Interim Results 2000 - Part 3
Legal & General Group PLC
26 July 2000
PART 3
Supplementary unaudited results on the Achieved Profits basis
For the six months to 30 June 2000
----------------------------------------------------------------------
CONTENTS
P1 Overview
P3 Consolidated Profit & Loss Account
P4 Consolidated Balance Sheet
P5 Contribution from continuing long term business
P6 Embedded value from continuing operations
P6 Movement in embedded value
P7 Segmental analysis of shareholders' funds
P8 Embedded value assumptions
P8 Alternative assumptions
P1
Supplementary financial statements on the Achieved Profits basis
For the six months to 30 June 2000
A description of the Achieved Profits methodology was provided in the
1999 Report and Accounts.
Businesses which are not affected by the use of Achieved Profits, are
discussed in Part 1 of this release.
2000 Interim results
The operating profit before tax for the six months to 30 June 2000 was
£336m, compared with £259m in the first half of 1999. The 2000 result
was driven by the strong growth in the profits of the worldwide life
and pensions businesses, which in total grew by 38% to £274m.
The profit before tax for the period was £256m compared with £580m in
the first half of 1999. The comparative 1999 figure benefited from
particularly strong investment markets, which resulted in an
investment return for that half year of £274m in excess of the longer
term investment return.
UK life and pensions
The operating profit before tax increased from £164m to £216m. The
contribution from new business increased to £49m from £45m and as a
percentage of EPI, the contribution increased to 24% from 23% for full
year 1999, reflecting a favourable mix of new business and control of
acquisition expenses. We have thus written new business which again
delivers significant value to shareholders and further contributions
to operating profit will arise from the subsequent management of this
business.
The contribution from the in-force business increased to £102m
(1H99: £56m). This reflected the strong growth in the business
portfolio in recent years and the increase in the risk discount rate
which generates the expected return from the in-force business for the
period. In addition, the effect on profits of our investment in
strategic systems fell significantly to £8m (1H99: £25m).
The contribution from shareholders' net worth was broadly stable at
£65m (1H99: £63m).
Profit before tax includes the effect of variances from the assumed
investment return, together with economic assumption changes. During
the first half of 2000, weak equity markets in the UK gave rise to an
investment return on the equity and property portfolio which was 4.3%
lower (1H99: 6.8% higher) than the assumption for the period. These
market conditions generated an unfavourable investment variance of
£82m (1H99: positive £269m).
P2
Investment management
The operating profit from investment management has increased from
£38m to £40m. This includes a profit of £36m from the UK Managed Fund
business, compared with £41m in 1999, reflecting a lower contribution
from new business as volumes of pension fund management business
reduced to £5.3bn from the exceptional £6.0bn achieved in 1999.
Embedded value has increased proportionately with the growth in the
pension funds under management.
The investment management operating profit includes a profit of £2m
(1H99: £1m) from the Ventures operation and a breakeven result
(1H99: £6m loss) from the unit trust and PEP/ISA business, which are
not calculated on an Achieved Profits basis.
International life and pensions
Operating profit from international business grew from £35m to £58m in
2000, including a strong growth in new business contribution to £20m
(1H99: £16m).
USA
The highly successful US business is the largest component of
international profits and provided a contribution from new business up
12% at £14m (1H99: £13m) and an operating profit of £35m (1H99: £24m).
Contribution from new business as a percentage of EPI was broadly
stable, compared with full year 1999, at 36%. In force business
contributed £18m (1H99: £9m), reflecting the benefits of the strong
growth in the business in recent years. Profit before tax was £46m
(1H99: £19m), after a positive contribution of £13m (1H99: negative
£5m) from the effect of economic assumption changes.
Europe
The Dutch business had an operating profit of £8m (1H99: £7m) with a
contribution from new business of £2m (1H99: £2m). The French
operation had an operating profit of £15m (1H99: £4m), reflecting a
contribution from new business of £4m (1H99: £1m) as new business grew
rapidly, the growth of the portfolio, better persistency and a benefit
of £4m from a revised treatment of the reserve de capitalisation.
Embedded values
The embedded value after tax of the UK life and pensions business at
June 2000 was £3,796m, compared with £3,498m at June 1999. The growth
in the UK embedded value, before the accrued transfer to shareholders,
over the year represents an annual return of 15% after tax.
The embedded value of the Pension Fund Management business at June
2000 was £133m compared with £97m at 30 June 1999, and the embedded
value of the international businesses grew by 33% from £401m to £534m.
In total, the net assets of the Group rose from £4,844m to £5,356m
during the past year. This represents an annual growth after tax of
15%, pre dividend.
Legal & General Group Plc P3
Consolidated Profit & Loss Account - Achieved Profits basis
Six months ended 30 June 2000
----------------------------------------------------------------------
Six months Six months Full year
to 30.6.00 to 30.6.99 1999
Profit from continuing £m £m £m
operations
UK life and pensions (Note1) 216 164 412
International life and
pensions (Note 1) ------- ------- -------
- USA : 35: : 24: : 58:
- Netherlands : 8: : 7: : 14:
- France : 15: : 4: : 15:
------- ------- -------
58 35 87
------- ------- -------
274 199 499
Investment management 40 38 99
General insurance 6 5 20
Other income 16 17 29
------- ------- -------
Operating profit 336 259 647
Variation from longer term
investment return (90) 274 670
Effect of economic
assumption changes 10 47 (23)
------- ------- -------
Profit on ordinary
activities before tax 256 580 1,294
Tax on profit on
ordinary activities (97) (138) (295)
------- ------- -------
Profit for the
financial period 159 442 999
======= ======= =======
Accrued transfer from
UK long term fund (net) 109 99 198
Dividends payable 77 66 212
Earnings per share
- based on operating
profit after tax 4.66p 3.57p 9.51p
- based on profit for
the financial period 3.10p 8.67p 19.57p
Diluted earnings per share
- based on operating
profit after tax 4.65p 3.55p 9.46p
- based on profit for
the financial period 3.09p 8.61p 19.47p
Dividend per share 1.48p 1.30p 4.13p
======================================================================
The results for the six months to 30 June 2000 and 30 June 1999 are
unaudited, but have been subject to a review by the auditors.
Legal & General Group Plc P4
Consolidated Balance Sheet - Achieved Profits basis
As at 30 June 2000
----------------------------------------------------------------------
As at 30.6.00 As at 30.6.99 As at 31.12.99
£m £m £m
Assets
Investments 34,350 32,307 34,143
Assets held to cover
linked liabilities 68,618 54,949 65,928
Long term in-force business 2,193 2,006 2,216
Other assets 2,267 2,042 2,084
--------- --------- ---------
107,428 91,304 104,371
========= ========= =========
Liabilities
Shareholders'
funds (Note 4) 5,356 4,844 5,250
Fund for future
appropriations 5,147 4,709 5,814
Technical provisions
--------- --------- ---------
Technical provisions for : : : : : :
linked liabilities : 68,529: : 54,883: : 65,742:
Other long term : : : : : :
business provisions : 25,023: : 23,949: : 24,538:
General insurance : : : : : :
provisions : 333: : 368: : 365:
--------- --------- ---------
93,885 79,200 90,645
Borrowings
--------- --------- ---------
Borrowings for : : : : : :
financing operations : 138: : 64: : 141:
Mortgage related : : : : : :
borrowings : 257: : 309: : 285:
--------- --------- ---------
395 373 426
Bank customer deposits 1,245 968 1,031
Other creditors 1,400 1,210 1,205
--------- --------- ---------
107,428 91,304 104,371
======================================================================
Legal & General Group Plc P5
Notes to Financial Statements - Achieved Profits basis
Six months ended 30 June 2000
----------------------------------------------------------------------
1. Contribution from continuing long term business
Six months to Six months to Full year
30.6.00 30.6.99 1999
UK UK UK UK UK UK
Life and Managed Life and Managed Life and Managed
Pensions Funds + Pensions Funds + Pensions Funds +
£m £m £m £m £m £m
Contribution from
new business 49 18 45 25 99 50
Contribution from
in-force business * 102 18 56 16 194 46
Contribution from
shareholders'
net worth 65 - 63 - 119 -
------ ------ ------ ------ ------ ------
Operating profit 216 36 164 41 412 96
Variation from longer
term investment
return** (82) (7) 269 5 663 17
Effect of economic
assumption changes (3) 0 52 (2) (26) 3
------ ------ ------ ------ ------ ------
Profit before tax 131 29 485 44 1,049 116
Tax (50) (9) (111) (13) (243) (35)
------ ------ ------ ------ ------ ------
Profit after tax 81 20 374 31 806 81
====== ====== ====== ====== ====== ======
Intern- Intern- Intern-
ational Total ational Total ational Total
£m £m £m £m £m £m
Contribution from
new business 20 87 16 86 29 178
Contribution from
in-force business * 28 148 15 87 49 289
Contribution from
shareholders'
net worth 10 75 4 67 9 128
------ ------ ------ ------ ------ ------
Operating profit 58 310 35 240 87 595
Variation from longer
term investment
return** 3 (86) (2) 272 (13) 667
Effect of economic
assumption changes 13 10 (3) 47 0 (23)
------ ------ ------ ------ ------ ------
Profit before tax 74 234 30 559 74 1,239
Tax (26) (85) (11) (135) (26) (304)
------ ------ ------ ------ ------ ------
Profit after tax 48 149 19 424 48 935
====== ====== ====== ====== ====== ======
+ Included in the Investment management result of £40m (30.6.99: £38m;
31.12.99: £99m).
* The UK life and pensions contribution from in-force business
reflects a charge of £8m (30.6.99: £25m; 31.12.99: £50m) primarily
relating 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
Six months ended 30 June 2000
----------------------------------------------------------------------
2. Embedded value from continuing operations
As at 30.6.00 As at 30.6.99 As at 31.12.99
UK UK UK UK UK UK
Life and Managed Life and Managed Life and Managed
Pensions Funds Pensions Funds Pensions Funds
£m £m £m £m £m £m
Shareholders'
net worth 1,451 - 1,359 - 1,457 -
Value of in-force
business 2,345 133 2,139 97 2,367 130
------ ------ ------ ------ ------ ------
Embedded value 3,796 133 3,498 97 3,824 130
====== ====== ====== ====== ====== ======
Intern- Intern- Intern-
ational Total ational Total ational Total
£m £m £m £m £m £m
Shareholders'
net worth 131 1,582 120 1,479 135 1,592
Value of in-force
business 403 2,881 281 2,517 326 2,823
------ ------ ------ ------ ------ ------
Embedded value 534 4,463 401 3,996 461 4,415
====== ====== ====== ====== ====== ======
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 £182m (30.6.99: £140m;
31.12.99: £163m) 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
Six months to Six months to Full year
30.6.00 30.6.99 1999
UK UK UK UK UK UK
Life and Managed Life and Managed Life and Managed
Pensions Funds Pensions Funds Pensions Funds
£m £m £m £m £m £m
At 1 January 3,824 130 3,237 77 3,237 77
Profit after tax 81 20 374 31 806 81
Capital movements 0 - (14) - (21) -
Distributions (109) (17) (99) (11) (198) (28)
------ ------ ------ ------ ------ ------
At end of period 3,796 133 3,498 97 3,824 130
====== ====== ====== ====== ====== ======
Intern- Intern- Intern-
ational Total ational Total ational Total
£m £m £m £m £m £m
At 1 January 461 4,415 376 3,690 376 3,690
Exchange rate movement 25 25 6 6 (4) (4)
------ ------ ------ ------ ------ ------
486 4,440 382 3,696 372 3,686
Profit after tax 48 149 19 424 48 935
Capital movements - - - (14) 45 24
Distributions 0 (126) - (110) (4) (230)
------ ------ ------ ------ ------ ------
At end of period 534 4,463 401 3,996 461 4,415
======================================================================
Legal & General Group Plc P7
Notes to Financial Statements - Achieved Profits basis
Six months ended 30 June 2000
----------------------------------------------------------------------
4. Segmental analysis of shareholders' funds
As at 30.6.00 As at 30.6.99 As at 31.12.99
Embedded value of life £m £m £m
and pension businesses:
- UK 3,796 3,498 3,824
- USA 397 297 344
- Netherlands 68 60 62
- France 69 44 55
-------- -------- --------
4,330 3,899 4,285
Investment management* 246 166 222
General insurance 73 70 69
Banking 94 97 96
Corporate funds 613 612 578
-------- -------- --------
5,356 4,844 5,250
======== ======== ========
* Including £133m (30.6.99: £97m; 31.12.99: £130m) 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
Six months ended 30 June 2000
----------------------------------------------------------------------
5. Embedded value assumptions
Key economic assumptions are set out below and should be read in
conjunction with the supplementary financial statements in the 1999
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.
UK As at As at As at As at
30.6.00 30.6.99 31.12.9931.12.98
% p/a. % p/a. % p/a. % p/a.
Type of investment
Gilts and RPI linked 4.9 5.0 5.1 4.5
Other fixed interest 6.6 6.1 6.4 5.7
Equities and property 7.5 7.6 7.7 7.1
Risk discount rate (after tax) 7.4 7.5 7.6 7.0
Inflation
Expenses/earnings 4.0 4.0 4.2 3.4
Indexation 3.0 3.0 3.2 2.4
USA
Reinvestment rate 7.6 7.0 7.6 5.8
Risk discount rate (after tax) 8.6 8.4 9.0 7.8
Operational assumptions, which are reviewed annually to reflect recent
operating experience, are largely unchanged from those made at the end
of 1999. The value of new business has been calculated using actual
acquisition costs in the first half of 2000.
======================================================================
6. 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 1% 1% 1%
published lower higher higher
risk risk equity/
discount discount prop-
rate rate erty
yields
Effect on embedded value at
30 June 2000 £3,796m +£320m -£280m +£320m
It should be noted that in calculating each of these values all other
assumptions have been left unchanged.
=====================================================================
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