L&G Interim Results 2006 PT 5

Legal & General Group PLC
27 July 2006

                                                                                                                   P57
Capital and Cash Flow
---------------------

5.1   Group capital resources

The Group's total capital resources of £7.0bn on an IFRS basis, comprise ordinary equity holders' capital (£4.2bn), 
subordinated debt (£0.8bn), and unallocated divisible surplus (£2.0bn, including £0.3bn of Sub-fund).


5.2   Insurance Groups Directive surplus

The Group is required to measure and monitor its capital resources on a regulatory, as well as an IFRS, basis and to 
comply with the minimum capital requirements of regulators in each territory in which it operates. At a Group level, 
Legal & General must comply with the requirements of the Insurance Groups Directive (IGD). This is a very prudent 
measure of capital resources as it excludes any amount of surplus capital within a long term fund (£2.3bn at 
30 June 2006). The table below shows the total estimated Group capital resources, Group capital resources requirement 
and the surplus.

                                                                                         30.06.06            Full year
                                                                                                              31.12.05
                                                                                                 £m                 £m
----------------------------------------------------------------------------------------------------------------------
Tier I                                                                                        5,399              6,047
Upper tier II                                                                                   423                394
Lower tier II                                                                                   411                408
Deductions                                                                                      (67)               (62)
----------------------------------------------------------------------------------------------------------------------
Group capital resources                                                                       6,166              6,787
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Group capital resources requirement                                                           3,833              4,376
----------------------------------------------------------------------------------------------------------------------
Insurance Groups Directive surplus                                                            2,333              2,411
======================================================================================================================

A reconciliation of the Group capital resources on an IGD basis to the capital and reserves attributable to the equity 
holders of the company on an IFRS basis is given below.

                                                                                           30.06.06          Full year
                                                                                                              31.12.05
                                                                                                 £m                 £m
----------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to equity holders on an IFRS basis                          4,252              4,651
Qualifying tier II capital                                                                      834                408
Additional capital available from Legal & General Assurance Society Ltd                       1,552              2,148
Adjustment to reflect regulatory value of L&G America                                          (466)              (430)
Other adjustments to restate to IGD basis                                                        (6)                10
----------------------------------------------------------------------------------------------------------------------
Group capital resources                                                                       6,166              6,787
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                                                                                                                   P58
5.3   Society capital resources

(a)   Analysis of Society capital on an IFRS basis

Legal & General Assurance Society Limited (Society), the Group's principal operating subsidiary, has been allocated 
capital of £4.6bn, reflecting the significance of this operation and the importance of ensuring financial strength
to support long term growth of the business. Of this total, £2.0bn is held outside the long term fund as Society 
Shareholder Capital (SSC), and the remainder of £2.6bn is held within the UK long term fund as Shareholder Retained
Capital (SRC). An analysis of the movement in total Society capital on the IFRS basis is provided in the table below:

                                                 30.06.06    30.06.06   30.06.05    30.06.05     Full year   Full year
                                                                                                  31.12.05    31.12.05
                                                      SSC         SRC        SSC         SRC           SSC         SRC
                                         Notes         £m          £m         £m          £m            £m          £m
----------------------------------------------------------------------------------------------------------------------
SSC/SRC as at 1 January                             1,896       2,560      1,973       2,196         1,973       2,196

Investment return                                      70                    103                       250
Transfer from long term fund            5.4(b)        138                    115                       265
Dividends from subsidiaries                             2                    105                       105
Distribution to shareholders                          (50)                  (229)                     (638)
Tax                                                   (11)                   (22)                      (57)
Other                                                  (3)                     3                        (2)           
----------------------------------------------------------------------------------------------------------------------
SSC at end of period                                2,042                  2,048                     1,896

Investment return                                                 104                    129                       387
Net capital released from non profit 
 business                               5.3(b)                    110                    138                       478
Distribution of operating profit from non
profit business                                                  (175)                  (151)                     (349)
Tax                                                               (33)                   (18)                     (148)
SRC movement included in total
 recognised income and expense                                     25                      7                        (4)
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SRC at end of period                                            2,591                  2,301                     2,560
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Society capital at end of period                    2,042       2,591      2,048       2,301         1,896       2,560
======================================================================================================================

(b)  Analysis of net capital released from non profit business
                                                                                                                        
                                                                                    30.06.06    30.06.05     Full year
                                                                                                              31.12.05
                                                                                          £m          £m            £m
----------------------------------------------------------------------------------------------------------------------
Net capital released from non profit business comprises:
     New business:
      - Strain arising in the period, before financing arrangements                     (279)       (207)         (466)
      - Financing arrangements                                                            94           -           125
     Existing business:
      - Expected capital release in the period, before financing arrangements            290         198           499
      - Financing arrangements                                                           (26)          -             -
     Experience variances                                                                (45)        127           274
     Changes to non-economic assumptions                                                 (28)        (35)          (35)
     Movements in non-cash items                                                          58           2           (67)
     Other                                                                                13          12             5
----------------------------------------------------------------------------------------------------------------------
                                                                                          77          97           335
     Tax gross-up                                                                         33          41           143
----------------------------------------------------------------------------------------------------------------------
                                                                                         110         138           478
======================================================================================================================
Financing arrangements comprise the financial reinsurance for new term assurance business which was finalised in the 
last quarter of 2005. The reinsurance contract has a beneficial impact of £94m (net of tax) on the financing of new
business for regulatory purposes. This has been partially offset by repayments (£26m) relating to the financial 
reinsurance on premiums written in 2005. Under IFRS, the impact is neutral and there is an equal and opposite impact 
reported through non-cash items.


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                                                                                                                   P59
5.3   Society capital resources (continued)

Expected capital release represents the capital and profit generated in the period from the in-force non profit 
business if the embedded value assumptions are borne out in practice. The experience variances are calculated with
reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model. 
The release figure of £290m reflects the substantial growth in non profit business in recent years.

On average, the capital invested in new non profit business is repaid from product cash flows in approximately five 
years if required solvency margin is excluded, and approximately six years when required solvency margin is included.
Both new business strain and expected capital release exclude required solvency margin, as this is not accounted for 
under IFRS.

An analysis of the experience variances, non-economic assumption changes and non-cash items, all net of tax, is 
provided below:

Experience variances                                                                      30.06.06           Full year
                                                                                                              31.12.05
                                                                                                £m                  £m
----------------------------------------------------------------------------------------------------------------------
Persistency                                                                                      -                  13
Mortality / morbidity                                                                           (1)                 15
Expenses                                                                                       (20)                 (8)
Bulk Purchase Annuity data loading                                                              43                  78
Investment                                                                                       2                 121
Allocated tax and other                                                                        (69)                 55
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                                                                                               (45)                274
======================================================================================================================
Experience variances of £(45)m comprises principally the impact from loading data onto the new administration system 
for Bulk Purchase Annuity business, and variances between actual and modelled allocated tax.

Changes to non-economic assumptions                                                       30.06.06           Full year
                                                                                                              31.12.05
                                                                                                £m                  £m
----------------------------------------------------------------------------------------------------------------------
Mortality / morbidity                                                                            -                  33
Expenses                                                                                       (13)               (19)
Negative inflation                                                                             (15)               (33)
Other                                                                                            -                (16)
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                                                                                               (28)               (35)
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Movements in non-cash items                                                               30.06.06           Full year
                                                                                                              31.12.05
                                                                                                £m                  £m
----------------------------------------------------------------------------------------------------------------------
Deferred tax                                                                                    37                  34
Deferred acquisition costs                                                                     130                 160
Deferred income liabilities                                                                    (25)               (110)
IFRS adjustment for financial reinsurance                                                      (68)               (125)
Other                                                                                          (16)                (26)
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                                                                                                58                 (67)
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(c)  Regulatory capital surplus

Society is required to measure and monitor its capital resources on a regulatory basis. The primary requirement is for 
Society to maintain capital resources in excess of its capital resources requirement and the table below shows the
estimated regulatory capital surplus as at 30 June 2006.

                                                                        30.06.06    30.06.06     Full year   Full year
                                                                                                  31.12.05    31.12.05
                                                                         Long term     General   Long term     General
                                                                          business   insurance    business   insurance
                                                                                £m          £m          £m          £m
----------------------------------------------------------------------------------------------------------------------
Tier I                                                                       7,527          55       7,944          55
Upper tier II                                                                  602           -         602           -
----------------------------------------------------------------------------------------------------------------------
Available capital resources                                                  8,129          55       8,546          55
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Capital resources requirement                                                3,597          53       4,142          55
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Regulatory capital surplus                                                   4,532           2       4,404           -
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                                                                                                                   P60
5.3   Society capital resources (continued)

Tier I resources include an implicit item relating to non profit business of £425m (FY05: £540m).

Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis. If the surplus on 
a realistic basis is lower than the surplus using Peak 1 solvency rules, then a further capital requirement is
included in the capital resources requirement. This additional capital requirement is the With-Profits Insurance 
Capital Component and amounts to £1,192m for 30 June 2006 (FY05: £1,504m) of the total capital resources
requirement of £3,597m (FY05: £4,142m).

The table below summarises the realistic position of the with-profits part of the fund:

                                                                                       30.06.06              Full year
                                                                                                              31.12.05
                                                                                             £m                     £m
----------------------------------------------------------------------------------------------------------------------
With-profits surplus                                                                        907                    842
Risk capital margin (RCM)                                                                   244                    327
----------------------------------------------------------------------------------------------------------------------
Surplus                                                                                     663                    515
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(d)  Society financial strength ratings

Society continues to be one of the two highest rated European life assurers. Currently, our financial strength ratings 
from Standard & Poor's, Moody's and A.M.Best are AA+, Aa1 and A+ respectively, all with a stable outlook.


5.4   Distributions to shareholders from the UK long term fund

(a)   Calculation of distribution relating to non profit and shareholder net worth

The transfer to shareholders from the long term fund is limited by a formula agreed with our regulator. The formula is 
the aggregate of the shareholders' share of the with-profits surplus, a smoothed investment return of 7% on the
embedded value of the SRC and Sub-fund, the shareholder net worth (SNW) and 5% on the embedded value of the non profit 
business.
                                                30.06.06    30.06.06    30.06.05    30.06.05     Full year   Full year
                                                                                                  31.12.05    31.12.05
                                              Non profit         SNW  Non profit         SNW    Non profit         SNW
                                                      £m          £m          £m          £m            £m          £m
----------------------------------------------------------------------------------------------------------------------
At end of period                                   2,649       1,714       2,268       1,464         2,387       1,762
Less: subordinated debt capital                        -        (602)          -        (602)            -        (602)
Add back: pension deficit attributable to SNW          -          38           -          47             -          51
Add back: distributions                                -         110           -          92             -         219
----------------------------------------------------------------------------------------------------------------------
                                                   2,649       1,260       2,268       1,001         2,387       1,430
Distribution formula - full year                                                                        5%          7%
Distribution formula - half year                    2.5%        3.5%        2.5%        3.5%                          
----------------------------------------------------------------------------------------------------------------------
Distribution after tax                                67          43          57          35           119         100
Tax gross up @ 30%                                    29          18          26          15            51          42
----------------------------------------------------------------------------------------------------------------------
Distribution before tax                               96          61          83          50           170         142
======================================================================================================================

(b)    Analysis of distribution to shareholders
                                                            30.06.06                30.06.05                 Full year
                                                                                                              31.12.05
                                                                  £m                      £m                        £m
----------------------------------------------------------------------------------------------------------------------
With-profits transfer                                             28                      23                        46
Non profit transfer                                              110                      92                       219
----------------------------------------------------------------------------------------------------------------------
Transfer from long term fund                                     138                     115                       265
Subordinated debt                                                 13                      13                        26
----------------------------------------------------------------------------------------------------------------------
Distribution to shareholders after tax                           151                     128                       291
Tax gross up @ 30%                                                64                      55                       124
----------------------------------------------------------------------------------------------------------------------
Distribution to shareholders before tax                          215                     183                       415
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                                                                                                                   P61
5.5   Group cash flow statement

The table below shows the cash flows relating to the Group's parent company.
                                                                            30.06.06        30.06.05         Full year
                                                                                            Restated          31.12.05
                                                                                  £m              £m                £m
----------------------------------------------------------------------------------------------------------------------
Dividends received:
   UK life and pensions                                                           50             124               533
   General insurance                                                               -             105               105
   Investment management                                                           -              24                69
   Other                                                                           2               1                 2
----------------------------------------------------------------------------------------------------------------------
                                                                                  52             254               709
Dividend distributions to
ordinary equity holders of the Company during the period                        (236)           (224)             (331)
Distributions during the period on subordinated borrowings designated as equity    -              (8)              (16)
Proceeds from issue of equity                                                     12               -                 1
Proceeds from issue of subordinated borrowings                                     -             397               397
Working capital movements                                                         (6)            (66)             (136)
----------------------------------------------------------------------------------------------------------------------
Net cash (outflow)/inflow                                                       (178)            353               624
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Following the implementation of FRS 21 'Events after the balance sheet date', dividends from operating subsidiaries 
are paid prior to the year end to fund both the final and interim dividend payments to shareholders. This has
contributed to the net cash outflow in the first half of 2006.






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