L&G Interim Results Part 2

Legal & General Group PLC 24 July 2003 Part 2 Legal & General Group Plc P1 Consolidated Profit and Loss Account - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- Notes Full year 30.6.03 30.6.02 2002 Â£m Â£m Â£m Profit on continuing operations Life and pensions 1 306 313 581 Institutional fund management 37 40 92 General insurance 4 19 22 46 Other operational income 5 3 (13) (24) ------- ------- ------- Operating profit on continuing operations 365 362 695 Profit on discontinued operations Other operational income - Banking - 3 4 ------- ------- ------- Operating profit 365 365 699 Variation from longer term investment return 7 86 (492) (1,174) Change in equalisation provision (4) (3) (5) Effect of economic assumption changes 8 (8) (1) (6) Effect of UK Budget tax changes 9 (27) - - Profit on sale of banking operations 10 - - 36 ------- ------- ------- Profit/(loss) on ordinary activities before tax 412 (131) (450) ''''''''' ''''''''' ''''''''' Tax (charge) on operating profit (105) (105) (197) Tax credit on other profits/(losses) 0 99 224 ''''''''' ''''''''' ''''''''' Tax (charge)/credit on profit/(loss) on ordinary activities (105) (6) 27 ------- ------- ------- Profit/(loss) for the financial period 307 (137) (423) Dividends (102) (86) (297) ------- ------- ------- Retained profit/(loss) 205 (223) (720) ======================================================================================== ======= ======= ======= Earnings per share P P P Based on operating profit after tax on continuing operations 4.01 4.58 8.50 Based on profit/(loss) for the financial period 4.73 (2.44) (7.21) Diluted earnings per share Based on operating profit after tax on continuing operations 3.92 4.44 8.28 Based on profit/(loss) for the financial period 4.61 (2.44) (7.21) Dividend per share 1.57 1.53 4.78 ======================================================================================== ======= ======= ======= These financial statements were approved by the Board on 23 July 2003 and have been prepared for long term business using the Achieved Profits (AP) basis. The Modified Statutory Solvency (MSS) results are included in Part 3. The results for the six months to 30 June 2003 and 30 June 2002 are unaudited, but have been subject to a review by the auditors and constitute non-statutory accounts within the meaning of Section 240 of the Companies Act 1985. They have been prepared on a basis which is consistent with the financial statements for the year ended 31 December 2002. The results for the year ended 2002 have been taken from the financial statements for the year ended 2002 which have been filed with the Registrar of Companies and include an auditors' report which is unqualified and does not contain a statement under either sections 237(2) or 237 (3) of the Companies Act 1985. ======================================================================================================================== Legal & General Group Plc P2 Consolidated Balance Sheet - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- Notes At At At 30.6.03 30.6.02 31.12.02 Assets Â£m Â£m Â£m Investments 12 33,884 34,234 32,442 Assets held to cover linked liabilities 75,733 72,162 69,723 Long term in-force business asset 2,028 2,190 1,916 Other assets 5,548 3,431 4,489 ------- ------- ------- 117,193 112,017 108,570 ======= ======= ======= Liabilities Shareholders' funds 14 5,272 4,775 5,061 Fund for future appropriations 633 1,078 516 Technical provisions ''''''''' ''''''''' ''''''''' - Technical provisions for linked liabilities 75,557 72,011 69,413 - Long term business provisions 32,350 29,697 30,679 - General insurance provisions 360 327 345 ''''''''' ''''''''' ''''''''' 108,267 102,035 100,437 Borrowings 15 1,409 1,762 1,589 Other creditors 1,612 2,367 967 ------- ------- ------- 117,193 112,017 108,570 ======================================================================================== ======= ======= ======= Statement of Total Recognised Gains and Losses At At At 30.6.03 30.6.02 31.12.02 Â£m Â£m Â£m Profit/(loss) for the financial period 307 (137) (423) Exchange gains/(losses) 6 2 (5) ------- ------- ------- Total recognised gains and losses 313 (135) (428) ======================================================================================== ======= ======= ======= Legal & General Group Plc P3 New business Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- New Annual Premium Equivalent Full year 30.6.03 30.6.02 2002 Â£m Â£m Â£m Insurance business Life 135 163 314 Pensions 148 155 294 ------- ------- ------- UK 283 318 608 ''''''''' ''''''''' ''''''''' USA 28 29 57 Netherlands 10 10 19 France 9 8 16 ''''''''' ''''''''' ''''''''' 47 47 92 ------- ------- ------- Insurance total 330 365 700 Retail investment business UK 122 131 203 France 1 2 3 ------- ------- ------- Total new business 453 498 906 ======= ======= ======= International insurance new business expressed at 30 June 2003 exchange rates USA 28 26 56 Netherlands 10 11 21 France 9 9 17 ------- ------- ------- 47 46 94 ======= ======= ======= Annual Premium Equivalent (APE) is calculated for total new business, including unit trusts and ISAs but excluding institutional fund management, and comprises the new annual premiums together with 10% of single premiums. Full year 30.6.03 30.6.02 2002 Institutional fund management Â£m Â£m Â£m Managed pension funds * - Pooled funds 5,207 6,325 12,359 - Segregated funds 359 477 1,039 - Limited partnerships 239 103 167 ------- ------- ------- 5,805 6,905 13,565 Other funds 175 312 402 ------- ------- ------- 5,980 7,217 13,967 ======= ======= ======= * New monies from pension fund clients of Legal & General Assurance (Pensions Management) Ltd. Corporate pensions gross new business excludes Â£1.0bn (1H02: Â£0.7bn; FY02: Â£2.1bn) which is held on a temporary basis, generally as part of a portfolio reconstruction. ======================================================================================================================== Legal & General Group Plc P4 New business Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 6 months 3 months 3 months 6 months 3 months 3 months 30.6.03 30.6.03 31.3.03 30.6.02 30.6.02 31.3.02 Â£m Â£m Â£m Â£m Â£m Â£m UK annual premiums Insurance business Life - Mortgage-related 48 27 21 49 25 24 - Protection 23 12 11 22 12 10 - Group risk 13 6 7 14 8 6 Pensions - Individual pensions 57 28 29 93 50 43 - Group pensions 2 1 1 4 2 2 ------- ------- ------- ------- ------- ------- 143 74 69 182 97 85 Retail investment business ISAs 15 9 6 26 17 9 Unit trusts 4 3 1 5 3 2 ------- ------- ------- ------- ------- ------- Total 162 86 76 213 117 96 ========================================================= ======= ======= ======= ======= ======= ======= UK single premiums Insurance business Bonds - With-profits 329 134 195 665 312 353 - Other 186 108 78 111 63 48 Pensions - Individual pensions 165 75 90 150 72 78 - Annuities - individual 314 154 160 185 86 99 - Annuities - bulk purchase 367 119 248 175 87 88 - Other group business 3 2 1 28 15 13 - DSS rebates 37 20 17 43 20 23 ------- ------- ------- ------- ------- ------- 1,401 612 789 1,357 655 702 Retail investment business ISAs 393 273 120 536 330 206 Unit trusts 632 304 328 469 251 218 ------- ------- ------- ------- ------- ------- Total 2,426 1,189 1,237 2,362 1,236 1,126 ========================================================= ======= ======= ======= ======= ======= ======= UK APE Individual life and pensions 231 116 115 279 142 137 Retail investments 122 70 52 131 78 53 by channel ''''''''' ''''''''' ''''''''' ''''''''' ''''''''' ''''''''' - Independent financial advisers 188 93 95 180 98 82 - Business partnerships 123 65 58 164 83 81 - Business partnerships direct 19 13 6 29 16 13 - Direct 23 15 8 37 23 14 ''''''''' ''''''''' ''''''''' ''''''''' ''''''''' ''''''''' Total UK individual 353 186 167 410 220 190 Group 52 19 33 39 21 18 ------- ------- ------- ------- ------- ------- Total 405 205 200 449 241 208 ========================================================= ======= ======= ======= ======= ======= ======= Legal & General Group Plc P5 New business Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 6 months 3 months 3 months 6 months 3 months 3 months 30.6.03 30.6.03 31.3.03 30.6.02 30.6.02 31.3.02 Â£m Â£m Â£m Â£m Â£m Â£m International annual premiums Insurance business USA 27 13 14 29 14 15 Netherlands 6 4 2 5 3 2 France 4 3 1 3 2 1 ------- ------- ------- ------- ------- ------- Total 37 20 17 37 19 18 ========================================================= ======= ======= ======= ======= ======= ======= International single premiums Insurance business USA 8 7 1 0 0 0 Netherlands 46 17 29 53 21 32 France 49 23 26 53 24 29 ------- ------- ------- ------- ------- ------- 103 47 56 106 45 61 Retail investment business France 10 5 5 16 9 7 ------- ------- ------- ------- ------- ------- Total 113 52 61 122 54 68 ========================================================= ======= ======= ======= ======= ======= ======= Legal & General Group Plc P6 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 1. Operating profit from long term business Life and Managed Intern- pensions pension UK ational Total funds * Total Six months ended 30.6.03 Â£m Â£m Â£m Â£m Â£m Contribution from: New business 131 19 150 12 162 In-force business - expected return 108 22 130 6 136 - experience variances 0 (2) (2) 1 (1) - operating assumption changes (50) 0 (50) 10 (40) Shareholder net worth 71 7 78 3 81 ------- ------- ------- ------- ------- Operating profit 260 46 306 32 338 ======= ======= ======= ======= ======= Six months ended 30.6.02 Contribution from: New business 94 18 112 15 127 In-force business - expected return 128 23 151 7 158 - experience variances (18) (14) (32) 7 (25) - operating assumption changes (7) 1 (6) 2 (4) Development costs (3) - (3) (1) (4) Shareholder net worth 83 8 91 2 93 ------- ------- ------- ------- ------- Operating profit 277 36 313 32 345 ======= ======= ======= ======= ======= Full year ended 31.12.02 Contribution from: New business 211 38 249 32 281 In-force business - expected return 264 46 310 15 325 - experience variances (25) (18) (43) 14 (29) - operating assumption changes (105) 1 (104) 16 (88) Development costs (3) - (3) (1) (4) Shareholder net worth 159 13 172 7 179 ------- ------- ------- ------- ------- Operating profit 501 80 581 83 664 ======= ======= ======= ======= ======= * Included in the Institutional fund management result of Â£37m (1H02: Â£40m; FY02: Â£92m). ======================================================================================================================== Legal & General Group Plc P7 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 2. Life and pensions gross premiums and operating profit Full year Full year 30.6.03 30.6.03 30.6.02 30.6.02 2002 2002 Premiums Operating Premiums Operating Premiums Operating written profit written profit written profit Â£m Â£m Â£m Â£m Â£m Â£m UK 2,193 260 2,085 277 4,229 501 USA 154 28 142 20 285 50 Netherlands 75 14 78 11 137 23 France 73 4 74 5 153 7 ------- ------- ------- ------- ------- ------- 2,495 306 2,379 313 4,804 581 ======= ======= ======= ======= ======= ======= International life and pensions gross premiums and operating profit expressed at 30 June 2003 exchange rates are: Full year Full year 30.6.02 30.6.02 2002 2002 Premiums Operating Premiums Operating written profit written profit Â£m Â£m Â£m Â£m USA 131 18 278 49 Netherlands 83 12 146 24 France 79 5 163 7 ============================================================================= ======= ======= ======= ======= 3. Sterling exchange rates used 30.6.03 30.6.02 31.12.02 United States dollar 1.65 1.52 1.61 Euro 1.44 1.54 1.53 ============================================================================= ======= ======= ======= ======= 4. General insurance net premiums and operating profit Full year Full year 30.6.03 30.6.03 30.6.02 30.6.02 2002 2002 Premiums Operating Premiums Operating Premiums Operating written profit written profit written profit Â£m Â£m Â£m Â£m Â£m Â£m Household 146 10 108 8 231 18 Other business 38 9 33 14 73 28 ------- ------- ------- ------- ------- ------- Total 184 19 141 22 304 46 =========================================================== ======= ======= ======= ======= ======= ======= Legal & General Group Plc P8 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 5. Other operational income Full year 30.6.03 30.6.02 2002 Â£m Â£m Â£m Shareholders' other income - Investment return on shareholders' funds 50 21 54 - Interest expense (30) (21) (52) ------- ------- ------- 20 0 2 Other operations (10) (8) (14) Unallocated corporate and development expenses (7) (5) (12) ------- ------- ------- 3 (13) (24) ======================================================================================== ======= ======= ======= 6. General insurance and shareholders' investment return Full year 30.6.03 30.6.02 2002 Â£m Â£m Â£m Investment income 41 22 57 Interest expense and charges (31) (21) (52) Realised investment losses (6) 0 (6) Unrealised investment appreciation/ (depreciation) 45 (22) (42) ------- ------- ------- 49 (21) (43) ======= ======= ======= reported within: General insurance 9 9 18 Other operational income 20 0 2 Variation from longer term investment return ''''''''' ''''''''' ''''''''' - General insurance 1 (9) (21) - Other operational income 19 (21) (42) ''''''''' ''''''''' ''''''''' 20 (30) (63) The investment return shown represents the return on the General insurance and Corporate funds. Shareholders' other income, reported within Other operational income, has been allocated based on a longer term rate of investment return with the variation from the actual return being reported as Variation from longer term investment return. ======================================================================================================================== Legal & General Group Plc P9 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 7. Variation from longer term investment return Full year 30.6.03 30.6.02 2002 Â£m Â£m Â£m Life and pensions - UK 56 (425) (1,045) - International 7 (13) (18) ------- ------- ------- Total life and pensions 63 (438) (1,063) Managed pension funds 3 (24) (48) ------- ------- ------- Total long term business 66 (462) (1,111) General insurance 1 (9) (21) Other operational income 19 (21) (42) ------- ------- ------- 86 (492) (1,174) ======= ======= ======= For long term business, the variation from longer term investment return represents the effect of the investment performance in respect of shareholder net worth and in-force business, compared with embedded value assumptions at the beginning of the period. ======================================================================================================================== 8. Effect of economic assumption changes Full year 30.6.03 30.6.02 2002 Â£m Â£m Â£m Life and pensions - UK (1) 1 (14) - International (7) (2) 8 ------- ------- ------- Total long term business (8) (1) (6) ========================================================================================= ======= ======== ======= 9. Effect of UK Budget tax changes Changes in the 2003 Budget to the corporation tax rates applicable to the policyholders' share of certain income and gains reduced the UK life and pensions embedded value by Â£19m. The effect has been reported as a charge before tax of Â£27m. ======================================================================================================================== 10. Sale of Banking operations The sale of Legal & General Bank Ltd and Legal & General Mortgage Services Ltd, two wholly owned subsidiaries, to Northern Rock plc, was completed on 1 August 2002. The results to the date of sale have been reported as discontinued business. This transaction resulted in an exceptional profit before tax of Â£36m (Â£36m after tax) and generated net proceeds of Â£133m. ======================================================================================================================== 11. Acquisition of Alliance & Leicester Life Assurance Company Limited The acquisition of Alliance & Leicester Life Assurance Company Ltd from Alliance & Leicester plc was completed on 3 September 2002. The acquisition cost of Â£89m represented Â£22m for the value of the in-force business and Â£67m for the net assets of the company. The results have been accounted for as an acquisition in the Group's consolidated financial statements. ======================================================================================================================== Legal & General Group Plc P10 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 12. Funds under management At At At 30.6.03 30.6.02 31.12.02 Â£m Â£m Â£m Land and buildings 3,839 3,266 3,589 Shares, variable yield securities and unit trusts 10,922 11,964 10,139 Debt and other fixed income securities 17,679 15,029 15,977 Loans secured by mortgages 191 1,670 204 Other loans and investments 97 338 144 Deposits with credit institutions 1,156 1,967 2,389 ------- ------- ------- Total investments 33,884 34,234 32,442 Assets held to cover linked liabilities 75,733 72,162 69,723 ------- ------- ------- Funds included in the consolidated balance sheet 109,617 106,396 102,165 Segregated funds 8,714 8,334 8,970 Unit trusts, ISAs and PEPs 6,176 5,353 5,117 ------- ------- ------- Total funds under management 124,507 120,083 116,252 ======= ======= ======= representing: Managed in the UK - Active 39,158 34,204 36,018 - Index tracking 82,265 80,353 76,855 - For overseas subsidiaries 1,160 1,109 1,119 ------- ------- ------- 122,583 115,666 113,992 Other including managed overseas 1,924 2,672 2,260 ------- ------- ------- 124,507 118,338 116,252 Investments of discontinued banking operations - 1,745 - ------- ------- ------- 124,507 120,083 116,252 ======= ======= ======= including Institutional funds under management: Managed pension funds - Pooled 64,600 62,522 60,397 - Segregated 6,980 5,702 6,308 ------- ------- ------- 71,580 68,224 66,705 Other funds 3,084 2,632 2,662 ------- ------- ------- 74,664 70,856 69,367 ======= ======= ======= The reported asset mix shown above does not reflect the use of derivatives. The effect of outstanding futures contracts is to change the mix as if the value reported for shares, variable yield securities and unit trusts increased by Â£48m (1H02: Â£83m; FY02: Â£631m); deposits would be changed by corresponding amounts. The effect of other derivatives is not considered significant enough to be reported separately. ======================================================================================================================== Legal & General Group Plc P11 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ------------------------------------------------------------------------------------------------------------------------ 13. Embedded value Life and Managed Intern- pensions pension UK ational Total funds Total Â£m Â£m Â£m Â£m Â£m Six months ended 30.6.03 At 1 January 3,887 641 4,528 262 4,790 Exchange rate movements - (2) (2) - (2) ------- ------- ------- ------- ------- 3,887 639 4,526 262 4,788 Profit after tax 210 29 239 25 264 Distributions (122) 0 (122) - (122) ------- ------- ------- ------- ------- At end of period 3,975 668 4,643 287 4,930 ======= ======= ======= ======= ======= comprising: Value of in-force business 2,296 432 2,728 142 2,870 Shareholder net worth ** 1,679 236 1,915 145 2,060 ------- ------- ------- ------- ------- 3,975 668 4,643 287 4,930 ======= ======= ======= ======= ======= Six months ended 30.6.02 At 1 January 4,432 633 5,065 252 5,317 Exchange rate movements - (11) (11) - (11) ------- ------- ------- ------- ------- 4,432 622 5,054 252 5,306 (Loss)/profit after tax (141) 14 (127) 6 (121) Capital movements * 100 - 100 - 100 Distributions (140) (1) (141) - (141) ------- ------- ------- ------- ------- At end of period 4,251 635 4,886 258 5,144 ======= ======= ======= ======= ======= comprising: Value of in-force business 2,474 401 2,875 129 3,004 Shareholder net worth ** 1,777 234 2,011 129 2,140 ------- ------- ------- ------- ------- 4,251 635 4,886 258 5,144 =================================================================== ======= ======= ======= ======= ======= Legal & General Group Plc P12 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 13. Embedded value (continued) Life and Managed Intern- pensions Pension UK ational Total Funds Total Â£m Â£m Â£m Â£m Â£m Full year ended 31.12.02 At 1 January 4,432 633 5,065 252 5,317 Exchange rate movements - (36) (36) - (36) ------- ------- ------- ------- ------- 4,432 597 5,029 252 5,281 (Loss)/profit after tax (502) 45 (457) 25 (432) Capital movements * 214 (1) 213 - 213 Distributions (257) - (257) (15) (272) ------- ------- ------- ------- ------- At 31 December 3,887 641 4,528 262 4,790 ======= ======= ======= ======= ======= comprising: Value of in-force business 2,153 408 2,561 132 2,693 Shareholder net worth ** 1,734 233 1,967 130 2,097 ------- ------- ------- ------- ------- 3,887 641 4,528 262 4,790 ======= ======= ======= ======= ======= * Capital movements in 1H02 comprised an increase in subordinated debt of Â£100m; FY02 comprised an increase in subordinated debt of Â£100m together with Â£114m representing proceeds from the sale of Legal & General Bank Limited allocated to the shareholder retained capital (SRC). ** For the UK life and pensions business, shareholder net worth comprises the SRC on the MSS basis, adjusted for deferred acquisition costs, and the sub-fund, both net of an appropriate allowance for tax. It also includes intra-group subordinated debt capital of Â£602m (1H02: Â£602m; FY02: Â£602m) but excludes the net liabilities of Â£12m (1H02: net assets of Â£71m; FY02: net liabilities of Â£11m) of the UK long term fund (LTF) operational subsidiaries. ======================================================================================================================== Legal & General Group Plc P13 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 14. Shareholders' funds Segmental analysis At At At 30.6.03 30.6.02 31.12.02 Embedded value of life and pensions businesses: Â£m Â£m Â£m - UK * 3,975 4,251 3,887 - USA 492 486 486 - Netherlands 101 84 87 - France 75 65 68 ------- ------- ------- 4,643 4,886 4,528 Institutional fund management ** 321 294 293 ------- ------- ------- 4,964 5,180 4,821 General insurance 108 95 101 Corporate funds *** 200 (500) 139 ------- ------- ------- 5,272 4,775 5,061 ======= ======= ======= Movement At 1 January 5,061 4,994 4,994 Profit/(loss) for the financial period 307 (137) (423) Exchange movements 6 2 (5) Dividends (102) (86) (297) Increase in share capital/share premium 0 2 792 ------- ------- ------- At end of period 5,272 4,775 5,061 ======= ======= ======= * Including Â£602m (1H02: Â£602m; FY02: Â£602m) of intra-group subordinated debt capital attributed to the SRC. ** Including Â£287m (1H02: Â£258m; FY02: Â£262m) net assets of managed pension funds business. *** Corporate funds include the convertible debt of Â£517m (1H02: Â£515m; FY02 Â£516m) and the senior debt of Â£602m (1H02: Â£602m; FY02: Â£602m) which has been onlent to the UK Long Term Fund and the net proceeds of Â£788m from the 2002 rights issue. ======================================================================================================================== 15. Borrowings At At At 30.6.03 30.6.02 31.12.02 Â£m Â£m Â£m 2.75% Convertible bond 2006 517 515 516 Medium Term Notes 2031-2041 597 597 597 Medium Term Notes 2003-2004 36 454 369 Commercial paper 2003 258 179 89 Bank loans 2003 1 17 18 ------- ------- ------- Total borrowings 1,409 1,762 1,589 ======= ======= ======= The convertible bond matures in 2006 with a coupon of 2.75% p.a. and is convertible into ordinary shares of the Company at 184p per share. If converted, this bond would give rise to the issue of 285.3m new ordinary shares which represents approximately 4.4% of the current issued share capital. ======================================================================================================================== Legal & General Group Plc P14 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 16. Embedded value assumptions UK life and pensions Key economic assumptions are set out below and should be read in conjunction with the notes to the supplementary financial statements in the 2002 Report and Accounts. The assumed future pre-tax return on fixed interest securities is set by reference to redemption yields available in the market at the end of the reporting period. The corresponding return on equities and property and the risk discount rate have been set by reference to the gilt assumption. 30.6.03 30.6.02 31.12.02 31.12.01 % p.a. % p.a. % p.a. % p.a. UK Investment return - Gilts - Fixed interest 4.3 5.0 4.5 5.0 - RPI linked 4.2 5.0 4.4 5.0 - Non-gilts - Fixed interest 4.8 - 5.5 5.4 - 6.2 4.9 - 5.8 5.4 - 6.3 - RPI linked 4.8 - 5.2 5.2 - 5.6 4.8 - 5.3 5.1 - 5.8 - Equities and property 6.9 7.6 7.1 7.6 Risk discount rate (after tax) 6.8 7.5 7.0 7.5 Inflation - Expenses/earnings 3.5 3.7 3.3 3.5 - Indexation 2.5 2.7 2.3 2.5 USA Reinvestment rate 4.3 5.9 4.8 6.5 Risk discount rate (after tax) 6.1 7.4 6.4 7.6 Europe Government bond return 4.0 5.2 4.5 5.0 Risk discount rate (after tax) 7.5 8.5 8.0 8.5 Operational assumptions, which are reviewed annually to reflect recent operating experience, are largely unchanged from those made at the end of 2002 except for certain assumption changes primarily relating to mortgage endowment policies. The value of new business has been calculated using actual acquisition costs. ======================================================================================================================== 17. Alternative assumptions The discount rate appropriate to any investor will depend on the investor's own requirements, tax and perception of the risks associated with the anticipated cash flows to shareholders. The table below shows the effect of alternative discount rates and equity and property yields on the UK life and pensions embedded value and new business contribution for the period. 1% lower 1% higher 1% higher risk risk equities discount discount property As rate rate yields published Â£m Â£m Â£m Â£m Effect on embedded value at 30 June 2003 3,975 +260 -230 +240 Effect on new business contribution for the period 131 +19 -16 +9 It should be noted that in calculating the alternative values all other assumptions are left unchanged. ======================================================================================================================== Legal & General Group Plc P15 Notes to Financial Statements - Achieved Profits Basis Six months ended 30 June 2003 ----------------------------------------------------------------------------------------------------------------------- 18. Contingent liabilities, guarantees and indemnities Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance of actual experience from that assumed may result in such liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of such contracts, or the circumstances in which policyholders have entered into them (together in this paragraph 'liabilities'). The extent of such liabilities is influenced by a number of factors including the actions and requirements of the FSA, by ombudsman rulings, by industry compensation schemes and by court judgements. The continuing profile and emphasis being given by the FSA and other bodies to the suitability of the past sales of endowment policies in the context of some mortgage transactions has led to an increased number of claims from holders of endowment policies. An increased provision has been made in respect of this. It is not possible to predict, with certainty, the extent and the timing of the financial impact to which these liabilities may give rise. The relevant members of the Group nevertheless consider that each makes prudent provision for such liabilities, as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet all reasonably foreseeable eventualities. Legal & General Assurance Society Limited ('the Society') is involved in arbitration proceedings with Munich Reinsurance Company ('the reinsurer'), in which the reinsurer is seeking to avoid or to rectify its reinsurance of a substantial tranche of the Society's individual term assurance business on the basis of mistaken pricing by the reinsurer. If the reinsurer were successful in its claim, the reported profit for the Group would be adversely affected on an AP basis, and there would be an adverse impact on the reported change in the SRC and profit before tax on an MSS basis. How significant the financial impact would be would depend on the terms on which any rectification were to be made or, if the reinsurance were declared void, the terms of the alternative arrangements which the Society would then make. Having taken advice from Leading Counsel, the directors are confident that the reinsurer's claim will fail and that it is unlikely that a material loss will arise. Further details are not given at this time to avoid any prejudice to the legal proceedings. In 1975 the Society 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 the Society. 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), provided an indemnity to the Society against any liability the Society may have as a result of the ILU's requirement, and the ILU agreed that its requirement of the Society would not apply to policies written or renewed after the acquisition. Whether the Society has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability is uncertain. The Society has made no payment or provision in respect of this matter. Group companies have given indemnities and guarantees, including interest rate guarantees, as a normal part of their operating activities or in relation to capital market transactions. This information is provided by RNS The company news service from the London Stock Exchange

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