L&G FY Results 2006 - Part 4
Legal & General Group PLC
14 March 2007
International Financial Reporting Standards Page 35
===========================================
Operating profit income statement
---------------------------------
For the year ended 31 December 2006
2006 2005
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
From continuing operations
Life and pensions 4.02 592 489
Investment management 4.03 133 103
General insurance 4.04 9 14
Other operational income 4.05 18 41
------------------------------------------------------------------------------------------------------------------------
Operating profit 752 647
Variation from longer term investment return 4.06 63 139
Contribution from UK non profit business 4.07 1,136 516
Property income attributable to minority interests 67 81
------------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax attributable to equity holders 2,018 1,383
Tax attributable to equity holders 4.08 (387) (371)
------------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 1,631 1,012
Profit from discontinued operations 4.09 - 13
------------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after tax 1,631 1,025
Profit attributable to minority interests 4.17 (67) (81)
------------------------------------------------------------------------------------------------------------------------
Profit attributable to equity holders 1,564 944
========================================================================================================================
p p
------------------------------------------------------------------------------------------------------------------------
Earnings per share 4.10
Based on operating profit from continuing operations after tax 8.33 7.04
Based on profit attributable to ordinary equity holders of the Company 24.12 14.33
Diluted earnings per share 4.10
Based on operating profit from continuing operations after tax 8.27 7.00
Based on profit attributable to ordinary equity holders of the Company 23.95 13.95
========================================================================================================================
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.
For UK life and pensions business, operating profit represents:
• the distribution of profit relating to non profit and shareholder net worth, grossed up for tax. The current
distribution comprises;
- 7% of the embedded value of the SRC and Sub-fund (shareholder net worth - SNW) adjusted to remove the impact from the
contingent loan between SRC and LGP and the SNW of LGP; and
- 5% of the embedded value of the non profit business adjusted to remove the impact from the contingent loan between
SRC and LGP;
• the subordinated debt interest on the intra-group subordinated debt included within the SRC, until it was repaid in
December 2006;
• the shareholders' share of the with-profits surplus recognised in the year, grossed up for tax.
An analysis of the distribution of profit relating to non profit and shareholder net worth is included in Note 5.05(a).
Operating profit includes a longer term investment return on shareholders', General insurance's and Netherlands' funds
held outside a LTF. It excludes investment variances and the contribution from UK non profit business. The income
statement comprises returns to shareholders and excludes policyholders' returns.
========================================================================================================================
Page 36
Consolidated income statement
-----------------------------
For the year ended 31 December 2006
2006 2005
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Revenue
Gross written premiums 4.11 4,286 4,084
Outward reinsurance premiums (518) (406)
Net change in provision for unearned premiums 7 (6)
------------------------------------------------------------------------------------------------------------------------
Net premiums earned 3,775 3,672
Fees from fund management and investment contracts 535 348
Investment return 16,572 26,931
Operational income 84 38
------------------------------------------------------------------------------------------------------------------------
Total revenue 20,966 30,989
------------------------------------------------------------------------------------------------------------------------
Expenses
Claims and change in insurance liabilities 1,938 6,367
Reinsurance recoveries 1,123 19
------------------------------------------------------------------------------------------------------------------------
Net claims and change in insurance liabilities 3,061 6,386
Change in provisions for investment contract liabilities 13,878 21,369
Acquisition costs 987 550
Finance costs 153 116
Other expenses 674 619
Transfers to unallocated divisible surplus 284 360
------------------------------------------------------------------------------------------------------------------------
Total expenses 19,037 29,400
------------------------------------------------------------------------------------------------------------------------
Profit before income tax 1,929 1,589
Income tax attributable to policyholder returns 89 (206)
------------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before income tax attributable to equity holders 2,018 1,383
------------------
Total income tax expense :(298) : (577):
Income tax attributable to policyholder returns : (89) : 206 :
------------------
Income tax attributable to equity holders (387) (371)
------------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after income tax 1,631 1,012
Profit from discontinued operations - 13
------------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after income tax 1,631 1,025
========================================================================================================================
Attributable to:
Minority interests 67 81
Equity holders of the Company 1,564 944
========================================================================================================================
Dividend distributions to ordinary equity holders of the Company during the year 349 331
Distributions during the year on subordinated borrowings designated as equity - 16
Dividend distributions to ordinary equity holders of the Company proposed after the year end 248 236
========================================================================================================================
p p
------------------------------------------------------------------------------------------------------------------------
Earnings per share
Based on profit from continuing operations after income tax attributable to ordinary equity holders 24.12 14.13
Diluted earnings per share
Based on profit from continuing operations after income tax attributable to ordinary equity holders 23.95 13.76
========================================================================================================================
========================================================================================================================
Page 37
Consolidated balance sheet
--------------------------
As at 31 December 2006
2006 2005
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Assets
Investment in associates 16 16
Plant and equipment 43 32
Investment property 6,852 5,774
Financial investments 4.14 201,430 176,622
Reinsurers' share of contract liabilities 1,481 2,779
Purchased interest in long term businesses 23 25
Deferred acquisition costs 1,456 1,375
Income tax recoverable 12 79
Other assets 1,622 1,162
Cash and cash equivalents 4,930 4,001
------------------------------------------------------------------------------------------------------------------------
Total assets 217,865 191,865
========================================================================================================================
Equity
Share capital 163 163
Share premium account 923 908
Treasury shares (45) (36)
Other reserves 49 34
Retained earnings 4,335 3,188
------------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to ordinary equity holders of the Company 4.15 5,425 4,257
Subordinated borrowings designated as equity 4.16 - 394
------------------------------------------------------------------------------------------------------------------------
Capital and reserves attributable to equity holders of the Company 5,425 4,651
Minority interests 4.17 414 285
------------------------------------------------------------------------------------------------------------------------
Total equity 4.18 5,839 4,936
========================================================================================================================
Liabilities
Subordinated borrowings 4.16 818 415
---------------------
Participating insurance contracts 4.19 : 12,660 : 13,180 :
Participating investment contracts 4.20 : 7,501 : 7,476 :
Unallocated divisible surplus : 2,178 : 1,894 :
Value of in-force non-participating contracts : (391) : (379) :
---------------------
Participating contract liabilities 21,948 22,171
---------------------
Non-participating insurance contracts 4.19 : 21,602 : 23,152 :
Non-participating investment contracts 4.20 : 162,016 : 135,804 :
---------------------
Non-participating contract liabilities 183,618 158,956
Senior borrowings 4.16 1,607 1,634
Provisions 568 582
Deferred income liabilities 422 351
Deferred tax liabilities 472 492
Income tax liabilities 106 197
Other liabilities 1,663 1,303
Net asset value attributable to unitholders 804 828
------------------------------------------------------------------------------------------------------------------------
Total liabilities 212,026 186,929
------------------------------------------------------------------------------------------------------------------------
Total equity and liabilities 217,865 191,865
========================================================================================================================
========================================================================================================================
Page 38
Consolidated statement of recognised income and expense
-------------------------------------------------------
For the year ended 31 December 2006
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
Fair value losses on cash flow hedges (3) -
Exchange differences on translation of overseas operations (35) 20
Actuarial gains/(losses) on defined benefit pension schemes 3 (55)
Actuarial (gains)/losses on defined benefit pension schemes transferred to unallocated
divisible surplus (1) 22
Net change in financial investments designated as available-for-sale 7 (10)
------------------------------------------------------------------------------------------------------------------------
Expense recognised directly in equity, net of tax (29) (23)
Profit from ordinary activities after income tax 1,631 1,025
------------------------------------------------------------------------------------------------------------------------
Total recognised income and expense 1,602 1,002
========================================================================================================================
Attributable to:
Minority interests 67 81
Equity holders of the Company 1,535 921
========================================================================================================================
========================================================================================================================
Page 39
Consolidated cash flow statement
--------------------------------
For the year ended 31 December 2006
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Profit from ordinary activities after income tax 1,631 1,025
Adjustments for non cash movements in net profit for the period
Realised and unrealised gains on financial investments and investment properties (9,505) (20,962)
Investment income (6,630) (5,646)
Interest expense 153 116
Income tax payable 298 577
Other adjustments 46 40
Net (increase)/decrease in operational assets
Investments designated as held for trading or fair value through profit or loss (9,599) (16,519)
Investments designated as available-for-sale (251) 86
Other assets 557 (294)
Net increase/(decrease) in operational liabilities
Insurance contracts (1,893) 3,071
Transfer to unallocated divisible surplus 285 338
Investment contracts 19,527 33,173
Value of in-force non-participating contracts (12) 55
Other liabilities 596 536
------------------------------------------------------------------------------------------------------------------------
Cash used in operations (4,797) (4,404)
Interest paid (146) (96)
Interest received 3,478 2,967
Income tax paid (315) (240)
Dividends received 3,095 2,576
------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 1,315 803
========================================================================================================================
Cash flows from investing activities
Net acquisition of plant and equipment (24) (22)
Net proceeds from disposal of Ventures' investments 10 23
Net proceeds from disposal of Gresham - 73
Non-financial investments purchased (3) (19)
------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (17) 55
========================================================================================================================
Cash flows from financing activities
Dividend distributions to ordinary equity holders of the Company during the year (349) (331)
Distributions during the year on subordinated borrowings designated as equity - (16)
Proceeds from issue of ordinary share capital 15 1
Purchase of treasury shares (11) (15)
Proceeds from borrowings 1,062 764
Repayment of borrowings (1,051) (257)
Other - (1)
------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (334) 145
========================================================================================================================
Net increase in cash and cash equivalents 964 1,003
Exchange (losses)/gains on cash and cash equivalents (35) 6
Cash and cash equivalents at 1 January 4,001 2,992
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at 31 December 4,930 4,001
========================================================================================================================
The Group's consolidated cash flow statement includes all cash and cash equivalent flows, including those relating to
the UK LTFs.
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Page 40
Notes to the Financial Statements
---------------------------------
4.01 Significant impacts
------------------------
The capital review update within the 2006 Review identifies three key initiatives implemented during the year. The
financial impact on IFRS reporting is set out below.
Corporate restructuring
-----------------------
On 31 December 2006, the non-linked non profit pensions and annuity business of Legal & General Assurance Society
Limited (Society) was ceded to a new, wholly owned, reinsurance company, Legal & General Pensions Limited (LGP). LGP has
been capitalised using £1.3bn of Society shareholder capital, £400m of which is represented by subordinated debt
(£200m upper tier II, £200m lower tier II) and £900m by equity. The reinsurance was effected on arm's length terms
resulting in an initial regulatory loss in LGP. Further funds of £571m have been injected from Society's LTF into LGP's
LTF by means of a contingent loan to cover this loss. On an IFRS basis, after adjusting for certain prudent reserves,
the transaction creates a pre-tax profit in SRC of £502m (see note 5.03(c)). The corresponding IFRS loss in LGP has
given rise to a deferred tax asset of £171m, resulting in a retained loss of £331m.
Prior to the capitalisation of LGP, the intra-group subordinated debt capital of £602m attributed to SRC was repaid to
Group Plc and an equivalent amount was lent to Society shareholder capital on a subordinated basis (£301m upper tier II,
£301m lower tier II).
The corporate restructuring has had no impact on the pre-tax IFRS result for the year. The movement in liabilities and
assets between Society and LGP is eliminated in the Group consolidation, but the initial loss in LGP has given rise to a
deferred tax asset of £171m in LGP.
Implementation of changes to FSA reporting and capital rules (Policy Statement 06/14)
-------------------------------------------------------------------------------------
In 2006, the FSA introduced a more realistic reserving framework for certain non profit business. As a result, there
has been a reduction in the regulatory reserves required for term assurance business of £641m (see note 5.03(c)). The
associated financial reinsurance previously in place to finance these reserves was terminated.
As a consequence of these changes, the deferred acquisition cost asset relating to term assurance business amounting to
£145m has been eliminated. The net impact on the IFRS income statement has been to increase profit after tax by £496m.
Review of annuity investment policy
-----------------------------------
During 2006 Society undertook a review of its asset liability matching policy for annuity business. Property assets
backing annuity liabilities were replaced with corporate bonds, and Society entered into inflation swaps to mitigate
negative inflation risk. As a result, a closer match between assets and liabilities was achieved. Additionally, the
margin within the reserves to cover an interest rate mismatch was reviewed and reduced. These actions increased the IFRS
profit after tax for Society by £422m (see note 5.03(c)).
4.02 Life and pensions operating profit
---------------------------------------
2006 2005
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Distribution relating to non profit and shareholder net worth 5.05(a) 388 312
Subordinated debt interest 34 37
------------------------------------------------------------------------------------------------------------------------
Non profit business 422 349
With-profits business 95 66
------------------------------------------------------------------------------------------------------------------------
UK 517 415
USA 58 52
Netherlands 7 18
France 10 4
------------------------------------------------------------------------------------------------------------------------
592 489
========================================================================================================================
4.03 Investment management operating profit
-------------------------------------------
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
Managed pension funds 96 74
Ventures 4 4
Property 6 4
Retail investments 11 7
Other external income 6 5
Other income 10 9
------------------------------------------------------------------------------------------------------------------------
133 103
========================================================================================================================
========================================================================================================================
Page 41
4.04 General insurance operating profit, underwriting result and combined operating ratios
------------------------------------------------------------------------------------------
Operating Under- Combined Operating Under- Combined
profit/ writing operating profit writing operating
(loss) result ratio result ratio
2006 2006 2006 2005 2005 2005
£m £m % £m £m %
------------------------------------------------------------------------------------------------------------------------
From continuing operations
Household (9) (21) 111% 7 (6) 101%
Other business 18 13 89% 7 1 101%
------------------------------------------------------------------------------------------------------------------------
9 (8) 105% 14 (5) 101%
========================================================================================================================
The combined operating ratio is:
-- --
| Net incurred claimes Expenses + Net commission |
|---------------------- + --------------------------| x 100
| Net earned premiums Net written premiums |
-- --
4.05 Other operational income
-----------------------------
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
Shareholders' other income
Investment return on ordinary shareholders' equity 139 127
Interest expense (106) (75)
------------------------------------------------------------------------------------------------------------------------
33 52
Other operations1 (2) (5)
Unallocated corporate and development expenses (13) (6)
------------------------------------------------------------------------------------------------------------------------
18 41
========================================================================================================================
1. Principally the Regulated mortgage network and Cofunds.
4.06 Variation from longer term investment return
-------------------------------------------------
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
Netherlands (18) 10
Investment management (1) -
General insurance (7) 8
Other operational income 89 121
------------------------------------------------------------------------------------------------------------------------
63 139
========================================================================================================================
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.
4.07 Contribution from UK non profit business
---------------------------------------------
2006 2005
Notes £m £m
------------------------------------------------------------------------------------------------------------------------
Investment income 75 67
Interest expense and charges (3) (3)
Realised investment gains 215 191
Unrealised investment gains 16 132
------------------------------------------------------------------------------------------------------------------------
Investment return on SRC 303 387
Net capital released from non profit business 5.03 1,255 478
Distribution of operating profit from non profit business (422) (349)
------------------------------------------------------------------------------------------------------------------------
Contribution from UK non profit business before tax 1,136 516
========================================================================================================================
========================================================================================================================
Page 42
4.08 Analysis of tax
--------------------
Profit Tax Profit Tax
before tax before tax
2006 2006 2005 2005
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
From continuing operations
UK life and pensions 517 (154) 415 (125)
International life and pensions 75 (24) 74 (25)
------------------------------------------------------------------------------------------------------------------------
592 (178) 489 (150)
Investment management 133 (40) 103 (32)
General insurance 9 (2) 14 (4)
Other operational income 18 8 41 (5)
------------------------------------------------------------------------------------------------------------------------
Operating profit 752 (212) 647 (191)
Variation from longer term investment return 63 (11) 139 (32)
Contribution from UK non profit business 1,136 (164) 516 (148)
Property income attributable to minority interests 67 - 81 -
------------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax / Tax 2,018 (387) 1,383 (371)
========================================================================================================================
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.
In accordance with the Group's policy for attributing tax to equity holders and policyholders, the IFRS profit before
equity holder tax from the net capital released from UK non profit business is determined by grossing up after tax
amounts at the standard rate of UK corporation tax (30%). In 2006, there was no current or deferred tax charge on these
profits.
No deferred tax is provided at the incremental rate on the undeclared surplus in the Society LTF 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 £717m (2005: £509m).
4.09 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).
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
Post tax result from discontinued operations to 31 March 2005 - (2)
Gain on disposal - 15
------------------------------------------------------------------------------------------------------------------------
- 13
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========================================================================================================================
Page 43
4.10 Earnings per share
-----------------------
(a) Earnings per share
Profit Tax Profit Earnings Profit Tax Profit/ Earnings
before tax charge after tax per share before tax (charge)/ (loss) per share
credit after tax
2006 2006 2006 2006 2005 2005 2005 2005
£m £m £m p £m £m £m p
------------------------------------------------------------------------------------------------------------------------
Operating profit from
continuing operations 752 (212) 540 8.33 647 (191) 456 7.04
Variation from longer term
investment return 63 (11) 52 0.80 139 (32) 107 1.66
Contribution from UK non
profit business 1,136 (164) 972 14.99 516 (148) 368 5.68
Profit from discontinued
operations - - - - 12 1 13 0.20
Distributions on subordinated
borrowings designated as equity - - (16) (0.25)
------------------------------------------------------------------------------------------------------------------------
Earnings per share based on profit
attributable to equity holders 1,951 (387) 1,564 24.12 1,314 (370) 928 14.33
========================================================================================================================
(b) Diluted earnings per share
(i) Based on operating profit from continuing operations after tax
Profit Number Earnings Profit Number Earnings
after tax of shares1 per share after tax of shares1 per share
2006 2006 2006 2005 2005 2005
£m m p £m m p
------------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations after tax 540 6,483 8.33 456 6,474 7.04
Net shares under options allocable
for no further consideration - 46 (0.06) - 38 (0.04)
Convertible bonds outstanding - - - 20 285 -
------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 540 6,529 8.27 476 6,797 7.00
========================================================================================================================
(ii) Based on profit attributable to ordinary equity holders
Profit Number Earnings Profit Number Earnings
after tax of shares1 per share after tax of shares1 per share
2006 2006 2006 2005 2005 2005
£m m p £m m p
------------------------------------------------------------------------------------------------------------------------
Profit attributable to ordinary
equity holders of the Company 1,564 6,483 24.12 928 6,474 14.33
Net shares under options allocable
for no further consideration - 46 (0.17) - 38 (0.08)
Convertible bonds outstanding - - - 20 285 (0.30)
------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 1,564 6,529 23.95 948 6,797 13.95
========================================================================================================================
The number of shares in issue at 31 December 2006 was 6,532,261,961 (2005: 6,507,421,932).
1. Weighted average number of shares
========================================================================================================================
Page 44
4.11 Gross written premiums
---------------------------
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
From continuing operations
UK life and pensions participating business 376 485
UK life and pensions non-participating business 2,691 2,428
------------------------------------------------------------------------------------------------------------------------
Total UK life and pensions 3,067 2,913
USA 347 329
Netherlands 266 243
France 283 265
------------------------------------------------------------------------------------------------------------------------
Total life and pensions 3,963 3,750
General insurance
Household 240 234
Other business 83 100
------------------------------------------------------------------------------------------------------------------------
Total General insurance 323 334
------------------------------------------------------------------------------------------------------------------------
Total gross written premiums 4,286 4,084
========================================================================================================================
4.12 Segmental analysis
-----------------------
The Group is organised into three main business segments:
- Long term business (includes insurance and investment business)
- Investment management
- General insurance
Other operations comprise Shareholders' assets, Regulated mortgage network, Estate agencies 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
business1 manage- insurance operations of inter
ment segment
amounts
For the year ended 31 December 2006 £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 8,355 12,013 315 526 (243) 20,966
Total expenses from continuing operations 6,802 11,849 314 315 (243) 19,037
Profit from continuing operations after
income tax 1,344 93 1 193 - 1,631
Profit from discontinued operations - - - - - -
========================================================================================================================
Inter segment revenue (26) (40) (2) (175) 243 -
========================================================================================================================
For the year ended 31 December 2005
------------------------------------------------------------------------------------------------------------------------
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 -
========================================================================================================================
1. The long term business segment for 2006 has been impacted by the matters discussed in Note 4.01.
(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 2006 £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Total assets 69,729 144,725 534 4,519 (1,642) 217,865
Total liabilities 66,053 144,000 365 3,250 (1,642) 212,026
Total equity 3,676 725 169 1,269 - 5,839
========================================================================================================================
As at 31 December 2005
------------------------------------------------------------------------------------------------------------------------
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
========================================================================================================================
========================================================================================================================
Page 45
4.12 Segmental analysis (continued)
-----------------------------------
(iii) Revenue and assets by geographic segments (secondary disclosures)
UK USA Netherlands France Elimination Total
of inter
segment
amounts
31 December 2006 £m £m £m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 20,020 329 300 319 (2) 20,966
Total assets 212,185 2,478 1,415 1,807 (20) 217,865
========================================================================================================================
31 December 2005
------------------------------------------------------------------------------------------------------------------------
Total revenue from continuing operations 29,918 321 362 388 - 30,989
Total assets 186,936 2,016 1,269 1,663 (19) 191,865
========================================================================================================================
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 of, and contributions
to, such arrangements. At 31 December 2006, the combined after tax deficit arising from these arrangements (net of
annuity obligations insured by Society has been estimated at £122m (2005: £148m). These amounts have been recognised in
the financial statements with £72m charged against shareholder equity (2005: £88m) and £50m against the unallocated
divisible surplus (2005: £60m).
4.14 Financial investments
--------------------------
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
Equities 112,589 99,277
Unit trusts 4,190 2,941
Debt securities 82,685 72,941
Accrued interest 1,079 887
Derivative assets 77 30
Loans and receivables 810 546
------------------------------------------------------------------------------------------------------------------------
201,430 176,622
========================================================================================================================
4.15 Segmental analysis of ordinary shareholders' equity
--------------------------------------------------------
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
SRC1 3,263 2,560
--------------------
Society shareholder capital (excluding LGP) : 1,307 : 1,896 :
LGP shareholder capital : 950 : - :
--------------------
Society shareholder capital2 2,257 1,896
------------------------------------------------------------------------------------------------------------------------
5,520 4,456
General insurance 169 167
Netherlands 97 103
France 82 64
------------------------------------------------------------------------------------------------------------------------
Total Society shareholders' equity 5,868 4,790
USA 552 570
Investment management 311 268
Corporate funds3 (1,306) (1,371)
------------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity 5,425 4,257
========================================================================================================================
1. 2005 included £602m of intra-group subordinated debt capital attributed to the SRC, which was repaid in 2006. An
equivalent amount (£602m) was then lent to Society shareholder capital on a subordinated basis, £400m of this was lent
to LGP on similar terms.
2. Represents capital held outside Society's Long Term Fund, including the rights issue proceeds and LGP shareholder
capital.
3. Includes the convertible debt of £nil (2005: £509m), subordinated borrowings of £818m (2005: £809m) and senior debt
of £602m, which has been lent to Society shareholder capital on a subordinated basis (2005: £602m lent to the SRC on a
subordinated basis).
========================================================================================================================
Page 46
4.16 Borrowings
---------------
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
Subordinated borrowings designated as equity
5.875% Sterling undated subordinated notes - 394
Subordinated borrowings
5.875% Sterling undated subordinated notes 429 -
4.0% Euro subordinated notes 2025 389 415
------------------------------------------------------------------------------------------------------------------------
Total subordinated borrowings 818 809
========================================================================================================================
Senior borrowings
2.75% Sterling convertible bond 2006 - 509
Sterling medium term notes 2031-2041 608 608
Euro commercial paper 2007 370 110
Bank loans 2007 3 6
Non recourse financing
- US Dollar Triple X securitisation 2025 270 308
- US Dollar Triple X securitisation 2037 226 -
- Sterling property partnership loans 2011 130 93
------------------------------------------------------------------------------------------------------------------------
Total senior borrowings 1,607 1,634
========================================================================================================================
Total borrowings 2,425 2,443
========================================================================================================================
Total borrowings (excluding non recourse financing) 1,799 2,042
========================================================================================================================
During 2006 £602m of borrowings which were previously attributed to the SRC were attributed to Society shareholders.
£106m of interest expense was incurred during the period (2005: £75m) on borrowings (excluding non recourse financing).
Subordinated borrowings
-----------------------
The Sterling undated subordinated notes are treated as upper tier II capital for regulatory purposes and the Euro dated
subordinated notes as lower tier II capital.
5.875% Sterling undated subordinated notes
------------------------------------------
Legal & General Group Plc has issued £400m of 5.875% undated subordinated notes. These notes are callable on 1 April
2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five
year benchmark gilt yield plus 2.33% per annum. As at 31 December 2005 the undated subordinated notes were classified
as equity because their perpetual nature meant that in certain circumstances interest could be deferred indefinitely.
On 13 March 2006 the Group entered into a supplementary deed to remove the discretionary nature of the interest in
certain circumstances. This had the effect of reclassifying the notes from equity to liability and coupon payments
from distributions to interest. Upon reclassification the debt was recognised at fair value.
4.0% Euro subordinated notes 2025
---------------------------------
Legal & General Group Plc has also issued €600m of 4.0% Euro dated subordinated notes. The proceeds were swapped into
sterling. 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 three month Euribor plus 1.7% per annum.
Non recourse financing
----------------------
US Dollar Triple X securitisation 2025
--------------------------------------
A subsidiary of Legal & General America has issued US$550m of non recourse debt in the US 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.
US Dollar Triple X securitisation 2037
--------------------------------------
In 2006, a subsidiary of Legal & General America issued US$450m of non recourse debt in the US 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.
Sterling property partnership loans 2011
----------------------------------------
The property partnership loans are secured on specific properties.
Convertible bond
----------------
The convertible bond matured in 2006 and was redeemed at par without being converted into ordinary shares.
4.17 Minority interests
-----------------------
Minority interests represent third party interests in property investment vehicles which are consolidated in the
Group's results
========================================================================================================================
Page 47
4.18 Total equity
-----------------
2006 2005
£m £m
------------------------------------------------------------------------------------------------------------------------
At 1 January 4,936 4,283
Total recognised income and expense 1,602 1,002
Issue of ordinary share capital 15 1
Net movements in employee share schemes and treasury shares (5) 7
Dividend distributions to ordinary equity holders of the Company during the year (349) (331)
Distributions during the year on subordinated borrowings designated as equity - (16)
Movements in minority interests including disposals 62 (10)
Reclassification of subordinated borrowings from equity to debt (394) -
Fair value loss after tax on reclassification of subordinated borrowings as debt (Note 4.16) (28) -
------------------------------------------------------------------------------------------------------------------------
At 31 December 5,839 4,936
========================================================================================================================
4.19 Insurance contract liabilities
-----------------------------------
(a) Analysis of insurance contract liabilities
Gross Reinsurance Gross Reinsurance
2006 2006 2005 2005
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Life and pensions participating insurance contracts 12,660 (1) 13,180 (1)
Life and pension non-participating insurance contracts 21,321 (1,237) 22,860 (2,649)
General insurance contracts 281 (16) 292 (14)
------------------------------------------------------------------------------------------------------------------------
Insurance contract liabilities 34,262 (1,254) 36,332 (2,664)
========================================================================================================================
(b) Movement in participating insurance contract liabilities
Gross Reinsurance Gross Reinsurance
2006 2006 2005 2005
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
At 1 January 13,180 (1) 12,388 (1)
New liabilities in the year 240 - 224 -
Liabilities discharged in the year (1,671) - (1,142) -
Unwinding of discount rates 432 - 402 -
Effect of change in non-economic assumptions 29 - 305 -
Effect of change in economic assumptions 487 - 1,148 -
Other (37) - (145) -
------------------------------------------------------------------------------------------------------------------------
At 31 December 12,660 (1) 13,180 (1)
========================================================================================================================
In 2005, 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
Gross Reinsurance Gross Reinsurance
2006 2006 2005 2005
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
At 1 January 22,860 (2,649) 20,509 (2,887)
New liabilities in the year 1,995 (287) 2,370 (457)
Liabilities discharged in the year (1,630) 75 (1,350) 215
Unwinding of discount rates 958 (134) 926 (225)
Effect of change in non-economic assumptions 90 (33) (709) 706
Effect of change in economic assumptions (417) 9 899 (1)
Foreign exchange adjustments (176) 26 95 (19)
Other (2,359) 1,756 120 19
------------------------------------------------------------------------------------------------------------------------
At 31 December 21,321 (1,237) 22,860 (2,649)
========================================================================================================================
Included within Effect of economic assumption changes is the impact of Society's review of its annuity investment policy
as described in Note 4.01.
In 2006, Other includes £2,248m gross (£1,756m reinsurance) relating to the impact of applying PS06/14. The
implementation of PS06/14 is described in Note 4.01.
========================================================================================================================
Page 48
4.19 Insurance contract liabilities (continued)
-----------------------------------------------
(d) Analysis of General insurance contract liabilities
Gross Reinsurance Gross Reinsurance
2006 2006 2005 2005
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Outstanding claims 101 (4) 97 (5)
Claims incurred but not reported 36 (1) 45 -
Unearned premiums 144 (11) 150 (9)
------------------------------------------------------------------------------------------------------------------------
General insurance contract liabilities 281 (16) 292 (14)
========================================================================================================================
(e) Movement in General insurance claim liabilities
Gross Reinsurance Gross Reinsurance
2006 2006 2005 2005
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
At 1 January 142 (5) 180 (6)
Claims arising 247 (3) 272 (6)
Claims paid (206) 2 (219) 6
Adjustments to prior year liabilities (46) 1 (38) 1
------------------------------------------------------------------------------------------------------------------------
137 (5) 195 (5)
Disposal of Gresham - - (53) -
------------------------------------------------------------------------------------------------------------------------
At 31 December 137 (5) 142 (5)
========================================================================================================================
4.20 Investment contract liabilities
------------------------------------
(a) Analysis of investment contract liabilities
Gross Reinsurance Gross Reinsurance
2006 2006 2005 2005
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
Participating investment contracts 7,501 (88) 7,476 (64)
Non-participating investment contracts 162,016 (139) 135,804 (51)
------------------------------------------------------------------------------------------------------------------------
Investment contract liabilities 169,517 (227) 143,280 (115)
========================================================================================================================
The UK participating liabilities are valued under the requirements of FRS 27.
(b) Movement in investment contract liabilities
Gross Reinsurance Gross Reinsurance
2006 2006 2006 2006
£m £m £m £m
------------------------------------------------------------------------------------------------------------------------
At 1 January 143,280 (115) 110,144 (67)
Reserves in respect of new business 28,423 (93) 24,542 (31)
Amounts paid on surrenders and maturities during the year (15,633) 3 (12,389) 1
Investment return and related benefits 13,804 (22) 21,289 (18)
Management charges (339) - (269) -
Foreign exchange adjustments (18) - (37) -
------------------------------------------------------------------------------------------------------------------------
At 31 December 169,517 (227) 143,280 (115)
========================================================================================================================
========================================================================================================================
Page 49
4.21 Value of assets in the UK Long Term Funds
----------------------------------------------
2006 2005
£bn £bn
------------------------------------------------------------------------------------------------------------------------
With-profits business 30.1 29.7
Non profit business 26.6 22.7
Sub-fund 0.3 0.3
SRC 3.3 2.6
------------------------------------------------------------------------------------------------------------------------
60.3 55.3
========================================================================================================================
4.22 Non linked invested asset mix and investment return
--------------------------------------------------------
Investment| With-profits With-profits With-profits Non profit SRC Sub-fund | SSC |
Return| Asset share Non Par Other | |
At 31 December 2006 2006 %| % % % % % % | % |
--------------------------------|--------------------------------------------------------------------------------|-----|
Equities 14| 50 4 (35) 1 74 83 | 53 |
Bonds 1| 28 82 125 96 - - | 45 |
Property 20| 19 2 - 2 25 15 | - |
Cash 5| 3 12 10 1 1 2 | 2 |
--------------------------------|--------------------------------------------------------------------------------|-----|
| 100 100 100 100 100 100 | 100 |
=================================================================================================================|=====|
| |
Investment return (%) 6 11 2 (5) 2 15 15 | 7 |
=================================================================================================================|=====|
| |
Invested assets (£bn) 18.7 2.5 1.7 16.1 1.7 0.3 | 2.6 |
========================================================================================================================
4.23 Sensitivities
------------------
(a) UK non profit life and pensions sensitivity analysis
Impact on Impact on
pre-tax profit equity
net of net of
reinsurance reinsurance
2006 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Sensitivity test
Market interest rate increase of 1% (139) (98)
Market interest rate decrease of 1% 237 166
Reduction in the mortality rates for annuitants of 5% (234) (164)
Protection claims increasing by 5% (73) (51)
Increase in expenses of 10% (59) (41)
Increase in lapse rates of 10% (25) (18)
Decrease in lapse rates of 10% 27 19
========================================================================================================================
(b) General insurance sensitivity analysis
Impact on Impact on
pre-tax profit equity
net of net of
reinsurance reinsurance
2006 2006
£m £m
------------------------------------------------------------------------------------------------------------------------
Sensitivity test
Single storm event with 1 in 200 year probability (30) (21)
Subsidence event - worst claims ratio in last 30 years (37) (26)
Repeat of 1990 recession on ASU/DMI1/Household accounts (52) (36)
5% decrease in overall claims ratio 15 11
5% surplus over claims liabilities 7 5
=======================================================================================================================
1. Accident, sickness and unemployment (ASU)/Domestic mortgage indemnity (DMI)
========================================================================================================================
Page 50
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.
Various Group companies receive claims and become involved in actual or threatened litigation and regulatory issues from
time to time. Provision for liabilities continues to be made and is regularly reviewed. However, it is not possible to
predict, with certainty, the extent and the timing of the financial impact to which these claims, litigation or issues
may give rise. The relevant members of the Group nevertheless consider that each makes prudent provision, as and when
circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet all
reasonably foreseeable eventualities.
In 1975 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 7 February 2007, the Group entered into an agreement with the Nationwide Building Society to purchase Nationwide Life
Limited and Nationwide Unit Trust Managers Limited for a consideration estimated at £285m. Consideration will be set by
reference to the financial position of the two companies at the date of completion using an agreed basis of valuation.
In addition, the arrangement provides access to Nationwide's distribution network, through which it is anticipated that
a wide range of the Group's investment, pensions and life insurance products will be sold. The sale is conditional on
the consent of the Financial Services Authority to the change of control of the companies, and other customary
conditions, and is expected to complete in the summer of 2007, when the distribution arrangements are expected to be
launched.
4.26 Foreign exchange rates
---------------------------
Principal rates of exchange used for translation are:
01.01.06- 01.01.05- 01.07.05-
31.12.06 2006 30.06.05 31.12.05 2005
Average Year end Average Average Year end
------------------------------------------------------------------------------------------------------------------------
United States Dollar 1.84 1.96 1.87 1.77 1.72
Euro 1.47 1.48 1.46 1.47 1.46
========================================================================================================================
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