has been achieved through improved
investment efficiency and increased diversification through use of additional asset classes. The calculated return
takes account of derivatives and other credit instruments in the investment portfolio.
Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the
proceeds reinvested in corporate bonds with a redemption yield 0.40% p.a. greater than the swap rate at that time.
The returns on fixed and index-linked securities are calculated net of an allowance for default risk which takes
account of the outstanding term of the securities. The allowances for default risk are set separately for the asset
portfolios supporting fixed and index-linked securities, and average 0.12% p.a. and 0.07% p.a. respectively across the
portfolios as a whole (0.15% p.a. and 0.10% p.a. at 31.12.2006).
Economic assumptions
--------------------
30.06.07 30.06.06 31.12.06 31.12.05
% 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 5.1 4.6 4.6 4.1
- RPI linked 5.6 4.7 4.7 4.2
- Non gilts:
- Fixed interest 5.6 - 6.0 4.9 - 5.3 4.9 - 5.3 4.4 - 4.8
- RPI linked 5.3 - 5.9 4.7 - 5.2 4.6 - 5.1 4.2 - 4.6
- Equities 8.1 7.6 7.6 7.1
- Property 7.1 6.6 6.6 6.1
Risk margin 3.0 3.0 3.0 3.0
Risk discount rate (net of tax) 8.1 7.6 7.6 7.1
Inflation
- Expenses/earnings 4.5 4.1 4.2 3.9
- Indexation 3.5 3.1 3.2 2.9
The assumed returns on non gilt securities are net of an allowance for default risk of 0.2% p.a. (2006: 0.2%),
other than for certain government-supported securities where no such allowance is made.
UK life and pensions
--------------------
i. The value of the Sub-fund is the discounted value of total projected investment returns over its lifetime.
ii. Assets are valued at market value.
iii. 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.
iv. The value of in-force business reflects the cost, including administration expenses, of providing for benefit
enhancement or compensation in relation to certain products.
=======================================================================================================================
European Embedded Value Page 37
=======================
Notes to the Financial Statements
---------------------------------
3.17 Assumptions (continued)
----------------------------
v. 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 future experience with a minimum annual improvement of 0.6%, and the average of
projections MC and LC for statutory reserving with a minimum annual improvement of 0.8%. 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 future experience, with the same underpinning minima as for males.
vi. £400m of subordinated debt attributed to Legal & General Pensions Limited (LGPL) in 2006 has been included at face
value. The estimated market value was £374m at 30 June 2007.
vii. Development costs relate to enhanced financial reporting and strategic systems.
UK managed pension funds
------------------------
viii. All contracts are assumed to lapse over a 10 year period. 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
-------------
ix. Key assumptions:
30.06.07 30.06.06 31.12.06 31.12.05
% p.a. % p.a. % p.a. % p.a.
USA
Reinvestment rate 5.8 5.9 5.4 5.1
Risk margin 3.0 3.0 3.0 3.0
Risk discount rate (net of tax) 8.1 8.2 7.8 7.4
Europe
Government bond return 4.6 4.1 4.0 3.3
Risk margin 3.0 3.0 3.0 3.0
Risk discount rate (net of tax) 7.6 7.1 7.0 6.3
x. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including
those for mortality, morbidity, persistency and maintenance expenses.
Tax
---
xi. EEV results are computed on an after tax basis and are grossed up by notional attributed tax for presentation in
the income statement. The tax rate used for grossing up is the corporate tax rate in the territory concerned
which for the UK was 28% (H1 06: 30%; FY 06: 30%).
Stochastic calculations
-----------------------
xii. The time value of options and guarantees is calculated using economic and non-economic assumptions consistent
with those used for the deterministic embedded value calculations.
This section describes the models used to generate future investment simulations, and gives some sample statistics
for the simulations used. A single model has been used for UK and international business, with different economic
assumptions for each territory.
Government nominal interest rates are generated using a LIBOR Money Market Model projecting full yield curves at
annual intervals. The model provides a good fit to the initial yield curve.
The total annual returns on equities and property are calculated as the return on 1 year bonds plus an excess
return. The excess return is assumed to have a lognormal distribution. Corporate bonds are modelled separately by
credit rating using stochastic credit spreads over the risk-free rates, transition matrices and default recovery
rates. The real yield curve model assumes that the real short rate follows a mean-reverting process subject to
two normally distributed random shocks.
Asset classes
The significant asset classes are for:
- UK with-profits business - equities, property and fixed rate bonds of various durations;
- UK annuity business - fixed rate and index-linked bonds of various durations; and
- International business - fixed rate bonds of various durations.
=======================================================================================================================
European Embedded Value Page 38
=======================
Notes to the Financial Statements
---------------------------------
3.17 Assumptions (continued)
----------------------------
Summary statistics
The following table sets out means and standard deviations (StDev) of future returns as at 30 June 2007 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(1) StDev(2) Mean(1) StDev(2)
UK Business (Sterling)
Government bonds 5.6% 3.1% 5.3% 3.3%
Corporate bonds 6.1% 3.3% 5.9% 3.5%
Property (excess returns) 2.0% 14.6% 2.0% 15.0%
Equities (excess returns) 3.1% 20.2% 3.0% 19.9%
European Business (Euro)
Long Government bonds(3) 4.8% 5.7% 5.2% 5.8%
Short Government bonds(4) 4.8% 4.4% 5.2% 8.5%
US Business (US Dollar)
Long Government bonds(3) 5.1% 5.8% 5.5% 6.0%
1. Other than for equities and property, means are calculated as the excess of 1 year bond asset return means
plus 1 year bond means. Means for the equities and property excess returns are calculated as the excess of 1
year bond asset return means. Each mean is derived by calculating the accumulated value of a unit asset
invested to time in years for each simulation, averaging the resultant values across all simulations, then
calculating the equivalent annual return required to give this average accumulation (by taking the nth root of
the average accumulation and deducting 1).
2. Standard deviations are calculated by accumulating a unit investment for n years in each simulation, taking
the natural logarithm of the result, calculating the variance of this statistic, dividing by n and taking the
square root. Equities and property values use excess returns. The results are comparable to implied
volatilities quoted in investment markets.
3. Long term bonds are defined to be 10-year par-coupon bonds.
4. Short term bonds are defined to be 1 year duration bonds.
Risk discount rate
The risk discount rate is scenario-dependent within the stochastic projection. It is calculated by applying the
deterministic risk margin to the risk free rate in each stochastic projection.
Sensitivity calculations
------------------------
In accordance with the dispensation within the CFO guidelines, a full sensitivity analysis is only provided annually.
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