REG - Legal & General Grp - L&G Half-year results 2015 Part 2 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 5
05/08/2015 07:01
- Part 5: For the preceding part double click ID:nRSE1056Vd
shares, is adjusted to assume conversion of all potential ordinary shares, such as share options granted to employees.
IFRS and Cash
42
2.11 Acquisition
On 1 April 2015, the Group acquired 100% of New Life Home Finance Limited, a UK based lifetime mortgage provider for a
consideration of £5m. The acquisition gave rise to an increase in the Group's goodwill of £2m and an increase in purchased
interest in long term businesses (PILTB) and other intangibles of £2m. This enables the Group to offer lifetime mortgages
as part of its retirement solutions suite of products.
2.12 Disposal
On 29 May 2015, the Group sold its interests in Snow + Rock Group Holding Limited to Cotswold Outdoor Limited for £34m. The carrying value of the investment was £6m, net of amortisation of the brand, hence realising a profit on disposal of £28m reported in operational income in the Consolidated Income Statement. The majority of the profit on disposal is allocated to the with-profits fund.
2.13 Held for sale
Non-current assets (or disposal groups) are classified
as assets held for sale when their carrying amount is
recovered principally through a sale transaction and a
sale is considered highly probable. They are stated at
the lower of carrying amount and fair value less costs
to sell. In February 2015 the Group entered into an
agreement to sell Legal & General International
(Ireland) Limited (LGII), the Group's Dublin based
offshore bond provider to Canada Life. The sale
completed on 1 July 2015. The assets and liabilities of
LGII are a disposal group and have been classified as
held for sale at 30 June 2015. On 12 July 2015, the
Group entered into an agreement to sell Commercial
International Life Insurance Company SAE (CIL), the
Group's Egypt based life insurance joint venture, to
AXA. In addition on 28 July 2015 the Group entered into
an agreement to sell its interest in Legal & General
Gulf BSC (LGG), the Group's Bahrain based life insurance
joint venture, to a third party. Completion of these
transactions are subject to customary closing
conditions, including the receipt of regulatory
approvals, and are expected to take place by the end of
2015. The assets and liabilities of CIL and LGG are
disposal groups and have been classified as held for
sale at 30 June 2015. On 30 July 2015 the Group
entered into exclusive negotiations to sell Legal &
General Holdings (France) S.A (LGF), the Group's French
insurance business after receiving a binding offer from
APICIL Prévoyance. The transaction is subject to the
signing of a definitive agreement, customary closing
conditions and regulatory approvals. The assets and
liabilities of LGF have accordingly been assessed as a
disposal group and have been classified as held for sale
as at 30 June 2015. The assets and liabilities of all
disposal groups were remeasured to the lower of their
carrying amount and their estimated fair value less
costs to sell at the date of the classification as held
for sale. The impairment loss arising of £40m is
recognised in other expenses. Neither LGF, LGII, CIL nor
LGG is a discontinued operation as none represent a
major line of business or geographical segment of the
group.
Total
30.06.15
£m
Assets classified as held for sale
Investment in associates 12
DAC 71
Property, plant and equipment 45
Financial investments 5,601
Reinsurers' share of contract liabilities 10
Other assets 410
Total assets of the disposal group 6,149
Liabilities classified as held for sale
Insurance contract liabilities (320)
Investment contract liabilities (5,187)
Unallocated divisible surplus (229)
Tax liabilities (22)
Other liabilities (238)
Total liabilities of the disposal group (5,996)
Total net assets of the disposal group 153
IFRS and Cash
43
2.14 Post balance sheet events
On 1 July 2015, the Group sold Legal & General International (Ireland) Limited (LGII), the Group's Dublin based offshore
bond provider, to Canada Life for £16m.
On 12 July 2015, the Group sold Commercial International Life Insurance Company SAE (CIL), the Group's Egypt based life
insurance company, to AXA for an estimated £34m, subject to regulatory approval.
2.15 Financial investments and Investment property
Full year
30.06.15 30.06.14 31.12.14
£m £m £m
Equities 161,507 161,552 162,177
Unit trusts 7,303 7,252 7,529
Debt securities1 170,910 164,104 178,766
Accrued interest 1,393 1,548 1,604
Derivative assets2 9,625 5,251 10,035
Loans and receivables 421 463 503
Financial investments 351,159 340,170 360,614
Investment property 8,779 7,352 8,152
Total financial investments and investment property 359,938 347,522 368,766
1. Detailed analysis of debt securities which
shareholders are directly exposed to is disclosed in
Note 4.05.
2. Derivatives are used to ensure 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 and include £5,819m (H1 14:
£2,888m; FY 14: £6,011m) held on behalf of unit linked
policyholders.
(a) Fair value hierarchy
Fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date. Fair value measurements are based on
observable and unobservable inputs. Observable inputs
reflect market data obtained from independent sources,
while unobservable inputs reflect the Group's view of
market assumptions in the absence of observable market
information. The Group utilises techniques that maximise
the use of observable inputs and minimise the use of
unobservable inputs. The levels of fair value
measurement bases are defined as follows:Level 1: fair
values measured using quoted prices (unadjusted) in
active markets for identical assets or liabilities.Level
2: fair values measured using valuation techniques for
all inputs significant to the measurement other than
quoted prices included within level 1 that are
observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from
prices).Level 3: fair values measured using valuation
techniques for any input for the asset or liability
significant to the measurement that is not based on
observable market data (unobservable inputs). All of the
Group's level 2 assets have been valued using standard
market pricing sources, such as iBoxx, IDC and
Bloomberg, which use mathematical modelling and multiple
source validation in order to determine "consensus"
prices, except for bespoke CDO and swaps holdings (see
below). In normal market conditions, we would consider
these market prices to be observable market prices.
Following consultation with our pricing providers and a
number of their contributing brokers, we have considered
that these prices are not from a suitably active market
and have classified them as level 2. These CDOs are
valued using an external valuation based on observable
market inputs, which include CDX and iTraxx index
tranches and CDS spreads on underlying reference
entities. This is then validated against the internal
valuation. Accordingly, these assets have also been
classified in level 2.
The table on the following page presents the Group's
assets by IFRS 13 hierarchy levels:
IFRS and Cash
44
2.15 Financial investments and Investment property (continued)
(a) Fair value hierarchy (continued)
Amortised
Total Level 1 Level 2 Level 3 cost
For the six months ended 30 June 2015 £m £m £m £m £m
Shareholder
Equity securities 1,932 1,681 - 251 -
Debt securities 4,570 1,861 2,445 264 -
Accrued interest 30 11 15 4 -
Derivative assets 87 81 6 - -
Loans and receivables 419 - - - 419
Investment property 183 - - 183 -
Non profit non-unit linked
Equity securities 307 296 11 - -
Debt securities 38,851 5,845 32,155 851 -
Accrued interest 445 32 407 6 -
Derivative assets 3,664 264 3,400 - -
Loans and receivables - - - - -
Investment property 2,037 - - 2,037 -
With-profits
Equity securities 3,596 3,084 2 510 -
Debt securities 6,886 3,265 3,604 17 -
Accrued interest 79 35 44 - -
Derivative assets 55 37 18 - -
Loans and receivables 2 - - - 2
Investment property 1,057 - - 1,057 -
Unit linked
Equity securities 162,975 159,401 3,331 243 -
Debt securities 120,603 79,895 40,701 7 -
Accrued interest 839 295 544 - -
Derivative assets 5,819 960 4,859 - -
Loans and receivables - - - - -
Investment property 5,502 - - 5,502 -
Total financial investments and investment property 359,938 257,043 91,542 10,932 421
IFRS and Cash
45
2.15 Financial investments and Investment property (continued)
(a) Fair value hierarchy (continued)
Amortised
Total Level 1 Level 2 Level 3 cost
For the six months ended 30 June 2014 £m £m £m £m £m
Shareholder
Equity securities 1,445 1,268 24 153 -
Debt securities 5,135 2,124 2,846 165 -
Accrued interest 45 19 24 2 -
Derivative assets 153 52 101 - -
Loans and receivables 178 - - - 178
Investment property 328 - - 328 -
Non profit non-unit linked
Equity securities 84 72 12 - -
Debt securities 33,330 5,343 27,115 872 -
Accrued interest 404 38 359 7 -
Derivative assets 2,184 313 1,871 - -
Loans and receivables - - - - -
Investment property 1,692 - - 1,692 -
With-profits
Equity securities 4,206 3,674 13 519 -
Debt securities 10,619 4,377 6,225 17 -
Accrued interest 146 52 94 - -
Derivative assets 26 24 2 - -
Loans and receivables 30 - - - 30
Investment property 961 - - 961 -
Unit linked
Equity securities 163,069 160,615 2,127 327 -
Debt securities 115,020 78,246 36,771 3 -
Accrued interest 953 343 610 - -
Derivative assets 2,888 908 1,980 - -
Loans and receivables 255 - - - 255
Investment property 4,371 - - 4,371 -
Total financial investments and investment property 347,522 257,468 80,174 9,417 463
IFRS and Cash
46
2.15 Financial investments and Investment property (continued)
(a) Fair value hierarchy (continued)
Amortised
Total Level 1 Level 2 Level 3 cost
For the year ended 31 December 2014 £m £m £m £m £m
Shareholder
Equity securities 1,891 1,664 1 226 -
Debt securities 5,033 1,975 2,818 240 -
Accrued interest 41 20 19 2 -
Derivative assets 113 28 85 - -
Loans and receivables 286 - - - 286
Investment property 151 - - 151 -
Non profit non-unit linked
Equity securities 279 268 - 11 -
Debt securities 40,238 6,315 32,951 972 -
Accrued interest 476 42 427 7 -
Derivative assets 3,850 41 3,809 - -
Loans and receivables - - - - -
Investment property 1,879 - - 1,879 -
With-profits
Equity securities 4,065 3,531 14 520 -
Debt securities 8,860 4,174 4,668 18 -
Accrued interest 111 45 66 - -
Derivative assets 61 31 30 - -
Loans and receivables 29 - - - 29
Investment property 1,034 - - 1,034 -
Unit linked
Equity securities 163,471 157,191 5,895 385 -
Debt securities 124,635 84,287 40,344 4 -
Accrued interest 976 339 637 - -
Derivative assets 6,011 444 5,567 - -
Loans and receivables 188 - - - 188
Investment property 5,088 - - 5,088 -
Total financial investments and investment property 368,766 260,395 97,331 10,537 503
IFRS and Cash
47
2.15 Financial investments and Investment property (continued)
(b) Assets measured at fair value based on level 3
Level 3 assets where internal models are used represent a small proportion of assets to which shareholders are exposed.
These comprise both property and unquoted equities, the latter including investments in private equity, property vehicles
and suspended securities.
In many situations, inputs used to measure the fair value of an asset or liability may fall into different levels of the
fair value hierarchy. In these situations, the Group determines the level in which the fair value falls based upon the
lowest level input that is significant to the determination of the fair value. As a result, both observable and
unobservable inputs may be used in the determination of fair values that the Group has classified within level 3.
The Group determines the fair values of certain financial assets and liabilities based on quoted market prices, where
available. The Group also determines fair value based on estimated future cash flows discounted at the appropriate current
market rate. As appropriate, fair values reflect adjustments for counterparty credit quality, the Group's credit standing,
liquidity and risk margins on unobservable inputs.
Where quoted market prices are not available, fair value estimates are made at a point in time, based on relevant market
data, as well as the best information about the individual financial instrument. Illiquid market conditions have resulted
in inactive markets for certain of the Group's financial instruments. As a result, there is generally no or limited
observable market data for these assets and liabilities. Fair value estimates for financial instruments deemed to be in an
illiquid market are based on judgments regarding current economic conditions, liquidity discounts, currency, credit and
interest rate risks, loss experience and other factors. These fair values are estimates and involve considerable
uncertainty and variability as a result of the inputs selected and may differ significantly from the values that would have
been used had a ready market existed, and the differences could be material. As a result, such calculated fair value
estimates may not be realisable in an immediate sale or settlement of the instrument. In addition, changes in the
underlying assumptions used in the fair value measurement technique could significantly affect these fair value estimates.
Fair values are subject to a control framework designed to ensure that input variables and outputs are assessed independent
of the risk taker. These inputs and outputs are reviewed and approved by a valuation committee.
There have been no significant transfers between level 1 and level 2 for the period ended 30 June 2015 (H1 14: £nil; FY 14:
£nil).
IFRS and Cash
48
2.15 Financial investments and Investment property (continued)
(b) Assets measured at fair value based on level 3 (continued)
Other Other
financial financial
Equity invest- Investment Equity invest- Investment
securities ments1 property Total securities ments1 property Total
30.06.15 30.06.15 30.06.15 30.06.15 30.06.14 30.06.14 30.06.14 30.06.14
£m £m £m £m £m £m £m £m
As at 1 January 1,142 1,243 8,152 10,537 974 633 6,377 7,984
Total gains or (losses) for the period
recognised in profit:
- in other comprehensive income - - - - - 5 - 5
- realised and unrealised
gains or (losses)2 97 (21) 226 302 21 25 237 283
Purchases / Additions 26 164 512 702 37 426 863 1,326
Improvements - - 63 63 - - 7 7
Sales / Disposals (140) (105) (174) (419) (50) (125) (132) (307)
Transfers into level 33 12 5 - 17 30 112 - 142
Transfers out of level 33 (126) (144) - (270) (13) (10) - (23)
Other (7) 7 - - - - - -
As at 30 June 1,004 1,149 8,779 10,932 999 1,066 7,352 9,417
2. The realised and unrealised gains and losses have been recognised in investment return in the Consolidated Income Statement.
3. The Group holds regular discussion with its pricing providers to determine whether transfers between levels of the fair value hierarchy have occurred. The above transfers occurred as result of this process.
IFRS and Cash
49
2.15 Financial investments and Investment property
(continued)
(c) Effect on changes in significant unobservable inputs
to reasonably possible alternative assumptions on level
3 assets
Fair values of financial instruments are, in certain
circumstances, measured using valuation techniques that
incorporate assumptions that are not evidenced by prices
from observable current market transactions in the same
instrument and are not based on observable market data.
The following table shows the level 3 financial
instruments carried at fair value as at the balance
sheet date, the valuation basis, main assumptions used
in the valuation of these instruments and reasonably
possible increases or decreases in fair value based on
reasonably possible alternative assumptions.
Reasonably possible
alternative assumptions
Current Increase Decrease
fair in fair in fair
For the six months ended 30 June 2015 Main value value value
Financial instruments and investment property assumptions £m £m £m
Assets
Shareholder
- Private equity investment vehicles1 Price earnings multiple 15 1 (1)
- Unquoted investments in property vehicles2 Property yield; occupancy 137 7 (7)
- Untraded and other debt securities Cash flows; expected defaults 268 13 (13)
- Unquoted and other securities Cash flows; expected defaults 99 3 (3)
- Investment property2 Property yield; occupancy 183 9 (9)
Non profit non-linked
- Asset backed securities Cash flows; expected defaults 725 36 (36)
- Untraded and other debt securities Cash flows; expected defaults 3 - -
- Unquoted and other securities Cash flows; expected defaults 129 6 (6)
- Investment property2 Property yield; occupancy 2,037 102 (102)
With-profits
- Private equity investment vehicles1 Price earnings multiple 140 8 (8)
- Asset backed securities Cash flows; expected defaults 5 - -
- Unquoted and other securities Cash flows; expected defaults 379 19 (19)
- Other 3 - -
- Investment property2 Property yield; occupancy 1,057 53 (53)
Unit linked
- Unquoted investments in property vehicles2 Property yield; occupancy 37 2 (2)
- Suspended securities Estimated recoverable amount 11 1 (1)
- Asset
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