REG - Legal & General Grp - L&G Full Year Results 2020 Part 2
Legal & General Group Plc
2020 Full Year Results Part 2
IFRS Disclosures on performance and Release from operations Page 37
1.01 Operating profit#
For the year ended 31 December 2020
2020
20191
Notes
£m
£m
From continuing operations
Legal & General Retirement (LGR)
1.03
1,731
1,569
- LGR Institutional (LGRI)
1,331
1,216
- LGR Retail (LGRR)
400
353
Legal & General Investment Management (LGIM)
1.04
404
394
Legal & General Capital (LGC)
1.05
275
363
Legal & General Insurance (LGI)
1.03
189
314
- UK and Other
205
223
- US (LGIA)
(16)
91
Operating profit from divisions:
From continuing operations
2,599
2,640
From discontinued operations2
34
11
Operating profit from divisions
2,633
2,651
Group debt costs3
(233)
(208)
Group investment projects and expenses
(155)
(157)
Covid-19 costs4
(27)
-
Operating profit
2,218
2,286
Investment and other variances
1.06
(394)
(150)
Losses on non-controlling interests
(36)
(24)
Adjusted profit before tax attributable to equity holders
1,788
2,112
Tax expense attributable to equity holders
3.07
(217)
(302)
Profit for the year
1,571
1,810
Profit attributable to equity holders
1,607
1,834
Earnings per share:
Basic (pence per share)5
1.07
27.00p
30.92p
Diluted (pence per share)5
1.07
25.60p
30.75p
1. 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to Legal & General Investment Management (LGIM) within Operating profit from divisions. This has reduced LGIM operating profit by £29m for the year ended 31 December 2019.
2. Discontinued operations include the results of the Mature Savings division, the sale of which completed on 7 September 2020. In 2019, discontinued operations also included the results of the General Insurance division.
3. Group debt costs exclude interest on non recourse financing.
4. Covid-19 costs reflect incremental operational expenses incurred as a result of Covid-19 and include IT spend on delivering remote working solutions.
5. 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.
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 the operating profit for LGC's trading businesses (which reflects the IFRS profit before tax). Variances between actual and long-term expected investment return assumptions are reported below operating profit, which include any differences between investment return on actual assets and the target long-term asset mix. Exceptional income and expenses which arise outside the normal course of business in the year, such as gains/losses from mergers 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 38
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
Other
Tax expense/ (credit)
For the year ended
31 December 2020
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
LGR
655
277
932
116
400
33
-
1,481
250
1,731
- LGRI
492
220
712
81
314
30
-
1,137
194
1,331
- LGRR
163
57
220
35
86
3
-
344
56
400
LGIM
357
(15)
342
(17)
-
(1)
-
324
80
404
- LGIM (excluding
Workplace Savings)2
327
-
327
-
-
-
-
327
80
407
- Workplace Savings3
30
(15)
15
(17)
-
(1)
-
(3)
-
(3)
LGC
224
-
224
-
-
-
-
224
51
275
LGI
250
8
258
(41)
58
(5)
(115)
155
34
189
- UK and Other
146
8
154
(41)
58
(5)
-
166
39
205
- US (LGIA)4
104
-
104
-
-
-
(115)
(11)
(5)
(16)
From continuing operations
1,486
270
1,756
58
458
27
(115)
2,184
415
2,599
From discontinued operations5
28
-
28
-
-
-
-
28
6
34
Total from divisions
1,514
270
1,784
58
458
27
(115)
2,212
421
2,633
Group debt costs
(189)
-
(189)
-
-
-
-
(189)
(44)
(233)
Group investment projects and expenses
(56)
-
(56)
-
-
-
(61)
(117)
(38)
(155)
Covid-19 costs6
-
-
-
-
-
-
(20)
(20)
(7)
(27)
Total
1,269
270
1,539
58
458
27
(196)
1,886
332
2,218
1. Release from operations within US (LGIA) includes £84m of dividends from the US.
2. LGIM (excluding Workplace Savings) includes profits on fund management services.
3. Workplace Savings represents administration business only.
4. Other includes experience variances, changes in valuation assumptions and non-cash items for LGIA.
5. Discontinued operations include the results of the Mature Savings division, the sale of which completed on 7 September 2020.
6. Covid-19 costs reflect incremental operational expenses incurred as a result of Covid-19 and include IT spend on delivering remote working solutions.
Release from operations for LGR, LGIM - Workplace Savings and LGI UK and Other represents the expected IFRS surplus generated in the year from the difference between the prudent assumptions underlying the IFRS liabilities and our best estimate of future experience for in-force non-profit annuities, workplace savings and UK protection businesses. 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 from the Mature Savings business.
New business surplus/strain for LGR, LGIM - Workplace Savings and LGI UK and Other represents the initial profit or loss from writing new business. This includes the costs associated with acquiring new business and setting up prudent reserves in respect of 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. At certain period ends, depending upon the quantum and timing of pension risk transfer (PRT) volumes, we may have sourced more or less of the high quality assets targeted to support that business. At year end, the profit impact of the difference between the actual assets held (including alternative surplus assets where suitable) 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 and LGIM (excluding workplace savings) 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 39
1.02 Reconciliation of release from operations to operating profit# before tax (continued)
Changes
Operating
New
Net
in
Operating
profit/
Release
business
release
Exper-
valuation
profit/
Tax
(loss)
from
surplus/
from
ience
assump-
Non-cash
(loss)
expense/
before
For the year ended
operations1
(strain)
operations
variances
tions
items
Other
after tax
(credit)
tax
31 December 2019
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
LGR
598
327
925
(53)
390
91
-
1,353
216
1,569
- LGRI
418
265
683
(40)
313
88
-
1,044
172
1,216
- LGRR
180
62
242
(13)
77
3
-
309
44
353
LGIM2
348
(20)
328
(6)
-
(4)
-
318
76
394
- LGIM (excluding Workplace
Savings)3
321
-
321
-
-
-
-
321
77
398
- Workplace Savings4
27
(20)
7
(6)
-
(4)
-
(3)
(1)
(4)
LGC
295
-
295
-
-
-
-
295
68
363
LGI
259
(7)
252
(11)
44
(12)
4
277
37
314
- UK and Other
165
(7)
158
(11)
44
(12)
4
183
40
223
- US (LGIA)5
94
-
94
-
-
-
-
94
(3)
91
From continuing operations
1,500
300
1,800
(70)
434
75
4
2,243
397
2,640
From discontinued operations6
9
-
9
-
-
-
-
9
2
11
Total from divisions
1,509
300
1,809
(70)
434
75
4
2,252
399
2,651
Group debt costs
(168)
-
(168)
-
-
-
-
(168)
(40)
(208)
Group investment projects
and expenses2
(44)
-
(44)
-
-
-
(79)
(123)
(34)
(157)
Total
1,297
300
1,597
(70)
434
75
(75)
1,961
325
2,286
1. Release from operations within US (LGIA) includes £81m of dividends from the US.
2. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £23m and Workplace Savings operating profit by £6m.
3. LGIM (excluding Workplace Savings) includes profits on fund management services.
4. Workplace Savings represents administration business only.
5. Other includes experience variances, changes in valuation assumptions and non-cash items for LGIA.
6. Discontinued operations include the results of the Mature Savings and General Insurance divisions, the sales of which completed on 7 September 2020 and 31 December 2019 respectively.
# 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 40
1.03 Analysis of LGR and LGI operating profit
For the year ended 31 December 2020
LGR
LGI
LGR
LGI
2020
2020
2019
2019
£m
£m
£m
£m
Net release from operations
932
258
925
252
Experience variances
- Persistency
7
3
(4)
(9)
- Mortality/morbidity1
104
(46)
6
(5)
- Expenses
(5)
(5)
(23)
-
- Project and development costs
(5)
(1)
(12)
-
- Other
15
8
(20)
3
Total experience variances
116
(41)
(53)
(11)
Changes to valuation assumptions
- Persistency
-
(1)
-
(16)
- Mortality/morbidity2
255
54
352
39
- Expenses
-
2
5
-
- Other3
145
3
33
21
Total changes to valuation assumptions
400
58
390
44
Movement in non-cash items
- Acquisition expense tax relief
-
(3)
-
(2)
- Other4
33
(2)
91
(10)
Total movement in non-cash items
33
(5)
91
(12)
Other1
-
(115)
-
4
Operating profit after tax
1,481
155
1,353
277
Tax gross up
250
34
216
37
Operating profit before tax
1,731
189
1,569
314
1. Mortality experience variances are driven by increased claims experience due to Covid-19, particularly impacting LGIA (reflected in Other) where we retain the majority of the mortality risk, and include a provision of £110m for future Covid-19 related claims.
2. Mortality assumption changes for LGR include a one off release of £153m (net of tax) from an update in the longevity trend assumption from adjusted CMI 2017 to adjusted CMI 2018. In 2019, the comparable one off release of £134m was from adjusted CMI 2016 to adjusted CMI 2017. Other positive longevity variances are driven by routine updates to our assumptions relating to base mortality rates.
3. The £145m positive Other change to valuation assumptions in LGR reflects both the reduction in the assumed late retirement factors applied to deferred annuities and the impact from updating unit cost and investment expense assumptions.
4. LGR Other movement in non-cash items is driven by the net effect of the capitalisation and unwind of future asset management profits on activity managed by LGIM, and is a function of new business volumes and movements in the main unit cost assumptions.
IFRS Disclosures on performance and Release from operations Page 41
1.04 LGIM operating profit
2020
20195
£m
£m
Asset management revenue (excluding 3rd party market data)1,2
929
889
Asset management transactional revenue3
27
23
Asset management expenses (excluding 3rd party market data)1,2
(549)
(514)
Workplace Savings operating loss4
(3)
(4)
Total LGIM operating profit
404
394
1. Asset management revenue and expenses exclude income and costs of £27m in relation to the provision of third party market data (2019: £24m).
2. The ETF operating result is included as part of asset management revenue and expenses.
3. Transactional revenue from external clients includes execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees.
4. Workplace Savings represents administration business.
5. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. For the respective 2019 periods this has increased Asset management expenses (2019: £23m) and reduced the Workplace Savings operating result (2019: £6m).
1.05 LGC operating profit
2020
2019
£m
£m
Direct investments1
112
217
Traded investment portfolio including treasury assets2
163
146
Total LGC operating profit
275
363
1. Direct Investments represents LGC's portfolio of assets across future cities (including specialist commercial real estate and clean energy), residential property and SME finance.
2. The traded investment portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash.
1.06 Investment and other variances
2020
2019
£m
£m
Investment variance1
(691)
(27)
M&A related and other variances2
297
(123)
Total investment and other variances
(394)
(150)
1. The investment variance for the year ended 31 December 2020 is broadly made up of three significant items: 1) £459m in LGI, reflecting a reduction in the discount rate used to calculate protection liabilities, the rate being linked to UK government bond and US Treasury yields; 2) £299m in LGC, reflecting market movements in our traded and treasury portfolio and write-downs on certain property assets; 3) partially offset by a positive variance of £57m in respect of the defined benefit pension scheme, reflecting the impact of the acquisition of annuity assets from LGR, and the beneficial rate difference between the IAS19 and annuity discount rates.
2. M&A related and other variances includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. 2020 includes a £335m profit on disposal of the Mature Savings division.
Investment variance includes differences between actual and long term expected investment return on traded and real assets, economic assumption changes (e.g. credit default and inflation), the impact of any difference between the actual allocated asset mix and the target long-term asset mix on new pension risk transfer business, and excludes the yield associated with assets held for future new pension risk transfer business from the valuation discount rate.
The long term expected investment return is based on opening economic assumptions applied to the assets under management at the start of the reporting period. The assumptions underlying the calculation of the expected returns for traded equity and commercial property assets are based on long term historic average returns expected to apply through the cycle. The principal assumptions are:
2020
2019
Equities
7%
7%
Commercial property
5%
5%
Residential property
RPI + 50bps
RPI + 50bps
IFRS Disclosures on performance and Release from operations Page 42
1.07 Earnings per share
(a) Basic earnings per share
After tax
Per share1
After tax
Per share1
2020
2020
2019
2019
£m
p
£m
p
Profit for the year attributable to equity holders
1,607
27.10
1,834
30.92
Less: coupon payable in respect of restricted tier 1 convertible notes net of tax relief
(6)
(0.10)
-
-
Total basic earnings
1,601
27.00
1,834
30.92
Less: earnings derived from discontinued operations
(290)
(4.89)
(23)
(0.39)
Basic earnings derived from continuing operations
1,311
22.11
1,811
30.53
1. Basic earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the year, excluding employee scheme treasury shares.
(b) Diluted earnings per share
After tax
Weighted
average
number of
shares
Per share1
2020
2020
2020
£m
m
p
Profit for the year attributable to equity holders
1,607
5,930
27.10
Net shares under options allocable for no further consideration
-
40
(0.18)
Conversion of restricted tier 1 convertible notes
-
307
(1.32)
Total diluted earnings
1,607
6,277
25.60
Less: diluted earnings derived from discontinued operations
(290)
-
(4.62)
Diluted earnings derived from continuing operations
1,317
6,277
20.98
After tax
Weighted
average
number of
shares
Per share1
2019
2019
2019
£m
m
p
Profit for the year attributable to equity holders
1,834
5,932
30.92
Net shares under options allocable for no further consideration
-
33
(0.17)
Total diluted earnings
1,834
5,965
30.75
Less: diluted earnings derived from discontinued operations
(23)
-
(0.39)
Diluted earnings derived from continuing operations
1,811
5,965
30.36
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 and conversion of restricted tier 1 convertible notes.
IFRS Disclosures on performance and Release from operations Page 43
1.08 Segmental analysis
Reportable segments
The group has four reportable segments that are continuing operations, comprising LGR, LGIM, LGC and LGI, 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.
Continuing operations exclude the results of the Mature Savings and the General Insurance divisions (General Insurance is in respect of 2019 only), which have been classified as discontinued following the group's announcement to sell these businesses to ReAssure Limited and Allianz respectively. The sale of the Mature Savings business completed on 7 September 2020, whilst that of the General insurance business completed on 31 December 2019.
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
and debt
continuing
LGR
LGIM
LGC
LGI
costs1
operations
For the year ended 31 December 2020
£m
£m
£m
£m
£m
£m
Operating profit/(loss)#
1,731
404
275
189
(415)
2,184
Investment and other variances
19
(3)
(299)
(459)
24
(718)
Losses attributable to non-controlling interests
-
-
-
-
(36)
(36)
Profit/(loss) before tax attributable to equity holders
1,750
401
(24)
(270)
(427)
1,430
Tax (expense)/credit attributable to equity holders
(230)
(63)
(8)
58
94
(149)
Profit/(loss) for the year
1,520
338
(32)
(212)
(333)
1,281
Group
expenses
Total
and debt
continuing
LGR
LGIM2
LGC
LGI
costs2
operations
For the year ended 31 December 2019
£m
£m
£m
£m
£m
£m
Operating profit/(loss)#
1,569
394
363
314
(365)
2,275
Investment and other variances
43
(9)
91
(234)
(58)
(167)
Losses attributable to non-controlling interests
-
-
-
-
(24)
(24)
Profit/(loss) before tax attributable to equity holders
1,612
385
454
80
(447)
2,084
Tax (expense)/credit attributable to equity holders
(234)
(75)
(75)
12
75
(297)
Profit/(loss) for the year
1,378
310
379
92
(372)
1,787
1. Group expenses and debt costs include £27m of incremental costs incurred as a result of Covid-19.
2. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £29m for the year ended 31 December 2019.
# 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 44
1.08 Segmental analysis (continued)
(b) Total income
LGC and
Total continuing
LGR
LGIM1,2
LGI
other3
operations
For the year ended 31 December 2020
£m
£m
£m
£m
£m
Internal income
-
201
-
(201)
-
External income
15,057
20,878
1,799
12,497
50,231
Total income
15,057
21,079
1,799
12,296
50,231
LGC and
Total continuing
LGR
LGIM1,2
LGI
other3
operations
For the year ended 31 December 2019
£m
£m
£m
£m
£m
Internal income
-
188
-
(188)
-
External income
16,385
43,836
1,593
4,972
66,786
Total income
16,385
44,024
1,593
4,784
66,786
1. LGIM internal income relates to investment management services provided to other segments.
2. LGIM external income primarily includes fees from fund management and investment returns on unit linked funds.
3. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
IFRS Primary Financial Statements Page 45
2.01 Consolidated Income Statement
2020
2019
For the year ended 31 December 2020
Notes
£m
£m
Income
Gross written premiums
12,545
15,203
Outward reinsurance premiums
(3,187)
(3,452)
Net change in provision for unearned premiums
12
(66)
Net premiums earned
9,370
11,685
Fees from fund management and investment contracts
873
834
Investment return
39,168
53,014
Other operational income
820
1,253
Total income
1.08
50,231
66,786
Expenses
Claims and change in insurance contract liabilities
17,768
19,005
Reinsurance recoveries
(3,601)
(3,502)
Net claims and change in insurance contract liabilities
14,167
15,503
Change in investment contract liabilities
31,410
45,809
Acquisition costs
617
805
Finance costs
305
269
Other expenses
2,233
2,244
Total expenses
48,732
64,630
Profit before tax
1,499
2,156
Tax expense attributable to policyholder returns
(69)
(72)
Profit before tax attributable to equity holders
1,430
2,084
Total tax expense
(218)
(369)
Tax expense attributable to policyholder returns
69
72
Tax expense attributable to equity holders
3.07
(149)
(297)
Profit after tax from continuing operations
1.08
1,281
1,787
Profit after tax from discontinued operations
290
23
Profit for the year
1,571
1,810
Attributable to:
Non-controlling interests
(36)
(24)
Equity holders
1,607
1,834
Dividend distributions to equity holders during the year
3.05
1,048
998
Dividend distributions to equity holders proposed after the year end
3.05
754
753
p
p
Total basic earnings per share1
1.07
27.00
30.92
Total diluted earnings per share1
1.07
25.60
30.75
Basic earnings per share derived from continuing operations1
1.07
22.11
30.53
Diluted earnings per share derived from continuing operations1
1.07
20.98
30.36
1. All earnings per share calculations are based on profit attributable to equity holders of the company.
IFRS Primary Financial Statements Page 46
2.02 Consolidated Statement of Comprehensive Income
2020
2019
For the year ended 31 December 2020
£m
£m
Profit for the year
1,571
1,810
Items that will not be reclassified subsequently to profit or loss
Actuarial (losses) on defined benefit pension schemes
(168)
(62)
Tax on actuarial (losses) on defined benefit pension schemes
48
11
Total items that will not be reclassified subsequently to profit or loss
(120)
(51)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations
2
(67)
Movement in cross-currency hedge
7
13
Tax on movement in cross-currency hedge
(4)
(1)
Movement in financial investments designated as available-for-sale
2
72
Tax on movement in financial investments designated as available-for-sale
-
(15)
Total items that may be reclassified subsequently to profit or loss
7
2
Other comprehensive (expense) after tax
(113)
(49)
Total comprehensive income for the year
1,458
1,761
Total comprehensive income for the year attributable to:
Continuing operations
1,168
1,738
Discontinued operations
290
23
Total comprehensive income/(expense) for the year attributable to:
Non-controlling interests
(36)
(24)
Equity holders
1,494
1,785
IFRS Primary Financial Statements Page 47
2.03 Consolidated Balance Sheet
2020
20191
As at 31 December 2020
Notes
£m
£m
Assets
Goodwill
68
64
Purchased interest in long term businesses and other intangible assets
329
190
Deferred acquisition costs
47
54
Investment in associates and joint ventures accounted for using the equity method
288
324
Property, plant and equipment
274
298
Investment property
3.06
8,475
7,695
Financial investments
3.06
526,057
498,389
Reinsurers' share of contract liabilities
6,939
5,947
Deferred tax assets
3.07
5
8
Current tax assets
634
468
Receivables and other assets
9,429
8,532
Assets of operations classified as held for sale
-
24,844
Cash and cash equivalents
18,020
13,923
Total assets
570,565
560,736
Equity
Share capital
3.08
149
149
Share premium
3.08
1,006
1,000
Employee scheme treasury shares
(75)
(65)
Capital redemption and other reserves
198
205
Retained earnings
8,224
7,749
Attributable to owners of the parent
9,502
9,038
Restricted tier 1 convertible notes
3.09
495
-
Non-controlling interests
3.10
(31)
55
Total equity
9,966
9,093
Liabilities
Non-participating insurance contract liabilities
89,029
77,881
Non-participating investment contract liabilities
343,543
320,594
Core borrowings
3.11
4,558
4,091
Operational borrowings
3.12
1,055
1,020
Provisions
3.16
1,288
1,220
UK deferred tax liabilities
3.07
168
189
Overseas deferred tax liabilities
3.07
39
76
Current tax liabilities
61
107
Payables and other financial liabilities
3.13
91,942
84,039
Other liabilities
756
804
Net asset value attributable to unit holders
28,160
31,507
Liabilities of operations classified as held for sale
-
30,115
Total liabilities
560,599
551,643
Total equity and liabilities
570,565
560,736
1. Following a change in accounting policy for LGIA universal life and annuity reserves, a number of balance sheet items have been restated, notably deferred acquisition costs, financial investments, reinsurers' share of contract liabilities, capital redemption and other reserves, non-participating insurance contract liabilities and overseas deferred tax liabilities. The overall net impact on the group's retained earnings as at 31 December 2019 is a reduction of £284m. Further details on the change in accounting policy are provided in Note 3.01.
IFRS Primary Financial Statements Page 48
2.04 Consolidated Statement of Changes in Equity
Employee
Capital
Equity
Restricted
scheme
redemption
attributable
tier 1
Non-
Share
Share
treasury
and other
Retained
to owners
convertible
controlling
Total
For the year ended 31 December 2020
capital
premium
shares
reserves1
earnings
of the parent
notes
interests
equity
£m
£m
£m
£m
£m
£m
£m
£m
£m
As at 1 January 2020
149
1,000
(65)
205
7,749
9,038
-
55
9,093
Profit for the year
-
-
-
-
1,607
1,607
-
(36)
1,571
Exchange differences on translation of overseas operations
-
-
-
2
-
2
-
-
2
Net movement in cross-currency hedge
-
-
-
3
-
3
-
-
3
Net actuarial losses on defined benefit pension schemes
-
-
-
-
(120)
(120)
-
-
(120)
Net movement in financial investments designated as available-for-sale
-
-
-
2
-
2
-
-
2
Total comprehensive income for the year
-
-
-
7
1,487
1,494
-
(36)
1,458
Options exercised under share option schemes
-
6
-
-
-
6
-
-
6
Shares purchased
-
-
(23)
-
-
(23)
-
-
(23)
Shares vested
-
-
13
(27)
-
(14)
-
-
(14)
Employee scheme treasury shares:
- Value of employee services
-
-
-
43
-
43
-
-
43
Share scheme transfers to retained earnings
-
-
-
-
12
12
-
-
12
Dividends
-
-
-
-
(1,048)
(1,048)
-
-
(1,048)
Restricted tier 1 convertible notes2
-
-
-
-
-
-
495
-
495
Coupon payable in respect of restricted tier 1 convertible notes net of tax relief
-
-
-
-
(6)
(6)
-
-
(6)
Movement in third party interests
-
-
-
-
-
-
-
(50)
(50)
Currency translation differences
-
-
-
(30)
30
-
-
-
-
As at 31 December 2020
149
1,006
(75)
198
8,224
9,502
495
(31)
9,966
1. Capital redemption and other reserves as at 31 December 2020 include share-based payments £101m, foreign exchange £43m, capital redemption £17m, hedging reserves £35m and available-for-sale reserves £2m.
2. See Note 3.09 for details.
IFRS Primary Financial Statements Page 49
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 2019
capital
premium
shares
reserves1
earnings
of the parent
interests
equity
£m
£m
£m
£m
£m
£m
£m
£m
As at 1 January 2019
149
992
(52)
230
7,261
8,580
72
8,652
Change in accounting policy2
-
-
-
9
(330)
(321)
-
(321)
Restated as at 1 January 2019
149
992
(52)
239
6,931
8,259
72
8,331
Profit for the year
-
-
-
-
1,834
1,834
(24)
1,810
Exchange differences on translation of overseas operations
-
-
-
(67)
-
(67)
-
(67)
Net movement in cross-currency hedge
-
-
-
12
-
12
-
12
Net actuarial gains on defined benefit pension schemes
-
-
-
-
(51)
(51)
-
(51)
Net movement in financial investments designated as available-for-sale
-
-
-
57
-
57
-
57
Total comprehensive income for the year
-
-
-
2
1,783
1,785
(24)
1,761
Options exercised under share option schemes
-
8
-
-
-
8
-
8
Shares purchased
-
-
(20)
-
-
(20)
-
(20)
Shares vested
-
-
7
(35)
-
(28)
-
(28)
Employee scheme treasury shares:
- Value of employee services
-
-
-
39
-
39
-
39
Share scheme transfers to retained earnings
-
-
-
-
1
1
-
1
Dividends
-
-
-
-
(998)
(998)
-
(998)
Movement in third party interests
-
-
-
-
-
-
7
7
Currency translation differences
-
-
-
14
(14)
-
-
-
Change in accounting policy2
-
-
-
(54)
46
(8)
-
(8)
Restated as at 31 December 2019
149
1,000
(65)
205
7,749
9,038
55
9,093
1. Capital redemption and other reserves as at 31 December 2019 include share-based payments £85m, foreign exchange £71m, capital redemption £17m and hedging reserves £32m.
2. Change in accounting policy represents the impact on retained earnings of the change in accounting policy related to LGIA universal life and annuity reserves, described in Note 3.01. The change has been applied retrospectively.
IFRS Primary Financial Statements Page 50
2.05 Consolidated Statement of Cash Flows
2020
2019
For the year ended 31 December 2020
Notes
£m
£m
Cash flows from operating activities
Profit for the year
1,571
1,810
Adjustments for non cash movements in net profit for the year
Net gains on financial investments and investment property
(28,530)
(45,516)
Investment income
(9,761)
(10,501)
Interest expense
337
322
Tax expense
144
598
Other adjustments
(12)
117
Net decrease/(increase) in operational assets
Investments held for trading or designated as fair value through profit or loss
6,519
(18,031)
Investments designated as available-for-sale
1,072
(179)
Other assets
(2,445)
(4,660)
Net increase/(decrease) in operational liabilities
Insurance contracts
11,607
13,089
Investment contracts
20,855
27,514
Other liabilities
(5,900)
21,313
Net increase in held for sale net liabilities
-
1,206
Cash utilised in operations
(4,543)
(12,918)
Interest paid
(301)
(263)
Interest received
5,190
5,047
Tax paid1
(554)
(540)
Dividends received
4,509
5,389
Net cash flows from/(utilised in) operations
4,301
(3,285)
Cash flows from investing activities
Net acquisition of plant, equipment, intangibles and other assets
(164)
(89)
Net disposal of operations, net of cash (transferred)/acquired
3.02
(277)
198
Net (investment)/disposal in associates and joint ventures
(16)
29
Net cash flows (utilised)/generated from investing activities
(457)
138
Cash flows from financing activities
Dividend distributions to ordinary equity holders during the year
3.05
(1,048)
(998)
Coupon payment in respect of restricted tier 1 convertible notes, gross of tax
(7)
-
Options exercised under share option schemes
3.08
6
8
Treasury shares purchased for employee share schemes
(23)
(20)
Payment of lease liabilities
(37)
(33)
Proceeds from borrowings
1,086
1,309
Repayment of borrowings
(501)
(958)
Proceeds from issuance of restricted tier 1 convertible notes, net of associated expenses
495
-
Net cash flows utilised in financing activities
(29)
(692)
Net increase/(decrease) in cash and cash equivalents
3,815
(3,839)
Exchange losses on cash and cash equivalents
(28)
(16)
Cash and cash equivalents at 1 January (before reallocation of held for sale cash)
14,233
18,088
Total cash and cash equivalents
18,020
14,233
Less: cash and cash equivalents of operations classified as held for sale
3.03
-
(310)
Cash and cash equivalents at 31 December
18,020
13,923
1. Tax comprises UK corporation tax paid of £417m (2019: £381m), withholding tax of £137m (2019: £166m) and an overseas corporate tax refund of £nil (2019: £7m).
IFRS Disclosure Notes Page 51
3.01 Basis of preparation
The preliminary announcement for the year ended 31 December 2020 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information in this preliminary announcement has been derived from the group financial statements within the group's 2020 Annual Report and Accounts, which will be available on the group's website on 22 March 2021. The group's 2019 Annual Report and Accounts have been filed with the Registrar of Companies, and those for 2020 will be delivered in due course. KPMG have reported on the 2020 and 2019 report and accounts. Both their reports were (i) unqualified, (ii) did not include a reference to any matters to which they drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
The group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (EU), and with the requirements of the Companies Act 2006 applicable to companies reporting under IFRS. The group financial statements also comply with interpretations by the IFRS Interpretations Committee as issued by the IASB and as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU. Under the European Union (Withdrawal) Act 2018, enacted in UK law by the European Union (Withdrawal Agreement) Act 2020, an implementation period had been established, which ended on 'IP completion day', defined as 31 December 2020 at 11.00 p.m. UK time. Reporting in the UK continues to be subject to the EU legislative framework until 31 December 2020. From 1 January 2021, the group will prepare financial statements in accordance with UK-adopted international accounting standards. A new UK endorsement mechanism, overseen by the Secretary of State, is being put in place and to this aim a UK Endorsement Board is currently in the process of being established.
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 or 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 Consolidated 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 2020 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.
IFRS Disclosure Notes Page 52
3.01 Basis of preparation (continued)
Changes in accounting policy
Legal & General Insurance America (LGIA) universal life and annuity liabilities
During the year, the group has changed its accounting policy for universal life and annuity liabilities on business transacted by its US subsidiaries, which was previously based on recognised actuarial methods reflecting US GAAP. From 1 July 2020, 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 brings it closer to the principles introduced by the upcoming new accounting standard for insurance contracts, IFRS 17. Following the change, the group no longer has any long-term business accounted for based on actuarial methods reflecting US GAAP therefore resulting in the financial statements providing more reliable and relevant information about the impact of long-term business on the group's financial position, financial performance or cash flows, in line with IFRS requirements.
In addition to the change highlighted above, as at 1 July 2020 the group has reclassified £1,621m of financial investments from designated as available-for-sale and amortised cost to designated as fair value through profit or loss. This represents a further change in accounting policy permitted by IFRS 4, 'Insurance Contracts'.
The above represent voluntary changes in accounting policy and have 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 the deferred acquisition costs balance, which has been derecognised, and the associated cash flows now recognised within the insurance contract liability calculation. The carrying value of financial investments has also been affected where the measurement model for such investments has moved from amortised cost to fair value through profit or loss.
The impact on each line item of the Consolidated Balance Sheet as at 31 December 2019 is shown in the table below:
As reported at
31 December 2019
Adjustments
As restated at
31 December 2019
£m
£m
£m
Financial investments
498,376
13
498,389
Deferred acquisition costs
75
(21)
54
Reinsurers' share of contract liabilities
5,810
137
5,947
Non-participating insurance contract liabilities
77,317
564
77,881
Overseas deferred tax liability
182
(106)
76
Capital redemption and other reserves
250
(45)
205
Retained earnings
8,033
(284)
7,749
IFRS Disclosure Notes Page 53
3.02 Disposals
Mature Savings Division
On 6 December 2017 the group announced the sale of its Mature Savings business to ReAssure Limited ("ReAssure") for £650m. While the Part VII transfer became effective on 7 September 2020, the economic effective date of completion and the date on which the assets and liabilities of the Mature Savings business, previously classified as held for sale, were fully derecognised was 31 August 2020. The group recognised a pre-tax gain on disposal of £289m which has been included in profit from discontinued operations in the Consolidated Income Statement for the year ended 31 December 2020¹.
(i) Profit on the sale of the Mature Savings business
2020
£m
Consideration received
650
Less: Unwind of expected underlying profits before disposal2
(106)
Less: Final settlement3
(55)
Less: Transaction and separation costs
(63)
Net proceeds from sale
426
Carrying value of net assets disposed
137
Profit on the sale of the Mature Savings business before tax1
289
1. The group's total tax expense in the Consolidated Income Statement includes income tax borne by both policyholders and shareholders. This is apportioned between that attributable to policyholders' returns and equity holders' profits. Under this methodology, the profit on disposal before tax attributable to equity holders' is £335m, as disclosed in Note 3.03.
2. From 1 January 2018 up until the completion of the transaction, the group recognised the unwind of expected profits from the Mature Savings business through the Consolidated Income Statement, totalling £106m since that time. This effectively reduces the amount of consideration attributable to the final profit on sale by an equivalent amount.
3. The final settlement is an amount payable from the group to ReAssure, reflecting the residual net position of assets and liabilities transferred at the date of the Part VII.
(ii) Carrying value of net assets disposed
2020
£m
Deferred acquisition costs
438
Investment property
926
Financial investments
25,092
Reinsurers' share of contract liabilities
550
Income tax recoverable
101
Cash and cash equivalents
248
Other assets
117
Total assets
27,472
Participating insurance contracts
(4,297)
Participating investment contracts
(4,352)
Unallocated divisible surplus
(655)
Present value of future profits
42
Non-participating insurance contacts
(837)
Non-participating investment contracts
(16,804)
Provisions
(1)
Deferred tax liabilities
(17)
Payables and other financial liabilities
(253)
Other liabilities
(161)
Total liabilities
(27,335)
Carrying value of net assets disposed
137
IFRS Disclosure Notes Page 54
3.03 Discontinued operations
The group classifies as discontinued operations components which have been disposed of or are classified as held for sale, and which either represent a separate major line of business or geographical area, are part of a plan to dispose of one, or are a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are shown on the face of the Consolidated Income Statement, separately from the results of the other parts of the group's business.
The results of the Mature Savings business have been classified as discontinued operations. 2019 also includes the results of the General Insurance business, the sale of which completed on 31 December 2019.
(i) Financial performance of discontinued operations
2020
2019
£m
£m
Revenue1
(855)
4,225
Expenses2
782
(3,973)
Profit on disposal
289
-
Profit before tax
216
252
Tax credit/(expense)
74
(229)
Profit after tax from discontinued operations
290
23
Total comprehensive income from discontinued operations
290
23
1. Revenue includes investment return.
2. Expenses include change in insurance and investment contract liabilities.
This is represented as:
2020
2019
£m
£m
Profit before tax
216
252
Tax expense attributable to policyholder returns
142
(224)
Profit before tax attributable to equity holders
358
28
Tax expense attributable to equity holders
(68)
(5)
Profit after tax from discontinued operations
290
23
Adjusted profit before tax attributable to equity holders reported in Note 1.01 as:
2020
2019
£m
£m
Operating profit# from discontinued operations
34
11
Investment and other variances1
324
17
Adjusted profit before tax attributable to equity holders
358
28
1. Investment and other variances in 2020 includes the profit on disposal attributable to equity holders of the Mature Savings business of £335m. (2019 includes the profit on disposal of the General Insurance business of £2m).
(ii) Cash flow information of discontinued operations
2020
2019
£m
£m
Net cash inflow/(outflow) from operating activities
9
35
Net cash inflow/(outflow) from investing activities
-
-
Net cash inflow/(outflow) from financing activities
-
-
Net increase/(decrease) in cash generated by discontinued operations
9
35
# Operating profit represents 'Group adjusted operating profit', an alternative performance measure defined in the glossary.
IFRS Disclosure Notes Page 55
3.04 Post balance sheet events
In the Budget on 3 March 2021, the Chancellor of the Exchequer announced an increase in the headline rate of corporation tax to 25% from 1 April 2023.
Deferred tax assets and liabilities are required to be valued using the tax rate which will be in force at the time when the temporary difference is expected to unwind. In line with the requirements of IAS12, the impact of the change in rate has not been reflected in the deferred tax balances at 31 December 2020 and will be recognised once it has been substantively enacted by the UK Parliament. The estimated impact of the change in tax rate would be an increase in the deferred tax liability of c.£50m.
The Solvency II balance sheet and capital position recognise deferred tax assets and liabilities associated with the taxable differences between the IFRS and Solvency II balance sheets. The estimated impact of the change in tax rate is a small increase in the group's coverage ratio.
3.05 Dividends and appropriations
Dividend
Per share1
Dividend
Per share1
2020
2020
2019
2019
£m
p
£m
p
Ordinary dividends paid and charged to equity in the year:
- Final 2018 dividend paid in June 2019
-
-
704
11.82
- Interim 2019 dividend paid in September 2019
-
-
294
4.93
- Final 2019 dividend paid in June 2020
754
12.64
-
-
- Interim 2020 dividend paid in September 2020
294
4.93
-
-
Total dividends
1,048
17.57
998
16.75
Ordinary share dividend proposed2
754
12.64
753
12.64
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 2020, the directors declared a final dividend for 2020 of 12.64 pence per ordinary share. This dividend will be paid on 27 May 2021. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2021 and is not included as a liability in the Consolidated Balance Sheet as at 31 December 2020.
3.06 Financial investments and investment property
2020
2019
£m
£m
Equities1
189,089
200,365
Debt securities2, 5
294,226
287,244
Accrued interest5
1,434
1,648
Derivative assets3
24,631
14,828
Loans4,5
16,677
16,498
Financial investments
526,057
520,583
Investment property
8,475
9,107
Total financial investments and investment property
534,532
529,690
Less: financial investments and investment property of operations classified as held for sale
-
(23,606)
Financial investments and investment property
534,532
506,084
1. Equity securities include investments in unit trusts of £13,215m (31 December 2019: £13,046m).
2. A detailed analysis of debt securities to which shareholders are directly exposed is disclosed in Note 6.03.
3. 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 £23,208m (31 December 2019: £13,113m).
4. Loans include £131m (31 December 2019: £121m) of loans valued at amortised cost.
5. As part of a change in accounting policy for LGIA universal life and annuity reserves, certain financial investments were reclassified from designated as amortised cost to designated as fair value through profit or loss. Accordingly, the 2019 balance for Debt securities, Accrued interest and Loans have been restated to reflect the fair value of those assets. Further details on the change in accounting policy are provided in Note 3.01.
IFRS Disclosure Notes Page 56
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
2020
2020
2019
2019
£m
£m
£m
£m
Profit before tax attributable to equity holders
1,430
1,788
2,084
2,112
Tax calculated at 19.00%
272
340
396
401
Adjusted for the effects of:
Recurring reconciling items:
Income not subject to tax
(1)
(1)
(4)
(4)
(Lower)/higher rate of tax on profits taxed overseas1
(111)
(111)
(117)
(117)
Non-deductible expenses
11
11
2
2
Differences between taxable and accounting investment gains
(10)
(10)
(10)
(10)
Property income attributable to minority interests
-
-
4
4
Foreign tax
1
1
6
6
Unrecognised tax losses
14
14
14
14
Non-recurring reconciling items:
Income not subject to tax
-
-
(6)
(6)
Non-deductible expenses
-
-
6
6
Adjustments in respect of prior years2
(42)
(42)
9
9
Impact of the revaluation of deferred tax balances3
16
16
(2)
(2)
Other
(1)
(1)
(1)
(1)
Tax attributable to equity holders
149
217
297
302
Equity holders' effective tax rate4
10.4%
12.1%
14.3%
14.3%
1. The lower rate of tax on overseas profits is principally driven by the 0% rate of taxation arising in our Bermudan reinsurance company, which provides the group with regulatory capital flexibility for both our PRT and US term insurance businesses. This line also includes the impact of tax on our US operations which are taxed at 21%.
2. In line with normal practice, adjustments in respect of prior years relate to revisions of earlier estimates.
3. The Finance Act 2020 removed the planned reduction in the headline UK corporation tax rate from 19% to 17%. As a result, UK deferred tax assets and liabilities previously recognised at 17% have been revalued. In the Budget on 3 March 2021, the Chancellor of the Exchequer announced an increase in the headline rate of corporation tax to 25% from 1 April 2023. The impact of this has not been reflected in the tax balances at 31 December 2020. See Note 3.04 for further details.
4. 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 57
3.07 Tax (continued)
(b) Deferred tax
2020
20191
Deferred tax (liabilities)/assets
£m
£m
Deferred acquisition expenses
85
35
- UK
-
(40)
- Overseas
85
75
Difference between the tax and accounting value of insurance contracts
(557)
(524)
- UK
(207)
(198)
- Overseas
(350)
(326)
Unrealised gains on investments
(11)
(184)
Excess of depreciation over capital allowances
18
15
Excess expenses
1
20
Accounting provisions and other
(48)
(44)
Trading losses2
289
217
Pension fund deficit
22
28
Acquired intangibles
(1)
(2)
Total net deferred tax liabilities
(202)
(439)
Less: net deferred tax liabilities of operations classified as held for sale3
-
182
Net deferred tax liabilities
(202)
(257)
Analysed by:
- Deferred tax assets
5
8
- UK deferred tax liabilities
(168)
(189)
- Overseas deferred tax liabilities4
(39)
(76)
Net deferred tax liabilities
(202)
(257)
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 universal life and annuity reserves. The net impact to overseas deferred tax liabilities is a reduction of £106m at 31 December 2019.
2. Trading losses reflect deferred tax on UK trade and US operating losses of £5m (2019: £4m) and £284m (2019: £213m) respectively.
3. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.
4. Overseas deferred tax liability is wholly comprised of US balances as at 31 December 2020.
IFRS Disclosure Notes Page 58
3.08 Share capital and share premium
2020
2019
Number of
2020
Number of
2019
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 2020
5,965,349,607
149
1,000
Options exercised under share option schemes
2,009,106
-
6
As at 31 December 2020
5,967,358,713
149
1,006
Share
Share
Number of
capital
premium
Issued share capital, fully paid
shares
£m
£m
As at 1 January 2019
5,960,768,234
149
992
Options exercised under share option schemes
4,581,373
-
8
As at 31 December 2019
5,965,349,607
149
1,000
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 Restricted tier 1 convertible notes
On 24 June 2020, Legal & General Group Plc issued £500m of 5.625% perpetual restricted Tier 1 contingent convertible notes. The notes are callable at par between 24 March 2031 and 24 September 2031 (the First Reset Date) inclusive and every 5 years after the First Reset Date. If not called, the coupon from 24 September 2031 will be reset to the prevailing five year benchmark gilt yield plus 5.378%.
The notes have no fixed maturity date. Optional cancellation of coupon payments is at the discretion of the issuer and mandatory cancellation is upon the occurrence of certain conditions. The Tier 1 notes are therefore treated as equity and coupon payments are recognised directly in equity when paid. The notes rank junior to all other liabilities and senior to equity attributable to shareholders. On the occurrence of certain conversion trigger events the notes are convertible into ordinary shares of the Issuer at the prevailing conversion price.
The notes are treated as restricted Tier 1 own funds for Solvency II purposes.
3.10 Non-controlling interests
Non-controlling interests represent third party interests in direct equity investments, including private equity, and property investment vehicles which are consolidated in the group's results.
As at 31 December 2020, non-controlling interests primarily represent third party ownership in Thorpe Park Holdings, a mixed residential/commercial retail space in which the group holds 50%.
The decrease in non-controlling interests during the year primarily reflects the deconsolidation of property investment vehicles following the sale of the Mature Savings business.
No other individual non-controlling interests are considered to be material on the basis of the year end carrying value or share of profit or loss.
IFRS Disclosure Notes Page 59
3.11 Core borrowings
Carrying
Coupon
Carrying
Coupon
amount
rate
Fair value
amount
rate
Fair value
2020
2020
2020
2019
2019
2019
£m
%
£m
£m
%
£m
Subordinated borrowings
10% Sterling subordinated notes 2041 (Tier 2)
313
10.00
329
312
10.00
353
5.5% Sterling subordinated notes 2064 (Tier 2)
589
5.50
813
589
5.50
726
5.375% Sterling subordinated notes 2045 (Tier 2)
604
5.38
714
603
5.38
691
5.25% US Dollar subordinated notes 2047 (Tier 2)
628
5.25
703
648
5.25
704
5.55% US Dollar subordinated notes 2052 (Tier 2)
369
5.55
411
380
5.55
405
5.125% Sterling subordinated notes 2048 (Tier 2)
400
5.13
484
399
5.13
459
3.75% Sterling subordinated notes 2049 (Tier 2)
598
3.75
662
598
3.75
613
4.5% Sterling subordinated notes 2050 (Tier 2)
499
4.50
587
-
-
-
Client fund holdings of group debt (Tier 2)1
(42)
-
(51)
(38)
-
(44)
Total subordinated borrowings
3,958
4,652
3,491
3,907
Senior borrowings
Sterling medium term notes 2031-2041
609
5.88
926
609
5.88
877
Client fund holdings of group debt1
(9)
-
(12)
(9)
-
(13)
Total senior borrowings
600
-
914
600
-
864
Total core borrowings
4,558
-
5,566
4,091
-
4,771
1. £51m (2019: £47m) of the group's subordinated and senior borrowings are 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 60
3.11 Core borrowings (continued)
Subordinated borrowings
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.
3.75% Sterling subordinated notes 2049
On 26 November 2019, Legal & General Group Plc issued £600m of 3.75% dated subordinated notes. The notes are callable at par on 26 November 2029 and every five years thereafter. If not called, the coupon from 26 November 2029 will be reset to the prevailing five year benchmark gilt yield plus 4.05% p.a. These notes mature on 26 November 2049.
4.5% Sterling subordinated notes 2050
On 1 May 2020, Legal & General Group Plc issued £500m of 4.5% dated subordinated notes. The notes are callable at par on 1 November 2030 and every five years thereafter. If not called, the coupon from 1 November 2030 will be reset to the prevailing five year benchmark gilt yield plus 5.25% pa. These notes mature on 1 November 2050.
All of the above subordinated notes are treated as tier 2 own funds for Solvency II purposes.
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 61
3.12 Operational borrowings
Carrying
Interest
Carrying
Interest
amount
rate
Fair value
amount
rate
Fair value
2020
2020
2020
2019
2019
2019
£m
%
£m
£m
%
£m
Short term operational borrowings
Euro Commercial Paper
50
0.78
50
200
0.93
200
Bank loans and overdrafts
54
-
54
-
-
-
Non recourse borrowings
Consolidated Property Limited Partnerships
-
-
-
58
2.36
58
Later Living portfolio
72
2.77
72
72
3.47
72
CALA revolving credit facility
170
2.95
170
178
3.37
178
Class B Surplus Notes
639
2.45
639
489
4.33
489
Affordable Homes revolving credit facility
60
2.13
60
29
2.66
29
L&G Homes Limited revolving credit facility
-
-
-
16
3.44
16
Total operational borrowings1
1,045
1,045
1,042
1,042
Less: liabilities of operations classified as held for sale2
-
-
-
(29)
2.36
(29)
Operational borrowings
1,045
1,045
1,013
1,013
1. Unit linked borrowings with a carrying value of £10m (2019: £7m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,055m (2019: £1,020m).
2. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.
Non recourse borrowings
- Consolidated Property Limited Partnerships loans had a charge on the assets of the relevant Property Fund.
- Loan facilities to Later Living portfolio have a charge on all assets of each individual SPV company.
- CALA Group (Holdings) Limited's revolving credit facility is 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 Class B Surplus Notes have been issued by a US subsidiary of the group as part of a coinsurance structure for the purpose of US statutory regulations. The notes were issued in exchange for bonds of the same value from an unrelated party, included within financial investments on the group's Consolidated Balance Sheet.
- The revolving credit facility to Affordable Homes is subject to agreed covenants, a breach of which could result in a charge on the land and work in progress of L&G Affordable Homes (Development 2) Limited.
- The revolving credit facility to L&G Homes Limited was secured by way of a charge on the land assets of L&G Homes Limited.
The carrying value of operational borrowings approximates to 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 and Affordable Homes revolving credit facility which have been classified as Level 3.
Syndicated Credit Facility
As at 31 December 2020, the group had in place a £1bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2023. No amounts were outstanding at 31 December 2020.
IFRS Disclosure Notes Page 62
3.13 Payables and other financial liabilities
2020
2019
£m
£m
Derivative liabilities
23,208
13,113
Repurchase agreements1
53,853
56,884
Other financial liabilities2
14,881
14,476
Total payables and other financial liabilities
91,942
84,473
Less: payables and other financial liabilities of operations classified as held for sale3
-
(434)
Payables and other financial liabilities
91,942
84,039
Due within 12 months4
65,316
64,689
Due after 12 months4
26,626
19,784
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, lease liabilities, FX spots and the value of short positions taken out to cover reverse repurchase agreements. The value of the short positions at 31 December 2020 was £5,147m (2019: £7,673m).
3. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.
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
Amortised
Total
Level 1
Level 2
Level 3
cost1
As at 31 December 2020
£m
£m
£m
£m
£m
Derivative liabilities
23,208
300
22,826
82
-
Repurchase agreements
53,853
-
53,853
-
-
Other financial liabilities
14,881
5,222
29
11
9,619
Total payables and other financial liabilities
91,942
5,522
76,708
93
9,619
Amortised
Total
Level 1
Level 2
Level 3
cost1
As at 31 December 2019
£m
£m
£m
£m
£m
Derivative liabilities
13,113
283
12,828
2
-
Repurchase agreements
56,884
-
56,884
-
-
Other financial liabilities
14,476
7,822
9
139
6,506
Total payables and other financial liabilities
84,473
8,105
69,721
141
6,506
1. The carrying value of payables and other financial liabilities at amortised cost approximates its fair value.
Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as a Level 3 liability. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (2019: £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 2020 (2019: no significant transfers).
IFRS Disclosure Notes Page 63
3.14 IFRS sensitivity analysis
Impact on
Impact on
pre-tax
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
2020
2020
2019
2019
£m
£m
£m
£m
Economic sensitivity
Long-term insurance
100bps increase in interest rates
438
350
257
130
50bps decrease in interest rates
(283)
(227)
(188)
(109)
50bps increase in future inflation expectations
(148)
(119)
53
43
Credit spreads widen by 100bps with no change in expected defaults
(304)
(246)
(220)
(273)
25% rise in equity markets1
482
399
512
446
25% fall in equity markets1
(482)
(399)
(513)
(446)
15% rise in property values1
1,111
903
1,016
838
15% fall in property values1
(1,187)
(964)
(1,075)
(886)
10bps increase in credit default assumptions
(856)
(692)
(717)
(580)
10bps decrease in credit default assumptions1
832
672
703
569
Non-economic sensitivity
Long-term insurance
1% increase in annuitant mortality
209
176
195
221
1% decrease in annuitant mortality
(218)
(183)
(201)
(225)
5% increase in assurance mortality
(450)
(356)
(385)
(305)
10% increase in maintenance expenses
(254)
(205)
(210)
(170)
1. Following improvements to the modelling of market risk sensitivities during the current year, a number of 2019 impacts have been restated to be on a basis consistent with the 2020 results. These restatements do not impact any items reported in the Consolidated Income Statement or Consolidated Balance Sheet.
The table above shows the impacts on group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario. The current disclosure reflects management's view of key risks in current economic conditions.
In calculating the alternative values, all other assumptions are left unchanged. In practice, items of the group's experience may be correlated.
The sensitivity analyses do not take into account management actions that 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 analysis also ignores any second order effects of the assumption change, including the potential impact on the group asset and liability position and any second order tax effects.
The sensitivity of the profit to changes in assumptions may not be linear. They should not be extrapolated to changes of a much larger order.
The change in interest rate test assumes a 100 basis point increase and a 50 basis point decrease in the gross redemption yield on fixed interest securities together with the same change in the real yields on variable securities. Valuation interest rates are assumed to move in line with market yields, adjusted to allow for prudence calculated in a manner consistent with the base results.
The inflation stress adopted is a 0.5% pa increase in inflation, resulting in a 0.5% pa reduction in real yield and no change to the nominal yield. In addition, the expense inflation rate is increased by 0.5% pa.
In the sensitivity for credit spreads, corporate bond yields have increased by 100bps, gilt and approved security yields unchanged, and there has been no adjustment to the default assumptions. All lifetime mortgages are excluded, as their primary exposure is to property risk, and therefore captured under the property stress below.
The equity stresses are a 25% rise and 25% fall in listed equity market values.
The property stresses adopted are a 15% rise and 15% fall in property market values including lifetime mortgages. Rental income is assumed to be unchanged. Where property is being used to back liabilities, valuation interest rates move with property yields, and so the value of the liabilities will also move.
The credit default assumption is set based on the credit rating of individual bonds and their outstanding term using Moody's global credit default rates. The credit default stress assumes a +/-10bps stress to the current unapproved credit default assumption, which will have an impact on the valuation interest rates used to discount liabilities. Other credit default allowances are unchanged. All lifetime mortgages are excluded, as their primary exposure is to property risk, and therefore captured under the property stress below.
The annuitant mortality stresses are a 1% increase and 1% decrease in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates.
The assurance mortality stress is a 5% increase in the mortality and morbidity rates with no change to the mortality and morbidity improvement rates.
The maintenance expense stress is a 10% increase in all types of maintenance expenses in future years.
IFRS Disclosure Notes Page 64
3.15 Foreign exchange rates
Principal rates of exchange used for translation are:
Year end exchange rates
2020
2019
United States dollar
1.37
1.33
Euro
1.12
1.18
Average exchange rates
2020
2019
United States dollar
1.28
1.28
Euro
1.13
1.14
3.16 Provisions
(a) Analysis of provisions
2020
2019
Note
£m
£m
Retirement benefit obligations
3.16 (b)
1,165
1,107
Other provisions
123
114
Total provisions
1,288
1,221
Less: liabilities of operations classified as held for sale
-
(1)
Provisions
1,288
1,220
(b) Retirement benefit obligations
Fund and
CALA Homes
Fund and
CALA Homes
Scheme
and Overseas
Scheme
and Overseas
2020
2020
2019
2019
£m
£m
£m
£m
Gross pension obligations included in provisions
1,138
27
1,083
24
Annuity obligations insured by LGAS
(1,051)
-
(944)
-
Gross defined benefit pension deficit
87
27
139
24
Deferred tax on defined benefit pension deficit
(17)
(5)
(24)
(4)
Net defined benefit pension deficit
70
22
115
20
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 65
3.17 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.
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.
3.18 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 £137m (2019: £86m) for all employees.
At 31 December 2020 and 31 December 2019 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:
2020
2019
£m
£m
Salaries
8
12
Share-based incentive awards
5
7
Key management personnel compensation
13
19
(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 £50m (2019: £78m) purchased by the group's UK defined benefit pension schemes during the year, priced on an arm's length basis;
- During the year, the Legal & General Group UK Senior Pension Scheme (the Scheme) completed an Assured Payment Policy (APP) transaction with Legal and General Assurance Society Limited (LGAS), a group company. An APP is an investment contract product sold by LGR which, issued to a pension scheme, provides the scheme with a fixed or inflation linked schedule of payments to match the scheme's expected liabilities.
At inception a premium of £397m was paid by the Scheme to LGAS, and LGAS and the Scheme recognised an investment contract liability and an APP plan asset respectively of the same amount. As at 31 December 2020, LGAS recognised a liability related to the APP transaction with the Scheme of £396m which is included in the group's non-participating investment contract liabilities. The Scheme holds a transferable plan asset of the same amount which does not eliminate on consolidation.
- Loans outstanding from related parties at 31 December 2020 of £89m (2019: £83m), with a further commitment of £14m;
- The group has total other commitments of £1,207m to related parties (2019: £1,213m), of which £772m has been drawn at 31 December 2020 (2019: £749m).
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