L&G Full Year Results 2020 Part 2

RNS Number : 7165R

Legal & General Group Plc

10 March 2021

Legal & General Group Plc

2020 Full Year Results Part 2

IFRS Disclosures on performance and Release from operations Page 37

1.01 Operating profit^#

For the year ended 31 December 2020

		2020	2019¹
	Notes	£m	£m


From continuing operations
Legal & General Retirement (LGR)	1.03	1,731	1,569
- LGR Institutional (LGRI)		1,331	1,216
- LGR Retail (LGRR)		400	353
Legal & General Investment Management (LGIM)	1.04	404	394
Legal & General Capital (LGC)	1.05	275	363
Legal & General Insurance (LGI)	1.03	189	314
- UK and Other		205	223
- US (LGIA)		(16)	91


Operating profit from divisions:
From continuing operations		2,599	2,640
From discontinued operations ²		34	11


Operating profit from divisions		2,633	2,651
Group debt costs ³		(233)	(208)
Group investment projects and expenses		(155)	(157)
Covid-19 costs ⁴		(27)	-


Operating profit		2,218	2,286
Investment and other variances	1.06	(394)	(150)
Losses on non-controlling interests		(36)	(24)

Adjusted profit before tax attributable to equity holders		1,788	2,112
Tax expense attributable to equity holders	3.07	(217)	(302)


Profit for the year		1,571	1,810


Profit attributable to equity holders		1,607	1,834


Earnings per share:
Basic (pence per share) ⁵	1.07	27.00p	30.92p
Diluted (pence per share) ⁵	1.07	25.60p	30.75p


1. 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to Legal & General Investment Management (LGIM) within Operating profit from divisions. This has reduced LGIM operating profit by £29m for the year ended 31 December 2019.
2. Discontinued operations include the results of the Mature Savings division, the sale of which completed on 7 September 2020. In 2019, discontinued operations also included the results of the General Insurance division.
3. Group debt costs exclude interest on non recourse financing.
4. Covid-19 costs reflect incremental operational expenses incurred as a result of Covid-19 and include IT spend on delivering remote working solutions.
5. 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 year.

· LGR represents worldwide pension risk transfer business including longevity insurance (within LGRI), and retail 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.

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). Variances between actual and long-term expected 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 year, such as gains/losses from mergers 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 38

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 2020	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m


LGR	655	277	932	116	400	33	-	1,481	250	1,731
- LGRI	492	220	712	81	314	30	-	1,137	194	1,331
- LGRR	163	57	220	35	86	3	-	344	56	400
LGIM	357	(15)	342	(17)	-	(1)	-	324	80	404
- LGIM (excluding
Workplace Savings) ²	327	-	327	-	-	-	-	327	80	407
- Workplace Savings ³	30	(15)	15	(17)	-	(1)	-	(3)	-	(3)
LGC	224	-	224	-	-	-	-	224	51	275
LGI	250	8	258	(41)	58	(5)	(115)	155	34	189
- UK and Other	146	8	154	(41)	58	(5)	-	166	39	205
- US (LGIA) ⁴	104	-	104	-	-	-	(115)	(11)	(5)	(16)


From continuing operations	1,486	270	1,756	58	458	27	(115)	2,184	415	2,599
From discontinued operations ⁵	28	-	28	-	-	-	-	28	6	34


Total from divisions	1,514	270	1,784	58	458	27	(115)	2,212	421	2,633


Group debt costs	(189)	-	(189)	-	-	-	-	(189)	(44)	(233)
Group investment projects and expenses	(56)	-	(56)	-	-	-	(61)	(117)	(38)	(155)
Covid-19 costs ⁶	-	-	-	-	-	-	(20)	(20)	(7)	(27)


Total	1,269	270	1,539	58	458	27	(196)	1,886	332	2,218


1. Release from operations within US (LGIA) includes £84m of dividends from the US.
2. LGIM (excluding Workplace Savings) includes profits on fund management services.
3. Workplace Savings represents administration business only.
4. Other includes experience variances, changes in valuation assumptions and non-cash items for LGIA.
5. Discontinued operations include the results of the Mature Savings division, the sale of which completed on 7 September 2020.
6. Covid-19 costs reflect incremental operational expenses incurred as a result of Covid-19 and include IT spend on delivering remote working solutions.

Release from operations for LGR, LGIM - Workplace Savings and LGI UK and Other represents the expected IFRS surplus generated in the year from the difference between the prudent assumptions underlying the IFRS liabilities and our best estimate of future experience for in-force non-profit annuities, workplace savings and UK protection businesses. 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 from the Mature Savings business.

New business surplus/strain for LGR, LGIM - Workplace Savings and LGI UK and Other represents the initial profit or loss from writing new business. This includes the costs associated with acquiring new business and setting up prudent reserves in respect of 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 of pension risk transfer (PRT) volumes, we may have sourced more or less of the high quality assets targeted to support that business. At year end, the profit impact of the difference between the actual assets held (including alternative surplus assets where suitable) 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 (excluding workplace savings) 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 39

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

					Changes					Operating
		New	Net		in			Operating		profit/
	Release	business	release	Exper-	valuation			profit/	Tax	(loss)
	from	surplus/	from	ience	assump-	Non-cash		(loss)	expense/	before
For the year ended	operations¹	(strain)	operations	variances	tions	items	Other	after tax	(credit)	tax
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 ²	348	(20)	328	(6)	-	(4)	-	318	76	394
- LGIM (excluding Workplace
Savings) ³	321	-	321	-	-	-	-	321	77	398
- Workplace Savings ⁴	27	(20)	7	(6)	-	(4)	-	(3)	(1)	(4)
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) ⁵	94	-	94	-	-	-	-	94	(3)	91

From continuing operations	1,500	300	1,800	(70)	434	75	4	2,243	397	2,640
From discontinued operations ⁶	9	-	9	-	-	-	-	9	2	11


Total from divisions	1,509	300	1,809	(70)	434	75	4	2,252	399	2,651


Group debt costs	(168)	-	(168)	-	-	-	-	(168)	(40)	(208)
Group investment projects
and expenses ²	(44)	-	(44)	-	-	-	(79)	(123)	(34)	(157)

Total	1,297	300	1,597	(70)	434	75	(75)	1,961	325	2,286

1. Release from operations within US (LGIA) includes £81m of dividends from the US.
2. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £23m and Workplace Savings operating profit by £6m.
3. LGIM (excluding Workplace Savings) includes profits on fund management services.
4. Workplace Savings represents administration business only.
5. Other includes experience variances, changes in valuation assumptions and non-cash items for LGIA.
6. Discontinued operations include the results of the Mature Savings and General Insurance divisions, the sales of which completed on 7 September 2020 and 31 December 2019 respectively.

# 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 40

1.03 Analysis of LGR and LGI operating profit

For the year ended 31 December 2020


	LGR	LGI	LGR	LGI
	2020	2020	2019	2019
	£m	£m	£m	£m


Net release from operations	932	258	925	252


Experience variances
- Persistency	7	3	(4)	(9)
- Mortality/morbidity ¹	104	(46)	6	(5)
- Expenses	(5)	(5)	(23)	-
- Project and development costs	(5)	(1)	(12)	-
- Other	15	8	(20)	3


Total experience variances	116	(41)	(53)	(11)


Changes to valuation assumptions
- Persistency	-	(1)	-	(16)
- Mortality/morbidity ²	255	54	352	39
- Expenses	-	2	5	-
- Other ³	145	3	33	21


Total changes to valuation assumptions	400	58	390	44


Movement in non-cash items
- Acquisition expense tax relief	-	(3)	-	(2)
- Other ⁴	33	(2)	91	(10)


Total movement in non-cash items	33	(5)	91	(12)


Other ¹	-	(115)	-	4


Operating profit after tax	1,481	155	1,353	277


Tax gross up	250	34	216	37


Operating profit before tax	1,731	189	1,569	314


1. Mortality experience variances are driven by increased claims experience due to Covid-19, particularly impacting LGIA (reflected in Other) where we retain the majority of the mortality risk, and include a provision of £110m for future Covid-19 related claims.
2. Mortality assumption changes for LGR include a one off release of £153m (net of tax) from an update in the longevity trend assumption from adjusted CMI 2017 to adjusted CMI 2018. In 2019, the comparable one off release of £134m was from adjusted CMI 2016 to adjusted CMI 2017. Other positive longevity variances are driven by routine updates to our assumptions relating to base mortality rates.
3. The £145m positive Other change to valuation assumptions in LGR reflects both the reduction in the assumed late retirement factors applied to deferred annuities and the impact from updating unit cost and investment expense assumptions.
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 41

1.04 LGIM operating profit


	2020	2019⁵
	£m	£m


Asset management revenue (excluding 3rd party market data) ^1,2	929	889
Asset management transactional revenue ³	27	23
Asset management expenses (excluding 3rd party market data) ^1,2	(549)	(514)
Workplace Savings operating loss ⁴	(3)	(4)

Total LGIM operating profit	404	394

1. Asset management revenue and expenses exclude income and costs of £27m in relation to the provision of third party market data (2019: £24m).
2. The ETF operating result is included as part of asset management revenue and expenses.
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.
5. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. For the respective 2019 periods this has increased Asset management expenses (2019: £23m) and reduced the Workplace Savings operating result (2019: £6m).

1.05 LGC operating profit


	2020	2019
	£m	£m


Direct investments¹	112	217
Traded investment portfolio including treasury assets²	163	146


Total LGC operating profit	275	363


1. Direct Investments represents LGC's portfolio of assets across future cities (including specialist commercial real estate and clean energy), residential property 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



	2020	2019
	£m	£m


Investment variance ¹	(691)	(27)
M&A related and other variances ²	297	(123)


Total investment and other variances	(394)	(150)


1. The investment variance for the year ended 31 December 2020 is broadly made up of three significant items: 1) £459m in LGI, reflecting a reduction in the discount rate used to calculate protection liabilities, the rate being linked to UK government bond and US Treasury yields; 2) £299m in LGC, reflecting market movements in our traded and treasury portfolio and write-downs on certain property assets; 3) partially offset by a positive variance of £57m in respect of the defined benefit pension scheme, reflecting the impact of the acquisition of annuity assets from LGR, and the beneficial rate difference between the IAS19 and annuity discount rates.
2. M&A related and other variances includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. 2020 includes a £335m profit on disposal of the Mature Savings division.

Investment variance includes differences between actual and long term expected investment return on traded and real assets, economic assumption changes (e.g. credit default and inflation), the impact of any difference between the actual allocated asset mix and the target long-term asset mix on new pension risk transfer business, and excludes the yield associated with assets held for future new pension risk transfer business from the valuation discount rate.

The long term expected investment return is based on opening economic assumptions applied to the assets under management at the start of the reporting period. The assumptions underlying the calculation of the expected returns for traded equity and commercial property assets are based on long term historic average returns expected to apply through the cycle. The principal assumptions are:

	2020	2019


Equities	7%	7%
Commercial property	5%	5%
Residential property	RPI + 50bps	RPI + 50bps

IFRS Disclosures on performance and Release from operations Page 42

1.07 Earnings per share

(a) Basic earnings per share



	After tax	Per share¹	After tax	Per share¹
	2020	2020	2019	2019
	£m	p	£m	p


Profit for the year attributable to equity holders	1,607	27.10	1,834	30.92
Less: coupon payable in respect of restricted tier 1 convertible notes net of tax relief	(6)	(0.10)	-	-
Total basic earnings	1,601	27.00	1,834	30.92
Less: earnings derived from discontinued operations	(290)	(4.89)	(23)	(0.39)
Basic earnings derived from continuing operations	1,311	22.11	1,811	30.53

1. Basic earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the year, excluding employee scheme treasury shares.

(b) Diluted earnings per share


	After tax	Weighted average number of shares	Per share¹
	2020	2020	2020
	£m	m	p


Profit for the year attributable to equity holders	1,607	5,930	27.10
Net shares under options allocable for no further consideration	-	40	(0.18)
Conversion of restricted tier 1 convertible notes	-	307	(1.32)


Total diluted earnings	1,607	6,277	25.60
Less: diluted earnings derived from discontinued operations	(290)	-	(4.62)
Diluted earnings derived from continuing operations	1,317	6,277	20.98



	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
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 and conversion of restricted tier 1 convertible notes.

IFRS Disclosures on performance and Release from operations Page 43

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 the General Insurance divisions (General Insurance is in respect of 2019 only), which have been classified as discontinued following the group's announcement to sell these businesses to ReAssure Limited and Allianz respectively. The sale of the Mature Savings business completed on 7 September 2020, whilst that of the General insurance business completed on 31 December 2019.

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	costs¹	operations
For the year ended 31 December 2020	£m	£m	£m	£m	£m	£m


Operating profit/(loss)^#	1,731	404	275	189	(415)	2,184
Investment and other variances	19	(3)	(299)	(459)	24	(718)
Losses attributable to non-controlling interests	-	-	-	-	(36)	(36)

Profit/(loss) before tax attributable to equity holders	1,750	401	(24)	(270)	(427)	1,430
Tax (expense)/credit attributable to equity holders	(230)	(63)	(8)	58	94	(149)


Profit/(loss) for the year	1,520	338	(32)	(212)	(333)	1,281



					Group
					expenses	Total
					and debt	continuing
	LGR	LGIM²	LGC	LGI	costs²	operations
For the year ended 31 December 2019	£m	£m	£m	£m	£m	£m


Operating profit/(loss)^#	1,569	394	363	314	(365)	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	385	454	80	(447)	2,084
Tax (expense)/credit attributable to equity holders	(234)	(75)	(75)	12	75	(297)


Profit/(loss) for the year	1,378	310	379	92	(372)	1,787


1. Group expenses and debt costs include £27m of incremental costs incurred as a result of Covid-19.
2. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £29m for the year ended 31 December 2019.

# 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 44

1.08 Segmental analysis (continued)

(b) Total income

				LGC and	Total continuing
	LGR	LGIM^1,2	LGI	other³	operations
For the year ended 31 December 2020	£m	£m	£m	£m	£m


Internal income	-	201	-	(201)	-
External income	15,057	20,878	1,799	12,497	50,231


Total income	15,057	21,079	1,799	12,296	50,231


				LGC and	Total continuing
	LGR	LGIM^1,2	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


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 45

2.01 Consolidated Income Statement

		2020	2019
For the year ended 31 December 2020	Notes	£m	£m


Income
Gross written premiums		12,545	15,203
Outward reinsurance premiums		(3,187)	(3,452)
Net change in provision for unearned premiums		12	(66)


Net premiums earned		9,370	11,685
Fees from fund management and investment contracts		873	834
Investment return		39,168	53,014
Other operational income		820	1,253


Total income	1.08	50,231	66,786


Expenses
Claims and change in insurance contract liabilities		17,768	19,005
Reinsurance recoveries		(3,601)	(3,502)


Net claims and change in insurance contract liabilities		14,167	15,503
Change in investment contract liabilities		31,410	45,809
Acquisition costs		617	805
Finance costs		305	269
Other expenses		2,233	2,244


Total expenses		48,732	64,630


Profit before tax		1,499	2,156
Tax expense attributable to policyholder returns		(69)	(72)


Profit before tax attributable to equity holders		1,430	2,084


Total tax expense		(218)	(369)
Tax expense attributable to policyholder returns		69	72


Tax expense attributable to equity holders	3.07	(149)	(297)


Profit after tax from continuing operations	1.08	1,281	1,787
Profit after tax from discontinued operations		290	23


Profit for the year		1,571	1,810


Attributable to:
Non-controlling interests		(36)	(24)
Equity holders		1,607	1,834



Dividend distributions to equity holders during the year	3.05	1,048	998
Dividend distributions to equity holders proposed after the year end	3.05	754	753




		p	p
Total basic earnings per share¹	1.07	27.00	30.92
Total diluted earnings per share¹	1.07	25.60	30.75

Basic earnings per share derived from continuing operations¹	1.07	22.11	30.53
Diluted earnings per share derived from continuing operations¹	1.07	20.98	30.36



1. All earnings per share calculations are based on profit attributable to equity holders of the company.

IFRS Primary Financial Statements Page 46

2.02 Consolidated Statement of Comprehensive Income

	2020	2019
For the year ended 31 December 2020	£m	£m


Profit for the year	1,571	1,810
Items that will not be reclassified subsequently to profit or loss
Actuarial (losses) on defined benefit pension schemes	(168)	(62)
Tax on actuarial (losses) on defined benefit pension schemes	48	11


Total items that will not be reclassified subsequently to profit or loss	(120)	(51)


Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations	2	(67)
Movement in cross-currency hedge	7	13
Tax on movement in cross-currency hedge	(4)	(1)
Movement in financial investments designated as available-for-sale	2	72
Tax on movement in financial investments designated as available-for-sale	-	(15)


Total items that may be reclassified subsequently to profit or loss	7	2


Other comprehensive (expense) after tax	(113)	(49)


Total comprehensive income for the year	1,458	1,761


Total comprehensive income for the year attributable to:
Continuing operations	1,168	1,738
Discontinued operations	290	23

Total comprehensive income/(expense) for the year attributable to:
Non-controlling interests	(36)	(24)
Equity holders	1,494	1,785

IFRS Primary Financial Statements Page 47

2.03 Consolidated Balance Sheet


		2020	2019¹
As at 31 December 2020	Notes	£m	£m


Assets
Goodwill		68	64
Purchased interest in long term businesses and other intangible assets		329	190
Deferred acquisition costs		47	54
Investment in associates and joint ventures accounted for using the equity method		288	324
Property, plant and equipment		274	298
Investment property	3.06	8,475	7,695
Financial investments	3.06	526,057	498,389
Reinsurers' share of contract liabilities		6,939	5,947
Deferred tax assets	3.07	5	8
Current tax assets		634	468
Receivables and other assets		9,429	8,532
Assets of operations classified as held for sale		-	24,844
Cash and cash equivalents		18,020	13,923


Total assets		570,565	560,736



Equity
Share capital	3.08	149	149
Share premium	3.08	1,006	1,000
Employee scheme treasury shares		(75)	(65)
Capital redemption and other reserves		198	205
Retained earnings		8,224	7,749


Attributable to owners of the parent		9,502	9,038
Restricted tier 1 convertible notes	3.09	495	-
Non-controlling interests	3.10	(31)	55


Total equity		9,966	9,093



Liabilities
Non-participating insurance contract liabilities		89,029	77,881
Non-participating investment contract liabilities		343,543	320,594
Core borrowings	3.11	4,558	4,091
Operational borrowings	3.12	1,055	1,020
Provisions	3.16	1,288	1,220
UK deferred tax liabilities	3.07	168	189
Overseas deferred tax liabilities	3.07	39	76
Current tax liabilities		61	107
Payables and other financial liabilities	3.13	91,942	84,039
Other liabilities		756	804
Net asset value attributable to unit holders		28,160	31,507
Liabilities of operations classified as held for sale		-	30,115


Total liabilities		560,599	551,643


Total equity and liabilities		570,565	560,736


1. Following a change in accounting policy for LGIA universal life and annuity reserves, a number of balance sheet items have been restated, notably deferred acquisition costs, financial investments, reinsurers' share of contract liabilities, capital redemption and other reserves, non-participating insurance contract liabilities and overseas deferred tax liabilities. The overall net impact on the group's retained earnings as at 31 December 2019 is a reduction of £284m. Further details on the change in accounting policy are provided in Note 3.01.

IFRS Primary Financial Statements Page 48

2.04 Consolidated Statement of Changes in Equity


			Employee	Capital		Equity	Restricted
			scheme	redemption		attributable	tier 1	Non-
	Share	Share	treasury	and other	Retained	to owners	convertible	controlling	Total
For the year ended 31 December 2020	capital	premium	shares	reserves¹	earnings	of the parent	notes	interests	equity
For the year ended 31 December 2020	£m	£m	£m	£m	£m	£m	£m	£m	£m


As at 1 January 2020	149	1,000	(65)	205	7,749	9,038	-	55	9,093


Profit for the year	-	-	-	-	1,607	1,607	-	(36)	1,571
Exchange differences on translation of overseas operations	-	-	-	2	-	2	-	-	2
Net movement in cross-currency hedge	-	-	-	3	-	3	-	-	3
Net actuarial losses on defined benefit pension schemes	-	-	-	-	(120)	(120)	-	-	(120)
Net movement in financial investments designated as available-for-sale	-	-	-	2	-	2	-	-	2


Total comprehensive income for the year	-	-	-	7	1,487	1,494	-	(36)	1,458
Options exercised under share option schemes	-	6	-	-	-	6	-	-	6
Shares purchased	-	-	(23)	-	-	(23)	-	-	(23)
Shares vested	-	-	13	(27)	-	(14)	-	-	(14)
Employee scheme treasury shares: - Value of employee services	-	-	-	43	-	43	-	-	43
Share scheme transfers to retained earnings	-	-	-	-	12	12	-	-	12
Dividends	-	-	-	-	(1,048)	(1,048)	-	-	(1,048)
Restricted tier 1 convertible notes²	-	-	-	-	-	-	495	-	495
Coupon payable in respect of restricted tier 1 convertible notes net of tax relief	-	-	-	-	(6)	(6)	-	-	(6)
Movement in third party interests	-	-	-	-	-	-	-	(50)	(50)
Currency translation differences	-	-	-	(30)	30	-	-	-	-


As at 31 December 2020	149	1,006	(75)	198	8,224	9,502	495	(31)	9,966



1. Capital redemption and other reserves as at 31 December 2020 include share-based payments £101m, foreign exchange £43m, capital redemption £17m, hedging reserves £35m and available-for-sale reserves £2m.
2. See Note 3.09 for details.

IFRS Primary Financial Statements Page 49

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 2019	capital	premium	shares	reserves¹	earnings	of the parent	interests	equity
For the year ended 31 December 2019	£m	£m	£m	£m	£m	£m	£m	£m


As at 1 January 2019	149	992	(52)	230	7,261	8,580	72	8,652


Change in accounting policy²	-	-	-	9	(330)	(321)	-	(321)


Restated as at 1 January 2019	149	992	(52)	239	6,931	8,259	72	8,331


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 gains 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)	-	-	-
Change in accounting policy²	-	-	-	(54)	46	(8)	-	(8)


Restated as at 31 December 2019	149	1,000	(65)	205	7,749	9,038	55	9,093



1. Capital redemption and other reserves as at 31 December 2019 include share-based payments £85m, foreign exchange £71m, capital redemption £17m and hedging reserves £32m.
2. Change in accounting policy represents the impact on retained earnings of the change in accounting policy related to LGIA universal life and annuity reserves, described in Note 3.01. The change has been applied retrospectively.

IFRS Primary Financial Statements Page 50

2.05 Consolidated Statement of Cash Flows

		2020	2019
For the year ended 31 December 2020	Notes	£m	£m


Cash flows from operating activities
Profit for the year		1,571	1,810
Adjustments for non cash movements in net profit for the year
Net gains on financial investments and investment property		(28,530)	(45,516)
Investment income		(9,761)	(10,501)
Interest expense		337	322
Tax expense		144	598
Other adjustments		(12)	117
Net decrease/(increase) in operational assets
Investments held for trading or designated as fair value through profit or loss		6,519	(18,031)
Investments designated as available-for-sale		1,072	(179)
Other assets		(2,445)	(4,660)
Net increase/(decrease) in operational liabilities
Insurance contracts		11,607	13,089
Investment contracts		20,855	27,514
Other liabilities		(5,900)	21,313
Net increase in held for sale net liabilities		-	1,206


Cash utilised in operations		(4,543)	(12,918)
Interest paid		(301)	(263)
Interest received		5,190	5,047
Tax paid¹		(554)	(540)
Dividends received		4,509	5,389


Net cash flows from/(utilised in) operations		4,301	(3,285)


Cash flows from investing activities
Net acquisition of plant, equipment, intangibles and other assets		(164)	(89)
Net disposal of operations, net of cash (transferred)/acquired	3.02	(277)	198
Net (investment)/disposal in associates and joint ventures		(16)	29


Net cash flows (utilised)/generated from investing activities		(457)	138


Cash flows from financing activities
Dividend distributions to ordinary equity holders during the year	3.05	(1,048)	(998)
Coupon payment in respect of restricted tier 1 convertible notes, gross of tax		(7)	-
Options exercised under share option schemes	3.08	6	8
Treasury shares purchased for employee share schemes		(23)	(20)
Payment of lease liabilities		(37)	(33)
Proceeds from borrowings		1,086	1,309
Repayment of borrowings		(501)	(958)
Proceeds from issuance of restricted tier 1 convertible notes, net of associated expenses		495	-


Net cash flows utilised in financing activities		(29)	(692)


Net increase/(decrease) in cash and cash equivalents		3,815	(3,839)
Exchange losses on cash and cash equivalents		(28)	(16)
Cash and cash equivalents at 1 January (before reallocation of held for sale cash)		14,233	18,088


Total cash and cash equivalents		18,020	14,233
Less: cash and cash equivalents of operations classified as held for sale	3.03	-	(310)


Cash and cash equivalents at 31 December		18,020	13,923


1. Tax comprises UK corporation tax paid of £417m (2019: £381m), withholding tax of £137m (2019: £166m) and an overseas corporate tax refund of £nil (2019: £7m).

IFRS Disclosure Notes Page 51

3.01 Basis of preparation

The preliminary announcement for the year ended 31 December 20 20 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 20 20 Annual Report and Accounts, which will be available on the group's website on 22 March 202 1 . The group's 201 9 Annual Report and Accounts have been filed with the Registrar of Companies, and those for 20 20 will be delivered in due course. KPMG have reported on the 20 20 and 201 9 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) as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (EU), and with the requirements of the Companies Act 2006 applicable to companies reporting under IFRS. The group financial statements also comply with interpretations by the IFRS Interpretations Committee as issued by the IASB and as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU. Under the European Union (Withdrawal) Act 2018, enacted in UK law by the European Union (Withdrawal Agreement) Act 2020, an implementation period ha d been established, which end ed on 'IP completion day', defined as 31 December 2020 at 11.00 p.m. UK time. Reporting in the UK continues to be subject to the EU legislative framework until 31 December 2020. From 1 January 2021, the group will prepare financial statements in accordance with UK-adopted international accounting standards. A new UK endorsement mechanism, overseen by the Secretary of State, is being put in place and to this aim a UK Endorsement Board is currently in the process of being established.

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 Consolidated 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 20 20 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 52

3.01 Basis of preparation (continued)

Changes in accounting policy

Legal & General Insurance America (LGIA) universal life and annuity liabilities

During the year, the group has changed its accounting policy for universal life and annuity liabilities on business transacted by its US subsidiaries, which was previously based on recognised actuarial methods reflecting US GAAP. From 1 July 2020, the group has calculated such liabilities on the basis of current information using the gross premium valuation method, which is in line with how similar products are accounted for in other parts of the business.

The group believes the new policy is preferable as it more closely aligns the accounting for this business with that of business written in the UK, and brings it closer to the principles introduced by the upcoming new accounting standard for insurance contracts, IFRS 17. Following the change, the group no longer has any long-term business accounted for based on actuarial methods reflecting US GAAP therefore resulting in the financial statements providing more reliable and relevant information about the impact of long-term business on the group's financial position, financial performance or cash flows, in line with IFRS requirements.

In addition to the change highlighted above, as at 1 July 2020 the group has reclassified £ 1,621 m of financial investments from designated as available-for-sale and amortised cost to designated as fair value through profit or loss. This represents a further change in accounting policy permitted by IFRS 4, 'Insurance Contracts'.

The above represent voluntary changes in accounting policy and have been applied retrospectively, with prior year retained earnings adjusted accordingly.

The principal impact of the change on the prior year consolidated financial statements is in the non-participating insurance contract liabilities and in the deferred acquisition costs balance, which has been derecognised, and the associated cash flows now recognised within the insurance contract liability calculation. The carrying value of financial investments has also been affected where the measurement model for such investments has moved from amortised cost to fair value through profit or loss.

The impact on each line item of the Consolidated Balance Sheet as at 31 December 2019 is shown in the table below:

	As reported at 31 December 2019	Adjustments	As restated at 31 December 2019
	£m	£m	£m
Financial investments	498,376	13	498,389
Deferred acquisition costs	75	(21)	54
Reinsurers' share of contract liabilities	5,810	137	5,947
Non-participating insurance contract liabilities	77,317	564	77,881
Overseas deferred tax liability	182	(106)	76
Capital redemption and other reserves	250	(45)	205
Retained earnings	8,033	(284)	7,749

IFRS Disclosure Notes Page 53

3.02 Disposals

Mature Savings Division
On 6 December 2017 the group announced the sale of its Mature Savings business to ReAssure Limited ("ReAssure") for £650m. While the Part VII transfer became effective on 7 September 2020, the economic effective date of completion and the date on which the assets and liabilities of the Mature Savings business, previously classified as held for sale, were fully derecognised was 31 August 2020. The group recognised a pre-tax gain on disposal of £289m which has been included in profit from discontinued operations in the Consolidated Income Statement for the year ended 31 December 2020¹.

(i) Profit on the sale of the Mature Savings business
								2020
								£m


Consideration received								650
Less: Unwind of expected underlying profits before disposal²								(106)
Less: Final settlement³								(55)
Less: Transaction and separation costs								(63)


Net proceeds from sale								426


Carrying value of net assets disposed								137


Profit on the sale of the Mature Savings business before tax ¹								289


1. The group's total tax expense in the Consolidated Income Statement includes income tax borne by both policyholders and shareholders. This is apportioned between that attributable to policyholders' returns and equity holders' profits. Under this methodology, the profit on disposal before tax attributable to equity holders' is £335m, as disclosed in Note 3.03.
2. From 1 January 2018 up until the completion of the transaction, the group recognised the unwind of expected profits from the Mature Savings business through the Consolidated Income Statement, totalling £106m since that time. This effectively reduces the amount of consideration attributable to the final profit on sale by an equivalent amount.
3. The final settlement is an amount payable from the group to ReAssure, reflecting the residual net position of assets and liabilities transferred at the date of the Part VII.

(ii) Carrying value of net assets disposed
								2020
								£m


Deferred acquisition costs								438
Investment property								926
Financial investments								25,092
Reinsurers' share of contract liabilities								550
Income tax recoverable								101
Cash and cash equivalents								248
Other assets								117


Total assets								27,472


Participating insurance contracts								(4,297)
Participating investment contracts								(4,352)
Unallocated divisible surplus								(655)
Present value of future profits								42
Non-participating insurance contacts								(837)
Non-participating investment contracts								(16,804)
Provisions								(1)
Deferred tax liabilities								(17)
Payables and other financial liabilities								(253)
Other liabilities								(161)


Total liabilities								(27,335)


Carrying value of net assets disposed								137

IFRS Disclosure Notes Page 54

3.03 Discontinued operations

The group classifies as discontinued operations components which have been disposed of or are classified as held for sale, and which either represent a separate major line of business or geographical area, are part of a plan to dispose of one, or are a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are shown on the face of the Consolidated Income Statement, separately from the results of the other parts of the group's business.

The results of the Mature Savings business have been classified as discontinued operations. 2019 also includes the results of the General Insurance business, the sale of which completed on 31 December 2019.

(i) Financial performance of discontinued operations
	2020	2019
	£m	£m

Revenue ¹	(855)	4,225
Expenses ²	782	(3,973)
Profit on disposal	289	-
Profit before tax	216	252
Tax credit/(expense)	74	(229)
Profit after tax from discontinued operations	290	23
Total comprehensive income from discontinued operations	290	23
1. Revenue includes investment return.
2. Expenses include change in insurance and investment contract liabilities.


This is represented as:
	2020	2019
	£m	£m
Profit before tax	216	252
Tax expense attributable to policyholder returns	142	(224)
Profit before tax attributable to equity holders	358	28
Tax expense attributable to equity holders	(68)	(5)
Profit after tax from discontinued operations	290	23


Adjusted profit before tax attributable to equity holders reported in Note 1.01 as:
	2020	2019
	£m	£m
Operating profit^# from discontinued operations	34	11
Investment and other variances ¹	324	17
Adjusted profit before tax attributable to equity holders	358	28
1. Investment and other variances in 2020 includes the profit on disposal attributable to equity holders of the Mature Savings business of £335m. (2019 includes the profit on disposal of the General Insurance business of £2m).



(ii) Cash flow information of discontinued operations
	2020	2019
	£m	£m

Net cash inflow/(outflow) from operating activities	9	35
Net cash inflow/(outflow) from investing activities	-	-
Net cash inflow/(outflow) from financing activities	-	-
Net increase/(decrease) in cash generated by discontinued operations	9	35


# Operating profit represents 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

IFRS Disclosure Notes Page 55

3.04 Post balance sheet events

In the Budget on 3 March 2021, the Chancellor of the Exchequer announced an increase in the headline rate of corporation tax to 25% from 1 April 2023.

Deferred tax assets and liabilities are required to be valued using the tax rate which will be in force at the time when the temporary difference is expected to unwind. In line with the requirements of IAS12, the impact of the change in rate has not been reflected in the deferred tax balances at 31 December 2020 and will be recognised once it has been substantively enacted by the UK Parliament. The estimated impact of the change in tax rate would be an increase in the deferred tax liability of c.£50m.

The Solvency II balance sheet and capital position recognise deferred tax assets and liabilities associated with the taxable differences between the IFRS and Solvency II balance sheets. The estimated impact of the change in tax rate is a small increase in the group's coverage ratio.

3.05 Dividends and appropriations

	Dividend	Per share ¹	Dividend	Per share¹
	2020	2020	2019	2019
	£m	p	£m	p


Ordinary dividends paid and charged to equity in the year:
- Final 2018 dividend paid in June 2019	-	-	704	11.82
- Interim 2019 dividend paid in September 2019	-	-	294	4.93
- Final 2019 dividend paid in June 2020	754	12.64	-	-
- Interim 2020 dividend paid in September 2020	294	4.93	-	-

Total dividends	1,048	17.57	998	16.75


Ordinary share dividend proposed ²	754	12.64	753	12.64


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 2020, the directors declared a final dividend for 2020 of 12.64 pence per ordinary share. This dividend will be paid on 27 May 2021. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2021 and is not included as a liability in the Consolidated Balance Sheet as at 31 December 2020.

3.06 Financial investments and investment property

	2020	2019
	£m	£m


Equities¹	189,089	200,365
Debt securities ^{2, 5}	294,226	287,244
Accrued interest⁵	1,434	1,648
Derivative assets ³	24,631	14,828
Loans ^4,5	16,677	16,498


Financial investments	526,057	520,583


Investment property	8,475	9,107


Total financial investments and investment property	534,532	529,690
Less: financial investments and investment property of operations classified as held for sale	-	(23,606)
Financial investments and investment property	534,532	506,084
1. Equity securities include investments in unit trusts of £13,215m (31 December 2019: £13,046m).
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 £23,208m (31 December 2019: £13,113m).
4. Loans include £131m (31 December 2019: £121m) of loans valued at amortised cost.
5. As part of a change in accounting policy for LGIA universal life and annuity reserves, certain financial investments were reclassified from designated as amortised cost to designated as fair value through profit or loss. Accordingly, the 2019 balance for Debt securities, Accrued interest and Loans have been restated to reflect the fair value of those assets. Further details on the change in accounting policy are provided in Note 3.01.

IFRS Disclosure Notes Page 56

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
	2020	2020	2019	2019
	£m	£m	£m	£m


Profit before tax attributable to equity holders	1,430	1,788	2,084	2,112
Tax calculated at 19.00%	272	340	396	401

Adjusted for the effects of:
Recurring reconciling items:
Income not subject to tax	(1)	(1)	(4)	(4)
(Lower)/higher rate of tax on profits taxed overseas¹	(111)	(111)	(117)	(117)
Non-deductible expenses	11	11	2	2
Differences between taxable and accounting investment gains	(10)	(10)	(10)	(10)
Property income attributable to minority interests	-	-	4	4
Foreign tax	1	1	6	6
Unrecognised tax losses	14	14	14	14

Non-recurring reconciling items:
Income not subject to tax	-	-	(6)	(6)
Non-deductible expenses	-	-	6	6
Adjustments in respect of prior years²	(42)	(42)	9	9
Impact of the revaluation of deferred tax balances³	16	16	(2)	(2)
Other	(1)	(1)	(1)	(1)


Tax attributable to equity holders	149	217	297	302


Equity holders' effective tax rate ⁴	10.4%	12.1%	14.3%	14.3%

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 the group with regulatory capital flexibility for both our PRT and US term insurance businesses. This line also includes the impact of tax on our US operations which are taxed at 21%.
2. In line with normal practice, adjustments in respect of prior years relate to revisions of earlier estimates.
3. The Finance Act 2020 removed the planned reduction in the headline UK corporation tax rate from 19% to 17%. As a result, UK deferred tax assets and liabilities previously recognised at 17% have been revalued. In the Budget on 3 March 2021, the Chancellor of the Exchequer announced an increase in the headline rate of corporation tax to 25% from 1 April 2023. The impact of this has not been reflected in the tax balances at 31 December 2020. See Note 3.04 for further details.
4. 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 57

3.07 Tax (continued)

(b) Deferred tax
	2020	2019¹
Deferred tax (liabilities)/assets	£m	£m


Deferred acquisition expenses	85	35
- UK	-	(40)
- Overseas	85	75
Difference between the tax and accounting value of insurance contracts	(557)	(524)
- UK	(207)	(198)
- Overseas	(350)	(326)
Unrealised gains on investments	(11)	(184)
Excess of depreciation over capital allowances	18	15
Excess expenses	1	20
Accounting provisions and other	(48)	(44)
Trading losses²	289	217
Pension fund deficit	22	28
Acquired intangibles	(1)	(2)

Total net deferred tax liabilities	(202)	(439)
Less: net deferred tax liabilities of operations classified as held for sale³	-	182


Net deferred tax liabilities	(202)	(257)


Analysed by:

- Deferred tax assets
- Deferred tax assets	5	8
- UK deferred tax liabilities	(168)	(189)
- Overseas deferred tax liabilities⁴	(39)	(76)


Net deferred tax liabilities	(202)	(257)


1. US deferred tax liabilities in respect of deferred acquisition costs and non-participating insurance contracts have been restated following the change in accounting policy for LGIA universal life and annuity reserves. The net impact to overseas deferred tax liabilities is a reduction of £106m at 31 December 2019.
2. Trading losses reflect deferred tax on UK trade and US operating losses of £5m (2019: £4m) and £284m (2019: £213m) respectively.
3. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.
4. Overseas deferred tax liability is wholly comprised of US balances as at 31 December 2020.

IFRS Disclosure Notes Page 58

3.08 Share capital and share premium

		2020			2019
		Number of	2020		Number of	2019
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 2020			5,965,349,607		149	1,000
Options exercised under share option schemes			2,009,106		-	6


As at 31 December 2020			5,967,358,713		149	1,006


					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


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 Restricted tier 1 convertible notes

On 24 June 2020, Legal & General Group Plc issued £500m of 5.625% perpetual restricted Tier 1 contingent convertible notes. The notes are callable at par between 24 March 2031 and 24 September 2031 (the First Reset Date) inclusive and every 5 years after the First Reset Date. If not called, the coupon from 24 September 2031 will be reset to the prevailing five year benchmark gilt yield plus 5.378%.

The notes have no fixed maturity date. Optional cancellation of coupon payments is at the discretion of the issuer and mandatory cancellation is upon the occurrence of certain conditions. The Tier 1 notes are therefore treated as equity and coupon payments are recognised directly in equity when paid. The notes rank junior to all other liabilities and senior to equity attributable to shareholders. On the occurrence of certain conversion trigger events the notes are convertible into ordinary shares of the Issuer at the prevailing conversion price.

The notes are treated as restricted Tier 1 own funds for Solvency II purposes.

3.10 Non-controlling interests

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

As at 31 December 2020, non-controlling interests primarily represent third party ownership in Thorpe Park Holdings, a mixed residential/commercial retail space in which the group holds 50%.

The decrease in non-controlling interests during the year primarily reflects the deconsolidation of property investment vehicles following the sale of the Mature Savings business.

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

IFRS Disclosure Notes Page 59

3.11 Core borrowings

	Carrying	Coupon		Carrying	Coupon
	amount	rate	Fair value	amount	rate	Fair value
	2020	2020	2020	2019	2019	2019
	£m	%	£m	£m	%	£m

Subordinated borrowings
10% Sterling subordinated notes 2041 (Tier 2)	313	10.00	329	312	10.00	353
5.5% Sterling subordinated notes 2064 (Tier 2)	589	5.50	813	589	5.50	726
5.375% Sterling subordinated notes 2045 (Tier 2)	604	5.38	714	603	5.38	691
5.25% US Dollar subordinated notes 2047 (Tier 2)	628	5.25	703	648	5.25	704
5.55% US Dollar subordinated notes 2052 (Tier 2)	369	5.55	411	380	5.55	405
5.125% Sterling subordinated notes 2048 (Tier 2)	400	5.13	484	399	5.13	459
3.75% Sterling subordinated notes 2049 (Tier 2)	598	3.75	662	598	3.75	613
4.5% Sterling subordinated notes 2050 (Tier 2)	499	4.50	587	-	-	-
Client fund holdings of group debt (Tier 2) ¹	(42)	-	(51)	(38)	-	(44)
Total subordinated borrowings	3,958		4,652	3,491		3,907

Senior borrowings
Sterling medium term notes 2031-2041	609	5.88	926	609	5.88	877
Client fund holdings of group debt ¹	(9)	-	(12)	(9)	-	(13)
Total senior borrowings	600	-	914	600	-	864
Total core borrowings	4,558	-	5,566	4,091	-	4,771
1. £51m (2019: £47m) 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 60

3.11 Core borrowings (continued)

Subordinated borrowings

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.

4.5% Sterling subordinated notes 2050

On 1 May 2020, Legal & General Group Plc issued £500m of 4.5% dated subordinated notes. The notes are callable at par on 1 November 2030 and every five years thereafter. If not called, the coupon from 1 November 2030 will be reset to the prevailing five year benchmark gilt yield plus 5.25% pa. These notes mature on 1 November 2050.

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 61

3.12 Operational borrowings


	Carrying	Interest		Carrying	Interest
	amount	rate	Fair value	amount	rate	Fair value
	2020	2020	2020	2019	2019	2019
	£m	%	£m	£m	%	£m


Short term operational borrowings
Euro Commercial Paper	50	0.78	50	200	0.93	200
Bank loans and overdrafts	54	-	54	-	-	-
Non recourse borrowings
Consolidated Property Limited Partnerships	-	-	-	58	2.36	58
Later Living portfolio	72	2.77	72	72	3.47	72
CALA revolving credit facility	170	2.95	170	178	3.37	178
Class B Surplus Notes	639	2.45	639	489	4.33	489
Affordable Homes revolving credit facility	60	2.13	60	29	2.66	29
L&G Homes Limited revolving credit facility	-	-	-	16	3.44	16


Total operational borrowings ¹	1,045		1,045	1,042		1,042
Less: liabilities of operations classified as held for sale ²	-	-	-	(29)	2.36	(29)


Operational borrowings	1,045		1,045	1,013		1,013


1. Unit linked borrowings with a carrying value of £10m (2019: £7m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,055m (2019: £1,020m).
2. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.

Non recourse borrowings
- Consolidated Property Limited Partnerships loans had 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, a 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 was secured by way of a charge on the land assets of L&G Homes Limited.

The carrying value of operational borrowings approximates to 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 and Affordable Homes revolving credit facility which have been classified as Level 3.


Syndicated Credit Facility
As at 31 December 2020, the group had in place a £1bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2023. No amounts were outstanding at 31 December 2020.

IFRS Disclosure Notes Page 62

3.13 Payables and other financial liabilities

				2020	2019
				£m	£m

Derivative liabilities
Derivative liabilities				23,208	13,113
Repurchase agreements ¹				53,853	56,884
Other financial liabilities ²				14,881	14,476

Total payables and other financial liabilities				91,942	84,473
Less: payables and other financial liabilities of operations classified as held for sale ³				-	(434)

Payables and other financial liabilities				91,942	84,039



Due within 12 months ⁴				65,316	64,689
Due after 12 months ⁴				26,626	19,784
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, FX spots and the value of short positions taken out to cover reverse repurchase agreements. The value of the short positions at 31 December 2020 was £5,147m (2019: £7,673m).
3. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.
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
					Amortised
	Total	Level 1	Level 2	Level 3	cost¹
As at 31 December 2020	£m	£m	£m	£m	£m

Derivative liabilities	23,208	300	22,826	82	-
Repurchase agreements	53,853	-	53,853	-	-
Other financial liabilities	14,881	5,222	29	11	9,619
Total payables and other financial liabilities	91,942	5,522	76,708	93	9,619

					Amortised
	Total	Level 1	Level 2	Level 3	cost¹
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
1. The carrying value of payables and other financial liabilities at amortised cost approximates its fair value.

Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as a Level 3 liability. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (2019: £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 2020 (2019: no significant transfers).

IFRS Disclosure Notes Page 63

3.14 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
		2020		2020		2019		2019
		£m		£m		£m		£m
Economic sensitivity
Long-term insurance
100bps increase in interest rates		438		350		257		130
50bps decrease in interest rates		(283)		(227)		(188)		(109)
50bps increase in future inflation expectations	(148)		(119)		53		43
Credit spreads widen by 100bps with no change in expected defaults	(304)		(246)		(220)		(273)
25% rise in equity markets¹		482		399		512		446
25% fall in equity markets¹		(482)		(399)		(513)		(446)
15% rise in property values¹		1,111		903		1,016		838
15% fall in property values¹		(1,187)		(964)		(1,075)		(886)
10bps increase in credit default assumptions	(856)		(692)		(717)		(580)
10bps decrease in credit default assumptions¹	832		672		703		569

Non-economic sensitivity
Long-term insurance
1% increase in annuitant mortality	209		176		195		221
1% decrease in annuitant mortality	(218)		(183)		(201)		(225)
5% increase in assurance mortality	(450)		(356)		(385)		(305)
10% increase in maintenance expenses	(254)		(205)		(210)		(170)

1. Following improvements to the modelling of market risk sensitivities during the current year, a number of 2019 impacts have been restated to be on a basis consistent with the 2020 results. These restatements do not impact any items reported in the Consolidated Income Statement or Consolidated Balance Sheet.

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.

In calculating the alternative values, all other assumptions are left unchanged. In practice, items of the group's experience may be correlated.

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.

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.

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.

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.

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. All lifetime mortgages are excluded, as their primary exposure is to property risk, and therefore captured under the property stress below.

The equity stresses are a 25% rise and 25% fall in listed equity market values.

The property stresses adopted are a 15% rise and 15% fall in property market values including lifetime mortgages. 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 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. All lifetime mortgages are excluded, as their primary exposure is to property risk, and therefore captured under the property stress below.

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

The maintenance expense stress is a 10% increase in all types of maintenance expenses in future years.

IFRS Disclosure Notes Page 64

3.15 Foreign exchange rates

Principal rates of exchange used for translation are:

Year end exchange rates	2020	2019


United States dollar	1.37	1.33
Euro	1.12	1.18



Average exchange rates	2020	2019


United States dollar	1.28	1.28
Euro	1.13	1.14

3.16 Provisions

(a) Analysis of provisions


			2020	2019
		Note	£m	£m


Retirement benefit obligations		3.16 (b)	1,165	1,107
Other provisions			123	114


Total provisions			1,288	1,221


Less: liabilities of operations classified as held for sale			-	(1)


Provisions			1,288	1,220



(b) Retirement benefit obligations
	Fund and	CALA Homes	Fund and	CALA Homes
	Scheme	and Overseas	Scheme	and Overseas
	2020	2020	2019	2019
	£m	£m	£m	£m


Gross pension obligations included in provisions	1,138	27	1,083	24
Annuity obligations insured by LGAS	(1,051)	-	(944)	-


Gross defined benefit pension deficit	87	27	139	24
Deferred tax on defined benefit pension deficit	(17)	(5)	(24)	(4)


Net defined benefit pension deficit	70	22	115	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 65

3.17 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.

3.18 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 £137m (2019: £86m) for all employees.
At 31 December 2020 and 31 December 2019 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:


	2020	2019
	£m	£m


Salaries	8	12
Share-based incentive awards	5	7


Key management personnel compensation	13	19

(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 £50m (2019: £78m) purchased by the group's UK defined benefit pension schemes during the year, priced on an arm's length basis;

- During the year, the Legal & General Group UK Senior Pension Scheme (the Scheme) completed an Assured Payment Policy (APP) transaction with Legal and General Assurance Society Limited (LGAS), a group company. An APP is an investment contract product sold by LGR which, issued to a pension scheme, provides the scheme with a fixed or inflation linked schedule of payments to match the scheme's expected liabilities.

At inception a premium of £397m was paid by the Scheme to LGAS, and LGAS and the Scheme recognised an investment contract liability and an APP plan asset respectively of the same amount. As at 31 December 2020, LGAS recognised a liability related to the APP transaction with the Scheme of £396m which is included in the group's non-participating investment contract liabilities. The Scheme holds a transferable plan asset of the same amount which does not eliminate on consolidation.

- Loans outstanding from related parties at 31 December 2020 of £89m (2019: £83m), with a further commitment of £14m;

- The group has total other commitments of £1,207m to related parties (2019: £1,213m), of which £772m has been drawn at 31 December 2020 (2019: £749m).

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