L&G Full Year Results 2019 Part 2

RNS Number : 9181E

Legal & General Group Plc

04 March 2020

 

Legal & General Group Plc

Full Year Results 2019 Part 2

IFRS Disclosures on performance and Release from operations  Page 31

1.01 Operating profit^#

For the year ended 31 December 2019

			2019	2018
		Notes	£m	£m
From continuing operations
Legal & General Retirement (LGR)		1.03	1,569	1,548
- LGR Institutional (LGRI)			1,216	1,149
- LGR Retail (LGRR)			353	399
Legal & General Investment Management (LGIM)		1.04	423	407
Legal & General Capital (LGC)		1.05	363	322
Legal & General Insurance (LGI)		1.03	314	308
- UK and Other			223	246
- US (LGIA)			91	62
Operating profit from divisions:
From continuing operations			2,669	2,585
From discontinued operations 1			11	79
Operating profit from divisions			2,680	2,664
Group debt costs 2			(208)	(203)
Group investment projects and expenses			(186)	(126)
Operating profit			2,286	2,335
Investment and other variances		1.06	(150)	(188)
Losses on non-controlling interests			(24)	(19)
Adjusted profit before tax attributable to equity holders			2,112	2,128
Tax expense attributable to equity holders		3.07	(302)	(320)
Profit for the year			1,810	1,808
Profit attributable to equity holders			1,834	1,827
Earnings per share:
Basic (pence per share) 3		1.07	30.92p	30.79p
Diluted (pence per share) 3		1.07	30.75p	30.64p
1. Discontinued operations include the results of the Mature Savings and General Insurance divisions following the group announcement to sell these businesses to ReAssure Limited (a subsidiary of Swiss Re) and Allianz respectively. The sale of the General Insurance business completed on 31 December 2019.
2. Group debt costs exclude interest on non recourse financing.
3. All earnings per share calculations are based on profit attributable to equity holders of the company.

This supplementary operating profit information (one of the group's key performance indicators) provides further analysis of the results reported under IFRS and the group believes it provides shareholders with a better understanding of the underlying performance of the business in the period.

· LGR represents worldwide pension risk transfer business including longevity insurance (within LGRI), and individual retirement and lifetime mortgages (within LGRR).

· LGIM represents institutional and retail investment management and workplace savings businesses.

· LGC represents shareholder assets invested in direct investments primarily in the areas of housing, urban regeneration, clean energy and SME finance, as well as traded and treasury assets.

· LGI primarily represents UK and US retail protection business, UK group protection and Fintech business.

· Discontinued operations represent the results of the Mature Savings and General Insurance divisions following the group announcement to sell these businesses to ReAssure Limited (a subsidiary of Swiss Re) and Allianz respectively. The sale of the General Insurance business completed on 31 December 2019.

Operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Operating profit therefore reflects longer-term economic assumptions for the group's insurance businesses and shareholder funds, except the operating profit for LGC's trading businesses (which reflects the IFRS profit before tax) and LGIA's non-term business (which excludes unrealised investment returns to align with the liability measurement under US GAAP). Variances between actual and smoothed investment return assumptions are reported below operating profit, which include any differences between investment return on actual assets and the target long-term asset mix. Exceptional income and expenses which arise outside the normal course of business in the period, such as gains/losses from merger and acquisition, and start-up costs, are also excluded from operating profit.

# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

IFRS Disclosures on performance and Release from operations  Page 32

1.02 Reconciliation of release from operations to operating profit^# before tax

					Changes in valuation assump- tions			Operating profit/ (loss) after tax		Operating profit/ (loss) before tax
		New business surplus/ (strain)	Net release from operations
	Release from operations1			Exper- ience variances		Non-cash items	Other		Tax expense/ (credit)
For the year ended
31 December 2019	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	598	327	925	(53)	390	91	-	1,353	216	1,569
- LGRI	418	265	683	(40)	313	88	-	1,044	172	1,216
- LGRR	180	62	242	(13)	77	3	-	309	44	353
LGIM	366	(20)	346	(1)	-	(4)	-	341	82	423
- LGIM (excluding
Workplace Savings) 2	339	-	339	-	-	-	-	339	82	421
- Workplace Savings 3	27	(20)	7	(1)	-	(4)	-	2	-	2
LGC	295	-	295	-	-	-	-	295	68	363
LGI	259	(7)	252	(11)	44	(12)	4	277	37	314
- UK and Other	165	(7)	158	(11)	44	(12)	4	183	40	223
- US (LGIA)	94	-	94	-	-	-	-	94	(3)	91
From continuing operations	1,518	300	1,818	(65)	434	75	4	2,266	403	2,669
From discontinued operations 4	9	-	9	-	-	-	-	9	2	11
Total from divisions	1,527	300	1,827	(65)	434	75	4	2,275	405	2,680
Group debt costs	(168)	-	(168)	-	-	-	-	(168)	(40)	(208)
Group investment projects and expenses	(44)	-	(44)	-	-	-	(102)	(146)	(40)	(186)
Total	1,315	300	1,615	(65)	434	75	(98)	1,961	325	2,286
1. Release from operations within US (LGIA) includes £81m of dividends from the US.
2. LGIM (excluding Workplace Savings) includes profits on fund management services.
3. Workplace Savings represents administration business only.
4. Discontinued operations include the results of the Mature Savings and General Insurance divisions following the group's announcement to sell these businesses to ReAssure Limited (a subsidiary of Swiss Re) and Allianz respectively. The sale of the General Insurance business completed on 31 December 2019 and the recognised operating loss for the year is £35m (2018: £nil).
Release from operations for LGR, LGIM - Workplace Savings and LGI represents the expected IFRS surplus generated in the year from the in-force non profit annuities, workplace savings and UK protection businesses using best estimate assumptions. The LGIM release from operations also includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from LGIA. The release from operations within discontinued operations primarily reflects the unwind of expected profits after tax under the risk transfer agreement with ReAssure Limited (a subsidiary of Swiss Re) from the Mature Savings business, offset by losses from the General Insurance business in 2019.
New business surplus/strain for LGR, LGIM - Workplace Savings and LGI represents the cost of acquiring new business and setting up prudent reserves in respect of the new business for UK non profit annuities, workplace savings and protection, net of tax. The new business surplus and release from operations for LGR, LGIM and LGI excludes any capital held in excess of the prudent reserves from the liability calculation.
LGR's new business metrics are presented based on a target long-term asset portfolio. At certain period ends, depending upon the quantum and timing pf pension risk transfer (PRT) volumes, we may continue to source high quality assets to support that business after the period end, as appropriate, taking into account the alternative risks and rewards of traded credit. At year end, any difference between the actual assets and the long-term asset mix is reflected in investment variance.
Net release from operations for LGR, LGIM - Workplace Savings, LGI and discontinued operations is defined as release from operations plus new business surplus/(strain).
Release from operations and net release from operations for LGC and LGIM represents the operating profit (net of tax).
See Note 1.03 for more detail on experience variances, changes to valuation assumptions and non-cash items.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

IFRS Disclosures on performance and Release from operations  Page 33

1.02 Reconciliation of release from operations to operating profit^# before tax (continued)

					Changes in valuation assump- tions			Operating profit/ (loss) after tax		Operating profit/ (loss) before tax
		New business surplus/ (strain)	Net release from operations
	Release from operations1			Exper- ience variances		Non-cash items	Other		Tax expense/ (credit)
For the year ended
31 December 2018	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	551	217	768	33	444	40	-	1,285	263	1,548
- LGRI	379	188	567	22	324	43	-	956	193	1,149
- LGRR	172	29	201	11	120	(3)	-	329	70	399
LGIM	354	(25)	329	(3)	(1)	1	-	326	81	407
- LGIM (excluding
Workplace Savings) 2	323	-	323	-	-	-	-	323	81	404
- Workplace Savings 3	31	(25)	6	(3)	(1)	1	-	3	-	3
LGC	261	-	261	-	-	-	-	261	61	322
LGI	258	(22)	236	24	35	(19)	(7)	269	39	308
- UK and Other	181	(22)	159	24	35	(19)	1	200	46	246
- US (LGIA)	77	-	77	-	-	-	(8)	69	(7)	62
From continuing operations	1,424	170	1,594	54	478	22	(7)	2,141	444	2,585
From discontinued operations 4	44	-	44	(6)	-	26	-	64	15	79
Total from divisions	1,468	170	1,638	48	478	48	(7)	2,205	459	2,664
Group debt costs	(164)	-	(164)	-	-	-	-	(164)	(39)	(203)
Group investment projects and expenses	(34)	-	(34)	-	-	-	(68)	(102)	(24)	(126)
Total	1,270	170	1,440	48	478	48	(75)	1,939	396	2,335
1. Release from operations within US (LGIA) includes £77m of dividends from the US.
2. LGIM (excluding Workplace Savings) includes profits on fund management services.
3. Workplace Savings represents administration business only.
4. Discontinued operations reflect the results of the Mature Savings and General Insurance divisions following the group's announcements to sell these businesses to ReAssure Limited (a subsidiary of Swiss Re) and Allianz respectively. Operating profit of the General Insurance business in 2018 was £0m.

# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

IFRS Disclosures on performance and Release from operations  Page 34

1.03 Analysis of LGR and LGI operating profit

For the year ended 31 December 2019

		LGR	LGI	LGR	LGI
		2019	2019	2018	2018
		£m	£m	£m	£m
Net release from operations		925	252	768	236
Experience variances
- Persistency		(4)	(9)	8	(12)
- Mortality/morbidity		6	(5)	73	(7)
- Expenses		(23)	-	(13)	2
- Project and development costs		(12)	-	(11)	-
- Other 1		(20)	3	(24)	41
Total experience variances		(53)	(11)	33	24
Changes to valuation assumptions
- Persistency		-	(16)	-	(4)
- Mortality/morbidity 2		352	39	444	25
- Expenses		5	-	-	17
- Other 3		33	21	-	(3)
Total changes to valuation assumptions		390	44	444	35
Movement in non-cash items
- Acquisition expense tax relief		-	(2)	-	(11)
- Other 4		91	(10)	40	(8)
Total movement in non-cash items		91	(12)	40	(19)
Other		-	4	-	(7)
Operating profit after tax		1,353	277	1,285	269
Tax gross up		216	37	263	39
Operating profit before tax		1,569	314	1,548	308
1. Other experience variances for LGI in 2018 reflected a number of modelling requirements which were not repeated in 2019.
2. Mortality assumption changes for LGR include a one off release of £134m (net of tax) from an update in the longevity trend assumption from adjusted CMI 2016 to adjusted CMI 2017. In 2018, the comparable one off release of £359m was from adjusted CMI 2015 to adjusted CMI 2016. Other positive longevity variances are driven by routine updates to our assumptions relating to base mortality rates.
3. LGR Other changes to valuation assumptions reflect a change in assumption on the future exercise of an option within a longevity swap contract.
4. LGR Other movement in non-cash items is driven by the net effect of the capitalisation and unwind of future asset management profits on activity managed by LGIM, and is a function of new business volumes and movements in the main unit cost assumptions.

IFRS Disclosures on performance and Release from operations  Page 35

1.04 LGIM operating profit

				2019	2018
				£m	£m
Asset management revenue (excluding 3rd party market data) 1,2				889	820
Asset management transactional revenue 3				23	27
Asset management expenses (excluding 3rd party market data) 1,2				(491)	(443)
Workplace Savings operating profit 4				2	3
Total LGIM operating profit				423	407
1. Asset management revenue and expenses exclude income and costs of £24m in relation to the provision of third party market data (2018: £19m).
2. The ETF operating result is included as part of asset management revenue and expenses, which represents a change in the presentation from previous periods. Asset management revenue (excluding 3rd party market data) and Asset management expenses (excluding 3rd party market data) have therefore been restated for the full year ended 31 December 2018 to reflect this change.
3. Transactional revenue from external clients includes execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees.
4. Workplace Savings represents administration business.

1.05 LGC operating profit

				2019	2018
				£m	£m
Direct investments1				217	188
Traded investment portfolio including treasury assets2				146	134
Total LGC operating profit				363	322
1. Direct Investments represents LGC's portfolio of assets across future cities (including urban regeneration and clean energy), housing and SME finance.
2. The traded investment portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash.

1.06 Investment and other variances

				2019	2018
				£m	£m
Investment variance 1				(27)	(126)
M&A related and other variances 2				(123)	(62)
Total investment and other variances				(150)	(188)
1. Investment variance includes differences between actual and smoothed investment return on traded and real assets, economic assumption changes (e.g. credit default and inflation) and the impact of any difference between the actual allocated asset mix and the target long-term asset mix on new pension risk transfer business written during the period and held at a period end.
2. M&A related and other variances includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. 2019 reflects the impact of impairing £55m of capitalised software intangibles following a groupwide review, as well as a £43m gain on the disposal of the group's stake in IndiaFirst Life Insurance Company Limited.

IFRS Disclosures on performance and Release from operations  Page 36

1.07 Earnings per share

 (a) Basic earnings per share

				After tax	Per share1	After tax	Per share1
				2019	2019	2018	2018
				£m	p	£m	p
Profit for the year attributable to equity holders				1,834	30.92	1,827	30.79
Less: earnings derived from discontinued operations				(23)	(0.39)	(43)	(0.72)
Basic earnings derived from continuing operations				1,811	30.53	1,784	30.07
1. Basic earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the period, excluding employee scheme treasury shares.

(b) Diluted earnings per share

					After tax	Weighted average number of shares	Per share1
					2019	2019	2019
					£m	m	p
Profit for the year attributable to equity holders					1,834	5,932	30.92
Net shares under options allocable for no further consideration					-	33	(0.17)
Total diluted earnings					1,834	5,965	30.75
Less: diluted earnings derived from discontinued operations					(23)	-	(0.39)
Diluted earnings derived from continuing operations					1,811	5,965	30.36
					After tax	Weighted average number of shares	Per share1
					2018	2018	2018
					£m	m	p
Profit for the year attributable to equity holders					1,827	5,933	30.79
Net shares under options allocable for no further consideration					-	29	(0.15)
Total diluted earnings					1,827	5,962	30.64
Less: diluted earnings derived from discontinued operations					(64)	-	(0.72)
Diluted earnings derived from continuing operations					1,763	5,962	29.92
1. 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 Disclosures on performance and Release from operations  Page 37

1.08 Segmental analysis

Reportable segments

The group has four reportable segments that are continuing operations, comprising LGR, LGIM, LGC and LGI, as set out in Note 1.01. Group central expenses and debt costs are reported separately. Transactions between reportable segments are on normal commercial terms, and are included within the reported segments.

Continuing operations exclude the results of the Mature Savings and General Insurance divisions which have been classified as discontinued following the group's announcements to sell these businesses to ReAssure Limited (a subsidiary of Swiss Re) and Allianz respectively.

Reporting of assets and liabilities by reportable segment has not been included, as this is not information that is provided to key decision makers on a regular basis. The group's assets and liabilities are managed on a legal entity rather than reportable segment basis, in line with regulatory requirements.

Financial information on the reportable segments is further broken down where relevant in order to better explain the drivers of the group's results.

(a) Profit/(loss) for the year
					Group
					expenses	Total
					and debt	continuing
	LGR	LGIM	LGC	LGI	costs	operations
For the year ended 31 December 2019	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	1,569	423	363	314	(394)	2,275
Investment and other variances	43	(9)	91	(234)	(58)	(167)
Losses attributable to non-controlling interests	-	-	-	-	(24)	(24)
Profit/(loss) before tax attributable to equity holders	1,612	414	454	80	(476)	2,084
Tax (expense)/credit attributable to equity holders	(234)	(81)	(75)	12	81	(297)
Profit/(loss) for the year	1,378	333	379	92	(395)	1,787
					Group
					expenses	Total
					and debt	continuing
	LGR	LGIM	LGC	LGI	costs	operations
For the year ended 31 December 2018	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	1,548	407	322	308	(329)	2,256
Investment and other variances	95	(4)	(273)	(1)	22	(161)
Losses attributable to non-controlling interests	-	-	-	-	(19)	(19)
Profit/(loss) before tax attributable to equity holders	1,643	403	49	307	(326)	2,076
Tax (expense)/credit attributable to equity holders	(267)	(81)	13	(39)	63	(311)
Profit/(loss) for the year	1,376	322	62	268	(263)	1,765
# Operating profit for total continuing operations represents 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

IFRS Disclosures on performance and Release from operations  Page 38

1.08 Segmental analysis (continued)

(b) Total income
				LGC and	Total continuing
	LGR	LGIM1,2	LGI	other3	operations
For the year ended 31 December 2019	£m	£m	£m	£m	£m
Internal income	-	188	-	(188)	-
External income	16,385	43,836	1,593	4,972	66,786
Total income	16,385	44,024	1,593	4,784	66,786
				LGC and	Total continuing
	LGR	LGIM1,2	LGI	other3	operations
For the year ended 31 December 2018	£m	£m	£m	£m	£m
Internal income	-	172	-	(172)	-
External income	8,507	(10,654)	1,742	1,299	894
Total income	8,507	(10,482)	1,742	1,127	894
1. LGIM internal income relates to investment management services provided to other segments.
2. LGIM external income primarily includes fees from fund management and investment returns on unit linked funds.
3. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.

IFRS Primary Financial Statements  Page 39

2.01 Consolidated Income Statement

				2019		2018
For the year ended 31 December 2019		Notes		£m		£m
Income
Gross written premiums				15,203		12,843
Outward reinsurance premiums				(3,452)		(2,114)
Net change in provision for unearned premiums				(66)		-
Net premiums earned				11,685		10,729
Fees from fund management and investment contracts				834		802
Investment return				53,014		(11,843)
Other operational income				1,253		1,206
Total income		1.08		66,786		894
Expenses
Claims and change in insurance contract liabilities				19,005		8,370
Reinsurance recoveries				(3,502)		(1,051)
Net claims and change in insurance contract liabilities				15,503		7,319
Change in investment contract liabilities				45,809		(11,304)
Acquisition costs				805		780
Finance costs				269		238
Other expenses				2,244		1,732
Total expenses				64,630		(1,235)
Profit before tax				2,156		2,129
Tax expense attributable to policyholder returns				(72)		(53)
Profit before tax attributable to equity holders				2,084		2,076
Total tax expense				(369)		(364)
Tax expense attributable to policyholder returns				72		53
Tax expense attributable to equity holders		3.07		(297)		(311)
Profit after tax from continuing operations		1.08		1,787		1,765
Profit after tax from discontinued operations1		3.04		23		43
Profit for the year				1,810		1,808
Attributable to:
Non-controlling interests				(24)		(19)
Equity holders				1,834		1,827
Dividend distributions to equity holders during the year		3.05		998		932
Dividend distributions to equity holders proposed after the year end		3.05		753		704
				p		p
Total basic earnings per share2		1.07		30.92		30.79
Total diluted earnings per share2		1.07		30.75		30.64
Basic earnings per share derived from continuing operations2		1.07		30.53		30.07
Diluted earnings per share derived from continuing operations2		1.07		30.36		29.92
1. Discontinued operations reflect the results of the Mature Savings and General Insurance divisions following the group's announcements to sell these businesses to ReAssure Limited (a subsidiary of Swiss Re) and Allianz respectively. The sale of the General Insurance business completed on 31 December 2019.
2. All earnings per share calculations are based on profit attributable to equity holders of the company.

IFRS Primary Financial Statements  Page 40

2.02 Consolidated Statement of Comprehensive Income

	2019	2018
For the year ended 31 December 2019	£m	£m
Profit for the year	1,810	1,808
Items that will not be reclassified subsequently to profit or loss
Actuarial (losses)/gains on defined benefit pension schemes	(62)	117
Tax on actuarial (losses)/gains on defined benefit pension schemes	11	(22)
Total items that will not be reclassified subsequently to profit or loss	(51)	95
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations	(67)	62
Movement in cross-currency hedge	13	34
Tax on movement in cross-currency hedge	(1)	(5)
Movement in financial investments designated as available-for-sale	72	(36)
Tax on movement in financial investments designated as available-for-sale	(15)	5
Total items that may be reclassified subsequently to profit or loss	2	60
Other comprehensive (expense)/income after tax	(49)	155
Total comprehensive income for the year	1,761	1,963
Total comprehensive income for the year attributable to:
Continuing operations	1,738	1,920
Discontinued operations	23	43
Total comprehensive income/(expense) for the year attributable to:
Non-controlling interests	(24)	(19)
Equity holders	1,785	1,982

IFRS Primary Financial Statements  Page 41

2.03 Consolidated Balance Sheet

		2019	2018
As at 31 December 2019	Notes	£m	£m
Assets
Goodwill		64	65
Purchased interest in long term businesses and other intangible assets		190	223
Deferred acquisition costs		75	140
Investment in associates and joint ventures accounted for using the equity method		324	259
Property, plant and equipment 1		298	57
Investment property	3.06	7,695	6,965
Financial investments	3.06	498,376	430,498
Reinsurers' share of contract liabilities		5,810	4,737
Deferred tax assets	3.07	8	7
Current tax assets		468	418
Receivables and other assets		8,532	5,593
Assets of operations classified as held for sale	3.04	24,844	26,234
Cash and cash equivalents		13,923	17,321
Total assets		560,607	492,517
Equity
Share capital	3.08	149	149
Share premium	3.08	1,000	992
Employee scheme treasury shares		(65)	(52)
Capital redemption and other reserves		250	230
Retained earnings		8,033	7,261
Attributable to owners of the parent		9,367	8,580
Non-controlling interests	3.09	55	72
Total equity		9,422	8,652
Liabilities
Non-participating insurance contract liabilities		77,317	64,707
Non-participating investment contract liabilities		320,594	293,080
Core borrowings	3.1	4,091	3,922
Operational borrowings	3.11	1,020	1,026
Provisions	3.15	1,220	1,140
UK deferred tax liabilities	3.07	189	144
Overseas deferred tax liabilities	3.07	182	185
Current tax liabilities		107	171
Payables and other financial liabilities	3.12	84,039	62,548
Other liabilities		804	619
Net asset value attributable to unit holders		31,507	26,481
Liabilities of operations classified as held for sale	3.04	30,115	29,842
Total liabilities		551,185	483,865
Total equity and liabilities		560,607	492,517
1. Property, plant and equipment for 2019 includes £238m of right of use assets that have arisen on the implementation of IFRS 16.

IFRS Primary Financial Statements  Page 42

2.04 Consolidated Statement of Changes in Equity

			Employee	Capital		Equity
			scheme	redemption		attributable	Non-
	Share	Share	treasury	and other	Retained	to owners	controlling	Total
For the year ended 31 December 2019	capital	premium	shares	reserves1	earnings	of the parent	interests	equity
	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2019	149	992	(52)	230	7,261	8,580	72	8,652
Profit for the year	-	-	-	-	1,834	1,834	(24)	1,810
Exchange differences on translation of overseas operations	-	-	-	(67)	-	(67)	-	(67)
Net movement in cross-currency hedge	-	-	-	12	-	12	-	12
Net actuarial losses on defined benefit pension schemes	-	-	-	-	(51)	(51)	-	(51)
Net movement in financial investments designated as available-for-sale	-	-	-	57	-	57	-	57
Total comprehensive income for the year	-	-	-	2	1,783	1,785	(24)	1,761
Options exercised under share option schemes	-	8	-	-	-	8	-	8
Shares purchased	-	-	(20)	-	-	(20)	-	(20)
Shares vested	-	-	7	(35)	-	(28)	-	(28)
Employee scheme treasury shares: - Value of employee services	-	-	-	39	-	39	-	39
Share scheme transfers to retained earnings	-	-	-	-	1	1	-	1
Dividends	-	-	-	-	(998)	(998)	-	(998)
Movement in third party interests	-	-	-	-	-	-	7	7
Currency translation differences	-	-	-	14	(14)	-	-	-
As at 31 December 2019	149	1,000	(65)	250	8,033	9,367	55	9,422
1. Capital redemption and other reserves as at 31 December 2019 include share-based payments £85m, foreign exchange £68m, capital redemption £17m, hedging reserves £32m and available-for-sale reserves £48m.

IFRS Primary Financial Statements  Page 43

2.04 Consolidated Statement of Changes in Equity (continued)

			Employee	Capital		Equity
			scheme	redemption		attributable	Non-
	Share	Share	treasury	and other	Retained	to owners	controlling	Total
For the year ended 31 December 2018	capital	premium	shares	reserves1	earnings	of the parent	interests	equity
	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2018	149	988	(40)	168	6,251	7,516	76	7,592
Profit for the year	-	-	-	-	1,827	1,827	(19)	1,808
Exchange differences on translation of overseas operations	-	-	-	62	-	62	-	62
Net movement in cross-currency hedge	-	-	-	29	-	29	-	29
Net actuarial gains on defined benefit pension schemes	-	-	-	-	95	95	-	95
Net movement in financial investments designated as available-for-sale	-	-	-	(31)	-	(31)	-	(31)
Total comprehensive income for the year	-	-	-	60	1,922	1,982	(19)	1,963
Options exercised under share option schemes	-	4	-	-	-	4	-	4
Shares purchased	-	-	(17)	-	-	(17)	-	(17)
Shares vested	-	-	5	(26)	-	(21)	-	(21)
Employee scheme treasury shares: - Value of employee services	-	-	-	38	-	38	-	38
Share scheme transfers to retained earnings	-	-	-	-	10	10	-	10
Dividends	-	-	-	-	(932)	(932)	-	(932)
Movement in third party interests	-	-	-	-	-	-	15	15
Currency translation differences	-	-	-	(10)	10	-	-	-
As at 31 December 2018	149	992	(52)	230	7,261	8,580	72	8,652
1. Capital redemption and other reserves as at 31 December 2018 include share-based payments £81m, foreign exchange £121m, capital redemption £17m, hedging reserves £20m and available-for-sale reserves £(9)m.

IFRS Primary Financial Statements  Page 44

2.05 Consolidated Statement of Cash Flows

		2019	2018
For the year ended 31 December 2019	Notes	£m	£m
Cash flows from operating activities
Profit for the year		1,810	1,808
Adjustments for non cash movements in net profit for the year
Net (gains)/losses on financial investments and investment property		(45,516)	23,132
Investment income		(10,501)	(10,182)
Interest expense		322	293
Tax expense		598	210
Other adjustments		117	183
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss		(18,031)	(10,381)
Investments designated as available-for-sale		(179)	(248)
Other assets		(4,660)	1,258
Net increase/(decrease) in operational liabilities
Insurance contracts		13,089	3,257
Investment contracts		27,514	(22,571)
Other liabilities		21,313	12,057
Net increase/(decrease) in held for sale net liabilities		1,206	(8,500)
Cash utilised in operations		(12,918)	(9,684)
Interest paid		(263)	(215)
Interest received		5,047	4,841
Tax paid1		(540)	(504)
Dividends received		5,389	5,201
Net cash flows utilised in operating activities		(3,285)	(361)
Cash flows from investing activities
Net acquisition of plant, equipment, intangibles and other assets		(89)	(401)
Net disposal/(acquisition) of operations, net of cash (transferred)/acquired	3.02, 3.03	198	326
Net disposal/(investment) in associates and joint ventures		29	(130)
Net cash flows generated/(utilised) from investing activities		138	(205)
Cash flows from financing activities
Dividend distributions to ordinary equity holders during the year	3.05	(998)	(932)
Options exercised under share option schemes	3.08	8	4
Treasury shares purchased for employee share schemes		(20)	12
Payment of lease liabilities		(33)	-
Proceeds from borrowings		1,309	960
Repayment of borrowings		(958)	(325)
Net cash flows utilised in financing activities		(692)	(281)
Net (decrease)/increase in cash and cash equivalents		(3,839)	(847)
Exchange (losses)/gains on cash and cash equivalents		(16)	16
Cash and cash equivalents at 1 January (before reallocation of held for sale cash)		18,088	18,919
Total cash and cash equivalents		14,233	18,088
Less: cash and cash equivalents of operations classified as held for sale	3.04	(310)	(767)
Cash and cash equivalents at 31 December		13,923	17,321
1. Tax comprises UK corporation tax paid of £381m (2018: £359m), withholding tax of £166m (2018: £120m) and an overseas corporate tax refund of £7m (2018: tax paid £25m).

IFRS Disclosure Notes  Page 45

3.01 Basis of preparation

The preliminary announcement for the year ended 31 December 2019 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information in this preliminary announcement has been derived from the group financial statements within the group's 2019 Annual report and accounts, which will be available on the group's website on 12 March 2020. The group's 2018 Annual report and accounts have been filed with the Registrar of Companies, and those for 2019 will be delivered in due course. KPMG have reported on the 2019 and 2018 report and accounts. Both their reports were (i) unqualified, (ii) did not include a reference to any matters to which they drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and as adopted by the European Union, and with those parts of the UK Companies Act 2006 applicable to companies reporting under IFRS. The group financial statements also comply with IFRS and interpretations by the IFRS Interpretations Committee as issued by the IASB and as adopted by the European Union. 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 or 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.

Financial assets and financial liabilities are disclosed gross in the Consolidated 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 Consolidated 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 the 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.

Critical accounting policies and the 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 valuation of insurance and investment contract liabilities, unquoted illiquid assets, investment property, and the determination of defined benefit pension plan assumptions. From a policy application perspective, the major areas of judgement are the assessment of whether a contract transfers significant insurance risk to the group, and whether the group controls underlying entities and should therefore consolidate them. The basis of accounting for these areas, and the significant judgements used in determining them, are outlined in the respective notes to the group's 2019 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.

Tax attributable to policyholders and equity holders

The total tax expense shown in the group's Consolidated Income Statement includes income tax borne by both policyholders and shareholders. This has been apportioned between that attributable to policyholders' returns and equity holders' profits. This represents the fact that the group's long-term business in the UK pays tax on policyholder investment return, in addition to the corporation tax charge charged on shareholder profit. The separate presentation is intended to provide more relevant information about the tax that the group pays on the profits that it makes.

For this apportionment, the equity holders' tax on long-term business is estimated by applying the statutory tax rate to profits attributed to equity holders. This is considered to approximate the corporation tax attributable to shareholders as calculated under UK tax rules. The balance of income tax associated with UK long-term business is attributed to income tax attributable to policyholders' returns and approximates the corporation tax attributable to policyholders as calculated under UK tax rules.

IFRS Disclosure Notes  Page 46

3.02 Acquisitions

Accelerated Digital Ventures Limited

On 31 August 2019 the group increased its shareholding in Accelerated Digital Ventures Ltd to 97% from 48.5%.

The transaction has been accounted for as a stepped acquisition in accordance with IFRS 3 'Business combinations'. The assets and liabilities acquired at the point of the transaction have been recorded at the fair value for the purposes of the acquisition balance sheet and included in the consolidated accounts of the group using the group's accounting policies in accordance with IFRS.

The total deemed consideration for the 97% stake was £41m compared to £49m of net assets at fair value net of non-controlling interest, giving rise to a one off gain of £8m, which has been recognised within other operational income in the Consolidated Income Statement.

3.03 Disposals

IndiaFirst Life Insurance Company Limited
On 7 February 2019, the group completed the disposal of its stake in IndiaFirst Life Insurance Company Limited ("IndiaFirst Life") to an affiliate of Warburg Pincus LLC for INR 7.1bn (c.£76m at GBP:INR 1:92). A pre-tax gain on disposal of £43m, net of transaction costs, has been recognised in other operational income in the Consolidated Income Statement. The operations of IndiaFirst Life have not been classified as discontinued operations since they do not represent a major line of business of the group.
Legal & General Insurance Limited
On 31 May 2019 the group announced the sale of its General Insurance ("GI") business to Allianz, and the transaction completed on 31 December 2019 for an estimated consideration of £255m. The carrying value of the GI business on disposal was £231m, resulting in a profit on disposal of £2m, net of transaction and separation costs of £22m. The result arising from the GI business until its disposal, as well as the gain on the sale, have been recognised in the Consolidated Income Statement, as part of profit from discontinued operations. The GI balance sheet on disposal is presented below:
								Total
								2019
								£m
Deferred acquisition costs								65
Financial investments								368
Receivables								160
Intangible assets								44
Reinsurers' share of contract liabilities								24
Cash and cash equivalents								26
Other assets								9
Total assets								696
Insurance contract liabilities								378
Tax liabilities								49
Other liabilities								38
Total liabilities								465
Net assets on disposal								231

IFRS Disclosure Notes  Page 47

3.04 Assets and liabilities of operations classified as held for sale

Mature Savings On 6 December 2017 the group announced the sale of its Mature Savings business to the ReAssure Limited, a subsidiary of Swiss Re Limited ('Swiss Re') for a consideration of £650m. As part of the transaction, on 1 January 2018 the group entered into a risk transfer agreement with Swiss Re, whereby the group transferred all economic risks and rewards of the Mature Savings business to ReAssure limited. The risk transfer agreement operates until the business is transferred under a court approved scheme under Part VII of the Financial Services and Markets Act 2000. The sale is expected to finalise in 2020 following the completion of the Part VII transfer.  As the legal transfer of the business has not yet occurred the Mature Savings business has been classified as held for sale on the Group's balance sheet as at 31 December 2019. The profit arising from the Mature Savings business in accordance with the risk transfer agreement has been recognised as "Profit after tax from discontinued operations" in the Consolidated Income Statement. Up until the Part VII this reflects the unwind of expected underlying profits, which will offset the final profit on disposal. Swiss Re has since announced the sale of ReAssure Limited to Phoenix Group Holdings. The announcement is not expected to have any direct impact on the transfer of the Mature Savings business to ReAssure Limited.

3.05 Dividends and appropriations

		Dividend	Per share1	Dividend	Per share1
		2019	2019	2018	2018
		£m	p	£m	p
Ordinary dividends paid and charged to equity in the year:
- Final 2017 dividend paid in June 2018		-	-	658	11.05
- Interim 2018 dividend paid in September 2018		-	-	274	4.60
- Final 2018 dividend paid in June 2019		704	11.82	-	-
- Interim 2019 dividend paid in September 2019		294	4.93	-	-
Total dividends		998	16.75	932	15.65
Ordinary share dividend proposed 2		753	12.64	704	11.82
1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.
2. Subsequent to 31 December 2019, the directors declared a final dividend for 2019 of 12.64 pence per ordinary share. This dividend will be paid on 4 June 2020. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2020 and is not included as a liability in the Consolidated Balance Sheet as at 31 December 2019.

IFRS Disclosure Notes  Page 48

3.06 Financial investments and investment property

				2019	2018
				£m	£m
Equities1				200,365	177,566
Debt securities 2				286,916	254,452
Accrued interest				1,647	1,635
Derivative assets 3				14,828	10,065
Loans 4				16,814	9,662
Financial investments				520,570	453,380
Investment property				9,107	8,608
Total financial investments and investment property				529,677	461,988
Less: financial investments and investment property of operations classified as held for sale				(23,606)	(24,525)
Financial investments and investment property				506,071	437,463
1. Equity securities include investments in unit trusts of £13,046m (2018: £10,553m).
2. A detailed analysis of debt securities to which shareholders are directly exposed is disclosed in Note 6.03.
3. Derivatives are used 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. Derivative assets are shown gross of derivative liabilities of £13,113m (2018: £7,791m).
4. Loans include £437m (2018: £456m) of loans valued at amortised cost.

IFRS Disclosure Notes  Page 49

3.07 Tax

(a) Tax charge in the Consolidated Income Statement
The tax attributable to equity holders differs from the tax calculated at the standard UK corporation tax rate as follows:
	Continuing		Continuing
	operations	Total	operations	Total
	2019	2019	2018	2018
	£m	£m	£m	£m
Profit before tax attributable to equity holders	2,084	2,112	2,076	2,128
Tax calculated at 19.00%	396	401	394	404
Adjusted for the effects of:
Recurring reconciling items:
Income not subject to tax	(4)	(4)	-	-
(Lower)/higher rate of tax on profits taxed overseas1	(117)	(117)	(55)	(55)
Non-deductible expenses	2	2	5	5
Differences between taxable and accounting investment gains	(10)	(10)	(4)	(4)
Property income attributable to minority interests	4	4	-	-
Foreign tax	6	6	-	-
Unrecognised tax losses	14	14	-	-
Non-recurring reconciling items:
Income not subject to tax	(6)	(6)	(10)	(10)
Non-deductible expenses	6	6	5	5
Adjustments in respect of prior years2	9	9	(35)	(36)
Impact of changes in corporate tax rates on deferred tax balances	(2)	(2)	11	11
Other	(1)	(1)	-	-
			-	-
Tax attributable to equity holders	297	302	311	320
Equity holders' effective tax rate 3	14.3%	14.3%	15.0%	15.0%
1. The lower rate of tax on overseas profits is principally driven by the 0% rate of taxation arising in our Bermudan reinsurance company, which provides our business with regulatory capital flexibility for both our PRT business and our US term insurance business. This is partially offset by the effect of our US operations taxed at 21%.
2. Adjustments in respect of prior years relate to revisions to earlier estimates.
3. Equity holders' effective tax rate is calculated by dividing the tax attributable to equity holders over profit before tax attributable to equity holders.

IFRS Disclosure Notes  Page 50

3.07 Tax

(b) Deferred tax
					2019	2018
Deferred tax (liabilities)/assets					£m	£m
Deferred acquisition expenses					35	25
- UK					(40)	(40)
- Overseas					75	65
Difference between the tax and accounting value of insurance contracts					(630)	(577)
- UK					(198)	(171)
- Overseas					(432)	(406)
Unrealised gains on investments					(184)	(72)
Excess of depreciation over capital allowances					15	12
Excess expenses					20	21
Accounting provisions and other					(44)	(28)
Trading losses1					217	163
Pension fund deficit					28	41
Acquired intangibles					(2)	(4)
Total net deferred tax liabilities2					(545)	(419)
Less: net deferred tax liabilities of operations classified as held for sale					182	97
Net deferred tax liabilities					(363)	(322)
Analysed by:
- Deferred tax assets					8	7
- UK deferred tax liabilities					(189)	(144)
- Overseas deferred tax liabilities					(182)	(185)
Net deferred tax liabilities					(363)	(322)
1. Trading losses include deferred tax on UK trade and US operating losses of £4m (2018: £4m) and £213m (2018: £159m) respectively.
2. Total net deferred tax liabilities are presented gross of held for sale liabilities in 2019. Disclosure relating to liabilities of operations classified as held for sale is included in Note 3.04.

IFRS Disclosure Notes  Page 51

3.08 Share capital and share premium

				2019			2018
				Number of	2019		Number of	2018
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 2019					5,960,768,234		149	992
Options exercised under share option schemes					4,581,373		-	8
As at 31 December 2019					5,965,349,607		149	1,000
							Share	Share
						Number of	capital	premium
Issued share capital, fully paid						shares	£m	£m
As at 1 January 2018					5,958,438,193		149	988
Options exercised under share option schemes					2,330,041		-	4
As at 31 December 2018					5,960,768,234		149	992
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.

3.09 Non-controlling interests

Non-controlling interests represent third party interests in direct equity investments as well as investments in private equity and property investment vehicles which are consolidated in the group's results.

No individual non-controlling interest is considered to be material on the basis of the year end carrying value or share of profit or loss.

IFRS Disclosure Notes  Page 52

3.10 Core borrowings

		Carrying	Coupon		Carrying	Coupon
		amount	rate	Fair value	amount	rate	Fair value
		2019	2019	2019	2018	2018	2018
		£m	%	£m	£m	%	£m
Subordinated borrowings
5.875% Sterling undated subordinated notes (Tier 2)		-	-	-	405	5.88	409
10% Sterling subordinated notes 2041 (Tier 2)		312	10.00	353	312	10.00	366
5.5% Sterling subordinated notes 2064 (Tier 2)		589	5.50	726	589	5.50	569
5.375% Sterling subordinated notes 2045 (Tier 2)		603	5.38	691	603	5.38	627
5.25% US Dollar subordinated notes 2047 (Tier 2)		648	5.25	704	659	5.25	612
5.55% US Dollar subordinated notes 2052 (Tier 2)		380	5.55	405	387	5.55	356
5.125% Sterling subordinated notes 2048 (Tier 2)		399	5.13	459	399	5.13	401
3.75% Sterling subordinated notes 2049 (Tier 2)		598	3.75	613	-	-	-
Client fund holdings of group debt (Tier 2) 1		(38)	-	(44)	(31)	-	(30)
Total subordinated borrowings		3,491		3,907	3,323		3,310
Senior borrowings
Sterling medium term notes 2031-2041		609	5.88	877	609	5.88	824
Client fund holdings of group debt 1		(9)	-	(13)	(10)	-	(13)
Total senior borrowings		600		864	599		811
Total core borrowings		4,091		4,771	3,922		4,121
1. £47m (2018: £41m) of the group's subordinated and senior borrowings are held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total core borrowings in the table above.
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.

IFRS Disclosure Notes  Page 53

3.10 Core borrowings (continued)

Subordinated borrowings

5.875% Sterling undated subordinated notes

In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes were called at par on 1 April 2019.

10% Sterling subordinated notes 2041

In 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% p.a. These notes mature on 23 July 2041.

5.5% Sterling subordinated notes 2064

In 2014, Legal & General Group Plc issued £600m of 5.5% dated subordinated notes. The notes are callable at par on 27 June 2044 and every five years thereafter. If not called, the coupon from 27 June 2044 will be reset to the prevailing five year benchmark gilt yield plus 3.17% p.a. These notes mature on 27 June 2064.

5.375% Sterling subordinated notes 2045

In 2015, Legal & General Group Plc issued £600m of 5.375% dated subordinated notes. The notes are callable at par on 27 October 2025 and every five years thereafter. If not called, the coupon from 27 October 2025 will be reset to the prevailing five year benchmark gilt yield plus 4.58% p.a. These notes mature on 27 October 2045.

5.25% US Dollar subordinated notes 2047

On 21 March 2017, Legal & General Group Plc issued $850m of 5.25% dated subordinated notes. The notes are callable at par on 21 March 2027 and every five years thereafter. If not called, the coupon from 21 March 2027 will be reset to the prevailing US Dollar mid-swap rate plus 3.687% p.a. These notes mature on 21 March 2047.

5.55% US Dollar subordinated notes 2052

On 24 April 2017, Legal & General Group Plc issued $500m of 5.55% dated subordinated notes. The notes are callable at par on 24 April 2032 and every five years thereafter. If not called, the coupon from 24 April 2032 will be reset to the prevailing US Dollar mid-swap rate plus 4.19% p.a. These notes mature on 24 April 2052.

5.125% Sterling subordinated notes 2048

On 14 November 2018, Legal & General Group Plc issued £400m of 5.125% dated subordinated notes. The notes are callable at par on 14 November 2028 and every five years thereafter. If not called, the coupon from 14 November 2028 will be reset to the prevailing five year benchmark gilt yield plus 4.65% p.a. These notes mature on 14 November 2048.

3.75% Sterling subordinated notes 2049

On 26 November 2019, Legal & General Group Plc issued £600m of 3.75% dated subordinated notes. The notes are callable at par on 26 November 2029 and every five years thereafter. If not called, the coupon from 26 November 2029 will be reset to the prevailing five year benchmark gilt yield plus 4.05% p.a. These notes mature on 26 November 2049.

All of the above subordinated notes are treated as tier 2 own funds for Solvency II purposes.

Senior borrowings

Between 2000 and 2002 Legal & General Finance Plc issued £600m of senior unsecured Sterling medium term notes 2031-2041 at coupons between 5.75% and 5.875%. These notes have various maturity dates between 2031 and 2041.

IFRS Disclosure Notes  Page 54

3.11 Operational borrowings

	Carrying	Interest		Carrying	Interest
	amount	rate	Fair value	amount	rate	Fair value
	2019	2019	2019	2018	2018	2018
	£m	%	£m	£m	%	£m
Short term operational borrowings
Euro Commercial Paper	200	0.93	200	293	0.93	293
Non recourse borrowings
Consolidated Property Limited Partnerships	58	2.36	58	57	2.46	57
Later Living portfolio	72	3.47	72	76	3.45	76
CALA revolving credit facility	178	3.37	178	188	3.37	188
Class B Surplus Notes	489	4.33	489	296	5.61	296
Affordable Homes revolving credit facility	29	2.66	29	-	-	-
L&G Homes Limited revolving credit facility	16	3.44	16	-	-	-
Bank loans and overdrafts	-	-	-	83	-	83
Total operational borrowings 1	1,042		1,042	993		993
Less: liabilities of operations classified as held for sale 2	(29)	2.36	(29)	(28)	2.46	(28)
Operational borrowings	1,013		1,013	965		965
1. Unit linked borrowings with a carrying value of £7m (2018: £61m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,020m (2018: £1,026m).
2. Disclosure related to liabilities of operations classified as held for sale is included in Note 3.04.
Non recourse borrowings
- Consolidated Property Limited Partnerships loans have a charge on the assets of the relevant Property Fund - Loan facilities to Later Living portfolio have a charge on all assets of each individual SPV company. - CALA Group (Holdings) Limited's revolving credit facility is secured by way of a bond and floating charge, and guarantees and fixed charges granted by CALA Group Limited and its main subsidiaries (CALA 1999 Limited, CALA Limited, and CALA Management Limited). A number of other bonds and floating charges, fixed securities, debentures and share pledges over land and assets have been granted by certain subsidiaries of CALA Group Limited in favour of the lenders. - The Class B Surplus Notes have been issued by a US subsidiary of the group as part of a coinsurance structure for the purpose of US statutory regulations. The notes were issued in exchange for bonds of the same value from an unrelated party, included within financial investments on the group's Consolidated Balance Sheet. - The revolving credit facility to Affordable Homes is subject to agreed covenants, the breach of which could result in a charge on the land and work in progress of L&G Affordable Homes (Development 2) Limited. - The revolving credit facility to L&G Homes Limited is secured by way of a charge on the land assets of L&G Homes Limited.
The carrying value of operational borrowings approximates their fair value. The presented fair values reflect observable market information and have been classified as Level 2 in the fair value hierarchy with the exception of the Later Living portfolio, Affordable Homes and L&G Homes Limited revolving credit facilities which have been classified as Level 3.

As at 31 December 2019, the group had in place a £1.0bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2022. No amounts were outstanding at 31 December 2019.

IFRS Disclosure Notes  Page 55

3.12 Payables and other financial liabilities

						2019	2018
						£m	£m
Derivative liabilities						13,113	7,791
Repurchase agreements 1						56,884	43,775
Other financial liabilities 2						14,476	11,406
Total payables and other financial liabilities						84,473	62,972
Less: Payables and other liabilities of operations classified as held for sale 3						(434)	(424)
Payables and other financial liabilities						84,039	62,548
Due within 12 months 4						64,689	51,178
Due after 12 months 4						19,784	11,794
1. The repurchase agreements are presented gross, however they and their related assets (included within debt securities) are subject to master netting arrangements. The vast majority of the repurchase agreements are unit linked.
2. Other financial liabilities includes trail commission, lease liabilities, reinsurance payables and collateral repayable on short position reverse repurchase agreements. The value of collateral repayable on short position reverse repurchase agreements was £7,673m (2018: £4,883m).
3. Disclosure relating to liabilities of operations classified as held for sale is included in Note 3.04.
4. The maturity analysis of the liabilities between less and more than 12 months is based on the Total payables and other financial liabilities.
Fair value hierarchy
			Total	Level 1	Level 2	Level 3	Amortised cost
As at 31 December 2019			£m	£m	£m	£m	£m
Derivative liabilities			13,113	283	12,828	2	-
Repurchase agreements			56,884	-	56,884	-	-
Other financial liabilities			14,476	7,822	9	139	6,506
Total payables and other financial liabilities			84,473	8,105	69,721	141	6,506
							Amortised
			Total	Level 1	Level 2	Level 3	cost
As at 31 December 2018			£m	£m	£m	£m	£m
Derivative liabilities			7,791	337	7,452	2	-
Repurchase agreements			43,775	-	43,775	-	-
Other financial liabilities			11,406	4,718	35	496	6,157
Total payables and other financial liabilities			62,972	5,055	51,262	498	6,157
Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as Level 3 liabilities. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (2018: £4m).
Significant transfers between levels There have been no significant transfers of liabilities between Levels 1, 2 and 3 for the year ended 31 December 2019 (2018: no significant transfers).

IFRS Disclosure Notes  Page 56

3.13 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
					2019	2019	2018	2018
					£m	£m	£m	£m
Economic sensitivity
Long-term insurance
100bps increase in interest rates					257	130	384	209
50bps decrease in interest rates					(188)	(109)	(220)	(122)
50bps increase in future inflation expectations					53	43	65	53
Credit spreads widen by 100bps with no change in expected defaults					(220)	(273)	(138)	(213)
25% rise in equity markets					434	383	458	399
25% fall in equity markets					(434)	(383)	(459)	(399)
15% rise in property values					899	744	738	606
15% fall in property values					(958)	(791)	(761)	(623)
10bps increase in credit default assumptions					(717)	(580)	(551)	(446)
10bps decrease in credit default assumptions					633	512	558	451
Non-economic sensitivity
Long-term insurance
1% increase in annuitant mortality					195	221	157	192
1% decrease in annuitant mortality					(201)	(225)	(147)	(183)
5% increase in assurance mortality					(385)	(305)	(375)	(298)

The table above shows the impacts on group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario. The current disclosure reflects management's view of key risks in current economic conditions.

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. The scenario does not reflect management actions which could be taken to reduce the impact of a decrease in interest rates.

The change in interest rate test assumes a 100 basis point increase and a 50 basis point decrease in the gross redemption yield on fixed interest securities together with the same change in the real yields on variable securities.  Valuation interest rates are assumed to move in line with market yields, adjusted to allow for prudence calculated in a manner consistent with the base results.

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

The inflation stress adopted is a 0.5% pa increase in inflation, resulting in a 0.5% pa reduction in real yield and no change to the nominal yield. In addition, the expense inflation rate is increased by 0.5% pa.

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

The property stresses adopted are a 15% rise and 15% fall in property market values. Rental income is assumed to be unchanged.  Where property is being used to back liabilities, valuation interest rates move with property yields, and so the value of the liabilities will also move.

The annuitant mortality stresses are a 1% increase and 1% decrease in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates. The equity stresses are a 25% rise and 25% fall in listed equity market values.

The assurance mortality stress is a 5% increase in the mortality and morbidity rates with no change to the mortality and morbidity improvement rates.

The sensitivity analyses do not take into account management actions that 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 analysis also ignores 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 may be correlated. The sensitivity of the profit to changes in assumptions may not be linear. They should not be extrapolated to changes of a much larger order.

IFRS Disclosure Notes  Page 57

3.14 Foreign exchange rates

Principal rates of exchange used for translation are:
Year end exchange rates				2019	2018
United States dollar				1.33	1.28
Euro				1.18	1.11
Average exchange rates				2019	2018
United States dollar				1.28	1.34
Euro				1.14	1.13

3.15 Provisions

(a) Analysis of provisions

					2019	2018
				Notes	£m	£m
Retirement benefit obligations				3.16 (b)	1,107	1,112
Other provisions					114	29
Total provisions					1,221	1,141
Less: liabilities of operations classified as held for sale1					(1)	(1)
Provisions					1,220	1,140
1.  Disclosure related to liabilities of operations classified as held for sale is included in Note 3.04
(b) Retirement benefit obligations
			Fund and	CALA Homes	Fund and	CALA Homes
			Scheme	and Overseas	Scheme	and Overseas
			2019	2019	2018	2018
			£m	£m	£m	£m
Gross pension obligations included in provisions			1,083	24	1,091	21
Annuity obligations insured by LGAS			(944)	-	(858)	-
Gross defined benefit pension deficit			139	24	233	21
Deferred tax on defined benefit pension deficit			(24)	(4)	(41)	(1)
Net defined benefit pension deficit			115	20	192	20
The Legal & General Group UK Pension and Assurance Fund (Fund) and the Legal & General Group UK Senior Pension Scheme (Scheme) account for the majority of the UK and worldwide assets of, and contributions to, such arrangements. The Fund and Scheme were closed to future accrual on 31 December 2015.

IFRS Disclosure Notes  Page 58

3.16 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, FCA, 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.

Group companies have given warranties, indemnities and guarantees as a normal part of their business and operating activities or in relation to capital market transactions or corporate disposals. 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. LGAS has provided indemnities, a liquidity and expense risk agreement, a deed of support and a cash and securities liquidity facility in respect of the liabilities of group companies to facilitate the group's matching adjustment reorganisation pursuant to Solvency II.

3.17 Related party transactions
(i) Key management personnel transactions and compensation
There were no material transactions between key management and the Legal & General group of companies during the year. All transactions between the group and its key management are on commercial terms which are no more favourable than those available to employees in general. Contributions to the post-employment defined benefit plans were £86m (2018: £84m) for all employees.
At 31 December 2019 and 31 December 2018 there were no loans outstanding to officers of the company.
The aggregate compensation for key management personnel, including executive and non-executive directors, is as follows:
					2019	2018
					£m	£m
Salaries					12	10
Post-employment benefits					-	-
Share-based incentive awards					7	6
Key management personnel compensation1					19	16
1. Information relating to individual directors' emoluments, interests and transactions is given in the Directors' Report on Remuneration in the Annual Report and Accounts.

(ii) Services provided to and by related parties

All transactions between the group and associates, joint ventures and other related parties during the year are on commercial terms which are no more favourable than those available to companies in general.

Loans and commitments to related parties are made in the normal course of business.

The group has the following material related party transactions:

- Annuity contracts issued by Legal and General Assurance Society Limited for consideration of £78m (2018: £59m) purchased by the group's UK defined benefit pension schemes during the period, priced on an arm's length basis;

- Loans outstanding from related parties at 31 December 2019 of £83m (2018: £201m), with a further commitment of £16m;

- The group has total other commitments of £1,213m to related parties (2018: £837m), of which £749m has been drawn at 31 December 2019 (2018: £507m).

 

END

 

 

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