REG - Legal & General Grp - L&G Full Year Results 2018 Part 2
RNS Number : 9538RLegal & General Group Plc06 March 2019Legal & General Group Plc
Full Year Results 2018 Part 2
IFRS Disclosures on performance and Release from operations Page 33
1.01 Operating profit#
For the year ended 31 December 2018
2018
2017
Notes
£m
£m
From continuing operations
Legal & General Retirement (LGR)
1.03
1,548
1,247
- LGR Institutional (LGRI)
1,149
906
- LGR Retail (LGRR)
399
341
Legal & General Investment Management (LGIM)
1.04
407
400
Legal & General Capital (LGC)
1.06
322
272
Legal & General Insurance (LGI)
1.03
308
303
- UK and Other
246
209
- US (LGIA)
62
94
General Insurance
1.05
-
37
Operating profit from divisions:
From continuing operations
2,585
2,259
From discontinued operations1
79
107
Operating profit from divisions
2,664
2,366
Group debt costs2
(203)
(191)
Group investment projects and central expenses
1.07
(126)
(120)
Operating profit
2,335
2,055
Investment and other variances
1.08
(188)
24
Gains on non-controlling interests
(19)
11
Adjusted profit before tax attributable to equity holders
2,128
2,090
Tax expense attributable to equity holders
3.07
(320)
(188)
Profit for the year
1,808
1,902
Profit attributable to equity holders
1,827
1,891
Earnings per share:
Basic (pence per share)3
1.09
30.79p
31.87p
Diluted (pence per share)3
1.09
30.64p
31.73p
1. Operating profit from discontinued divisions primarily reflects the operating profit of the Savings division following the group's announcement in December 2017 to sell the Mature Savings business to Swiss Re. For these operating profit disclosures, discontinued operations in 2017 also includes the results of Legal & General Netherlands (LGN) which was sold during 2017 and was a component of the LGI (UK and Other) division.
2. Group debt costs exclude interest on non recourse financing.
3. All earnings per share calculations are based on profit attributable to equity holders of the company.
This supplementary operating profit information (one of the group's key performance indicators) provides further analysis of the results reported under IFRS and the group believes it provides shareholders with a better understanding of the underlying performance of the business in the year.
· LGR represents worldwide pension risk transfer business, including longevity insurance (within LGRI), and individual retirement and lifetime mortgages (within LGRR).
· LGIM represents institutional and retail investment management and workplace savings businesses.
· LGC represents shareholder assets invested in direct investments primarily in the areas of housing, urban regeneration, clean energy and SME finance, as well as traded and treasury assets.
· LGI primarily represents UK and US retail protection business, UK group protection and Fintech business.
· General Insurance comprises short-term household and other personal insurance.
· Discontinued operations represent businesses that have either been sold or announced to sell subject to formal transfer, namely Mature Savings (including with-profits). In 2017 the discontinued operations include Mature Savings (sale announced in December 2017) and Legal & General Netherlands (sold in April 2017).
Operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Operating profit therefore reflects longer-term economic assumptions for the group's insurance businesses and shareholder funds, except for LGC's trading businesses (which reflects the IFRS profit before tax) and LGIA non-term business (which excludes unrealised investment returns to align with the liability measurement under US GAAP). Variances between actual and smoothed investment return assumptions are reported below operating profit, which include any differences between investment return on actual assets and the long-term asset mix. Exceptional income and expenses which arise outside the normal course of business in the period, such as merger and acquisition, and start-up costs, are also excluded from operating profit.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.
IFRS Disclosures on performance and Release from operations Page 34
1.02 Reconciliation of release from operations to operating profit# before tax
Changes in
valuation assump- tions
Operating profit/ (loss) after tax
Operating profit/ (loss) before
tax
New business surplus/ (strain)
Net
release from operations
Release from operations1
Exper- ience variances
Non-cash items and other
Inter- national and other
Tax expense/ (credit)
For the year ended
31 December 2018
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
LGR
551
217
768
33
444
40
-
1,285
263
1,548
- LGRI
379
188
567
22
324
43
-
956
193
1,149
- LGRR
172
29
201
11
120
(3)
-
329
70
399
LGIM
354
(25)
329
(3)
(1)
1
-
326
81
407
- LGIM (excluding
Workplace Savings)
323
-
323
-
-
-
-
323
81
404
- Workplace Savings2
31
(25)
6
(3)
(1)
1
-
3
-
3
LGC
261
-
261
-
-
-
-
261
61
322
LGI
258
(22)
236
24
35
(19)
(7)
269
39
308
- UK and Other
181
(22)
159
24
35
(19)
1
200
46
246
- US (LGIA)
77
-
77
-
-
-
(8)
69
(7)
62
General Insurance
-
-
-
-
-
-
-
-
-
-
From continuing operations
1,424
170
1,594
54
478
22
(7)
2,141
444
2,585
From discontinued operations3
44
-
44
(6)
-
26
-
64
15
79
Total from divisions
1,468
170
1,638
48
478
48
(7)
2,205
459
2,664
Group debt costs
(164)
-
(164)
-
-
-
-
(164)
(39)
(203)
Group investment projects and expenses
(34)
-
(34)
-
-
-
(68)
(102)
(24)
(126)
Total
1,270
170
1,440
48
478
48
(75)
1,939
396
2,335
1. Release from operations includes dividends from the US of £77m within the US (LGIA).
2. Workplace Savings represents administration business only. Profits on fund management services are included within LGIM (excluding Workplace Savings).
3. Discontinued operations reflects the result of the Savings division following the announcement in December 2017 to sell the Mature Savings business to Swiss Re.
Release from operations for LGR, LGIM - Workplace Savings and LGI represents the expected IFRS surplus generated in the year from the in-force non profit annuities, workplace savings and UK protection businesses using best estimate assumptions. The LGIM release from operations also includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from LGIA. The release from operations within discontinued operations primarily reflects the unwind of expected profits after tax under the risk transfer agreement with ReAssure Limited (a subsidiary of Swiss Re) from the Mature Savings business.
New business surplus/strain for LGR, LGIM - Workplace Savings and LGI represents the cost of acquiring new business and setting up prudent reserves in respect of the new business for UK non profit annuities, workplace savings and protection, net of tax. The new business surplus and release from operations for LGR, LGIM and LGI excludes any capital held in excess of the prudent reserves from the liability calculation.
LGR's new business metrics are presented based on a target long term asset portfolio. 2018 has seen record pension risk transfer (PRT) volumes, and as a result we continue to source direct investment assets to support this business in 2019, as appropriate, taking into account the alternative risk and rewards of traded credit. At year end, any difference between the actual assets and the long-term asset mix is reflected in investment variance.
Net release from operations for LGR, LGIM - Workplace Savings, LGI and discontinued operations is defined as release from operations plus new business surplus/(strain).
Release from operations and net release from operations for LGC, LGIM and General Insurance represents the operating profit (net of tax).
See Note 1.03 for more detail on experience variances, changes to valuation assumptions and non-cash items.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.
IFRS Disclosures on performance and Release from operations Page 35
1.02 Reconciliation of release from operations to operating profit# before tax (continued)
Changes in
valuation assump- tions
Operating profit/ (loss) after tax
Operating profit/ (loss) before
tax
New business surplus/ (strain)
Net
release from operations
Release from operations1
Exper- ience variances
Non-cash items and other
Inter- national and other
Tax expense/ (credit)
For the year ended
31 December 2017
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
LGR
508
180
688
72
274
3
-
1,037
210
1,247
- LGRI
347
152
499
66
190
1
-
756
150
906
- LGRR
161
28
189
6
84
2
-
281
60
341
LGIM
342
(21)
321
(4)
(1)
2
-
318
82
400
- LGIM (excluding
Workplace Savings)
318
-
318
-
-
-
-
318
82
400
- Workplace Savings2
24
(21)
3
(4)
(1)
2
-
-
-
-
LGC
224
-
224
-
-
-
-
224
48
272
LGI
273
2
275
(50)
48
(25)
(26)
222
81
303
- UK and Other
193
2
195
(50)
48
(25)
1
169
40
209
- US (LGIA)
80
-
80
-
-
-
(27)
53
41
94
General Insurance
30
-
30
-
-
-
-
30
7
37
From continuing operations
1,377
161
1,538
18
321
(20)
(26)
1,831
428
2,259
From discontinued operations3
107
(5)
102
(1)
3
(21)
3
86
21
107
Total from divisions
1,484
156
1,640
17
324
(41)
(23)
1,917
449
2,366
Group debt costs
(154)
-
(154)
-
-
-
-
(154)
(37)
(191)
Group investment projects and expenses
(32)
-
(32)
-
-
-
(64)
(96)
(24)
(120)
Total
1,298
156
1,454
17
324
(41)
(87)
1,667
388
2,055
1. Release from operations includes dividends from the US of £80m within the US (LGIA).
2. Workplace Savings represents administration business only. Profits on fund management services are included within LGIM (excluding Workplace Savings).
3. Discontinued operations primarily reflects the result of the Savings division following the announcement in December 2017 to sell the Mature Savings business to Swiss Re. For this reconciliation, discontinued operations also include the results of Legal & General Netherlands. This business was sold during 2017.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.
IFRS Disclosures on performance and Release from operations Page 36
1.03 Analysis of LGR and LGI operating profit
For the year ended 31 December 2018
LGR
LGI
LGR
LGI
2018
2018
2017
2017
£m
£m
£m
£m
Net release from operations
768
236
688
275
Experience variances
- Persistency
8
(12)
9
(18)
- Mortality/morbidity1
73
(7)
30
(26)
- Expenses
(13)
2
(21)
3
- Project and development costs
(11)
-
(15)
(3)
- Other2,3
(24)
41
69
(6)
Total experience variances
33
24
72
(50)
Changes to valuation assumptions
- Persistency
-
(4)
-
(11)
- Mortality/morbidity4
444
25
303
51
- Expenses
-
17
(20)
9
- Other
-
(3)
(9)
(1)
Total changes to valuation assumptions
444
35
274
48
Movement in non-cash items
- Acquisition expense tax relief
-
(11)
-
(18)
- Other5
40
(8)
3
(7)
Total movement in non-cash items
40
(19)
3
(25)
International and other
-
(7)
-
(26)
Operating profit after tax
1,285
269
1,037
222
Tax gross up
263
39
210
81
Operating profit before tax
1,548
308
1,247
303
1. Mortality / morbidity experience variances for LGR reflect higher than expected deaths over the year.
2. Other experience variances for LGR reflect changes made to annuity reserving and updates to the policy/member data.
3. Other experience variances for LGI reflect a number of modelling refinements in reserving for future claims.
4. Mortality assumption changes for LGR reflect a one off release of £359m (net of tax) from an update in the longevity trend assumption from adjusted CMI 2015 to adjusted CMI 2016.
5. LGR Movement in non-cash items is largely due to a positive adjustment made to reflect all asset management activity on new bulk annuity contracts being handled by LGIM.
IFRS Disclosures on performance and Release from operations Page 37
1.04 LGIM operating profit
2018
2017
£m
£m
Asset management revenue (excluding 3rd party market data)1
813
780
Asset management transactional revenue2
27
25
Asset management expenses (excluding 3rd party market data)1
(433)
(405)
ETF operating loss3
(3)
-
Workplace Savings operating profit4
3
-
Total LGIM operating profit
407
400
1. Asset management revenue and expenses exclude income and costs of £19m in relation to the provision of third party market data (2017: £17m).
2. Transactional revenue includes execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees for property funds.
3. ETF represents the results of the Canvas ETF business, the acquisition of which completed in March 2018.
4. Workplace Savings represents administration business only.
1.05 General Insurance operating profit and combined operating ratio
2018
2017
£m
£m
General Insurance operating profit1
-
37
General Insurance combined operating ratio2
104%
93%
1. Includes the General Insurance underwriting result and smoothed investment return.
2. The calculation of the General Insurance combined operating ratio incorporates claims, commission and expenses as a percentage of net earned premiums.
1.06 LGC operating profit
2018
2017
£m
£m
Direct investments1
188
124
Traded investment portfolio including treasury assets2
134
148
Total LGC operating profit
322
272
1. Direct Investments represents LGC's portfolio of assets across future cities (including urban regeneration and clean energy), housing (including CALA Homes) and SME finance.
2. The traded investment portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash.
1.07 Group investment projects and central expenses
2018
2017
£m
£m
Group investment projects and central expenses
113
61
Restructuring and other costs
13
59
Total group investment projects and expenses
126
120
1.08 Investment and other variances
2018
2017
£m
£m
Investment variance1
(126)
129
M&A related and other variances2
(62)
(105)
Total investment and other variances
(188)
24
1. Investment variance includes differences between actual and smoothed investment return on traded and real assets, economic assumption changes (e.g. credit default and inflation) and the impact of any difference between the actual allocated asset mix and the long-term assumed asset mix on new pension risk transfer business written during the year and held at a period end.
2. Includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. 2018 includes the recognition of a one-off profit of £20m arising on the stepped acquisition of CALA Homes (see Note 3.02).
IFRS Disclosures on performance and Release from operations Page 38
1.09 Earnings per share
(a) Basic earnings per share
After tax
Per share1
After tax
Per share1
2018
2018
2017
2017
£m
p
£m
p
Profit for the year attributable to equity holders
1,827
30.79
1,891
31.87
Less: earnings derived from discontinued operations
(64)
(1.07)
(80)
(1.35)
Basic earnings derived from continuing operations
1,763
29.72
1,811
30.52
1. Basic earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the period, excluding employee scheme treasury shares.
(b) Diluted earnings per share
After tax
Weighted
average
number of
shares
Per share1
2018
2018
2018
£m
m
p
Profit for the year attributable to equity holders
1,827
5,933
30.79
Net shares under options allocable for no further consideration
-
29
(0.15)
Total diluted earnings
1,827
5,962
30.64
Less: diluted earnings derived from discontinued operations
(64)
-
(1.07)
Diluted earnings derived from continuing operations
1,763
5,962
29.57
After tax
Weighted
average
number of
shares
Per share1
2017
2017
2017
£m
m
p
Profit for the year attributable to equity holders
1,891
5,933
31.87
Net shares under options allocable for no further consideration
-
27
(0.14)
Total diluted earnings
1,891
5,960
31.73
Less: diluted earnings derived from discontinued operations
(80)
-
(1.35)
Diluted earnings derived from continuing operations
1,811
5,960
30.38
1. For diluted earnings per share, the weighted average number of ordinary shares in issue, excluding employee scheme treasury shares, is adjusted to assume conversion of all potential ordinary shares, such as share options granted to employees.
IFRS Disclosures on performance and Release from operations Page 39
1.10 Segmental analysis
Reportable segments
The group has five reportable segments that are continuing operations, comprising LGR, LGIM, LGC, LGI and General Insurance, as set out in Note 1.01. Group central expenses and debt costs are reported separately. Transactions between reportable segments are on normal commercial terms, and are included within the reported segments.
Reporting of assets and liabilities by reportable segment has not been included, as this is not information that is provided to key decision makers on a regular basis. The group's assets and liabilities are managed on a legal entity rather than reportable segment basis, in line with regulatory requirements.
Financial information on the reportable segments is further broken down where relevant in order to better explain the drivers of the group's results.
(a) Profit/(loss) for the year
Group
expenses
Total
General
and debt
continuing
LGR
LGIM
LGC
LGI
Insurance
costs
operations1
For the year ended 31 December 2018
£m
£m
£m
£m
£m
£m
£m
Operating profit/(loss)#
1,548
407
322
308
-
(329)
2,256
Investment and other variances
95
(4)
(273)
(1)
(27)
22
(188)
Losses attributable to non-controlling interests
-
-
-
-
-
(19)
(19)
Profit/(loss) before tax attributable to equity holders
1,643
403
49
307
(27)
(326)
2,049
Tax (expense)/credit attributable to equity holders
(267)
(81)
13
(39)
6
63
(305)
Profit/(loss) for the year
1,376
322
62
268
(21)
(263)
1,744
Group
expenses
Total
General
and debt
Continuing
LGR
LGIM
LGC
LGI2
Insurance
costs
operations1
For the year ended 31 December 2017
£m
£m
£m
£m
£m
£m
£m
Operating profit/(loss)#
1,247
400
272
303
37
(311)
1,948
Investment and other variances
4
(9)
91
(60)
6
(14)
18
Gains attributable to non-controlling interests
-
-
-
-
-
11
11
Profit/(loss) before tax attributable to equity holders
1,251
391
363
243
43
(314)
1,977
Tax (expense)/credit attributable to equity holders
(225)
(84)
(77)
182
(8)
43
(169)
Profit/(loss) for the year
1,026
307
286
425
35
(271)
1,808
1. Continuing operations exclude the results of the Mature Savings division which has been classified as discontinued following the announcement in December 2017 to sell the Mature Savings business to Swiss Re. For the year ended 31 December 2017, continuing operations also exclude profits relating to Legal & General Netherlands, which was sold during 2017 and was previously reflected in the LGI divisional results.
2. The LGI tax credit of £182m in 2017 primarily reflects the impact of a one-off US tax benefit of £246m arising from the revaluation of net deferred tax liabilities as a result of the reduction in the US corporate income tax rate in 2017.
# Operating profit for total continuing operations represents 'Group adjusted operating profit', an alternative performance measure defined in the glossary.
IFRS Disclosures on performance and Release from operations Page 40
1.10 Segmental analysis (continued)
(b) Total income
General
LGC and
Total continuing
LGR
LGIM1,2
LGI
Insurance
other3
operations4
For the year ended 31 December 2018
£m
£m
£m
£m
£m
£m
Internal income
-
172
-
-
(172)
-
External income
8,507
(10,654)
1,742
370
1,299
1,264
Total income
8,507
(10,482)
1,742
370
1,127
1,264
General
LGC and
Total continuing
LGR
LGIM1,2
LGI5
Insurance
other3,5
operations4
For the year ended 31 December 2017
£m
£m
£m
£m
£m
£m
Internal income
-
158
-
-
(158)
-
External income
6,862
28,779
2,027
342
2,382
40,392
Total income
6,862
28,937
2,027
342
2,224
40,392
1. LGIM internal income relates to investment management services provided to other segments.
2. LGIM external income includes fees from fund management and investment return.
3. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
4. Continuing operations exclude the results of the Mature Savings division which has been classified as discontinued following the announcement in December 2017 to sell the Mature Savings business to Swiss Re. For the year ended 31 December 2017, continuing operations also excludes income relating to Legal & General Netherlands, which was sold during 2017 and was previously reflected in the LGI divisional results.
5. Following a review of the segmentation of income between certain business divisions we have reallocated £518m for the year ended 31 December 2017 from LGI to LGC and other, as this better reflects the nature of that income.
IFRS Primary Financial Statements Page 41
2.01 Consolidated Income Statement
2018
2017
For the year ended 31 December 2018
Notes
£m
£m
Income
Gross written premiums
13,253
7,932
Outward reinsurance premiums
(2,131)
(1,858)
Net change in provision for unearned premiums
(19)
(23)
Net premiums earned
11,103
6,051
Fees from fund management and investment contracts
802
771
Investment return
(11,847)
33,457
Other operational income
1,206
212
Total income
1.10
1,264
40,491
Expenses
Claims and change in insurance contract liabilities
8,612
8,326
Reinsurance recoveries
(1,053)
(1,776)
Net claims and change in insurance contract liabilities
7,559
6,550
Change in investment contract liabilities
(11,304)
29,848
Acquisition costs
893
734
Finance costs
238
212
Other expenses
1,776
1,086
Total expenses
(838)
38,430
Profit before tax
2,102
2,061
Tax expense attributable to policyholder returns
(53)
(70)
Profit before tax attributable to equity holders
2,049
1,991
Total tax expense
(358)
(239)
Tax expense attributable to policyholder returns
53
70
Tax expense attributable to equity holders
3.07
(305)
(169)
Profit after tax from continuing operations
1.10
1,744
1,822
Profit after tax from discontinued operations1
3.03
64
80
Profit for the year
1,808
1,902
Attributable to:
Non-controlling interests
(19)
11
Equity holders
1,827
1,891
Dividend distributions to equity holders during the year
3.05
932
872
Dividend distributions to equity holders proposed after the year end
3.05
704
658
p
p
Total basic earnings per share2
1.09
30.79
31.87
Total diluted earnings per share2
1.09
30.64
31.73
Basic earnings per share derived from continuing operations2
1.09
29.72
30.52
Diluted earnings per share derived from continuing operations2
1.09
29.57
30.38
1. Discontinued operations reflects the results of Mature Savings following the group's announcement in December 2017 to sell the Mature Savings business to Swiss Re.
2. All earnings per share calculations are based on profit attributable to equity holders of the company.
IFRS Primary Financial Statements Page 42
2.02 Consolidated Statement of Comprehensive Income
2018
2017
For the year ended 31 December 2018
£m
£m
Profit for the year
1,808
1,902
Items that will not be reclassified subsequently to profit or loss
Actuarial gains/(losses) on defined benefit pension schemes
117
(55)
Tax on actuarial gains/(losses) on defined benefit pension schemes
(22)
10
Total items that will not be reclassified subsequently to profit or loss
95
(45)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations
62
(99)
Movement in cross-currency hedge
34
(12)
Tax on movement in cross-currency hedge
(5)
2
Movement in financial investments designated as available-for-sale
(36)
27
Tax on movement in financial investments designated as available-for-sale
5
(4)
Total items that may be reclassified subsequently to profit or loss
60
(86)
Other comprehensive income/(expense) after tax
155
(131)
Total comprehensive income for the year
1,963
1,771
Total comprehensive income for the year attributable to:
Continuing operations
1,899
1,691
Discontinued operations
64
80
Total comprehensive income for the year attributable to:
Non-controlling interests
(19)
11
Equity holders
1,982
1,760
IFRS Primary Financial Statements Page 43
2.03 Consolidated Balance Sheet
2018
20171
As at 31 December 2018
Notes
£m
£m
Assets
Goodwill
65
11
Purchased interest in long term businesses and other intangible assets
223
138
Deferred acquisition costs
140
140
Investment in associates and joint ventures accounted for using the equity method
259
252
Property, plant and equipment
57
59
Investment property
3.06
6,965
7,110
Financial investments
3.06
430,498
443,162
Reinsurers' share of contract liabilities
4,737
5,545
Deferred tax assets
3.07
7
7
Current tax assets
418
342
Receivables and other assets
5,593
6,083
Assets of operations classified as held for sale
3.03
26,234
22,584
Cash and cash equivalents
17,321
18,919
Total assets
492,517
504,352
Equity
Share capital
3.08
149
149
Share premium
3.08
992
988
Employee scheme treasury shares
(52)
(40)
Capital redemption and other reserves
230
168
Retained earnings
7,261
6,251
Attributable to owners of the parent
8,580
7,516
Non-controlling interests
3.09
72
76
Total equity
8,652
7,592
Liabilities
Non-participating insurance contract liabilities
64,707
61,308
Non-participating investment contract liabilities
293,080
315,651
Core borrowings
3.10
3,922
3,459
Operational borrowings
3.11
1,026
538
Provisions
3.15
1,140
1,335
UK deferred tax liabilities
3.07
144
13
Overseas deferred tax liabilities
3.07
185
221
Current tax liabilities
171
223
Payables and other financial liabilities
3.12
62,548
52,246
Other liabilities
619
491
Net asset value attributable to unit holders
26,481
27,317
Liabilities of operations classified as held for sale
3.03
29,842
33,958
Total liabilities
483,865
496,760
Total equity and liabilities
492,517
504,352
1. Following a change in accounting policy for LGIA term assurance reserves, a number of balance sheet items have been restated, notably deferred acquisition costs, reinsurers' share of contract liabilities, non-participating insurance contract liabilities, overseas deferred tax liabilities and other liabilities. The overall net impact on the group's retained earnings as at 31 December 2017 is a reduction of £327m. Further details on the change in accounting policy are provided in Note 3.01.
IFRS Primary Financial Statements Page 44
2.04 Consolidated Statement of Changes in Equity
Employee
Capital
Equity
scheme
redemption
attributable
Non-
Share
Share
treasury
and other
Retained
to owners
controlling
Total
For the year ended 31 December 2018
capital
premium
shares
reserves1
earnings
of the parent
interests
equity
£m
£m
£m
£m
£m
£m
£m
£m
As at 1 January 2018
149
988
(40)
168
6,251
7,516
76
7,592
Profit for the year
-
-
-
-
1,827
1,827
(19)
1,808
Exchange differences on translation of overseas operations
-
-
-
62
-
62
-
62
Net movement in cross-currency hedge
-
-
-
29
-
29
-
29
Net actuarial gains on defined benefit pension schemes
-
-
-
-
95
95
-
95
Net movement in financial investments designated as available-for-sale
-
-
-
(31)
-
(31)
-
(31)
Total comprehensive income for the year
-
-
-
60
1,922
1,982
(19)
1,963
Options exercised under share option schemes
-
4
-
-
-
4
-
4
Shares purchased
-
-
(17)
-
-
(17)
-
(17)
Shares vested
-
-
5
(26)
-
(21)
-
(21)
Employee scheme treasury shares:
- Value of employee services
-
-
-
38
-
38
-
38
Share scheme transfers to retained earnings
-
-
-
-
10
10
-
10
Dividends
-
-
-
-
(932)
(932)
-
(932)
Movement in third party interests
-
-
-
-
-
-
15
15
Currency translation differences
-
-
-
(10)
10
-
-
-
As at 31 December 2018
149
992
(52)
230
7,261
8,580
72
8,652
1. Capital redemption and other reserves as at 31 December 2018 include share-based payments £81m, foreign exchange £121m, capital redemption £17m, hedging reserves £20m and available-for-sale reserves £(9)m.
IFRS Primary Financial Statements Page 45
2.04 Consolidated Statement of Changes in Equity (continued)
Employee
Capital
Equity
scheme
redemption
attributable
Non-
Share
Share
treasury
and other
Retained
to owners
controlling
Total
For the year ended 31 December 2017
capital
premium
shares
reserves1
earnings
of the parent
interests
equity
£m
£m
£m
£m
£m
£m
£m
£m
As at 1 January 2017
149
981
(30)
212
5,633
6,945
338
7,283
Change in accounting policy2
-
-
-
-
(277)
(277)
-
(277)
Restated as at 1 January 2017
149
981
(30)
212
5,356
6,668
338
7,006
Profit for the year
-
-
-
-
1,891
1,891
11
1,902
Exchange differences on translation of overseas operations
-
-
-
(99)
-
(99)
-
(99)
Net movement in cross-currency hedge
-
-
-
(10)
-
(10)
-
(10)
Net actuarial losses on defined benefit pension schemes
-
-
-
-
(45)
(45)
-
(45)
Net movement in financial investments designated as available-for-sale
-
-
-
23
-
23
-
23
Total comprehensive income for the year
-
-
-
(86)
1,846
1,760
11
1,771
Options exercised under share option schemes
-
7
-
-
-
7
-
7
Shares purchased
-
-
(16)
-
-
(16)
-
(16)
Shares vested
-
-
6
(19)
-
(13)
-
(13)
Employee scheme treasury shares:
- Value of employee services
-
-
-
28
-
28
-
28
Share scheme transfers to retained earnings
-
-
-
-
4
4
-
4
Dividends
-
-
-
-
(872)
(872)
-
(872)
Movement in third party interests
-
-
-
-
-
-
(273)
(273)
Currency translation differences
-
-
-
33
(33)
-
-
-
Change in accounting policy2
-
-
-
-
(50)
(50)
-
(50)
Restated as at 31 December 2017
149
988
(40)
168
6,251
7,516
76
7,592
1. Capital redemption and other reserves as at 31 December 2017 include share-based payments £69m, foreign exchange £69m, capital redemption £17m, available-for-sale reserves £22m and hedging reserves £(9)m.
2. Change in accounting policy represents the impact on retained earnings of the change in accounting policy related to the recognition of LGIA term assurance reserves, described in Note 3.01. The change has been applied retrospectively.
IFRS Primary Financial Statements Page 46
2.05 Consolidated Statement of Cash Flows
2018
2017
For the year ended 31 December 2018
Notes
£m
£m
Cash flows from operating activities
Profit for the year
1,808
1,902
Adjustments for non cash movements in net profit for the year
Net losses/(gains) on financial investments and investment properties
23,132
(25,024)
Investment income
(10,182)
(9,953)
Interest expense
293
220
Tax expense
210
377
Other adjustments
183
154
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss
(10,381)
11,794
Investments designated as available-for-sale
(248)
277
Other assets
1,258
(2,344)
Net increase/(decrease) in operational liabilities
Insurance contracts
3,257
(3,989)
Investment contracts
(22,571)
(10,798)
Other liabilities
12,057
20,650
Net (decrease)/increase in held for sale net liabilities
(8,500)
12,139
Cash utilised in operations
(9,684)
(4,595)
Interest paid
(215)
(221)
Interest received
4,841
4,528
Tax paid1
(504)
(497)
Dividends received
5,201
5,196
Net cash flows from operating activities
(361)
4,411
Cash flows from investing activities
Net acquisition of plant, equipment, intangibles and other assets
(401)
(230)
Net disposal/(acquisition) of operations
326
223
Investment in joint ventures and associates
(130)
(7)
Net cash flows utilised in investing activities
(205)
(14)
Cash flows from financing activities
Dividend distributions to ordinary equity holders during the year
3.05
(932)
(872)
Issue of ordinary share capital
4
7
Exercise of employee scheme shares (net)
12
10
Proceeds from borrowings
960
1,232
Repayment of borrowings
(325)
(600)
Movement in non-controlling interests
-
(262)
Net cash flows utilised in financing activities
(281)
(485)
Net (decrease)/increase in cash and cash equivalents
(847)
3,912
Exchange gains/(losses) on cash and cash equivalents
16
(19)
Cash and cash equivalents at 1 January (before reallocation of held for sale cash)
18,919
15,348
Total cash and cash equivalents
18,088
19,241
Less: cash and cash equivalents of operations classified as held for sale
(767)
(322)
Cash and cash equivalents at 31 December
17,321
18,919
1. Tax comprises UK corporation tax paid of £359m (2017: £290m), overseas corporate taxes of £25m (2017: £12m), and withholding tax of £120m (2017: £195m).
IFRS Disclosure Notes Page 47
3.01 Basis of preparation
The group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and as adopted by the European Union, and with those parts of the UK Companies Act 2006 applicable to companies reporting under IFRS. The group financial statements also comply with IFRS and interpretations by the IFRS Interpretations Committee as issued by the IASB and as adopted by the European Union. The group financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets and financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss.
The group has selected accounting policies which state fairly its financial position, financial performance and cash flows for a reporting period. The accounting policies have been consistently applied to all years presented, unless otherwise stated.
Financial assets and financial liabilities are disclosed gross in the Consolidated Balance Sheet unless a legally enforceable right of offset exists and there is an intention to settle recognised amounts on a net basis. Income and expenses are not offset in the Consolidated Income Statement unless required or permitted by any accounting standard or interpretations by the IFRS Interpretations Committee.
Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. The functional currency of the group's foreign operations is the currency of the primary economic environment in which the entity operates. The assets and liabilities of all of the group's foreign operations are translated into sterling, the group's presentation currency, at the closing rate at the date of the balance sheet. The income and expenses for the income statement are translated at average exchange rates. On consolidation, exchange differences arising from the translation of the net investment in foreign entities and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate component of shareholders' equity.
Critical accounting policies and the use of estimates
The preparation of the financial statements includes the use of estimates and assumptions which affect items reported in the Consolidated Balance Sheet and Income Statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant for the valuation of insurance and investment contract liabilities, unquoted illiquid assets, investment property, and the determination of defined benefit pension plan assumptions. From a policy application perspective, the major areas of judgement are the assessment of whether a contract transfers significant insurance risk to the group, and whether the group controls underlying entities and should therefore consolidate them. The basis of accounting for these areas, and the significant judgements used in determining them, are outlined in the respective notes to the group's 2018 Annual Report and Accounts.
Key technical terms and definitions
The report refers to various key performance indicators, accounting standards and other technical terms. A comprehensive list of these definitions is contained within the glossary.
Tax attributable to policyholders and equity holders
The total tax expense shown in the group's Consolidated Income Statement includes income tax borne by both policyholders and shareholders. This has been apportioned between that attributable to policyholders' returns and equity holders' profits. This represents the fact that the group's long-term business in the UK pays tax on policyholder investment return, in addition to the corporation tax charge charged on shareholder profit. The separate presentation is intended to provide more relevant information about the tax that the group pays on the profits that it makes.
For this apportionment, the equity holders' tax on long-term business is estimated by applying the statutory tax rate to profits attributed to equity holders. This is considered to approximate the corporation tax attributable to shareholders as calculated under UK tax rules. The balance of income tax associated with UK long-term business is attributed to income tax attributable to policyholders' returns and approximates the corporation tax attributable to policyholders as calculated under UK tax rules.
Changes in accounting policy
LGIA (Legal & General Insurance America) Term Assurance
During the year, the group has changed its accounting policy for term assurance liabilities on business transacted by its US subsidiaries, which was previously based on recognised actuarial methods reflecting US GAAP. From 1 January 2018, the group has calculated such liabilities on the basis of current information using the gross premium valuation method, which is in line with how similar products are accounted for in other parts of the business.
The group believes the new policy is preferable as it more closely aligns the accounting for this business with that of business written in the UK, and therefore results in the financial statements providing reliable and more relevant information about the impact of term assurance business on the group's financial position, financial performance or cash flows, in line with IFRS requirements.
This represents a voluntary change in accounting policy and has been applied retrospectively, with prior year retained earnings adjusted accordingly.
The principal impact of the change on the prior year consolidated financial statements is in the non-participating insurance contract liabilities and in deferred acquisition costs, which have been derecognised, and the associated cash flows now recognised within the insurance contract liability calculation.
IFRS Disclosure Notes Page 48
3.01 Basis of preparation (continued)
The group reported an initial best estimate of the impact of this change in accounting policy as part of its 2018 half year report. During the second half of 2018 we have continued to refine the calculation of the retrospective impact based on enhanced historic information. The final impact on each line item of the consolidated balance sheet as at 31 December 2017 is shown in the table below:
As reported
at 31 December 2017
Adjustments
Restated
£m
£m
£m
Deferred acquisition costs
1,507
(1,367)
140
Reinsurers' share of contract liabilities
5,703
(158)
5,545
Non-participating insurance contract liabilities
62,318
(1,010)
61,308
Overseas deferred tax liability
337
(116)
221
Other liabilities
563
(72)
491
Retained earnings
6,578
(327)
6,251
As a consequence of the change highlighted above, the group has reclassified £164m (as of 1 January 2017) of financial investments backing term assurance business from designated as available-for-sale to designated as fair value through profit or loss. This represents a further change in accounting policy permitted by IFRS 4 'Insurance Contracts'.
UK Whole of Life and Term Assurance Mortality Assumptions
During the year, the group changed its accounting policy for UK whole of life and term assurance mortality improvers. This change has arisen following the change in regulatory regime to Solvency II. The old regime only allowed improvers to be added where reserves would be increased, in line with INSPRU 1.2.60 section 5a requirements. Under the new policy mortality improvement assumptions can now be applied consistently across all types of mortality business. The change covers all UK whole of life and term assurance products, and results in the group no longer needing to comply with INSPRU. The group believes that the new policy better reflects the risks that the business is exposed to, providing more reliable and relevant information to users of the financial statements.
This represents a voluntary change in accounting policy. However, because the impact of this change on prior period is considered insignificant, the group has applied the change prospectively.
IFRS Disclosure Notes Page 49
3.02 Acquisitions
CALA Group (Holdings) Limited
On 12 March 2018 the group increased its shareholding in CALA Group (Holdings) Limited ('CALA Homes') to 100% by acquiring the remaining 52.12% shareholding of the company it did not previously own. Under the agreement, the counterparty for £152m of loan notes payable by CALA Homes was novated to the group and the loan notes subsequently cancelled which reduced the fair value of the purchase consideration from £605m to £453m.
The transaction has been accounted for as a stepped acquisition in accordance with IFRS 3 'Business Combinations', resulting in the recognition of a one-off profit of £20m.
The assets and liabilities acquired at the point of the transaction have been recorded at their fair values for the purposes of the acquisition balance sheet and included in the consolidated accounts of the group using the group's accounting policies in accordance with IFRS.
The following table summarises the consideration for the acquisition, fair value of the 100% share of the assets acquired, liabilities assumed, and resulting allocation to goodwill.
Fair Value
£m
Assets
Intangible assets
25
Other non-current assets
4
Inventories
1,006
Other receivables
34
Cash and cash equivalents
18
Total assets
1,087
Liabilities
Loans and borrowings
362
Trade and other payables
271
Other liabilities1
33
Total liabilities
666
Fair value of net assets acquired
421
Fair value of purchase consideration
453
Goodwill arising on acquisition
32
1. Other liabilities include deferred tax balances
Fair value adjustments arising on acquisition were in relation to identifiable intangible assets, inventories and related deferred tax liabilities. The residual goodwill recognised on acquisition, none of which is expected to be deductible for tax purposes, is attributable to the network of customers and contractors and the pipeline of future land and homes that could not be directly attributed to homes currently under construction or the brand acquired.
There were no contingent consideration arrangements or indemnification assets recognised on acquisition.
Other acquisitions
During the year ended 31 December 2018, the group completed the acquisitions of 100% shareholdings in Canvas (the European exchange-traded fund platform) and Buddies Enterprises Limited.
The assets and liabilities of the acquired businesses have been recorded at their fair values for the purposes of the acquisition balance sheet and included in the consolidated accounts of the group using the group's accounting policies in accordance with IFRS.
A total residual goodwill of £22m has been recognised in respect of these acquisitions.
IFRS Disclosure Notes Page 50
3.03 Assets and liabilities of operations classified as held for sale
Mature Savings
On 6 December 2017 the group announced the sale of its Mature Savings business to the ReAssure division of Swiss Re Limited ('Swiss Re') for a consideration of £650m. As part of the transaction, on 1 January 2018 the group entered into a risk transfer agreement with Swiss Re, whereby the group will transfer all economic risks and rewards of the Mature Savings business to Swiss Re from that date. The risk transfer agreement operates until the business is transferred under a court approved scheme under Part VII of the Financial Services and Markets Act 2000, which is expected to complete in 2019. The consideration of £650m was received in 2018.
As a result of the transaction, the Mature Savings business has been classified as held for sale. Profit arising from the Mature Savings business in accordance with the risk transfer agreement, has been classified as "Profit after tax from discontinued operations" in the Consolidated Income Statement.
IndiaFirst Life Insurance Company Limited
On 1 June 2018 the group announced the sale of its stake in IndiaFirst Life Insurance Company Limited ("IndiaFirst Life") to an affiliate of Warburg Pincus LLC for INR 7.1bn (c.£79m at GBP:INR 1:90). As a result of the announcement, the group's interest in IndiaFirst Life has been classified as held for sale as at 31 December 2018. The transaction has completed after 31 December 2018.
3.04 Post balance sheet events
IndiaFirst Life Insurance Company Limited
The sale of the group's stake in IndiaFirst Life Insurance Company Limited (announced on 1 June 2018) was completed on 7 February 2019.
5.875% Sterling undated subordinated notes
On 4 February 2019, notification was given that the group intends to redeem the 5.875% Sterling undated subordinated notes in full on 1 April 2019. Effective from the notification date, the notes were no longer treated as tier 2 own funds for Solvency II purposes.
3.05 Dividends
Dividend
Per share1
Dividend
Per share1
2018
2018
2017
2017
£m
p
£m
p
Ordinary dividends paid and charged to equity in the year:
- Final 2016 dividend
-
-
616
10.35
- Final 2017 dividend
658
11.05
-
-
- Interim dividend
274
4.60
256
4.30
Total dividends
932
15.65
872
14.65
Ordinary share dividend proposed2
704
11.82
658
11.05
1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.
2. Subsequent to 31 December 2018, the directors declared a final dividend for 2018 of 11.82 pence per ordinary share. This dividend will be paid on 6 June 2019. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2019 and is not included as a liability in the Consolidated Balance Sheet as at 31 December 2018.
IFRS Disclosure Notes Page 51
3.06 Financial investments and investment property
2018
2017
£m
£m
Equities
167,013
199,858
Unit trusts
10,553
9,147
Debt securities1
254,452
230,941
Accrued interest
1,635
1,518
Derivative assets2
10,065
12,595
Loans3
9,662
9,165
Financial investments
453,380
463,224
Investment property
8,608
8,337
Total financial investments and investment property
461,988
471,561
Less: financial investments and investment property of operations classified as held for sale
(24,525)
(21,289)
Financial investments and investment property
437,463
450,272
1. A detailed analysis of debt securities to which shareholders are directly exposed, is disclosed in Note 6.03.
2. Derivatives are used for efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management. Derivative assets are shown gross of derivative liabilities of £7,791m (2017: £8,173m).
3. Loans includes £456m (2017: £496m) of loans valued at amortised cost.
IFRS Disclosure Notes Page 52
3.07 Tax
(a) Tax charge in the Consolidated Income Statement
The tax attributable to equity holders differs from the tax calculated at the standard UK corporation tax rate as follows:
Continuing
Continuing
operations
Total
operations
Total
2018
2018
2017
2017
£m
£m
£m
£m
Profit before tax attributable to equity holders
2,049
2,128
1,991
2,090
Tax calculated at 19.00% (2017: 19.25%)
389
404
383
402
Adjusted for the effects of:
Recurring reconciling items:
Income not subject to tax1
-
-
(11)
(11)
Higher/(lower) rate of tax on overseas profits2
(55)
(55)
1
1
Non-deductible expenses
5
5
1
1
Differences between taxable and accounting investment gains
(4)
(4)
(3)
(3)
Unrecognised tax losses
-
-
1
1
Non-recurring reconciling items:
Income not subject to tax1
(10)
(10)
(4)
(4)
Non-deductible expenses
5
5
10
10
Differences between taxable and accounting investment gains
-
-
10
10
Adjustments in respect of prior years3
(36)
(36)
23
23
Impact of reduction in UK and US corporate tax rates on deferred tax balances4
11
11
(242)
(242)
Tax attributable to equity holders
305
320
169
188
Equity holders' effective tax rate5
14.9%
15.0%
8.5%
9.0%
1. The acquisition of the remaining share capital of CALA Homes in the year significantly reduced our non-taxable share of income from joint ventures.
2. The lower rate of tax on overseas profits in 2018 primarily relates to the net effect of our Bermudan operations taxed at 0% and our US operations taxed at 21%.
3. Adjustments in respect of prior years relates to the revisions to earlier estimates.
4. The US federal corporate income tax rate reduced from 35% to 21% from 1 January 2018. The enacted rate of 21% has been applied to the US temporary differences to calculate US deferred tax assets and liabilities on the basis of when temporary differences are expected to reverse. 2017 includes the impact of the one-off US tax benefit of £246m arising from the revaluation of net deferred tax liabilities as a result of the reduction in the US corporate income tax rate.
5. Equity holders' effective tax rate is calculated by dividing the tax attributable to equity holders over profit before tax attributable to equity holders.
IFRS Disclosure Notes Page 53
3.07 Tax (continued)
(b) Deferred tax
20181
20171
Deferred tax (liabilities)/assets
£m
£m
Deferred acquisition expenses
25
15
- UK
(40)
(40)
- Overseas
65
55
Difference between the tax and accounting value of insurance contracts
(577)
(334)
- UK
(171)
(69)
- Overseas
(406)
(265)
Realised and unrealised gains on investments
(72)
(282)
Excess of depreciation over capital allowances
12
15
Excess expenses
21
31
Accounting provisions and other
(28)
(33)
Trading losses2
163
31
Pension fund deficit
41
70
Acquired intangibles
(4)
(2)
Total net deferred tax liabilities
(419)
(489)
Less: net deferred tax liabilities of operations classified as held for sale
97
262
Net deferred tax liabilities
(322)
(227)
Analysed by:
- Deferred tax assets
7
7
- UK deferred tax liabilities
(144)
(13)
- Overseas deferred tax liabilities
(185)
(221)
Net deferred tax liabilities
(322)
(227)
1. US deferred tax liabilities in respect of deferred acquisition costs and non-participating insurance contracts have been restated following the change in accounting policy for LGIA term assurance reserves. The net tax impact to overseas deferred tax liabilities is a reduction of £116m at 31 December 2017.
2. Trading losses include UK trade and US operating losses of £4m (2017: £4m) and £159m (2017: £27m) respectively.
IFRS Disclosure Notes Page 54
3.08 Share capital and share premium
2018
2017
Number of
2018
Number of
2017
Authorised share capital
shares
£m
shares
£m
At 31 December: ordinary shares of 2.5p each
9,200,000,000
230
9,200,000,000
230
Share
Share
Number of
capital
premium
Issued share capital, fully paid
shares
£m
£m
As at 1 January 2018
5,958,438,193
149
988
Options exercised under share option schemes
2,330,041
-
4
As at 31 December 2018
5,960,768,234
149
992
Share
Share
Number of
capital
premium
Issued share capital, fully paid
shares
£m
£m
As at 1 January 2017
5,954,656,466
149
981
Options exercised under share option schemes
3,781,727
-
7
As at 31 December 2017
5,958,438,193
149
988
There is one class of ordinary shares of 2.5p each. All shares issued carry equal voting rights.
The holders of the company's ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings of the company.
3.09 Non-controlling interests
Non-controlling interests represent third party interests in direct equity investments as well as investments in private equity and property investment vehicles which are consolidated in the group's results.
No individual non-controlling interest is considered to be material on the basis of the year end carrying value or share of profit or loss.
IFRS Disclosure Notes Page 55
3.10 Core borrowings
Carrying
Coupon
Carrying
Coupon
amount
rate
Fair value
amount
rate
Fair value
2018
2018
2018
2017
2017
2017
£m
%
£m
£m
%
£m
Subordinated borrowings
5.875% Sterling undated subordinated notes (Tier 2)
405
5.88
409
408
5.88
428
10% Sterling subordinated notes 2041 (Tier 2)
312
10.00
366
311
10.00
397
5.5% Sterling subordinated notes 2064 (Tier 2)
589
5.50
569
589
5.50
710
5.375% Sterling subordinated notes 2045 (Tier 2)
603
5.38
627
603
5.38
694
5.25% US Dollar subordinated rates 2047 (Tier 2)
659
5.25
612
628
5.25
679
5.55% US Dollar subordinated rates 2052 (Tier 2)
387
5.55
356
369
5.55
397
5.125% Sterling subordinated notes 2048 (Tier 2)
399
5.13
401
-
-
-
Client fund holdings of group debt1
(31)
-
(30)
(32)
-
(38)
Total subordinated borrowings
3,323
3,310
2,876
3,267
Senior borrowings
Sterling medium term notes 2031-2041
609
5.88
824
609
5.88
857
Client fund holdings of group debt1
(10)
-
(13)
(26)
-
(37)
Total senior borrowings
599
811
583
820
Total core borrowings
3,922
4,121
3,459
4,087
1. £41m (2017: £58m) of the group's subordinated and senior borrowings are currently held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total core borrowings in the table above.
The presented fair values of the group's core borrowings reflect quoted prices in active markets and they have been classified as level 1 in the fair value hierarchy.
IFRS Disclosure Notes Page 56
3.10 Core borrowings (continued)
Subordinated borrowings
5.875% Sterling undated subordinated notes
In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. On 4 February 2019, notification was given that the Group intends to redeem these notes in full on 1 April 2019. Effective from the notification date, the notes were no longer treated as tier 2 own funds for Solvency II purposes.
10% Sterling subordinated notes 2041
In 2009, Legal & General Group Plc issued £300m of 10% dated subordinated notes. The notes are callable at par on 23 July 2021 and every five years thereafter. If not called, the coupon from 23 July 2021 will be reset to the prevailing five year benchmark gilt yield plus 9.325% p.a. These notes mature on 23 July 2041.
5.5% Sterling subordinated notes 2064
In 2014, Legal & General Group Plc issued £600m of 5.5% dated subordinated notes. The notes are callable at par on 27 June 2044 and every five years thereafter. If not called, the coupon from 27 June 2044 will be reset to the prevailing five year benchmark gilt yield plus 3.17% p.a. These notes mature on 27 June 2064.
5.375% Sterling subordinated notes 2045
In 2015, Legal & General Group Plc issued £600m of 5.375% dated subordinated notes. The notes are callable at par on 27 October 2025 and every five years thereafter. If not called, the coupon from 27 October 2025 will be reset to the prevailing five year benchmark gilt yield plus 4.58% p.a. These notes mature on 27 October 2045.
5.25% US Dollar subordinated notes 2047
On 21 March 2017, Legal & General Group Plc issued $850m of 5.25% dated subordinated notes. The notes are callable at par on 21 March 2027 and every five years thereafter. If not called, the coupon from 21 March 2027 will be reset to the prevailing US Dollar mid-swap rate plus 3.687% p.a. These notes mature on 21 March 2047.
5.55% US Dollar subordinated notes 2052
On 24 April 2017, Legal & General Group Plc issued $500m of 5.55% dated subordinated notes. The notes are callable at par on 24 April 2032 and every five years thereafter. If not called, the coupon from 24 April 2032 will be reset to the prevailing US Dollar mid-swap rate plus 4.19% p.a. These notes mature on 24 April 2052.
5.125% Sterling subordinated notes 2048
On 14 November 2018, Legal & General Group Plc issued £400m of 5.125% dated subordinated notes. The notes are callable at par on 14 November 2028 and every five years thereafter. If not called, the coupon from 14 November 2028 will be reset to the prevailing five year benchmark gilt yield plus 4.65% p.a. These notes mature on 14 November 2048.
All of the above subordinated notes are treated as tier 2 own funds for Solvency II purposes unless otherwise stated.
Senior borrowings
Between 2000 and 2002 Legal & General Finance Plc issued £600m of senior unsecured Sterling medium term notes 2031-2041 at coupons between 5.75% and 5.875%. These notes have various maturity dates between 2031 and 2041.
IFRS Disclosure Notes Page 57
3.11 Operational borrowings
Carrying
Interest
Carrying
Interest
amount
rate
Fair value
amount
rate
Fair value
2018
2018
2018
2017
2017
2017
£m
%
£m
£m
%
£m
Short term operational borrowings
Euro Commercial Paper
293
0.93
293
349
1.27
349
Non recourse borrowings
Consolidated Property Limited Partnerships
57
2.46
57
57
2.46
57
Later Living portfolio
76
2.75
76
45
3.20
45
CALA revolving credit facility
188
3.37
188
-
-
-
Class B Surplus Note
296
5.61
296
-
-
-
Bank loans and overdrafts
83
-
83
-
-
-
Total operational borrowings1
993
993
451
451
Less: liabilities of operations classified as held for sale2
(28)
2.46
(28)
-
-
Operational borrowings
965
965
451
451
1. Unit linked borrowings with a carrying value of £61m (2017: £87m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,026m (2017: £538m).
2. Detailed disclosure related to liabilities of operations classified as held for sale is included in Note 3.03.
The Class B Surplus Note have been issued by a US subsidiary of the group as part of a coinsurance structure for the purpose of US statutory regulations. The Note was issued in exchange for a bond of the same value from an unrelated party, included within financial investments on the group's Consolidated Balance Sheet.
Non recourse borrowings include Property Funds loans with a charge on the assets of the relevant Property Fund, loan facilities to Later Living SPVs with a charge on all assets of each individual SPV company, CALA Group (Holdings) Limited's revolving credit facility secured by way of a bond and floating charge, and guarantees and fixed charges granted by CALA Group Limited and its main subsidiaries (CALA 1999 Limited, CALA Limited, and CALA Management Limited). A number of other bonds and floating charges, fixed securities, debentures and share pledges over land and assets have been granted by certain subsidiaries of CALA Group Limited in favour of the lenders.
The carrying value of operational borrowings approximates their fair value. The presented fair values reflect observable market information and have been classified as Level 2 in the fair value hierarchy with the exception of the Later Living portfolio which has been classified as Level 3.
As at 31 December 2018, the group had in place a £1.0bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2022. No amounts were outstanding at 31 December 2018.
IFRS Disclosure Notes Page 58
3.12 Payables and other financial liabilities
2018
2017
£m
£m
Derivative liabilities
7,791
8,173
Repurchase agreements1
43,775
32,357
Other financial liabilities2
11,406
12,026
Total payables and other financial liabilities
62,972
52,556
Less: liabilities of operations classified as held for sale3
(424)
(310)
Payables and other financial liabilities
62,548
52,246
Due within 12 months4
51,178
47,212
Due after 12 months4
11,794
5,344
1. The repurchase agreements are presented gross, however they and their related assets (included within debt securities) are subject to master netting arrangements. The vast majority of the repurchase agreements are unit linked.
2. Other financial liabilities includes trail commission, FX spots and collateral repayable on short position reverse repurchase agreements. The value of collateral repayable on short position reverse repurchase agreements was £4,883m (2017: £5,138m).
3. Detailed disclosure relating to liabilities of operations classified as held for sale is included in Note 3.03.
4. The maturity analysis of the liabilities between less and more than 12 months is based on the Total payables and other financial liabilities.
Fair value hierarchy
Total
Level 1
Level 2
Level 3
Amortised cost
As at 31 December 2018
£m
£m
£m
£m
£m
Derivative liabilities
7,791
337
7,452
2
-
Repurchase agreements
43,775
-
43,775
-
-
Other financial liabilities
11,406
4,718
35
496
6,157
Total payables and other financial liabilities
62,972
5,055
51,262
498
6,157
Amortised
Total
Level 1
Level 2
Level 3
cost
As at 31 December 2017
£m
£m
£m
£m
£m
Derivative liabilities
8,173
193
7,969
11
-
Repurchase agreements
32,357
-
32,357
-
-
Other financial liabilities
12,026
4,793
7
140
7,086
Total payables and other financial liabilities
52,556
4,986
40,333
151
7,086
Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as Level 3 liabilities. The entire movement in the balance has been reflected in the Consolidated Income Statement during the period. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (2017: £4m).
Significant transfers between levels
There have been no significant transfers of liabilities between Levels 1, 2 and 3 for the year ended 31 December 2018 (31 December 2017: no significant transfers), other than those noted above.
IFRS Disclosure Notes Page 59
3.13 IFRS sensitivity analysis
Impact on pre-tax
Impact on
Impact on pre-tax
Impact on
group profit
group equity
group profit
group equity
net of re-
net of re-
net of re-
net of re-
insurance
insurance
insurance
insurance
2018
2018
2017
2017
£m
£m
£m
£m
Economic sensitivity
Long-term insurance
100bps increase in interest rates1
384
209
195
59
50bps decrease in interest rates1
(220)
(122)
(126)
(45)
50bps increase in future inflation expectations
65
53
6
5
Credit spreads widen by 100bps with no change in expected defaults
(138)
(213)
(108)
(172)
25% rise in equity markets
458
399
514
456
25% fall in equity markets
(459)
(399)
(443)
(399)
15% rise in property values
738
606
408
346
15% fall in property values
(761)
(623)
(441)
(373)
10bps increase in credit default assumptions
(551)
(446)
(477)
(383)
10bps decrease in credit default assumptions
558
451
469
377
Non-economic sensitivity
Long-term insurance
1% increase in annuitant mortality
157
192
186
197
1% decrease in annuitant mortality
(147)
(183)
(178)
(191)
5% increase in assurance mortality1
(375)
(298)
(49)
(37)
General insurance
Single storm event with 1 in 200 year probability2
(235)
(190)
(221)
(179)
1. Sensitivities have been calculated in accordance with the new reserving basis for term assurance business in LGIA adopted from 1 January 2018, which now uses current information where applicable. Further details on this change in accounting policy are provided in Note 1.
2. Sensitivity shows the ultimate cost to the group taking into account intra group reassurance arrangements. Sensitivities in 2017 showed the impact on Legal & General Insurance Limited alone and have been restated to be on a consistent basis.
The table above shows the impacts on group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario. The group has aligned sensitivity analysis disclosure requirements across various reported metrics, primarily for interest rate, equity, property value, and annuitant mortality. The current disclosure also reflects management's view of key risks in current economic conditions.
For the year ended 31 December 2017, US term assurance liabilities were calculated on a US GAAP basis which takes a more passive approach to assumption setting. The economic and demographic assumptions set at inception were assumed to be unchanged under the sensitivities specified, making the liabilities insensitive to changes in assumptions. Following a change in accounting policy for these liabilities during 2018 (see Note 3.01 for details) to bring them in line with how similar products are accounted for in other parts of the business, a gross premium valuation methodology has been used, and assumptions are now set on the basis of current information. This change in accounting policy has a significant impact on the interest rate and assurance mortality assumption stresses for the US term assurance liabilities.
The interest rate sensitivity assumes a 100bps increase, and 50bps decrease, in the gross redemption yield on fixed interest securities together with a 100bps and 50bps change in the real yields on variable securities for respective sensitivity analyses. The interest rate sensitivities reflect the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the long term business. No yield floors have been applied in the estimation of the stresses, despite the current low interest rate environment.
The inflation stress adopted is a 50bps p.a. increase in inflation resulting in a 50bps p.a. reduction in real yield and no change to the nominal yield. In addition the expense inflation rate is increased by 50bps p.a. In the sensitivity for credit spreads, corporate bond yields have increased by 100bps, gilt and approved security yields are unchanged, and there has been no adjustment to the default assumptions.
The equity stress is a +/- 25% in equity values. The property stress adopted is a +/-15% in property market values. Rental income is assumed to be unchanged; however the vacant possession value is stressed down by 15% in line with the market value stress. Where property is being used to back liabilities, the valuation interest rate used to place a value on the liabilities moves with the implied change in property yields.
The credit default stress assumes a +/-10bps stress to the current credit default assumptions for unapproved corporate bonds which will have an impact on the valuation interest rates used to discount liabilities. The credit default assumption is set based on the credit rating of the individual bonds in the asset portfolio and their outstanding term using Moody's global credit default rates.
The annuitant mortality stress is a +/-1% in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates. The assurance mortality stress represents an increase in mortality/morbidity rates for assurance contracts by 5%.
The group has external weather catastrophe reinsurance in place such that for any single weather event with claims up to £600m (2017: 520m) the ultimate cost of claims is limited to £200m. Intra group reinsurance means for losses in excess of £50m (2017: £30m) but less than £600m (2017: £520m) the cost of claims in Legal & General Insurance Limited would be £25m. (2017: £30m plus 50% of a £5m excess £30m layer). Legal and General Assurance Society Limited is exposed to 93% of claims between £50m and £120m (2017: £35m to £105m) and Legal & General Reinsurance Limited is exposed to 85% of claims between £120m and £220m (2017: 71% of claims between £105m and £225m). An event costing £600m is approximately equivalent to (but slightly lower than) the end-2018 modelled 1 in 200 year loss. In addition to the cost of claims the group would also incur additional claims handling costs and the cost of reinstatement premiums.
IFRS Disclosure Notes Page 60
3.13 IFRS sensitivity analysis (continued)
The above sensitivity analyses do not reflect management actions which could be taken to reduce the impacts. The group seeks to actively manage its asset and liability position. A change in market conditions may lead to changes in the asset allocation or charging structure which may have a more, or less, significant impact on the value of the liabilities. The analyses also ignore any second order effects of the assumption change, including the potential impact on the group asset-liability position and any second order tax effects. In calculating the alternative values, all other assumptions are left unchanged, though in practice, items may be correlated. The sensitivity of the profit and equity to changes in assumptions may not be linear. These results should not be extrapolated to changes of a much larger order, which could be significantly more or less than the amounts shown above.
3.14 Foreign exchange rates
Principal rates of exchange used for translation are:
Year end exchange rates
2018
2017
United States dollar
1.28
1.35
Euro
1.11
1.13
Average exchange rates
2018
2017
United States dollar
1.34
1.29
Euro
1.13
1.14
3.15 Provisions
(a) Analysis of provisions
2018
2017
£m
£m
Retirement benefit obligations
1,112
1,266
Other provisions
29
73
Total provisions
1,141
1,339
Less: liabilities of operations classified as held for sale1
(1)
(4)
Provisions
1,140
1,335
1. Liabilities of operations classified as held for sale relate to Mature Savings following the group's announcement in December 2017 to sell the Mature Savings business to Swiss Re.
(b) Retirement benefit obligations
Fund and
CALA Homes1
Fund and
Scheme
and Overseas
Scheme
Overseas
2018
2018
2017
2017
£m
£m
£m
£m
Gross pension obligations included in provisions
1,091
21
1,261
5
Annuity obligations insured by LGAS
(858)
-
(875)
-
Gross defined benefit pension deficit
233
21
386
5
Deferred tax on defined benefit pension deficit
(41)
(1)
(69)
(1)
Net defined benefit pension deficit
192
20
317
4
1. Following the stepped acquisition of CALA Homes in 2018 the pension obligations of CALA Homes have been included in 2018 balances.
The Legal & General Group UK Pension and Assurance Fund (Fund) and the Legal & General Group UK Senior Pension Scheme (Scheme) account for the majority of the UK and worldwide assets of, and contributions to, such arrangements. The Fund and Scheme were closed to future accrual on 31 December 2015.
IFRS Disclosure Notes Page 61
3.16 Contingent liabilities, guarantees and indemnities
Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance between actual experience from that assumed may result in those liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of policyholder contracts, or the circumstances in which policyholders have entered into them. The extent of these liabilities is influenced by a number of factors including the actions and requirements of the PRA, FCA, ombudsman rulings, industry compensation schemes and court judgments.
Various group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. The relevant members of the group ensure that they make prudent provision as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet reasonably foreseeable eventualities. The provisions made are regularly reviewed. It is not possible to predict, with certainty, the extent and the timing of the financial impact of these claims, litigation or issues.
In 1975, Legal and General Assurance Society Limited (LGAS) 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 LGAS. 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 LGAS against any liability LGAS may have as a result of the ILU's requirement, and the ILU agreed that its requirement of LGAS would not apply to policies written or renewed after the acquisition. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary of Berkshire Hathaway Inc. Whether LGAS has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability is uncertain. LGAS has made no payment or provision in respect of this matter.
Group companies have given warranties, indemnities and guarantees as a normal part of their business and operating activities or in relation to capital market transactions or corporate disposals. Legal & General Group Plc has provided indemnities and guarantees in respect of the liabilities of group companies in support of their business activities including Pension Protection Fund compliant guarantees in respect of certain group companies' liabilities under the group pension fund and scheme. LGAS has provided indemnities, a liquidity and expense risk agreement, a deed of support and a cash and securities liquidity facility in respect of the liabilities of group companies to facilitate the group's matching adjustment reorganisation pursuant to Solvency II.
3.17 Related party transactions
(i) Key management personnel transactions and compensation
There were no material transactions between key management and the Legal & General group of companies during the year. All transactions between the group and its key management are on commercial terms which are no more favourable than those available to employees in general. Contributions to the post-employment defined benefit plans were £84m (2017: £93m) for all employees.
At 31 December 2018 and 31 December 2017 there were no loans outstanding to officers of the company.
The aggregate compensation for key management personnel, including executive and non-executive directors, is as follows:
2018
2017
£m
£m
Salaries
10
10
Post-employment benefits
-
-
Share-based incentive awards
6
4
Key management personnel compensation
16
14
Number of key management personnel
15
15
(ii) Services provided to and by related parties
All transactions between the group and associates, joint ventures and other related parties during the year are on commercial terms which are no more favourable than those available to companies in general.
Loans and commitments to related parties are made in the normal course of business.
The group has the following material related party transactions:
- Annuity contracts issued by Legal and General Assurance Society Limited for consideration of £59m (2017: £161m) purchased by the group's UK defined benefit pension schemes during the period, priced on an arm's length basis;
- Loans outstanding from related parties, including preference shares, at 31 December 2018 of £201m (2017: £203m), with a further commitment of £6m;
- The group has total other commitments of £837m to related parties (2017: £633m), of which £507m has been drawn at 31 December 2018 (2017: £357m).
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDFR CKPDKBBKBANK
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