L&G Half-year Report 2010 - P

RNS Number : 4828Q

Legal & General Group Plc

04 August 2010

 



Asset Disclosures										Page 53
4.01	Investment portfolio
								Market	Market	Market
								value	value	value
								At 30.06.10	At 30.06.09	At 31.12.09
							Notes	£bn	£bn	£bn
Worldwide funds under management								331	287	334
Client and policyholder assets								(278)	(240)	(283)
Non-unit linked with-profits assets1								(20)	(18)	(20)
Assets to which shareholders are directly exposed								33	29	31
Comprising:
Assets held to back the UK non-linked non profit business:
	Legal & General Pensions Limited (LGPL)							24.2	20.2	22.5
	Other UK non profit insurance business							0.9	1.5	1.2
								25.1	21.7	23.7
Assets held to back other insurance businesses (including Triple-X reserves)2								3.2	2.9	3.2
Society shareholder capital							4.05	2.8	2.2	2.3
Other Group capital							4.05	2.0	1.9	1.9
								33.1	28.7	31.1
1. Includes assets backing participating business in France of £2bn (H1 09: £2bn; FY 09: £2bn).
2. £0.9bn (H1 09: £0.7bn; FY 09: £0.8bn) of index linked assets within Legal & General Netherlands have been reclassified from client and policyholder assets to assets to which shareholders are directly exposed.  FY 09 and H1 09 comparatives have been reclassified accordingly.
Analysed by asset class:
			LGPL	Other UK	Other	Society	Other	Total	Total	Total
				non profit	insurance	shareholder	Group
				insurance	business	capital	capital
				business
			At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.09	At 31.12.09
			£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Equities			-	-	-	0.8	-	0.8	0.8	0.9
Bonds1			22.4	0.4	2.9	1.1	1.3	28.1	22.9	26.5
Derivative assets2			1.3	0.4	-	-	0.3	2.0	1.7	1.5
Property			-	-	-	0.1	-	0.1	0.2	0.1
Cash (including cash								-
equivalents)			0.5	0.1	0.3	0.8	0.4	2.1	3.1	2.1
			24.2	0.9	3.2	2.8	2.0	33.1	28.7	31.1
1. Further information can be found in Note 4.02.
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, credit default 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 54
4.02	Bond portfolio summary
(i) Analysed by sector
							LGPL	LGPL	Total	Total
							At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.10
						Notes	£m	%	£m	%
Sovereigns, Supras and Sub-Sovereigns							2,709	12	4,658	16
Banks	- Tier 11					4.04	490	2	517	2
	- Tier 2 and other subordinated					4.04	1,656	7	1,884	7
	- Senior						1,353	6	2,063	7
Utilities							2,714	12	2,962	11
Consumer Services & Goods							2,195	10	2,556	9
Financial Services							794	4	1,012	4
Technology & Telecoms							1,455	7	1,729	6
Insurance							937	4	1,072	4
Industrials							963	4	1,160	4
Oil & Gas							1,253	6	1,488	5
Health Care							529	2	556	2
Property							494	2	553	2
ABS						4.03	3,748	17	4,745	17
CDO							1,124	5	1,129	4
Total							22,414	100	28,084	100
							Total	Total	Total	Total
							At 30.06.09	At 30.06.09	At 31.12.09	At 31.12.09
						Notes	£m	%	£m	%
Sovereigns, Supras and Sub-Sovereigns							2,987	13	2,916	11
Banks	- Tier 11					4.04	415	2	528	2
	- Tier 2 and other subordinated					4.04	1,825	8	2,078	8
	- Senior						2,013	9	2,242	9
Utilities							2,451	11	3,009	11
Consumer Services & Goods							2,062	9	2,624	10
Financial Services							884	4	1,141	4
Technology & Telecoms							1,465	6	1,665	6
Insurance							942	4	1,219	5
Industrials							952	4	1,086	4
Oil & Gas							921	4	1,155	4
Health Care							730	3	608	2
Property							430	2	584	2
ABS						4.03	3,775	16	4,441	17
CDO							1,080	5	1,212	5
Total							22,932	100	26,508	100
1. Tier 1 holdings include £53m (30 June 2009: £65m; 31 December 2009: £45m) of preference shares.
Asset Disclosures										Page 55
4.02	Bond portfolio summary (continued)
(ii) Analysed by domicile
							LGPL	LGPL	Total	Total
							At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.10
							£m	%	£m	%
United Kingdom							9,014	40	10,393	37
North America							7,053	31	9,458	34
Europe							5,061	23	6,852	24
Other							1,286	6	1,381	5
Total							22,414	100	28,084	100
							Total	Total	Total	Total
							At 30.06.09	At 30.06.09	At 31.12.09	At 31.12.09
							£m	%	£m	%
United Kingdom							8,611	38	9,192	35
North America							7,733	34	8,964	34
Europe							5,812	25	7,020	26
Other							776	3	1,332	5
Total							22,932	100	26,508	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	LGPL	Total	Total
							At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.10
							£m	%	£m	%
AAA							3,911	17	6,669	24
AA							2,337	10	3,002	11
A							8,704	39	10,030	35
BBB							5,297	24	6,057	21
BB or below							397	2	476	2
Unrated: Bespoke CDOs							1,028	5	1,028	4
Other							740	3	822	3
							22,414	100	28,084	100
							Total	Total	Total	Total
							At 30.06.09	At 30.06.09	At 31.12.09	At 31.12.09
							Restated	Restated	Restated	Restated
							£m	%	£m	%
AAA							5,327	23	5,086	19
AA							2,913	13	3,274	13
A							8,219	36	9,891	37
BBB							4,406	19	5,864	22
BB or below							360	2	425	2
Unrated: Bespoke CDOs							974	4	1,104	4
Other							733	3	864	3
							22,932	100	26,508	100
Other unrated bonds have been assessed and rated internally and are all assessed as investment grade.
The methodology for analysing assets by credit rating has been amended in 2010 to present the average of the available external credit
ratings.  This provides a more realistic view of the credit quality of the Group's assets.  In previous periods, the credit ratings were presented
using the lowest of the available external credit ratings.  H1 09 and FY 09 comparatives have been restated accordingly.
Asset Disclosures										Page 56
4.02	Bond portfolio summary (continued)
(iv) CDOs
The Group holds collateralised debt obligations (CDO) with a market value of £1,129m at 30 June 2010 (30 June 2009: £1,080m; 31 December 2009: £1,212m).
These holdings include £992m (30 June 2009: £934m; 31 December 2009: £1,063m) relating to four CDOs that were constructed in 2007 and 2008 in accordance with terms specified by Legal & General as part of a strategic review of the assets backing the annuity portfolio.  These CDOs mature in 2017 and 2018.  The Group selected at outset and manages the reference portfolios underlying the CDOs to give exposure to globally diversified portfolios of investment grade corporate bonds.  The Group is able to substitute the constituents of the original reference portfolios with new reference assets, allowing the management of the underlying credit risk although substitutions in 2009 were limited and no substitutions were made in H1 10. A breakdown of the underlying CDO reference portfolio by sector is provided below:
Sector
								At 30.06.10	At 30.06.09	At 31.12.09
								%	%	%
Banks								14	14	14
Utilities								10	10	10
Consumer Services & Goods								26	26	26
Financial Services								6	6	6
Technology & Telecoms								9	9	9
Insurance								6	6	6
Industrials								20	20	20
Oil & Gas								6	6	6
Health Care								3	3	3
								100	100	100
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 30%, then over 39% 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.  For illustration a £200m loss could be incurred if default losses to the reference portfolios exceeded 31% or if 44% of the names in the diversified global investment grade portfolio defaulted, with an average 30% recovery rate.  (All figures are averages across the four CDOs.)
Despite the difficult financial conditions in early 2009, the underlying reference portfolio has had no reference entity defaults in 2009 or H1 10.
Losses are limited under the terms of the CDOs to assets and collateral invested.
These CDOs also incorporate features under which, in certain circumstances, the Group can choose either to post additional cash collateral or to allow wind up of the structures.  These features are dependant on the portfolios' weighted average spreads, default experience to date and time to maturity.  No additional collateral was posted to any of the CDOs in H1 10 (2009: £nil).
These CDOs are valued using an internal valuation which is based on observable 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 is 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.
The balance of £137m of CDO holdings includes a £36m (30 June 2009: £40m; 31 December 2009: £41m) exposure to an equity tranche of a bespoke CDO.
Asset Disclosures										Page 57
4.03	Asset backed securities summary
(i) By security
							LGPL	LGPL	Total	Total
							At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.10
							£m	%	£m	%
Traditional ABS:
RMBS - Prime1							369	10	650	14
RMBS - Sub-prime2							-	-	21	-
CMBS							230	6	419	9
Credit Card							9	-	285	6
Auto							14	-	119	2
Consumer Loans							43	1	47	1
Student Loan							21	1	42	1
							686	18	1,583	33
Other:
Secured Bond							1,525	41	1,571	33
Commercial Property Backed Bonds							227	6	227	5
Infrastructure / PFI / Social housing							989	27	991	21
Whole Business Securitisation							273	7	276	6
Other secured holdings3							48	1	97	2
							3,062	82	3,162	67
Total							3,748	100	4,745	100
							Total	Total	Total	Total
							At 30.06.09	At 30.06.09	At 31.12.09	At 31.12.09
							£m	%	£m	%
Traditional ABS:
RMBS - Prime1							549	15	646	15
RMBS - Sub-prime2							21	1	22	-
CMBS							273	7	376	8
Credit Card							287	8	297	7
Auto							84	2	83	2
Consumer Loans							50	1	56	1
Student Loan							38	1	51	1
							1,302	35	1,531	34
Other:
Secured Bond							1,113	29	1,431	32
Commercial Property Backed Bonds							175	5	211	5
Infrastructure / PFI / Social housing							942	25	946	21
Whole Business Securitisation							191	5	250	6
Other secured holdings3							52	1	72	2
							2,473	65	2,910	66
Total							3,775	100	4,441	100
1. 61% (30 June 2009: 78%; 31 December 2009: 64%) of Prime RMBS holdings relate to UK mortgages.
2. 52% (30 June 2009: 81%; 31 December 2009: 54%) of Sub-prime RMBS holdings have a credit rating of AAA and 55% (30 June 2009: 53%; 31 December 2009: 57%) relate to the UK.
3. Other secured holdings include covered bonds of £13m (30 June 2009: £11m; 31 December 2009: £11m).
Asset Disclosures										Page 58
4.03	Asset backed securities summary (continued)
(ii) By credit rating
							LGPL	LGPL	Total	Total
							At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.10
							£m	%	£m	%
AAA							1,133	30	1,862	40
AA							769	21	855	18
A							1,156	31	1,244	26
BBB							544	14	607	13
BB or below							14	-	21	-
Unrated							132	4	156	3
Total							3,748	100	4,745	100
							Total	Total	Total	Total
							At 30.06.09	At 30.06.09	At 31.12.09	At 31.12.09
							Restated	Restated	Restated	Restated
							£m	%	£m	%
AAA							1,746	46	1,821	41
AA							581	16	675	15
A							765	20	1,120	25
BBB							575	15	563	13
BB or below							17	1	107	2
Unrated							91	2	155	4
Total							3,775	100	4,441	100
Of the £897m of traditional ABS holdings held outside of LGPL, 76% are rated AAA (30 June 2009: £777m of which 91% are rated AAA;
31 December 2009: £839m of which 79% are rated AAA).
The credit ratings of monoline wrapped bonds are based on the rating of the underlying securities.
The methodology for analysing assets by credit rating has been amended in 2010 to present the average of the available external
credit ratings.  This provides a more realistic view of the credit quality of the Group's assets.  In previous periods the credit ratings were
presented using the lowest of the available external credit ratings. H1 09 and FY 09 comparatives have been restated accordingly.
Asset Disclosures										Page 59
4.04	Group subordinated bank exposures
					Market	Total	Market	Total	Market	Total
					value		value		value
					At 30.06.10	At 30.06.10	At 30.06.09	At 30.06.09	At 31.12.09	At 31.12.09
					£m	%	£m	%	£m	%
Tier 1
	United Kingdom1				264	11	246	11	224	8
	North America				106	4	69	3	101	4
	Europe				118	5	91	4	174	7
	Others				29	1	9	-	29	1
Total tier 1					517	21	415	18	528	20
Lower tier 2
	United Kingdom				804	34	743	33	853	33
	North America				502	21	549	25	569	22
	Europe				213	9	299	13	311	12
	Others				84	4	81	4	79	3
Upper tier 2
	United Kingdom				94	4	101	5	89	3
	North America				26	1	-	-	24	1
	Europe				68	3	47	2	73	3
	Others				5	-	5	-	4	-
Other subordinated
	United Kingdom				5	-	-	-	3	-
	North America				76	3	-	-	72	3
	Europe				-	-	-	-	1	-
	Others				7	-	-	-	-	-
Total tier 2 and other subordinated					1,884	79	1,825	82	2,078	80
Total					2,401	100	2,240	100	2,606	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.
In 2009, the Group has taken advantage of the favourable terms on which some banks exchanged junior subordinated debt for more senior debt and this has contributed to the reduction in the holdings of junior subordinated bank debt.
Asset Disclosures										Page 60
4.05	Group capital asset mix
						Other			Other
					Society	Group		Society	Group
					shareholder	shareholder		shareholder	shareholder
					capital	assets	Total	capital	assets	Total
					At 30.06.10	At 30.06.10	At 30.06.10	At 30.06.09	At 30.06.09	At 30.06.09
					%	%	%	%	%	%
Equities					29	-	17	32	3	19
Bonds					39	65	50	30	56	42
Derivative assets					-	15	6	1	15	8
Property					4	-	2	7	-	4
Cash (including cash equivalents)					28	20	25	30	26	27
					100	100	100	100	100	100
Invested assets (£bn)					2.8	2.0	4.8	2.2	1.9	4.1
									Other
								Society	Group
								shareholder	shareholder
								capital	assets	Total
								At 31.12.09	At 31.12.09	At 31.12.09
								%	%	%
Equities								39	-	21
Bonds								35	58	46
Derivative assets								-	11	5
Property								4	-	2
Cash (including cash equivalents)								22	31	26
								100	100	100
Invested assets (£bn)								2.3	1.9	4.2
4.06	Value of policyholder assets held in Society and LGPL
								At 30.06.10	At 30.06.09	At 31.12.09
								£bn	£bn	£bn
With-profits business								25.1	23.2	25.6
Non profit business								37.3	32.0	35.9
								62.4	55.2	61.5
Asset Disclosures										Page 61
4.07	Non-linked business invested asset mix and investment return
							UK			UK non
						Investment	With-profits	UK	UK	linked
						return	asset	With-profits	With-profits	non profit
							share	non par	other	business
As at 30 June 2010						%	%	%	%	%
Equities						(4)	36	4	(55)	-
Bonds						6	43	85	153	99
Property						8	14	1	-	-
Cash						-	7	10	2	1
							100	100	100	100
Investment return (% pa)						5	2	5	17	5
Invested assets (£bn):
Net of derivative liabilities							13.3	2.4	1.6	23.4
Gross of derivative liabilities							13.4	2.4	1.6	25.1
As at 30 June 2009
Equities						(1)	35	4	(56)	-
Bonds						1	44	86	137	94
Property						(10)	14	1	-	-
Cash						1	7	9	19	6
							100	100	100	100
Investment return (% pa)						-	(1)	-	(4)	3
Invested assets (£bn):
Net of derivative liabilities							12.1	2.2	1.8	20.3
Gross of derivative liabilities							12.1	2.2	1.8	21.7
As at 31 December 2009
Equities						19	37	4	(68)	-
Bonds						13	42	87	161	98
Property						3	13	1	-	-
Cash						2	8	8	7	2
							100	100	100	100
Investment return (% pa)						12	14	10	(19)	15
Invested assets (£bn):
Net of derivative liabilities							13.6	2.3	1.4	22.4
Gross of derivative liabilities							13.7	2.3	1.4	23.7
All investment return percentages reflect actual investment returns on average asset holdings for the period.
Asset Disclosures										Page 62
4.08	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 30 June 2010							£bn	£bn	£bn	£bn
Group capital and other insurance business
Equities							0.6	0.1	0.1	0.8
Bonds							1.9	3.4	-	5.3
Derivative assets							-	0.3	-	0.3
							2.5	3.8	0.1	6.4
Non profit non-unit linked
Equities							-	-	-	-
Bonds							2.4	20.4	-	22.8
Derivative assets							0.2	1.5	-	1.7
							2.6	21.9	-	24.5
							Fair value measurement at the
							end of the reporting period based on:
							Level 1	Level 2	Level 3	Total
As at 30 June 2009							£bn	£bn	£bn	£bn
Group capital and other insurance business
Equities							0.6	0.1	-	0.7
Bonds							1.7	2.6	-	4.3
Derivative assets							-	0.3	-	0.3
							2.3	3.0	-	5.3
Non profit non-unit linked
Equities							0.1	-	-	0.1
Bonds							1.4	17.2	-	18.6
Derivative assets							0.2	1.2	-	1.4
							1.7	18.4	-	20.1
							Fair value measurement at the
							end of the reporting period based on:
							Level 1	Level 2	Level 3	Total
As at 31 December 2009							£bn	£bn	£bn	£bn
Group capital and other insurance business
Equities							0.7	0.1	0.1	0.9
Bonds							1.7	3.0	-	4.7
Derivative assets							-	0.2	-	0.2
							2.4	3.3	0.1	5.8
Non profit non-unit linked
Equities							-	-	-	-
Bonds							1.0	20.8	-	21.8
Derivative assets							-	1.3	-	1.3
							1.0	22.1	-	23.1
Consolidated CDO holdings have been presented on a net basis within level 2.
The analysis excludes cash, loans and receivables and property investments of £2.2bn (30 June 2009: £3.3bn; 31 December 2009: £2.2bn)
(Note 4.01).
Asset Disclosures										Page 63
4.08	Analysis of fair value measurement bases (continued)
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arms length transaction.
Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflects the Group's view of market assumptions in the absence of observable market information. The Group utilises techniques that maximise the use of observable inputs and minimise the use of unobservable inputs.
The levels of fair value measurement bases are defined as follows:
Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 : fair values measured using valuation techniques for all inputs significant to the measurement other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: fair values measured using valuation techniques for any input for the asset or liability significant to the measurement that is not based on observable market data (unobservable inputs).
In current market conditions, the liquidity of financial instruments is lower 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 market 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. Accordingly, these assets have also been classified in level 2.
Level 3 assets, where internal models are used to represent a small proportion of assets to which shareholders are exposed and reflect unquoted equities including investments in private equity, property vehicles and suspended securities.
In many situations, inputs used to measure the fair value of an asset or liability may fall into different levels  of the fair value hierarchy. In these situations, the Group determines the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. As a result, both observable and unobservable inputs may be used in the determination of fair values that the Group has classified with level 3.
The Group determines the fair values of certain financial assets and liabilities based on quoted market prices, where available. The Group also determines fair value based on estimated future cash flows discounted at the appropriate current market rate. As appropriate, fair values reflect adjustments for counterparty credit quality, the Group's credit standing, liquidity and risk margins on unobservable inputs.
Where quoted market prices are not available, fair value estimates are made at a point in time, based on relevant market data, as well as the best information about the individual financial instrument. Illiquid market conditions have resulted in inactive markets for certain of the Group's financial instruments. As a result, there is generally limited observable market data for these assets and liabilities. Fair value estimates for financial instruments deemed to be in an illiquid market are based on judgments regarding current economic conditions, liquidity discounts, currency, credit and interest rate risks, loss experience and other factors. These fair values are estimates and involve considerable uncertainty and variability as a result of the inputs selected and may differ significantly from the values that would have been used had a ready market existed, and the differences could be material. As a result, such calculated fair value estimates may not be realisable in an immediate sale or settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique could significantly affect these fair value estimates.
Fair values are subject to a control framework designed to ensure that input variables and outputs are assessed independently of the risk taker. These inputs and outputs are reviewed and approved by a valuation committee.

 

END

 

 

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