L&G 2007 FY Results Part 4
Legal & General Group Plc
18 March 2008
Page 37
International Financial Reporting Standards
===========================================
Operating profit income statement
---------------------------------
For the year ended 31 December 2007
2007 2006
Restated
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
From continuing operations
Life and pensions 4.02 643 1,621
Investment management 4.03 155 133
General insurance 4.04 (67) 9
Other operational income 4.05 (73) (43)
------------------------------------------------------------------------------------------------------------------------
Operating profit 658 1,720
Variation from longer term investment return 4.06 (90) 231
Property (expense)/income attributable to minority interests (6) 67
Release of 1996 Sub-fund 321 -
------------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax attributable to equity holders 883 2,018
Tax attributable to equity holders 4.07 (165) (387)
------------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after tax 718 1,631
Loss/(profit) attributable to minority interests 4.14 6 (67)
------------------------------------------------------------------------------------------------------------------------
Profit attributable to equity holders 724 1,564
========================================================================================================================
p p
------------------------------------------------------------------------------------------------------------------------
Earnings per share 4.08
Based on operating profit from continuing operations after tax
attributable to equity holders 7.17 21.45
Based on profit attributable to equity holders of the Company 11.24 24.12
Diluted earnings per share 4.08
Based on operating profit from continuing operations after tax
attributable to equity holders 7.13 21.30
Based on profit attributable to equity holders of the Company 11.18 23.95
========================================================================================================================
This supplementary operating profit information provides further analysis of the results reported under IFRS and we
believe gives shareholders a better understanding of the underlying performance of the business.
Following Society's LTF restructure (see Note 4.01), operating profit for UK life and pensions business now represents
the net capital invested/released from the non profit business, a smoothed investment return on all Society shareholder
capital, including that retained within the LTF, and the with-profits transfer. The definition of the with-profits
transfer and operating profit from all other subsidiaries remains unchanged.
For 2007, the group has refined the method of estimating the apportionment of the income tax expense of Society between
the elements attributable to policyholder returns and equity holders' profits. If the 2007 method had been applied to
the 2006 operating profit income statement, the operating profit from life and pensions would have reduced to £1,408m,
the profit from continuing operations before tax attributable to equity holders would have reduced to £1,805m, and the
income tax attributable to equity holders reduced to £174m. The profit from ordinary activities after tax would have
been unchanged.
If the 2006 method had been applied to 2007, the release of the 1996 Sub-fund, profit from continuing operations before
tax attributable to equity holders, and tax attributable to equity holders would all have been increased by £138m. The
profit from ordinary activities after tax would have been unchanged.
Investment return on non profit business is calculated on a smoothed basis using EEV assumptions (as set out in Note
3.17), applied to the average balance of Society shareholder capital invested assets (including interest bearing intra
group balances) calculated on a quarterly basis.
Operating profit also includes a longer term investment return on the shareholders' funds in our General insurance,
Investment management and Netherlands' operations.
========================================================================================================================
Page 38
Consolidated income statement
-----------------------------
For the year ended 31 December 2007
2007 2006
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Revenue
Gross written premiums 4.09 4,793 4,286
Outward reinsurance premiums (517) (518)
Net change in provision for unearned premiums 7 7
------------------------------------------------------------------------------------------------------------------------
Net premiums earned 4,283 3,775
Fees from fund management and investment contracts 640 535
Investment return 13,225 16,572
Operational income 54 84
------------------------------------------------------------------------------------------------------------------------
Total revenue 18,202 20,966
------------------------------------------------------------------------------------------------------------------------
Expenses
Claims and change in insurance liabilities 4,467 1,938
Reinsurance recoveries (345) 1,123
------------------------------------------------------------------------------------------------------------------------
Net claims and change in insurance liabilities 4,122 3,061
Change in provisions for investment contract liabilities 11,999 13,878
Acquisition costs 848 987
Finance costs 214 153
Other expenses 662 674
Transfers (from)/to unallocated divisible surplus(1) (438) 284
------------------------------------------------------------------------------------------------------------------------
Total expenses 17,407 19,037
------------------------------------------------------------------------------------------------------------------------
Profit before income tax 795 1,929
Income tax attributable to policyholder returns 88 89
------------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before income tax attributable to equity holders 883 2,018
-------------------
Total income tax expense 4.07 : (77): (298):
Income tax attributable to policyholder returns : (88): (89):
-------------------
Income tax attributable to equity holders (165) (387)
------------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after income tax 718 1,631
========================================================================================================================
Attributable to:
Minority interests (6) 67
Equity holders of the Company 724 1,564
========================================================================================================================
Dividend distributions to equity holders of the Company during the year 369 349
Dividend distributions to equity holders of the Company proposed after the year end 247 248
========================================================================================================================
p p
------------------------------------------------------------------------------------------------------------------------
Earnings per share
Based on profit attributable to equity holders of the Company 4.08 11.24 24.12
Diluted earnings per share
Based on profit attributable to equity holders of the Company 4.08 11.18 23.95
========================================================================================================================
1. Includes £321m release of 1996 Sub-fund in 2007.
========================================================================================================================
Page 39
Consolidated balance sheet
--------------------------
As at 31 December 2007
2007 2006
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Assets
Investment in associates 14 16
Plant and equipment 79 43
Investment property 5,969 6,852
Financial investments 4.11 261,718 201,430
Reinsurers' share of contract liabilities 1,530 1,481
Purchased interest in long term businesses 19 23
Deferred acquisition costs 1,696 1,456
Income tax recoverable 4 12
Other assets 1,519 1,622
Cash and cash equivalents 8,737 4,930
------------------------------------------------------------------------------------------------------------------------
Total assets 281,285 217,865
========================================================================================================================
Equity
Share capital 157 163
Share premium account 927 923
Employee scheme shares (42) (45)
Other reserves 59 49
Retained earnings 4,345 4,335
------------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to equity holders of the Company 4.12 5,446 5,425
Minority interests 4.14 178 414
------------------------------------------------------------------------------------------------------------------------
Total equity 4.15 5,624 5,839
========================================================================================================================
Liabilities
Subordinated borrowings 4.13 1,461 818
---------------------
Participating insurance contracts 4.16 : 11,663 : 12,660 :
Participating investment contracts 4.17 : 7,462 : 7,501 :
Unallocated divisible surplus : 1,721 : 2,178 :
Value of in-force non-participating contracts : (276): (391):
---------------------
Participating contract liabilities 20,570 21,948
---------------------
Non-participating insurance contracts 4.16 : 22,873 : 21,602 :
Non-participating investment contracts 4.17 : 224,906 : 162,016 :
---------------------
Non-participating contract liabilities 247,779 183,618
Senior borrowings 4.13 1,327 1,607
Provisions 595 568
Deferred income liabilities 493 422
Deferred tax liabilities 296 472
Income tax liabilities 113 106
Other liabilities 2,115 1,663
Net asset value attributable to unit holders 912 804
------------------------------------------------------------------------------------------------------------------------
Total liabilities 275,661 212,026
------------------------------------------------------------------------------------------------------------------------
Total equity and liabilities 281,285 217,865
========================================================================================================================
========================================================================================================================
Page 40
Consolidated statement of recognised income and expense
-------------------------------------------------------
For the year ended 31 December 2007
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Fair value losses on cash flow hedges - (3)
Exchange differences on translation of overseas operations 4 (35)
Actuarial (losses)/gains on defined benefit pension schemes (40) 3
Actuarial losses/(gains) on defined benefit pension schemes
transferred to unallocated divisible surplus 16 (1)
Net change in financial investments designated as available-for-sale 1 7
------------------------------------------------------------------------------------------------------------------------
Expense recognised directly in equity, net of tax (19) (29)
Profit from ordinary activities after income tax 718 1,631
------------------------------------------------------------------------------------------------------------------------
Total recognised income and expense 699 1,602
========================================================================================================================
Attributable to:
Minority interests (6) 67
Equity holders of the Company 705 1,535
========================================================================================================================
========================================================================================================================
Page 41
Consolidated cash flow statement
--------------------------------
For the year ended 31 December 2007
2007 2006
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Profit from ordinary activities after income tax 718 1,631
Adjustments for non cash movements in net profit for the period
Realised and unrealised gains on financial investments and investment properties (4,862) (9,505)
Investment income (7,797) (6,630)
Interest expense 214 153
Income tax payable 77 298
Other adjustments 46 46
Net (increase)/decrease in operational assets
Investments designated as held for trading or fair value through profit or loss (8,322) (9,599)
Investments designated as available-for-sale (98) (251)
Other assets (230) 557
Net increase/(decrease) in operational liabilities Insurance contracts 152 (1,893)
Transfer (from)/to unallocated divisible surplus (455) 285
Investment contracts 17,686 19,527
Value of in-force non-participating contracts 115 (12)
Other liabilities (73) 596
------------------------------------------------------------------------------------------------------------------------
Cash used in operations (2,829) (4,797)
Interest paid (214) (146)
Interest received 4,202 3,478
Income tax paid (244) (315)
Dividends received 3,312 3,095
------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 4,227 1,315
========================================================================================================================
Cash flows from investing activities
Net acquisition of plant and equipment (58) (24)
Net proceeds from disposal of private equity investments - 10
Non-financial investments purchased - (3)
------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (58) (17)
========================================================================================================================
Cash flows from financing activities
Dividend distributions to ordinary equity holders of the Company during the year (369) (349)
Proceeds from issue of ordinary share capital 4 15
Purchase of employee scheme shares (5) (11)
Purchase of shares under share buyback programme 4.01 (320) -
Proceeds from borrowings 1,948 1,062
Repayment of borrowings (1,637) (1,051)
------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (379) (334)
========================================================================================================================
Net increase in cash and cash equivalents 3,790 964
Exchange gains/(losses) on cash and cash equivalents 17 (35)
Cash and cash equivalents at 1 January 4,930 4,001
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at 31 December 8,737 4,930
========================================================================================================================
The Group's consolidated cash flow statement includes all cash and cash equivalent flows, including those relating to
the UK long term funds.
========================================================================================================================
Page 42
Notes to the Financial Statements
---------------------------------
4.01 Capital Review
---------------------
Share buyback programme
-----------------------
In July 2007, the Group announced a £1bn return of capital to shareholders through an on-market share buyback programme.
At 31 December 2007, 241,207,267 ordinary shares had been acquired under the buyback programme for cancellation for
total consideration of £320m. The buyback programme has continued and as at 29 February 2008 a total of 397,421,196
ordinary shares have been acquired for a total consideration of £519m.
Conversion of Legal & General Pensions Limited (LGPL) to an Insurance Special Purpose Vehicle (ISPV)
----------------------------------------------------------------------------------------------------
On 1 November 2007, LGPL was converted to an ISPV and repaid subordinated debt of £400m to Society.
There has been no impact on the IFRS net assets or profit before tax as a result of the ISPV conversion.
Society's long term fund restructure
------------------------------------
In December 2007, the Group implemented a new capital structure for Society.
A key component was the removal of the transfer formula, which has limited the annual amounts of distribution from
Society's long term fund since 1996. As part of the restructure, it was also announced that the 1996 Sub-fund (£321m)
was merged into the Shareholder Retained Capital (SRC). Society's Board of Directors has undertaken to maintain an
initial £500m of assets within Society to support the with-profits business. The amount of the commitment will
gradually reduce to zero over a period not exceeding ten years.
The removal of the formula and the merger of the 1996 Sub-fund with the SRC have removed significant dividing lines
between the pools of shareholder capital within Society. From 2007, all the assets supporting the UK non profit life and
pensions businesses have been aggregated for reporting purposes and designated 'Society Shareholder Capital'. This
comprises the SRC (including the merged 1996 Sub-fund), and all Society's shareholder capital held outside the long term
fund (LTF) and in LGPL.
For 2007, £1.7bn has been transferred from the SRC into the shareholder capital held outside Society's long term fund.
There was no incremental tax in respect of this transfer. Deferred tax is provided at the incremental rate on the
undeclared surplus in Society's LTF represented by the SRC. For 2007, the incremental rate in respect of the undeclared
surplus of £2,047m was zero. At 31 December 2006, no deferred tax was provided, on the grounds that, at the balance
sheet date, no obligation to make a declaration of surplus actually existed and
there was no expectation that such a declaration would occur.
The merger of the 1996 Sub-fund into the SRC has increased IFRS profit before tax by £321m reflecting the transfer from
unallocated divisible surplus to ordinary shareholders' equity.
========================================================================================================================
Page 43
4.02 Life and pensions operating profit
-----------------------------------------
(a) Analysis of life and pensions operating profit
--------------------------------------------------
2007 2006
Restated
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Net capital released from non profit business 4.02(b) 161 1,255
Investment return 317 213
Other expenses(1) (27) (17)
------------------------------------------------------------------------------------------------------------------------
Non profit business 451 1,451
With-profits business 106 95
------------------------------------------------------------------------------------------------------------------------
UK 557 1,546
USA 59 58
Netherlands 11 7
France 16 10
------------------------------------------------------------------------------------------------------------------------
643 1,621
========================================================================================================================
Following Society's LTF restructure (see Note 4.01), operating profit for UK life and pensions business now represents
the net capital invested/released from the non profit business, a smoothed investment return on all Society shareholder
capital, including that retained within the LTF, and the with-profits transfer. The definition of the with-profits
transfer and operating profit from all other subsidiaries remains unchanged.
Further details relating to Society's LTF restructure can be found in Note 4.01.
1.Other expenses include management fees payable, project expenses allocated to Society and amortisation of acquired
VIF.
(b) Analysis of net capital released from non profit business
---------------------------------------------------------------
2007 2006
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Net capital released from non profit business comprises:
New business
- Strain before financing arrangements (344) (546)
- Changes to FSA reporting and capital rules - 278
Existing business
- Expected capital release, before financing arrangements 406 555
- Financing arrangements - (125)
Experience variances 4.02(c) 115 90
Changes to non-economic assumptions 4.02(d) (137) (90)
Annuity investment policy - 422
Changes to FSA reporting and capital rules 37 363
Movements in non-cash items 4.02(e) 74 (96)
Other (38) 27
------------------------------------------------------------------------------------------------------------------------
113 878
Tax gross-up 48 377
------------------------------------------------------------------------------------------------------------------------
161 1,255
========================================================================================================================
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.
Both new business strain and expected capital release exclude required solvency margin, as this is not accounted for
under IFRS. On average, the capital invested in new non profit business, including solvency margin, is repaid from
product cash flows in approximately 6 years.
========================================================================================================================
Page 44
4.02 Life and pensions operating profit (continued)
-----------------------------------------------------
An analysis of the experience variances, non-economic assumption changes and non-cash items, all net of tax, is provided
below:
(c) Experience variances
------------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Persistency 10 4
Mortality/morbidity 22 -
Expenses (57) (28)
BPA data loading 3 157
Investment 134 27
Other 3 (70)
------------------------------------------------------------------------------------------------------------------------
115 90
========================================================================================================================
(d) Changes to non-economic assumptions
---------------------------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Mortality/morbidity(1) (121) (27)
Expenses (37) (50)
Other 21 (13)
------------------------------------------------------------------------------------------------------------------------
(137) (90)
========================================================================================================================
1. 2007 includes £(214)m relating to the strengthening of assumptions for annuitant, longevity on existing business,
offset by £64m relating to changes to the assumptions for the proportions married.
(e) Movements in non-cash items
-----------------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Deferred tax (17) (123)
Deferred acquisition costs 114 (21)
Deferred income liabilities (72) (78)
IFRS adjustment for financial reinsurance - 125
Other 49 1
----------------------------------------------------------------------------------------------------------------------
74 (96)
========================================================================================================================
========================================================================================================================
Page 45
4.03 Investment management operating profit
---------------------------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Managed pension funds 103 96
Private equity - 4
Property 6 6
Retail investments 8 11
Other income(1) 38 16
------------------------------------------------------------------------------------------------------------------------
155 133
========================================================================================================================
1. In 2007, other income includes £23m of profits arising from the provision of investment management services at market
referenced rates charged to the Group's UK life and pensions businesses.
4.04 General insurance operating profit, underwriting result and combined operating ratios
------------------------------------------------------------------------------------------
Operating Under- Combined Operating Under- Combined
profit/ writing operating profit/ writing operating
(loss) result ratio (loss) result ratio
2007 2007 2007 2006 2006 2006
£m £m % £m £m %
------------------------------------------------------------------------------------------------------------------------
From continuing operations
Household(1) (86) (101) 145% (9) (21) 111%
Other business(2) 19 15 74% 18 13 89%
------------------------------------------------------------------------------------------------------------------------
(67) (86) 131% 9 (8) 105%
========================================================================================================================
1.Household business in 2007 includes a loss of £76m net of reinsurance as a result of flood related claims in June and
July 2007.
2. Other business in 2007 includes £6m profit following the withdrawal from the healthcare business in the first
quarter.
The combined operating ratio is:
-- --
: Net incurred claims Expenses + Net commission :
:------------------------ + --------------------------- : x 100
: Net earned premiums Net written premiums :
-- --
4.05 Other operational income
--------------------------------
2007 2006
Restated
£m £m
------------------------------------------------------------------------------------------------------------------------
Shareholders' other income
Investment return on shareholders' equity(1) 51 65
Interest expense(2) (119) (106)
------------------------------------------------------------------------------------------------------------------------
(68) (41)
Other operations(3) 1 -
Unallocated corporate and development expenses (6) (2)
------------------------------------------------------------------------------------------------------------------------
(73) (43)
========================================================================================================================
1. Investment return on shareholders' equity excludes investment return on Society shareholder capital, which is
included in UK life and pensions.
2. Interest expense relates to average borrowings, excluding non-recourse financing (see Note 4.13).
3. Principally the regulated mortgage network and Cofunds.
4.06 Variation from longer term investment return
---------------------------------------------------
2007 2006
Restated
£m £m
------------------------------------------------------------------------------------------------------------------------
UK life and pensions (75) 239
Netherlands (11) (18)
Investment management 4 (1)
General insurance (9) (7)
Other operational income 1 18
------------------------------------------------------------------------------------------------------------------------
(90) 231
========================================================================================================================
Investment return is allocated to operating profit by reference to a longer term rate of investment return for the
respective invested funds. The difference between the amount allocated to operating profit and actual investment return
is the variation from longer term investment return analysed above.
========================================================================================================================
Page 46
4.07 Analysis of tax
----------------------
Profit/(loss) Tax Profit/(loss) Tax
before tax before tax
2007 2007 2006 2006
Restated Restated
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
From continuing operations
UK life and pensions 557 (173) 1,546 (280)
International life and pensions 86 (25) 75 (24)
------------------------------------------------------------------------------------------------------------------------
643 (198) 1,621 (304)
Investment management 155 (47) 133 (40)
General insurance (67) 19 9 (2)
Other operational income (73) 30 (43) 17
------------------------------------------------------------------------------------------------------------------------
Operating profit 658 (196) 1,720 (329)
Variation from longer term investment return (90) 31 231 (58)
Property income attributable to minority interests (6) - 67 -
Release of 1996 Sub-fund 321 - - -
------------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax/Tax 883 (165) 2,018 (387)
========================================================================================================================
Only the element of total tax attributable to equity holders' profit is shown explicitly in the analysis above; the tax
attributable to policyholder returns is included within expenses in the operating profit income statement.
Deferred tax is provided at the incremental rate on the undeclared surplus in Society's LTF represented by the
Shareholder Retained Capital (SRC). For 2007, the incremental rate in respect of the undeclared surplus of £2,047m was
zero. At 31 December 2006, no deferred tax was provided, on the grounds that, at the balance sheet date, no obligation
to make a declaration of surplus actually existed and there was no expectation that such a declaration would occur. The
maximum amount of incremental tax which would have crystallised on such a declaration of surplus at 31 December 2006 was
estimated to be £717m.
========================================================================================================================
Page 47
4.08 Earnings per share
-------------------------
(a) Earnings per share
----------------------
Profit/ Tax Profit/ Earnings Profit Tax Profit Earnings
(loss) (charge)/ (loss) per share before charge after per share
before credit after tax tax
tax tax
2007 2007 2007 2007 2006 2006 2006 2006
Restated Restated Restated Restated
£m £m £m p £m £m £m p
------------------------------------------------------------------------------------------------------------------------
Operating profit from
continuing operations 658 (196) 462 7.17 1,720 (329) 1,391 21.45
Variation from longer term
investment return (90) 31 (59) (0.91) 231 (58) 173 2.67
Release of 1996 Sub-fund 321 - 321 4.98 - - - -
------------------------------------------------------------------------------------------------------------------------
Earnings per share based
on profit attributable
to equity holders 889 (165) 724 11.24 1,951 (387) 1,564 24.12
========================================================================================================================
(b) Diluted earnings per share
------------------------------
(i) Based on operating profit from continuing operations after tax
------------------------------------------------------------------
Profit Number Earnings Profit Number Earnings
after of per share after of per share
tax shares(1) tax shares(1)
2007 2007 2007 2006 2006 2006
Restated Restated
£m m p £m m p
------------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations after tax 462 6,444 7.17 1,391 6,483 21.45
Net shares under options allocable for
no further consideration - 34 (0.04) - 46 (0.15)
------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 462 6,478 7.13 1,391 6,529 21.30
========================================================================================================================
(ii) Based on profit attributable to equity holders
---------------------------------------------------
Profit Number Earnings Profit Number Earnings
after of per share after of per share
tax shares(1) tax shares(1)
2007 2007 2007 2006 2006 2006
£m m p £m m p
------------------------------------------------------------------------------------------------------------------------
Profit attributable to equity
holders of the Company 724 6,444 11.24 1,564 6,483 24.12
Net shares under options allocable for
no further consideration - 34 (0.06) - 46 (0.17)
------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 724 6,478 11.18 1,564 6,529 23.95
========================================================================================================================
The number of shares in issue at 31 December 2007 was 6,296,321,160 (2006: 6,532,261,961).
1. Weighted average number of shares.
========================================================================================================================
Page 48
4.09 Gross written premiums
---------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
From continuing operations
UK life and pensions participating business 382 376
UK life and pensions non-participating business 3,152 2,691
------------------------------------------------------------------------------------------------------------------------
Total UK life and pensions 3,534 3,067
USA 345 347
Netherlands 259 266
France 348 283
------------------------------------------------------------------------------------------------------------------------
Total life and pensions 4,486 3,963
General insurance
Household 255 240
Other business 52 83
------------------------------------------------------------------------------------------------------------------------
Total General insurance 307 323
------------------------------------------------------------------------------------------------------------------------
Total gross written premiums 4,793 4,286
========================================================================================================================
4.10 Segmental analysis
-----------------------
The Group is organised into three main business segments:
- Long term business (includes insurance and investment business)
- Investment management
- General insurance
Other operations comprise estate agencies, regulated mortgage network corporate expenses and assets held outside the
three main business segments, none of which constitutes a separately reportable segment.
As a result of Society's long term fund restructure detailed in Note 4.01, the Society shareholder capital held outside
the LTF has been reclassified in 2007 as attributable to long term business. The comparatives have been restated
accordingly.
(i) Income statement analysed by business segments
--------------------------------------------------
Long term Investment General Other Elimination Total
business manage- insurance operations of inter
ment segment
amounts
For the year ended 31 December 2007 £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 6,540 11,379 308 233 (258) 18,202
Total expenses from continuing operations 5,793 11,169 384 319 (258) 17,407
Profit from continuing operations
after income tax 719 109 (55) (55) - 718
========================================================================================================================
Inter segment revenue (40) (79) - (139) 258 -
========================================================================================================================
Restated Restated Restated
For the year ended 31 December 2006 £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 8,540 12,013 315 349 (251) 20,966
Total expenses from continuing operations 6,818 11,849 314 307 (251) 19,037
Profit from continuing operations
after income tax 1,483 93 1 54 - 1,631
========================================================================================================================
Inter segment revenue (30) (40) (2) (179) 251 -
========================================================================================================================
========================================================================================================================
Page 49
4.10 Segmental analysis (continued)
-------------------------------------
(ii) Balance sheet analysed by business segments
------------------------------------------------
Long term Investment General Other Elimination Total
business manage- insurance operations of inter
ment segment
amounts
As at 31 December 2007 £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Total assets 75,279 204,313 473 3,266 (2,046) 281,285
Total liabilities 70,449 203,550 359 3,349 (2,046) 275,661
Total equity 4,830 763 114 (83) - 5,624
========================================================================================================================
Restated Restated Restated
As at 31 December 2006 £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Total assets 72,208 144,725 534 2,645 (2,247) 217,865
Total liabilities 67,133 144,000 365 2,775 (2,247) 212,026
Total equity 5,075 725 169 (130) - 5,839
========================================================================================================================
(iii) Revenue and assets by geographic segments
-----------------------------------------------
UK USA Netherlands France Elimination Total
of inter
segment
amounts
For the year ended 31 December 2007 £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 17,204 338 290 373 (3) 18,202
Total assets 274,975 2,588 1,663 2,110 (51) 281,285
========================================================================================================================
For the year ended 31 December 2006
------------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 20,020 329 300 319 (2) 20,966
Total assets 212,185 2,478 1,415 1,807 (20) 217,865
========================================================================================================================
4.11 Financial investments
--------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Equities 149,567 112,589
Unit trusts 4,659 4,190
Debt securities 104,087 82,685
Accrued interest 1,363 1,079
Derivative assets 694 77
Loans and receivables 1,348 810
------------------------------------------------------------------------------------------------------------------------
261,718 201,430
========================================================================================================================
4.12 Segmental analysis of shareholders' equity
-----------------------------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Society shareholder capital(1) 4,832 5,520
General insurance 114 169
Netherlands 107 97
France(2) 130 82
------------------------------------------------------------------------------------------------------------------------
Total Society shareholders' equity 5,183 5,868
USA(2) 643 552
Investment management 349 311
Corporate funds(3) (729) (1,306)
------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 5,446 5,425
========================================================================================================================
1. As part of the capital review a £400m dividend was paid and £602m of subordinated debt capital was repaid to
Corporate funds. Further details relating to the capital review can be found in Note 4.01.
2. Capital of £57m ($114m) and £27m (€40m) respectively was injected into the USA and France operations.
3. Corporate funds include investments, subordinated borrowings and senior borrowings. The increase in Corporate funds
primarily reflects the repayment of the subordinated debt from Society shareholder capital of £602m during the year.
========================================================================================================================
Page 50
4.13 Analysis of borrowings
---------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Subordinated borrowings
6.385% Sterling perpetual capital securities 620 -
5.875% Sterling undated subordinated notes 427 429
4.0% Euro subordinated notes 2025 414 389
------------------------------------------------------------------------------------------------------------------------
Total subordinated borrowings 1,461 818
========================================================================================================================
Senior borrowings
Sterling medium term notes 2031-2041 608 608
Euro commercial paper 118 370
Bank loans 13 3
Non recourse financing
- US Dollar Triple X securitisation 2025 266 270
- US Dollar Triple X securitisation 2037 223 226
- Sterling property partnership loans 2011 99 130
------------------------------------------------------------------------------------------------------------------------
Total senior borrowings 1,327 1,607
========================================================================================================================
Total borrowings 2,788 2,425
========================================================================================================================
Total borrowings (excluding non recourse financing) 2,200 1,799
========================================================================================================================
Subordinated borrowings
-----------------------
6.385% Sterling perpetual capital securities
In 2007, Legal & General Group Plc issued £600m of 6.385% sterling perpetual capital securities. Simultaneous with the
issuance, the fixed coupon was swapped into six month LIBOR plus 0.94% per annum. These securities are callable at par
on 2 May 2017 and every three months thereafter. If not called, the coupon from 2 May 2017 will be reset to three month
LIBOR plus 1.93% per annum. For regulatory purposes these securities are treated as innovative tier I capital. These
securities have been classified as liability as the interest payments become mandatory in certain circumstances.
5.875% Sterling undated subordinated notes
In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable
at par on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the
prevailing five year benchmark gilt yield plus 2.33% per annum. These notes are treated as upper tier II capital for
regulatory purposes. These securities have been classified as liability as the interest payments become mandatory in
certain circumstances.
4.0% Euro subordinated notes 2025
In 2005, Legal & General Group Plc issued €600m of 4.0% Euro dated subordinated notes. The proceeds were swapped into
sterling. The notes are callable at par on 8 June 2015 and each year thereafter. If not called, the coupon from 8 June
2015 will reset to a floating rate of interest based on prevailing three month Euribor plus 1.7% per annum. These notes
mature on 8 June 2025 and are treated as lower tier II capital for regulatory purposes.
Non recourse financing
----------------------
US Dollar Triple X securitisation 2025
In 2004, a subsidiary of Legal & General America Inc issued US$550m of non recourse debt in the US capital markets to
meet the Triple X reserve requirements of part of the US term insurance written up to 2005. It is secured on the cash
flows related to that tranche of business.
US Dollar Triple X securitisation 2037
In 2006, a subsidiary of Legal & General America Inc issued US$450m of non recourse debt in the US capital markets to
meet the Triple X reserve requirements of part of the US term insurance written after 2005 and 2006. It is secured on
the cash flows related to that tranche of business.
Sterling property partnership loans 2011
The property partnership loans are secured on specific properties.
4.14 Minority interests
-----------------------
Minority interests represent third party interests in property investment vehicles which are consolidated in the Group's
results. The reduction in the minority interest is primarily as a result of divestments during 2007.
========================================================================================================================
Page 51
4.15 Total equity
-----------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
As at 1 January 5,839 4,936
Total recognised income and expense 699 1,602
Issue of share capital 4 15
Share buyback (320) -
Net movements in employee scheme shares 1 (5)
Dividend distributions to equity holders of the Company during the year (369) (349)
Movements in minority interests including disposals (230) 62
Reclassification of subordinated borrowings from equity to debt - (394)
Fair value loss after tax on reclassification of subordinated borrowings as debt - (28)
------------------------------------------------------------------------------------------------------------------------
As at 31 December 5,624 5,839
========================================================================================================================
4.16 Insurance contract liabilities
-----------------------------------
(a) Analysis of insurance contract liabilities
----------------------------------------------
Gross Reinsurance Gross Reinsurance
2007 2007 2006 2006
Notes £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Life and pensions participating insurance contracts 4.16(b) 11,663 (1) 12,660 (1)
Life and pensions non-participating insurance contracts 4.16(c) 22,568 (1,302) 21,321 (1,237)
General insurance contracts 4.16(d) 305 (19) 281 (16)
-----------------------------------------------------------------------------------------------------------------------
Insurance contract liabilities 34,536 (1,322) 34,262 (1,254)
========================================================================================================================
(b) Movement in participating insurance contract liabilities
------------------------------------------------------------
Gross Reinsurance Gross Reinsurance
2007 2007 2006 2006
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
As at 1 January 12,660 (1) 13,180 (1)
New liabilities in the year 219 - 240 -
Liabilities discharged in the year (1,684) - (1,671) -
Unwinding of discount rates 520 - 432 -
Effect of change in non-economic assumptions (102) - 29 -
Effect of change in economic assumptions 50 - 487 -
Other - - (37) -
------------------------------------------------------------------------------------------------------------------------
As at 31 December 11,663 (1) 12,660 (1)
========================================================================================================================
(c) Movement in non-participating insurance contract liabilities
----------------------------------------------------------------
Gross Reinsurance Gross Reinsurance
2007 2007 2006 2006
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
As at 1 January 21,321 (1,237) 22,860 (2,649)
New liabilities in the year 2,463 (286) 1,995 (287)
Liabilities discharged in the year (1,108) 78 (1,630) 75
Unwinding of discount rates 876 (126) 958 (134)
Effect of change in non-economic assumptions 1 179 90 (33)
Effect of change in economic assumptions (902) - (417) 9
Foreign exchange adjustments 109 2 (176) 26
Other (192) 88 (2,359) 1,756
------------------------------------------------------------------------------------------------------------------------
As at 31 December 22,568 (1,302) 21,321 (1,237)
========================================================================================================================
In 2007, the Effect of changes in non-economic assumptions includes an increase of approximately £214m relating to the
strengthening of assumptions for annuitant longevity on existing business, which was largely offset by weakening of
mortality and expense assumptions on term business (on a gross reassurance basis).
In 2006, Other includes £2,248m gross (£1,756m reinsurance) relating to the impact of applying
PS 06/14.
========================================================================================================================
Page 52
4.16 Insurance contract liabilities (continued)
-----------------------------------------------
(d) Analysis of General insurance contract liabilities
------------------------------------------------------
Gross Reinsurance Gross Reinsurance
2007 2007 2006 2006
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Outstanding claims 132 (12) 101 (4)
Claims incurred but not reported 40 - 36 (1)
Unearned premiums 133 (7) 144 (11)
------------------------------------------------------------------------------------------------------------------------
General Insurance contract liabilities 305 (19) 281 (16)
========================================================================================================================
(e) Movement in General insurance claim liabilities
---------------------------------------------------
Gross Reinsurance Gross Reinsurance
2007 2007 2006 2006
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
As at 1 January 137 (5) 142 (5)
Claims arising 323 (6) 247 (3)
Claims paid (255) (2) (206) 2
Adjustments to prior year liabilities (33) 1 (46) 1
------------------------------------------------------------------------------------------------------------------------
As at 31 December 172 (12) 137 (5)
========================================================================================================================
Total gross claims of £86m (net £76m) arose as a result of the floods in 2007. At the year end £38m of these claims had
been paid.
4.17 Investment contract liabilities
------------------------------------
(a) Analysis of investment contract liabilities
-----------------------------------------------
Gross Reinsurance Gross Reinsurance
2007 2007 2006 2006
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Participating investment contracts 7,462 (74) 7,501 (88)
Non-participating investment contracts 224,906 (134) 162,016 (139)
------------------------------------------------------------------------------------------------------------------------
Investment contract liabilities 232,368 (208) 169,517 (227)
========================================================================================================================
(b) Movement in investment contract liabilities
-----------------------------------------------
Gross Reinsurance Gross Reinsurance
2007 2007 2006 2006
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
As at 1 January 169,517 (227) 143,280 (115)
Reserves in respect of new business 75,969 (412) 28,423 (93)
Amounts paid on surrenders and maturities during the year (24,706) 262 (15,633) 3
Investment return and related benefits 11,854 169 13,804 (22)
Management charges (399) - (339) -
Foreign exchange adjustments 133 - (18) -
------------------------------------------------------------------------------------------------------------------------
As at 31 December 232,368 (208) 169,517 (227)
========================================================================================================================
========================================================================================================================
Page 53
4.18 Value of policyholder assets held in Society and LGPL
------------------------------------------------------------
2007 2006
Restated
£bn £bn
------------------------------------------------------------------------------------------------------------------------
With-profits business 29.5 30.1
Non profit business 30.7 26.6
------------------------------------------------------------------------------------------------------------------------
60.2 56.7
========================================================================================================================
4.19 Non-linked business and Society shareholder capital invested asset mix and investment return
---------------------------------------------------------------------------------------------------
Investment : With-profits With-profits With-profits Non profit : Society
return : asset share non par other : shareholder
: : capital
As at 31 December 2007 % : % % % % : %
------------------------------------------------------------------------------------------------------------------------
Equities 9 : 45 4 (43) - : 69
Bonds 1 : 35 83 129 99 : 12
Property (5) : 17 2 - - : 12
Cash 5 : 3 11 14 1 : 7
------------------------------------------------------------------------------------------------------------------------
: 100 100 100 100 : 100
========================================================================================================================
Investment return (% pa) 3 4 3 6 - 6
========================================================================================================================
Invested assets (£bn) 17.1 2.4 1.8 16.6 4.0
========================================================================================================================
As at 31 December 2006
------------------------------------------------------------------------------------------------------------------------
Equities 14 : 50 4 (35) 1 : 62
Bonds 1 : 28 82 125 96 : 26
Property 20 : 19 2 - 2 : 10
Cash 5 : 3 12 10 1 : 2
------------------------------------------------------------------------------------------------------------------------
: 100 100 100 100 100
========================================================================================================================
Investment return (% pa) 6 11 2 (5) 2 11
========================================================================================================================
Invested assets (£bn) 18.7 2.5 1.7 16.1 4.6
========================================================================================================================
All investment return percentages reflect average returns for the period.
Following the corporate restructure, all the assets supporting the UK non profit life and pensions businesses have been
aggregated for reporting purposes and designated 'Society Shareholder Capital'. This comprises the SRC (including the
merged 1996 Sub-fund), and all Society's shareholder capital held outside the long term fund (LTF) and in LGPL.
Comparatives have been represented accordingly.
4.20 Sensitivities
------------------
General insurance sensitivity analysis
--------------------------------------
Impact on Impact on Impact on Impact on
pre-tax equity pre-tax equity
profit net of profit net of
net of reinsurance net of reinsurance
reinsurance reinsurance
2007 2007 2006 2006
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Sensitivity test
Single storm event with 1 in 200 year probability (42) (29) (30) (21)
Subsidence event - worst claims ratio in last 30 years (36) (25) (37) (26)
Repeat of 1990 recession on ASU/DMI(1)/Household accounts (54) (38) (52) (36)
5% decrease in overall claims ratio 13 9 15 11
5% surplus over claims liabilities 7 5 7 5
========================================================================================================================
1. Accident, sickness and unemployment (ASU)/Domestic mortgage indemnity (DMI)
========================================================================================================================
Page 54
4.21 Pension cost
-----------------
The Legal & General Group UK Pension and Assurance Fund and the Legal & General Group UK Senior Pension Scheme are
defined benefit pension arrangements and account for all UK and the majority of worldwide assets of, and contributions
to, such arrangements. At 31 December 2007, the combined after tax deficit arising from these arrangements (net of
annuity obligations insured by Society) has been estimated at £130m (2006: £122m). These amounts have been recognised in
the financial statements with £77m charged against shareholder equity (2006: £72m) and £53m against the unallocated
divisible surplus (2006: £50m).
4.22 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 general 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 the continuing receipt of claims from holders of endowment policies.
Various Group companies receive claims and become involved in actual or threatened litigation and regulatory issues from
time to time. Provision for liabilities continues to be made and is regularly reviewed. However, it is not possible to
predict, with certainty, the extent and the timing of the financial impact to which these claims, litigation or issues
may give rise. The relevant members of the Group nevertheless consider that each makes prudent provision, as and when
circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet all
reasonably foreseeable eventualities.
In 1975, 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) acquired Victory and 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.
Society has been discussing with Her Majesty's Revenue & Customs the application of certain tax legislation specific to
life assurance companies for the years 1999 to 2006. It has not been possible to reach agreement and a reference will be
made in 2008 to the Special Commissioners. The maximum exposure is estimated to be £230m. No amount is included in
respect of this issue in the income tax provision at 31 December 2007, as the Group's view, supported by leading tax
counsel, is that no amount will be payable.
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.
4.23 Events after the balance sheet date
----------------------------------------
On 7 February 2007, the Group entered into an agreement with the Nationwide Building Society to purchase Nationwide Life
Limited and Nationwide Unit Trust Managers Limited. On 1 February 2008 the acquisition was completed for total
consideration of approximately £293m. The arrangements also provide access to Nationwide's distribution network, through
which it is anticipated that a wide range of the Group's investment, pensions and life insurance products will be sold.
Since 31 December 2007, additional purchases have been made under the Company's share buyback programme. At 29 February
2008, a further 156,213,929 ordinary shares (representing 2.5% of Legal & General Group Plc's issued share capital at 31
December 2007) had been purchased for cancellation at a total cost of £199m including expenses, at an average cost of
127p per share. Cumulatively, a total of 397,421,196 shares have been repurchased at a total cost of £519m.
4.24 Foreign exchange rates
---------------------------
Principal rates of exchange used for translation are:
01.01.07- 01.01.06-
31.12.07 2007 31.12.06 2006
Average Year end Average Year end
------------------------------------------------------------------------------------------------------------------------
United States Dollar 2.00 1.99 1.84 1.96
Euro 1.46 1.36 1.47 1.48
========================================================================================================================
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