L&G 2008 Final Results Part 6

RNS Number : 4210P

Legal & General Group Plc

25 March 2009

 



Asset Disclosures										Page 71
6.01  Investment portfolio
									2008	2007
									Market	Market
									value	value
							Notes		£bn	£bn
Worldwide funds under management									280	312
Client and policyholder assets									(233)	(264)
Non-unit linked With-profits fund assets1									(19)	(23)
Assets to which shareholders are directly exposed									28	25
Comprising:
Assets held to back the UK non-linked non profit business:
	Legal & General Pensions Limited (LGPL)								18.7	16.6
	Other UK non profit insurance business2								1.9	0.5
							3.20		20.6	17.1
Assets held to back other insurance businesses (including Triple-X reserves)									2.5	1.8
Society shareholder capital							3.20/6.05		2.9	4.0
Other Group shareholder assets							6.05		2.3	2.1
									28.3	25.0
1. Includes assets backing participating business in France of £2bn (2007 restated: £2bn).
2. Includes £1.5bn of assets held within Nationwide Life, acquired during the year.
Analysed by asset class:
					LGPL	Other UK non profit insurance business	Other insurance business	Society shareholder capital	Other Group shareholder assets	Total
As at 31 December 2008				Notes	£bn	£bn	£bn	£bn	£bn	£bn
Equities1					-	0.1	-	1.3	-	1.4
Property					-	-	-	0.2	-	0.2
Bonds				6.02	17.1	0.5	2.1	0.7	1.0	21.4
Derivative assets2					1.3	0.7	-	-	0.3	2.3
Cash (including cash equivalents)					0.3	0.6	0.4	0.7	1.0	3.0
					18.7	1.9	2.5	2.9	2.3	28.3
1. Since the year end the Group has reduced shareholder exposure to equity investments by £0.4bn through disposals.
2. Derivative assets are shown gross of derivative liabilities. Exposures arise from: a. The use of derivatives for efficient portfolio management, especially the use of interest rate swaps, inflation swaps and foreign exchange forward contracts for asset and liability management. b. Derivatives matching Guaranteed Equity Bonds within the Nationwide Life portfolio.
Asset Disclosures										Page 72
6.02  Bond portfolio summary
(i) Analysed by sector
							LGPL		Total
As at 31 December 2008						Notes	£m	%	£m	%
Sovereigns, Supras and Sub-Sovereigns							1,317	8	2,517	12
Banks	- Tier 11					6.04	594	3	650	3
	- Tier 2 and other subordinated					6.04	2,207	13	2,410	11
	- Senior						1,096	6	1,815	8
Utilities							2,033	12	2,291	11
Consumer Services & Goods							1,627	9	1,829	8
Financial Services							894	5	989	5
Technology & Telecoms							940	6	1,172	5
Insurance							775	5	904	4
Industrials							557	3	784	4
Oil & Gas							549	3	611	3
Health Care							484	3	541	3
Property							443	3	516	2
ABS						6.03	2,572	15	3,389	16
CDO							991	6	1,004	5
Total							17,079	100	21,422	100
1. Tier 1 holdings include £75m of preference shares.
(ii) Analysed by domicile
							LGPL		Total
As at 31 December 2008							£m	%	£m	%
United Kingdom							7,694	45	8,996	42
North America							4,831	28	6,833	32
Europe							3,868	23	4,821	22
Other							686	4	772	4
Total							17,079	100	21,422	100
Within the UK non profit annuity business all non-sterling denominated bonds are currency hedged back to sterling.
(iii) Analysed by credit rating
							LGPL		Total
As at 31 December 2008							£m	%	£m	%
AAA							2,571	15	4,616	22
AA							1,893	11	2,359	11
A							7,064	42	8,180	38
BBB							3,779	22	4,385	20
BB or below							168	1	183	1
Unrated: Bespoke CDOs							878	5	878	4
Other							726	4	821	4
							17,079	100	21,422	100
Other unrated bonds have been assessed and rated internally and are all categorised as investment grade.
Asset Disclosures										Page 73
6.02  Bond portfolio summary (continued)
As at 31 December 2008
(iv) CDOs
Total Group holds collateralised debt obligations (CDO) with a market value of £1,004m.
These holdings include £126m in traded CDOs and £34m exposure to an equity tranche of a bespoke CDO. The current market value of the equity tranche is approximately equal to the present value of future interest payable on the notes.
The balance of £844m relates to a further four CDOs that were constructed in 2007 and 2008 in accordance with terms specified by Legal & General. These CDOs mature in 2017 and 2018. The Group selects the reference portfolios underlying the CDOs to give exposure to globally diversified portfolios of investment grade corporate bonds.
The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 28%, on average across the four CDOs, before the CDOs incur any default losses. Assuming an average recovery rate of 33%, then over 42% of the reference names would have to default before the CDOs incur any default losses.
Beyond 28% of default losses on the reference portfolio, losses to the CDO would occur at a rate that is a multiple of the loss rate on the reference portfolio. Losses are limited under the terms of the CDOs to assets and collateral invested. For illustration a £200m loss could be reached if default losses to the reference portfolios exceeded 32% or if 48% of the names in the diversified global investment grade portfolio defaulted, with an average 33% recovery rate. (All figures are averages across the four CDOs.)
These CDOs are valued using an internal valuation which is based on market inputs. This is then validated against the counterparty valuation and, at the year end, validated by independent external consultants.
For the purposes of valuing the non profit annuity regulatory and IFRS liabilities the yield on the CDOs are included within the calculation of the yield used to calculate the valuation discount rate for the annuity liabilities. An allowance for the risks, including default, is also made. For EEV purposes, the yield on the CDOs, reduced by the realistic default assumption, is similarly included in assumed future investment returns.
Asset Disclosures										Page 74
6.03  Asset backed securities summary
(i) By security
							LGPL	LGPL	Total	Total
As at 31 December 2008							£m	%	£m	%
Traditional ABS:
RMBS - Prime1							292	12	593	17
RMBS - Sub-prime2							-	-	30	1
CMBS							137	5	284	8
Credit Card							36	1	267	8
Auto							-	-	82	2
Student Loan							20	1	30	1
							485	19	1,286	37
Other:
Secured Bond							1,061	41	1,068	31
Commercial Property Backed Bonds							155	6	155	5
Infrastructure / PFI / Social housing							640	25	641	19
Whole Business Securitisation							220	9	221	7
Other secured holdings3							11	-	18	1
							2,087	81	2,103	63
Total							2,572	100	3,389	100
1. 87% of Prime RMBS holdings relate to UK mortgages.
2. 90% of Sub-prime RMBS holdings have a credit rating of AAA and 49% relate to the UK.
3. Other includes covered bonds (£9m) and non investment grade monoline wrapped securities (£2m).
(ii) By credit rating
							LGPL	LGPL	Total	Total
As at 31 December 2008							£m	%	£m	%
AAA							947	37	1,703	51
AA							553	21	581	17
A							713	28	721	21
BBB							340	13	359	11
BB or below							14	1	16	-
Unrated							5	-	9	-
Total							2,572	100	3,389	100
Of the £801m of traditional ABS holdings held outside of LGPL, 93% are rated AAA.
The credit ratings of monoline wrapped bonds are based on the rating of the underlying securities. No credit is taken for
the wrap.
Asset Disclosures										Page 75
6.04  Group subordinated bank exposures
									Market	Total
									value
As at 31 December 2008									£m	%
Tier 1
	United Kingdom1								448	15
	North America								102	3
	Europe								88	3
	Others								12	-
Total tier 1									650	21
Lower Tier 2
	United Kingdom								760	25
	North America								668	22
	Europe								255	8
	Others								71	2
Upper Tier 2
	United Kingdom								474	16
	North America								3	-
	Europe								142	5
	Others								9	-
Other subordinated
	United Kingdom								10	-
	North America								18	1
	Europe								-	-
	Others								-	-
Total tier 2 and other subordinated									2,410	79
Total									3,060	100
1. The exposure to UK tier 1 debt includes issuances from the UK subsidiaries of European banks where there is no explicit
parental guarantee.
Asset Disclosures										Page 76
6.05  Shareholder asset mix
						Other			Other
					Society	Group		Society	Group
					shareholder	shareholder		shareholder	shareholder
					capital	assets	Total	capital	assets	Total
					2008	2008	2008	2007	2007	2007
					%	%	%	%	%	%
Equities					43	2	25	69	3	47
Property					6	-	4	12	-	8
Bonds					23	50	35	12	59	28
Derivative assets					1	12	6	-	4	1
Cash (including cash equivalents)					27	36	30	7	34	16
					100	100	100	100	100	100
Invested assets (£bn)					2.9	2.3	5.2	4.0	2.1	6.1
6.06  Fair value hierarchy
(i) Analysis of fair value measurement bases
							Fair value measurement at the
							end of the reporting period based on:
							Level 1	Level 2	Level 3	Total
As at 31 December 2008							£bn	£bn	£bn	£bn
Shareholder
Equity securities							1.1	-	0.2	1.3
Bonds							1.2	2.6	-	3.8
Derivative assets							-	0.3	-	0.3
							2.3	2.9	0.2	5.4
Non profit non-unit linked
Equity securities							0.1	-	-	0.1
Bonds							1.1	16.5	-	17.6
Derivative assets							-	2.0	-	2.0
							1.2	18.5	-	19.7
The levels of fair value measurement bases are defined as follows:
	Level 1: fair values measured using quoted prices in an active market for identical assets or liabilities.
	Level 2: fair values measured using valuation techniques for which all inputs significant to the measurement are based on observable market data.
	Level 3: fair values measured using valuation techniques for which any input significant to the measurement is not based on observable market data.
Level 1 financial instruments principally include listed equity instruments, government and certain supranational institution bonds and exchange traded futures and options.
Level 2 financial instruments principally include listed corporate bonds, commercial paper, and derivative instruments which are not exchange traded.
Level 3 financial instruments principally include unquoted equities, including investments in venture capital, and suspended securities.
In current market conditions, the liquidity of financial instruments is less than it has been in the past. All of the Group's level 2 assets have been valued using standard market pricing sources, such as iBoxx, IDC and Bloomberg except for bespoke CDO and swaps holdings (see below). In normal market conditions we would consider these prices to be observable market prices. However, following consultation with our pricing providers and a number of their contributing brokers we have considered that these prices are not from a suitably active market and have prudently classified them as level 2.
Our holdings in bespoke CDOs and swaps are priced using industry standard internal models which utilise market assumptions. The CDO valuations have also been verified using externally provided prices. The models used have also been verified by independent external consultants and reviewed by our auditors. Accordingly these assets have also been classified in level 2.
Level 3 assets, where internal models are used represent a small proportion of assets to which shareholders are exposed and reflect unquoted equities including investments in venture capital, and suspended securities.

 

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