L&G 2007 FY Results Part 6
Legal & General Group Plc
18 March 2008
Page 60
Appendices
==========
I UK funds under management
---------------------------
2007 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Total investments 296,649 232,969
========================================================================================================================
Represented by
Index tracking funds:
- UK equities 86,294 68,531
- Overseas equities 63,930 42,114
- Fixed interest 34,256 29,076
- Index linked 28,776 21,594
- Cash/deposits 860 652
------------------------------------------------------------------------------------------------------------------------
Total index tracking funds 214,116 161,967
Actively managed funds 70,727 66,503
Structured solutions 11,806 4,499
------------------------------------------------------------------------------------------------------------------------
296,649 232,969
========================================================================================================================
By investment approach
Indexed equities 150,224 110,644
Indexed bonds (including index linked funds and cash) 63,891 51,322
Active bonds (including index linked funds and cash) 51,546 44,713
Structured solutions 11,806 4,499
Active equities 9,816 10,966
Property 9,086 10,444
Private equity 280 381
------------------------------------------------------------------------------------------------------------------------
296,649 232,969
========================================================================================================================
By source of business
Institutional funds under management(1):
- Managed pension funds pooled 194,771 142,716
- Structured solutions 11,806 4,499
- Other 7,030 6,217
- Managed pension funds segregated 5,807 4,101
------------------------------------------------------------------------------------------------------------------------
Total institutional funds under management 219,414 157,533
UK businesses (life and general insurance funds) 65,280 63,677
UK businesses (unit trusts - excluding life fund investment) 11,955 11,759
------------------------------------------------------------------------------------------------------------------------
296,649 232,969
========================================================================================================================
1. Excludes institutional investments in unit trust funds.
========================================================================================================================
Page 61
II Capital
----------
a) Group capital resources
--------------------------
UK non Shareholders'
UK with- profit, LGPL Overseas Total equity and Total
profits and and PMC life other
SRC activities
As at 31 December 2007 £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Shareholders' equity outside
the LTF - - 512 1,104 1,616 1,648 3,264
Shareholders' equity held in
the LTF - 2,182 - - 2,182 - 2,182
------------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable
to equity holders of the Company - 2,182 512 1,104 3,798 1,648 5,446
------------------------------------------------------------------------------------------------------------------------
Adjustments onto regulatory basis(1):
Unallocated divisible surplus(2) 1,757 - - (36) 1,721 - 1,721
Other(3) (710) (349) (5) (506) (1,570) (255) (1,825)
------------------------------------------------------------------------------------------------------------------------
Other qualifying capital:
Subordinated borrowings(4) - - - - - 1,429 1,429
Internal loans(5) - (703) 703 - - - -
Proposed dividend - - - - - (247) (247)
------------------------------------------------------------------------------------------------------------------------
Total available capital resources 1,047 1,130 1,210 562 3,949 2,575 6,524
========================================================================================================================
IFRS liability analysis:
UK participating liabilities
on realistic basis
- Options and guarantees 533 - - - 533 - 533
- Other policyholder obligations 16,782 32 - - 16,814 - 16,814
Overseas participating liabilities - - - 1,778 1,778 - 1,778
Unallocated divisible surplus(2) 1,757 - - (36) 1,721 - 1,721
Value of in-force
non-participating contracts (276) - - - (276) - (276)
------------------------------------------------------------------------------------------------------------------------
Participating contract
liabilities 18,796 32 - 1,742 20,570 - 20,570
========================================================================================================================
Unit linked non-participating
life assurance liabilities 677 5,014 - 1,183 6,874 - 6,874
Non linked non-participating
life assurance liabilities 2,097 12,019 - 1,578 15,694 - 15,694
Unit linked non-participating
investment contract liabilities 8,208 14,107 - 202,591 224,906 - 224,906
General insurance liabilities - - - - - 305 305
------------------------------------------------------------------------------------------------------------------------
Non-participating contract
liabilities 10,982 31,140 - 205,352 247,474 305 247,779
========================================================================================================================
1. Figures extracted from draft unaudited regulatory returns.
2. The negative overseas unallocated divisible surplus arises as a result of differences between regulatory and IFRS
reporting.
3. Shareholders' share in realistic liabilities of £616m and changes to the values of assets and liabilities on a
regulated basis of £1,181m are included within Other.
4. In 2007, the Group issued £600m of perpetual capital securities which are treated as innovative tier I capital for
regulatory purposes.
5. Internal loans wholly comprises the contingent loan (£703m) from Society's LTF to LGPL, which is reflected in the
value of LGPL for regulatory purposes.
========================================================================================================================
Page 62
II Capital (continued)
----------------------
b) Movements in life business capital resources
-----------------------------------------------
UK with- UK non LGPL Overseas Total
profits profit, and PMC life
and SRC
2007 2007 2007 2007 2007
£m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
As at 1 January 1,128 2,752 1,451 504 5,835
Effect of investment variations (22) 199 171 (18) 330
Effect of changes in non-economic assumptions 62 69 (296) 9 (156)
Changes in management policy (59) - - - (59)
Changes in regulatory requirements 30 28 9 - 67
New business (32) (242) (100) (140) (514)
Cash distributions - (1,700) - (55) (1,755)
Other factors (60) 24 (25) 262 201
------------------------------------------------------------------------------------------------------------------------
As at 31 December 1,047 1,130 1,210 562 3,949
========================================================================================================================
========================================================================================================================
Page 63
III New business
----------------
a) UK life and pensions new business APE by quarter
---------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
Restated(1) Restated(1) Restated(1) Restated(1)
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Protection 55 57 55 56 59 61 55 56
Annuities(1) 78 38 45 44 54 53 40 35
------------------------------------------------------------------------------------------------------------------------
Total risk 133 95 100 100 113 114 95 91
------------------------------------------------------------------------------------------------------------------------
Unit linked bonds 53 62 62 74 80 60 60 61
Pensions, stakeholder
and other non profit 60 60 64 69 60 55 52 41
With-profits savings 45 54 69 60 40 55 50 46
------------------------------------------------------------------------------------------------------------------------
Total savings 158 176 195 203 180 170 162 148
------------------------------------------------------------------------------------------------------------------------
Total UK risk and savings 291 271 295 303 293 284 257 239
========================================================================================================================
1. For 2007 reporting, with-profits annuity business has been recategorised from 'with-profits' to 'annuities' and 2006
comparatives restated.
b) UK life and pensions new business annual premiums by quarter
---------------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
Restated(1) Restated(1) Restated(1) Restated(1)
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Protection 55 57 55 56 59 61 55 56
Annuities(1) - - - - - - - -
------------------------------------------------------------------------------------------------------------------------
Total risk 55 57 55 56 59 61 55 56
-----------------------------------------------------------------------------------------------------------------------
Unit linked bonds - - - - - - - -
Pensions, stakeholder
and other non profit 37 34 27 43 31 31 37 27
With-profits savings 23 27 45 35 25 30 33 29
------------------------------------------------------------------------------------------------------------------------
Total savings 60 61 72 78 56 61 70 56
------------------------------------------------------------------------------------------------------------------------
Total UK risk and savings 115 118 127 134 115 122 125 112
========================================================================================================================
1. For 2007 reporting, with-profits annuity business has been recategorised from 'with-profits' to 'annuities' and 2006
comparatives restated.
c) UK life and pensions new business single premiums by quarter
---------------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
Restated(1) Restated(1) Restated(1) Restated(1)
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Protection - - - - - - - -
Annuities(1) 780 370 458 437 537 536 393 353
------------------------------------------------------------------------------------------------------------------------
Total risk 780 370 458 437 537 536 393 353
------------------------------------------------------------------------------------------------------------------------
Unit linked bonds 537 620 616 739 799 600 608 605
Pensions, stakeholder
and other non profit 229 258 373 262 278 245 152 142
With-profits savings 217 278 240 248 162 244 167 170
------------------------------------------------------------------------------------------------------------------------
Total savings 983 1,156 1,229 1,249 1,239 1,089 927 917
------------------------------------------------------------------------------------------------------------------------
Total UK risk and savings 1,763 1,526 1,687 1,686 1,776 1,625 1,320 1,270
========================================================================================================================
1. For 2007 reporting, with-profits annuity business has been recategorised from 'with-profits' to 'annuities' and 2006
comparatives restated.
d) International life and pensions new business APE by quarter
--------------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
USA 11 12 11 11 10 11 10 11
Netherlands 7 6 6 8 7 6 7 9
France 6 9 17 10 7 5 13 7
------------------------------------------------------------------------------------------------------------------------
Total 24 27 34 29 24 22 30 27
========================================================================================================================
========================================================================================================================
Page 64
III New Business (continued)
----------------------------
e) International life and pensions new business annual premiums by quarter
--------------------------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
USA 11 12 11 11 10 11 10 11
Netherlands 3 3 2 3 3 2 4 3
France 1 5 9 2 1 2 8 1
------------------------------------------------------------------------------------------------------------------------
Total 15 20 22 16 14 15 22 15
========================================================================================================================
f) International life and pensions new business single premiums by quarter
--------------------------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
USA - - - - - - - -
Netherlands 36 30 35 56 40 34 37 59
France 47 45 78 78 50 38 48 59
------------------------------------------------------------------------------------------------------------------------
Total 83 75 113 134 90 72 85 118
========================================================================================================================
g) Core retail investments new business APE by quarter
------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
Restated(1) Restated(1) Restated(1) Restated(1)
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
UK(1) 37 38 51 35 28 26 40 29
France - - 1 1 - 1 1 -
------------------------------------------------------------------------------------------------------------------------
Total 37 38 52 36 28 27 41 29
========================================================================================================================
1. For 2007 reporting, total UK core retail investments excludes institutional investments in unit trust funds which
are disclosed as part of institutional fund management new business in Note III(k). 2006 has been restated to reflect
this change.
h) Core retail investments new business annual premiums by quarter
------------------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
Restated(1) Restated(1) Restated(1) Restated(1)
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
UK(1) 5 5 7 4 2 5 6 4
France - - - - - - - -
------------------------------------------------------------------------------------------------------------------------
Total 5 5 7 4 2 5 6 4
========================================================================================================================
1. For 2007 reporting, total UK core retail investments excludes institutional investments in unit trust funds which
are disclosed as part of institutional fund management new business in Note III(k). 2006 has been restated to reflect
this change.
i) Core retail investments new business single premiums by quarter
------------------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
Restated(1) Restated(1) Restated(1) Restated(1)
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
UK(1) 316 324 440 319 258 208 345 252
France 4 5 9 6 8 7 5 5
------------------------------------------------------------------------------------------------------------------------
Total 320 329 449 325 266 215 350 257
========================================================================================================================
1. For 2007 reporting, total UK core retail investments excludes institutional investments in unit trust funds which
are disclosed as part of institutional fund management new business in Note III(k). 2006 has been restated to reflect
this change.
========================================================================================================================
Page 65
III New Business (continued)
----------------------------
j) Analysis of total UK APE
---------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
Restated(1) Restated(1) Restated(1) Restated(1)
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Independent financial
advisers 185 206 220 231 203 196 175 145
Tied 57 66 72 66 69 65 69 67
Direct 5 9 13 9 6 7 15 10
------------------------------------------------ -----------------------------------------------------------------------
Total UK individual 247 281 305 306 278 268 259 222
========================================================================================================================
Individual life and pensions 210 243 254 271 250 242 219 193
Core retail investments(1) 37 38 51 35 28 26 40 29
------------------------------------------------------------------------------------------------------------------------
UK individual 247 281 305 306 278 268 259 222
Group life and pensions 81 28 41 32 43 42 38 46
------------------------------------------------------------------------------------------------------------------------
Total UK 328 309 346 338 321 310 297 268
========================================================================================================================
1. For 2007 reporting, total UK core retail investments excludes institutional investments in unit trust funds which
are disclosed as part of institutional fund management new business in Note III(k). 2006 has been restated to reflect
this change.
k) Institutional fund management new business by quarter
--------------------------------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
31.12.07 30.09.07 30.06.07 31.03.07 31.12.06 30.09.06 30.06.06 31.03.06
Restated(1) Restated(1) Restated(1) Restated(1)
£m £m £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Managed pension funds(2)
Pooled funds 19,903 13,989 10,646 4,922 5,801 3,814 4,500 3,763
Segregated funds 230 1,925 380 68 1 8 538 61
------------------------------------------------------------------------------------------------------------------------
Total managed funds 20,133 15,914 11,026 4,990 5,802 3,822 5,038 3,824
Other funds(3) 871 492 506 499 2,179 753 1,933 2,682
------------------------------------------------------------------------------------------------------------------------
Total 21,004 16,406 11,532 5,489 7,981 4,575 6,971 6,506
========================================================================================================================
Attributable to:
Legal & General
Investment Management 20,247 16,149 11,167 5,059 5,961 3,931 5,195 5,563
Legal & General
Retail Investments 757 257 365 430 2,020 644 1,776 943
========================================================================================================================
1. For 2007 reporting, Other funds includes institutional investments in unit trust funds managed by Legal & General
Retail Investments which were previously disclosed as UK core retail investments APE in Notes III (g), (h), (i) and
(j). 2006 has been restated to reflect this change.
2. New monies from pension fund clients of Legal & General Assurance (Pensions Management) Limited exclude £19.4bn
(2006: £4.4bn) held through the year on a temporary basis, generally as part of portfolio reconstructions.
3. Includes segregated property, property partnerships, ventures partnerships and institutional clients funds managed
by Legal & General Investment Management and institutional investments in unit trust funds managed by Legal & General
Retail Investments.
========================================================================================================================
Page 66
IV European Embedded Value Methodology
--------------------------------------
Basis of preparation
--------------------
The supplementary financial statements have been prepared in accordance with the European Embedded Value (EEV)
Principles issued in May 2004 by the European Insurance CFO Forum.
Covered business
----------------
The Group uses EEV methodology to value individual and group life assurance, pensions and annuity business written in
the UK, Continental Europe and the US and within our UK managed pension funds company.
From 2007, all shareholder assets held within Legal & General Assurance Society Limited (Society) and Legal & General
Pensions Limited (LGPL) have been allocated to covered business.
All other businesses are accounted for on the IFRS basis adopted in the primary financial statements.
There is no distinction made between insurance and investment contracts in our life and pensions businesses as there is
under IFRS.
Description of methodology
--------------------------
The objective of EEV is to provide shareholders with realistic information on the financial position and current
performance of the Group.
The methodology requires assets of an insurance company, as reported in the primary financial statements, to be
attributed between those supporting the covered business and the remainder. The method accounts for assets in the
covered business on an EEV basis and the remainder of the Group's assets on the IFRS basis adopted in the primary
financial statements.
The EEV methodology recognises as profit from the covered business the total of:
i. cash transfers during the relevant period from the covered business to the remainder of the Group's assets; and
ii. the movement in the present value of future distributable profits to shareholders arising from the covered
business over the relevant reporting period.
Embedded value
--------------
Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the shareholders'
equity of other businesses, less the value included for purchased interests in long term business.
The embedded value is the sum of the shareholder net worth (SNW) and the value of the in-force business (VIF). SNW is
defined as those amounts, within covered business (both within the long term fund and held outside the long term fund
but used to support long term business), which are regarded either as required capital or which represent free surplus.
The VIF is the present value of future shareholder profits arising from the covered business, projected using best
estimate assumptions, less an appropriate deduction for the cost of holding the required level of capital and the time
value of financial options and guarantees (FOGs).
Service companies
-----------------
All services relating to the UK life and pensions business are charged on a cost recovery basis, with the exception of
investment management services provided to LGPL, which have been charged at market referenced rates since
1 January 2007, and to Society, which have been charged at market referenced rates from 1 July 2007. Profits arising on
the provision of these services are valued on a 'look through' basis.
As the EEV methodology incorporates the future capitalised cost of these internal investment management services, the
equivalent IFRS profits have been removed from the Investment management segment and are instead included in the
results of the UK life and pensions segment on an EEV basis.
The capitalised value of future profits emerging from internal investment management services are therefore included in
the embedded value and new business contribution calculations for the UK life and pensions segment. However, the
historical profits which have emerged continue to be reported in the shareholders' equity of the Investment management
segment on an IFRS basis. Since the look through into service companies includes only future profits and losses, current
intra-group profits or losses must be eliminated from the closing embedded value and in order to reconcile the profits
arising in the financial period within each segment with the net assets on the opening and closing balance sheet, a
transfer of IFRS profits for the period from the UK life and pensions SNW is deemed to occur.
New business
------------
New business premiums reflect income arising from the sale of new contracts during the reporting period and any changes
to existing contracts, which were not anticipated at the outset of the contract.
In-force business comprises previously written single premium, regular premium and recurrent single premium contracts.
========================================================================================================================
Page 67
IV European Embedded Value Methodology (continued)
--------------------------------------------------
Department of Work and Pensions rebates have not been treated as recurrent and are included in single premium new
business when received.
New business contribution arising from the new business premiums written during the reporting period has been calculated
on the same economic and operating assumptions used in the embedded value at the end of the financial period. This
has then been rolled forward to the end of the financial period using the risk discount rate applicable at the end of
the reporting period.
The present value of future new business premiums (PVNBP) has been calculated and expressed at the point of sale. The
PVNBP is equivalent to the total single premiums plus the discounted value of regular premiums expected to be received
over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end
of the financial period. The new business margin is defined as new business contribution at the end of the reporting
period divided by the PVNBP. The premium volumes and projection assumptions used to calculate the PVNBP are the same as
those used to calculate new business contribution.
Projection assumptions
----------------------
Cash flow projections are determined using realistic assumptions for each component of cash flow and for each policy
group. Future economic and investment return assumptions are based on conditions at the end of the financial year.
Future investment returns are projected by one of two methods. The first method is based on an assumed investment return
attributed to assets at their market value. The second, which is used in the US, where the investments of that
subsidiary are substantially all fixed interest, projects the cash flows from the current portfolio of assets and
assumes an investment return on reinvestment of surplus cash flows. The assumed discount and inflation rates are
consistent with the investment return assumptions.
Detailed projection assumptions including mortality, persistency, morbidity and expenses reflect recent operating
experience and are reviewed annually. Allowance is made for future improvements in annuitant mortality based on
experience and externally published data. Favourable changes in operating experience are not anticipated until the
improvement in experience has been observed.
All costs relating to the covered business, whether incurred in the covered business or elsewhere in the Group, are
allocated to that business. The expense assumptions used for the cash flow projections therefore include the full cost
of servicing this business.
Tax
---
The projections take into account all tax which is expected to be paid, based on best estimate assumptions, applying
current legislation and practice together with known or expected future changes. This includes tax which would arise if
surplus assets within the covered business were eventually to be distributed. The future benefit of certain current UK
tax rules on the apportionment of income has not been reflected. It is expected that these rules will be amended
as part of the current consultation on life assurance taxation, such that the benefit is not expected to be realised.
Allowance for risk
------------------
Aggregate risks within the covered business are allowed for through the following principal mechanisms:
i. setting required capital levels with reference to both the Group's internal risk based capital models, and an
assessment of the strength of regulatory reserves in the covered business;
ii. allowing explicitly for the time value of financial options and guarantees within the Group's products; and
iii. setting risk discount rates by deriving a Group level risk margin to be applied consistently to local risk
free rates.
Required capital and free surplus
---------------------------------
Regulatory capital for UK life and pensions business is provided by assets backing the with-profits business or by the
SNW. The SNW comprises all shareholders' capital within Society, including those funds retained within the long term
fund and the excess assets in LGPL (collectively Society Shareholder Capital).
Society Shareholder Capital is either required to cover EU solvency margin or is free surplus as its distribution to
shareholders is not restricted.
For UK with-profits business, the required capital is covered by the surplus within the with-profits part of the fund
and no effect is attributed to shareholders except for the burn-through cost, which is described later. This treatment
is consistent with the Principles and Practices of Financial Management for this part of the fund.
For UK non profit business, the required capital will be maintained at no less than the level of the EU minimum solvency
requirement. This level, together with the margins for adverse deviation in the regulatory reserves, is, in aggregate,
in excess of internal capital targets assessed in conjunction with the Individual Capital Assessment (ICA) and the
with-profits support account.
The initial strains relating to new non profit business, together with the related EU solvency margin, are supported by
releases from existing non profit business and the Society Shareholder Capital. As a consequence, the writing of
new business defers the release of capital to free surplus. The cost of holding required capital is defined as the
difference between the value of the required capital and the present value of future releases of that capital. For new
business, the cost of capital is taken as the difference in the value of that capital assuming it was available for
release immediately and the present value of the future releases of that capital. As the investment return, net of tax,
on that capital is less than the risk discount rate, there is a resulting cost of capital which is reflected in the
value of new business.
========================================================================================================================
Page 68
IV European Embedded Value Methodology (continued)
--------------------------------------------------
For our UK managed pension funds business, management's capital policy has been used to set the level of required
capital. The balance of net assets within the UK managed funds business is treated as free surplus.
For Legal & General America, the Company Action Level (CAL) of capital has been treated as required capital for
modelling purposes. The CAL is the regulatory capital level at which the company would have to take prescribed action,
such as submission of plans to the State insurance regulator, but would be able to continue operating on the existing
basis. The CAL is currently twice the level of capital at which the regulator is permitted to take control of the
business.
For Legal & General Netherlands, 100% of EU minimum solvency margin has been used for all EV modelling purposes for all
products both with and without FOGs. The level of capital has been determined using risk based capital techniques.
For Legal & General France, 100% of EU minimum solvency margin has been used for EV modelling purposes for all products
both with and without FOGs. The level of capital has been determined using risk based capital techniques.
The contribution from new business for our International businesses reflects an appropriate allowance for the cost of
holding the required capital.
Financial options and guarantees
--------------------------------
In the UK, all financial options and guarantees (FOGs) are within the UK life and pensions business.
Under the EEV Principles an allowance for time value of FOGs is required where a financial option exists which is
exercisable at the discretion of the policyholder. These types of option principally arise within the with-profits
part of the fund and their time value is recognised within the with-profits burn-through cost described below.
Additional financial options for non profit business exist only for a small amount of deferred annuity business where
guaranteed early retirement and cash commutation terms apply when the policyholders choose their actual retirement date.
Further financial guarantees exist for non profit business, in relation to index-linked annuities where capped or
collared restrictions apply. Due to the nature of these restrictions and the manner in which they vary depending on the
prevailing inflation conditions, they are also treated as FOGs and a time value cost recognised accordingly.
The time value of FOGs has been calculated stochastically using a large number of real world economic scenarios derived
from assumptions consistent with the deterministic EEV assumptions and allowing for appropriate management actions
where applicable. The management action primarily relates to the setting of bonus rates. Future regular and terminal
bonuses on participating business within the projections are set in a manner consistent with expected future returns
available on assets deemed to back the policies within the stochastic scenarios.
In recognising the residual value of any projected surplus assets within the with-profits part of the fund in the
deterministic projection, it is assumed that terminal bonuses are increased to exhaust all of the assets in the part of
the fund over the future lifetime of the in-force with-profits policies. However, under stochastic modelling, there may
be some extreme economic scenarios when the total projected assets within the with-profits part of the fund are
insufficient to pay all projected policyholder claims and associated costs. The average additional shareholder cost
arising from this shortfall has been included in the time value cost of options and guarantees and is referred to as the
with-profits burn-through cost.
Economic scenarios have been used to assess the time value of the financial guarantees for non profit business by using
the inflation rate generated in each scenario. The inflation rate used to project index-linked annuities will be
constrained in certain real world scenarios, for example, where negative inflation occurs but the annuity payments do
not reduce below pre-existing levels. The time value cost of FOGs allows for the projected average cost of these
constrained payments for the index-linked annuities. It also allows for the small additional cost of the guaranteed
early retirement and cash commutation terms for the minority of deferred annuity business where such guarantees have
been written.
In the US, FOGs relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The
guaranteed surrender value of the contract is based on the accumulated value of the contract including accrued interest.
The crediting rates are discretionary but related to the accounting income for the amortising bond portfolio. The
majority of the guaranteed minimum crediting rates are between 4% and 5%. The assets backing these contracts are
invested in US dollar denominated fixed interest securities.
In the Netherlands, there are two types of guarantees which have been separately provided for: interest rate guarantees
and maturity guarantees. Certain contracts provide an interest rate guarantee where there is a minimum crediting
rate based on the higher of 1-year Euribor and the policy guarantee rate. This guarantee applies on a monthly basis.
Certain unit linked contracts provide a guaranteed minimum value at maturity where the maturity amount is the higher of
the fund value and a guarantee amount. The fund values for both these contracts are invested in Euro denominated fixed
interest securities.
========================================================================================================================
Page 69
IV European Embedded Value Methodology (continued)
--------------------------------------------------
In France, FOGs which have been separately provided for relate to guaranteed minimum crediting rates and surrender
values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the
contract including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios
plus income and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed
surrender values. Local statutory accounting rules require the establishment of a specific liability when the accounting
income for a company is less than 125% of the guaranteed minimum credited returns, although this has never been
required. In general, the guaranteed annual bonus rates are between 0% and 4.5%.
Risk discount rate
------------------
The risk discount rate (RDR) is a combination of the risk free rate and a risk margin, which reflects the residual
risks inherent in the Group's covered businesses, after taking account of prudential margins in the statutory
provisions, the required capital and the specific allowance for FOGs.
The risk margin has been determined based on an assessment of the Group's weighted average cost of capital (WACC).
This assessment incorporates a beta for the Group, which measures the correlation of movements in the Group's share
price to movements in a relevant index. Beta values therefore allow for the market's assessment of the risks inherent
in the business relative to other companies in the chosen index.
The WACC is derived from the Group's cost of equity and debt, and the proportion of equity to debt in the Group's
capital structure measured using market values. Each of these three parameters should be forward looking, although
informed by historic information. The cost of equity is calculated as the risk free rate plus the equity risk premium
for the chosen index multiplied by the Company's beta. Forward-looking or adjusted betas make allowance for the
observed tendency for betas to revert to 1 and therefore a weighted average of the historic beta and 1 tends to be a
better estimate of the Company's beta for the future period. We have computed the WACC using an arithmetical average of
forward-looking betas against the FTSE 100 index.
The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and
subordinated long term debt. All debt interest attracts tax relief at a rate of 28%.
Whilst the WACC approach is a relatively simple and transparent calculation to apply, subjectivity remains within a
number of the assumptions. Management believes that the chosen margin, together with the levels of required capital,
the inherent strength of the Group's regulatory reserves and the explicit deduction for the cost of options and
guarantees, is appropriate to reflect the risks within the covered business. For these results the risk margin has been
maintained at 3.0%.
A similar approach will be adopted when risk margins are reassessed in future periods.
Key assumptions are summarised below:
Risk free rate Derived from gross redemption yields on relevant gilt portfolio
Equity risk premium 3.0% (UK only)
Property risk premium 2.0% (UK only)
Risk margin 3.0%
Analysis of profit
------------------
Operating profit is identified at a level which reflects an assumed longer term level of investment return.
The contribution to operating profit in a period is attributed to four sources:
i. new business;
ii. the management of in-force business;
iii. development costs; and
iv. return on shareholder net worth.
Further profit contributions arise from actual investment return differing from the assumed long term investment return
(investment return variances), and from the effect of economic assumption changes.
The contribution from new business represents the value recognised at the end of each period from new business written
in that period, after allowing for the actual cost of acquiring the business and of establishing the required technical
provisions and reserves and after making allowance for the cost of capital. New business contributions are calculated
using closing assumptions.
========================================================================================================================
Page 70
IV European Embedded Value Methodology (continued)
--------------------------------------------------
The contribution from in-force business is calculated using opening assumptions and comprises:
i. expected return - the discount earned from the value of business in-force at the start of the year;
ii. experience variances - the variance in the actual experience over the reporting period from that assumed in
the value of business in-force as at the start of the year; and
iii. operating assumption changes - the effects of changes in future assumptions, other than changes in economic
assumptions from those used in valuing the business at the start of the year. These changes are made
prospectively from the end of the year.
Development costs are associated with investment in building a new enterprise or exceptional development activity over
a defined period.
The contribution from shareholder net worth comprises the increase in embedded value based on assumptions at the start
of the year in respect of :
i. encumbered assets within the covered business - principally the unwind of the discount rate; and
ii. other assets - the expected investment return.
Further profit contributions arise from actual investment returns differing from the assumed long term investment
returns (investment return variances) and from the effect of economic assumption changes.
Investment return variances represent the effect of actual investment performance and changes to investment policy on
shareholder net worth and in-force business from that assumed at the beginning of the period.
Economic assumption changes comprise the effect of changes in economic variables on shareholder net worth and in-force
business from that assumed at the beginning of the period, which are beyond the control of management, including
associated changes to valuation bases to the extent that they are reflected in revised assumptions.
V IFRS basis of preparation
---------------------------
Basis of preparation
--------------------
The Group's financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRS) issued by the International Accounting Standards Board (IASB) and as adopted by the European Commission (EC)
for use in the European Union. The Group's financial statements also comply with IFRS as issued by the IASB.
The Group presents its balance sheet broadly in order of liquidity. Given the long term nature of the Group's core
business, this is considered to be more relevant than a presentation that distinguishes between before or after twelve
months. However, for each asset and liability line item which combines amounts expected to be recovered or settled
before and after twelve months from the balance sheet date, disclosure of the split is made by way of note.
Financial assets and financial liabilities are disclosed gross in the balance sheet unless a legally enforceable right
of offset exists and there is an intention to settle recognised amounts on a net basis. Income and expenses are not
offset in the income statement unless required or permitted by any accounting standard or International Financial
Reporting Interpretations Committee (IFRIC) interpretation, as detailed in the applicable accounting policies of the
Group.
Use of estimates
----------------
The preparation of the financial statements includes the use of estimates and assumptions which affect items reported
in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the
date of the financial statements. Although these estimates are based on management's best knowledge of current
circumstances and future events and actions, actual results may differ from those estimates, possibly significantly.
They are particularly relevant to the estimation of insurance and investment contract liabilities and associated
balances, deferred acquisition costs, pension schemes, deferred tax liabilities and the determination of fair values
of unquoted financial investments.
Summary of significant accounting policies
------------------------------------------
The Group has selected accounting policies which fairly state its financial position and financial performance for a
reporting period. The accounting policies have been consistently applied to all years presented, unless otherwise
stated.
=======================================================================================================================
This information is provided by RNS
The company news service from the London Stock Exchange
Latest directors dealings
- 23 hours ago Savannah Energy
- 1 day ago Buccaneer Energy PLC
- 1 day ago Savannah Energy
- 1 day ago Carclo
- 1 day ago Schroder Japan Growth Fund