L&G Interim Results - Part 5

Legal & General Group PLC 26 July 2007 Capital and Cash Flow Page 54 ===================== 5.01 Regulatory capital resources ----------------------------------- (a) Insurance Groups Directive The Group is required to measure and monitor its capital resources on a regulatory basis and to comply with the minimum capital requirements of regulators in each territory in which it operates. At Group level, Legal & General must comply with the requirements of the Insurance Groups Directive (IGD). This is a very prudent measure of capital resources as it excludes any amount of surplus capital within a long term fund (£3.2bn for Society at 30 June 2007). The table below shows the estimated total Group capital resources, Group capital resources requirement and the surplus. At 30.06.07 At 30.06.06 At 31.12.06 £bn £bn £bn ----------------------------------------------------------------------------------------------------------------------- Core tier I 5.8 5.4 5.9 Innovative tier I 0.6 - - Upper tier II 0.4 0.4 0.4 Lower tier II 0.4 0.4 0.4 Deductions (0.1) (0.1) (0.1) ----------------------------------------------------------------------------------------------------------------------- Group capital resources 7.1 6.1 6.6 ----------------------------------------------------------------------------------------------------------------------- Group capital resources requirement 4.5 3.8 4.6 ----------------------------------------------------------------------------------------------------------------------- Insurance Groups Directive surplus 2.6 2.3 2.0 ======================================================================================================================= A segmental analysis is given below. At 30.06.07 At 30.06.06 At 31.12.06 £bn £bn £bn ----------------------------------------------------------------------------------------------------------------------- Society long term fund 3.6 3.6 3.7 Society shareholder capital 0.5 2.0 1.3 L&G Pensions 1.5 - 1.4 L&G Insurance 0.1 0.1 0.1 L&G France 0.1 0.1 0.1 L&G Netherlands 0.1 0.1 0.1 L&G America 0.1 0.1 0.1 Investment management 0.3 0.3 0.3 Other 1.5 1.1 0.5 Innovative tier I 0.6 - - Tier II 0.8 0.8 0.8 Debt (2.1) (2.1) (1.8) ----------------------------------------------------------------------------------------------------------------------- Group capital resources 7.1 6.1 6.6 ----------------------------------------------------------------------------------------------------------------------- Society long term fund 3.6 3.6 3.7 L&G Pensions 0.6 - 0.6 Other 0.3 0.2 0.3 ----------------------------------------------------------------------------------------------------------------------- Group capital resources requirement 4.5 3.8 4.6 ----------------------------------------------------------------------------------------------------------------------- A reconciliation of the Group capital resources on an IGD basis to the capital and reserves attributable to the equity holders of the Company on an IFRS basis is given below. At 30.06.07 At 30.06.06 At 31.12.06 £bn £bn £bn ----------------------------------------------------------------------------------------------------------------------- Capital and reserves attributable to equity holders on an IFRS basis 5.5 4.3 5.4 Innovative tier I 0.6 - - Tier II 0.8 0.8 0.8 Additional capital available from Society 0.7 1.5 0.8 Adjustment to reflect regulatory value of L&G America (0.5) (0.5) (0.4) ----------------------------------------------------------------------------------------------------------------------- Group capital resources 7.1 6.1 6.6 ======================================================================================================================= ======================================================================================================================= Capital and Cash Flow Page 55 ===================== 5.01 Regulatory capital resources (continued) ----------------------------------------------- (b) Society capital surplus Society is required to measure and monitor its capital resources on a regulatory basis. At 30.06.07 At 30.06.07 At 30.06.06 At 30.06.06 At 31.12.06 At 31.12.06 Long term General Long term General Long term General business insurance business insurance business insurance £bn £bn £bn £bn £bn £bn ----------------------------------------------------------------------------------------------------------------------- Tier I 8.9 0.1 7.5 0.1 8.7 0.1 Upper tier II(1) - - 0.6 - 0.3 - Lower tier II(1) - - - - 0.3 - ----------------------------------------------------------------------------------------------------------------------- Available capital resources 8.9 0.1 8.1 0.1 9.3 0.1 ----------------------------------------------------------------------------------------------------------------------- Insurance capital requirement 1.7 - 1.8 - 1.7 - Resilience capital requirement - - 0.5 - - - With-Profits Insurance Capital Component 2.0 - 1.2 - 2.0 - Capital requirements of regulated related undertakings 0.7 0.1 0.1 0.1 0.7 0.1 ----------------------------------------------------------------------------------------------------------------------- Capital resources requirement 4.4 0.1 3.6 0.1 4.4 0.1 ----------------------------------------------------------------------------------------------------------------------- Regulatory capital surplus 4.5 - 4.5 - 4.9 - ======================================================================================================================= 1. The tier II capital of £602m was repaid in June 2007. The table below summarises the realistic position of the with-profits part of Society's LTF: Full year 30.06.07 30.06.06 31.12.06 £m £m £m ----------------------------------------------------------------------------------------------------------------------- With-profits surplus 1,174 907 1,128 Risk capital margin 236 244 465 ----------------------------------------------------------------------------------------------------------------------- Surplus 938 663 663 ======================================================================================================================= Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis (Peak 2). If the surplus on a realistic basis is lower than the surplus using Peak 1 solvency rules, then a further capital requirement, the With-Profits Insurance Capital Component (WPICC) is required. At H1 07, the WPICC was reduced to reflect the value of shareholder transfers of £499m (H1 06: £nil, FY 06: £432m) within the risk capital margin calculation. (c) LGPL capital surplus At 30.06.07 At 30.06.06 At 31.12.06 Long term Long term Long term business business business £bn £bn £bn ----------------------------------------------------------------------------------------------------------------------- Tier I 1.1 - 1.0 Upper tier II 0.2 - 0.2 Lower tier II 0.2 - 0.2 ----------------------------------------------------------------------------------------------------------------------- Available capital resources 1.5 - 1.4 ----------------------------------------------------------------------------------------------------------------------- Insurance capital requirement 0.6 - 0.6 ----------------------------------------------------------------------------------------------------------------------- Capital resources requirement 0.6 - 0.6 ----------------------------------------------------------------------------------------------------------------------- Regulatory capital surplus 0.9 - 0.8 ======================================================================================================================= The regulatory capital surplus in LGPL of £0.9bn (H1 06: £nil, FY 06: £0.8bn) is included within the IGD calculation (see note 5.02(a)). For Society's regulatory capital calculation (on the adjusted solo basis), the regulatory capital surplus of LGPL is reduced by £0.2bn to reflect ineligible surplus capital; this principally reflects the difference between the GAAP and regulatory values of LGPL. As a result, LGPL is included at a regulatory value of £0.7bn in Society's regulatory capital surplus. ======================================================================================================================= Capital and Cash Flow Page 56 ===================== 5.02 IFRS capital resources ----------------------------- (a) Group capital resources The Group's total capital resources of £9.2bn on an IFRS basis, comprise ordinary equity holders' capital (£5.5bn) (see note 4.12), subordinated debt (£1.4bn), and unallocated divisible surplus (£2.3bn, including £0.3bn of Sub-fund). (b) Society capital resources Society has been allocated capital of £4.8bn, reflecting the significance of this operation and the importance of ensuring financial strength to support long term growth of the business. Of this total, £1.5bn is held outside any long term fund as Society Shareholder Capital (SSC) of which approximately £1.0bn is within LGPL; the remainder of £3.3bn is held within Society's long term fund as Shareholder Retained Capital (SRC). An analysis of the movement in total Society capital on the IFRS basis is provided in the table below: 30.06.07 30.06.07 SRC SSC ------------------------------------------------------------------- Gross Tax Net Gross Tax Net Notes £m £m £m £m £m £m ----------------------------------------------------------------------------------------------------------------------- SRC/SSC as at 1 January 3,263 2,257 Investment return 165 (84) 81 98 (22) 76 Transfer from Society long term fund: - Non profit distribution (199) 60 (139) 199 (60) 139 - With-profits distribution - - - 50 (15) 35 Net capital released from NP business 5.02(c) 77 (23) 54 76 (23) 53 Distribution to shareholders - - - (400) - (400) Repayment of subordinated loan capital - - - (602) - (602) Movement included in the statement of recognised income and expense 38 (12) 26 - - - Other - - - (18) 5 (13) ----------------------------------------------------------------------------------------------------------------------- At 30 June 3,285 1,545 ======================================================================================================================= Held within: LGPL - 1,044 Society 3,285 501 ======================================================================================================================= The total net capital released from the non profit business is £153m (see note 4.06), which comprises the net capital released from LGPL non profit business of £76m (net of tax £53m) and the net capital released from Society of £77m (net of tax £54m). 30.06.06 30.06.06 SRC SSC ------------------------------------------------------------------- Gross Tax Net Gross Tax Net Notes £m £m £m £m £m £m ----------------------------------------------------------------------------------------------------------------------- SRC/SSC as at 1 January 2,560 1,896 Investment return 104 (52) 52 70 (11) 59 Transfer from Society long term fund: - Non profit distribution (157) 47 (110) 157 (47) 110 - With-profits distribution - - - 40 (12) 28 - Subordinated debt (18) 5 (13) - - - Dividends from subsidiaries - - - 2 - 2 Net capital released from NP business 5.02(c) 110 (33) 77 - - - Distribution to shareholders - - - (50) - (50) Movement included in the statement of recognised income and expense 36 (11) 25 - - - Other - - - (3) - (3) ----------------------------------------------------------------------------------------------------------------------- At 30 June (held within Society) 2,591 2,042 ======================================================================================================================= ======================================================================================================================= Capital and Cash Flow Page 57 ===================== 5.02 IFRS capital resources (continued) ----------------------------------------- Full year Full year 31.12.06 31.12.06 SRC SSC ------------------------------------------------------------------- Gross Tax Net Gross Tax Net Notes £m £m £m £m £m £m ----------------------------------------------------------------------------------------------------------------------- SSC/SRC as at 1 January 2,560 1,896 Investment return 303 (84) 219 186 (35) 151 Transfer from Society long term fund: - Non profit distribution (388) 116 (272) 388 (116) 272 - With-profits distribution - - - 95 (29) 66 - Subordinated debt (34) 10 (24) - - - Dividends from subsidiaries - - - 2 - 2 Capital invested in subsidiaries - - - (13) - (13) Net capital released / contributed from NP business 5.02(c) 1,972 (592) 1,380 (717) 215 (502) Distribution to shareholders - - - (380) - (380) (Repayment) / issue of subordinated loan capital (602) - (602) 602 - 602 Movement included in the statement of recognised income and expense 3 (1) 2 - - - Deferred tax asset on corporate restructure - - - - 171 171 Other - - - (12) 4 (8) ----------------------------------------------------------------------------------------------------------------------- At 31 December 3,263 2,257 ======================================================================================================================= Held within: LGPL - 950 Society 3,263 1,307 ======================================================================================================================= The total net capital released from the non profit business is £1,255m (see note 4.06), which comprises the net capital contributed to LGPL non profit business of £717m (net of tax £502m) and the net capital released from Society of £1,972m (net of tax £1,380m). (c) Analysis of net capital released from non profit business Full year 30.06.07 30.06.06 31.12.06 £m £m £m ----------------------------------------------------------------------------------------------------------------------- Net capital released from non profit business comprises: New business - Strain, before financing arrangements (142) (279) (546) - Changes to FSA reporting and capital rules - - 278 - Financing arrangements - 94 - Existing business - Expected capital release, before financing arrangements 211 290 555 - Financing arrangements - (26) (125) Experience variances 49 (45) 90 Changes to non-economic assumptions (6) (28) (90) Annuity investment policy - - 422 Changes to FSA reporting and capital rules - - 363 Movements in non-cash items 7 58 (96) Other (12) 13 27 ----------------------------------------------------------------------------------------------------------------------- 107 77 878 Tax gross up 46 33 377 ----------------------------------------------------------------------------------------------------------------------- 153 110 1,255 ======================================================================================================================= At 31 December 2006, the SRC included £502m relating to the effect of the corporate restructure. This was offset by an equal and opposite amount in the SSC. ======================================================================================================================= Capital and Cash Flow Page 58 ===================== 5.02 IFRS capital resources (continued) ----------------------------------------- Expected capital release represents the capital and profit generated in the period from the in-force non profit business if the embedded value assumptions are borne out in practice. The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model. Both new business strain and expected capital release exclude required solvency margin, as this is not accounted for under IFRS. On average, the capital invested in new non profit business, including solvency margin, is repaid from product cash flows in approximately 6 years. An analysis of the experience variances, non-economic assumption changes and non-cash items, all net of tax, is provided below: Experience variances Full year 30.06.07 30.06.06 31.12.06 £m £m £m ----------------------------------------------------------------------------------------------------------------------- Persistency 1 - 4 Mortality / morbidity 5 (1) - Expenses (27) (20) (28) BPA data loading 12 43 157 Investment 67 2 27 Other (9) (69) (70) ----------------------------------------------------------------------------------------------------------------------- 49 (45) 90 ======================================================================================================================= Changes to non-economic assumptions Full year 30.06.07 30.06.06 31.12.06 £m £m £m ----------------------------------------------------------------------------------------------------------------------- Mortality / morbidity - - (27) Expenses (1) (13) (50) Negative inflation - (15) - Other (5) - (13) ----------------------------------------------------------------------------------------------------------------------- (6) (28) (90) ======================================================================================================================= Movements in non-cash items Full year 30.06.07 30.06.06 31.12.06 £m £m £m ----------------------------------------------------------------------------------------------------------------------- Deferred tax (18) 37 (123) Deferred acquisition costs 64 130 (21) Deferred income liabilities (42) (25) (78) IFRS adjustment for financial reinsurance - (68) 125 Other 3 (16) 1 ----------------------------------------------------------------------------------------------------------------------- 7 58 (96) ======================================================================================================================= 5.03 Group credit ratings --------------------------- Society continues to be one of the two highest rated European life assurers. Our financial strength ratings from Standard & Poor's, Moody's and A.M.Best were maintained at AA+, Aa1 and A+ respectively, all with stable outlooks. The Group's current long term and short term debt ratings are, from Standard & Poor's, AA- and A1+ and, from Moody's A1 and P1. ======================================================================================================================= Capital and Cash Flow Page 59 ===================== 5.04 Distributions to shareholders from Society's long term fund ---------------------------------------------------------------- (a) Calculation of distribution relating to non profit and shareholder net worth The transfer to shareholders from Society's long term fund is limited by a formula agreed with our regulator. The full year formula is the aggregate of the shareholders' share of the with-profits surplus, a smoothed investment return of 7% on the embedded value of the SRC and Sub-fund and 5% on the embedded value of the non profit business of Society and LGPL, adjusted to remove the impact of the contingent loan (between SRC and LGPL) and the SNW of LGPL. Full year Full year 30.06.07 30.06.07 30.06.06 30.06.06 31.12.06 31.12.06 Non profit SNW Non profit SNW Non profit SNW £m £m £m £m £m £m ----------------------------------------------------------------------------------------------------------------------- Embedded value at end of period 1,902 3,890 2,649 1,714 1,643 3,828 Less: subordinated debt - - - (602) - - Less: LGPL shareholder capital - (1,313) - - - (1,280) Contingent loan 521 (521) - - 571 (571) Add back: pension deficit / market referenced fees attributable to SNW - 37 - 38 (5) 60 Add back: distributions - 139 - 110 - 272 ----------------------------------------------------------------------------------------------------------------------- 2,423 2,232 2,649 1,260 2,209 2,309 Distribution formula - full year 5.0% 7.0% Distribution formula - half year 2.5% 3.5% 2.5% 3.5% ----------------------------------------------------------------------------------------------------------------------- Distribution after tax 61 78 67 43 110 162 Tax gross up 26 34 29 18 47 69 ----------------------------------------------------------------------------------------------------------------------- Distribution before tax 87 112 96 61 157 231 ======================================================================================================================= (b) Analysis of distribution to shareholders Full year 30.06.07 30.06.06 31.12.06 £m £m £m ----------------------------------------------------------------------------------------------------------------------- Non profit transfer 139 110 272 With-profits transfer 35 28 66 ----------------------------------------------------------------------------------------------------------------------- Transfer from Society's long term fund 174 138 338 Subordinated debt interest - 13 24 ----------------------------------------------------------------------------------------------------------------------- Distribution to shareholders after tax 174 151 362 Tax gross up 75 64 155 ----------------------------------------------------------------------------------------------------------------------- Distribution to shareholders before tax 249 215 517 ======================================================================================================================= 5.05 Group cash flow statement ------------------------------ The table below shows the cash flows in the period relating to the Group's parent company. Full year 30.06.07 30.06.06 31.12.06 £m £m £m ----------------------------------------------------------------------------------------------------------------------- Dividends received: UK life and pensions 400 50 380 Investment management - - 50 Other - 2 3 ----------------------------------------------------------------------------------------------------------------------- 400 52 433 Dividend distributions to equity holders of the Company during the period (248) (236) (349) Repayment of intra-group subordinated debt 605 - - Proceeds from issue of equity 3 12 15 Proceeds from issue of innovative tier I borrowings 595 - - Capital injected into the USA operation (46) - - Repayment of convertible bond - - (525) Working capital movements (369) (6) (52) ----------------------------------------------------------------------------------------------------------------------- Net cash inflow / (outflow) 940 (178) (478) ======================================================================================================================= ======================================================================================================================= This information is provided by RNS The company news service from the London Stock Exchange

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