L&G HY 09 Results Part 7

RNS Number : 8046W

Legal & General Group Plc

04 August 2009

 



Appendices										Page 83
I  UK funds under management
								At 30.06.09	At 30.06.08	At 31.12.08
								£m	£m	£m
Total investments								270,899	285,785	264,228
Represented by
Index tracking funds:
- UK equities								55,595	73,117	54,780
- Overseas equities								56,715	60,794	54,366
- Fixed interest								34,798	35,989	35,912
- Index linked								31,514	30,958	30,704
- Cash/deposits								1,939	523	(186)
Total index tracking funds								180,561	201,381	175,576
Actively managed funds								67,864	69,287	65,872
Structured solutions								22,474	15,117	22,780
								270,899	285,785	264,228
By investment approach
Index equities								112,310	133,910	109,146
Index bonds (including index linked funds and cash)								68,252	67,470	66,430
Active bonds (including index linked funds and cash)								54,453	51,447	51,439
Structured solutions								22,474	15,117	22,780
Active equities								7,290	9,155	7,576
Property								5,899	8,568	6,646
Private equity								221	118	211
								270,899	285,785	264,228
By source of business
Institutional funds under management1:
- Managed pension funds pooled								163,875	181,279	160,946
- Structured solutions								22,474	15,117	22,780
- Other								9,055	8,473	8,631
- Managed pension funds segregated								6,378	6,769	3,832
Total institutional funds under management								201,782	211,638	196,189
UK businesses (life and general insurance funds)								58,198	63,198	57,688
UK businesses (unit trusts - excluding life fund investment)								10,919	10,949	10,351
								270,899	285,785	264,228
1.  Excludes institutional investments in unit trust funds.
Appendices										Page 84
II New business
a) Risk and Savings1 new business APE by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
Protection					46	44	49	48	60	50
Annuities					50	83	58	45	87	91
Total Risk					96	127	107	93	147	141
Unit linked bonds					14	18	30	26	35	40
Pensions, stakeholder and other non profit					71	76	82	84	93	69
With-profits					66	52	40	47	61	43
Total Savings					151	146	152	157	189	152
Total UK Risk and Savings					247	273	259	250	336	293
1. Excludes core retail investments.
b) Risk and Savings1 new business annual premiums by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
Protection					46	44	49	48	60	50
Annuities					-	-	-	-	-	-
Total Risk					46	44	49	48	60	50
Unit linked bonds					-	-	-	-	-	-
Pensions, stakeholder and other non profit					37	40	44	43	51	43
With-profits					36	32	25	26	32	25
Total Savings					73	72	69	69	83	68
Total UK Risk and Savings					119	116	118	117	143	118
1. Excludes core retail investments.
c) Risk and Savings1 new business single premiums by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
Protection					-	-	-	-	-	-
Annuities					498	830	573	457	871	905
Total Risk					498	830	573	457	871	905
Unit linked bonds					144	175	297	260	347	402
Pensions, stakeholder and other non profit					345	358	385	404	418	261
With-profits					290	203	155	208	304	171
Total Savings					779	736	837	872	1,069	834
Total UK Risk and Savings					1,277	1,566	1,410	1,329	1,940	1,739
1. Excludes core retail investments.
d) International1 new business APE by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
USA					13	16	15	12	12	12
Netherlands					6	7	6	6	8	9
France					6	24	6	8	4	15
Total					25	47	27	26	24	36
1. Excludes core retail investments.
Appendices										Page 85
II New business (continued)
e) International1 new business annual premiums by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
USA					13	16	15	12	12	12
Netherlands					2	2	3	4	3	3
France					-	19	2	5	-	10
Total					15	37	20	21	15	25
1. Excludes core retail investments.
f) International1 new business single premiums by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
USA					-	-	-	-	-	-
Netherlands					31	55	29	32	37	59
France					61	49	38	34	43	49
Total					92	104	67	66	80	108
1. Excludes core retail investments.
g) Core retail investments new business APE by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
UK					91	60	61	53	73	42
France					1	2	2	1	2	1
Total					92	62	63	54	75	43
h) Core retail investments new business annual premiums by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
UK					9	9	10	12	14	5
France					-	-	-	-	-	-
Total					9	9	10	12	14	5
i) Core retail investments new business single premiums by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
UK					818	513	510	416	577	376
France					16	16	19	18	19	7
Total					834	529	529	434	596	383
Appendices										Page 86
II New business (continued)
j) Analysis of total Risk and Savings APE
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
Independent financial advisers					186	191	207	199	234	187
Tied					86	51	57	57	76	53
Direct					25	27	9	7	10	8
Total individual Risk and Savings1					297	269	273	263	320	248
Individual Risk and Savings1					206	209	212	210	247	206
Core retail investments					91	60	61	53	73	42
Total individual Risk and Savings					297	269	273	263	320	248
Group Risk and Savings					41	64	47	40	90	86
Total Risk and Savings					338	333	320	303	410	334
1. Excludes core retail investments.
k) Investment management new business by quarter
					3 months	3 months	3 months	3 months	3 months	3 months
					30.06.09	31.03.09	31.12.08	30.09.08	30.06.08	31.03.08
					£m	£m	£m	£m	£m	£m
Managed pension funds1
Pooled funds					5,763	6,025	3,423	9,748	8,254	5,308
Segregated funds					533	714	430	47	141	223
Total managed funds					6,296	6,739	3,853	9,795	8,395	5,531
Other funds2					1,382	720	890	908	3,151	568
Total					7,678	7,459	4,743	10,703	11,546	6,099
Attributable to:
Legal & General Investment Management					7,166	7,016	4,185	10,464	10,611	5,613
Legal & General Retail Investments					512	443	558	239	935	486
1. New monies from pension fund clients of Legal & General Assurance (Pensions Management) Limited exclude £2.4bn (H1 08: £4.6bn; FY 08: £7.4bn) held through the period on a temporary basis, generally as part of portfolio reconstructions.
2. Includes segregated property, property partnerships, private equity partnerships, and institutional clients funds managed by Legal & General Investment Management and institutional investments in unit trust funds managed by Legal & General Retail Investments.

Appendices									Page 87
III  IFRS basis of preparation

Basis of preparation

The Group's financial information for the period ended 30 June 2009 has been prepared in accordance with the Listing Rules of the Financial Services Authority. The 2009 Half-year Report has also been prepared in accordance with IAS 34, 'Interim Financial Reporting'. The Group's financial information has been prepared in accordance with the accounting policies and methods of computation which the Group expects to adopt for the 2009 year end. These policies are consistent with the principal accounting policies which were set out in the Group's 2008 consolidated financial statements which were consistent with IFRSs issued by the International Accounting Standards Board as adopted by the European Commission for use in the European Union. 

The preparation of the Half-year Report 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 information. The economic and non-economic actuarial assumptions used to establish the liabilities in relation to insurance and investment contracts are significant. For half-year financial reporting, economic assumptions have been updated to reflect market conditions. Non-economic assumptions are consistent with those used in the 31 December 2008 financial statements except for higher expense assumptions on unit pensions and non profit annuity contracts, and lower expense assumptions for our term assurance business. Claims in payment expense assumptions for our group permanent health insurance business have also been reviewed and strengthened. All of these changes reflect experience to date in 2009.

Estimates are based on management's best knowledge of current circumstances and future events and actions, however, actual results may differ from those estimates, possibly significantly. 

The Group chose to adopt IFRS 8, 'Operating segments' from the 31 December 2008 financial statements. IFRS 8 supercedes the disclosure requirements of IAS 14, 'Segment reporting' and reflects the basis on which the business is managed. In accordance with the provisions of the standard, the half-year comparatives have been reclassified. There is no impact on profit or net assets resulting from the adoption of this standard, as its provisions relate to disclosure.

The Group has adopted the revised presentation under Revised IAS 1, 'Presentation of financial statements' and accordingly included a separate statement of comprehensive income. The revision prohibits the presentation of items of income and expenses in the statement of changes in equity and requires changes in equity attributable to shareholders to be presented separately to those that are not attributable to shareholders. The changes are purely presentational and the comparatives have been restated to reflect the new presentation.

Reportable segments

The Group has five reporting segments comprising Risk, Savings, Investment management, International, and Group capital and financing.  

The Risk segment comprises individual and group protection, individual and bulk purchase annuities, and general insurance, together with estate agencies and the housing related business conducted through our regulated mortgage network.  

The Savings segment comprises non profit investment bonds, non profit pensions (including SIPPs), ISAs, retail unit trusts, and all with-profits products. 'Other' principally comprises the Group's interest in Cofunds.

The Investment management segment comprises institutional fund management and institutional unit trust business. 

The International segment comprises businesses in the United States, France, the Netherlands and emerging markets.  

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

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

The Group assesses performance and allocates resources on the basis of IFRS operating profit before tax, (set out in the Operating profit income statement). Segmental IFRS operating profit before tax is reconciled to the consolidated profit from continuing operations before tax attributable to equity holders and consolidated profit from ordinary activities after income tax.

Appendices									Page 88
IV  European Embedded Value Methodology

Basis of preparation

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

Covered business

The Group uses EEV methodology to value individual and group life assurance, pensions and annuity business written in the UK, Continental Europe and the US. The UK covered business also includes non-insured self invested personal pension (SIPP) business.

In 2008, business written in our UK managed pension funds company was removed from covered business and the result of the managed pension funds business reported on an IFRS basis. Half-year 2008 comparatives have been restated accordingly.

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

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

Description of methodology

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

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

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

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

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

Embedded value

Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the shareholders' equity of other businesses, less the value included for purchased interests in long term business.  

The embedded value is the sum of the shareholder net worth (SNW) and the value of the in-force business (VIF). SNW is defined as those amounts, within covered business (both within the long term fund and held outside the long term fund but used to support long term business), which are regarded either as required capital or which represent free surplus.

The VIF is the present value of future shareholder profits arising from the covered business, projected using best estimate assumptions, less an appropriate deduction for the cost of holding the required level of capital and the time value of financial options and guarantees (FOGs).

Service companies

All services relating to the UK covered business are charged on a cost recovery basis, with the exception of investment management services provided to Legal & General Pensions Limited (LGPL), which have been charged at market referenced rates since 1 January 2007, and to Legal & General Assurance Society Limited (Society), which have been charged at market referenced rates since 1 July 2007. Profits arising on the provision of these services are valued on a look through basis.

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

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

New business

New business premiums reflect income arising from the sale of new contracts during the reporting period and any changes to existing contracts, which were not anticipated at the outset of the contract.  

In-force business comprises previously written single premium, regular premium and recurrent single premium contracts. 

Appendices									Page 89
IV  European Embedded Value Methodology (continued)

Department of Work and Pensions rebates have not been treated as recurrent and are included in single premium new business when received.  

New business contribution arising from the new business premiums written during the reporting period has been calculated on the same economic and operating assumptions used in the embedded value at the end of the financial period. This has then been rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.

The present value of future new business premiums (PVNBP) has been calculated and expressed at the point of sale. The PVNBP is equivalent to the total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end of the financial period. The new business margin is defined as new business contribution at the end of the reporting period divided by the PVNBP. The premium volumes and projection assumptions used to calculate the PVNBP are the same as those used to calculate new business contribution. 

Projection assumptions

Cash flow projections are determined using realistic assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on conditions at the end of the financial period. Future investment returns are projected by one of two methods. The first method is based on an assumed investment return attributed to assets at their market value. The second, which is used in the US, where the investments of that subsidiary are substantially all fixed interest, projects the cash flows from the current portfolio of assets and assumes an investment return on reinvestment of surplus cash flows. The assumed discount and inflation rates are consistent with the investment return assumptions.

Detailed projection assumptions including mortality, morbidity, persistency and expenses reflect recent operating experience and are normally reviewed annually. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favourable changes in operating experience are not anticipated until the improvement in experience has been observed.

All costs relating to the covered business, whether incurred in the covered business or elsewhere in the Group, are allocated to that business. The expense assumptions used for the cash flow projections therefore include the full cost of servicing this business.

Tax

The projections take into account all tax which is expected to be paid, based on best estimate assumptions, applying current legislation and practice together with known or expected future changes. This includes tax which would arise if surplus assets within the covered business were eventually to be distributed. The benefit of certain current UK tax rules on the apportionment of income has not been reflected as it is expected that these rules will be amended before such benefit is realised.

Allowance for risk

Aggregate risks within the covered business are allowed for through the following principal mechanisms:

i.  setting required capital levels with reference to both the Group's internal risk based capital models, and an assessment of the strength of regulatory reserves in the covered business;

ii.  allowing explicitly for the time value of financial options and guarantees within the Group's products; and

iii.  setting risk discount rates by deriving a Group level risk margin to be applied consistently to local risk free rates.

Required capital and free surplus

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

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

For UK with-profits business, the required capital is covered by the surplus within the with-profits part of the fund and no effect is attributed to shareholders except for the burn-through cost, which is described later. This treatment is consistent with the Principles and Practices of Financial Management for this part of the fund.

For UK non profit business, the required capital will be maintained at no less than the level of the EU minimum solvency requirement. This level, together with the margins for adverse deviation in the regulatory reserves, is, in aggregate, in excess of internal capital targets assessed in conjunction with the Individual Capital Assessment (ICA) and the with-profits support account.  

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

Appendices									Page 90
IV  European Embedded Value Methodology (continued)

As the investment return, net of tax, on that capital is less than the risk discount rate, there is a resulting cost of capital which is reflected in the value of new business.  

For Legal & General America, the Company Action Level (CAL) of capital has been treated as required capital for modelling purposes. The CAL is the regulatory capital level at which the company would have to take prescribed action, such as submission of plans to the State insurance regulator, but would be able to continue operating on the existing basis. The CAL is currently twice the level of capital at which the regulator is permitted to take control of the business.

For Legal & General Netherlands, required capital has been set at 100% of EU minimum solvency margin for all products without FOGs. For those products with FOGs, capital of between 100% and 175% of the EU minimum solvency margin has been used. The level of capital has been determined using risk based capital techniques. 

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

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

Financial options and guarantees

Under the EEV Principles an allowance for time value of FOGs is required where a financial option exists which is exercisable at the discretion of the policyholder. These types of option principally arise within the with-profits part of the fund and their time value is recognised within the with-profits burn-through cost described below. Additional financial options for non profit business exist only for a small amount of deferred annuity business where guaranteed early retirement and cash commutation terms apply when the policyholders choose their actual retirement date.

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

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

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

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

In the US, FOGs relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is based on the accumulated value of the contract including accrued interest. The crediting rates are discretionary but related to the accounting income for the amortising bond portfolio. The majority of the guaranteed minimum crediting rates are between 4% and 5%. The assets backing these contracts are invested in US Dollar denominated fixed interest securities.

In the Netherlands, there are two types of guarantees which have been separately provided for: interest rate guarantees and maturity guarantees. Certain contracts provide an interest rate guarantee where there is a minimum crediting rate based on the higher of 1-year Euribor and the policy guarantee rate. This guarantee applies on a monthly basis. Certain unit linked contracts provide a guaranteed minimum value at maturity where the maturity amount is the higher of the fund value and a guarantee amount. The fund values for both these contracts are invested in Euro denominated fixed interest securities.

Appendices									Page 91
IV  European Embedded Value Methodology (continued)

In France, FOGs which have been separately provided for relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the contract including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios plus income and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed surrender values. Local statutory accounting rules require the establishment of a specific liability when the accounting income for a company is less than 125% of the guaranteed minimum credited returns, although this has never been required. In general, the guaranteed annual bonus rates are between 0% and 4.5%. 

Risk discount rate 

The risk discount rate (RDR) is a combination of the risk free rate and a risk margin, which reflects the residual risks inherent in the Group's covered businesses, after taking account of prudential margins in the statutory provisions, the required capital and the specific allowance for FOGs.

The risk margin has been determined based on an assessment of the Group's weighted average cost of capital (WACC). This assessment incorporates a beta for the Group, which measures the correlation of movements in the Group's share price to movements in a relevant index. Beta values therefore allow for the market's assessment of the risks inherent in the business relative to other companies in the chosen index. 

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

The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and subordinated long term debt. All debt interest attracts tax relief at a rate of 28%. 

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

For FY 08 reporting the risk margin was increased to 4.5% (H1 08: 3.0%). This 1.5% increase included a 0.5% increase in the equity risk premium and a further 1% increase to reflect increased market perceived company specific risks in the current dislocated market conditions. The risk margin has been maintained at 4.5% for the 2009 Half-year results.

Key assumptions are summarised below:

Risk free rate	Derived from gross redemption yield on the 20 year gilt index
Equity risk premium	3.5% (UK only)
Property risk premium	2.0% (UK only)
Risk margin	4.5%

Analysis of profit

Operating profit is identified at a level which reflects an assumed longer term level of investment return. 

The contribution to operating profit in a period is attributed to four sources: 

i.  new business; 

ii.  the management of in-force business; 

iii.  development costs; and 

iv.  return on shareholder net worth. 

Further profit contributions arise from actual investment return differing from the assumed long term investment return (investment return variances), and from the effect of economic assumption changes.

The contribution from new business represents the value recognised at the end of each period from new business written in that period, after allowing for the actual cost of acquiring the business and of establishing the required technical provisions and reserves and after making allowance for the cost of capital. New business contributions are calculated using closing assumptions.

Appendices									Page 92
IV  European Embedded Value Methodology (continued)

The contribution from in-force business is calculated using opening assumptions and comprises:

i.  expected return - the discount earned from the value of business in-force at the start of the year;

ii.  experience variances - the variance in the actual experience over the reporting period from that assumed in the value of business in-force as at the start of the year; and

iii.  operating assumption changes - the effects of changes in future assumptions, other than changes in economic assumptions from those used in valuing the business at the start of the year. These changes are made prospectively from the end of the year.

Development costs relate to investment in strategic systems and development capability.

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

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

Investment return variances represent the effect of actual investment performance and changes to investment policy on SNW and VIF business from that assumed at the beginning of the period. 

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

Appendices									Page 93
V  Statement of Directors' Responsibilities (extracted from the Half-year Report)

We confirm to the best of our knowledge that: 

• the condensed set of financial statements have been prepared in accordance with IAS 34 as adopted by the European Union; and

• the Interim Management Report includes a fair review of the information required by DTR 4.2.7, namely important events that have occurred during the first six months of the financial period and their impact on the condensed set of financial statements, as well as a description of the principal risks and uncertainties faced by the Company and the undertakings included in the consolidation taken as a whole for the remaining six months of the financial year; 

• the Interim Management Report includes, as required by DTR 4.2.8, a fair review of material related party transactions that have taken place in the first six months of the financial period and any material changes in the related party transactions described in the last Annual Report; and

• the European Embedded Value basis consolidated income statement, the consolidated statement of comprehensive income and the consolidated balance sheet and associated notes have been prepared on the European Embedded Value basis as set out in Notes 22 and 33.

The directors of Legal & General Group Plc are listed in the Legal & General Group Plc Annual Report for 31 December 2008, except Dame Clara Furse who was appointed as a non-executive director of the Company on 1 June 2009. A list of current directors is maintained on the Legal & General Group Plc website: www.legalandgeneralgroup.com.

By order of the Board

Tim Breedon				Andrew Palmer
Group Chief Executive				Group Director (Finance)
3 August 2009				3 August 2009

Appendices									Page 94
VI Independent review report to Legal & General Group Plc (extracted from the Half-year Report)

Introduction

We have been engaged by the Company to review the condensed consolidated half-year financial information in the half-year financial report for the six months ended 30 June 2009, which comprises:

• the condensed consolidated income statement, consolidated statement of comprehensive income, condensed consolidated balance sheet as at 30 June 2009, the condensed consolidated statement of changes in equity, the condensed consolidated cash flow statement and related notes, prepared in accordance with the accounting policies set out in Note 8 ('the condensed set of financial statements', together 'the half-year financial information'). 

• the consolidated income statement, the consolidated balance sheet as at 30 June 2009 and related notes prepared on the European Embedded Value ('EEV') basis ('the supplementary half-year financial information'); and

We have read the other information contained in the half-year financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated half-year financial information.

Directors' responsibilities

The half-year financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-year financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in Note 8, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed consolidated half-year financial information included in this half-year financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.

The directors are responsible for preparing the supplementary half-year financial information in accordance with the EEV basis set out in Notes 22 and 33.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed consolidated financial information in the half-year financial report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. 

Our responsibility on the supplementary half-year financial information in the half-year financial report is to express to the Company a conclusion based on our review. This report on the supplementary half-year financial information, including the conclusion, has been prepared for and only for the Company in accordance with our letter of engagement dated 22 July 2009 and for no other purpose.

We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of half-year financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Appendices									Page 95
VI Independent review report to Legal & General Group Plc (extracted from the Half-year Report)

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that:

• the condensed consolidated half-year financial information in the half-year financial report for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority; and,

• the supplementary half-year financial information in the half-year financial report for the six months ended 30 June 2009 are not prepared, in all material respects, in accordance with the EEV basis set out in Notes 22 and 33.

PricewaterhouseCoopers LLP
Chartered Accountants
3 August 2009
London

Notes:

(a)  The maintenance and integrity of the Legal & General Group Plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

(b)  Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

END

 

 

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