L&G Prelims 2013 - Part 2

RNS Number : 5293B

Legal & General Group Plc

05 March 2014

IFRS and Cash Page 27

Operating profit

For the year ended 31 December 2013


		2013	2012 ¹
	Notes	£m	£m


From continuing operations
Legal & General Assurance Society (LGAS)	2.02	444	462
Legal & General Retirement (LGR)	2.02	310	281
Legal & General Investment Management (LGIM)	2.04	304	272
Legal & General Capital (LGC)	2.05	179	163
Legal & General America (LGA)		92	99


Operating profit from divisions		1,329	1,277
Group debt costs²		(127)	(127)
Group investment projects and expenses³		(44)	(63)


Operating profit		1,158	1,087
Investment and other variances	2.06	(27)	(42)
Gains/(losses) on non-controlling interests		3	(12)


Profit before tax		1,134	1,033
Tax expense attributable to equity holders of the Company		(238)	(235)


Profit for the year		896	798



Profit attributable to equity holders of the Company		893	810




		p	p


Earnings per share
Based on profit attributable to equity holders of the Company		15.20	13.84

Diluted earnings per share
Based on profit attributable to equity holders of the Company		15.00	13.61


1. Investment and other variances have been adjusted to reflect the adoption by the Group of amendments to IAS 19, 'Employee Benefits'. The impact is to reduce profit for the year by £3m for 2012, offset by a corresponding change in the Consolidated Statement of Comprehensive Income.
2. Group debt costs exclude interest on non recourse financing.
3. Group investment projects and expenses include investment project costs of £25m (2012: £50m) that predominantly relate to the Economic Capital programme and other strategic projects.

This supplementary operating profit information (one of the Group's key performance indicators) provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business.

Operating profit measures the pre-tax result reflecting longer-term economic assumptions for our insurance businesses and shareholder funds, except for LGA which excludes unrealised investment returns to align with the liability measurement under US GAAP. Variances between actual and smoothed assumptions are reported below operating profit. Income and expenses arising outside the normal course of business, such as merger and acquisition and restructuring costs, are excluded from operating profit, as are profits and losses arising on the elimination of own debt holdings.

During the year, the Group has made changes to the organisational structure, effective from 1 July 2013. The prior period segmental information has been represented to reflect these changes.

LGAS represents Protection business (retail protection, group protection and general insurance) and Savings business (platforms, workplace, SIPPs, mature savings and with-profits). The LGAS segment also includes Legal & General France (LGF), Legal & General Netherlands (LGN) and emerging markets.

LGR represents Annuities (both individual and bulk purchase) and longevity insurance.

The LGIM segment represents institutional and retail investment management businesses.

LGC represents the long term investment return (less investment expenses) on Group invested assets, using assumptions applied to the average balance of Group invested assets (including interest bearing intra-group balances) calculated on a monthly basis.

The LGA segment comprises protection business written in the USA.

IFRS and Cash Page 28

2.01 Operational cash generation


The table below provides an analysis of the operational cash generation by each of the Group's business segments, together with a reconciliation to operating profit before tax.

	Opera-				Changes					Operating
	tional		Net		in			Operating		profit/
	cash	New	cash	Exper-	valuation	Non-cash	Inter-	profit/	Tax	(loss)
	gene-	business	gene-	ience	assump-	items and	national	(loss)	expense/	before
For the year ended	ration¹	strain	ration	variances	tions	other	and other²	after tax	(credit)	tax
31 December 2013	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m


LGAS	474	(73)	401	(34)	31	(69)	10	339	105	444
- Protection	310	(15)	295	(7)	20	(47)	10	271	84	355
- Savings	164	(58)	106	(27)	11	(22)	-	68	21	89
LGR	260	33	293	9	(13)	(48)	-	241	69	310
LGIM	239	-	239	-	-	-	-	239	65	304
LGC	137	-	137	-	-	-	-	137	42	179
LGA	44	-	44	-	-	-	14	58	34	92


Total from divisions	1,154	(40)	1,114	(25)	18	(117)	24	1,014	315	1,329


Group debt costs	(97)	-	(97)	-	-	-	-	(97)	(30)	(127)
Group investment projects
and expenses	(15)	-	(15)	-	-	-	(19)	(34)	(10)	(44)


Total	1,042	(40)	1,002	(25)	18	(117)	5	883	275	1,158


1. Operational cash generation includes dividends remitted from LGF of £2m (2012: £2m), LGN of £14m (2012: £12m) and LGA of £44m (2012: £40m).
2. International and other includes the operating profits not remitted as dividends from LGF of £4m (2012: £8m), LGN of £6m (2012: £9m) within the Protection line and LGA of £14m (2012: £22m).

Operational cash generation for LGAS and LGR represents the expected surplus generated in the period from the UK in-force non profit Protection, Savings and Annuities businesses using best estimate assumptions. The LGAS operational cash generation also includes the shareholders' share of bonuses on with-profits business, dividends remitted from LGF and LGN and operating profit after tax from remaining Savings businesses.

New business strain for LGAS and LGR represents the cost of acquiring new business and setting up regulatory reserves in respect of the new business for UK non profit Protection, Savings and Annuities, net of tax. The new business strain and operational cash generation for both LGAS and LGR exclude required solvency margin from the liability calculation.

Net cash generation for LGAS and LGR is defined as operational cash generation less new business strain.

Operational cash generation and net cash for LGIM represents the operating profit (net of tax).

Operational cash generation for LGC represents the long term expected investment returns (net of tax) on Group invested assets.

The operational cash generation for LGA represents the dividends received.

See Note 2.02 for more detail on variances, assumption changes and non-cash items.

IFRS and Cash Page 29

2.01 Operational cash generation (continued)



	Opera-				Changes					Operating
	tional		Net		in			Operating		profit/
	cash	New	cash	Exper-	valuation	Non-cash	Inter-	profit/	Tax	(loss)
	gene-	business	gene-	ience	assump-	items and	national	(loss)	expense/	before
For the year ended	ration¹	strain	ration	variances	tions	other	and other²	after tax	(credit)	tax
31 December 2012	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m


LGAS	436	(107)	329	(47)	45	4	15	346	116	462
- Protection	279	(45)	234	(8)	25	1	17	269	90	359
- Savings	157	(62)	95	(39)	20	3	(2)	77	26	103
LGR	243	14	257	43	(24)	(64)	-	212	69	281
LGIM	219	-	219	-	-	-	-	219	53	272
LGC	123	-	123	-	-	-	-	123	40	163
LGA	40	-	40	-	-	-	22	62	37	99


Total from divisions	1,061	(93)	968	(4)	21	(60)	37	962	315	1,277


Group debt costs	(96)	-	(96)	-	-	-	-	(96)	(31)	(127)
Group investment projects
and expenses	(7)	-	(7)	-	-	-	(40)	(47)	(16)	(63)


Total	958	(93)	865	(4)	21	(60)	(3)	819	268	1,087


1. Operational cash generation includes dividends remitted from LGF of £2m, LGN of £12m and LGA of £40m.
2. International and other includes the operating profits not remitted as dividends from LGF of £8m, LGN of £9m within the Protection line and LGA of £22m.

IFRS and Cash Page 30

2.02 Analysis of LGAS and LGR operating profit


	LGAS	LGR	LGAS	LGR
	2013	2013	2012	2012
	£m	£m	£m	£m


Net cash generation	401	293	329	257


Experience variances
Persistency	5	1	(3)	(2)
Mortality/Morbidity	-	14	(1)	5
Expenses	(3)	-	5	-
BPA Loading	-	4	-	37
Project and development costs¹	(23)	(11)	(38)	(5)
Other	(13)	1	(10)	8


Total experience variances	(34)	9	(47)	43


Changes to valuation assumptions
Persistency	7	-	(10)	-
Mortality/Morbidity²	9	(13)	9	(23)
Expenses	8	-	18	-
Other³	7	-	28	(1)


Total valuation assumption changes	31	(13)	45	(24)


Movement in non-cash items
Deferred tax	(4)	-	(3)	(1)
Utilisation of brought forward trading losses	(4)	(70)	(2)	(70)
Acquisition expense tax relief ⁴	(51)	-	14	-
Deferred Acquisition costs (DAC)⁵	(54)	-	(9)	-
Deferred Income Liabilities (DIL)⁶	47	-	14	-
Other⁷	(3)	22	(10)	7


Total non-cash movement items	(69)	(48)	4	(64)


Other⁸	10	-	15	-


Operating profit after tax	339	241	346	212


Tax gross up	105	69	116	69


Operating profit before tax	444	310	462	281


1. The project and development costs in LGAS primarily relate to expenditure on workplace savings and the Retail Distribution Review. For LGR, it is primarily related to expenditure on our enhanced annuity platform proposition.
2. LGR adverse Mortality/Morbidity assumption changes primarily relate to the strengthening of the prudence margin for base mortality.
3. Other valuation assumption changes for LGAS in 2012 primarily relate to a reduction in the best estimate reserves within retail protection for reinsurer default and applying PS06/14 to a retail protection product.
4. Net cash for LGAS Protection and insured savings recognises tax relief from prior year acquisition expenses, which are spread evenly over seven years under relevant 'I-E' tax legislation, in the period the cash flows actually occur. In contrast, operating profit typically recognises the value of these future cash flows in the same period as the underlying expense as deferred tax amounts. The reconciling amounts arising from these items are included in the table above. Following the removal of new retail protection business from the I-E tax regime, and the removal of commission from new insured savings business under the Retail Distribution Review at the end of 2012, no material amount of deferred tax assets arise on new acquisition expenses. From 2013, as the deferred tax asset on prior period acquisition expenses unwinds, no replacement asset is created resulting in a higher level of Net Cash in 2013, which will then reduce over the following 6 years.
5. The DAC in LGAS represents the amortisation charges offset by new acquisitions costs deferred in the year. The decrease in deferred costs reflects the removal of commission payable on savings and investment business following the implementation of the requirements of the Retail Distribution Review on 1 January 2013.
6. The DIL in LGAS reflects initial fees on insured savings business which relate to the future provision of services and are deferred and amortised over the anticipated period in which these services are provided. The significant movement in the year is driven by the implementation of the requirements of the Retail Distribution Review on 1 January 2013.
7. The £22m in other non-cash items in LGR primarily relates to movement in valuation differences between IFRS and regulatory bases.
8. Other in LGAS includes the operating profits not remitted back as dividends from LGF £4m (2012: £8m) and LGN £6m (2012: £9m).

IFRS and Cash Page 31

2.03 General insurance combined operating ratio¹

	2013	2012
	%	%


General insurance combined operating ratio²	84	95


1. The calculation of the general insurance combined operating ratio incorporates commission and expenses as a percentage of earned premiums.
2. The reduced combined operating ratio reflects the continued pricing and underwriting discipline, improvements in the claims management processes during 2013 and benign weather experienced in the first 11 months of the year.

2.04 LGIM

	2013	2012
	£m	£m


Revenues	594	533
Expenses	(290)	(261)


Total LGIM operating profit¹	304	272


1. Total LGIM operating profit includes £37m (2012: £29m) from retail investment management.

2.05 LGC

	2013	2012
	£m	£m


Investment return	185	168
Investment expenses	(6)	(5)


Total LGC operating profit	179	163

2.06 Investment and other variances

	2013	2012
	£m	£m


Investment variance¹	29	(23)
M&A related²	(16)	-
Other³	(40)	(19)


Total	(27)	(42)


1. Investment variance is positive due to strong equity returns from shareholder funds and a positive impact from the increase in exposure to Direct Investments. This has been partly offset by the defined pension benefit scheme variance of £(30)m (2012: £40m), that reflects the actuarial gains and losses and valuation difference arising on annuity assets held by defined benefit pension schemes that have been purchased from Legal & General Assurance Society Limited. All other actuarial gains and losses on the defined benefit scheme assets and liabilities are presented in the Other Comprehensive Income.
2. M&A related includes gains, expenses and intangible amortisation relating to acquisitions.
3. Other includes new business start up costs, restructuring costs, and other non-investment related variance items.

IFRS and Cash Page 32

Consolidated Income Statement

For the year ended 31 December 2013

		2013	2012 ¹
	Notes	£m	£m


Revenue
Gross written premiums		6,162	5,668
Outward reinsurance premiums		(874)	(718)
Net change in provision for unearned premiums		(18)	(25)


Net premiums earned		5,270	4,925
Fees from fund management and investment contracts		1,040	875
Investment return		32,221	28,828
Operational income		720	342


Total revenue		39,251	34,970


Expenses
Claims and change in insurance liabilities		5,767	8,588
Reinsurance recoveries		(1,113)	(779)


Net claims and change in insurance liabilities		4,654	7,809
Change in provisions for investment contract liabilities		30,458	23,656
Acquisition costs		855	784
Finance costs		163	165
Other expenses		1,694	1,194
Transfers to unallocated divisible surplus		112	155


Total expenses		37,936	33,763


Profit before tax		1,315	1,207
Tax expense attributable to policyholder returns		(181)	(174)


Profit before tax		1,134	1,033


Total tax expense		(419)	(409)
Tax expense attributable to policyholder returns		181	174


Tax expense attributable to equity holders		(238)	(235)


Profit for the year		896	798



Attributable to:
Non-controlling interests		3	(12)
Equity holders of the Company		893	810



Dividend distributions to equity holders of the Company during the year	2.10	479	394
Dividend distributions to equity holders of the Company proposed after the year end	2.10	408	337





		p	p


Earnings per share
Based on profit attributable to equity holders of the Company	2.07	15.20	13.84


Diluted earnings per share
Based on profit attributable to equity holders of the Company	2.07	15.00	13.61


1. The Consolidated Income Statement has been restated to reflect the adoption by the Group of amendments to IAS 19, 'Employee Benefits'. Further details are contained in Note 2.21. The impact is to reduce profit for the year by £3m for 2012.

IFRS and Cash Page 33

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2013

	2013	2012 ¹
	£m	£m


Profit for the year	896	798
Items that will not be reclassified subsequently to profit or loss
Actuarial losses on defined benefit pension schemes	(145)	(101)
Actuarial losses on defined benefit pension schemes transferred to unallocated divisible surplus	49	38


Total items that will not be reclassified to profit or loss subsequently	(96)	(63)


Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations	(16)	(13)
Net change in financial investments designated as available-for-sale	(88)	32


Total items that may be reclassified to profit or loss subsequently	(104)	19


Other comprehensive (expense) after tax	(200)	(44)


Total comprehensive income for the year	696	754



Total comprehensive income/(expense) attributable to:
Non-controlling interests	3	(12)
Equity holders of the Company	693	766

1. The Consolidated Statement of Comprehensive Income has been restated to reflect the adoption by the Group of amendments to IAS 19, 'Employee Benefits'. Further details are contained in Note 2.21. The impact is to reduce profit for the year by £3m for 2012, offset by a corresponding change in the Other Comprehensive Income.

IFRS and Cash Page 34

Consolidated Balance Sheet

As at 31 December 2013

		2013	2012
	Notes	£m	£m


Assets
Goodwill	2.08	73	-
Purchased interest in long term businesses and other intangible assets		308	211
Deferred acquisition costs		1,880	1,904
Investment in associates and joint ventures		101	87
Property, plant and equipment		129	92
Investment property	2.09	6,060	5,143
Financial investments	2.09	331,802	316,748
Reinsurers' share of contract liabilities		2,897	2,499
Deferred tax asset		82	316
Current tax recoverable		310	194
Other assets		2,115	1,564
Assets of operations classified as held for sale¹		-	891
Cash and cash equivalents		17,407	16,652


Total assets		363,164	346,301



Equity
Share capital	2.11	148	148
Share premium	2.11	959	956
Employee scheme treasury shares		(39)	(43)
Capital redemption and other reserves		57	153
Retained earnings		4,517	4,227


Shareholders' equity		5,642	5,441
Non-controlling interests		58	39


Total equity		5,700	5,480



Liabilities
Participating insurance contracts	2.15	6,972	8,116
Participating investment contracts	2.16	7,493	7,403
Unallocated divisible surplus		1,221	1,153
Value of in-force non-participating contracts		(248)	(242)


Participating contract liabilities		15,438	16,430



Non-participating insurance contracts	2.15	40,273	37,728
Non-participating investment contracts	2.16	278,754	264,958


Non-participating contract liabilities		319,027	302,686



Core borrowings	2.13	2,453	2,445
Operational borrowings	2.14	704	920
Provisions	2.19	1,128	983
Deferred tax liabilities		362	382
Current tax liabilities		14	68
Payables and other financial liabilities		8,931	8,083
Other liabilities		1,032	959
Net asset value attributable to unit holders		8,375	7,702
Liabilities of operations classified as held for sale¹		-	163


Total liabilities		357,464	340,821


Total equity and liabilities		363,164	346,301

1. Assets and liabilities of operations classified as held for sale at 31 December 2012 relate to seed capital the Group had invested into newly established funds. They are classified as held for sale when the Group expects its ownership to reduce below the level for control within 12 months of classification. There are no such transactions at 31 December 2013.

IFRS and Cash Page 35

Consolidated Statement of Changes in Equity

			Employee	Capital
			scheme	redemption			Non-
	Share	Share	treasury	and other	Retained		controlling	Total
	capital	premium	shares	reserves	earnings	Total	interests	equity
For the year ended 31 December 2013	£m	£m	£m	£m	£m	£m	£m	£m


As at 1 January 2013	148	956	(43)	153	4,227	5,441	39	5,480
Profit for the year	-	-	-	-	893	893	3	896
Exchange differences on translation of
overseas operations	-	-	-	(16)	-	(16)	-	(16)
Actuarial losses on defined benefit
pension schemes	-	-	-	-	(145)	(145)	-	(145)
Actuarial losses on defined benefit
pension schemes transferred to
unallocated divisible surplus	-	-	-	-	49	49	-	49
Net change in financial investments
designated as available-for-sale	-	-	-	(88)	-	(88)	-	(88)


Total comprehensive income/(expense)
for the year	-	-	-	(104)	797	693	3	696
Options exercised under
share option schemes:
- Executive share option schemes	-	1	-	-	-	1	-	1
- Savings related share option scheme	-	2	-	-	-	2	-	2
Shares purchased	-	-	(12)	-	-	(12)	-	(12)
Shares vested	-	-	16	(19)	-	(3)	-	(3)
Employee scheme treasury shares:
- Value of employee services	-	-	-	28	-	28	-	28
Share scheme transfers
to retained earnings	-	-	-	-	(29)	(29)	-	(29)
Dividends	-	-	-	-	(479)	(479)	-	(479)
Movement in third party interests	-	-	-	-	-	-	16	16
Currency translation differences	-	-	-	(1)	1	-	-	-


As at 31 December 2013	148	959	(39)	57	4,517	5,642	58	5,700

IFRS and Cash Page 36

Consolidated Statement of Changes in Equity (continued)

			Employee	Capital
			scheme	redemption			Non-
	Share	Share	treasury	and other	Retained		controlling	Total
	capital	premium	shares	reserves	earnings¹	Total	interests	equity
For the year ended 31 December 2012	£m	£m	£m	£m	£m	£m	£m	£m


As at 1 January 2012	147	941	(48)	117	3,899	5,056	66	5,122
Profit for the year	-	-	-	-	810	810	(12)	798
Exchange differences on translation of
overseas operations	-	-	-	(13)	-	(13)	-	(13)
Actuarial losses on defined benefit
pension schemes	-	-	-	-	(101)	(101)	-	(101)
Actuarial losses on defined benefit
pension schemes transferred to
unallocated divisible surplus	-	-	-	-	38	38	-	38
Net change in financial investments
designated as available-for-sale	-	-	-	32	-	32	-	32


Total comprehensive income/(expense)
for the year	-	-	-	19	747	766	(12)	754
Options exercised under
share option schemes:
- Executive share option schemes	-	1	-	-	-	1	-	1
- Savings related share option scheme	1	14	-	-	-	15	-	15
Shares purchased	-	-	(3)	-	-	(3)	-	(3)
Shares vested	-	-	8	(21)	-	(13)	-	(13)
Employee scheme treasury shares:
- Value of employee services	-	-	-	19	-	19	-	19
Share scheme transfers
to retained earnings	-	-	-	-	(6)	(6)	-	(6)
Dividends	-	-	-	-	(394)	(394)	-	(394)
Movement in third party interests	-	-	-	-	-	-	(15)	(15)
Currency translation differences	-	-	-	19	(19)	-	-	-


As at 31 December 2012	148	956	(43)	153	4,227	5,441	39	5,480


1. The Consolidated Statement of Changes in Equity has been restated to reflect the adoption by the Group of amendments to IAS 19, 'Employee Benefits'. Further details are contained in the Basis of Preparation note. The impact is to reduce profit for the year by £3m for 2012.

IFRS and Cash Page 37

Consolidated Cash Flow Statement

For the year ended 31 December 2013

	2013	2012 ¹
	£m	£m


Cash flows from operating activities
Profit for the year	896	798
Adjustments for non cash movements in net profit for the year
Realised and unrealised gains on financial investments and investment properties	(21,443)	(18,429)
Investment income	(9,504)	(9,464)
Interest expense	163	165
Tax expense	419	409
Other adjustments	98	67
Net decrease/(increase) in operational assets
Investments held for trading or designated as fair value through profit or loss	3,571	(1,118)
Investments designated as available-for-sale	60	30
Other assets	553	(3,008)
Net increase/(decrease) in operational liabilities
Insurance contracts	1,384	3,221
Transfer from unallocated divisible surplus	63	112
Investment contracts	13,835	13,795
Value of in-force non-participating contracts	(6)	-
Other liabilities	2,221	7,026


Cash used in operations	(7,690)	(6,396)
Interest paid	(169)	(164)
Interest received	4,981	5,013
Tax paid²	(287)	(193)
Dividends received	4,497	4,539


Net cash flows from operating activities	1,332	2,799


Cash flows from investing activities
Net acquisition of plant, equipment and intangibles	(48)	(59)
Acquisitions (net of cash acquired)³	(97)	(27)
Acquisition of joint ventures	(68)	-


Net cash flows from investing activities	(213)	(86)


Cash flows from financing activities
Dividend distributions to ordinary equity holders of the Company during the year	(479)	(394)
Proceeds from issue of ordinary share capital	3	16
Purchase of employee scheme shares	(4)	(3)
Proceeds from borrowings	1,231	1,318
Repayment of borrowings	(1,115)	(1,105)


Net cash flows from financing activities	(364)	(168)


Net increase in cash and cash equivalents	755	2,545
Exchange gains/(losses) on cash and cash equivalents	-	(6)
Cash and cash equivalents at 1 January	16,652	14,113


Cash and cash equivalents at 31 December	17,407	16,652


1. The Consolidated Cash Flow Statement has been restated to reflect the adoption by the Group of amendments to IAS 19, 'Employee Benefits'. Further details are contained in Note 2.21. The impact is to reduce profit for the year by £3m for 2012, offset by corresponding changes to net cash flows from operating activities.
2. Tax comprises UK corporation tax paid of £133m (2012: £60m), overseas corporate taxes of £6m (2012: £8m) and overseas withholding tax of £148m (2012: £125m).
3. Net cash flows from acquisitions includes cash paid of £286m (2012: £33m) less cash and cash equivalents acquired of £190m (2012: £6m).

The Group's consolidated cash flow statement includes all cash and cash equivalent flows, including those relating to the UK long term fund policyholders.

IFRS and Cash Page 38

2.07 Earnings per share

(a) Earnings per share

	Profit	Earnings	Profit	Earnings
	after tax	per share¹	after tax	per share¹
	2013	2013	2012 ²	2012
	£m	p	£m	p


Operating profit	883	15.03	819	14.00
Investment and other variances	13	0.22	(2)	(0.04)
Impact of change in UK tax rates	(3)	(0.05)	(7)	(0.12)


Earnings per share based on profit
attributable to equity holders	893	15.20	810	13.84

(b) Diluted earnings per share

	Profit	Number	Earnings	Profit	Number	Earnings
	after tax	of shares³	per share	after tax	of shares³	per share
	2013	2013	2013	2012 ²	2012	2012
	£m	m	p	£m	m	p


Profit attributable to equity holders of the Company	893	5,875	15.20	810	5,851	13.84
Net shares under options allocable for no further consideration	-	79	(0.20)	-	99	(0.23)


Diluted earnings per share	893	5,954	15.00	810	5,950	13.61


1. Earnings per share is calculated by dividing profit after tax derived from continuing operations by the weighted average number of ordinary shares in issue during the year, excluding employee scheme treasury shares.
2. Profit for the year has been restated to reflect the adoption by the Group of amendments to IAS 19, 'Employee Benefits'. Further details are contained in Note 2.21. The impact is to reduce profit for the year by £3m for 2012.
3. For diluted earnings per share, the weighted average number of ordinary shares in issue, excluding employee scheme treasury shares, is adjusted to assume conversion of all potential ordinary shares, such as share options granted to employees.

IFRS and Cash Page 39

2.08 Goodwill


	Lucida	Cofunds	IDOL	Total
	2013	2013	2013	2013
	£m	£m	£m	£m


Consideration at date of acquisition
Cash payment for 100% acquisition	149	-	-	149
Cash payment for 75% acquisition	-	131	-	131
Cash payment for 46% holding	-	-	6	6
Acquisition date fair value of the 25% holding immediately prior to the acquisition	-	44	-	44
Acquisition date fair value of the 49% holding immediately prior to the acquisition	-	-	6	6


Total consideration	149	175	12	336


Recognised amounts of identifiable assets transferred and liabilities assumed at fair value
Purchased interest in long term business and other intangible assets	-	88	4	92
Other assets	1,351	44	1	1,396
Cash and cash equivalents	168	22	-	190
Non-participating contract liabilities	(1,294)	-	-	(1,294)
Other liabilities	(62)	(44)	(1)	(107)


Net assets attributable to equity holders of the Company	163	110	4	277


Goodwill arising on acquisition recognised in the Income statement	(14)	-	-	(14)
Goodwill arising on acquisition recognised in the Balance sheet	-	65	8	73

IFRS and Cash Page 40

2.09 Financial investments and Investment property

	2013	2012
	£m	£m


Equities	163,227	148,488
Unit trusts	9,457	7,238
Debt securities¹	152,409	152,526
Accrued interest	1,633	1,669
Derivative assets²	4,746	6,445
Loans and receivables	330	382


Financial investments	331,802	316,748


Investment property	6,060	5,143


Total financial investments and investment property	337,862	321,891


1. Detailed analysis of debt securities which shareholders are directly exposed to are disclosed in Note 4.03.
2. Derivatives are used to ensure efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management. Derivative assets are shown gross of derivative liabilities and include £2,391m (2012: £3,296m) held on behalf of unit linked policyholders.

IFRS and Cash Page 41

2.10 Dividends


		Per		Per
	Dividend	share¹	Dividend	share¹
	2013	2013	2012	2012
	£m	p	£m	p


Ordinary share dividends paid in the year
- Prior year final dividend	337	5.69	278	4.74
- Current year interim dividend	142	2.40	116	1.96


	479	8.09	394	6.70


Ordinary share dividend proposed²	408	6.90	337	5.69


1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.
2. The dividend proposed is not included as a liability in the balance sheet.

2.11 Share capital and share premium

		2013			2012
		Number of	2013		Number of	2012
Authorised share capital		shares	£m		shares	£m


At 31 December: ordinary shares of 2.5p each	9,200,000,000		230	9,200,000,000		230



					Share	Share
				Number of	capital	premium
Issued share capital, fully paid				shares	£m	£m


As at 1 January 2013			5,912,782,826		148	956
Options exercised under share option schemes
- Executive share option scheme				1,422,327	-	1
- Savings related share option scheme			2,861,483		-	2


As at 31 December 2013			5,917,066,636		148	959


					Share	Share
				Number of	capital	premium
Issued share capital, fully paid				shares	£m	£m


As at 1 January 2012			5,872,166,893		147	941
Options exercised under share option schemes
- Executive share option scheme				1,626,478	-	1
- Savings related share option scheme			38,989,455		1	14


As at 31 December 2012			5,912,782,826		148	956


There is one class of ordinary shares of 2.5p each. All shares issued carry equal voting rights.

The holders of the Company's ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings of the Company.

IFRS and Cash Page 42

2.12 Segmental analysis of shareholders' equity

	2013	2012
	£m	£m


General insurance	225	180
Netherlands (LGN)	163	156
France (LGF)	212	204
Other	183	145


LGAS	783	685



LGR	-	-



LGIM	421	423



LGC and group expenses	3,622	3,414


LGA	816	919



Shareholders' equity	5,642	5,441



Overseas shareholder equity is presented on a legal entity basis, whereas UK shareholder equity is based on a management assessment of this business.

The Group has five reportable segments comprising LGAS, LGR, LGIM, LGC and group expenses and LGA. LGAS represents Protection business (retail protection, group protection and general insurance) and Savings business (platforms, workplace, SIPPs, mature savings and with-profits). The LGAS segment also includes Legal & General France (LGF), Legal & General Netherlands (LGN) and emerging markets. LGR represents Annuities (both individual and bulk purchase) and longevity insurance. The LGIM segment represents institutional and retail investment management businesses. Shareholders' equity supporting the non profit LGR and LGAS businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within LGC and group expenses. This also includes capital within the Group's treasury function, and unit trust funds and property partnerships, which are managed on behalf of clients but are required to be consolidated under IFRS, which do not constitute a separately reportable segment. The LGC and group expenses segment also includes inter-segmental elimination. The LGA segment represents protection business written in the USA.

IFRS and Cash Page 43

2.13 Core Borrowings

	Carrying	Fair	Carrying	Fair
	amount	value	amount	value
	2013	2013	2012	2012
	£m	£m	£m	£m


Subordinated borrowings
6.385% Sterling perpetual capital securities (Tier 1)	680	650	700	636
5.875% Sterling undated subordinated notes (Tier 2)	418	438	419	425
4.0% Euro subordinated notes 2025 (Tier 2)	498	531	479	502
10% Sterling subordinated notes 2041 (Tier 2)	309	417	309	425
Client fund holdings of Group debt¹	(13)	(13)	(17)	(17)


Total subordinated borrowings	1,892	2,023	1,890	1,971



Senior borrowings
Sterling medium term notes 2031-2041	608	721	608	767
Client fund holdings of Group debt¹	(47)	(55)	(53)	(66)


Total senior borrowings	561	666	555	701


Total core borrowings	2,453	2,689	2,445	2,672


1. £60m (2012: £70m) of the Group's subordinated and senior borrowings are currently held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total core borrowings in the table above.

All of the Group's core borrowings are measured using amortised cost. The presented fair values of the Group's core borrowings reflect quoted prices in active markets and they have been classified as level 1 in the fair value hierarchy.

Subordinated borrowings

6.385% Sterling perpetual capital securities

In 2007, Legal & General Group Plc issued £600m of 6.385% Sterling perpetual capital securities. Simultaneous with the issuance, the fixed coupon was swapped into six month LIBOR plus 0.94% pa. These securities are callable at par on 2 May 2017 and every three months thereafter. If not called, the coupon from 2 May 2017 will be reset to three month LIBOR plus 1.93% pa. For regulatory purposes these securities are treated as innovative tier 1 capital.

5.875% Sterling undated subordinated notes

In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% pa. These notes are treated as tier 2 capital for regulatory purposes.

4.0% Euro subordinated notes 2025

In 2005, Legal & General Group Plc issued €600m of 4.0% Euro dated subordinated notes. The proceeds were swapped into sterling. The notes are callable at par on 8 June 2015 and each year thereafter. If not called, the coupon from 8 June 2015 will reset to a floating rate of interest based on prevailing three month Euribor plus 1.7% pa. These notes mature on 8 June 2025 and are treated as tier 2 capital for regulatory purposes.

10% Sterling subordinated notes 2041

On 16 July 2009, Legal & General Group Plc issued £300m of 10% dated subordinated notes. The notes are callable at par on 23 July 2021 and every five years thereafter. If not called, the coupon from 23 July 2021 will be reset to the prevailing five year benchmark gilt yield plus 9.325% pa. These notes mature on 23 July 2041 and are treated as tier 2 capital for regulatory purposes.

IFRS and Cash Page 44

2.14 Operational Borrowings

	Carrying	Fair	Carrying	Fair
	amount	value	amount	value
	2013	2013	2012	2012
	£m	£m	£m	£m


Short term operational borrowings
Euro Commercial paper	173	173	333	333
Bank loans/other	16	16	6	6


Total short term operational borrowings	189	189	339	339


Non recourse borrowings
US Dollar Triple X securitisation 2037	268	230	272	272
Suffolk Life unit linked borrowings	116	116	123	123
LGV 6/LGV 7 Private Equity Fund Limited Partnership	131	131	128	128
Consolidated Property Limited Partnerships	58	58	58	58


Total non recourse borrowings	573	535	581	581


Group holding of operational borrowings¹	(58)	(49)	-	-


Total operational borrowings	704	675	920	920


1. The Group investments in operational borrowings have been eliminated from the Group consolidated balance sheet.

The presented fair values of the Group's operational borrowings reflect observable market information and have been classified as level 2 in the fair value hierarchy.

Short term operational borrowings

Short term assets available at the holding company level exceeded the amount of short term operational borrowings of £189m (2012: £339m). Short term operational borrowings comprise Euro Commercial paper, bank loans and overdrafts.

Non recourse borrowings

US Dollar Triple X securitisation 2037

In 2006, a subsidiary of LGA issued US$450m of non recourse debt in the US capital markets to meet the Triple X reserve requirements of part of the US term insurance written after 2005 and 2006. It is secured on the cash flows related to that tranche of business.

Suffolk Life unit linked borrowings

All of these non recourse borrowings are in relation to commercial properties held within SIPP plans and the borrowings solely relate to client investments.

LGV6/LGV7 Private Equity Fund Limited Partnerships

These borrowings are non recourse bank borrowings.

Consolidated Property Limited Partnerships

These borrowings are non recourse bank borrowings.

Syndicated credit facility

As at 31 December 2013, the Group had in place a £1.00bn syndicated committed revolving credit facility provided by a number of its key relationship banks, £0.04bn matures in October 2017 and £0.96bn matures in October 2018. A test drawing was made under this facility during 2013. No amounts were outstanding at 31 December 2013.

IFRS and Cash Page 45

2.15 Insurance contract liabilities

(a) Analysis of insurance contract liabilities


			Re-		Re-
		Gross	insurance	Gross	insurance
		2013	2013	2012	2012
	Notes	£m	£m	£m	£m


Participating insurance contracts	2.15(b)	6,972	(1)	8,116	(1)
Non-participating insurance contracts	2.15(c)	39,975	(2,596)	37,445	(2,277)
General insurance contracts	2.15(d)	298	(5)	283	(8)


Insurance contract liabilities		47,245	(2,602)	45,844	(2,286)

(b) Movement in participating insurance contract liabilities


		Re-		Re-
	Gross	insurance	Gross	insurance
	2013	2013	2012	2012
	£m	£m	£m	£m


As at 1 January	8,116	(1)	8,750	(1)
New liabilities in the year	75	-	262	-
Liabilities discharged in the year	(1,606)	-	(1,413)	-
Unwinding of discount rates	79	-	78	-
Effect of change in non-economic assumptions	4	-	4	-
Effect of change in economic assumptions	291	-	329	-
Other	13	-	106	-


As at 31 December	6,972	(1)	8,116	(1)

IFRS and Cash Page 46

2.15 Insurance contract liabilities (continued)


		Re-		Re-
	Gross	insurance	Gross	insurance
	2013	2013	2012	2012
	£m	£m	£m	£m


As at 1 January	37,445	(2,277)	33,761	(2,110)
New liabilities in the year¹	3,872	(334)	2,667	(392)
Liabilities discharged in the year	(2,307)	167	(2,271)	213
Unwinding of discount rates	1,308	(134)	1,311	(118)
Effect of change in non-economic assumptions	77	(25)	(124)	132
Effect of change in economic assumptions	(430)	-	2,229	(17)
Foreign exchange adjustments	10	7	(128)	15


As at 31 December	39,975	(2,596)	37,445	(2,277)


1. New liabilities includes those acquired with Lucida Ltd of £1,294m (See Note 2.08).

(d) Analysis of General insurance contract liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2013	2013	2012	2012
	£m	£m	£m	£m


Outstanding claims	66	-	74	-
Claims incurred but not reported	37	-	30	-
Unearned premiums	195	(5)	179	(8)


General insurance contract liabilities	298	(5)	283	(8)

(e) Movement in General insurance claim liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2013	2013	2012	2012
	£m	£m	£m	£m


As at 1 January	104	-	93	(1)
Claims arising	175	-	181	-
Claims paid	(156)	-	(172)	1
Adjustments to prior year liabilities	(20)	-	2	-


As at 31 December	103	-	104	-

IFRS and Cash Page 47

2.16 Investment contract liabilities

(a) Analysis of investment contract liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2013	2013	2012	2012
	£m	£m	£m	£m


Participating investment contracts	7,493	-	7,403	(2)
Non-participating investment contracts	278,754	(295)	264,958	(211)


Investment contract liabilities	286,247	(295)	272,361	(213)

(b) Movement in investment contract liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2013	2013	2012	2012
	£m	£m	£m	£m


As at 1 January	272,361	(213)	258,621	(172)
Reserves in respect of new business	30,816	(237)	28,347	(281)
Amounts paid on surrenders and maturities during the year	(47,055)	66	(37,662)	16
Investment return and related benefits	30,369	89	23,432	224
Management charges	(295)	-	(300)	-
Foreign exchange adjustments	51	-	(55)	-
Other	-	-	(22)	-


As at 31 December	286,247	(295)	272,361	(213)



Change in provisions for investment contract liabilities represents the total gross and reinsurance investment return and related benefits of £30,458m (2012: £23,656m).

Fair value movements of £30,095m (2012: £23,199m) are included within the income statement arising from movements in investment contract liabilities designated as fair value through profit and loss.

IFRS and Cash Page 48

2.17 IFRS sensitivity analysis

	Impact on		Impact on
	pre-tax	Impact on	pre-tax	Impact on
	Group profit	Group equity	Group profit	Group equity
	net of re-	net of re-	net of re-	net of re-
	insurance	insurance	insurance	insurance
	2013	2013	2012	2012
	£m	£m	£m	£m


Economic sensitivity
Long-term insurance
1% increase in interest rates	39	32	8	7
1% decrease in interest rates	(11)	(10)	(46)	(35)
Credit spread widens by 100bps with no change in expected defaults	(100)	(76)	(123)	(93)
1% increase in inflation	45	36	(10)	(8)
10% decrease in listed equities	(143)	(114)	(124)	(95)
10% fall in property values	(53)	(41)	(31)	(24)
10bps increase in credit default assumption	(284)	(218)	(282)	(213)
10bps decrease in credit default assumption	292	224	280	212

Non-economic sensitivity
Long-term insurance
1% decrease in annuitant mortality	(105)	(80)	(96)	(73)
Default of largest reinsurer	(666)	(512)	(651)	(491)

General Insurance
Single storm event with 1 in 200 year probability	(73)	(56)	(63)	(47)
Subsidence event - worst claims ratio in last 30 years	(55)	(42)	(50)	(37)
5% decrease in overall claims ratio	7	5	8	6
5% surplus over claims liabilities	5	4	5	4

The table above shows the impacts on Group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario for the Group. The participating funds have been excluded in the above sensitivity analysis as the impact of the sensitivities on IFRS profit and equity is offset by the movement in the unallocated divisible surplus (UDS). The shareholders' share of with-profit bonus declared in the year is relatively insensitive to market movements due to the smoothing policies applied.

The above sensitivity analyses do not reflect management actions which could be taken to reduce the impacts. The Group seeks to actively manage its asset and liability position. A change in market conditions may lead to changes in the asset allocation or charging structure which may have a more, or less, significant impact on the value of the liabilities. The analyses also ignore any second order effects of the assumption change, including the potential impact on the Group asset and liability position and any second order tax effects. In calculating the alternative values, all other assumptions are left unchanged, though in practice, items of the Group's experience may be correlated. The sensitivity of the profit and equity to changes in assumptions may not be linear. These results should not be extrapolated to changes of a much larger order.

The interest rate sensitivity assumes a 100 basis point change in the gross redemption yield on fixed interest securities together with a 100 basis point change in the real yields on variable securities. For the UK long term funds, valuation interest rates are assumed to move in line with market yields adjusted to allow for the impact of PRA regulations. The interest rate sensitivities reflect the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the long term business.

In the sensitivity for credit spreads, corporate bond yields have increased by 100bps, gilt and approved security yields are unchanged, and there has been no adjustment to the default assumptions.

The inflation stress adopted is a 1% pa increase in inflation resulting in a 1% pa reduction in real yield and no change to the nominal yield. In addition the expense inflation rate is increased by 1% pa.

The equity stress is a 10% fall in listed equity market values. The property stress adopted is a 10% fall in property market value. Rental income is assumed to be unchanged; however the vacant possession value is stressed down by 10% in line with the market value stress. Where property is being used to back liabilities, the valuation interest rate used to place a value on the liabilities moves with the implied change in property yields.

The annuitant mortality stress is a 1% reduction in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates.

The credit default stress assumes a +/-10bps stress to the current credit default assumption for unapproved corporate bonds which will have an impact on the valuation interest rates used to discount liabilities. The credit default assumption is set based on the credit rating of the individual bonds in the asset portfolio and their outstanding term using Moody's global credit default rates.

For the sensitivity to the default of the Group's largest reinsurer, the reinsurer stress shown is equal to the technical provisions ceded to the reinsurer and represents the impact of the default of largest reinsurer at an entity level.

IFRS and Cash Page 49

2.18 Foreign exchange rates

Principal rates of exchange used for translation are:

Year end exchange rates	At 31.12.13	At 31.12.12


United States Dollar	1.66	1.63
Euro	1.20	1.23



	01.01.13 -	01.01.12 -
Average exchange rates	31.12.13	31.12.12


United States Dollar	1.57	1.58
Euro	1.18	1.23

2.19 Provisions

(a) Analysis of provisions
			2013	2012
		Note	£m	£m


Retirement benefit obligations		2.19(b)	1,113	969
Other provisions			15	14


			1,128	983




(b) Retirement benefit obligations
	Fund and		Fund and
	Scheme	Overseas	Scheme	Overseas
	2013	2013	2012	2012
	£m	£m	£m	£m


Gross pension obligations included in provisions	(1,113)	-	(967)	(2)
Annuity obligations insured by Society	646	-	636	-


Gross defined benefit pension deficit	(467)	-	(331)	(2)
Deferred tax on defined benefit pension deficit	93	-	76	-


Net defined benefit pension deficit	(374)	-	(255)	(2)

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 of, and contributions to, such arrangements. At 31 December 2013, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at £374m (2012: £255m). These amounts have been recognised in the financial statements with £236m charged against shareholder equity (2012: £152m) and £138m against the unallocated divisible surplus (2012: £103m).

The increase in gross defined benefit pension deficit is primarily due to the change in valuation assumption around inflation rates, partly offset by recovery plan payments and investment return in excess of the discount rate.

IFRS and Cash Page 50

2.20 Contingent liabilities, guarantees and indemnities

Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance between actual experience from that assumed may result in those liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of policyholder contracts, or the circumstances in which policyholders have entered into them. The extent of these liabilities is influenced by a number of factors including the actions and requirements of the PRA, ombudsman rulings, industry compensation schemes and court judgments.

Various Group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. The relevant members of the Group ensure that they make prudent provision as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet reasonably foreseeable eventualities. The provisions made are regularly reviewed. It is not possible to predict, with certainty, the extent and the timing of the financial impact of these claims, litigation or issues.

In 1975, Legal & General Assurance Society Limited (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. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary of Berkshire Hathaway Inc. 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 as a normal part of their business and operating activities or in relation to capital market transactions. Legal & General Group Plc has provided indemnities and guarantees in respect of the liabilities of Group companies in support of their business activities, including Pension Protection Fund compliant guarantees in respect of certain Group companies' liabilities under the Group pension fund and scheme.

IFRS and Cash Page 51

2.21 Basis of preparation

The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) as adopted by the European Union, and with those parts of the UK Companies Act 2006 applicable to companies reporting under IFRS. Except for the provisions of IFRS 10 'Consolidated Financial Statements', IFRS 11 'Joint Arrangements' and IFRS 12 'Disclosures of Interests in Other Entities' which have been endorsed for compulsory application in the EU for financial periods beginning on or after 1 January 2014, the Group financial statements also comply with IFRS and interpretations by the IFRS Interpretations Committee as issued by the IASB. The Group financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss.

The Group has selected accounting policies which state fairly its financial position, financial performance and cash flows for a reporting period. The accounting policies have been consistently applied to all years presented, unless otherwise stated.

The Group presents its balance sheet in order of liquidity. This is considered to be more relevant than a before and after 12 months presentation, given the long term nature of the Group's core business. However, for each asset and liability line item which combines amounts expected to be recovered or settled before and after 12 months from the balance sheet date, disclosure of the split is made by way of a note.

Financial assets and financial liabilities are disclosed gross in the balance sheet unless a legally enforceable right of offset exists and there is an intention to settle recognised amounts on a net basis. Income and expenses are not offset in the income statement unless required or permitted by any accounting standard or interpretations by the IFRS Interpretations Committee.

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. The functional currency of the Group's foreign operations is the currency of the primary economic environment in which the entity operates. The assets and liabilities of all of the Group's foreign operations are translated into sterling, the Group's presentation currency, at the closing rate at the date of the balance sheet. The income and expenses for each income statement are translated at average exchange rates. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate component of shareholders' equity.

Use of estimates

The preparation of the financial statements includes the use of estimates and assumptions which affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant for the determination of fair values of investment property and unquoted and illiquid financial investments; the estimation of deferred acquisition costs; tax balances; and the estimation of insurance and investment contract liabilities. The basis of accounting for these areas, and the significant judgements used in determining them, are outlined in the respective notes to the financial statements.

Reportable segments

Under the requirements of IFRS 8, 'Operating segments', operating and reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker, which has been identified as the Board of Legal & General Group Plc.

During the year, the Group has made changes to the organisational structure, effective from 1 July 2013. This has had the consequence of changing the reportable segments of the Group as outlined below. In accordance with the requirements of IFRS 8, 'Operating Segments', the prior period segmental information has been restated to reflect these changes.

The Group has five reportable segments comprising Legal & General Retirement (LGR), Legal & General Assurance Society (LGAS), Legal & General Investment Management (LGIM), Legal & General America (LGA), and Legal & General Capital (LGC and group expenses).

LGR represents Annuities (both individual and bulk purchase) and longevity insurance.

The LGIM segment represents institutional and retail investment management businesses.

Shareholders' equity supporting the non profit LGR and LGAS businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within LGC and group expenses. This also includes capital within the Group's treasury function and unit trust funds and property partnerships, which are managed on behalf of clients but are required to be consolidated under IFRS, which do not constitute a separately reportable segment. The group expenses segment also includes inter-segmental elimination.

The LGA segment comprises protection business written in the USA.

Transactions between reportable segments are on normal commercial terms, and are included within the reported segments.

The Group assesses performance and allocates resources on the basis of IFRS supplementary operating profit before tax. Segmental IFRS supplementary operating profit before tax is reconciled to the consolidated profit from continuing operations before tax attributable to equity holders and consolidated profit from ordinary activities after income tax.

IFRS and Cash Page 52

2.21 Basis of preparation (continued)

Changes to accounting policy - IAS 19 'Employee Benefits'

During 2013 the Group has changed its accounting policy on the recognition and measurement of defined benefit pension expense and termination benefits following the publication by the IASB in June 2011 of an amendment to IAS 19 'Employee Benefits'. This is compulsory for periods beginning on or after 1 January 2013. The impact of the amendment is to reduce profit for the year by £4m, following the allocation of the with-profit element to the unallocated divisible surplus, with an equivalent increase in Other Comprehensive Income. Total Comprehensive Income therefore remains unchanged.

The impact of this change upon the 2012 annual income statement, statement of comprehensive income, and cash flow statement is shown below. As the impact of the change is shown within investment variances there is no impact upon Group Operating Profit.

As the change has no balance sheet impact, an additional balance sheet for 31 December 2011 and related notes have not been presented.

							31.12.12
							£m


Profit for the period as previously reported							801
Investment return
IAS 19 'Employee Benefits' amendment							(6)
Expenses
Transfers to unallocated divisible surplus							3


Revised profit for the period (after tax)							798



Actuarial gain on defined benefit pension schemes							6
Actuarial gain on defined benefit pension schemes transferred to unallocated divisible surplus							(3)
Other items in other comprehensive income							(47)
Total Comprehensive Income for the period							754

The consolidated cash flow statement has been restated in line with these changes.

Changes to accounting policy - IFRS 13 'Fair Value Measurement'

On 1 January 2013 the Group adopted IFRS 13 'Fair Value Measurement'. This Standard defines fair value, sets out in a single IFRS a framework for measuring fair value, and requires disclosure about fair value measurements. The application impact on the Group for the full year lies in the expansion of the fair value disclosure requirements. The application of this standard can be found in the Annual Report and Accounts.

Key technical terms and definitions

The report refers to various key performance indicators, accounting standards and other technical terms. A comprehensive list of these definitions is contained within the glossary of the Group's 2013 Annual Report and Accounts.

Asset and premium flows Page 53

3.01 Legal & General investment management assets under management


		Active
	Index	fixed	Solu-	Property	Active
	funds	interest	tions¹	& other	equities	Total
Year ended 31 December 2013	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2013	243.2	82.2	64.0	8.9	7.7	406.0
External inflows^2,3	31.3	11.0	8.6	1.0	0.1	52.0
External outflows²	(31.8)	(5.0)	(5.2)	(0.3)	(0.4)	(42.7)


External net flows	(0.5)	6.0	3.4	0.7	(0.3)	9.3
Internal net flows	0.7	(1.7)	0.8	0.2	(0.2)	(0.2)


Total net flows	0.2	4.3	4.2	0.9	(0.5)	9.1
Market and other movements	26.4	2.9	2.2	1.5	1.4	34.4


At 31 December 2013	269.8	89.4	70.4	11.3	8.6	449.5




		Active
	Index	fixed	Solu-	Property	Active
	funds	interest	tions¹	& other	equities	Total
Year ended 31 December 2012	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2012	224.2	72.4	58.4	9.0	7.2	371.2
External inflows²	24.2	6.6	5.9	0.3	0.1	37.1
External outflows²	(22.5)	(5.1)	(3.7)	(0.1)	(0.4)	(31.8)


External net flows	1.7	1.5	2.2	0.2	(0.3)	5.3
Internal net flows	0.7	(1.8)	0.1	(0.1)	(0.2)	(1.3)


Total net flows	2.4	(0.3)	2.3	0.1	(0.5)	4.0
Market and other movements	16.6	10.1	3.3	(0.2)	1.0	30.8


At 31 December 2012	243.2	82.2	64.0	8.9	7.7	406.0




					12	12
					months	months
					to	to
					31.12.13	31.12.12
					£bn	£bn


LGIM total net flows					9.1	4.0
Attributable to:
International³					15.7	7.8
UK Institutional					(5.3)	0.1
UK Retail					0.4	(1.9)
Annuities⁴					1.4	0.6
Mature Savings					(3.1)	(2.6)

1. Solutions includes liability driven investments and multi-asset funds. 2. Includes unit trust business, both retail and institutional, now part of LGIM, following the organisational changes effective from 1 July 2013. 3. Includes £2.9bn of Legal & General France assets. 4. Pension funds already managed by LGIM that switch into LGR annuities are excluded.
Asset and premium flows Page 54 3.02 Legal & General investment management assets under management quarterly progression


		Active
	Index	fixed	Solu-	Property	Active
	funds	interest	tions¹	& other	equities	Total
Year ended 31 December 2013	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2013	243.2	82.2	64.0	8.9	7.7	406.0
External inflows²	11.0	2.2	1.1	0.1	-	14.4
External outflows²	(7.1)	(0.9)	(1.1)	-	(0.1)	(9.2)


External net flows	3.9	1.3	-	0.1	(0.1)	5.2
Internal net flows	0.1	(0.7)	0.1	-	-	(0.5)


Total net flows	4.0	0.6	0.1	0.1	(0.1)	4.7
Market and other movements	20.1	2.0	7.3	0.3	0.8	30.5


At 31 March 2013	267.3	84.8	71.4	9.3	8.4	441.2


External inflows²	6.2	1.3	4.6	0.2	-	12.3
External outflows²	(7.9)	(0.5)	(0.7)	(0.1)	(0.3)	(9.5)


External net flows	(1.7)	0.8	3.9	0.1	(0.3)	2.8
Internal net flows	0.4	(0.8)	0.6	-	-	0.2


Total net flows	(1.3)	-	4.5	0.1	(0.3)	3.0
Market and other movements	(3.9)	(1.9)	(5.0)	-	(0.4)	(11.2)


At 30 June 2013	262.1	82.9	70.9	9.4	7.7	433.0


External inflows^2,3	8.0	4.8	2.2	0.4	0.1	15.5
External outflows²	(8.3)	(2.0)	(1.7)	(0.1)	-	(12.1)


External net flows	(0.3)	2.8	0.5	0.3	0.1	3.4
Internal net flows	-	0.6	-	0.1	(0.1)	0.6


Total net flows	(0.3)	3.4	0.5	0.4	-	4.0
Market and other movements	3.2	1.4	0.1	0.6	0.3	5.6


At 30 September 2013	265.0	87.7	71.5	10.4	8.0	442.6


External inflows²	6.1	2.7	0.7	0.3	-	9.8
External outflows²	(8.5)	(1.6)	(1.7)	(0.1)	-	(11.9)


External net flows	(2.4)	1.1	(1.0)	0.2	-	(2.1)
Internal net flows	0.2	(0.8)	0.1	0.1	(0.1)	(0.5)


Total net flows	(2.2)	0.3	(0.9)	0.3	(0.1)	(2.6)
Market and other movements	7.0	1.4	(0.2)	0.6	0.7	9.5


At 31 December 2013	269.8	89.4	70.4	11.3	8.6	449.5


1. Solutions includes liability driven investments and multi-asset funds.
2. Includes unit trust business, both retail and institutional, now part of LGIM, following the organisational changes effective from 1 July 2013.
3. Includes £2.9bn of Legal & General France assets.

Asset and premium flows Page 55

3.02 Legal & General investment management assets under management quarterly progression (continued)

		Active
	Index	fixed	Solu-	Property	Active
	funds	interest	tions¹	& other	equities	Total
Year ended 31 December 2012	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2012	224.2	72.4	58.4	9.0	7.2	371.2
External inflows²	4.6	1.8	1.7	0.1	-	8.2
External outflows²	(4.7)	(0.4)	(0.9)	-	(0.1)	(6.1)


External net flows	(0.1)	1.4	0.8	0.1	(0.1)	2.1
Internal net flows	0.4	(0.8)	-	(0.2)	(0.1)	(0.7)


Total net flows	0.3	0.6	0.8	(0.1)	(0.2)	1.4
Market and other movements	8.8	1.3	(0.2)	(0.1)	0.5	10.3


At 31 March 2012	233.3	74.3	59.0	8.8	7.5	382.9


External inflows²	4.4	2.0	1.7	0.1	-	8.2
External outflows²	(5.4)	(1.3)	(0.4)	(0.1)	-	(7.2)


External net flows	(1.0)	0.7	1.3	-	-	1.0
Internal net flows	-	(0.8)	-	0.1	-	(0.7)


Total net flows	(1.0)	(0.1)	1.3	0.1	-	0.3
Market and other movements	(5.3)	3.0	0.9	-	(0.5)	(1.9)


At 30 June 2012	227.0	77.2	61.2	8.9	7.0	381.3


External inflows²	7.1	1.4	0.5	-	-	9.0
External outflows²	(5.7)	(2.0)	(1.4)	0.1	(0.1)	(9.1)


External net flows	1.4	(0.6)	(0.9)	0.1	(0.1)	(0.1)
Internal net flows	0.3	(0.2)	-	-	-	0.1


Total net flows	1.7	(0.8)	(0.9)	0.1	(0.1)	-
Market and other movements	7.3	3.9	(2.2)	(0.1)	0.5	9.4


At 30 September 2012	236.0	80.3	58.1	8.9	7.4	390.7


External inflows²	8.1	1.4	2.0	0.1	0.1	11.7
External outflows²	(6.7)	(1.4)	(1.0)	(0.1)	(0.2)	(9.4)


External net flows	1.4	-	1.0	-	(0.1)	2.3
Internal net flows	-	-	0.1	-	(0.1)	-


Total net flows	1.4	-	1.1	-	(0.2)	2.3
Market and other movements	5.8	1.9	4.8	-	0.5	13.0


At 31 December 2012	243.2	82.2	64.0	8.9	7.7	406.0


1. Solutions includes liability driven investments and multi-asset funds.
2. Includes unit trust business, both retail and institutional, now part of LGIM, following the organisational changes effective from 1 July 2013.

Asset and premium flows Page 56

3.02 Legal & General investment management assets under management quarterly progression (continued)

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.13	30.09.13	30.06.13	31.03.13	31.12.12	30.09.12	30.06.12	31.03.12
	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn


LGIM total net flows	(2.6)	4.0	3.0	4.7	2.3	-	0.3	1.4
Attributable to:
International¹	1.8	6.4	0.8	6.7	2.3	3.2	1.2	1.1
UK Institutional	(3.8)	(3.2)	2.7	(1.0)	0.6	(2.2)	0.3	1.4
UK Retail	0.1	0.3	0.3	(0.3)	(0.4)	(0.7)	(0.4)	(0.4)
Annuities²	(0.1)	1.4	0.1	-	0.5	0.3	(0.1)	(0.1)
Mature Savings	(0.6)	(0.9)	(0.9)	(0.7)	(0.7)	(0.6)	(0.7)	(0.6)


1. Q3 2013 International net flows include £2.9bn of Legal & General France assets.
2. Pension funds already managed by LGIM that switch into LGR annuities are excluded.

Asset and premium flows Page 57

3.03 Assets under administration

					Consol-
		Mature			idation		Retail
		Retail	Work-	Suffolk	adjust-	Total	Invest-
	Platforms¹	Savings²	place	Life	ment³	LGAS	ments⁴	Annuities
Year ended 31 December 2013	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2013	8.6	36.2	6.0	5.1	(1.4)	54.5	15.6	32.2
Gross inflows⁵	11.0	1.4	2.1	1.3	(0.3)	15.5	3.2	4.0
Gross outflows	(3.1)	(5.1)	(0.6)	(0.4)	0.5	(8.7)	(3.3)	-
Payments to annuitants	-	-	-	-	-	-	-	(1.9)


Net flows	7.9	(3.7)	1.5	0.9	0.2	6.8	(0.1)	2.1
Cofunds acquisition	45.7	-	-	-	(5.4)	40.3	-	-
Market and other movements	1.9	3.8	1.2	0.6	(0.2)	7.3	1.5	0.1


At 31 December 2013	64.1	36.3	8.7	6.6	(6.8)	108.9	17.0	34.4



					Consol-
		Mature			idation		Retail
		Retail	Work-	Suffolk	adjust-	Total	Invest-
	Platforms¹	Savings²	place	Life	ment³	LGAS	ments⁴	Annuities
Year ended 31 December 2012	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2012	6.7	36.4	3.8	4.3	(1.2)	50.0	14.9	28.4
Gross inflows	2.9	2.3	2.2	0.8	(0.2)	8.0	2.4	2.4
Gross outflows	(1.6)	(5.5)	(0.6)	(0.3)	0.1	(7.9)	(3.0)	-
Payments to annuitants	-	-	-	-	-	-	-	(1.8)


Net flows	1.3	(3.2)	1.6	0.5	(0.1)	0.1	(0.6)	0.6
Market and other movements	0.6	3.0	0.6	0.3	(0.1)	4.4	1.3	3.2


At 31 December 2012	8.6	36.2	6.0	5.1	(1.4)	54.5	15.6	32.2


1. Platforms includes Investor Portfolio Services (IPS) and Cofunds since acquisition.
2. Mature retail savings products includes with-profit products, bonds and retail pensions.
3. Consolidation adjustment represents Suffolk Life and Mature Retail Savings assets included in the Platforms column.
4. Retail Investments includes unit trust products (both LGIM and externally managed) and structured products (deposits and investments). It also includes £1.2bn of Cofunds assets.
5. Platforms gross inflows include Cofunds institutional net flows.

Asset and premium flows Page 58

3.04 Assets under administration quarterly progression

					Consol-
		Mature			idation		Retail
		Retail	Work-	Suffolk	adjust-	Total	Invest-
	Platforms¹	Savings²	place	Life	ment³	LGAS	ments⁴	Annuities
Year ended 31 December 2013	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2013	8.6	36.2	6.0	5.1	(1.4)	54.5	15.6	32.2
Gross inflows	0.2	0.4	0.5	0.2	-	1.3	0.7	0.8
Gross outflows	(0.2)	(1.2)	(0.2)	(0.1)	0.1	(1.6)	(1.0)	-
Payments to annuitants	-	-	-	-	-	-	-	(0.4)


Net flows	-	(0.8)	0.3	0.1	0.1	(0.3)	(0.3)	0.4
Market and other movements	0.5	1.7	0.6	0.3	(0.1)	3.0	1.0	0.7


At 31 March 2013	9.1	37.1	6.9	5.5	(1.4)	57.2	16.3	33.3


Gross inflows⁵	1.7	0.4	0.5	0.3	-	2.9	1.0	0.6
Gross outflows	(0.7)	(1.4)	(0.1)	(0.1)	-	(2.3)	(0.9)	-
Payments to annuitants	-	-	-	-	-	-	-	(0.5)


Net flows	1.0	(1.0)	0.4	0.2	-	0.6	0.1	0.1
Cofunds acquisition	45.7	-	-	-	(5.4)	40.3	-	-
Market and other movements	(2.1)	(0.4)	-	-	0.3	(2.2)	(0.3)	(1.2)


At 30 June 2013	53.7	35.7	7.3	5.7	(6.5)	95.9	16.1	32.2


Gross inflows⁵	4.5	0.3	0.5	0.4	(0.1)	5.6	0.9	2.3
Gross outflows	(1.2)	(1.4)	(0.1)	(0.1)	0.2	(2.6)	(0.8)	-
Payments to annuitants	-	-	-	-	-	-	-	(0.5)


Net flows	3.3	(1.1)	0.4	0.3	0.1	3.0	0.1	1.8
Market and other movements	1.3	1.4	0.2	0.1	(0.2)	2.8	0.5	0.5


At 30 September 2013	58.3	36.0	7.9	6.1	(6.6)	101.7	16.7	34.5


Gross inflows⁵	4.6	0.3	0.6	0.4	(0.2)	5.7	0.6	0.3
Gross outflows	(1.0)	(1.1)	(0.2)	(0.1)	0.2	(2.2)	(0.6)	-
Payments to annuitants	-	-	-	-	-	-	-	(0.5)


Net flows	3.6	(0.8)	0.4	0.3	-	3.5	-	(0.2)
Market and other movements	2.2	1.1	0.4	0.2	(0.2)	3.7	0.3	0.1


At 31 December 2013	64.1	36.3	8.7	6.6	(6.8)	108.9	17.0	34.4


1. Platforms includes Investor Portfolio Services (IPS) and Cofunds since acquisition.
2. Mature retail savings products includes with-profit products, bonds and retail pensions.
3. Consolidation adjustment represents Suffolk Life and Mature Retail Savings assets included in the Platforms column.
4. Retail Investments includes unit trust products (both LGIM and externally managed) and structured products (deposits and investments). It also includes £1.2bn of Cofunds assets.
5. Platforms gross inflows include Cofunds institutional net flows.

Asset and premium flows Page 59

3.04 Assets under administration quarterly progression (continued)

					Consol-
		Mature			idation		Retail
		Retail	Work-	Suffolk	adjust-	Total	Invest-
	Platforms¹	Savings²	place	Life	ment³	LGAS	ments⁴	Annuities
Year ended 31 December 2012	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn


At 1 January 2012	6.7	36.4	3.8	4.3	(1.2)	50.0	14.9	28.4
Gross inflows	0.5	0.6	0.4	0.2	-	1.7	0.7	0.3
Gross outflows	(0.2)	(1.3)	-	(0.1)	-	(1.6)	(1.1)	-
Payments to annuitants	-	-	-	-	-	-	-	(0.4)


Net flows	0.3	(0.7)	0.4	0.1	-	0.1	(0.4)	(0.1)
Market and other movements	0.4	1.8	0.3	0.2	(0.1)	2.6	0.7	0.1


At 31 March 2012	7.4	37.5	4.5	4.6	(1.3)	52.7	15.2	28.4


Gross inflows	0.8	0.5	0.4	0.2	-	1.9	0.7	0.3
Gross outflows	(0.4)	(1.2)	(0.1)	(0.1)	-	(1.8)	(0.6)	-
Payments to annuitants	-	-	-	-	-	-	-	(0.4)


Net flows	0.4	(0.7)	0.3	0.1	-	0.1	0.1	(0.1)
Market and other movements	(0.3)	(0.7)	(0.2)	(0.1)	-	(1.3)	(0.2)	0.6


At 30 June 2012	7.5	36.1	4.6	4.6	(1.3)	51.5	15.1	28.9


Gross inflows	0.9	0.6	0.7	0.2	(0.1)	2.3	0.5	0.8
Gross outflows	(0.7)	(1.5)	(0.3)	-	0.1	(2.4)	(0.7)	-
Payments to annuitants	-	-	-	-	-	-	-	(0.5)


Net flows	0.2	(0.9)	0.4	0.2	-	(0.1)	(0.2)	0.3
Market and other movements	0.4	0.9	0.3	0.1	-	1.7	0.5	1.3


At 30 September 2012	8.1	36.1	5.3	4.9	(1.3)	53.1	15.4	30.5


Gross inflows	0.7	0.6	0.7	0.2	(0.1)	2.1	0.5	1.0
Gross outflows	(0.3)	(1.5)	(0.2)	(0.1)	-	(2.1)	(0.6)	-
Payments to annuitants	-	-	-	-	-	-	-	(0.5)


Net flows	0.4	(0.9)	0.5	0.1	(0.1)	-	(0.1)	0.5
Market and other movements	0.1	1.0	0.2	0.1	-	1.4	0.3	1.2


At 31 December 2012	8.6	36.2	6.0	5.1	(1.4)	54.5	15.6	32.2


1. Platforms includes Investor Portfolio Services (IPS).
2. Mature retail savings products includes with-profit products, bonds and retail pensions.
3. Consolidation adjustment represents Suffolk Life and Mature Retail Savings assets included in the Platforms column.
4. Retail Investments includes unit trust products (both LGIM and externally managed) and structured products (deposits and investments).

Asset and premium flows Page 60

3.05 Annuities single premiums

	Single	Single
	premiums	premiums
	31.12.13	31.12.12
	£m	£m


Individual annuities	1,277	1,320
Bulk purchase annuities	2,812	1,019


Total Annuities	4,089	2,339

3.06 Annuities single premiums quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.13	30.09.13	30.06.13	31.03.13	31.12.12	30.09.12	30.06.12	31.03.12
	£m	£m	£m	£m	£m	£m	£m	£m


Individual annuities	200	323	348	406	448	350	254	268
Bulk purchase annuities	199	1,943	313	357	544	408	31	36


Total Annuities	399	2,266	661	763	992	758	285	304

3.07 Insurance new business

	Annual	Annual
	premiums	premiums
	31.12.13	31.12.12
	£m	£m


Group Protection	70	70
Retail Protection	148	151
France (LGF) Protection	21	37
Netherlands (LGN) Protection	7	12
US Protection	99	90
Longevity insurance	270	-


Total insurance new business	615	360

3.08 Insurance new business annual premiums quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.13	30.09.13	30.06.13	31.03.13	31.12.12	30.09.12	30.06.12	31.03.12
	£m	£m	£m	£m	£m	£m	£m	£m


Group Protection	13	17	20	20	13	20	25	12
Retail Protection	43	40	38	27	43	36	36	36
France (LGF) Protection	-	-	-	21	12	-	10	15
Netherlands (LGN) Protection	2	1	2	2	3	3	3	3
US Protection	26	28	23	22	24	24	22	20
Longevity insurance	95	-	-	175	-	-	-	-


Total insurance new business	179	86	83	267	95	83	96	86

Asset and premium flows Page 61

3.09 Gross written premiums on Insurance business

	12	12
	months	months
	to	to
	31.12.13	31.12.12
	£m	£m


Group protection	336	321
Retail protection	990	947
General Insurance	375	349
France (LGF)	168	159
Netherlands (LGN)	54	47
US Protection	654	584
Longevity insurance	212	70


Total	2,789	2,477

3.10 Gross written premiums on Insurance business quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.13	30.09.13	30.06.13	31.03.13	31.12.12	30.09.12	30.06.12	31.03.12
	£m	£m	£m	£m	£m	£m	£m	£m


Group protection	54	74	123	85	56	62	129	74
Retail protection	256	250	244	240	244	240	233	230
General Insurance	95	97	97	86	97	87	82	83
France (LGF)	41	41	43	43	40	40	39	40
Netherlands (LGN)	13	14	13	14	12	12	11	12
US Protection	172	156	172	154	156	140	150	138
Longevity insurance	60	60	60	32	18	18	17	17


Total	691	692	752	654	623	599	661	594

3.11 Overseas new business in local currency

	Annual	Single		Annual	Single
	premiums	premiums	APE	premiums	premiums	APE
	31.12.13	31.12.13	31.12.13	31.12.12	31.12.12	31.12.12


US Protection ($m)	155	-	155	142	-	142

Netherlands (LGN) (€m)	10	126	23	17	101	27

France (LGF) (€m)	26	312	57	46	287	75

India (Rs m) - Group's 26% interest	491	4,264	917	564	2,264	790

Egypt (Pounds m) - Group's 55% interest	136	-	136	134	-	134

Gulf (US$m) - Group's 50% interest	3	4	3	6	10	7

Asset and premium flows Page 62

3.12 Worldwide new business

	Annual	Single		Annual	Single
	premiums	premiums	APE	premiums	premiums	APE	Increase/
	2013	2013	2013	2012	2012	2012	(decrease)
	£m	£m	£m	£m	£m	£m	%


Individual annuities	-	1,277	128	-	1,320	132	(3)
Bulk purchase annuities	-	2,812	281	-	1,019	102	175


Total LGR¹	-	4,089	409	-	2,339	234	75


Group Protection	70	-	70	70	-	70	-
Retail Protection	148	-	148	151	-	151	(2)
France (LGF)	22	264	48	38	233	61	(21)
Netherlands (LGN)	8	107	19	13	82	21	(10)
Workplace Savings	660	747	735	502	1,115	614	20
Platforms (Cofunds & IPS)²	43	2,452	288	59	2,137	273	5
Suffolk Life	-	1,330	133	-	774	77	73
Mature Retail Savings³	11	790	90	17	1,331	150	(40)
With-profits	53	80	61	58	342	92	(34)


Total LGAS	1,015	5,770	1,592	908	6,014	1,509	6


Retail Investments⁴	12	3,427	355	10	2,311	241	47


US Protection	99	-	99	90	-	90	10


India (26% share)	5	46	10	7	24	9	11
Egypt (55% share)	13	-	13	14	-	14	(7)
Gulf (50% share)	2	3	2	4	6	5	(60)


Total emerging markets new business	20	49	25	25	30	28	(11)


Total worldwide new business	1,146	13,335	2,480	1,033	10,694	2,102	18


1. Total LGR new business excludes £270m (2012: £nil) of APE in relation to longevity insurance transactions. It is not included in the table due to the unpredictable deal flow from this type of business.
2. Platforms APE includes retail business only.
3. Includes bonds and retail pensions.
4. Includes retail unit trusts and structured products only.

Asset and premium flows Page 63

3.13 Worldwide new business APE quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.13	30.09.13	30.06.13	31.03.13	31.12.12	30.09.12	30.06.12	31.03.12
	£m	£m	£m	£m	£m	£m	£m	£m


Individual annuities	20	33	35	40	45	35	26	26
Bulk purchase annuities	20	194	31	36	54	41	3	4


Total LGR¹	40	227	66	76	99	76	29	30


Group Protection	13	17	20	20	13	20	25	12
Retail Protection	43	40	38	27	43	36	36	36
France (LGF)	4	7	6	31	19	4	18	20
Netherlands (LGN)	4	4	4	7	5	5	5	6
Workplace Savings	240	166	127	202	285	159	76	94
Platforms (Cofunds & IPS)²	99	94	69	26	62	78	83	50
Suffolk Life	44	39	31	19	18	19	19	21
Mature Retail Savings³	25	21	22	22	35	39	36	40
With-profits	17	13	14	17	16	18	30	28


Total LGAS	489	401	331	371	496	378	328	307


Retail Investments⁴	83	94	104	74	55	49	70	67


US Protection	26	28	23	22	24	24	22	20


India (26% share)	1	2	1	6	2	1	1	5
Egypt (55% share)	3	3	3	4	3	3	4	4
Gulf (50% share)	-	1	-	1	1	2	1	1


Total emerging markets new business	4	6	4	11	6	6	6	10


Total worldwide new business	642	756	528	554	680	533	455	434


1. Total LGR new business excludes £270m (2012: £nil) of APE in relation to longevity insurance transactions. It is not included in the table due to the unpredictable deal flow from this type of business.
2. Platforms APE includes retail business only.
3. Includes bonds and retail pensions.
4. Includes retail unit trusts and structured products only.

Asset and premium flows Page 64

3.14 Worldwide APE by channel

	Annual	Single
	premiums	premiums	APE	% of
For the year ended 31 December 2013	£m	£m	£m	total


Employee benefit consultants¹	796	3,597	1,156	47
Retail independent and restricted	228	7,871	1,015	41
Tied including bancassurance	95	1,418	237	10
Direct	27	449	72	2


Total	1,146	13,335	2,480	100


1. Includes Lucida business.

	Annual	Single
	premiums	premiums	APE	% of
For the year ended 31 December 2012	£m	£m	£m	total


Employee benefit consultants	662	2,242	886	42
Retail independent and restricted	198	5,010	699	33
Tied including bancassurance	153	3,008	454	22
Direct	20	434	63	3


Total	1,033	10,694	2,102	100

3.15 Worldwide APE by channel quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.13	30.09.13	30.06.13	31.03.13	31.12.12	30.09.12	30.06.12	31.03.12
	£m	£m	£m	£m	£m	£m	£m	£m


Employee benefit consultants¹	283	386	191	296	377	232	131	146
Retail independent and restricted	279	295	259	182	188	166	176	169
Tied including bancassurance	61	58	59	59	103	118	130	103
Direct	19	17	19	17	12	17	18	16


Total	642	756	528	554	680	533	455	434

1. Includes Lucida business.

Capital and Investments Page 65

4.01 Group regulatory capital
(a) Insurance Group's Directive (IGD)
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 IGD. The table below shows the estimated total Group capital resources, Group capital resources requirement and the Group surplus.

	At	At
	31.12.13	31.12.12
	£bn	£bn


Core tier 1	6.3	6.2
Innovative tier 1	0.6	0.6
Tier 2	1.2	1.2
Deductions	(0.8)	(0.8)


Group capital resources	7.3	7.2


Group capital resources requirement¹	3.3	3.1


IGD surplus	4.0	4.1



Coverage ratio (Group capital resources /	2.22	2.34
Group capital resources requirement)²	times	times


1. The Group capital resources requirement includes a With-profits Insurance Capital Component (WPICC) of £0.2bn (2012: £0.1bn). 2. Coverage ratio is calculated on unrounded values.

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		At
	31.12.13		31.12.12
	£bn		£bn


Capital and reserves attributable to equity holders on an IFRS basis	5.6		5.4
Innovative tier 1	0.6		0.6
Tier 2	1.2		1.2
UK unallocated divisible surplus	1.1		1.0
Proposed dividends	(0.4)		(0.3)
Intangibles¹	(0.4)		(0.2)
Other regulatory adjustments²	(0.4)		(0.5)


Group capital resources	7.3		7.2


1. Increase in intangibles related to the acquisition of remaining shareholdings of Cofunds and IDOL during 2013.
2. Other regulatory adjustments includes differences between accounting and regulatory basis.

The table below demonstrates how the Group's net cash generation flows to the IGD capital surplus position.¹

					At
					31.12.13
					£bn


IGD surplus at 1 January					4.1
Net cash generation					1.0
Dividends					(0.6)
Capital impact of organic growth					(0.1)
Capital impact of acquisitions					(0.3)
Other variances and regulatory adjustments					(0.1)


IGD surplus at 31 December					4.0



1. All IGD amounts are estimated, unaudited and after accrual of the final dividend of £408m (2012: £337m)

Capital and Investments Page 66

4.01 Group regulatory capital (continued)
(b) Legal & General Assurance Society Ltd capital surplus

Legal & General Assurance Society Ltd is the principal insurance regulated entity in the Group. The society is required to measure and monitor its capital resources on a regulatory basis.

	At	At	At	At
	31.12.13	31.12.13	31.12.12	31.12.12
	Long	General	Long	General
	term	insu-	term	insu-
	business	rance	business	rance
	£bn	£bn	£bn	£bn


Available capital resources - Tier 1	5.8	0.2	5.5	0.2


Insurance capital requirement	2.6	0.1	2.6	0.1
Capital requirements of regulated related undertakings	0.3	-	0.2	-
With-profits Insurance Capital Component	0.2	-	0.1	-


Capital resources requirement	3.1	0.1	2.9	0.1


Regulatory capital surplus	2.7	0.1	2.6	0.1

The table below shows the breakdown of Legal & General Assurance Society Ltd long term insurance capital requirement.

	At	At
	31.12.13	31.12.12
Pillar 1 capital requirement	£bn	£bn


Protection	0.7	0.7
LGR	1.2	1.2
Non profit pensions and unit linked bonds	0.1	0.1


Non profit	2.0	2.0
With-profits	0.6	0.6


Long term insurance capital requirement	2.6	2.6


On a regulatory basis (Peak 1), Society long term business regulatory capital surplus of £2.7bn (2012: £2.6bn) comprises capital resources within the long term fund of £3.0bn (2012: £2.7bn) and capital resources outside the long term fund of £2.8bn (2012: £2.8bn) less the capital resources requirement of £3.1bn (2012: £2.9bn).

The With-profits Insurance Capital Component (WPICC) is an additional capital requirement calculated if the surplus in the with-profits fund on a Peak 2 basis is lower than on a Peak 1 basis and represents the difference in the surplus between the two bases. It is calculated based on the most onerous risk capital margin stress referred to in 4.01 (c).

(c) With-profits realistic balance sheet
The table below summarises the realistic position of the with-profits part of Legal & General Assurance Society Ltd long term fund.

	At	At
	31.12.13	31.12.12
	£bn	£bn


With-profits surplus	0.8	0.7
Risk capital margin	0.1	0.1


Surplus	0.7	0.6


Legal & General Assurance Society Ltd is required to maintain a surplus in the with-profits part of the fund on a realistic basis (Peak 2). The risk capital margin is calculated based on the most onerous capital requirement calculated after performing five stresses specified by the PRA. The surplus includes the present value of future shareholder transfers of £0.3bn (2012: £0.3bn) as a liability in the calculation.

Capital and Investments Page 67

4.02 Investment portfolio

	Market	Market
	value	value
	2013	2012
	£m	£m


Worldwide assets under management	452,260	413,152
Client and policyholder assets	(391,521)	(351,663)
Non-unit linked with-profits assets¹	(17,380)	(18,605)


Investments to which shareholders are directly exposed	43,359	42,884


1. Includes assets backing participating business in LGF of £2,347m (2012: £2,304m).

Analysed by investment class:

			Other
			non profit		Other
		LGR	insurance	LGC	shareholder
		investments¹	investments	investments	investments	Total	Total
		2013	2013	2013	2013	2013	2012
	Note	£m	£m	£m	£m	£m	£m


Equities²		83	1	1,492	8	1,584	1,432
Bonds	4.03	30,018	2,628	1,783	1,268	35,697	34,923
Derivative assets³		2,100	26	180	1	2,307	3,103
Property		1,294	-	143	4	1,441	773
Cash (including cash
equivalents), loans & receivables		689	145	1,057	439	2,330	2,653


		34,184	2,800	4,655	1,720	43,359	42,884


1. LGR investments includes all business written in LGPL and excludes WP non-participating business.
2. Includes equity investment in CALA Group Limited.
3. Derivative assets are shown gross of derivative liabilities. Exposures arise from the use of derivatives for efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management.

Direct investments:¹


	Direct²	Traded³		Direct²	Traded³
	investments	securities	Total	investments	securities	Total
	2013	2013	2013	2012	2012	2012
	£m	£m	£m	£m	£m	£m


Equities	208	1,376	1,584	94	1,338	1,432
Bonds	1,048	34,649	35,697	419	34,504	34,923
Derivative assets	-	2,307	2,307	-	3,103	3,103
Property	1,441	-	1,441	773	-	773
Cash (including cash						-
equivalents), loans & receivables	6	2,324	2,330	-	2,653	2,653


	2,703	40,656	43,359	1,286	41,598	42,884


1. The analysis of Direct Investments above excludes £176m (2012: £135m) of assets which do not meet the definition of financial investments.
2. Direct Investments constitute a bilateral agreement with another party and represents an exposure to untraded and often less liquid asset classes. Direct Investments include physical assets, bilateral loans, private equity, and exclude hedge funds.
3. Traded securities are defined by exclusion. If an instrument is not a direct investment, then it is classed as a traded security.

Capital and Investments Page 68

4.03 Bond portfolio summary
(a) Analysed by sector
		LGR	LGR	Total	Total
		2013	2013	2013	2013
	Note	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.03(b)	4,772	16	6,502	18
Banks:
- Tier 1		100	-	105	-
- Tier 2 and other subordinated		637	2	698	2
- Senior		1,406	5	2,169	6
Financial Services
- Tier 1		2	-	5	-
- Tier 2 and other subordinated		206	1	251	1
- Senior		800	3	1,041	3
Insurance
- Tier 1		144	1	152	-
- Tier 2 and other subordinated		579	2	625	2
- Senior		481	2	552	2
Utilities		4,013	13	4,329	12
Consumer Services and Goods & Health Care		3,128	10	3,716	10
Technology and Telecoms		1,995	7	2,333	7
Industrials & Oil and Gas		3,074	10	3,626	10
Property		981	3	1,053	3
Asset backed securities:¹
- Traditional		763	3	1,395	4
- Securitisations and debentures		5,839	19	6,047	17
CDO²		1,098	3	1,098	3


Total		30,018	100	35,697	100


1. Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies and Debentures are securities with fixed redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio has had no reference entity defaults in 2012 or 2013. The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.5%, on average across the reference portfolio, before the CDOs incur any default losses. Assuming an average recovery rate of 30%, then over 39% of the reference names would have to default before the CDOs incur any default losses. These CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the internal valuation.

Capital and Investments Page 69

4.03 Bond portfolio summary (continued)
(a) Analysed by sector (continued)
		LGR	LGR	Total	Total
		2012	2012	2012	2012
	Note	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.03(b)	4,543	16	6,328	18
Banks:
- Tier 1		212	1	223	1
- Tier 2 and other subordinated		707	2	776	2
- Senior		1,399	5	2,243	6
Financial Services:
- Tier 1		4	-	4	-
- Tier 2 and other subordinated		46	-	67	-
- Senior		930	3	1,127	3
Insurance:
- Tier 1		134	-	142	-
- Tier 2 and other subordinated		546	2	575	2
- Senior		545	2	645	2
Utilities		3,928	13	4,177	12
Consumer Services and Goods & Health Care		3,484	12	3,966	12
Technology and Telecoms		2,010	7	2,337	7
Industrials & Oil and Gas		3,294	11	3,825	11
Property		628	2	698	2
Asset backed securities:¹
- Traditional		742	3	1,512	4
- Securitisations and debentures		5,005	17	5,181	15
CDO²		1,097	4	1,097	3


Total		29,254	100	34,923	100


1. Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies and Debentures are securities with fixed redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio has had no reference entity defaults in 2012 or 2013. The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.5%, on average across the reference portolio, before the CDOs incur any default losses. Assuming an average recovery rate of 30%, then over 39% of the reference names would have to default before the CDOs incur any default losses. These CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the internal valuation.

Capital and Investments Page 70

4.03 Bond portfolio summary (continued)
(b) Analysed by domicile

The tables below are based on the legal domicile of the security.
	LGR	Total	LGR	Total
	2013	2013	2012	2012
	£m	£m	£m	£m


Market value by region
United Kingdom	13,099	14,178	11,569	12,578
USA	7,237	9,779	8,394	10,856
Netherlands	1,736	2,164	1,661	2,267
France	1,382	1,681	1,313	1,742
Germany	411	791	316	651
GIIPS:
- Greece	-	-	-	-
- Ireland¹	234	271	271	289
- Italy	636	786	636	744
- Portugal	15	31	13	16
- Spain	178	263	192	260
Rest of Europe	1,299	1,721	1,191	1,636
Rest of World	2,693	2,934	2,601	2,787
CDO	1,098	1,098	1,097	1,097


Total	30,018	35,697	29,254	34,923


1. Within LGR, out of the £234m of bonds domiciled in Ireland, £218m relate to financing vehicles where the underlying exposure lies outside Ireland.

Additional analysis of sovereign debt exposures

	Sovereigns, Supras and Sub-Sovereigns

	LGR	Total	LGR	Total
	2013	2013	2012	2012
	£m	£m	£m	£m


Market value by region
United Kingdom	3,340	3,725	3,158	3,552
USA	282	664	323	470
Netherlands	10	194	1	423
France	90	220	80	299
Germany	212	472	165	380
GIIPS:
- Greece	-	-	-	-
- Ireland	-	7	-	6
- Italy	236	323	240	312
- Portugal	-	16	-	4
- Spain	-	14	-	47
Rest of Europe	474	661	459	669
Rest of World	128	206	117	166


Total	4,772	6,502	4,543	6,328

Capital and Investments Page 71

4.03 Bond portfolio summary (continued)
(c) Analysed by credit rating
	LGR	LGR	Total	Total
	2013	2013	2013	2013
	£m	%	£m	%


AAA¹	1,378	5	3,144	9
AA	6,743	22	7,599	21
A	10,236	34	11,703	34
BBB	8,326	28	9,456	26
BB or below	603	2	874	2
Unrated: Bespoke CDOs²	983	3	983	3
Other³	1,749	6	1,938	5


	30,018	100	35,697	100



	LGR	LGR	Total	Total
	2012	2012	2012	2012
	£m	%	£m	%


AAA	4,899	17	6,892	20
AA	3,240	11	4,087	12
A	9,810	34	11,466	33
BBB	8,625	29	9,595	27
BB or below	467	2	521	1
Unrated: Bespoke CDOs²	975	3	975	3
Other³	1,238	4	1,387	4


	29,254	100	34,923	100


1. During 2013 the UK sovereign debt was downgraded from AAA to AA+.
2. The CDOs are termed as super senior since default losses have to exceed 27.5%, on average across the reference portfolio, before the CDOs incur any default losses. The underlying reference portfolio has had no reference entity defaults in 2012 or 2013. Losses are limited under the terms of the CDOs to assets and collateral invested.
3. Other unrated bonds have been assessed and rated internally.

4.04 Value of policyholder assets held in Society and LGPL
	2013	2012
	£m	£m


With-profits business	23,959	24,656
Non profit business	49,949	46,869


	73,908	71,525

Capital and Investments Page 72

European Embedded Value Page 73

Group embedded value - summary
	Covered business
		LGAS		Non-
	UK	overseas		covered
	business	business	LGA	business	Total
For the year ended 31 December 2013	£m	£m	£m	£m	£m


At 1 January
Value of in-force business (VIF)	4,402	146	735	-	5,283
Shareholder net worth (SNW)	3,178	296	239	(96)	3,617


Embedded value at 1 January 2013	7,580	442	974	(96)	8,900
Exchange rate movements	-	9	(14)	(10)	(15)

Operating profit after tax for the year	804	16	70	168	1,058
Non-operating profit/(loss) for the year	222	60	(24)	(27)	231


Profit for the year	1,026	76	46	141	1,289
Intra-group distributions¹	(602)	(15)	(44)	661	-
Dividends to equity holders of the Company	-	-	-	(479)	(479)
Transfer to non-covered business²	(27)	-	-	27	-
Other reserve movements including pension deficit³	(35)	-	(29)	(45)	(109)


Embedded value at 31 December 2013	7,942	512	933	199	9,586


Value of in-force business	4,693	197	699	-	5,589
Shareholder net worth	3,249	315	234	199	3,997



Embedded value per share (p)⁴					162


1. UK intra-group distributions reflect a £625m dividend paid from Society to Group, and dividends of £10m (2012: £40m) paid to Society from subsidiaries (primarily Nationwide Life). Dividends of €16m (2012: €15m) from LGN are also paid to Society. Dividends of $69m (2012: $63m) from LGA and €2m (2012: €3m) from LGF were paid to the group.
2. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
3. The other reserve movements reflect the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.
4. The number of shares in issue at 31 December 2013 was 5,917,066,636 (31 December 2012: 5,912,782,826).

Further analysis of the LGAS and LGR covered business can be found in Note 5.01.

European Embedded Value Page 74

Group embedded value - summary (continued)
	Covered business
		LGAS		Non-
	UK	overseas		covered
	business	business	LGA	business	Total
For the year ended 31 December 2012 ¹	£m	£m	£m	£m	£m


At 1 January
Value of in-force business (VIF)	4,247	217	913	-	5,377
Shareholder net worth (SNW)	3,218	252	149	(388)	3,231


At 1 January 2012	7,465	469	1,062	(388)	8,608
Exchange rate movements	-	(12)	(50)	40	(22)

Operating profit after tax for the year	653	19	77	71	820
Non-operating loss for the year	(23)	(20)	(18)	(26)	(87)


Profit/(loss) for the year	630	(1)	59	45	733
Intra-group distributions²	(473)	(14)	(40)	527	-
Dividends to equity holders of the Company	-	-	-	(394)	(394)
Transfer to non-covered business³	(22)	-	-	22	-
Other reserve movements including pension deficit⁴	(20)	-	(57)	52	(25)


Embedded value at 31 December 2012	7,580	442	974	(96)	8,900


Value of in-force business	4,402	146	735	-	5,283
Shareholder net worth	3,178	296	239	(96)	3,617



Embedded value per share (p)⁵					151


1. This note has been restated to reflect an amendment to IAS 19 'Employee Benefits'. Details of this restatement are outlined in Note 5.09.
2. UK intra-group distributions reflect a £525m dividend paid from Society to Group and dividends of £40m paid to Society from subsidiaries (primarily Nationwide Life). Dividends of €15m from LGN are also paid to Society. Dividends of $63m from LGA and €3m from LGF were paid to the group.
3. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
4. The other reserve movements reflect the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.
5. The number of shares in issue at 31 December 2012 was 5,912,782,826.

Further analysis of the LGAS and LGR covered business can be found in Note 5.01.

European Embedded Value Page 75


5.01 LGAS and LGR embedded value reconciliation

	Shareholder net worth				Total
	Free	Required		Value of	embedded
	surplus	capital	Total	in-force	value
For the year ended 31 December 2013	£m	£m	£m	£m	£m


At 1 January 2013¹	1,259	2,215	3,474	4,548	8,022
Exchange movement	3	3	6	3	9

Operating profit/(loss) after tax - UK business:
- New business contribution²	(324)	284	(40)	484	444
- Expected return on VIF	-	-	-	266	266
- Expected transfer from non profit VIF to SNW³	815	(181)	634	(634)	-
- With-profits transfer	54	-	54	(54)	-
- Expected return on SNW	40	76	116	-	116
Generation of embedded value	585	179	764	62	826
- Experience variances	5	(9)	(4)	14	10
- Operating assumption changes	(24)	2	(22)	21	(1)
- Development costs	(31)	-	(31)	-	(31)
Variances	(50)	(7)	(57)	35	(22)
Operating profit after tax - LGAS overseas	7	1	8	8	16


Operating profit after tax	542	173	715	105	820
Non-operating profit/(loss) after tax - UK business:
- Economic variances	109	(8)	101	80	181
- Effect of tax rate changes and other taxation impacts⁴	-	-	-	41	41
Non-operating profit after tax - LGAS overseas	20	-	20	40	60
Non-operating profit/(loss) after tax for the year	129	(8)	121	161	282


Profit for the year	671	165	836	266	1,102
Intra-group distributions⁵	(617)	-	(617)	-	(617)
Transfer to non-covered business⁶	(27)	-	(27)	-	(27)
Other reserve movements including pension deficit⁷	(115)	7	(108)	73	(35)


Embedded value at 31 December 2013	1,174	2,390	3,564	4,890	8,454


1. Opening balances at 1 January 2013 include LGF and LGN.
2. The UK free surplus reduction of £324m to finance new business includes £40m new business strain and £284m additional required capital.
3. The increase in UK free surplus of £815m from the expected transfer from the in-force non profit business includes £634m of operational cash generation and a £181m reduction in required capital.
4. Reflects the implementation of the UK planned future reductions in corporation tax to 20% on 1 April 2015.
5. UK intra-group dividends reflect a £625m dividend paid from Society to Group and dividends of £10m paid to Society from subsidiaries (primarily Nationwide Life). Dividends of €16m from LGN are also paid to Society.
6. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
7. The other reserve movements reflects the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.

The value of in-force business of £4,890m is comprised of £4,454m of non profit business and £436m of with-profits business.

European Embedded Value Page 76

5.01 LGAS and LGR embedded value reconciliation (continued)

	Shareholder net worth				Total
	Free	Required		Value of	embedded
	surplus	capital	Total	in-force	value
For the year ended 31 December 2012	£m	£m	£m	£m	£m


At 1 January 2012	1,492	1,978	3,470	4,464	7,934
Exchange movement	(3)	(3)	(6)	(6)	(12)

Operating profit/(loss) after tax - UK business:
- New business contribution¹	(275)	182	(93)	386	293
- Expected return on VIF	-	-	-	270	270
- Expected transfer from non profit VIF to SNW²	762	(171)	591	(591)	-
- With-profits transfer	52	-	52	(52)	-
- Expected return on SNW	53	63	116	-	116
Generation of embedded value	592	74	666	13	679
- Experience variances	(26)	18	(8)	20	12
- Operating assumption changes	13	1	14	(23)	(9)
- Development costs	(29)	-	(29)	-	(29)
Variances	(42)	19	(23)	(3)	(26)
Operating profit after tax - LGAS overseas	11	10	21	(2)	19


Operating profit after tax	561	103	664	8	672
Non-operating profit/(loss) after tax - UK business:
- Economic variances	(182)	107	(75)	(37)	(112)
- Effect of tax rate changes and other taxation impacts³	-	-	-	89	89
Non-operating profit after tax - LGAS overseas	24	19	43	(63)	(20)
Non-operating (loss)/profit after tax	(158)	126	(32)	(11)	(43)


Profit for the year	403	229	632	(3)	629
Intra-group distributions⁴	(487)	-	(487)	-	(487)
Transfer to non-covered business⁵	(22)	-	(22)	-	(22)
Other reserve movements including pension deficit⁶	(124)	11	(113)	93	(20)


Embedded value at 31 December 2012	1,259	2,215	3,474	4,548	8,022


1. The UK free surplus reduction of £275m to finance new business includes £93m new business strain and £182m additional required capital.
2. The increase in UK free surplus of £762m from the expected transfer from the in-force non profit business includes £591m of operational cash generation and a £171m reduction in required capital.
3. Reflects the implementation of the UK planned future reductions in corporation tax to 21% on 1 April 2014.
4. UK intra-group dividends reflect a £525m dividend paid from Society to Group and dividends of £40m paid to Society from subsidiaries (primarily Nationwide Life). Dividends of €15m from LGN were also paid to Society.
5. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
6. The other reserve movements reflects the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.

The value of in-force business of £4,548m is comprised of £4,154m of non profit business and £394m of with-profits business.

European Embedded Value Page 77

5.02 Analysis of shareholders' equity

			LGC
	LGAS and		and group
	LGR	LGIM	expenses	LGA	Total
As at 31 December 2013	£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity¹	783	421	3,622	816	5,642
Additional retained profit/(loss) on an EEV basis	4,830	-	(1,003)	117	3,944


Shareholders' equity on an EEV basis	5,613	421	2,619	933	9,586


Comprising:
Business reported on an IFRS basis	408	421	(630)	-	199

Business reported on an EEV basis:
Shareholder net worth
- Free surplus²	67		1,107	192	1,366
- Required capital to cover solvency margin	248		2,142	42	2,432
Value of in-force
- Value of in-force business³	5,398			711	6,109
- Cost of capital	(508)			(12)	(520)


1. Shareholders' equity supporting the UK non profit LGAS and LGR businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within the LGC and group expenses segment.
2. Free surplus is the value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date.
3. Value of in-force business includes a deduction for the time value of options and guarantees of £23m (2012: £30m).


			LGC
	LGAS and		and group
	LGR	LGIM	expenses	LGA	Total
As at 31 December 2012	£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity¹	685	423	3,414	919	5,441
Additional retained profit/(loss) on an EEV basis	4,484	-	(1,080)	55	3,459


Shareholders' equity on an EEV basis	5,169	423	2,334	974	8,900


Comprising:
Business reported on an IFRS basis	325	423	(844)	-	(96)

Business reported on an EEV basis:
Shareholder net worth
- Free surplus²	57		1,202	206	1,465
- Required capital to cover solvency margin	239		1,976	33	2,248
Value of in-force
- Value of in-force business³	5,054			745	5,799
- Cost of capital	(506)			(10)	(516)


1. Shareholders' equity supporting the UK non profit LGAS and LGR businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within the LGC and group expenses segment.
2. Free surplus is the value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date.
3. Value of in-force business includes a deduction for the time value of options and guarantees of £30m.

Further analysis of shareholders' equity is included in Note 5.03.

European Embedded Value Page 78

5.03 Segmental analysis of shareholders' equity

	Covered	Other		Covered	Other
	business	business		business	business
	EEV	IFRS		EEV	IFRS
	basis	basis	Total	basis	basis	Total
	2013	2013	2013	2012	2012	2012
	£m	£m	£m	£m	£m	£m


LGAS
- LGAS UK Protection and Savings	2,331	-	2,331	2,197	-	2,197
- LGAS overseas business	512	-	512	442	-	442
- General insurance and other	-	408	408	-	325	325


Total LGAS	2,843	408	3,251	2,639	325	2,964



LGR	2,362	-	2,362	2,205	-	2,205



LGIM	-	421	421	-	423	423




LGC and group expenses	3,249	(630)	2,619	3,178	(844)	2,334



LGA	933	-	933	974	-	974



Total	9,387	199	9,586	8,996	(96)	8,900

5.04 Reconciliation of shareholder net worth

	UK		UK
	covered		covered
	business	Total	business	Total
	2013	2013	2012	2012
	£m	£m	£m	£m


SNW of long term operations (IFRS basis)	4,291	5,443	4,294	5,537
Other assets/(liabilities) (IFRS basis)	-	199	-	(96)


Shareholders' equity on the IFRS basis	4,291	5,642	4,294	5,441
Purchased interest in long term business	(52)	(59)	(63)	(64)
Deferred acquisition costs/deferred income liabilities	(223)	(1,129)	(235)	(1,093)
Deferred tax¹	(162)	232	(253)	74
Other²	(605)	(689)	(565)	(741)


Shareholder net worth on the EEV basis	3,249	3,997	3,178	3,617


1. Deferred tax represents all tax which is expected to be paid under current legislation. 2. Other primarily relates to the different treatment of annuities and LGA Triple X securitisation on an EEV and IFRS basis.

European Embedded Value Page 79

5.05 Profit/(loss) for the year

				LGC
		LGAS and		and group
		LGR	LGIM	expenses	LGA	Total
For the year ended 31 December 2013	Note	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new business after cost of capital	5.06	544			107	651
Contribution from in-force business:
- expected return¹		358			68	426
- experience variances ²		52			(23)	29
- operating assumption changes³		(9)			(52)	(61)
Development costs		(40)			-	(40)
Contribution from shareholder net worth		5		113	7	125


Operating profit on covered business		910	-	113	107	1,130

Business reported on an IFRS basis^4,5,6		47	270	(106)	-	211


Total operating profit		957	270	7	107	1,341
Economic variances⁷		250	(6)	8	(37)	215
Gains on non-controlling interests		-	-	3	-	3


Profit before tax		1,207	264	18	70	1,559
Tax (expense)/credit on profit from ordinary activities		(251)	(57)	21	(24)	(311)
Effect of tax rate changes and other taxation impacts⁸		41	-	-	-	41


Profit for the year		997	207	39	46	1,289



Operating profit attributable to:
LGAS		360
LGR		597



						p


Earnings per share
Based on profit attributable to equity holders of the Company						21.91

Diluted earnings per share
Based on profit attributable to equity holders of the Company						21.61


1. The expected return on in-force is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK LGAS and LGR business was £4,402m in 2013 (2012: £4,247m). This is adjusted for the effects of opening model changes of £27m (2012: £86m) to give an adjusted opening base VIF of £4,429m (2012: £4,333m). This is then multiplied by the opening risk discount rate of 6.0% (2012: 6.2%) and the result grossed up at the notional attributed tax rate of 20% (2012: 21%) to give a return of £331m (2012: £340m). The same approach has been applied for the LGAS overseas businesses.
2. LGAS and LGR variance primarily reflects UK cost of capital unwind, bulk purchase annuity data loading, fewer retail protection lapses and better longevity experience. LGA experience variance primarily relates to adverse persistency experience and mortality experience within term assurance and universal life products respectively.
3. LGAS and LGR assumption changes primarily reflects mortality assumption changes in LGR. LGA assumption changes primarily relate to improved modelling of term business in the period after the end of the guaranteed level premium period.
4. LGAS and LGR non-covered business primarily reflects GI operating profit and other of £47m (2012: £10m).
5. LGIM operating profit includes Retail Investments and excludes £34m (2012: £27m) of profits arising from the provision of investment management services at market referenced rates to the covered business on a look through basis and as a consequence are included in the LGAS and LGR covered business on an EEV basis.
6. LGC and group expenses non-covered business primarily reflects the shareholder interest expense and Investment projects (predominantly Economic Capital Programme and other strategic investments).
7. The LGAS and LGR positive variance has resulted from a number of factors including equity market outperformance, favourable default experience, actions to improve the yield on annuity assets and a lower risk margin offset by a higher risk free rate. The higher risk free rate has contributed to a negative variance in LGA.
8. Primarily reflects the implementation of the UK planned future reductions in corporation tax to 20% on 1 April 2015.

European Embedded Value Page 80

5.05 Profit/(loss) for the year (continued)

				LGC
		LGAS and		and group
		LGR	LGIM	expenses	LGA	Total
For the year ended 31 December 2012¹	Note	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new business after cost of capital	5.06	377			98	475
Contribution from in-force business:
- expected return²		372			76	448
- experience variances ³		12			(59)	(47)
- operating assumption changes⁴		(11)			(18)	(29)
Development costs		(37)			-	(37)
Contribution from shareholder net worth		6		134	5	145


Operating profit on covered business		719	-	134	102	955

Business reported on an IFRS basis^5,6,7,8		10	245	(165)	(4)	86


Total operating profit/(loss)		729	245	(31)	98	1,041
Economic variances⁹		(157)	(5)	(41)	8	(195)
Losses attributable to non-controlling interests		-	-	(12)	-	(12)


Profit/(loss) before tax		572	240	(84)	106	834
Tax (expense)/credit on profit from ordinary activities		(121)	(46)	27	(28)	(168)
Effect of tax rate changes and other taxation impacts¹⁰		89	-	-	(22)	67


Profit/(loss) for the year		540	194	(57)	56	733



Operating profit attributable to:
LGAS		291
LGR		438



						p¹


Earnings per share
Based on profit attributable to equity holders of the Company						12.73

Diluted earnings per share
Based on profit attributable to equity holders of the Company						12.52


1. The Profit for the period has been restated to reflect an amendment to IAS 19 'Employee Benefits'. Details of this restatement are outlined in Note 5.09.
2. The expected return on in-force is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK LGAS and LGR business was £4,247m. This is adjusted for the effects of opening model changes of £86m to give an adjusted opening base VIF of £4,333m. This is then multiplied by the opening risk discount rate of 6.2% and the result grossed up at the notional attributed tax rate of 21% to give a return of £340m. The same approach has been applied for the LGAS overseas businesses.
3. LGAS and LGR primarily reflects UK cost of capital unwind and bulk purchase annuity data loading, partially offset by model changes and negative persistency experience as a result of higher than expected lapses in unit linked bonds. LGA modelling and other experience variances mostly relate to additional reserving associated with the introduction of AG38 regulatory requirements.
4. Operating assumption changes in LGAS and LGR have been driven by negative mortality and demographic assumption changes in the annuity business and higher investment expense assumptions, largely offset by positive impacts reflecting changes in UK tax legislation. LGA operating assumption changes mostly relate to higher mortality assumptions on unit linked secondary guarantee business.
5. LGAS and LGR non-covered business primarily reflects GI operating profit and other of £10m.
6. LGIM operating profit excludes £27m of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the LGAS, LGR and L&G Capital and group expenses covered business on an EEV basis.
7. LGA non-covered business includes business unit costs of £4m allocated to the LGA segment.
8. LGC and group expenses non-covered business primarily reflects the shareholder interest expense and Investment projects (predominantly Economic Capital Programme and other strategic investments).
9. LGAS and LGR primarily reflect the impact of changes in reinvestment and disinvestment rates, higher costs of capital on increasing reserves mainly due to narrowing credit spreads, and other consequential impacts within lower yielding environments, partially offset by a lower risk discount rate.
10. Primarily reflects the implementation of the UK planned future reductions in corporation tax to 21% on 1 April 2014.

European Embedded Value Page 81

5.06 New business by product¹
		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the year ended 31 December 2013	£m	£m		£m	£m	£m	%


UK Protection	218	1,141	5.2	-	1,141	101	8.9
Overseas business	30	229	7.6	371	600	5	0.8
UK Savings	724	2,516	3.5	2,495	5,011	2	-

Total LGAS	972	3,886	4.0	2,866	6,752	108	1.6


LGR⁴	n/a	939	n/a	4,089	5,028	436	8.7


LGA	99	926	9.4	-	926	107	11.6


Total new business	1,071	5,751	5.4	6,955	12,706	651	5.1
Cost of capital						72


Contribution from new business before cost of capital						723




		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the year ended 31 December 2012	£m	£m		£m	£m	£m	%


UK Protection	221	1,176	5.3	-	1,176	139	11.8
Overseas business	51	409	8.0	315	724	5	0.7
UK Savings	577	2,117	3.7	3,002	5,119	27	0.5


Total LGAS	849	3,702	4.4	3,317	7,019	171	2.4


LGR⁴	n/a	-	n/a	2,339	2,339	206	8.8


LGA	90	830	9.2	-	830	98	11.8


Total new business	939	4,532	4.8	5,656	10,188	475	4.7
Cost of capital						60


Contribution from new business before cost of capital						535


1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.
4. LGR includes present value of annual premiums for longevity insurance on a net of reinsurance basis to enable a more representative margin figure. The gross of reinsurance longevity insurance annual premium is £270m (2012 : £nil). The LGR PVNBP contribution from new business and margin are also inclusive of longevity insurance.

European Embedded Value Page 82

5.07 Sensitivities
In accordance with the guidance issued by the European Insurance CFO Forum in October 2005 the table below shows the effect of alternative assumptions on the long term embedded value and new business contribution.

Effect on embedded value as at 31 December 2013

		1%	1%			1%
		lower	higher	1%	1%	higher
	As	risk	risk	lower	higher	equity/
	pub-	discount	discount	interest	interest	property
	lished	rate	rate	rate	rate	yields
	£m	£m	£m	£m	£m	£m


LGAS and LGR¹	8,454	614	(525)	295	(241)	128
LGA	933	115	(96)	38	(37)	-


Total covered business	9,387	729	(621)	333	(278)	128




					5%	5%
		10%	10%		lower	lower
		lower	lower	10%	mortality	mortality
	As	equity/	main-	lower	(UK	(other
	pub-	property	tenance	lapse	annu-	busi-
	lished	values	expenses	rates	ities)	ness)
	£m	£m	£m	£m	£m	£m


LGAS and LGR¹	8,454	(261)	115	85	(268)	73
LGA	933	-	12	4	n/a	129


Total covered business	9,387	(261)	127	89	(268)	202



Effect on new business contribution for the year

		1%	1%			1%
		lower	higher	1%	1%	higher
	As	risk	risk	lower	higher	equity/
	pub-	discount	discount	interest	interest	property
	lished	rate	rate	rate	rate	yields
	£m	£m	£m	£m	£m	£m


LGAS and LGR¹	544	76	(63)	-	(5)	15
LGA	107	14	(12)	1	(1)	-


Total covered business	651	90	(75)	1	(6)	15




					5%	5%
		10%	10%		lower	lower
		lower	lower	10%	mortality	mortality
	As	equity/	main-	lower	(UK	(other
	pub-	property	tenance	lapse	annu-	busi-
	lished	values	expenses	rates	ities)	ness)
	£m	£m	£m	£m	£m	£m


LGAS and LGR¹	544	(5)	23	16	(23)	10
LGA	107	-	2	2	n/a	17


Total covered business	651	(5)	25	18	(23)	27


1. Includes LGC.

Opposite sensitivities are broadly symmetrical.

Sensitivity to changes in assumptions may not be linear, and as such, they should not be extrapolated to changes of a much larger order. A 2% higher risk discount rate would result in a £913m negative impact on UK embedded value and a £108m negative impact on UK new business contribution for the year.

European Embedded Value Page 83

5.08 Assumptions

UK assumptions

The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to the portfolio yield on the relevant backing assets held at market value at the end of the reporting period. The calculated return takes account of derivatives and other credit instruments in the investment portfolio. Indicative yields on the portfolio, excluding annuities within LGR, but after allowance for long term default risk, are shown below.

For LGR, separate returns are calculated for new and existing business. Indicative combined yields, after allowance for long term default risk and the following additional assumptions, are also shown below. These additional assumptions are:

i. Where cash balances and debt securities are held at the reporting date in excess of, or below strategic investment guidelines, then it is assumed that these cash balances or debt securities are immediately invested or disinvested at current yields.

ii. 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 0.70% p.a. (0.70% p.a. at 31 December 2012) greater than the swap rate at that time (i.e. the long term credit rate).

iii. Where reinvestment or disinvestment is necessary to rebalance the asset portfolio in line with projected outgo, this is also assumed to take place at the long term credit rate above 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 credit rating, outstanding term of the securities, and increase in the expectation of credit defaults over the economic cycle. The allowance for corporate securities expressed as a level rate deduction from the expected returns for annuities was 27bps at 31 December 2013 (26bps at 31 December 2012).

UK covered business

i. Assets are valued at market value.

ii. Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders' portion of the with-profits business in accordance with established practice. The proportion of profits derived from with-profits business allocated to shareholders amounts to almost 10% throughout the projection.

iii. The value of in-force business reflects the cost, including administration expenses, of providing for benefit enhancement or compensation in relation to certain products.

iv. 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 normally reviewed annually.

An allowance is made for future mortality improvement, commencing 1 January 2010 as per CMIB's mortality improvement model (CMI 2012) with the following parameters:

Males: Long Term Rate of 1.5% p.a. for future experience and 2.0% p.a. for statutory reserving, up to age 85 tapering to 0% at 120;

Females: Long Term Rate of 1.0% p.a. for future experience and 1.5% p.a. for statutory reserving, up to age 85 tapering to 0% at 120.

Future improvements are generally assumed to converge to the long term rate in 2026.

On this basis, the best estimate of the expectation of life for a new 65 year old Male CPA annuitant is 24.3 years (31 December 2012: 24.1 years). The expectation of life on the regulatory reserving basis is 25.8 years (31 December 2012: 25.7 years).

v. Development costs relate to investment in strategic systems and development capability that are charged to the covered business. Projects charged to the non-covered business are included within Group Investment projects in LGC and group expenses.

Overseas covered business

vi. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses.

European Embedded Value Page 84

5.08 Assumptions (continued)

Economic assumptions


	As at	As at	As at
	2013	2012	2011
	% p.a.	% p.a.	% p.a.
Risk margin	3.4	3.7	3.7
Risk free rate¹
- UK	3.4	2.3	2.5
- Europe	2.2	1.7	2.6
- US	3.1	1.8	1.9
Risk discount rate (net of tax)
- UK	6.8	6.0	6.2
- Europe	5.6	5.4	6.3
- US	6.5	5.5	5.6
Reinvestment rate (US)	5.8	4.3	4.2
Other UK business assumptions
Equity risk premium	3.3	3.3	3.3
Property risk premium	2.0	2.0	2.0

Investment return (excluding annuities in LGPL)
- Gilts:
- Fixed interest	2.7 - 3.0	1.9 - 2.3	1.8 - 2.5
- RPI linked	3.6	2.7	2.6
- Non gilts:
- Fixed interest	2.2 - 3.3	1.9 - 2.9	3.0 - 4.6
- Equities	6.7	5.6	5.8
- Property	5.4	4.3	4.5

Long-term rate of return on non profit annuities in LGPL	4.6	4.3	5.0

Inflation
- Expenses/earnings	4.1	3.4	3.5
- Indexation	3.6	2.9	3.0

1. The risk free rate is the gross redemption yield on the 15 year gilt index. The Europe risk free rate is the 10 year ECB AAA-rated euro area central government bond par yield. The LGA risk free rate is the 10 year US Treasury effective yield.

Tax

vii. The profits on the covered business, except for the profits on the Society shareholder capital held outside the long term fund, are calculated on an after tax basis and are grossed up by the notional attributed tax rate for presentation in the income statement. For the UK, the after tax basis assumes the annualised current tax rate of 23.25% and the subsequent planned future reductions in corporation tax to 21% from 1 April 2014, and 20% from 1 April 2015. The tax rate used for grossing up is the long term corporate tax rate in the territory concerned, which for the UK is 20% (31 December 2012: 21%) taking into account the expected further rate reductions to 20% by 1 April 2015. The profits on the Society shareholder capital held outside the long term fund are calculated before tax and therefore tax is calculated on an actual basis.

US, Netherlands and France covered business profits are also grossed up using the long term corporate tax rates of the respective territories i.e. US is 35% (31 December 2012: 35%), France is 34.43% (31 December 2012: 34.3%) and Netherlands is 25% (31 December 2012: 25%).

European Embedded Value Page 85

5.08 Assumptions (continued)

Stochastic calculations

viii. 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.

A single model has been used for UK and international business, with different economic assumptions for each territory reflecting the significant asset classes in each territory.

Government nominal interest rates are generated using a LIBOR 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.

The significant asset classes are:

- 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.

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

ix. 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 would result in a 4.4% risk margin).

· 1% variation in interest rate environment - a one percentage point increased/decreased parallel shift in the risk free curve with consequential impacts on fixed asset market values, investment return assumptions, risk discount rate, including consequential changes to valuation bases.

· 1% higher equity/property yields - a one percentage point increase in the assumed equity/property investment returns, excluding any consequential changes, for example, to risk discount rates or valuation bases, has been assumed in each case (for example a 1% increase in equity returns would increase assumed total equity returns from 6.7% to 7.7%).

· 10% lower equity/property market values - an immediate 10% reduction in equity and property asset values.

· 10% lower maintenance expenses, excluding any consequential changes, for example, to valuation expense bases or potentially reviewable policy fees (for example a 10% decrease on a base assumption of £10 per annum would result in a £9 per annum expense assumption).

· 10% lower assumed persistency experience rates, excluding any consequential changes to valuation bases, incorporating a 10% decrease in lapse, surrender and premium cessation assumptions (for example a 10% decrease on a base assumption of 7% would result in a 6.3% lapse assumption).

· 5% lower mortality and morbidity rates, excluding any consequential changes to valuation bases but including assumed product repricing action where appropriate (for example if base experienced mortality is 90% of a standard mortality table then, for this sensitivity, the assumption is set to 85.5% of the standard table).

The sensitivities for covered business allow for any material changes to the cost of financial options and guarantees but do not allow for any changes to reserving bases or capital requirements within the sensitivity calculation, unless indicated otherwise above.

European Embedded Value Page 86

5.09 Methodology

Basis of preparation

The supplementary financial statements have been prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 by the European Insurance CFO Forum.

The supplementary financial statements have been reviewed by PricewaterhouseCoopers LLP and prepared with assistance from our consulting actuary Milliman in the USA.

Changes to accounting policy - IAS 19 'Employee Benefits'

During 2013 the Group has changed its accounting policy on the recognition and measurement of defined benefit pension expense and termination benefits following the publication by the IASB in June 2011 of an amendment to IAS 19 'Employee Benefits'. This is compulsory for years beginning on or after 1 January 2013. The impact of the amendment is to reduce profit for the year by £2m. This reflects the non-covered business component, since the with profit element is transferred to the unallocated divisible surplus and the non profit element is included within covered business (Other reserve movements), with an equivalent increase in Other Comprehensive Income. Total Comprehensive Income therefore remains unchanged.

The impact of this change upon the 2012 annual profit for the year and group embedded value - summary are shown below. As the impact of the change is shown within investment variances there is no impact upon group operating profit.

							2012
							£m


Profit for the year as previously reported							734
Economic variances
IAS 19 'Employee Benefits' amendment							(1)


Revised profit for the year (after tax)							733



Actuarial gain on defined benefit pension schemes							4
Actuarial gain on defined benefit pension schemes transferred to unallocated divisible surplus							(3)
Previously reported income							(40)
Total comprehensive income for the year							694

Earnings per share							p
Based on profit attributable to equity holders of the Company as previously reported							12.75
IAS 19 'Employee Benefits' amendment							-
Revised earnings per share based on profit attributable to equity holders of the Company							12.75
Diluted earnings per share
Based on profit attributable to equity holders of the Company as previously reported							12.54
IAS 19 'Employee Benefits' amendment							-
Revised diluted earnings per share based on profit attributable to equity holders of the Company							12.54

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. The UK covered business also includes non-insured self invested personal pension (SIPP) business.

The managed pension funds business has been excluded from covered business and is reported on an IFRS basis.

All other businesses are accounted for on the IFRS basis adopted in the primary financial statements.

There is no distinction made between insurance and investment contracts in our covered business as there is under IFRS.

European Embedded Value Page 87

5.09 Methodology (continued)

Description of methodology

The objective of EEV is to provide shareholders with realistic information on the financial position and current performance of the Group.

The methodology requires assets of an insurance company, as reported in the primary financial statements, to be attributed between those supporting the covered business and the remainder. The method accounts for assets in the covered business on an EEV basis and the remainder of the Group's assets on the IFRS basis adopted in the primary financial statements.

The EEV methodology recognises profit from the covered business as the total of:

i. cash transfers during the relevant period from the covered business to the remainder of the Group's assets; and

ii. the movement in the present value of future distributable profits to shareholders arising from the covered business over the relevant reporting period.

Embedded value

Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the shareholders' equity of other businesses, 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, within covered business (both within the long term fund and held outside the long term fund but used to support long term business), which are regarded either as required capital or which represent free surplus.

The VIF is the present value of future shareholder profits 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 (FOGs).

Service companies

All services relating to the UK covered business are charged on a cost recovery basis, with the exception of investment management services provided to Legal & General Pensions Limited (LGPL) and to Legal & General Assurance Society Limited (Society). Profits arising on the provision of these services are valued on a look through basis.

As the EEV methodology incorporates the future capitalised cost of these internal investment management services, the equivalent IFRS profits have been removed from the Investment management segment and are instead included in the results of the LGAS and LGR segments on an EEV basis.

The capitalised value of future profits emerging from internal investment management services are therefore included in the embedded value and new business contribution calculations for the LGAS and LGR segments. However, the historical profits which have emerged continue to be reported in the shareholders' equity of the LGIM segment on an IFRS basis. Since the look through into service companies includes only future profits and losses, current intra-group profits or losses must be eliminated from the closing embedded value and in order to reconcile the profits arising in the financial period within each segment with the net assets on the opening and closing balance sheet, a transfer of IFRS profits for the period from the UK SNW is deemed to occur.

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, recurrent single premium contracts and payments in relation to existing longevity insurance. Department of Work and Pensions rebates have not been treated as recurring and are included in single premium new business when received. Longevity insurance product comprises the exchange of a stream of fixed leg payments for a stream of floating payments, with the value of the income stream being the difference between the two legs. New business annual premiums have been excluded for longevity insurance due to the unpredictable deal flow from this type of business.

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 discounted value of longevity insurance regular premiums is calculated on a net of reinsurance basis to enable a more representative margin figure.

The new business margin is defined as new business contribution at the end of the reporting period divided by the PVNBP. The premium volumes and projection assumptions used to calculate the PVNBP are the same as those used to calculate new business contribution.

Intra-group reinsurance arrangements are in place between the US and UK businesses, and it is expected that these arrangements will be periodically extended to cover recent new business. US new business premiums and contribution reflect the groupwide expected impact of US directly-written business.

European Embedded Value Page 88

5.09 Methodology (continued)

Projection assumptions

Cash flow projections are determined using best estimate assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on conditions at the end of the financial period. 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 by LGA, 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, morbidity, persistency and expenses reflect recent operating experience and are normally 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 cash flow projections therefore include the full cost of servicing this business.

Tax

The projections take into account all tax which is expected to be paid, based on best estimate assumptions, applying current legislation and practice together with known future changes.

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 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 the UK LGAS and LGR businesses is provided by assets backing the with-profits business or by the SNW. The SNW comprises all shareholders' capital within Society, including those funds retained within the long term fund and the excess assets in LGPL (collectively Society shareholder capital).

Society shareholder capital is either required to cover EU solvency margin or is free surplus as its distribution to shareholders is not restricted.

For UK with-profits business, the required capital is covered by the surplus within the with-profits part of the fund and no effect is attributed to shareholders except for the burn-through cost, which is described later. This treatment is consistent with the Principles and Practices of Financial Management for this part of the 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, in aggregate, in excess of internal capital targets assessed in conjunction with the Individual Capital Assessment (ICA) and the with-profits support account.

The initial strains relating to new non profit business, together with the related EU solvency margin, are supported by releases from existing non profit business and the Society shareholder capital. As a consequence, the writing of new business defers the release of capital to free surplus. The cost of holding required capital is defined as the difference between the value of the required capital and the present value of future releases of that capital. For new business, the cost of capital is taken as the difference in the value of that capital assuming it was available for release immediately and the present value of the future releases of that capital. As the investment return, net of tax, on that capital is less than the risk discount rate, there is a resulting cost of capital which is reflected in the value of new business.

For LGA, 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 LGN, required capital has been set at 100% of EU minimum solvency margin for all products without FOGs. For those products with FOGs, capital of between 100% and 350% of the EU minimum solvency margin has been used. At total level a check is made to ensure the total requirement meets the 160% Solvency I (both EEV and NBVA) from the capital policy.The level of capital has been determined using risk based capital techniques.

For LGF, 100% of EU minimum solvency margin has been used for EV modelling purposes for all products both with and without FOGs. The level of capital has been determined using risk based capital techniques.

The contribution from new business for our International businesses reflects an appropriate allowance for the cost of holding the required capital.

European Embedded Value Page 89

5.09 Methodology (continued)

Financial options and guarantees

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 part of the fund and their time value is recognised within the with-profits burn-through cost described below. Additional financial options for non profit business exist only for a small amount of deferred annuity business where guaranteed early retirement and cash commutation terms apply when the policyholders choose their actual retirement date.

Further financial guarantees exist for non profit business, in relation to index-linked annuities where capped or collared restrictions apply. Due to the nature of these restrictions and the manner in which they vary depending on the prevailing inflation conditions, they are also treated as FOGs and a time value cost recognised accordingly.

The time value of FOGs has been calculated stochastically using a large number of real world economic scenarios derived from assumptions consistent with the deterministic EEV assumptions and allowing for appropriate management actions where applicable. The management action primarily relates to the setting of bonus rates. Future regular and terminal bonuses on participating business within the projections are set in a manner consistent with expected future returns available on assets deemed to back the policies within the stochastic scenarios.

In recognising the residual value of any projected surplus assets within the with-profits part of the fund in the deterministic projection, it is assumed that terminal bonuses are increased to exhaust all of the assets in the part of the fund over the future lifetime of the in-force with-profits policies. However, under stochastic modelling, there may be some extreme economic scenarios when the total projected assets within the with-profits part of the fund are insufficient to pay all projected policyholder claims and associated costs. The average additional shareholder cost arising from this shortfall has been included in the time value cost of financial options and guarantees and is referred to as the with-profits burn-through cost.

Economic scenarios have been used to assess the time value of the financial guarantees for non profit business by using the inflation rate generated in each scenario. The inflation rate used to project index-linked annuities will be constrained in certain real world scenarios, for example, where negative inflation occurs but the annuity payments do not reduce below pre-existing levels. The time value cost of FOGs allows for the projected average cost of these constrained payments for the index-linked annuities. It also allows for the small additional cost of the guaranteed early retirement and cash commutation terms for the minority of deferred annuity business where such guarantees have been written.

LGA FOGs relate to guaranteed minimum crediting rates and surrender values on a range of contracts, as well as impacts on no-lapse guarantees (NLG). 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 3% and 4%. The assets backing these contracts are invested in US Dollar denominated fixed interest securities.

LGN separately provides for 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. This guarantee applies on a monthly basis. Certain other 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.

For LGF, FOGs which have been separately provided for 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, although this has never been required. In general, the guaranteed annual bonus rates are between 0% and 4.5%.

Risk free rate

The risk free rate is set to reflect both the pattern of the emerging profits under EEV and the relevant duration of the liabilities where backing assets reflect this assumption (e.g. equity returns). For the UK, it is set by reference to the gross redemption yield on the 15 year gilt index. For LGA, the risk free rate is the 10 year US Treasury effective yield, while the 10 year ECB AAA-rated Euro area central government bond par yield is used for LGN and LGF.

European Embedded Value Page 90

5.09 Methodology (continued)

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 FOGs.

The risk margin has been determined based on an assessment of the Group's weighted average cost of capital (WACC). 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.

The WACC is derived from the Group's cost of equity and debt, and the proportion of equity to debt in the Group's capital structure measured using market values. Each of these three parameters is forward looking, although informed by historic information and appropriate judgements where necessary. The cost of equity is calculated as the risk free rate plus the equity risk premium for the chosen index multiplied by the Company's beta. Forward-looking or adjusted betas make allowance for the observed tendency for betas to revert to 1 and therefore a weighted average of the historic beta and 1 tends to be a better estimate of the Company's beta for the future period. We have computed the WACC using an arithmetical average of forward-looking betas against the FTSE 100 index.

The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and subordinated long term debt. All debt interest attracts tax relief at a rate of 20.1%.

Whilst the WACC approach is a relatively simple and transparent calculation to apply, subjectivity remains within a number of the assumptions. Management believes that the chosen margin, together with the levels of required capital, the inherent strength of the Group's regulatory reserves and the explicit deduction for the cost of options and guarantees, is appropriate to reflect the risks within the covered business.

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.

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.

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 relate to investment in strategic systems and development capability.

The contribution from shareholder net worth comprises the increase in embedded value based on assumptions at the start of the year in respect of the expected investment return on the Society shareholder capital.

Further profit contributions arise from investment return variances and the effect of economic assumption changes.

Economic variances represent:

i. the effect of actual investment performance and changes to investment policy on SNW and VIF business from that assumed at the beginning of the period; and

ii. the effect of changes in economic variables on SNW and VIF business from that assumed at the beginning of the period, which are beyond the control of management, including associated changes to valuation bases to the extent that they are reflected in revised assumptions.

This information is provided by RNS

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