Final Results - Year Ended 31 Dec 1999, Part 3
Legal & General Group PLC
29 February 2000
Part 3 P1
Legal & General Group Plc
Supplementary financial statements on the Achieved Profits basis
For the year to 31 December 1999
The Group's current external reporting for long term business described
in Parts 1 and 2 of the Stock Exchange announcement is based upon
statutory requirements designed to demonstrate solvency. It defers the
recognition of profit and does not recognise the shareholders' interest
in our portfolio of in-force long term business. The Association of
British Insurers (ABI) is continuing to develop the Achieved Profits
reporting basis as a more realistic method of accounting for long term
business. The Achieved Profits basis reflects the development of the
embedded value of long term business.
A description of Achieved Profits methodology is given in the Report
and Accounts. A discussion of the Achieved Profits results for long
term business for the year to 31 December 1999 is provided below. Other
businesses, including general insurance, which are not affected by the
use of Achieved Profits, are discussed in Part 1 of the Stock Exchange
announcement. These supplementary financial statements have been
reviewed and reported on by the auditors.
1999 Results
The Group's operating profit from continuing operations was £647
million compared with £522 million in 1998, with the contribution from
worldwide new business up 32% to £178 million. Profit on ordinary
activities before tax, which includes investment returns in excess of
assumptions, was £1,294 million (1998: £543 million before exceptional
items). Shareholders' funds grew to £5,250 million (1998: £4,465
million), an increase of 22% before the dividend.
UK life and pensions
Operating profit was £412 million, compared with £352 million for 1998.
The contribution before tax from new business was up 38% to £99
million. In an increasingly competitive market, we have again written
new business which delivers significant value for our shareholders. As
a proportion of EPI, the contribution increased from 21% to 23%,
reflecting a favourable mix of new business and control of acquisition
expenses. The contribution from new business reflects the degree to
which its anticipated profitability exceeds the target rate of return.
Further contributions to operating profit will arise from the
management of this business in future years.
The contribution from the in-force business was £194 million (1998:
£113 million). This benefited from strong growth in the business
portfolio in recent years and positive experience variances, which more
than offset the impact of the lower risk discount rate used for 1999.
This result is after the cost of the investment in strategic systems
of £50 million (1998: £55 million). The 1998 contribution was depressed
by the effect of anticipating lighter annuitant mortality.
The contribution from shareholders' net worth of £119 million (1998:
£167 million) reflects both the reduced expected rate of return and a
lower opening net worth, following the allocation of significant
additional capital to the business portfolio during 1998.
Profit before tax includes the effect of variances in investment return
from those assumed at the end of the previous year, together with
economic assumption changes. The investment variance was £663 million
(1998: £78 million); in 1999 the excess investment return on the equity
and property portfolio over the assumption for the period was 15.4%
(1998: 4.5%).
The effect of economic assumption changes was a small reduction of £26
million, compared to a reduction of £103 million in 1998, when interest
rates fell sharply.
P2
Investment management
The long term UK Managed Funds business generated an operating profit
of £96 million (1998: £70 million), of which new business contributed
£50 million (1998: £43 million). This reflects the continuing strong
growth in new business and funds under management in recent years.
Together with the results of the Ventures operation and the unit trust
and PEP/ISA business, which are not included on an Achieved Profits
basis, this gave a total investment management operating profit of
£99 million (1998: £65 million).
International life and pensions
Operating profit from continuing international business grew from £61
million to £87 million in 1999, including a strong new business
contribution of £29 million (1998: £20 million).
USA
The highly successful US business is the largest component of
international profits and provided a contribution from new business up
77% at £23 million which, as a percentage of EPI, was 36% (1998: 37%).
In force business contributed £31 million (1998: £21 million),
reflecting strong growth in the business in recent years, to give an
operating profit of £58 million (1998: £38 million). Profit before tax
was £47 million (1998: £47 million), after an increase in the risk
discount rate following the rise in bond rates, resulted in an £11
million charge.
Europe
The Dutch business had an operating profit of £14 million (1998: £9
million), with a contribution from new business of £4 million (1998: £4
million); whilst the French operation had an operating profit of £15
million (1998: £14 million), with a contribution from new business of
£2 million (1998: £3 million).
Embedded values
During 1999, the embedded value of the UK life and pensions business
grew by 24% from £3,237 million (excluding operational investments), to
£4,022 million, before the transfer from the UK long term fund of £198
million. This increase reflects new business growth, good operating
performance and strong investment markets.
The embedded value of the UK Managed Funds, as a subsidiary activity of
the Society LTF, is the value of the in-force business in excess of the
net assets included in the MSS accounts. This value grew very strongly
from £77 million at the end of 1998 to £158 million at the end of 1999,
before the distribution of £28 million which is included in the profit
reported on the MSS basis. A corresponding embedded value for the unit
trust and PEP/ISA operations is not included.
The embedded value of the international businesses grew from £376
million to £461 million, including capital injections of £45 million.
The changes in the embedded values of these long term businesses
underlay a post tax return on shareholders' funds of 18% to £5,250
million, after a dividend to shareholders of £212 million.
Legal & General Group Plc P3
Consolidated Profit & Loss Account - Achieved Profits basis
Year ended 31 December 1999
-----------------------------------------------------------------------
Notes 1999 1998
Profit from continuing operations £m £m
- UK Life and Pensions 1 412 352
-------- --------
- USA : 58 : : 38 :
- Netherlands : 14 : : 9 :
- France : 15 : : 14 :
-------- --------
1 87 61
-------- --------
499 413
Investment management 99 65
General insurance 20 14
Other income 29 30
-------- --------
647 522
Profit from discontinued operations
Australian business - 13
-------- --------
Operating profit 647 535
Variation from longer term
investment return 670 103
Effect of economic assumption changes (23) (95)
-------- --------
1,294 543
Profit on sale of Australian business 4 - 180
Premium on repurchase of
Euroconvertible bonds - (92)
-------- --------
Profit on ordinary activities
before tax 1,294 631
Tax on profit on ordinary activities (295) (127)
-------- --------
Profit for the financial period 999 504
======== ========
Accrued transfer from
UK long term fund (net) 198 180
Dividends payable 212 185
Earnings per share
- based on operating profit from
continuing operations after tax 9.51p 7.47p
- based on profit for the
financial period 19.57p 9.94p
Diluted earnings per share
- based on operating profit from
continuing operations after tax 9.46p 7.42p
- based on profit for the
financial period 19.47p 9.88p
Dividend per share 4.13p 3.62p
=======================================================================
Legal & General Group Plc P4
Consolidated Balance Sheet - Achieved Profits basis
As at 31 December 1999
-----------------------------------------------------------------------
Notes 1999 1998
£m £m
Assets
Investments 34,143 31,526
Assets held to cover
linked liabilities 65,928 45,253
Long term in-force business 2,216 1,806
Other assets 2,084 1,768
----------- -----------
104,371 80,353
=========== ===========
Liabilities
Shareholders' funds 5 5,250 4,465
Fund for future appropriations 5,814 4,240
Technical provisions ----------- -----------
Technical provisions for : : : :
linked liabilities : 65,742 : : 45,196 :
Other long term business provisions : 24,538 : : 23,319 :
General insurance provisions : 365 : : 401 :
----------- -----------
90,645 68,916
Borrowings ----------- -----------
Borrowings for financing operations : 141 : : 105 :
Mortgage related borrowings : 285 : : 355 :
----------- -----------
426 460
Bank customer deposits 1,031 942
Other creditors 1,205 1,330
----------- -----------
104,371 80,353
=======================================================================
Legal & General Group Plc P5
Notes to Financial Statements - Achieved Profits basis
Year ended 31 December 1999
-----------------------------------------------------------------------
1. Contribution from continuing long term business
1999 1998
UK UK UK UK
Life and Managed Life and Managed
Pensions Funds + Pensions Funds +
£m £m £m £m
Contribution from new business 99 50 72 43
Contribution from in-force
business * 194 46 113 27
Contribution from shareholders'
net worth 119 - 167 -
------ ------ ------ ------
Operating profit 412 96 352 70
Variation from longer term
investment return** 663 17 78 5
Effect of economic
assumption changes (26) 3 (103) 2
------ ------ ------ ------
Profit before tax 1,049 116 327 77
Tax (243) (35) (77) (24)
------ ------ ------ ------
Profit after tax 806 81 250 53
====== ====== ====== ======
Intern- Total Intern- Total
ational ational
£m £m £m £m
Contribution from new business 29 178 20 135
Contribution from in-force
business * 49 289 32 172
Contribution from shareholders'
net worth 9 128 9 176
------ ------ ------ ------
Operating profit 87 595 61 483
Variation from longer term
investment return** (13) 667 10 93
Effect of economic
assumption changes 0 (23) 6 (95)
------ ------ ------ ------
Profit before tax 74 1,239 77 481
Tax (26) (304) (29) (130)
------ ------ ------ ------
Profit after tax 48 935 48 351
====== ====== ====== ======
+ Included in the Investment management result.
* The UK life and pensions contribution from in-force business reflects
a charge of £50m (1998: £55m), relating, primarily, to the cost of
investment in strategic systems.
** The variation from longer term investment return represents the
effect of the investment performance in respect of shareholders' net
worth and in-force business, compared with embedded value assumptions
at the beginning of the period.
=======================================================================
Legal & General Group Plc P6
Notes to Financial Statements - Achieved Profits basis
Year ended 31 December 1999
-----------------------------------------------------------------------
2. Embedded value from continuing operations
As at 31.12.99 As at 31.12.98
UK UK UK UK
Life and Managed Life and Managed
Pensions Funds Pensions Funds
£m £m £m £m
Shareholders' net worth 1,457 - 1,287 -
Value of in-force business 2,367 130 1,950 77
------ ------ ------ ------
Embedded value 3,824 130 3,237 77
====== ====== ====== ======
Intern- Total Intern- Total
ational ational
£m £m £m £m
Shareholders' net worth 135 1,592 128 1,415
Value of in-force business 326 2,823 248 2,275
------ ------ ------ ------
Embedded value 461 4,415 376 3,690
====== ====== ====== ======
For the UK life and pensions business, shareholders' net worth
comprises the Shareholders' Retained Capital on the MSS basis, adjusted
for deferred acquisition costs, and the sub-fund, both net of allowance
for tax; but excludes net assets of £163m (1998: £116m) of long term
fund operational subsidiaries. For other life and pensions operations,
the shareholders' net worth comprises the shareholders' capital
associated with the long term business. This is adjusted, where
applicable, for an amount locked in to satisfy solvency requirements.
=======================================================================
3. Movement in embedded value
1999 1998
UK UK UK UK
Life and Managed Life and Managed
Pensions Funds Pensions Funds
£m £m £m £m
At 1 January 3,237 77 3,190 49
Profit after tax 806 81 250 53
Capital movements (21) - (23) -
Distributions (198) (28) (180) (25)
------ ------ ------ ------
At 31 December 3,824 130 3,237 77
====== ====== ====== ======
Intern- Total Intern- Total
ational ational
£m £m £m £m
At 1 January 376 3,690 327 3,566
Exchange rate movement (4) (4) 5 5
------ ------ ------ ------
372 3,686 332 3,571
Profit after tax 48 935 48 351
Capital movements 45 24 - (23)
Distributions (4) (230) (4) (209)
------ ------ ------ ------
At 31 December 461 4,415 376 3,690
=======================================================================
4. Sale of Legal & General Australia
Legal & General Australia was sold to Colonial Limited on 1 July 1998,
resulting in an exceptional pre-tax profit of £180m (£165m after tax).
=======================================================================
Legal & General Group Plc P7
Notes to Financial Statements - Achieved Profits basis
Year ended 31 December 1999
-----------------------------------------------------------------------
5. Segmental analysis of shareholders' funds
1999 1998
Embedded value of £m £m
life and pension businesses:
- UK 3,824 3,237
- USA 344 271
- Netherlands 62 60
- France 55 45
-------- --------
4,285 3,613
Investment management* 222 137
General insurance 69 67
Banking 96 87
Corporate funds 578 561
-------- --------
5,250 4,465
======== ========
* Including £130m (1998: £77m) embedded value of UK Managed Funds
business.
All Investment management subsidiaries are included at net asset value,
except for the UK Managed Funds business of Legal & General Assurance
(Pensions Management) Ltd, a long term insurance company, which is
included on the Achieved Profits basis. The net assets of these UK long
term fund subsidiaries and the value of the in-force UK Managed Funds
business, are attributed to the investment management business. The net
assets of the other UK long term fund operating subsidiaries are
included in Banking and Corporate funds.
=======================================================================
Legal & General Group Plc P8
Notes to Financial Statements - Achieved Profits basis
Year ended 31 December 1999
-----------------------------------------------------------------------
6. Assumptions
UK
i) 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 is set by reference to the gilt assumption
As at 31.12.99 As at 31.12.98
Investment return (pre-tax) % p.a. % p.a.
Gilts and RPI-linked 5.1 4.5
Other fixed interest 6.4 5.7
Equities and property 7.7 7.1
Risk discount rate (net of tax) 7.6 7.0
Inflation
Expenses/earnings 4.2 3.4
Indexation 3.2 2.4
The assumed return on other fixed interest securities is net of an
allowance for default risk of 0.05% p.a. (1998, 0.1% p.a.).
ii) The methodology requires an attribution of assets identified as
backing the long term contracts and the residual assets. Assets have
in particular been attributed to the with-profits fund. The residual
assets represent the balance of the long term fund, excluding the
with-profits fund and the assets backing the statutory long term
business provisions for contracts not written in the with-profits
fund.
iii) The risk discount rate has been set by reference to the assumed
future investment returns and is net of tax. Potential transfers
are discounted from the time at which they are assumed to become
available for distribution to shareholders. Thus, residual assets
retained in the long term fund to support the business are assumed
not to be immediately available for distributions; and their value
is the discounted value of future assumed distributions.
iv) The value of the in-force business has been calculated after
allowing for the additional cost, if any, of holding solvency
capital. No such additional cost exists for business written within
the with-profits fund whilst the solvency capital for that business
is met by that fund; nor is there any additional cost to shareholders
in respect of non profit business whilst the solvency capital is
provided by the residual assets.
v) Assets are valued at their market value. For the projection of
investment returns, asset values are adjusted in the case of fixed
interest and RPI linked investments to reflect the assumed interest
and inflation rates.
vi) The value of the subfund is the discounted value of projected
investment return for a period of 20 years (1998: 20 years).
vii) The contribution from new business has been calculated using
actual acquisition costs. It reflects the profit arising at the time
of sale and the profit arising from differences between actual and
expected experience on these policies during the year accumulated to
the year end.
Legal & General Group Plc P9
Notes to Financial Statements - Achieved Profits basis
Year ended 31 December 1999
-----------------------------------------------------------------------
6. Assumptions continued
viii) The costs of investment in strategic systems, which will also
be used for the acquisition and administration of future new
business, have all been charged against in-force business at the
beginning of the year.
ix) Future bonus rates have been set at levels which would fully
utilise the assets supporting with-profits business. The proportion
of profits derived from with-profits business allocated to
shareholders has been assumed to be 10% throughout.
x) The value reflects a prudent allowance for compensation in
relation to pension transfers and opt-outs.
xi) The value of the Managed Funds in-force business limits the
cashflow projection to ten years.
xii) Other actuarial assumptions have been set at levels which have
regard to recent operating performance and experience, including
those for mortality, persistency and maintenance expenses (excluding
non-recurring costs). These are reviewed annually. An allowance is
made for secular trends in annuitant mortality based on externally
published data, with the end 1999 assumptions taking into account
the publication of the improvement factors contained in CMI Report
No.17.
xiii) Business in force comprises previously written single premium,
regular premium and recurrent single premium contracts. For this
purpose, DSS rebates have not been treated as recurrent and the value
arising therefrom is included in the value of new business as the
premiums are received. For Managed Funds, new business consists of
monies received from new clients and incremental receipts from
existing clients, and excludes the roll-up of the investment returns.
xiv) Projected tax has been determined assuming current tax
legislation and rates, except where future changes have been
announced.
xv) Achieved Profits are computed on an after tax basis and are
grossed up to the pre-tax level for presentation in the profit and
loss account. This tax on shareholders' profit is notional. The tax
rate used for grossing-up results is the full rate of corporation tax
of 30.25% (1998: 31%), except for the contribution from shareholders'
net worth, which has been grossed up at a longer term rate of tax of
10% (1998: 20%). The total investment return on shareholders' net
worth bore tax at a rate of 5% (1998: 16%).
Legal & General Group Plc P10
Notes to Financial Statements - Achieved Profits basis
Year ended 31 December 1999
-----------------------------------------------------------------------
6. Assumptions continued
International
Key assumptions for the USA are:
As at 31.12.99 As at 31.12.98
% p.a. % p.a.
Reinvestment rate 7.6 5.8
Risk discount rate (net of tax) 9.0 7.8
The assumed pre-tax return is projected from the actual investment
portfolio less specific margins for the risks associated with the
investments.
7. Alternative assumptions
The discount rate appropriate to any investor will depend on the
investor's own circumstances, tax and perception of the risks
associated with the anticipated cash flows to shareholders.
The table below shows the UK life and pensions embedded values
calculated at alternative discount rates and equity/property yields.
As published 1% lower 1% higher 1% higher
risk risk equity/
discount discount property
rate rate yields
Effect on embedded value
at 31 December 1999 £3,824m +£310m -£270m +£310m
It should be noted that in calculating each of these values all other
assumptions have been left unchanged.
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