L&G Full Year Results 2018 Part 2

RNS Number : 9538R

Legal & General Group Plc

06 March 2019

 

Legal & General Group Plc

Full Year Results 2018 Part 2

IFRS Disclosures on performance and Release from operations                                       Page 33

1.01 Operating profit^#

For the year ended 31 December 2018			2018	2017
		Notes	£m	£m
From continuing operations
Legal & General Retirement (LGR)		1.03	1,548	1,247
- LGR Institutional (LGRI)			1,149	906
- LGR Retail (LGRR)			399	341
Legal & General Investment Management (LGIM)		1.04	407	400
Legal & General Capital (LGC)		1.06	322	272
Legal & General Insurance (LGI)		1.03	308	303
- UK and Other			246	209
- US (LGIA)			62	94
General Insurance		1.05	-	37
Operating profit from divisions:
From continuing operations			2,585	2,259
From discontinued operations1			79	107
Operating profit from divisions			2,664	2,366
Group debt costs2			(203)	(191)
Group investment projects and central expenses		1.07	(126)	(120)
Operating profit			2,335	2,055
Investment and other variances		1.08	(188)	24
Gains on non-controlling interests			(19)	11
Adjusted profit before tax attributable to equity holders			2,128	2,090
Tax expense attributable to equity holders		3.07	(320)	(188)
Profit for the year			1,808	1,902
Profit attributable to equity holders			1,827	1,891
Earnings per share:
Basic (pence per share)3		1.09	30.79p	31.87p
Diluted (pence per share)3		1.09	30.64p	31.73p
1. Operating profit from discontinued divisions primarily reflects the operating profit of the Savings division following the group's announcement in December 2017 to sell the Mature Savings business to Swiss Re. For these operating profit disclosures, discontinued operations in 2017 also includes the results of Legal & General Netherlands (LGN) which was sold during 2017 and was a component of the LGI (UK and Other) division.
2. Group debt costs exclude interest on non recourse financing.
3. All earnings per share calculations are based on profit attributable to equity holders of the company.

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

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

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

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

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

·     General Insurance comprises short-term household and other personal insurance.

·     Discontinued operations represent businesses that have either been sold or announced to sell subject to formal transfer, namely Mature Savings (including with-profits). In 2017 the discontinued operations include Mature Savings (sale announced in December 2017) and Legal & General Netherlands (sold in April 2017).

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 for LGC's trading businesses (which reflects the IFRS profit before tax) and LGIA non-term business (which excludes unrealised investment returns to align with the liability measurement under US GAAP). Variances between actual and smoothed investment return assumptions are reported below operating profit, which include any differences between investment return on actual assets and the long-term asset mix. Exceptional income and expenses which arise outside the normal course of business in the period, such as merger and acquisition, and start-up costs, are also excluded from operating profit.

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

IFRS Disclosures on performance and Release from operations                                       Page 34

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 and other	Inter- national and other		Tax expense/ (credit)
For the year ended
31 December 2018	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	551	217	768	33	444	40	-	1,285	263	1,548
- LGRI	379	188	567	22	324	43	-	956	193	1,149
- LGRR	172	29	201	11	120	(3)	-	329	70	399
LGIM	354	(25)	329	(3)	(1)	1	-	326	81	407
- LGIM (excluding
Workplace Savings)	323	-	323	-	-	-	-	323	81	404
- Workplace Savings2	31	(25)	6	(3)	(1)	1	-	3	-	3
LGC	261	-	261	-	-	-	-	261	61	322
LGI	258	(22)	236	24	35	(19)	(7)	269	39	308
- UK and Other	181	(22)	159	24	35	(19)	1	200	46	246
- US (LGIA)	77	-	77	-	-	-	(8)	69	(7)	62
General Insurance	-	-	-	-	-	-	-	-	-	-
From continuing operations	1,424	170	1,594	54	478	22	(7)	2,141	444	2,585
From discontinued operations3	44	-	44	(6)	-	26	-	64	15	79
Total from divisions	1,468	170	1,638	48	478	48	(7)	2,205	459	2,664
Group debt costs	(164)	-	(164)	-	-	-	-	(164)	(39)	(203)
Group investment projects and expenses	(34)	-	(34)	-	-	-	(68)	(102)	(24)	(126)
Total	1,270	170	1,440	48	478	48	(75)	1,939	396	2,335
1. Release from operations includes dividends from the US of £77m within the US (LGIA).
2. Workplace Savings represents administration business only. Profits on fund management services are included within LGIM (excluding Workplace Savings).
3. Discontinued operations reflects the result of the Savings division following the announcement in December 2017 to sell the Mature Savings business to Swiss Re.
Release from operations for LGR, LGIM - Workplace Savings and LGI represents the expected IFRS surplus generated in the year from the in-force non profit annuities, workplace savings and UK protection businesses using best estimate assumptions. The LGIM release from operations also includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from LGIA. The release from operations within discontinued operations primarily reflects the unwind of expected profits after tax under the risk transfer agreement with ReAssure Limited (a subsidiary of Swiss Re) from the Mature Savings business.
New business surplus/strain for LGR, LGIM - Workplace Savings and LGI represents the cost of acquiring new business and setting up prudent reserves in respect of the new business for UK non profit annuities, workplace savings and protection, net of tax. The new business surplus and release from operations for LGR, LGIM and LGI excludes any capital held in excess of the prudent reserves from the liability calculation.
LGR's new business metrics are presented based on a target long term asset portfolio. 2018 has seen record pension risk transfer (PRT) volumes, and as a result we continue to source direct investment assets to support this business in 2019, as appropriate, taking into account the alternative risk and rewards of traded credit. At year end, any difference between the actual assets and the long-term asset mix is reflected in investment variance.
Net release from operations for LGR, LGIM - Workplace Savings, LGI and discontinued operations is defined as release from operations plus new business surplus/(strain).
Release from operations and net release from operations for LGC, LGIM and General Insurance 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 35

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

					Changes in valuation assump- tions			Operating profit/ (loss) after tax		Operating profit/ (loss) before tax
		New business surplus/ (strain)	Net release from operations
	Release from operations1			Exper- ience variances		Non-cash items and other	Inter- national and other		Tax expense/ (credit)
For the year ended
31 December 2017	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	508	180	688	72	274	3	-	1,037	210	1,247
- LGRI	347	152	499	66	190	1	-	756	150	906
- LGRR	161	28	189	6	84	2	-	281	60	341
LGIM	342	(21)	321	(4)	(1)	2	-	318	82	400
- LGIM (excluding
Workplace Savings)	318	-	318	-	-	-	-	318	82	400
- Workplace Savings2	24	(21)	3	(4)	(1)	2	-	-	-	-
LGC	224	-	224	-	-	-	-	224	48	272
LGI	273	2	275	(50)	48	(25)	(26)	222	81	303
- UK and Other	193	2	195	(50)	48	(25)	1	169	40	209
- US (LGIA)	80	-	80	-	-	-	(27)	53	41	94
General Insurance	30	-	30	-	-	-	-	30	7	37
From continuing operations	1,377	161	1,538	18	321	(20)	(26)	1,831	428	2,259
From discontinued operations3	107	(5)	102	(1)	3	(21)	3	86	21	107
Total from divisions	1,484	156	1,640	17	324	(41)	(23)	1,917	449	2,366
Group debt costs	(154)	-	(154)	-	-	-	-	(154)	(37)	(191)
Group investment projects and expenses	(32)	-	(32)	-	-	-	(64)	(96)	(24)	(120)
Total	1,298	156	1,454	17	324	(41)	(87)	1,667	388	2,055
1. Release from operations includes dividends from the US of £80m within the US (LGIA).
2. Workplace Savings represents administration business only.  Profits on fund management services are included within LGIM (excluding Workplace Savings).
3. Discontinued operations primarily reflects the result of the Savings division following the announcement in December 2017 to sell the Mature Savings business to Swiss Re.  For this reconciliation, discontinued operations also include the results of Legal & General Netherlands. This business was sold during 2017.

# 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 36

1.03 Analysis of LGR and LGI operating profit

For the year ended 31 December 2018

		LGR	LGI	LGR	LGI
		2018	2018	2017	2017
		£m	£m	£m	£m
Net release from operations		768	236	688	275
Experience variances
- Persistency		8	(12)	9	(18)
- Mortality/morbidity1		73	(7)	30	(26)
- Expenses		(13)	2	(21)	3
- Project and development costs		(11)	-	(15)	(3)
- Other2,3		(24)	41	69	(6)
Total experience variances		33	24	72	(50)
Changes to valuation assumptions
- Persistency		-	(4)	-	(11)
- Mortality/morbidity4		444	25	303	51
- Expenses		-	17	(20)	9
- Other		-	(3)	(9)	(1)
Total changes to valuation assumptions		444	35	274	48
Movement in non-cash items
- Acquisition expense tax relief		-	(11)	-	(18)
- Other5		40	(8)	3	(7)
Total movement in non-cash items		40	(19)	3	(25)
International and other		-	(7)	-	(26)
Operating profit after tax		1,285	269	1,037	222
Tax gross up		263	39	210	81
Operating profit before tax		1,548	308	1,247	303
1. Mortality / morbidity experience variances for LGR reflect higher than expected deaths over the year.
2. Other experience variances for LGR reflect changes made to annuity reserving and updates to the policy/member data.
3. Other experience variances for LGI reflect a number of modelling refinements in reserving for future claims.
4. Mortality assumption changes for LGR reflect a one off release of £359m (net of tax) from an update in the longevity trend assumption from adjusted CMI 2015 to adjusted CMI 2016.
5. LGR Movement in non-cash items is largely due to a positive adjustment made to reflect all asset management activity on new bulk annuity contracts being handled by LGIM.

IFRS Disclosures on performance and Release from operations                                       Page 37

1.04 LGIM operating profit

				2018	2017
				£m	£m
Asset management revenue (excluding 3rd party market data)1				813	780
Asset management transactional revenue2				27	25
Asset management expenses (excluding 3rd party market data)1				(433)	(405)
ETF operating loss3				(3)	-
Workplace Savings operating profit4				3	-
Total LGIM operating profit				407	400
1. Asset management revenue and expenses exclude income and costs of £19m in relation to the provision of third party market data (2017: £17m).
2. Transactional revenue includes execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees for property funds.
3. ETF represents the results of the Canvas ETF business, the acquisition of which completed in March 2018.
4. Workplace Savings represents administration business only.

1.05 General Insurance operating profit and combined operating ratio

					2018	2017
					£m	£m
General Insurance operating profit1					-	37
General Insurance combined operating ratio2					104%	93%
1. Includes the General Insurance underwriting result and smoothed investment return.
2. The calculation of the General Insurance combined operating ratio incorporates claims, commission and expenses as a percentage of net earned premiums.

1.06 LGC operating profit

				2018	2017
				£m	£m
Direct investments1				188	124
Traded investment portfolio including treasury assets2				134	148
Total LGC operating profit				322	272
1. Direct Investments represents LGC's portfolio of assets across future cities (including urban regeneration and clean energy), housing (including CALA Homes) and SME finance.
2. The traded investment portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash.

1.07 Group investment projects and central expenses

				2018	2017
				£m	£m
Group investment projects and central expenses				113	61
Restructuring and other costs				13	59
Total group investment projects and expenses				126	120

1.08 Investment and other variances

				2018	2017
				£m	£m
Investment variance1				(126)	129
M&A related and other variances2				(62)	(105)
Total investment and other variances				(188)	24
1. Investment variance includes differences between actual and smoothed investment return on traded and real assets, economic assumption changes (e.g. credit default and inflation) and the impact of any difference between the actual allocated asset mix and the long-term assumed asset mix on new pension risk transfer business written during the year and held at a period end.
2. Includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. 2018 includes the recognition of a one-off profit of £20m arising on the stepped acquisition of CALA Homes (see Note 3.02).

IFRS Disclosures on performance and Release from operations                                       Page 38

1.09 Earnings per share

(a) Basic earnings per share

				After tax	Per share1	After tax	Per share1
				2018	2018	2017	2017
				£m	p	£m	p
Profit for the year attributable to equity holders				1,827	30.79	1,891	31.87
Less: earnings derived from discontinued operations				(64)	(1.07)	(80)	(1.35)
Basic earnings derived from continuing operations				1,763	29.72	1,811	30.52
1. Basic earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the period, excluding employee scheme treasury shares.

(b) Diluted earnings per share

					After tax	Weighted average number of shares	Per share1
					2018	2018	2018
					£m	m	p
Profit for the year attributable to equity holders					1,827	5,933	30.79
Net shares under options allocable for no further consideration					-	29	(0.15)
Total diluted earnings					1,827	5,962	30.64
Less: diluted earnings derived from discontinued operations					(64)	-	(1.07)
Diluted earnings derived from continuing operations					1,763	5,962	29.57
					After tax	Weighted average number of shares	Per share1
					2017	2017	2017
					£m	m	p
Profit for the year attributable to equity holders					1,891	5,933	31.87
Net shares under options allocable for no further consideration					-	27	(0.14)
Total diluted earnings					1,891	5,960	31.73
Less: diluted earnings derived from discontinued operations					(80)	-	(1.35)
Diluted earnings derived from continuing operations					1,811	5,960	30.38
1. For diluted earnings per share, the weighted average number of ordinary shares in issue, excluding employee scheme treasury shares, is adjusted to assume conversion of all potential ordinary shares, such as share options granted to employees.

IFRS Disclosures on performance and Release from operations                                       Page 39

1.10 Segmental analysis

Reportable segments

The group has five reportable segments that are continuing operations, comprising LGR, LGIM, LGC, LGI and General Insurance, 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.

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
					General	and debt	continuing
	LGR	LGIM	LGC	LGI	Insurance	costs	operations1
For the year ended 31 December 2018	£m	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	1,548	407	322	308	-	(329)	2,256
Investment and other variances	95	(4)	(273)	(1)	(27)	22	(188)
Losses attributable to non-controlling interests	-	-	-	-	-	(19)	(19)
Profit/(loss) before tax attributable to equity holders	1,643	403	49	307	(27)	(326)	2,049
Tax (expense)/credit attributable to equity holders	(267)	(81)	13	(39)	6	63	(305)
Profit/(loss) for the year	1,376	322	62	268	(21)	(263)	1,744
						Group
						expenses	Total
					General	and debt	Continuing
	LGR	LGIM	LGC	LGI2	Insurance	costs	operations1
For the year ended 31 December 2017	£m	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	1,247	400	272	303	37	(311)	1,948
Investment and other variances	4	(9)	91	(60)	6	(14)	18
Gains attributable to non-controlling interests	-	-	-	-	-	11	11
Profit/(loss) before tax attributable to equity holders	1,251	391	363	243	43	(314)	1,977
Tax (expense)/credit attributable to equity holders	(225)	(84)	(77)	182	(8)	43	(169)
Profit/(loss) for the year	1,026	307	286	425	35	(271)	1,808
1. Continuing operations exclude the results of the Mature Savings division which has been classified as discontinued following the announcement in December 2017 to sell the Mature Savings business to Swiss Re. For the year ended 31 December 2017, continuing operations also exclude profits relating to Legal & General Netherlands, which was sold during 2017 and was previously reflected in the LGI divisional results.
2. The LGI tax credit of £182m in 2017 primarily reflects the impact of a one-off US tax benefit of £246m arising from the revaluation of net deferred tax liabilities as a result of the reduction in the US corporate income tax rate in 2017.
# Operating profit for total continuing operations represents 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

IFRS Disclosures on performance and Release from operations                                       Page 40

1.10 Segmental analysis (continued)

(b) Total income

				General	LGC and	Total continuing
	LGR	LGIM1,2	LGI	Insurance	other3	operations4
For the year ended 31 December 2018	£m	£m	£m	£m	£m	£m
Internal income	-	172	-	-	(172)	-
External income	8,507	(10,654)	1,742	370	1,299	1,264
Total income	8,507	(10,482)	1,742	370	1,127	1,264
				General	LGC and	Total continuing
	LGR	LGIM1,2	LGI5	Insurance	other3,5	operations4
For the year ended 31 December 2017	£m	£m	£m	£m	£m	£m
Internal income	-	158	-	-	(158)	-
External income	6,862	28,779	2,027	342	2,382	40,392
Total income	6,862	28,937	2,027	342	2,224	40,392
1. LGIM internal income relates to investment management services provided to other segments.
2. LGIM external income includes fees from fund management and investment return.
3. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
4. Continuing operations exclude the results of the Mature Savings division which has been classified as discontinued following the announcement in December 2017 to sell the Mature Savings business to Swiss Re. For the year ended 31 December 2017, continuing operations also excludes income relating to Legal & General Netherlands, which was sold during 2017 and was previously reflected in the LGI divisional results.
5. Following a review of the segmentation of income between certain business divisions we have reallocated £518m for the year ended 31 December 2017 from LGI to LGC and other, as this better reflects the nature of that income.

IFRS Primary Financial Statements                                                                                              Page 41

2.01 Consolidated Income Statement

				2018		2017
For the year ended 31 December 2018		Notes		£m		£m
Income
Gross written premiums				13,253		7,932
Outward reinsurance premiums				(2,131)		(1,858)
Net change in provision for unearned premiums				(19)		(23)
Net premiums earned				11,103		6,051
Fees from fund management and investment contracts				802		771
Investment return				(11,847)		33,457
Other operational income				1,206		212
Total income		1.10		1,264		40,491
Expenses
Claims and change in insurance contract liabilities				8,612		8,326
Reinsurance recoveries				(1,053)		(1,776)
Net claims and change in insurance contract liabilities				7,559		6,550
Change in investment contract liabilities				(11,304)		29,848
Acquisition costs				893		734
Finance costs				238		212
Other expenses				1,776		1,086
Total expenses				(838)		38,430
Profit before tax				2,102		2,061
Tax expense attributable to policyholder returns				(53)		(70)
Profit before tax attributable to equity holders				2,049		1,991
Total tax expense				(358)		(239)
Tax expense attributable to policyholder returns				53		70
Tax expense attributable to equity holders		3.07		(305)		(169)
Profit after tax from continuing operations		1.10		1,744		1,822
Profit after tax from discontinued operations1		3.03		64		80
Profit for the year				1,808		1,902
Attributable to:
Non-controlling interests				(19)		11
Equity holders				1,827		1,891
Dividend distributions to equity holders during the year		3.05		932		872
Dividend distributions to equity holders proposed after the year end		3.05		704		658
				p		p
Total basic earnings per share2		1.09		30.79		31.87
Total diluted earnings per share2		1.09		30.64		31.73
Basic earnings per share derived from continuing operations2		1.09		29.72		30.52
Diluted earnings per share derived from continuing operations2		1.09		29.57		30.38
1. Discontinued operations reflects the results of Mature Savings following the group's announcement in December 2017 to sell the Mature Savings business to Swiss Re.
2. All earnings per share calculations are based on profit attributable to equity holders of the company.

IFRS Primary Financial Statements                                                                                              Page 42

2.02 Consolidated Statement of Comprehensive Income

	2018	2017
For the year ended 31 December 2018	£m	£m
Profit for the year	1,808	1,902
Items that will not be reclassified subsequently to profit or loss
Actuarial gains/(losses) on defined benefit pension schemes	117	(55)
Tax on actuarial gains/(losses) on defined benefit pension schemes	(22)	10
Total items that will not be reclassified subsequently to profit or loss	95	(45)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations	62	(99)
Movement in cross-currency hedge	34	(12)
Tax on movement in cross-currency hedge	(5)	2
Movement in financial investments designated as available-for-sale	(36)	27
Tax on movement in financial investments designated as available-for-sale	5	(4)
Total items that may be reclassified subsequently to profit or loss	60	(86)
Other comprehensive income/(expense) after tax	155	(131)
Total comprehensive income for the year	1,963	1,771
Total comprehensive income for the year attributable to:
Continuing operations	1,899	1,691
Discontinued operations	64	80
Total comprehensive income for the year attributable to:
Non-controlling interests	(19)	11
Equity holders	1,982	1,760

IFRS Primary Financial Statements                                                                                              Page 43

2.03 Consolidated Balance Sheet

		2018	20171
As at 31 December 2018	Notes	£m	£m
Assets
Goodwill		65	11
Purchased interest in long term businesses and other intangible assets		223	138
Deferred acquisition costs		140	140
Investment in associates and joint ventures accounted for using the equity method		259	252
Property, plant and equipment		57	59
Investment property	3.06	6,965	7,110
Financial investments	3.06	430,498	443,162
Reinsurers' share of contract liabilities		4,737	5,545
Deferred tax assets	3.07	7	7
Current tax assets		418	342
Receivables and other assets		5,593	6,083
Assets of operations classified as held for sale	3.03	26,234	22,584
Cash and cash equivalents		17,321	18,919
Total assets		492,517	504,352
Equity
Share capital	3.08	149	149
Share premium	3.08	992	988
Employee scheme treasury shares		(52)	(40)
Capital redemption and other reserves		230	168
Retained earnings		7,261	6,251
Attributable to owners of the parent		8,580	7,516
Non-controlling interests	3.09	72	76
Total equity		8,652	7,592
Liabilities
Non-participating insurance contract liabilities		64,707	61,308
Non-participating investment contract liabilities		293,080	315,651
Core borrowings	3.10	3,922	3,459
Operational borrowings	3.11	1,026	538
Provisions	3.15	1,140	1,335
UK deferred tax liabilities	3.07	144	13
Overseas deferred tax liabilities	3.07	185	221
Current tax liabilities		171	223
Payables and other financial liabilities	3.12	62,548	52,246
Other liabilities		619	491
Net asset value attributable to unit holders		26,481	27,317
Liabilities of operations classified as held for sale	3.03	29,842	33,958
Total liabilities		483,865	496,760
Total equity and liabilities		492,517	504,352
1. Following a change in accounting policy for LGIA term assurance reserves, a number of balance sheet items have been restated, notably deferred acquisition costs, reinsurers' share of contract liabilities, non-participating insurance contract liabilities, overseas deferred tax liabilities and other liabilities. The overall net impact on the group's retained earnings as at 31 December 2017 is a reduction of £327m. Further details on the change in accounting policy are provided in Note 3.01.

IFRS Primary Financial Statements                                                                                              Page 44

2.04 Consolidated Statement of Changes in Equity

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

IFRS Primary Financial Statements                                                                                              Page 45

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 2017	capital	premium	shares	reserves1	earnings	of the parent	interests	equity
	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2017	149	981	(30)	212	5,633	6,945	338	7,283
Change in accounting policy2	-	-	-	-	(277)	(277)	-	(277)
Restated as at 1 January 2017	149	981	(30)	212	5,356	6,668	338	7,006
Profit for the year	-	-	-	-	1,891	1,891	11	1,902
Exchange differences on translation of overseas operations	-	-	-	(99)	-	(99)	-	(99)
Net movement in cross-currency hedge	-	-	-	(10)	-	(10)	-	(10)
Net actuarial losses on defined benefit pension schemes	-	-	-	-	(45)	(45)	-	(45)
Net movement in financial investments designated as available-for-sale	-	-	-	23	-	23	-	23
Total comprehensive income for the year	-	-	-	(86)	1,846	1,760	11	1,771
Options exercised under share option schemes	-	7	-	-	-	7	-	7
Shares purchased	-	-	(16)	-	-	(16)	-	(16)
Shares vested	-	-	6	(19)	-	(13)	-	(13)
Employee scheme treasury shares: - Value of employee services	-	-	-	28	-	28	-	28
Share scheme transfers to retained earnings	-	-	-	-	4	4	-	4
Dividends	-	-	-	-	(872)	(872)	-	(872)
Movement in third party interests	-	-	-	-	-	-	(273)	(273)
Currency translation differences	-	-	-	33	(33)	-	-	-
Change in accounting policy2	-	-	-	-	(50)	(50)	-	(50)
Restated as at 31 December 2017	149	988	(40)	168	6,251	7,516	76	7,592
1. Capital redemption and other reserves as at 31 December 2017 include share-based payments £69m, foreign exchange £69m, capital redemption £17m, available-for-sale reserves £22m and hedging reserves £(9)m.
2. Change in accounting policy represents the impact on retained earnings of the change in accounting policy related to the recognition of LGIA term assurance reserves, described in Note 3.01. The change has been applied retrospectively.

IFRS Primary Financial Statements                                                                                              Page 46

2.05 Consolidated Statement of Cash Flows

		2018	2017
For the year ended 31 December 2018	Notes	£m	£m
Cash flows from operating activities
Profit for the year		1,808	1,902
Adjustments for non cash movements in net profit for the year
Net losses/(gains) on financial investments and investment properties		23,132	(25,024)
Investment income		(10,182)	(9,953)
Interest expense		293	220
Tax expense		210	377
Other adjustments		183	154
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss		(10,381)	11,794
Investments designated as available-for-sale		(248)	277
Other assets		1,258	(2,344)
Net increase/(decrease) in operational liabilities
Insurance contracts		3,257	(3,989)
Investment contracts		(22,571)	(10,798)
Other liabilities		12,057	20,650
Net (decrease)/increase in held for sale net liabilities		(8,500)	12,139
Cash utilised in operations		(9,684)	(4,595)
Interest paid		(215)	(221)
Interest received		4,841	4,528
Tax paid1		(504)	(497)
Dividends received		5,201	5,196
Net cash flows from operating activities		(361)	4,411
Cash flows from investing activities
Net acquisition of plant, equipment, intangibles and other assets		(401)	(230)
Net disposal/(acquisition) of operations		326	223
Investment in joint ventures and associates		(130)	(7)
Net cash flows utilised in investing activities		(205)	(14)
Cash flows from financing activities
Dividend distributions to ordinary equity holders during the year	3.05	(932)	(872)
Issue of ordinary share capital		4	7
Exercise of employee scheme shares (net)		12	10
Proceeds from borrowings		960	1,232
Repayment of borrowings		(325)	(600)
Movement in non-controlling interests		-	(262)
Net cash flows utilised in financing activities		(281)	(485)
Net (decrease)/increase in cash and cash equivalents		(847)	3,912
Exchange gains/(losses) on cash and cash equivalents		16	(19)
Cash and cash equivalents at 1 January (before reallocation of held for sale cash)		18,919	15,348
Total cash and cash equivalents		18,088	19,241
Less: cash and cash equivalents of operations classified as held for sale		(767)	(322)
Cash and cash equivalents at 31 December		17,321	18,919
1. Tax comprises UK corporation tax paid of £359m (2017: £290m), overseas corporate taxes of £25m (2017: £12m), and withholding tax of £120m (2017: £195m).

IFRS Disclosure Notes                                                                                                                      Page 47

3.01 Basis of preparation

The group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and as adopted by the European Union, and with those parts of the UK Companies Act 2006 applicable to companies reporting under IFRS. The group financial statements also comply with IFRS and interpretations by the IFRS Interpretations Committee as issued by the IASB and as adopted by the European Union. The group financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets and financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss.

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

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

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

Critical accounting policies and the use of estimates

The preparation of the financial statements includes the use of estimates and assumptions which affect items reported in the Consolidated Balance Sheet and Income Statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant for the valuation of insurance and investment contract liabilities, unquoted illiquid assets, investment property, and the determination of defined benefit pension plan assumptions. From a policy application perspective, the major areas of judgement are the assessment of whether a contract transfers significant insurance risk to the group, and whether the group controls underlying entities and should therefore consolidate them. The basis of accounting for these areas, and the significant judgements used in determining them, are outlined in the respective notes to the group's 2018 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.

Changes in accounting policy

LGIA (Legal & General Insurance America) Term Assurance

During the year, the group has changed its accounting policy for term assurance liabilities on business transacted by its US subsidiaries, which was previously based on recognised actuarial methods reflecting US GAAP. From 1 January 2018, 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 therefore results in the financial statements providing reliable and more relevant information about the impact of term assurance business on the group's financial position, financial performance or cash flows, in line with IFRS requirements.

This represents a voluntary change in accounting policy and has 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 deferred acquisition costs, which have been derecognised, and the associated cash flows now recognised within the insurance contract liability calculation.

IFRS Disclosure Notes                                                                                                                      Page 48

3.01 Basis of preparation (continued)

The group reported an initial best estimate of the impact of this change in accounting policy as part of its 2018 half year report. During the second half of 2018 we have continued to refine the calculation of the retrospective impact based on enhanced historic information. The final impact on each line item of the consolidated balance sheet as at 31 December 2017 is shown in the table below:
	As reported
	at 31 December 2017	Adjustments	Restated
	£m	£m	£m
Deferred acquisition costs	1,507	(1,367)	140
Reinsurers' share of contract liabilities	5,703	(158)	5,545
Non-participating insurance contract liabilities	62,318	(1,010)	61,308
Overseas deferred tax liability	337	(116)	221
Other liabilities	563	(72)	491
Retained earnings	6,578	(327)	6,251
As a consequence of the change highlighted above, the group has reclassified £164m (as of 1 January 2017) of financial investments backing term assurance business from designated as available-for-sale to designated as fair value through profit or loss. This represents a further change in accounting policy permitted by IFRS 4 'Insurance Contracts'.
UK Whole of Life and Term Assurance Mortality Assumptions
During the year, the group changed its accounting policy for UK whole of life and term assurance mortality improvers. This change has arisen following the change in regulatory regime to Solvency II. The old regime only allowed improvers to be added where reserves would be increased, in line with INSPRU 1.2.60 section 5a requirements. Under the new policy mortality improvement assumptions can now be applied consistently across all types of mortality business. The change covers all UK whole of life and term assurance products, and results in the group no longer needing to comply with INSPRU. The group believes that the new policy better reflects the risks that the business is exposed to, providing more reliable and relevant information to users of the financial statements.
This represents a voluntary change in accounting policy. However, because the impact of this change on prior period is considered insignificant, the group has applied the change prospectively.

IFRS Disclosure Notes                                                                                                                      Page 49

3.02 Acquisitions

CALA Group (Holdings) Limited

On 12 March 2018 the group increased its shareholding in CALA Group (Holdings) Limited ('CALA Homes') to 100% by acquiring the remaining 52.12% shareholding of the company it did not previously own. Under the agreement, the counterparty for £152m of loan notes payable by CALA Homes was novated to the group and the loan notes subsequently cancelled which reduced the fair value of the purchase consideration from £605m to £453m.

The transaction has been accounted for as a stepped acquisition in accordance with IFRS 3 'Business Combinations', resulting in the recognition of a one-off profit of £20m.

The assets and liabilities acquired at the point of the transaction have been recorded at their fair values for the purposes of the acquisition balance sheet and included in the consolidated accounts of the group using the group's accounting policies in accordance with IFRS.

The following table summarises the consideration for the acquisition, fair value of the 100% share of the assets acquired, liabilities assumed, and resulting allocation to goodwill.

		Fair Value
		£m
Assets
Intangible assets		25
Other non-current assets		4
Inventories		1,006
Other receivables		34
Cash and cash equivalents		18
Total assets		1,087
Liabilities
Loans and borrowings		362
Trade and other payables		271
Other liabilities1		33
Total liabilities		666
Fair value of net assets acquired		421
Fair value of purchase consideration		453
Goodwill arising on acquisition		32
1. Other liabilities include deferred tax balances
Fair value adjustments arising on acquisition were in relation to identifiable intangible assets, inventories and related deferred tax liabilities. The residual goodwill recognised on acquisition, none of which is expected to be deductible for tax purposes, is attributable to the network of customers and contractors and the pipeline of future land and homes that could not be directly attributed to homes currently under construction or the brand acquired. There were no contingent consideration arrangements or indemnification assets recognised on acquisition.

Other acquisitions

During the year ended 31 December 2018, the group completed the acquisitions of 100% shareholdings in Canvas (the European exchange-traded fund platform) and Buddies Enterprises Limited.

The assets and liabilities of the acquired businesses have been recorded at their fair values for the purposes of the acquisition balance sheet and included in the consolidated accounts of the group using the group's accounting policies in accordance with IFRS.

A total residual goodwill of £22m has been recognised in respect of these acquisitions.

IFRS Disclosure Notes                                                                                                                      Page 50

3.03 Assets and liabilities of operations classified as held for sale

Mature Savings On 6 December 2017 the group announced the sale of its Mature Savings business to the ReAssure division of Swiss Re Limited ('Swiss Re') for a consideration of £650m. As part of the transaction, on 1 January 2018 the group entered into a risk transfer agreement with Swiss Re, whereby the group will transfer all economic risks and rewards of the Mature Savings business to Swiss Re from that date. The risk transfer agreement operates until the business is transferred under a court approved scheme under Part VII of the Financial Services and Markets Act 2000, which is expected to complete in 2019. The consideration of £650m was received in 2018. As a result of the transaction, the Mature Savings business has been classified as held for sale. Profit arising from the Mature Savings business in accordance with the risk transfer agreement, has been classified as "Profit after tax from discontinued operations" in the Consolidated Income Statement.
IndiaFirst Life Insurance Company Limited On 1 June 2018 the group announced the sale of its stake in IndiaFirst Life Insurance Company Limited ("IndiaFirst Life") to an affiliate of Warburg Pincus LLC for INR 7.1bn (c.£79m at GBP:INR 1:90). As a result of the announcement, the group's interest in IndiaFirst Life has been classified as held for sale as at 31 December 2018. The transaction has completed after 31 December 2018.

3.04 Post balance sheet events

IndiaFirst Life Insurance Company Limited

The sale of the group's stake in IndiaFirst Life Insurance Company Limited (announced on 1 June 2018) was completed on 7 February 2019.

5.875% Sterling undated subordinated notes

On 4 February 2019, notification was given that the group intends to redeem the 5.875% Sterling undated subordinated notes in full on 1 April 2019. Effective from the notification date, the notes were no longer treated as tier 2 own funds for Solvency II purposes.

3.05 Dividends

		Dividend	Per share1	Dividend	Per share1
		2018	2018	2017	2017
		£m	p	£m	p
Ordinary dividends paid and charged to equity in the year:
- Final 2016 dividend		-	-	616	10.35
- Final 2017 dividend		658	11.05	-	-
- Interim dividend		274	4.60	256	4.30
Total dividends		932	15.65	872	14.65
Ordinary share dividend proposed2		704	11.82	658	11.05
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 2018, the directors declared a final dividend for 2018 of 11.82 pence per ordinary share. This dividend will be paid on 6 June 2019. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2019 and is not included as a liability in the Consolidated Balance Sheet as at 31 December 2018.

IFRS Disclosure Notes                                                                                                                      Page 51

3.06 Financial investments and investment property

				2018	2017
				£m	£m
Equities				167,013	199,858
Unit trusts				10,553	9,147
Debt securities1				254,452	230,941
Accrued interest				1,635	1,518
Derivative assets2				10,065	12,595
Loans3				9,662	9,165
Financial investments				453,380	463,224
Investment property				8,608	8,337
Total financial investments and investment property				461,988	471,561
Less: financial investments and investment property of operations classified as held for sale				(24,525)	(21,289)
Financial investments and investment property				437,463	450,272
1. A detailed analysis of debt securities to which shareholders are directly exposed, is disclosed in Note 6.03.
2. 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 £7,791m (2017: £8,173m).
3. Loans includes £456m (2017: £496m) of loans valued at amortised cost.

IFRS Disclosure Notes                                                                                                                      Page 52

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
	2018	2018	2017	2017
	£m	£m	£m	£m
Profit before tax attributable to equity holders	2,049	2,128	1,991	2,090
Tax calculated at 19.00% (2017: 19.25%)	389	404	383	402
Adjusted for the effects of:
Recurring reconciling items:
Income not subject to tax1	-	-	(11)	(11)
Higher/(lower) rate of tax on overseas profits2	(55)	(55)	1	1
Non-deductible expenses	5	5	1	1
Differences between taxable and accounting investment gains	(4)	(4)	(3)	(3)
Unrecognised tax losses	-	-	1	1
Non-recurring reconciling items:
Income not subject to tax1	(10)	(10)	(4)	(4)
Non-deductible expenses	5	5	10	10
Differences between taxable and accounting investment gains	-	-	10	10
Adjustments in respect of prior years3	(36)	(36)	23	23
Impact of reduction in UK and US corporate tax rates on deferred tax balances4	11	11	(242)	(242)
Tax attributable to equity holders	305	320	169	188
Equity holders' effective tax rate5	14.9%	15.0%	8.5%	9.0%
1. The acquisition of the remaining share capital of CALA Homes in the year significantly reduced our non-taxable share of income from joint ventures.
2. The lower rate of tax on overseas profits in 2018 primarily relates to the net effect of our Bermudan operations taxed at 0% and our US operations taxed at 21%.
3. Adjustments in respect of prior years relates to the revisions to earlier estimates.
4. The US federal corporate income tax rate reduced from 35% to 21% from 1 January 2018. The enacted rate of 21% has been applied to the US temporary differences to calculate US deferred tax assets and liabilities on the basis of when temporary differences are expected to reverse. 2017 includes the impact of the one-off US tax benefit of £246m arising from the revaluation of net deferred tax liabilities as a result of the reduction in the US corporate income tax rate.
5. 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 53

3.07 Tax (continued)

(b) Deferred tax
					20181	20171
Deferred tax (liabilities)/assets					£m	£m
Deferred acquisition expenses					25	15
- UK					(40)	(40)
- Overseas					65	55
Difference between the tax and accounting value of insurance contracts					(577)	(334)
- UK					(171)	(69)
- Overseas					(406)	(265)
Realised and unrealised gains on investments					(72)	(282)
Excess of depreciation over capital allowances					12	15
Excess expenses					21	31
Accounting provisions and other					(28)	(33)
Trading losses2					163	31
Pension fund deficit					41	70
Acquired intangibles					(4)	(2)
Total net deferred tax liabilities					(419)	(489)
Less: net deferred tax liabilities of operations classified as held for sale					97	262
Net deferred tax liabilities					(322)	(227)
Analysed by:
- Deferred tax assets
					7	7
- UK deferred tax liabilities					(144)	(13)
- Overseas deferred tax liabilities					(185)	(221)
Net deferred tax liabilities					(322)	(227)
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 term assurance reserves. The net tax impact to overseas deferred tax liabilities is a reduction of £116m at 31 December 2017.
2. Trading losses include UK trade and US operating losses of £4m (2017: £4m) and £159m (2017: £27m) respectively.

IFRS Disclosure Notes                                                                                                                      Page 54

3.08 Share capital and share premium

				2018			2017
				Number of	2018		Number of	2017
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 2018					5,958,438,193		149	988
Options exercised under share option schemes					2,330,041		-	4
As at 31 December 2018					5,960,768,234		149	992
							Share	Share
						Number of	capital	premium
Issued share capital, fully paid						shares	£m	£m
As at 1 January 2017					5,954,656,466		149	981
Options exercised under share option schemes					3,781,727		-	7
As at 31 December 2017					5,958,438,193		149	988
There is one class of ordinary shares of 2.5p each. All shares issued carry equal voting rights.
The holders of the company's ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings of the company.

3.09 Non-controlling interests

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

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

IFRS Disclosure Notes                                                                                                                      Page 55

3.10 Core borrowings

		Carrying	Coupon		Carrying	Coupon
		amount	rate	Fair value	amount	rate	Fair value
		2018	2018	2018	2017	2017	2017
		£m	%	£m	£m	%	£m
Subordinated borrowings
5.875% Sterling undated subordinated notes (Tier 2)		405	5.88	409	408	5.88	428
10% Sterling subordinated notes 2041 (Tier 2)		312	10.00	366	311	10.00	397
5.5% Sterling subordinated notes 2064 (Tier 2)		589	5.50	569	589	5.50	710
5.375% Sterling subordinated notes 2045 (Tier 2)		603	5.38	627	603	5.38	694
5.25% US Dollar subordinated rates 2047 (Tier 2)		659	5.25	612	628	5.25	679
5.55% US Dollar subordinated rates 2052 (Tier 2)		387	5.55	356	369	5.55	397
5.125% Sterling subordinated notes 2048 (Tier 2)		399	5.13	401	-	-	-
Client fund holdings of group debt1		(31)	-	(30)	(32)	-	(38)
Total subordinated borrowings		3,323		3,310	2,876		3,267
Senior borrowings
Sterling medium term notes 2031-2041		609	5.88	824	609	5.88	857
Client fund holdings of group debt1		(10)	-	(13)	(26)	-	(37)
Total senior borrowings		599		811	583		820
Total core borrowings		3,922		4,121	3,459		4,087
1. £41m (2017: £58m) of the group's subordinated and senior borrowings are currently held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total core borrowings in the table above.
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 56

3.10 Core borrowings (continued)

Subordinated borrowings

5.875% Sterling undated subordinated notes

In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. On 4 February 2019, notification was given that the Group intends to redeem these notes in full on 1 April 2019. Effective from the notification date, the notes were no longer treated as tier 2 own funds for Solvency II purposes.

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.

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

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 57

3.11 Operational borrowings

	Carrying		Interest				Carrying		Interest
	amount		rate		Fair value		amount		rate		Fair value
	2018		2018		2018		2017		2017		2017
	£m		%		£m		£m		%		£m
Short term operational borrowings
Euro Commercial Paper	293		0.93		293		349		1.27		349
Non recourse borrowings
Consolidated Property Limited Partnerships	57		2.46		57		57		2.46		57
Later Living portfolio	76		2.75		76		45		3.20		45
CALA revolving credit facility	188		3.37		188		-		-		-
Class B Surplus Note	296		5.61		296		-		-		-
Bank loans and overdrafts	83		-		83		-		-		-
Total operational borrowings1	993				993		451				451
Less: liabilities of operations classified as held for sale2	(28)		2.46		(28)		-				-
Operational borrowings	965				965		451				451
1. Unit linked borrowings with a carrying value of £61m (2017: £87m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,026m (2017: £538m).
2. Detailed disclosure related to liabilities of operations classified as held for sale is included in Note 3.03.
The Class B Surplus Note have been issued by a US subsidiary of the group as part of a coinsurance structure for the purpose of US statutory regulations. The Note was issued in exchange for a bond of the same value from an unrelated party, included within financial investments on the group's Consolidated Balance Sheet.
Non recourse borrowings include Property Funds loans with a charge on the assets of the relevant Property Fund, loan facilities to Later Living SPVs with a charge on all assets of each individual SPV company, CALA Group (Holdings) Limited's revolving credit facility 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 carrying value of operational borrowings approximates their fair value. The presented fair values reflect observable market information and have been classified as Level 2 in the fair value hierarchy with the exception of the Later Living portfolio which has been classified as Level 3.
As at 31 December 2018, the group had in place a £1.0bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2022. No amounts were outstanding at 31 December 2018.

IFRS Disclosure Notes                                                                                                                      Page 58

3.12 Payables and other financial liabilities

						2018	2017
						£m	£m
Derivative liabilities						7,791	8,173
Repurchase agreements1						43,775	32,357
Other financial liabilities2						11,406	12,026
Total payables and other financial liabilities						62,972	52,556
Less: liabilities of operations classified as held for sale3						(424)	(310)
Payables and other financial liabilities						62,548	52,246
Due within 12 months4						51,178	47,212
Due after 12 months4						11,794	5,344
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, FX spots and collateral repayable on short position reverse repurchase agreements. The value of collateral repayable on short position reverse repurchase agreements was £4,883m (2017: £5,138m).
3. Detailed disclosure relating to liabilities of operations classified as held for sale is included in Note 3.03.
4. The maturity analysis of the liabilities between less and more than 12 months is based on the Total payables and other financial liabilities.
Fair value hierarchy
			Total	Level 1	Level 2	Level 3	Amortised cost
As at 31 December 2018			£m	£m	£m	£m	£m
Derivative liabilities			7,791	337	7,452	2	-
Repurchase agreements			43,775	-	43,775	-	-
Other financial liabilities			11,406	4,718	35	496	6,157
Total payables and other financial liabilities			62,972	5,055	51,262	498	6,157
							Amortised
			Total	Level 1	Level 2	Level 3	cost
As at 31 December 2017			£m	£m	£m	£m	£m
Derivative liabilities			8,173	193	7,969	11	-
Repurchase agreements			32,357	-	32,357	-	-
Other financial liabilities			12,026	4,793	7	140	7,086
Total payables and other financial liabilities			52,556	4,986	40,333	151	7,086
Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as Level 3 liabilities. The entire movement in the balance has been reflected in the Consolidated Income Statement during the period. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (2017: £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 2018 (31 December 2017: no significant transfers), other than those noted above.

IFRS Disclosure Notes                                                                                                                      Page 59

3.13 IFRS sensitivity analysis

				Impact on pre-tax	Impact on	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
				2018	2018	2017	2017
				£m	£m	£m	£m
Economic sensitivity
Long-term insurance
100bps increase in interest rates1				384	209	195	59
50bps decrease in interest rates1				(220)	(122)	(126)	(45)
50bps increase in future inflation expectations				65	53	6	5
Credit spreads widen by 100bps with no change in expected defaults				(138)	(213)	(108)	(172)
25% rise in equity markets				458	399	514	456
25% fall in equity markets				(459)	(399)	(443)	(399)
15% rise in property values				738	606	408	346
15% fall in property values				(761)	(623)	(441)	(373)
10bps increase in credit default assumptions				(551)	(446)	(477)	(383)
10bps decrease in credit default assumptions				558	451	469	377
Non-economic sensitivity
Long-term insurance
1% increase in annuitant mortality				157	192	186	197
1% decrease in annuitant mortality				(147)	(183)	(178)	(191)
5% increase in assurance mortality1				(375)	(298)	(49)	(37)
General insurance
Single storm event with 1 in 200 year probability2				(235)	(190)	(221)	(179)
1. Sensitivities have been calculated in accordance with the new reserving basis for term assurance business in LGIA adopted from 1 January 2018, which now uses current information where applicable. Further details on this change in accounting policy are provided in Note 1.
2. Sensitivity shows the ultimate cost to the group taking into account intra group reassurance arrangements. Sensitivities in 2017 showed the impact on Legal & General Insurance Limited alone and have been restated to be on a consistent basis.

The table above shows the impacts on group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario. The group has aligned sensitivity analysis disclosure requirements across various reported metrics, primarily for interest rate, equity, property value, and annuitant mortality. The current disclosure also reflects management's view of key risks in current economic conditions.

For the year ended 31 December 2017, US term assurance liabilities were calculated on a US GAAP basis which takes a more passive approach to assumption setting.  The economic and demographic assumptions set at inception were assumed to be unchanged under the sensitivities specified, making the liabilities insensitive to changes in assumptions. Following a change in accounting policy for these liabilities during 2018 (see Note 3.01 for details) to bring them in line with how similar products are accounted for in other parts of the business, a gross premium valuation methodology has been used, and assumptions are now set on the basis of current information. This change in accounting policy has a significant impact on the interest rate and assurance mortality assumption stresses for the US term assurance liabilities.

The interest rate sensitivity assumes a 100bps increase, and 50bps decrease, in the gross redemption yield on fixed interest securities together with a 100bps and 50bps change in the real yields on variable securities for respective sensitivity analyses. The interest rate sensitivities reflect the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the long term business. No yield floors have been applied in the estimation of the stresses, despite the current low interest rate environment.

The inflation stress adopted is a 50bps p.a. increase in inflation resulting in a 50bps p.a. reduction in real yield and no change to the nominal yield. In addition the expense inflation rate is increased by 50bps p.a. In the sensitivity for credit spreads, corporate bond yields have increased by 100bps, gilt and approved security yields are unchanged, and there has been no adjustment to the default assumptions.

The equity stress is a +/- 25% in equity values. The property stress adopted is a +/-15% in property market values. Rental income is assumed to be unchanged; however the vacant possession value is stressed down by 15% in line with the market value stress. Where property is being used to back liabilities, the valuation interest rate used to place a value on the liabilities moves with the implied change in property yields.

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

The annuitant mortality stress is a +/-1% in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates. The assurance mortality stress represents an increase in mortality/morbidity rates for assurance contracts by 5%.

The group has external weather catastrophe reinsurance in place such that for any single weather event with claims up to £600m (2017: 520m) the ultimate cost of claims is limited to £200m.  Intra group reinsurance means for losses in excess of £50m (2017: £30m) but less than £600m (2017: £520m)  the cost of claims in  Legal & General Insurance Limited would be £25m.  (2017: £30m plus 50% of a £5m excess £30m layer).  Legal and General Assurance Society Limited is exposed to 93% of claims between £50m and £120m (2017: £35m to £105m) and Legal & General Reinsurance Limited is exposed to 85% of claims between £120m and £220m (2017: 71% of claims between £105m and £225m).  An event costing £600m is approximately equivalent to (but slightly lower than) the end-2018 modelled 1 in 200 year loss. In addition to the cost of claims the group would also incur additional claims handling costs and the cost of reinstatement premiums.

IFRS Disclosure Notes                                                                                                                      Page 60

3.13 IFRS sensitivity analysis (continued)

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

3.14 Foreign exchange rates

Principal rates of exchange used for translation are:
Year end exchange rates				2018	2017
United States dollar				1.28	1.35
Euro				1.11	1.13
Average exchange rates				2018	2017
United States dollar				1.34	1.29
Euro				1.13	1.14

3.15 Provisions

(a) Analysis of provisions

					2018	2017
					£m	£m
Retirement benefit obligations					1,112	1,266
Other provisions					29	73
Total provisions					1,141	1,339
Less: liabilities of operations classified as held for sale1					(1)	(4)
Provisions					1,140	1,335
1.  Liabilities of operations classified as held for sale relate to Mature Savings following the group's announcement in December 2017 to sell the Mature Savings business to Swiss Re.
(b) Retirement benefit obligations
			Fund and	CALA Homes1	Fund and
			Scheme	and Overseas	Scheme	Overseas
			2018	2018	2017	2017
			£m	£m	£m	£m
Gross pension obligations included in provisions			1,091	21	1,261	5
Annuity obligations insured by LGAS			(858)	-	(875)	-
Gross defined benefit pension deficit			233	21	386	5
Deferred tax on defined benefit pension deficit			(41)	(1)	(69)	(1)
Net defined benefit pension deficit			192	20	317	4
1. Following the stepped acquisition of CALA Homes in 2018 the pension obligations of CALA Homes have been included in 2018 balances.
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 61

3.16 Contingent liabilities, guarantees and indemnities

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

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

In 1975, Legal and General Assurance Society Limited (LGAS) was required by the Institute of London Underwriters (ILU) to execute the ILU form of guarantee in respect of policies issued through the ILU's Policy Signing Office on behalf of NRG Victory Reinsurance Company Ltd (Victory), a company which was then a subsidiary of LGAS. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to LGAS against any liability LGAS may have as a result of the ILU's requirement, and the ILU agreed that its requirement of LGAS would not apply to policies written or renewed after the acquisition. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary of Berkshire Hathaway Inc. Whether LGAS has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability is uncertain. LGAS has made no payment or provision in respect of this matter.

Group companies have given warranties, indemnities and guarantees as a normal part of their business and operating activities or in relation to capital market transactions or corporate disposals. Legal & General Group Plc has provided indemnities and guarantees in respect of the liabilities of group companies in support of their business activities including Pension Protection Fund compliant guarantees in respect of certain group companies' liabilities under the group pension fund and scheme. LGAS has provided indemnities, a liquidity and expense risk agreement, a deed of support and a cash and securities liquidity facility in respect of the liabilities of group companies to facilitate the group's matching adjustment reorganisation pursuant to Solvency II.

3.17 Related party transactions
(i) Key management personnel transactions and compensation
There were no material transactions between key management and the Legal & General group of companies during the year. All transactions between the group and its key management are on commercial terms which are no more favourable than those available to employees in general. Contributions to the post-employment defined benefit plans were £84m (2017: £93m) for all employees.
At 31 December 2018 and 31 December 2017 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:
					2018	2017
					£m	£m
Salaries					10	10
Post-employment benefits					-	-
Share-based incentive awards					6	4
Key management personnel compensation					16	14
Number of key management personnel					15	15

(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 £59m (2017: £161m) purchased by the group's UK defined benefit pension schemes during the period, priced on an arm's length basis;

- Loans outstanding from related parties, including preference shares, at 31 December 2018 of £201m (2017: £203m), with a further commitment of £6m;

- The group has total other commitments of £837m to related parties (2017: £633m), of which £507m has been drawn at 31 December 2018 (2017: £357m). 

 

END

 

 

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