L&G Interim Results 2006 PT 3
Legal & General Group PLC
27 July 2006
P19
European Embedded Value
-----------------------
Consolidated income statement
Six months ended 30 June 2006
30.06.06 30.06.05 Full year
Restated 31.12.05
Notes £m £m £m
-----------------------------------------------------------------------------------------------------------------------
From continuing operations
Life and pensions 3.2/3.3 456 385 901
Investment management 3.8 87 70 136
General insurance 4.4 2 4 14
Other operational income 4.5 15 18 41
-----------------------------------------------------------------------------------------------------------------------
Operating profit 560 477 1,092
Variation from longer term investment return 3.6 113 206 870
Effect of economic assumption changes 3.2 (18) 11 8
Property income attributable to minority interests 21 11 81
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax attributable to equity holders 676 705 2,051
Tax 3.9 (198) (186) (563)
Effect of UK tax changes 3.10 - (276) (276)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 478 243 1,212
Profit from discontinued operations 4.9 - 13 13
-----------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after tax 478 256 1,225
Profit attributable to minority interests 4.17 (21) (11) (81)
-----------------------------------------------------------------------------------------------------------------------
Profit attributable to equity holders of the Company 457 245 1,144
=======================================================================================================================
Earnings per share 3.11 p p p
Based on operating profit from continuing operations after tax 6.19 5.22 12.02
Based on profit attributable to ordinary equity holders of the Company 7.05 3.67 17.42
Diluted earnings per share 3.11
Based on operating profit from continuing operations after tax 6.07 5.09 11.74
Based on profit attributable to ordinary equity holders of the Company 6.89 3.61 16.89
=======================================================================================================================
=======================================================================================================================
P20
Consolidated balance sheet
As at 30 June 2006
At 30.06.06 At 30.06.05 At 31.12.05
Restated
Notes £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Assets
Investments 193,050 163,963 186,413
Long term in-force business asset 2,943 2,404 2,738
Other assets 6,862 6,080 5,427
-----------------------------------------------------------------------------------------------------------------------
202,855 172,447 194,578
=======================================================================================================================
Equity and liabilities
Ordinary shareholders' equity 3.14 7,166 6,177 6,970
Subordinated borrowings designated as equity - 394 394
Minority interests 318 215 285
Subordinated borrowings 813 407 415
Unallocated divisible surplus 1,982 1,938 1,894
Participating contract liabilities 19,764 19,152 20,277
Non-participating contract liabilities 167,126 138,687 158,956
Senior borrowings 1,682 1,566 1,634
Other creditors and provisions 4,004 3,911 3,753
-----------------------------------------------------------------------------------------------------------------------
202,855 172,447 194,578
=======================================================================================================================
Consolidated statement of recognised income and expense
Six months ended 30 June 2006
30.06.06 30.06.05 Full year
Restated 31.12.05
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
Fair value losses on cash flow hedges (3) - -
Exchange differences on translation of overseas operations (25) 10 22
Actuarial gains/(losses) on defined benefit pension scheme 64 (28) (55)
Actuarial (gains)/losses on defined benefit pension scheme transferred
to unallocated divisible surplus (28) 11 22
-----------------------------------------------------------------------------------------------------------------------
Net income/(expense) recognised directly in equity 8 (7) (11)
Profit from ordinary activities after tax 478 256 1,225
-----------------------------------------------------------------------------------------------------------------------
Total recognised income and expense for the period 486 249 1,214
=======================================================================================================================
Attributable to:
Minority interests 21 11 81
Equity holders of the Company 465 238 1,133
=======================================================================================================================
=======================================================================================================================
P21
Notes to the financial information
3.1 Restatement of 2005 comparatives
The 30 June 2005 comparatives have been restated for the following items:
1.After the 2005 Interim Results were presented 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 the six months to 30 June 2005 of £8m, due to the corresponding
reclassification of interest payments as distributions and an increase in total equity of £398m. On 13 March 2006, the
terms were varied and it is now classified as debt.
2.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 for the period ended 30 June 2005 was
reclassified from Other operational income and included in Investment management.
3.2 Profit from continuing operations after tax from covered business
UK International Life and Investment Total
pensions manage-
total ment(1)
Six months ended 30 June 2006 Notes £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Contribution from new business after cost of capital 179 13 192 27 219
Contribution from in-force business:
- expected return 158 33 191 12 203
- experience variances 3.4 53 (6) 47 12 59
- operating assumption changes 3.5 (7) 3 (4) 17 13
Development costs (10) - (10) (1) (11)
Contribution from shareholder net worth 32 8 40 3 43
-----------------------------------------------------------------------------------------------------------------------
Operating profit 405 51 456 70 526
Variation from longer term investment return 125 (31) 94 (8) 86
Effect of economic assumption changes (2) (16) (18) - (18)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax 528 4 532 62 594
Tax (175) (1) (176) (18) (194)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 353 3 356 44 400
=======================================================================================================================
Six months ended 30 June 2005
-----------------------------------------------------------------------------------------------------------------------
Contribution from new business after cost of capital 129 11 140 21 161
Contribution from in-force business:
- expected return 145 29 174 10 184
- experience variances 3.4 11 - 11 12 23
- operating assumption changes 3.5 (4) (3) (7) 13 6
Development costs (5) - (5) - (5)
Contribution from shareholder net worth 64 8 72 3 75
-----------------------------------------------------------------------------------------------------------------------
Operating profit 340 45 385 59 444
Variation from longer term investment return 135 10 145 11 156
Effect of economic assumption changes 21 (11) 10 1 11
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax 496 44 540 71 611
Tax (131) (15) (146) (21) (167)
Effect of UK tax changes (276) - (276) - (276)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 89 29 118 50 168
=======================================================================================================================
1. For covered business, Investment management comprises managed pension funds and is included in the total Investment
management result of £87m (1H05: £70m) see note 3.8.
=======================================================================================================================
P22
Notes to the financial information
3.2 Profit from continuing operations after tax from covered business (continued)
UK International Life and Investment Total
pensions manage-
total ment(1)
Full year ended 31 December 2005 Notes £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Contribution from new business after cost of capital 306 25 331 49 380
Contribution from in-force business:
- expected return 294 62 356 21 377
- experience variances 3.4 89 - 89 25 114
- operating assumption changes 3.5 (14) (5) (19) 14 (5)
Development costs (20) - (20) (1) (21)
Contribution from shareholder net worth 146 18 164 6 170
-----------------------------------------------------------------------------------------------------------------------
Operating profit 801 100 901 114 1,015
Variation from longer term investment return 653 53 706 35 741
Effect of economic assumption changes 3 5 8 - 8
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax 1,457 158 1,615 149 1,764
Tax (421) (51) (472) (45) (517)
Effect of UK tax changes (276) - (276) - (276)
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations after tax 760 107 867 104 971
=======================================================================================================================
1. For covered business, Investment management comprises managed pension funds and is included in the total Investment
management result of £136m see note 3.8.
3.3 Life and pensions operating profit
30.06.06 30.06.05 Full year
31.12.05
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK 405 340 801
USA 20 19 24
Netherlands 17 16 43
France 14 10 33
-----------------------------------------------------------------------------------------------------------------------
456 385 901
=======================================================================================================================
=======================================================================================================================
P23
Notes to the financial information
3.4 Analysis of experience variances
UK International Life and Investment Total
pensions manage-
total ment
Six months ended 30 June 2006 £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Persistency (5) 4 (1) 4 3
Mortality / morbidity 6 (7) (1) - (1)
Expenses (1) - (1) (1) (2)
Other 53 (3) 50 9 59
-----------------------------------------------------------------------------------------------------------------------
53 (6) 47 12 59
=======================================================================================================================
Full experience investigations are not undertaken at the half year. A conservative estimate is made of both positive and
negative variances.
UK other experience variances of £53m principally comprise the impact of the release of prudent margins as more data is
loaded onto the new administration system for bulk purchase annuity business (£17m) and opening adjustments (£39m)
primarily to reflect a revision of assessments of prior and future tax. These opening adjustments had a broadly
neutral effect on the embedded value with the positive variance here being offset by a negative variance in the
contribution from shareholder net worth.
Investment management other experience variances of £9m include the effect of higher average fee rates than assumed.
Six months ended 30 June 2005
-----------------------------------------------------------------------------------------------------------------------
Persistency (2) 3 1 7 8
Mortality / morbidity 7 (6) 1 - 1
Expenses (2) 4 2 1 3
Other 8 (1) 7 4 11
-----------------------------------------------------------------------------------------------------------------------
11 - 11 12 23
=======================================================================================================================
UK other experience variances of £8m principally comprise the impact of the release of prudent margins as more data is
loaded onto the new administration system for bulk purchase annuity business (£4m).
Investment management other experience variances of £4m include the effect of higher average fee rates than assumed.
Full year ended 31 December 2005
-----------------------------------------------------------------------------------------------------------------------
Persistency 2 2 4 15 19
Mortality / morbidity 14 (7) 7 - 7
Expenses (6) 1 (5) 2 (3)
Other 79 4 83 8 91
-----------------------------------------------------------------------------------------------------------------------
89 - 89 25 114
=======================================================================================================================
UK other experience variances of £79m principally comprise the impact of the release of prudent margins as more data is
loaded onto the new administration system for bulk purchase annuity business (£73m).
Investment management other experience variances of £8m include the effect of higher average fee rates than assumed.
=======================================================================================================================
P24
Notes to the financial information
3.5 Analysis of operating assumption changes
UK International Life and Investment Total
pensions manage-
total ment
Six months ended 30 June 2006 £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Persistency (7) 9 2 - 2
Mortality / morbidity - (6) (6) - (6)
Expenses (12) - (12) - (12)
Other 12 - 12 17 29
-----------------------------------------------------------------------------------------------------------------------
(7) 3 (4) 17 13
=======================================================================================================================
Full experience investigations are not undertaken at the half year. A conservative approach is taken when revising any
future operating assumptions.
UK other operating assumption changes of £12m principally comprise the impact of revisions to the anticipated future
releases of prudent margins as more data is loaded onto the new administration system for bulk purchase annuities
(£15m).
Investment management other operating assumption changes of £17m principally arise from the continuation of the ten
year lapse assumption for all contracts through the extension of the modelling period.
Six months ended 30 June 2005
-----------------------------------------------------------------------------------------------------------------------
Persistency (1) (3) (4) - (4)
Mortality / morbidity - - - - -
Expenses (2) - (2) - (2)
Other (1) - (1) 13 12
-----------------------------------------------------------------------------------------------------------------------
(4) (3) (7) 13 6
=======================================================================================================================
Investment management other operating assumption changes of £13m arise from the continuation of the ten year lapse
assumption for all contracts through the extension of the modelling period.
Full year ended 31 December 2005
-----------------------------------------------------------------------------------------------------------------------
Persistency 30 (12) 18 - 18
Mortality / morbidity 11 (11) - - -
Expenses (24) 4 (20) - (20)
Other (31) 14 (17) 14 (3)
-----------------------------------------------------------------------------------------------------------------------
(14) (5) (19) 14 (5)
=======================================================================================================================
UK other operating assumption changes of -£31m relate mainly to reserve strengthening relating to endowment compensation
(-£24m).
Investment management other operating assumption changes of £14m arise from the continuation of the ten year lapse
assumption for all contracts through the extension of the modelling period.
3.6 Variation from longer term investment return
30.06.06 30.06.05 Full year
31.12.05
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
Total covered business 86 156 741
General insurance (1) (2) 8
Other operational income 28 52 121
-----------------------------------------------------------------------------------------------------------------------
113 206 870
=======================================================================================================================
=======================================================================================================================
P25
Notes to the financial information
3.7 Time value of options and guarantees
30.06.06 30.06.05 Full year
31.12.05
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
Life and pensions:
UK with-profits 2 4 2
UK non profit 16 25 21
International 12 8 5
-----------------------------------------------------------------------------------------------------------------------
30 37 28
=======================================================================================================================
For UK non profit, the reduction is the result of the reduced financial impact of caps and collars on index linked
annuities.
For International, the increase is primarily the result of the impact of the rise in US interest rates on universal
life contracts which have a guaranteed minimum crediting rate and a guaranteed surrender value.
3.8 Investment management income statement
30.06.06 30.06.05 Full year
Restated 31.12.05
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
From continuing operations
Managed pension funds 70 59 114
Ventures 2 2 4
Property 4 3 4
Retail investments 5 4 7
Other external income 4 2 5
Other income 2 - 2
-----------------------------------------------------------------------------------------------------------------------
Operating profit from investment management 87 70 136
Variation from longer term investment return (8) 11 35
Effect of economic assumption changes - 1 -
-----------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities before tax 79 82 171
Tax (23) (22) (52)
-----------------------------------------------------------------------------------------------------------------------
Profit from ordinary activities after tax 56 60 119
=======================================================================================================================
Other income excludes the element relating to managed pension funds on the IFRS basis.
Investment management comprises the managed pensions fund business on an EEV basis and other investment management
business on an IFRS basis.
=======================================================================================================================
P26
Notes to the financial information
3.9 Analysis of tax
30.06.06 30.06.06 30.06.05 30.06.05 Full year Full year
Restated Restated 31.12.05 31.12.05
Profit/(loss) Tax Profit Tax Profit Tax
before before before
tax tax tax
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
From continuing operations
UK life and pensions 405 (121) 340 (98) 801 (230)
International life and pensions 51 (16) 45 (15) 100 (33)
-----------------------------------------------------------------------------------------------------------------------
456 (137) 385 (113) 901 (263)
Investment management 87 (25) 70 (21) 136 (42)
General insurance 2 - 4 (1) 14 (4)
Other operational income 15 3 18 (4) 41 (5)
-----------------------------------------------------------------------------------------------------------------------
Operating profit 560 (159) 477 (139) 1,092 (314)
Variation from longer term investment return 113 (45) 206 (43) 870 (246)
Effect of economic assumption changes (18) 6 11 (4) 8 (3)
Property income attributable to minority interests 21 - 11 - 81 -
-----------------------------------------------------------------------------------------------------------------------
Profit from continuing operations before tax / Tax 676 (198) 705 (186) 2,051 (563)
=======================================================================================================================
3.10 Effect of 2005 UK tax changes
The 2005 tax charge of £276m represented a one-off reduction in the embedded value arising from a change in tax law. The
Finance (No. 2) Act 2005 included provisions which change the way in which investment return is apportioned between
categories of business for the purposes of computing taxable profits earned from writing pension business. These changes
result in significantly larger taxable pension business profits in the non profit part of the fund.
=======================================================================================================================
P27
Notes to the financial information
3.11 Earnings per share
(a) Earnings per share
30.06.06 30.06.06 30.06.06 30.06.06 30.06.05 30.06.05 30.06.05 30.06.05
Restated Restated Restated Restated
Profit/ Tax Profit/ Per Profit Tax Profit/ Per
(loss) (charge)/ (loss) share before (charge)/ (loss) share
before credit after tax credit after
tax tax tax
£m £m £m p £m £m £m p
-----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations 560 (159) 401 6.19 477 (139) 338 5.22
Variation from longer term
investment return 113 (45) 68 1.05 206 (43) 163 2.52
Effect of economic assumption
changes (18) 6 (12) (0.19) 11 (4) 7 0.11
Profit from discontinued operations - - - - 12 1 13 0.20
Effect of UK tax changes - - - - - (276) (276) (4.26)
Distributions on subordinated
borrowings designated as equity - - (8) (0.12)
-----------------------------------------------------------------------------------------------------------------------
Earnings per share 655 (198) 457 7.05 706 (461) 237 3.67
=======================================================================================================================
Full year Full year Full year Full year
31.12.05 31.12.05 31.12.05 31.12.05
Profit Tax Profit/ Per
before (charge)/ (loss) share
tax credit after
tax
£m £m £m p
-----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations 1,092 (314) 778 12.02
Variation from longer term
investment return 870 (246) 624 9.64
Effect of economic assumption
changes 8 (3) 5 0.08
Profit from discontinued operations 12 1 13 0.20
Effect of UK tax changes - (276) (276) (4.27)
Distributions on subordinated
borrowings designated as equity (16) (0.25)
-----------------------------------------------------------------------------------------------------------------------
Earnings per share 1,982 (838) 1,128 17.42
=======================================================================================================================
=======================================================================================================================
P28
Notes to the financial information
3.11 Earnings per share (continued)
(b) Diluted earnings per share
(i) Based on operating profit from continuing operations after tax
30.06.06 30.06.06 30.06.06 30.06.05 30.06.05 30.06.05
Restated Restated
Profit Number Per share Profit Number Per share
after tax of shares(1) after tax of shares(1)
£m m p £m m p
-----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations after tax 401 6,478 6.19 338 6,477 5.22
Net shares under options allocable
for no further consideration - 41 (0.04) - 35 (0.03)
Convertible bonds outstanding 12 285 (0.08) 8 285 (0.10)
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 413 6,804 6.07 346 6,797 5.09
=======================================================================================================================
Full year Full year Full year
31.12.05 31.12.05 31.12.05
Profit Number Per share
after tax of shares(1)
£m m p
-----------------------------------------------------------------------------------------------------------------------
Operating profit from continuing
operations after tax 778 6,474 12.02
Net shares under options allocable
for no further consideration - 38 (0.07)
Convertible bonds outstanding 20 285 (0.21)
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 798 6,797 11.74
=======================================================================================================================
(ii) Based on profit attributable to ordinary equity holders of the Company
30.06.06 30.06.06 30.06.06 30.06.05 30.06.05 30.06.05
Profit Number Per share Profit Number Per share
after tax of shares(1) after tax of shares(1)
£m m p £m m p
-----------------------------------------------------------------------------------------------------------------------
Profit attributable to ordinary equity
holders of the Company 457 6,478 7.05 237 6,477 3.67
Net shares under options allocable
for no further consideration - 41 (0.04) - 35 (0.02)
Convertible bonds outstanding 12 285 (0.12) 8 285 (0.04)
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 469 6,804 6.89 245 6,797 3.61
=======================================================================================================================
Full year Full year Full year
31.12.05 31.12.05 31.12.05
Profit Number Per share
after tax of shares(1)
£m m p
-----------------------------------------------------------------------------------------------------------------------
Profit attributable to ordinary equity
holders of the Company 1,128 6,474 17.42
Net shares under options allocable
for no further consideration - 38 (0.09)
Convertible bonds outstanding 20 285 (0.44)
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 1,148 6,797 16.89
=======================================================================================================================
1. Weighted average number of shares.
=======================================================================================================================
P29
Notes to the financial information
3.12 Embedded value reconciliation
UK UK UK International Life and Investment Total
value of shareholder life and life and pensions manage-
in-force net worth pensions pensions total ment(1)
As at 30 June 2006 Notes £m £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
At 1 January
Value of in-force business 3,142 - 3,142 570 3,712 238 3,950
Shareholder net worth - 1,762 1,762 298 2,060 184 2,244
-----------------------------------------------------------------------------------------------------------------------
3,142 1,762 4,904 868 5,772 422 6,194
Exchange rate movements - - - (39) (39) - (39)
-----------------------------------------------------------------------------------------------------------------------
3,142 1,762 4,904 829 5,733 422 6,155
Profit for the period 298 55 353 3 356 44 400
Capital movements - - - 17 17 - 17
Distributions relating to:
--------- --------- ---------
With-profits EV : (28): : : : (28):
Non profit EV 5.4(a) : : : (67): : (67):
Shareholder net worth EV 5.4(a) : : : (43): : (43):
Subordinated debt : : : (13): : (13):
--------- --------- ---------
Distributions (28) (123) (151) - (151) - (151)
Movement in pension
deficit - 13 13 - 13 - 13
Inter-fund transfer (7) 7 - - - - -
-----------------------------------------------------------------------------------------------------------------------
Embedded value 3,405 1,714 5,119 849 5,968 466 6,434
=======================================================================================================================
Represented by:
With-profits 756 756
Non profit 2,649 2,649
-----------------------------------------------------------------------------------------------------------------------
Value of in-force business 3,405 - 3,405 601 4,006 250 4,256
Shareholder net worth - 1,714 1,714 248 1,962 216 2,178
=======================================================================================================================
1. For covered business, Investment management comprises managed pension funds and is included in the total Investment
management shareholders' equity of £564m as at 30 June 2006.
=======================================================================================================================
P30
Notes to the financial information
3.12 Embedded value reconciliation (continued)
UK UK UK International Life and Investment Total
value of shareholder life and life and pensions manage-
in-force net worth pensions pensions total ment(1)
As at 30 June 2005 Notes £m £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
At 1 January
Value of in-force business 2,885 - 2,885 431 3,316 191 3,507
Shareholder net worth - 1,560 1,560 276 1,836 162 1,998
-----------------------------------------------------------------------------------------------------------------------
2,885 1,560 4,445 707 5,152 353 5,505
Exchange rate movements - - - 25 25 - 25
-----------------------------------------------------------------------------------------------------------------------
2,885 1,560 4,445 732 5,177 353 5,530
Profit for the period 138 (49) 89 29 118 50 168
Capital movements - - - 5 5 - 5
Distributions relating to:
--------- --------- ---------
With-profits EV : (23): : : : (23):
Non profit EV 5.4(a) : : : (57): : (57):
Shareholder net worth EV 5.4(a) : : : (35): : (35):
Subordinated debt : : : (13): : (13):
--------- --------- ---------
Distributions (23) (105) (128) - (128) - (128)
Movement in pension deficit - (7) (7) - (7) - (7)
Inter-fund transfer (65) 65 - - - - -
-----------------------------------------------------------------------------------------------------------------------
Embedded value 2,935 1,464 4,399 766 5,165 403 5,568
=======================================================================================================================
Represented by:
With-profits 667 667
Non profit 2,268 2,268
-----------------------------------------------------------------------------------------------------------------------
Value of in-force business 2,935 - 2,935 476 3,411 215 3,626
Shareholder net worth - 1,464 1,464 290 1,754 188 1,942
=======================================================================================================================
1. For covered business, Investment management comprises managed pension funds
and is included in the total Investment management shareholders' equity of £489m
as at 30 June 2005.
=======================================================================================================================
P31
Notes to the financial information
3.12 Embedded value reconciliation (continued)
UK UK UK International Life and Investment Total
value of shareholder life and life and pensions manage-
in-force net worth pensions pensions total ment(1)
As at 31 December 2005 Notes £m £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
At 1 January
Value of in-force business 2,885 - 2,885 431 3,316 191 3,507
Shareholder net worth - 1,560 1,560 276 1,836 162 1,998
-----------------------------------------------------------------------------------------------------------------------
2,885 1,560 4,445 707 5,152 353 5,505
Exchange rate movements - - - 51 51 - 51
-----------------------------------------------------------------------------------------------------------------------
2,885 1,560 4,445 758 5,203 353 5,556
Profit for the period 585 175 760 107 867 104 971
Capital movements - - - 5 5 - 5
Distributions relating to:
--------- --------- ---------
With-profits EV : (46): : : : (46):
Non profit EV 5.4(a) : : : (119): : (119):
Shareholder net worth EV 5.4(a) : : : (100): : (100):
Subordinated debt : : : (26): : (26):
--------- --------- ---------
Distributions (46) (245) (291) (2) (293) (35) (328)
Movement in pension deficit - (10) (10) - (10) - (10)
Inter-fund transfer (282) 282 - - - - -
-----------------------------------------------------------------------------------------------------------------------
Embedded value 3,142 1,762 4,904 868 5,772 422 6,194
=======================================================================================================================
Represented by:
With-profits 755 755
Non profit 2,387 2,387
-----------------------------------------------------------------------------------------------------------------------
Value of in-force business 3,142 - 3,142 570 3,712 238 3,950
Shareholder net worth - 1,762 1,762 298 2,060 184 2,244
=======================================================================================================================
1. For covered business, Investment management comprises managed pension funds and is included in the total Investment
management shareholders' equity of £506m as at 31 December 2005.
=======================================================================================================================
P32
Notes to the financial information
3.13 Analysis of ordinary shareholders' equity
UK International Life and Investment Other Total
life and life and pensions manage- operations(2)
pensions pensions total ment(1)
As at 30 June 2006 £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Analysed as:
IFRS basis ordinary shareholders' equity 2,591 713 3,304 216 732 4,252
Additional retained profit on an EEV basis 2,528 136 2,664 250 - 2,914
-----------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity on an EEV basis 5,119 849 5,968 466 732 7,166
=======================================================================================================================
Comprising:
Shareholder net worth
- Free surplus - 96 96 198
- Required capital to cover solvency margin 689 152 841 18
- Other required capital 1,025 - 1,025 -
Value of in-force
- Value of in-force business 3,415 656 4,071 254
- Cost of capital (10) (55) (65) (4)
=======================================================================================================================
As at 30 June 2005 (restated)
-----------------------------------------------------------------------------------------------------------------------
Analysed as:
IFRS basis ordinary shareholders' equity 2,301 699 3,000 188 609 3,797
Additional retained profit on an EEV basis 2,098 67 2,165 215 - 2,380
-----------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity on an EEV basis 4,399 766 5,165 403 609 6,177
=======================================================================================================================
Comprising:
Shareholder net worth
- Free surplus - 174 174 170
- Required capital to cover solvency margin 575 116 691 18
- Other required capital 889 - 889 -
Value of in-force
- Value of in-force business 2,940 526 3,466 217
- Cost of capital (5) (50) (55) (2)
=======================================================================================================================
Free surplus is the market value of any capital and surplus allocated to, but not required to support, the in-force
covered business at the valuation date.
Total required capital includes any amount of assets attributed to the covered business over and above that required to
back liabilities for covered business whose distribution to shareholders is restricted.
1. Investment management comprises managed pension funds and is included in the total Investment management
shareholders' equity of £564m (at 30 June 2005: £489m).
2. Other Investment management businesses included on an IFRS basis of £98m are included in other operations (at 30 June
2005: £86m).
=======================================================================================================================
P33
Notes to the financial information
3.13 Analysis of ordinary shareholders' equity (continued)
UK International Life and Investment Other Total
life and life and pensions manage- operations(2)
pensions pensions total ment(1)
As at 31 December 2005 £m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
Analysed as:
IFRS basis ordinary shareholders' equity 2,560 737 3,297 184 776 4,257
Additional retained profit on an EEV basis 2,344 131 2,475 238 - 2,713
-----------------------------------------------------------------------------------------------------------------------
Ordinary shareholders' equity on an EEV basis 4,904 868 5,772 422 776 6,970
=======================================================================================================================
Comprising:
Shareholder net worth
- Free surplus - 148 148 166
- Required capital to cover solvency margin 689 150 839 18
- Other required capital 1,073 - 1,073 -
Value of in-force
- Value of in-force business 3,148 618 3,766 243
- Cost of capital (6) (48) (54) (5)
=======================================================================================================================
Free surplus is the market value of any capital and surplus allocated to, but not required to support, the in-force
covered business at the valuation date.
Total required capital includes any amount of assets attributed to the covered business over and above that required to
back liabilities for covered business whose distribution to shareholders is restricted.
1. Investment management comprises managed pension funds and is included in the total Investment management
shareholders' equity as at 31 December 2005 of £506m.
2. Other Investment management businesses as at 31 December 2005 included on an IFRS basis of £84m are included in other
operations.
=======================================================================================================================
P34
Notes to the financial information
3.14 Segmental analysis of ordinary shareholders' equity
At 30.06.06 At 30.06.06 At 30.06.06 At 30.06.05 At 30.06.05 At 30.06.05
Restated Restated
Covered Other Total Covered Other Total
business business business business
EEV basis IFRS basis EEV basis IFRS basis
£m £m £m £m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK(1) 5,119 - 5,119 4,399 - 4,399
Society shareholder capital(2) - 2,042 2,042 - 2,048 2,048
-----------------------------------------------------------------------------------------------------------------------
5,119 2,042 7,161 4,399 2,048 6,447
Embedded value of international life and
pensions businesses
- USA 537 - 537 543 - 543
- Netherlands 197 - 197 138 - 138
- France 115 - 115 85 - 85
-----------------------------------------------------------------------------------------------------------------------
5,968 2,042 8,010 5,165 2,048 7,213
Investment management 466 98 564 403 86 489
-----------------------------------------------------------------------------------------------------------------------
6,434 2,140 8,574 5,568 2,134 7,702
General insurance - 164 164 - 161 161
Corporate funds(3) - (1,572) (1,572) - (1,686) (1,686)
-----------------------------------------------------------------------------------------------------------------------
6,434 732 7,166 5,568 609 6,177
=======================================================================================================================
At 31.12.05 At 31.12.05 At 31.12.05
Covered Other Total
business business
EEV basis IFRS basis
£m £m £m
-----------------------------------------------------------------------------------------------------------------------
UK(1) 4,904 - 4,904
Society shareholder capital(2) - 1,896 1,896
-----------------------------------------------------------------------------------------------------------------------
4,904 1,896 6,800
Embedded value of international life and
pensions businesses
- USA 566 - 566
- Netherlands 192 - 192
- France 110 - 110
-----------------------------------------------------------------------------------------------------------------------
5,772 1,896 7,668
Investment management 422 84 506
-----------------------------------------------------------------------------------------------------------------------
6,194 1,980 8,174
General insurance - 167 167
Corporate funds(3) - (1,371) (1,371)
-----------------------------------------------------------------------------------------------------------------------
6,194 776 6,970
=======================================================================================================================
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 £518m (1H05: £501m; FY05: £509m), senior debt of £602m and subordinated borrowings
of £813m (1H05 £801m; FY05: £809m). £602m has been lent on to the UK Long Term Fund.
=======================================================================================================================
P35
Notes to the financial information
3.15 Assumptions
UK assumptions
--------------
The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to redemption yields
available in the market at the end of the reporting period. The corresponding return on equities and property is equal
to the fixed interest gilt assumption plus the appropriate risk premium. An asset mix consistent with the current
investment policy and future management intentions has been assumed within the projections.
Economic assumptions
--------------------
30.06.06 30.06.05 31.12.05 31.12.04
% p.a. % p.a. % p.a. % p.a.
Equity risk premium 3.0 3.0 3.0 3.0
Property risk premium 2.0 2.0 2.0 2.0
Investment return
- Gilts:
- Fixed interest 4.6 4.2 4.1 4.5
- RPI linked 4.7 4.2 4.2 4.5
- Non gilts:
- Fixed interest 4.9 - 5.3 4.5 - 5.0 4.4 - 4.8 4.9 - 5.3
- RPI linked 4.7 - 5.2 4.3 - 4.8 4.2 - 4.6 4.7 - 5.1
- Equities 7.6 7.2 7.1 7.5
- Property 6.6 6.2 6.1 6.5
Risk margin 3.0 3.0 3.0 3.0
Risk discount rate (net of tax) 7.6 7.2 7.1 7.5
Inflation
- Expenses/earnings 4.1 3.6 3.9 3.8
- Indexation 3.1 2.6 2.9 2.8
The assumed returns on non gilt securities are net of an allowance for default risk of 0.2% p.a. (2005: 0.2% p.a.),
other than for certain government-supported securities where no such allowance is made.
UK life and pensions
--------------------
i. The value of the Sub-fund is the discounted value of total projected investment returns over its lifetime.
ii. Assets are valued at market value. For the projection of fixed interest and RPI linked investment returns, asset
values are adjusted to reflect the assumed interest and inflation rates.
iii. Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders'
portion of the with-profits business. The proportion of profits derived from with-profits business allocated to
shareholders has been assumed to be 10% throughout.
iv. The value of in-force business reflects the cost, including administration expenses, of providing for benefit
enhancement or compensation in relation to certain products.
v. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those
for mortality, morbidity, persistency and maintenance expenses (excluding the development costs referred to
below). These are reviewed annually. An allowance is made for future improvements in annuitant mortality based on
experience and externally published data. Male annuitant mortality is assumed to improve in accordance with CMI
Working Paper 1, projection MC for future experience with a minimum annual improvement of 0.6%, and the average of
projections MC and LC for statutory reserving with a minimum annual improvement of 0.8%. Female annuitant
mortality is assumed to improve in accordance with the MC projection from CMI Working Paper 1 for statutory
reserving and at 70% of this rate for future experience, with the same underpinning minima as for males.
vi. The subordinated debt capital has been included in the embedded value at the face value of £602m (estimated market
value of £669m at 30 June 2006 (£699m at 31 December 2005)). If the market value of the subordinated debt capital
were used, total embedded value would increase by £20m (31 December 2005: £31m).
vii. Development costs relate to strategic systems.
viii. Projected tax has been determined assuming current tax legislation and rates.
=======================================================================================================================
P36
Notes to the financial information
3.15 Assumptions (continued)
ix. EEV results are computed on an after tax basis and are grossed up to the pre-tax level for presentation in the
profit and loss account. The tax rate used for grossing-up is the corporation tax rate of 30% (2005: 30%), except
for the profit attributable to shareholder net worth, where the rate used is derived from the tax attributed to
the contribution from shareholder net worth in the IFRS accounts. To arrive at operating profit, the contribution
from shareholder net worth is grossed up at 20% (2005: 20%) which reflects the tax associated with a longer term
investment return.
UK managed pension funds
------------------------
x. All contracts are assumed to lapse over a 10 year period. Fees are projected on a basis which reflects current
charges or, if less, anticipated charges. New business consists of monies received from new clients and
incremental receipts from existing clients, and excludes the roll-up of the investment returns. Development costs
relate to strategic systems.
International
-------------
xi. Key assumptions:
30.06.06 30.06.05 31.12.05 31.12.04
% p.a. % p.a. % p.a. % p.a.
USA
Reinvestment rate 5.9 4.7 5.1 4.9
Risk margin 3.0 3.0 3.0 3.0
Risk discount rate (net of tax) 8.2 7.0 7.4 7.3
Europe
Government bond return 4.1 3.3 3.3 3.8
Risk margin 3.0 3.0 3.0 3.0
Risk discount rate (net of tax) 7.1 6.3 6.3 6.8
xii. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those
for mortality, morbidity, persistency and maintenance expenses.
Stochastic calculations
-----------------------
xiii. The time value of options and guarantees is calculated using economic and non-economic assumptions consistent with
those used for the deterministic embedded value calculations.
This section describes the models used to generate future investment simulations, and gives some sample statistics
for the simulations used. A single model has been used for UK and international business, with different economic
assumptions for each territory.
Government nominal interest rates are generated using a LIBOR Money Market Model projecting full yield curves at
annual intervals. The model provides a good fit to the initial yield curve.
The total annual returns on equities and property are calculated as the return on 1 year bonds plus an excess
return. The excess return is assumed to have a lognormal distribution. Corporate bonds are modelled separately by
credit rating using stochastic credit spreads over the risk-free rates, transition matrices and default recovery
rates. The real yield curve model assumes that the real short rate follows a mean-reverting process subject to two
normally distributed random shocks.
Asset classes
The significant asset classes are for:
- UK with-profits business - equities, property and fixed rate bonds of various durations;
- UK annuity business - fixed rate and index-linked bonds of various durations; and
- International business - fixed rate bonds of various durations.
=======================================================================================================================
P36
Notes to the financial information
3.15 Assumptions (continued)
Summary statistics
The following table sets out means and standard deviations (StDev) of future returns as at 31 December 2005 for
the most significant asset classes. Correlations between asset classes have been set based on an internal
assessment of historical data.
10-year return 20-year return
Mean(1) StDev(2) Mean(1) StDev(2)
UK Business (Sterling)
Government bonds 4.7% 4.5% 4.6% 3.5%
Corporate bonds 5.3% 3.1% 5.2% 3.5%
Property (excess returns) 2.0% 15.1% 2.0% 15.1%
Equities (excess returns) 3.0% 19.9% 3.1% 20.2%
European Business (Euro)
Long Government bonds(3) 4.1% 5.3% 4.6% 5.4%
Short Government bonds(4) 4.1% 3.9% 4.6% 7.8%
US Business (US Dollar)
Long Government bonds(3) 5.4% 6.3% 5.9% 6.2%
1. Other than for equities and property, means are calculated as the excess of 1 year bond asset return means
plus 1 year bond means. Means for the equities and property excess returns are calculated as the excess of 1
year bond asset return means. Each mean is derived by calculating the accumulated value of a unit asset
invested to time n years for each simulation, averaging the resultant values across all simulations, then
calculating the equivalent annual return required to give this average accumulation (by taking the nth root
of the average accumulation and deducting 1).
2. Standard deviations are calculated by accumulating a unit investment for n years in each simulation, taking
the natural logarithm of the result, calculating the variance of this statistic, dividing by n and taking the
square root. Equities and property values use excess returns. The results are comparable to implied
volatilities quoted in investment markets.
3. Long term bonds are defined to be 10-year par-coupon bonds.
4. Short term bonds are defined to be 1 year duration bonds.
Risk discount rate
The risk discount rate is scenario-dependent within the stochastic projection. It is calculated by applying the
deterministic risk margin to the risk free rate in each stochastic projection.
Sensitivity calculations
------------------------
In accordance with the dispensation within the CFO guidelines, a full sensitivity analysis is only provided annually.
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