L&G FY 2005 Results Part 5
Legal & General Group PLC
17 March 2006
Part 5
Capital and Cashflow
====================
5.1 Group capital resources
-----------------------------
The Group's total capital resources of £7.0bn on an IFRS basis, comprise ordinary equity holders' capital (£4.3bn),
subordinated debt (£0.4bn), subordinated debt designated as equity (£0.4bn) and unallocated divisible surplus (£1.9bn,
including £0.3bn of Sub-fund).
In 2005, the Group established a Group Capital Committee as a sub-committee of the Group Risk and Compliance Committee.
The Group Capital Committee focuses on actively managing capital resources and the Group's balance sheet.
5.2 Insurance Groups Directive surplus
----------------------------------------
The Group is required to measure and monitor its capital resources on a regulatory, as well as an IFRS, basis and to
comply with the minimum capital requirements of regulators in each territory in which it operates. At a Group level,
Legal & General must comply with the requirements of the Insurance Groups Directive (IGD). This is a very prudent
measure of capital resources as it excludes any amount of surplus capital within a long term fund (£2.2bn for Legal &
General). The table below shows the unaudited total Group capital resources, Group capital resources requirement and
the surplus.
2005 2004
£m £m
----------------------------------------------------------------------------------------------------------------------
Tier I 6,035 4,483
Upper tier II 394 394
Lower tier II 415 -
Deductions (62) (28)
----------------------------------------------------------------------------------------------------------------------
Group capital resources 6,782 4,849
----------------------------------------------------------------------------------------------------------------------
Group capital resources requirement 4,352 3,171
----------------------------------------------------------------------------------------------------------------------
Insurance Groups Directive surplus 2,430 1,678
======================================================================================================================
The surplus has increased in 2005 due primarily to two factors. Under FRS 21, final dividends are only accrued when
approved by the Company in general meeting. The proposed 2005 final dividend to shareholders of £236m has therefore not
been accrued for. In addition, €600m (£415m) of lower tier II capital was raised in June 2005.
A reconciliation of the Group capital resources on an IGD basis to the capital and reserves attributable to the equity
holders of the company on an IFRS basis is given below.
2005
£m
----------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to equity holders on an IFRS basis 4,651
Qualifying lower tier II capital 415
UK long term fund capital resources (restricted to amount of capital resources requirement) 4,142
Shareholder retained capital on an IFRS basis (2,560)
Other adjustments to restate from IFRS to IGD basis 134
----------------------------------------------------------------------------------------------------------------------
Group capital resources 6,782
======================================================================================================================
5.3 Society capital resources
-------------------------------
(a) Analysis of Society capital on an IFRS basis
Legal & General Assurance Society Limited (Society), the Group's principal operating subsidiary, has been allocated
capital of £4.5bn, reflecting the significance of this operation and the importance of ensuring financial strength to
support long term growth of the business. Of this total, £1.9bn is held outside the long term fund as Society
Shareholder Capital (SSC), and the remainder of £2.6bn is held within the UK long term fund as Shareholder Retained
Capital (SRC). An analysis of the movement in total Society capital on the IFRS basis is provided in the table below:
2005 2005 2004 2004
SSC SRC SSC SRC
Note £m £m £m £m
----------------------------------------------------------------------------------------------------------------------
SSC/SRC as at 1 January 1,973 2,196 1,953 2,214
Investment return 250 144
Transfer from long term fund 265 248
Dividends from subsidiaries 105 -
Distribution to shareholders (638) (327)
Tax (57) (39)
Other (2) (6)
----------------------------------------------------------------------------------------------------------------------
SSC at end of period 1,896 1,973
Investment return 387 209
Net capital released from non profit business 5.3(b) 478 95
Distribution of operating profit from non profit business (349) (324)
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
----------------------------------------------------------------------------------------------------------------------
Society capital at end of period 1,896 2,560 1,973 2,196
======================================================================================================================
(b) Analysis of net capital released from non profit business
2005 2004
£m £m
----------------------------------------------------------------------------------------------------------------------
Net capital released from non profit business comprises:
New business:
- Strain arising in the year, before financing arrangements (466) (373)
- Financing arrangements 125 15
Expected capital release 499 329
Experience variances 274 290
Changes to non-economic assumptions (35) (197)
Movements in non-cash items (67) 10
Other 5 (8)
----------------------------------------------------------------------------------------------------------------------
335 66
Tax gross-up 143 29
----------------------------------------------------------------------------------------------------------------------
478 95
======================================================================================================================
For 2005, financing arrangements comprise the financial reinsurance for new term assurance business which was finalised
in the last quarter of 2005. The reinsurance contract has a beneficial impact of £125m (net of tax) on the financing of
new business for regulatory purposes. Under IFRS, the impact is neutral and there is an equal and opposite impact
reported through non-cash items. The financing will unwind as surplus emerges over an expected period of three years.
The Group has financing arrangements on the same terms in place for term assurance new business written in 2006.
Expected capital release represents the capital and profit generated in the period from the in-force non profit business
if the embedded value assumptions are borne out in practice. The experience variances are calculated with reference to
embedded value assumptions, including the apportionment of investment return and tax in the EEV model. The release
figure of £499m reflects the substantial growth in non profit business in recent years.
On average, the capital invested in new non profit business is repaid from product cashflows in approximately 5 years if
required solvency margin is excluded, and approximately 6 years when required solvency margin is included. Both new
business strain and expected capital release exclude required solvency margin, as this is not accounted for under IFRS.
An analysis of the experience variances, non-economic assumption changes and non-cash items, all net of tax, is provided
below:
Experience variances 2005
£m
----------------------------------------------------------------------------------------------------------------------
Persistency 13
Mortality / Morbidity 15
Expenses (8)
Bulk Purchase Annuity data loading 78
Investment 121
Allocated tax and other 55
----------------------------------------------------------------------------------------------------------------------
274
======================================================================================================================
Experience variances of £274m comprises investment return outperformance in the non profit fund, the impact from loading
data onto the new administration system for Bulk Purchase Annuity business, and favourable variances between actual and
modelled allocated tax.
Changes to non-economic assumptions 2005
£m
----------------------------------------------------------------------------------------------------------------------
Mortality / Morbidity 33
Expenses (19)
Negative inflation (33)
Other (16)
----------------------------------------------------------------------------------------------------------------------
(35)
======================================================================================================================
Movements in non-cash items 2005
£m
----------------------------------------------------------------------------------------------------------------------
Deferred tax 34
Deferred acquisition costs 160
Deferred income liabilities (110)
IFRS adjustment for financial reinsurance (125)
Other (26)
----------------------------------------------------------------------------------------------------------------------
(67)
======================================================================================================================
(c) Regulatory capital surplus
Society is required to measure and monitor its capital resources on a regulatory basis. The primary requirement is for
Society to maintain capital resources in excess of its capital resources requirement and the table below shows a strong
regulatory surplus at the end of 2005. The figures in the table are unaudited.
2005 2005 2004 2004
Long term General Long term General
business insurance business insurance
£m £m £m £m
----------------------------------------------------------------------------------------------------------------------
Tier I 7,944 55 6,368 75
Upper tier II 602 - 602 -
----------------------------------------------------------------------------------------------------------------------
Available capital resources 8,546 55 6,970 75
----------------------------------------------------------------------------------------------------------------------
Capital resources requirement 4,142 53 2,960 73
----------------------------------------------------------------------------------------------------------------------
Regulatory capital surplus 4,404 2 4,010 2
======================================================================================================================
Tier I resources include an implicit item relating to non profit business of £540m (2004: £755m).
Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis. If the surplus on a
realistic basis is lower than the surplus using Peak 1 solvency rules, then a further capital requirement is included in
the capital resources requirement. This additional capital requirement is the With-Profits Insurance Capital Component
and amounts to £1,503m in 2005 (2004: £995m) of the total capital resources requirement of £4,142m (2004: £2,960m).
The table below summarises the realistic position of the with-profits part of the fund:
2005 2004
£m £m
----------------------------------------------------------------------------------------------------------------------
With-profits surplus 842 864
Risk capital margin (RCM) 327 643
----------------------------------------------------------------------------------------------------------------------
Surplus 515 221
======================================================================================================================
The RCM has fallen significantly, as a result of management actions taken during 2005 to reduce the with-profits part of
the fund's exposure to financial risks. These actions include the provision for a charge for guarantees and improved
asset matching by product and duration.
(d) Society financial strength ratings
Society continues to be one of the two highest rated European life assurers. As at March 2006, our financial strength
ratings from Standard & Poor's, Moody's and A.M.Best were maintained at AA+, Aa1 and A+ respectively, all with a stable
outlook.
5.4 Distributions to shareholders from the UK long term fund
--------------------------------------------------------------
The transfer to shareholders from the long term fund is limited by a formula agreed with our regulator. The formula is
the aggregate of the shareholders' share of the with-profits surplus, a smoothed investment return of 7% on the
embedded value of the SRC and Sub-fund and 5% on the embedded value of the non profit business.
5.5 Group cashflow statement
------------------------------
The table below shows the cashflows in the year relating to the Group's parent company, which Legal & General believes
gives a clearer presentation of cashflows than the format prescribed by IFRS.
2005 2004
£m £m
Dividends received:
UK life and pensions 533 327
General insurance 105 -
Investment management 69 22
Other 2 4
----------------------------------------------------------------------------------------------------------------------
709 353
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 equity 1 1
Proceeds from issue of subordinated borrowings 397 -
Proceeds from issue of subordinated borrowings designated as equity - 394
Working capital movements (136) (17)
----------------------------------------------------------------------------------------------------------------------
Net cash inflow 624 398
======================================================================================================================
As a result of the implementation of FRS 21 'Events after the balance sheet date', an additional dividend was paid from
UK life and pensions in 2005 to ensure sufficient distributable reserves were in place in Legal & General Group Plc at
31 December 2005 to pay both the 2005 final and 2006 interim dividends to shareholders.
This information is provided by RNS
The company news service from the London Stock Exchange
Latest directors dealings
- 20 hours ago Savannah Energy
- 21 hours ago Buccaneer Energy PLC
- 22 hours ago Savannah Energy
- 22 hours ago Carclo
- 22 hours ago Schroder Japan Growth Fund