L&G FY 2005 Results Part 4
Legal & General Group PLC
17 March 2006
Part 4
International Financial Reporting Standards
===========================================
Operating profit income statement
---------------------------------
Year ended 31 December 2005
2005 2004
Restated
Notes £m £m
----------------------------------------------------------------------------------------------------------------------
From continuing operations
Life and pensions 4.2 489 477
Investment management 4.3 103 73
General insurance 4.4 14 32
Other operational income 4.5 41 35
----------------------------------------------------------------------------------------------------------------------
Operating profit 647 617
Variation from longer term investment return 4.6 139 48
Shareholder retained capital (SRC) movement 4.7 516 (20)
Property income attributable to minority interests 81 32
----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before income tax attributable to equity holders 1,383 677
Tax 4.8 (371) (187)
----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 1,012 490
Profit from discontinued operations 4.9 13 5
----------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after tax 1,025 495
Profit attributable to minority interests 4.17 (81) (32)
----------------------------------------------------------------------------------------------------------------------
Profit attributable to equity holders of the company 944 463
======================================================================================================================
p p
----------------------------------------------------------------------------------------------------------------------
Earnings per share 4.10
Based on operating profit from continuing operations after tax 7.04 6.79
Based on profit attributable to ordinary equity holders 14.33 6.96
Diluted earnings per share 4.10
Based on operating profit from continuing operations after tax 7.00 6.71
Based on profit attributable to ordinary equity holders 13.95 6.87
======================================================================================================================
For UK long term insurance business, operating profit is the accrued distributable transfer from the UK Long Term Fund
(LTF) to shareholders, grossed up at the corporate tax rate. For non profit business, it is augmented by the interest
paid on the intra-group subordinated debt capital included within the SRC. Operating profit includes a longer term
investment return on shareholders', general insurance and Netherland's funds held outside the UK LTF. It excludes
investment variances and the change in the SRC. The income statement comprises returns to shareholders and excludes
policyholders' returns. This supplementary 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.
Consolidated income statement
-----------------------------
Year ended 31 December 2005
2005 2004
Restated
Notes £m £m
----------------------------------------------------------------------------------------------------------------------
Revenue
Gross written premiums 4.11 4,084 3,714
Outward reinsurance premiums (406) (356)
Net change in provision for unearned premiums (6) (9)
----------------------------------------------------------------------------------------------------------------------
Net premiums earned 3,672 3,349
Fees from fund management and investment contracts 348 296
Investment return 26,931 13,590
Operational income 38 4
----------------------------------------------------------------------------------------------------------------------
Total revenue 30,989 17,239
----------------------------------------------------------------------------------------------------------------------
Expenses
Claims and change in insurance liabilities 6,367 4,298
Reinsurance recoveries 19 (17)
----------------------------------------------------------------------------------------------------------------------
Net claims and change in insurance liabilities 6,386 4,281
Change in provisions for investment contract liabilities 21,369 9,789
Acquisition costs 550 788
Finance costs 116 97
Other expenses 619 531
Transfers to unallocated divisible surplus 360 964
----------------------------------------------------------------------------------------------------------------------
Total expenses 29,400 16,450
----------------------------------------------------------------------------------------------------------------------
Profit before income tax 1,589 789
Income tax attributable to policyholder returns (206) (116)
----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before income tax attributable to equity holders 1,383 673
---------- ----------
Total income tax expense : (577): : (303):
Less income tax attributable to policyholder returns : 206 : : 116 :
---------- ----------
Income tax attributable to equity holders (371) (187)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after income tax 1,012 486
Profit from discontinued operations 13 9
----------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after income tax 1,025 495
======================================================================================================================
Attributable to:
Minority interests 81 32
Equity holders of the company 944 463
======================================================================================================================
Dividend distributions to ordinary equity holders of the company during the year 331 321
Distributions during the year on subordinated borrowings designated as equity 16 12
Dividend distributions to ordinary equity holders of the company proposed after the year end 236 224
======================================================================================================================
p p
----------------------------------------------------------------------------------------------------------------------
Earnings per share
Based on profit from continuing operations after income tax attributable to ordinary equity holders 14.13 6.82
Diluted earnings per share
Based on profit from continuing operations after income tax attributable to ordinary equity holders 13.76 6.74
======================================================================================================================
Consolidated balance sheet
--------------------------
As at 31 December 2005
At 31.12.05 At 31.12.04
Restated
Notes £m £m
----------------------------------------------------------------------------------------------------------------------
Assets
Investment in associates 16 -
Plant and equipment 32 23
Investment property 5,774 4,903
Financial investments 4.14 176,622 139,866
Reinsurers' share of contract liabilities 2,779 2,977
Purchased interests in long term business 25 24
Deferred acquisition costs 1,375 1,072
Income tax recoverable 79 20
Other debtors 1,162 996
Non-current assets held for sale - 733
Cash and cash equivalents 4,001 2,992
----------------------------------------------------------------------------------------------------------------------
Total assets 191,865 153,606
======================================================================================================================
Equity
Share capital 163 163
Share premium account 908 907
Treasury shares (36) (27)
Other reserves 34 38
Retained earnings 3,188 2,594
----------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to ordinary equity holders of the company 4.15 4,257 3,675
Subordinated borrowings designated as equity 4.16 394 394
----------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to equity holders of the company 4,651 4,069
Minority interests 4.17 285 214
----------------------------------------------------------------------------------------------------------------------
Total equity 4.18 4,936 4,283
======================================================================================================================
Liabilities
Subordinated borrowings 4.16 415 -
---------- ----------
Participating insurance contracts 4.19 : 13,180 : : 12,388 :
Participating investment contracts 4.20 : 7,476 : : 6,863 :
Unallocated divisible surplus : 1,894 : : 1,559 :
Value of in-force non-participating contracts : (379): : (434):
---------- ----------
Participating contract liabilities 22,171 20,376
---------- ----------
Non-participating insurance contracts 4.19 : 23,152 : : 20,912 :
Non-participating investment contracts 4.20 :135,804 : :103,281 :
---------- ----------
Non-participating contract liabilities 158,956 124,193
Senior borrowings 4.16 1,634 1,446
Provisions 582 503
Deferred income liabilities 351 238
Deferred tax liabilities 492 295
Income tax liabilities 197 79
Other creditors 1,303 984
Net asset value attributable to unitholders 828 575
Non-current liabilities held for sale - 634
----------------------------------------------------------------------------------------------------------------------
Total liabilities 186,929 149,323
----------------------------------------------------------------------------------------------------------------------
Total equity and liabilities 191,865 153,606
======================================================================================================================
Consolidated statement of recognised income and expense
-------------------------------------------------------
Year ended 31 December 2005
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
Exchange differences on translation of overseas operations 20 (8)
Actuarial losses on defined benefit pension scheme (55) (43)
Actuarial losses on defined benefit pension scheme transferred to unallocated divisible surplus 22 17
Net change in financial investments designated as available-for-sale (10) (2)
----------------------------------------------------------------------------------------------------------------------
Net expense recognised directly in equity (23) (36)
Profit from ordinary activities after income tax 1,025 495
----------------------------------------------------------------------------------------------------------------------
Total recognised income and expense for the year 1,002 459
======================================================================================================================
Attributable to:
Minority interests 81 32
Equity holders of the company 921 427
======================================================================================================================
Consolidated cashflow statement
-------------------------------
Year ended 31 December 2005
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
Cashflows from operating activities
Profit from ordinary activities after income tax 1,025 495
Adjustments for non cash movements in net profit for the period:
Realised and unrealised gains on financial investments and investment properties (20,962) (8,732)
Investment income (5,646) (4,531)
Interest expense 116 97
Income tax payable 577 303
Other adjustments 40 28
Net (increase)/decrease in operational assets:
Investments designated as held for trading or fair value through profit or loss (16,519) (17,591)
Investments designated as available-for-sale 86 (147)
Other assets (294) 98
Net increase/(decrease) in operational liabilities:
Insurance contracts 3,071 2,256
Transfer to unallocated divisible surplus 338 141
Investment contracts 33,173 24,102
Value of in-force non-participating contracts 55 (434)
Other liabilities 536 183
----------------------------------------------------------------------------------------------------------------------
Cash used in operations (4,404) (3,732)
Interest paid (96) (74)
Interest received 2,967 2,467
Income tax paid (240) (94)
Dividends received 2,576 1,925
----------------------------------------------------------------------------------------------------------------------
Net cashflows from operating activities 803 492
======================================================================================================================
Cashflows from investing activities
Net acquisition of plant and equipment (22) (11)
Net proceeds from disposal of Ventures 23 -
Net proceeds from disposal of Gresham 73 -
Non-financial investments purchased (19) -
----------------------------------------------------------------------------------------------------------------------
Net cashflows from investing activities 55 (11)
======================================================================================================================
Cashflows from financing activities
Dividend distributions to ordinary equity holders of the company during the year (331) (321)
Distributions during the year on subordinated borrowings designated as equity (16) (12)
Proceeds from issue of ordinary share capital 1 1
Purchase of treasury shares (15) (1)
Proceeds from borrowings designated as equity - 394
Proceeds from borrowings 764 342
Repayment of borrowings (257) (358)
Other (1) (5)
----------------------------------------------------------------------------------------------------------------------
Net cashflows from financing activities 145 40
======================================================================================================================
Net increase in cash and cash equivalents 1,003 521
Exchange gains/(losses) on cash and cash equivalents 6 (2)
Cash and cash equivalents at 1 January 2,992 2,473
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at 31 December 4,001 2,992
======================================================================================================================
Under IFRS, the Group's consolidated cashflow statement includes all cash and cash equivalent flows, including those
relating to the UK Long Term Fund.
Notes to the Financial Statements
---------------------------------
4.1 Restatement of 2004 comparatives
--------------------------------------
The 2004 comparatives have been restated for the following items:
1. After the 2004 Full Year Results were restated under International Financial Reporting Standards, the interpretation
of provisions within IAS 32, 'Financial Instruments: Disclosure and Presentation', has required the £400m 5.875%
undated subordinated notes to be classified as equity, rather than as a liability. The change in classification has
resulted in an increase in reported profit after tax for 2004 of £12m, due to the corresponding reclassification of
interest payments as distributions and an increase in total equity of £398m.
2. The adjustment of £49m to transfer Gresham discontinued expenses from other expenses to acquisition costs.
3. The Netherlands operating profit is affected by various mismatches between asset and liability valuations. An
adjustment to partially smooth the investment return fluctuations has been made to the Netherlands operating profit.
This reduces the 2004 operating profit by £11m and increases the variation from longer term investment return by the
same amount.
4. The results of Retail investments and Institutional fund management have been combined to create a new segment called
Investment management. The Retail investments operating profit of £4m in 2004 has been reclassified from Other
operational income and included in Investment management.
5. There has been no impact on the financial statements of the Group's early adoption of the amendment to IAS 39 on the
use of the fair value option.
4.2 Life and pensions operating profit
----------------------------------------
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
With-profits business 66 67
----------------------------------------------------------------------------------------------------------------------
Distribution relating to non profit and shareholder net worth 312 287
Subordinated debt interest 37 37
----------------------------------------------------------------------------------------------------------------------
Non profit business 349 324
----------------------------------------------------------------------------------------------------------------------
UK 415 391
USA 52 58
Netherlands 18 28
France 4 -
----------------------------------------------------------------------------------------------------------------------
489 477
======================================================================================================================
4.3 Investment management operating profit
--------------------------------------------
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
Managed pension funds 74 51
Ventures 4 4
Property 4 3
Retail investments 7 4
Other external income 5 3
Other income 9 8
----------------------------------------------------------------------------------------------------------------------
103 73
======================================================================================================================
4.4 General insurance operating profit, underwriting result and combined operating ratios
-------------------------------------------------------------------------------------------
2005 2005 2005 2004 2004 2004
Operating Underwriting Combined Operating Underwriting Combined
profit result operating profit result operating
ratio ratio
£m £m % £m £m %
----------------------------------------------------------------------------------------------------------------------
From continuing operations
Household 7 (6) 101% 22 10 93%
Other business 7 1 101% 10 5 96%
----------------------------------------------------------------------------------------------------------------------
14 (5) 101% 32 15 94%
======================================================================================================================
The combined operating ratio is:
--- ---
| Net incurred claims Expenses + Net commission |
|---------------------- + ----------------------------| x 100
| Net earned premiums Net written premiums |
--- ---
4.5 Other operational income
------------------------------
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
Shareholders' other income
Investment return on ordinary shareholders' equity 127 109
Interest expense (75) (57)
----------------------------------------------------------------------------------------------------------------------
52 52
Other operations(1) (5) (4)
Unallocated corporate and development expenses (6) (13)
----------------------------------------------------------------------------------------------------------------------
41 35
======================================================================================================================
1. Principally start up costs arising on the regulated mortgage network.
4.6 Variation from longer term investment return
--------------------------------------------------
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
Netherlands 10 11
General insurance 8 (3)
Other operational income 121 40
----------------------------------------------------------------------------------------------------------------------
139 48
======================================================================================================================
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.
4.7 Shareholder retained capital (SRC) movement
-------------------------------------------------
2005 2004
Notes £m £m
----------------------------------------------------------------------------------------------------------------------
Investment income 67 60
Interest expense and charges (3) (2)
Realised investment gains 191 100
Unrealised investment gains 132 51
----------------------------------------------------------------------------------------------------------------------
Investment return on SRC 387 209
Net capital released from non profit business 5.3 478 95
Distribution of operating profit from non profit business (349) (324)
----------------------------------------------------------------------------------------------------------------------
SRC movement before tax 516 (20)
----------------------------------------------------------------------------------------------------------------------
SRC at 1 January 2,196 2,214
SRC movement before tax 516 (20)
Tax (charge)/credit (148) 19
SRC movement included in total recognised income and expense (4) (17)
----------------------------------------------------------------------------------------------------------------------
SRC at end of period 2,560 2,196
======================================================================================================================
SRC includes intra-group subordinated debt capital of £602m.
Further analysis is given in note 5.3
4.8 Analysis of tax
---------------------
2005 2005 2004 2004
Restated Restated
Profit Tax Profit/(loss) Tax
before tax before tax
£m £m £m £m
----------------------------------------------------------------------------------------------------------------------
From continuing operations
UK life and pensions 415 (125) 391 (117)
International life and pensions 74 (25) 86 (29)
----------------------------------------------------------------------------------------------------------------------
489 (150) 477 (146)
Investment management 103 (32) 73 (22)
General insurance 14 (4) 32 (9)
Other operational income 41 (5) 35 -
----------------------------------------------------------------------------------------------------------------------
Operating profit 647 (191) 617 (177)
Variation from longer term investment return 139 (32) 48 (29)
SRC movement 516 (148) (20) 19
Property income attributable to minorities 81 - 32 -
----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax / Tax 1,383 (371) 677 (187)
======================================================================================================================
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.
No deferred tax is provided at the incremental rate on the undeclared surplus in the UK Long Term Fund represented by
the SRC on the grounds that, at the balance sheet date, no obligation to make a declaration of surplus actually exists
and there is no expectation that such a declaration will occur. The maximum amount of incremental tax which would
crystallise on such a declaration of surplus is estimated to be £509m (2004: £619m).
4.9 Profit from discontinued operations
-----------------------------------------
Gresham Insurance Company Limited
On 31 March 2005, the Group sold its 90% stake in its subsidiary Gresham to Barclays Bank Plc for a consideration of
£85m, of which £4m was paid in dividends by Gresham and the remainder in cash by Barclays. The transaction resulted in
an exceptional profit before tax of £15m (£15m after tax).
2005 2004
£m £m
----------------------------------------------------------------------------------------------------------------------
Post tax result from discontinued operations to 31 March 2005 (2) 5
Gain on disposal 15 -
----------------------------------------------------------------------------------------------------------------------
13 5
======================================================================================================================
4.10 Earnings per share
-------------------------
(a) Basic earnings per share
2005 2005 2005 2005 2004 2004 2004 2004
Restated Restated Restated Restated
Profit Tax Profit Per Profit Tax Profit Per
before (charge)/ /(loss) share /(loss) (charge)/ /(loss) share
tax credit after tax before tax credit after tax
£m £m £m p £m £m £m p
----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations 647 (191) 456 7.04 617 (177) 440 6.79
Variation from longer term investment
return 139 (32) 107 1.66 48 (29) 19 0.30
Change in SRC 516 (148) 368 5.68 (20) 19 (1) (0.02)
Profit from discontinued operations 12 1 13 0.20 7 (2) 5 0.08
Distributions on subordinated
borrowings designated as equity (16) (0.25) (12) (0.19)
----------------------------------------------------------------------------------------------------------------------
Basic earnings per share 1,314 (370) 928 14.33 652 (189) 451 6.96
======================================================================================================================
(b) Diluted earnings per share
Based on operating profit from continuing operations after tax
2005 2005 2005 2004 2004 2004
Restated Restated
Profit Weighted Per Profit Weighted Per
after average share after average share
tax number tax number
of shares of shares
£m m p £m m p
----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations 456 6,474 7.04 440 6,479 6.79
Net shares under options allocable for no
further consideration - 38 (0.04) - 33 (0.03)
Convertible bonds outstanding 20 285 - 16 285 (0.05)
----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 476 6,797 7.00 456 6,797 6.71
======================================================================================================================
Based on profit attributable to ordinary equity holders
2005 2005 2005 2004 2004 2004
Profit Weighted Per Profit Weighted Per
after average share after average share
tax number tax number
of shares of shares
£m m p £m m p
----------------------------------------------------------------------------------------------------------------------
Profit attributable to ordinary equity
holders of the company 928 6,474 14.33 451 6,479 6.96
Net shares under options allocable for no
further consideration - 38 (0.08) - 33 (0.03)
Convertible bonds outstanding 20 285 (0.30) 16 285 (0.06)
----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 948 6,797 13.95 467 6,797 6.87
======================================================================================================================
4.11 Analysis of gross written premiums
-----------------------------------------
2005 2004
£m £m
----------------------------------------------------------------------------------------------------------------------
From continuing operations
Life and pensions participating business 485 686
Life and pensions non-participating business 2,428 2,010
----------------------------------------------------------------------------------------------------------------------
Total UK life and pensions 2,913 2,696
USA 329 308
Netherlands 243 182
France 265 204
----------------------------------------------------------------------------------------------------------------------
Total life and pensions 3,750 3,390
General insurance business
Household 234 222
Other business 100 102
----------------------------------------------------------------------------------------------------------------------
Total general insurance 334 324
----------------------------------------------------------------------------------------------------------------------
Total gross written premiums 4,084 3,714
======================================================================================================================
4.12 Segmental analysis
-------------------------
(a) By business segments
The Group is organised into three main business segments:
- Long term business
- General insurance
- Investment management
Other operations comprise Shareholders' assets, Estate agencies, regulated mortgage network and corporate expenses,
none of which constitute a separately reportable segment.
(i) Income statement analysed by business segments (primary disclosures)
Long term Investment General Other Elimination Total
business manage- insurance operations of inter
ment segment
amounts
Year ended 31 December 2005 £m £m £m £m £m £m
----------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 11,512 18,833 328 559 (243) 30,989
Total expenses from continuing operations 10,373 18,724 311 235 (243) 29,400
Profit from continuing operations after
income tax 650 71 13 278 - 1,012
Profit from discontinued operations - - 13 - - 13
======================================================================================================================
Inter segment revenue - (59) (2) (182) 243 -
======================================================================================================================
Depreciation expense incurred during the year 13 1 - - - 14
======================================================================================================================
Year ended 31 December 2004 (Restated)
----------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 7,907 8,905 307 229 (109) 17,239
Total expenses from continuing operations 7,439 8,795 272 53 (109) 16,450
Profit from continuing operations after
income tax 270 50 25 141 - 486
Profit from discontinued operations 4 - 5 - - 9
======================================================================================================================
Inter segment revenue - (55) (1) (53) 109 -
======================================================================================================================
Depreciation expense incurred during the year 10 1 - - - 11
======================================================================================================================
(ii) Balance sheet analysed by business segments (primary disclosures)
Long term Investment General Other Elimination Total
business manage- insurance operations of inter
ment segment
amounts
As at 31 December 2005 £m £m £m £m £m £m
----------------------------------------------------------------------------------------------------------------------
Total assets 65,146 123,304 516 4,676 (1,777) 191,865
Total liabilities 62,901 122,622 351 2,832 (1,777) 186,929
Total equity 2,245 682 165 1,844 - 4,936
Plant and equipment acquired during the year 21 2 1 - - 24
======================================================================================================================
As at 31 December 2004 (Restated)
----------------------------------------------------------------------------------------------------------------------
Total assets 56,130 94,894 732 3,361 (1,511) 153,606
Total liabilities 54,080 94,216 477 2,061 (1,511) 149,323
Total equity 2,050 678 255 1,300 - 4,283
Plant and equipment acquired during the year 10 1 - - - 11
======================================================================================================================
(b) By geographic segments
UK USA Netherlands France Elimination Total
of inter
segment
amounts
31 December 2005 £m £m £m £m £m £m
----------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 29,918 321 362 388 - 30,989
Segment assets 186,936 2,016 1,269 1,663 (19) 191,865
Plant and equipment acquired during the year 23 - 1 - - 24
======================================================================================================================
31 December 2004 (Restated)
----------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 16,423 260 259 297 - 17,239
Segment assets 149,363 1,756 1,048 1,458 (19) 153,606
Plant and equipment acquired during the year 11 - - - - 11
======================================================================================================================
4.13 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 and contributions to
such schemes. At 31 December 2005 the combined after tax deficit of these arrangements (net of annuity obligations) has
been estimated at £148m (2004: £109m). These amounts have been recognised in the financial statements with £88m charged
against shareholder equity (2004: £65m) and £60m against the unallocated divisible surplus (2004: £44m).
4.14 Financial investments
----------------------------
2005 2004
£m £m
----------------------------------------------------------------------------------------------------------------------
Equities 99,277 78,322
Unit trusts 2,941 1,875
Debt securities 72,941 58,604
Accrued interest 887 753
Derivative assets 30 23
Loans and receivables 546 289
----------------------------------------------------------------------------------------------------------------------
176,622 139,866
======================================================================================================================
4.15 Segmental analysis of ordinary shareholders' equity
----------------------------------------------------------
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
SRC(1) 2,560 2,196
Society shareholder capital(2) 1,896 1,973
----------------------------------------------------------------------------------------------------------------------
4,456 4,169
General insurance 167 247
Netherlands 103 84
France 64 64
----------------------------------------------------------------------------------------------------------------------
Total Society shareholders' equity 4,790 4,564
USA 570 488
Investment management 268 240
Corporate funds(3) (1,371) (1,617)
----------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity 4,257 3,675
======================================================================================================================
1. Includes £602m of intra-group subordinated debt capital attributed to the SRC.
2. Represents surplus capital held outside the UK Long Term Fund, including the rights issue proceeds.
3. Includes the convertible debt of £509m (2004: £493m) and £602m of senior debt which has been on lent to the UK Long
Term Fund.
4.16 Borrowings
-----------------
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
Subordinated borrowings designated as equity
5.875% Sterling undated subordinated notes 394 394
======================================================================================================================
Subordinated borrowings
4.0% Euro subordinated notes 2025 415 -
======================================================================================================================
Senior borrowings
2.75% Sterling convertible bond 2006 509 493
Sterling medium term notes 2031-2041 608 608
Euro commercial paper 2006 110 -
Bank loans 2006 6 2
Non-recourse financing
- US Dollar Triple X securitisation 2025 308 275
- Sterling property partnership loans 2011 93 68
----------------------------------------------------------------------------------------------------------------------
Total senior borrowings 1,634 1,446
======================================================================================================================
Total borrowings 2,443 1,840
======================================================================================================================
Total borrowings (excluding non-recourse financing) 2,042 1,497
======================================================================================================================
£75m of interest expense was incurred during the period (2004: £57m).
The convertible bond matures in 2006 and is convertible into ordinary shares of Legal & General Group Plc at 184p per
share. If converted, this bond would give rise to the issue of 285.3m new ordinary shares, which would represent
approximately 4.4% of the current issued share capital.
In June 2005 Legal & General Group Plc issued €600m of 4% dated subordinated notes. The proceeds were swapped into
sterling and will be used to repay part of the convertible bond which matures in 2006. The notes are callable 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 3 month Euribor plus 1.7% per annum.
In March 2004 Legal & General Group Plc issued £400m of 5.875% undated subordinated notes. These notes are callable on
1 April 2019 and every 5 years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing
5 year benchmark gilt yield plus 2.33% per annum.
Coupon payments on both subordinated issues may be deferred if no dividend is paid on the Group's ordinary shares.
The undated subordinated notes have been classified as equity because their perpetual nature means that in certain
circumstances, interest can be deferred indefinitely.
The Euro dated subordinated notes are treated as lower tier II capital for regulatory purposes and the sterling undated
subordinated notes as upper tier II capital.
In November 2004 a subsidiary of Legal & General America issued US$550m of non-recourse debt in the US domestic capital
markets to meet the Triple X reserve requirements on the US term insurance business. It is secured on the cash flows
related to this business.
The property partnership loans are secured on specific properties.
Of the total borrowings £602m (2004: £602m) is attributed to the SRC.
4.17 Minority interests
-------------------------
In 2005 minority interests represent third party interests in property investment vehicles which are consolidated in the
Group's results. The 2004 minority interests also included interests in venture capital subsidiaries.
4.18 Total equity
-------------------
2005 2004
Restated
£m £m
----------------------------------------------------------------------------------------------------------------------
At 1 January 4,283 3,726
Total recognised income and expense for the year 1,002 459
Issue of ordinary share capital 1 1
Issue of subordinated borrowings designated as equity - 394
Net movements in employee share schemes and treasury shares 7 13
Dividend distributions to ordinary equity holders of the company during the year (331) (321)
Distributions during the year on subordinated borrowings designated as equity (16) (12)
Movements in minority interests including disposals (10) 23
----------------------------------------------------------------------------------------------------------------------
At 31 December 4,936 4,283
======================================================================================================================
4.19 Insurance contract liabilities
-------------------------------------
(a) Analysis of insurance contract liabilities
2005 2005 2004 2004
Gross Reinsurance Gross Reinsurance
£m £m £m £m
----------------------------------------------------------------------------------------------------------------------
Life and pensions participating insurance contracts 13,180 (1) 12,388 (1)
Life and pensions non-participating insurance contracts 22,860 (2,649) 20,509 (2,887)
General insurance contracts 292 (14) 403 (22)
----------------------------------------------------------------------------------------------------------------------
Insurance contract liabilities 36,332 (2,664) 33,300 (2,910)
======================================================================================================================
(b) Movement in participating insurance contract liabilities
2005 2005
Gross Reinsurance
£m £m
----------------------------------------------------------------------------------------------------------------------
At 1 January 12,388 (1)
New liabilities in the year 224 -
Liabilities discharged in the year (1,142) -
Unwinding of discount rates 402 -
Effect of change in non-economic assumptions 305 -
Effect of change in economic assumptions 1,148 -
Other (145) -
----------------------------------------------------------------------------------------------------------------------
At 31 December 13,180 (1)
======================================================================================================================
The 2003 balance sheet was not restated on adoption of Financial Reporting Standard (FRS) 27 'Life assurance'.
Therefore, the movement in participating contract liabilities has not been shown for the year ended 31 December 2004.
The largest impact of changes to non-economic assumptions was from the strengthening of the provision for claims on the
endowment book (£240m).
(c) Movement in non-participating insurance contract liabilities
2005 2005 2004 2004
Gross Reinsurance Gross Reinsurance
£m £m £m £m
----------------------------------------------------------------------------------------------------------------------
At 1 January 20,509 (2,887) 19,176 (3,177)
New liabilities in the year 2,370 (457) 2,118 (627)
Liabilities discharged in the year (1,350) 215 (1,330) 311
Unwinding of discount rates 926 (225) 838 (197)
Effect of change in non-economic assumptions (709) 706 (620) 774
Effect of change in economic assumptions 899 (1) 387 -
Foreign exchange adjustments 95 (19) (71) 11
Other 120 19 11 18
----------------------------------------------------------------------------------------------------------------------
At 31 December 22,860 (2,649) 20,509 (2,887)
======================================================================================================================
(d) Analysis of general insurance contract liabilities
2005 2005 2004 2004
Gross Reinsurance Gross Reinsurance
£m £m £m £m
----------------------------------------------------------------------------------------------------------------------
Outstanding claims 97 (5) 127 (5)
Claims incurred but not reported 45 - 53 (1)
Unearned premiums 150 (9) 223 (16)
----------------------------------------------------------------------------------------------------------------------
General insurance contract liabilities 292 (14) 403 (22)
======================================================================================================================
(e) Movement in general insurance claim liabilities
2005 2005 2004 2004
Gross Reinsurance Gross Reinsurance
£m £m £m £m
----------------------------------------------------------------------------------------------------------------------
At 1 January 180 (6) 148 (4)
Claims arising 272 (6) 268 (5)
Claims paid (219) 6 (231) 4
Adjustments to prior year liabilities (38) 1 (5) (1)
----------------------------------------------------------------------------------------------------------------------
Claims incurred 195 (5) 180 (6)
Disposal of Gresham (53) - - -
----------------------------------------------------------------------------------------------------------------------
At 31 December 142 (5) 180 (6)
======================================================================================================================
4.20 Investment contract liabilities
--------------------------------------
(a) Analysis of investment contract liabilities
2005 2005 2004 2004
Gross Reinsurance Gross Reinsurance
£m £m £m £m
Participating investment contracts 7,476 (64) 6,863 (52)
Non-participating investment contracts 135,804 (51) 103,281 (15)
----------------------------------------------------------------------------------------------------------------------
Investment contract liabilities 143,280 (115) 110,144 (67)
======================================================================================================================
The UK participating liabilities are valued under the requirements of FRS 27.
(b) Movement in investment contract liabilities
2005 2005
Gross Reinsurance
£m £m
----------------------------------------------------------------------------------------------------------------------
At 1 January 110,144 (67)
Contributions 24,542 (31)
Account balances paid on surrender and maturities during the year (12,389) 1
Investment return credited and related benefits 21,289 (18)
Management charges (269) -
Foreign exchange adjustments (37) -
----------------------------------------------------------------------------------------------------------------------
At 31 December 143,280 (115)
======================================================================================================================
The 2003 balance sheet was not restated on adoption of FRS 27. Therefore, the movement in investment contract
liabilities has not been shown for the year ended 31 December 2004.
4.21 Value of UK Long Term Fund assets
----------------------------------------
2005 2004
£bn £bn
----------------------------------------------------------------------------------------------------------------------
With-profits business 29.7 26.8
Non profit business 22.7 17.6
Sub-fund 0.3 0.2
SRC 2.6 2.2
----------------------------------------------------------------------------------------------------------------------
55.3 46.8
======================================================================================================================
4.22 Non linked invested asset mix and investment return
----------------------------------------------------------
Investment | With-profits With-profits With-profits Non profit SRC Sub-fund
Return | Asset share Non Par Other
31 December 2005 2005 % | % % % % % %
----------------------------------------------------------------------------------------------------------------------
Equities 24 | 48 4 (26) 2 82 84
Bonds 11 | 30 85 109 92 - -
Property 20 | 18 1 - 5 17 15
Cash 5 | 4 10 17 1 1 1
----------------------------------------------------------------------------------------------------------------------
| 100 100 100 100 100 100
======================================================================================================================
Investment return (%) 15 19 10 7 12 23 23
======================================================================================================================
Invested assets (£bn) 19 2 2 16 2 -
======================================================================================================================
4.23 Sensitivities
--------------------
(a) Life and pensions sensitivity analysis
2005 2005
Impact on Impact on
pre-tax profit equity
net of net of
reinsurance reinsurance
£m £m
----------------------------------------------------------------------------------------------------------------------
Sensitivity test
Market interest rate increase of 1% 6 4
Market interest rate decrease of 1% (10) (7)
Reduction in the mortality rates for annuitants of 5% (343) (240)
Protection claims worsening by 5% (63) (44)
Increase in expenses of 10% (45) (32)
======================================================================================================================
(b) General insurance sensitivity analysis
2005 2005 2005
Impact on Impact on Impact on
pre-tax profit pre-tax profit equity
gross of net of net of
reinsurance reinsurance reinsurance
£m £m £m
----------------------------------------------------------------------------------------------------------------------
Sensitivity test
Single storm event with 1 in 200 year probability (215) (31) (22)
Subsidence event - worst claims ratio in last 30 years (70) (70) (50)
Repeat of 1990 recession on ASU/DMI(1) accounts (9) (6) (4)
5% decrease in overall claims ratio 17 16 11
5% surplus over claims liabilities 7 7 5
======================================================================================================================
1. Accident, sickness and unemployment (ASU)/Domestic mortgage indemnity (DMI)
4.24 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.
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 liabilities may give rise. The relevant
members of the Group nevertheless consider that each makes prudent provision for such liabilities, 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 the 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.
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.
4.25 Events after the balance sheet date
------------------------------------------
On 13 March 2006 Legal & General Group Plc entered into a supplementary trust deed in respect of the £400m undated
subordinated notes issued in March 2004. Under the terms of this deed, if regulations change so that the notes no longer
qualify to be included in the Group's regulatory capital, the Group cannot exercise its discretion to defer interest.
This has had the effect of changing the classification of the notes from equity to liability and coupon payments on the
notes from distributions to interest in 2006.
4.26 Foreign exchange rates
-----------------------------
Principal rates of exchange used for translation are:
01.01.05- 01.07.05- 2005 01.01.04- 01.07.04- 2004
30.06.05 31.12.05 Year 30.06.04 31.12.04 Year
Average Average end Average Average end
----------------------------------------------------------------------------------------------------------------------
United States Dollar 1.87 1.77 1.72 1.82 1.84 1.92
Euro 1.46 1.47 1.46 1.48 1.46 1.41
======================================================================================================================
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