L&G 2007 FY Results Part 5
Legal & General Group Plc
18 March 2008
Page 55
Capital and Cash Flow
=====================
5.01 Capital review
-------------------
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.
ISPVs have no formal requirement to hold a regulatory solvency margin. The conversion has therefore resulted in a
reduction in the capital resources requirement for Society of £0.5bn, which has increased Society's regulatory surplus
capital by a similar amount (2007 total surplus: £4.4bn). The Group's Insurance Groups Directive (IGD) regulatory
surplus has also increased by approximately £0.5bn (2007 total surplus: £4.1bn) for similar reasons.
Society's long term fund restructure
------------------------------------
In December 2007, the Group implemented a new capital structure for Society.
For 2007, £1.7bn has been transferred from the SRC into the shareholder capital held outside Society's long term fund.
The full £1.7bn transfer is reflected in the increased Group's IGD surplus of £4.1bn, highlighting the increased
flexibility of the funds transferred out of SRC. There has been no impact on Society's regulatory surplus capital.
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Page 56
5.02 Regulatory capital resources
---------------------------------
(a) Insurance Groups Directive
------------------------------
The Group is required to measure and monitor its capital resources on a regulatory basis and to comply with the minimum
capital requirements of regulators in each territory in which it operates. At Group level, Legal & General must comply
with the requirements of the IGD. This is a very prudent measure of capital resources as it excludes any amount of
surplus capital within a long term fund (£1.1bn for Society at 31 December 2007). The table below shows the estimated
total Group capital resources, Group capital resources requirement and the surplus.
2007 2006
Notes £bn £bn
------------------------------------------------------------------------------------------------------------------------
Core tier I 7.1 5.9
Innovative tier I 0.6 -
Upper tier II 0.4 0.4
Lower tier II 0.4 0.4
Deductions (0.2) (0.1)
------------------------------------------------------------------------------------------------------------------------
Group capital resources 8.3 6.6
------------------------------------------------------------------------------------------------------------------------
Group capital resources requirement 4.2 4.6
------------------------------------------------------------------------------------------------------------------------
IGD surplus 5.01 4.1 2.0
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A segmental analysis is given below.
2007 2006
£bn £bn
------------------------------------------------------------------------------------------------------------------------
Society long term fund 3.9 3.7
Society shareholder capital(1) 3.1 1.3
LGPL - 1.4
General insurance 0.1 0.1
France 0.1 0.1
Netherlands 0.1 0.1
USA 0.1 0.1
Investment management 0.3 0.3
Other(2) 1.4 0.5
Innovative tier I 0.6 -
Tier II 0.8 0.8
Debt (2.2) (1.8)
------------------------------------------------------------------------------------------------------------------------
Group capital resources 8.3 6.6
========================================================================================================================
Society long term fund 3.9 3.7
LGPL - 0.6
Other 0.3 0.3
------------------------------------------------------------------------------------------------------------------------
Group capital resources requirement 5.01 4.2 4.6
========================================================================================================================
1. Includes capital resources of LGPL for 2007 and excludes shareholder capital held within Society's long term fund for
both 2006 and 2007.
2. Other reflects general corporate assets held at Group level including those used to support the ongoing share buyback
programme.
A reconciliation of the Group capital resources on an IGD basis to the capital and reserves attributable to the equity
holders of the Company on an IFRS basis is given below.
2007 2006
£bn £bn
------------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to equity holders on an IFRS basis 5.4 5.4
Innovative tier I 0.6 -
Tier II 0.8 0.8
Proposed 2007 final dividend (0.2) -
Additional capital available from Society 2.2 0.8
Adjustment to reflect regulatory value of the USA operation (0.5) (0.4)
------------------------------------------------------------------------------------------------------------------------
Group capital resources 8.3 6.6
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Further details relating to the impact of the Capital review can be found in Note 5.01.
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Page 57
5.02 Regulatory capital resources (continued)
---------------------------------------------
(b) Society capital surplus
---------------------------
Society is required to measure and monitor its capital resources on a regulatory basis.
2007 2007 2006 2006
Long term General Long term General
business insurance business insurance
£bn £bn £bn £bn
------------------------------------------------------------------------------------------------------------------------
Tier I 8.4 0.1 8.7 0.1
Upper tier II(1) - - 0.3 -
Lower tier II(1) - - 0.3 -
------------------------------------------------------------------------------------------------------------------------
Available capital resources 8.4 0.1 9.3 0.1
------------------------------------------------------------------------------------------------------------------------
Insurance capital requirement 1.9 0.1 1.7 -
With-Profits Insurance Capital Component 2.0 - 2.0 -
Capital requirements of regulated related undertakings 0.1 - 0.7 0.1
------------------------------------------------------------------------------------------------------------------------
Capital resources requirement 4.0 0.1 4.4 0.1
------------------------------------------------------------------------------------------------------------------------
Regulatory capital surplus 4.4 - 4.9 -
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1. The tier II capital of £602m was repaid in June 2007.
The table below summarises the realistic position of the with-profits part of Society's LTF:
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
With-profits surplus 1,047 1,128
Risk capital margin 262 465
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Surplus 785 663
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Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis (peak 2). If the
surplus on a realistic basis is lower than the surplus using peak 1 solvency rules, then a further capital requirement,
the With-Profits Insurance Capital Component (WPICC) is required. At 31 December 2007, the WPICC was reduced to reflect
the value of shareholder transfers of £396m (2006: £432m) within the Risk Capital Margin calculation.
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Page 58
5.03 IFRS capital resources
---------------------------
(a) Group capital resources
---------------------------
The Group's total capital resources of £8.6bn on an IFRS basis, comprise equity holders' capital (£5.4bn) (see Note
4.12), subordinated debt (£1.5bn) and unallocated divisible surplus (£1.7bn).
(b) Society capital resources
-----------------------------
Society has been allocated capital of £4.8bn, £2.6bn is held outside any long term fund of which approximately £0.5bn is
within LGPL; the remainder of £2.2bn is held within Society's long term fund. An analysis of the movement in Society
Shareholder Capital (SSC) on the IFRS basis is provided in the table below:
Society
Shareholder Capital
-------------------------------------
Notes Gross Tax Net
2007 £m £m £m
------------------------------------------------------------------------------------------------------------------------
As at 1 January 5,520
Investment return 242 (70) 172
With-profits distribution 106 (32) 74
Repayment of subordinated debt (602) - (602)
Capital invested in subsidiaries (27) - (27)
Net capital contributed/released from non profit business 4.02 161 (48) 113
Release of 1996 Sub-fund 321 - 321
Distribution to Group Plc (728) - (728)
Movement included in the statement of recognised income and expense (13) (3) (16)
Other 2 3 5
------------------------------------------------------------------------------------------------------------------------
As at 31 December 4,832
========================================================================================================================
The total net capital released from the non profit business is £161m, which comprises the net capital contributed to
LGPL non profit business of £167m (net of tax £117m) and the net capital released from Society of £328m (net of tax
£230m).
2006
------------------------------------------------------------------------------------------------------------------------
As at 1 January 4,456
Investment return 452 (108) 344
With-profits distribution 95 (29) 66
Dividends from subsidiaries 2 - 2
Capital invested in subsidiaries (13) - (13)
Net capital contributed/released from non profit business 4.02 1,255 (377) 878
Distribution to Group Plc (380) - (380)
Movement included in the statement of recognised income and expense 3 (1) 2
Deferred tax asset on corporate restructure - 171 171
Other (9) 3 (6)
------------------------------------------------------------------------------------------------------------------------
As at 31 December 5,520
========================================================================================================================
The total net capital released from the non profit business is £1,255m, which comprises the net capital contributed to
LGPL non profit business of £717m (net of tax £502m) and the net capital released from Society of £1,972m (net of tax
£1,380m).
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Page 59
5.04 Group credit ratings
-------------------------
Society continues to be one of the two highest rated European life assurers. The financial strength ratings from
Standard & Poor's, Moody's and A.M.Best were maintained at AA+, Aa1 and A+ respectively, all with stable outlooks.
The Group's current long term and short term debt ratings are, from Standard & Poor's, AA- and A1+ and, from Moody's,
A1 and P1.
5.05 Parent company cash flow statement
---------------------------------------
The table below shows the cash flows in the year relating to the Group's parent company.
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Dividends received:
UK life and pensions(1) 728 380
Investment management 71 50
Other 1 3
------------------------------------------------------------------------------------------------------------------------
800 433
Dividend distributions to equity holders of the Company during the year (369) (349)
Repayment of intra-group subordinated debt(1) 602 -
Proceeds from issue of equity 4 15
Proceeds from issue of subordinated borrowings 595 -
Repayment of commercial paper (249) -
Capital injected into subsidiaries (90) -
Repayment of convertible bond - (525)
Purchase of shares under share buyback programme (320) -
Working capital movements (84) (52)
------------------------------------------------------------------------------------------------------------------------
Net cash inflow/(outflow) 889 (478)
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1. A first interim dividend of £400m was paid from brought forward distributable reserves in June 2007 to finance part
of Group Plc's £1bn on-market share buyback programme with the balance financed when Society repaid £602m
subordinated debt in June 2007 to Group Plc. A further dividend of £328m was paid in December 2007 in support of
Group Plc's dividend to shareholders.
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