REG - Legal & General Grp - L&G Half-year results 2015 Part 3 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 6
05/08/2015 07:02
- Part 6: For the preceding part double click ID:nRSE1058Ve
Embedded value at 31 December 2014 887 2,632 3,519 6,118 9,637
1. The UK free surplus reduction of £340m to finance new business reflects £343m additional required capital in relation to new business.
2. The increase in UK free surplus of £901m from the expected transfer from the in-force covered business includes £688m of operational cash generation and a £213m reduction in required capital. The £1,026m operational cash generation from Insurance, Savings, LGR and LGIM per Note 2.01 also includes £29m dividend from LGN, £2m dividend from LGF and £307m primarily reflecting profit from non-covered business.
3. Reflects the implementation of the UK planned future reductions in corporation tax to 20% on 1 April 2015.
4. Intra-group distributions primarily reflect £675m dividends paid from Society to Group and dividends of E35m from LGN and £5m from Nationwide to Society.
5. The transfer to non-covered business represents the IFRS profits arising in the year from the provision of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
6. The other reserve movements reflect the pension deficit movement, the effect of reinsurance arrangement transactions between UK and US covered business and intragroup capital contribution.
The value of in-force business of £6,118m is comprised of £5,778m of non profit business and £340m of with-profits business.
European Embedded Value
91
5.02 Reconciliation of shareholder net worth
UK UK UK
covered covered covered
business Total business Total business Total
30.06.15 30.06.15 30.06.14 30.06.14 31.12.14 31.12.14
£m £m £m £m £m £m
SNW of long term operations (IFRS basis) 4,700 5,989 4,645 5,820 4,693 5,889
Other assets/(liabilities) (IFRS basis) - 43 - (109) - 139
Shareholders' equity on the IFRS basis 4,700 6,032 4,645 5,711 4,693 6,028
Purchased interest in long term business (42) (48) (51) (54) (46) (49)
Deferred acquisition costs/deferred income liabilities (189) (1,217) (212) (1,140) (201) (1,255)
Deferred tax1 (36) 399 (123) 282 (16) 444
Other2 (642) (889) (632) (768) (911) (976)
Shareholder net worth on the EEV basis 3,791 4,277 3,627 4,031 3,519 4,192
1. Deferred tax represents all tax which is expected to be paid under legislation in force at the balance sheet date.2. Other primarily relates to the different treatment of annuities and LGA Triple X securitisation between the EEV and IFRS basis.
European Embedded Value
92
5.03 Profit/(loss) for the period
Covered business
Insurance Non-
UK overseas covered
business business LGA business Total
For the six months ended 30 June 2015 Note £m £m £m £m £m
Business reported on an EEV basis:
Contribution from new business after cost of capital 5.04 155 - 41 - 196
Contribution from in-force business:
- expected return1 205 4 29 - 238
- experience variances 2 (22) (2) 12 - (12)
- operating assumption changes3 50 1 (1) - 50
Development costs (9) - - - (9)
Contribution from shareholder net worth4 98 1 3 - 102
Operating profit/(loss) on covered business 477 4 84 - 565
Business reported on an IFRS basis5 - - - 107 107
Total operating profit/(loss) 477 4 84 107 672
Economic variances6 57 1 (7) (55) (4)
Other variances7 - (51) - - (51)
Gains on non-controlling interests - - - 8 8
Profit/(loss) before tax 534 (46) 77 60 625
Tax (expense)/credit on profit from ordinary activities (70) (1) (27) (7) (105)
Other taxation impacts8 - - - - -
Profit/(loss) for the period 464 (47) 50 53 520
Operating profit on covered business before tax
attributable to:
Insurance 150
Savings 40
LGR 178
LGIM9 11
LGC 98
Total 477
p
Earnings per share
Based on profit attributable to equity holders of the 8.66
Company
Diluted earnings per share
Based on profit attributable to equity holders of the 8.60
Company
1. The expected return on in-force for UK covered
business is based on the unwind of the risk discount
rate on the opening, adjusted base value of in-force
(VIF). The opening base VIF of the UK covered business
was £6,118m in 2015 (2014: £4,693m). This is adjusted
for the effects of opening model changes of £(15)m (H1
14: £4m; FY 14: £(30)m) to give an adjusted opening base
VIF of £6,103m (H1 14: £4,697m; FY 14: £4,663m). This is
then multiplied by the opening risk discount rate of
5.5% (2014: 6.8%) and the result grossed up at the
notional attributed tax rate of 20% (2014: 20%) to give
a return of £205m (H1 14: £196m; FY 14: £397m). The same
approach has been applied for the Insurance overseas
businesses.
2. UK covered business variance primarily reflects the
impact from annuities expense experience and selective
longevity and asset reinsurance related to bulk annuity
transactions.
3. UK covered business operating assumption change
primarily reflects a change in mortality reserving
assumptions in relation to unreported deaths of deferred
annuitants.
4. Contribution from shareholder net worth reflects the
returns on shareholder funds' assets of covered
business.
5. Non-covered business operating profit primarily
reflects: LGIM business excluding Workplace savings, GI
and LGC non-covered business, which comprises of Group
debt costs, investment projects and expenses, partly
offset by investment returns from non-covered
shareholder assets.
6. The UK covered positive variance has resulted from a
number of factors including favourable default
experience, enhanced yield on annuity assets offset by a
higher risk free rate.
7. Other variances primarily reflect the recognition of
impairment losses arising on the classification of LGF
as Held for Sale.
8. The impact of the further corporation tax rate
reductions announced on 8 July 2015 has not been
included in the H1 15 results as they were not known at
the reporting date. The impact will be included in the
FY 15 results.
9. LGIM figures are the Workplace Savings results, other
areas of LGIM are not included in covered business.
European Embedded Value
93
5.03 Profit/(loss) for the period (continued)
Covered business
Insurance Non-
UK overseas covered
business business LGA business Total
For the six months ended 30 June 2014 Note £m £m £m £m £m
Business reported on an EEV basis:
Contribution from new business after cost of capital 5.04 368 2 51 - 421
Contribution from in-force business:
- expected return1 196 14 28 - 238
- experience variances 2 46 (4) (10) - 32
- operating assumption changes3 (24) 1 - - (23)
Development costs (14) - - - (14)
Contribution from shareholder net worth 87 3 3 - 93
Operating profit on covered business 659 16 72 - 747
Business reported on an IFRS basis4 - - - 103 103
Total operating profit 659 16 72 103 850
Economic variances5 68 2 (2) (60) 8
Gains on non-controlling interests - - - 6 6
Profit before tax 727 18 70 49 864
Tax (expense)/credit on profit from ordinary activities (150) (4) (24) 12 (166)
Effect of tax rate changes and other taxation impacts6 21 - - - 21
Profit for the period 598 14 46 61 719
Operating profit on covered business before tax
attributable to:
Insurance 88
Savings 44
LGR 430
LGIM7 10
LGC 87
Total 659
p
Earnings per share
Based on profit attributable to equity holders of the 12.12
Company
Diluted earnings per share
Based on profit attributable to equity holders of the 11.99
Company
1.The expected return on in-force for UK covered
business is based on the unwind of the risk discount
rate on the opening, adjusted base value of in-force
(VIF). The opening base VIF of the UK covered business
was £4,693m in 2014. This is adjusted for the effects of
opening model changes of £4m to give an adjusted opening
base VIF of £4,697m. This is then multiplied by the
opening risk discount rate of 6.8% and the result
grossed up at the notional attributed tax rate of 20% to
give a return of £196m. The same approach has been
applied for the Insurance overseas businesses.
2. UK covered business variance primarily reflects cost
of capital unwind, bulk purchase annuity data loading
and fewer retail protection lapses. LGA experience
variance primarily relates to adverse mortality
experience within term assurance and universal life
products.
3. UK covered business assumption changes primarily
reflect mortality reserves strengthening partly offset
by a reduction in prudence margin in the regulatory
morbidity reserves within retail protection.
4. Non covered business operating profit primarily
reflect LGIM business excluding Workplace savings, GI
and LGC non covered business.
5. The UK covered business positive variance has
resulted from a number of factors including lower risk
discount rate and enhanced yield on annuity assets
offset by a lower risk free rate and a narrowing credit
spread. Non covered business variance primarily reflects
lower equity return from shareholder funds.
6. Other taxation impacts reflects the change in the
treatment of deferred tax on in-force business to align
with IFRS by removing the effect of discounting.
7. LGIM figures are the Workplace Savings results, other
areas of LGIM are not included in covered business.
European Embedded Value
94
5.03 Profit/(loss) for the year (continued)
Covered business
Insurance Non-
UK overseas covered
business business LGA business Total
For the year ended 31 December 2014 Note £m £m £m £m £m
Business reported on an EEV basis:
Contribution from new risks after cost of capital:
- contribution from new business 5.04 753 7 90 - 850
- intra-group transfer from With-Profit to Non Profit 100 100
Fund
Contribution from in-force business:
- expected return1 397 27 66 - 490
- experience variances2 32 (11) (23) - (2)
- operating assumption changes3 42 16 (241) - (183)
Development costs (32) - - - (32)
Contribution from shareholder net worth 184 7 3 - 194
Operating profit on covered business 1,476 46 (105) - 1,417
Business reported on an IFRS basis4 - - - 164 164
Total operating profit 1,476 46 (105) 164 1,581
Economic variances5 863 (18) (17) (38) 790
Gains on non-controlling interests - - - 7 7
Profit before tax 2,339 28 (122) 133 2,378
Tax (expense)/credit on profit from ordinary activities (364) (8) 43 (31) (360)
Effect of tax rate changes and other taxation impacts6 (2) - - - (2)
Profit for the year 1,973 20 (79) 102 2,016
Operating profit on covered business before tax
attributable to:
Insurance 232
Savings 22
LGR 1,011
LGIM7 27
LGC 184
Total 1,476
p
Earnings per share
Based on profit attributable to equity holders of the 34.07
Company
Diluted earnings per share
Based on profit attributable to equity holders of the 33.73
Company
1. The expected return on in-force for UK covered
business is based on the unwind of the risk discount
rate on the opening, adjusted base value of in-force
(VIF). The opening base VIF of the UK covered business
was £4,693m in 2014. This is adjusted for the effects of
opening model changes of £(30)m to give an adjusted
opening base VIF of £4,663m. This is then multiplied by
the opening risk discount rate of 6.8% and the result
grossed up at the notional attributed tax rate of 20% to
give a return of £397m. The same approach has been
applied for the Insurance overseas businesses.
2. UK covered business variance primarily reflects UK
cost of capital unwind and favourable mortality
experience for bulk annuities. LGA experience variance
primarily relates to adverse mortality experience within
term assurance and universal life products respectively.
3. UK covered operating assumption change primarily
reflects mortality assumptions changes for non-profit
annuities. LGA operating assumption change primarily
incorporates an adjustment to our mortality assumptions
to reflect the changes in industry wide mortality tables
(which were issued in the second half of 2014).
4. Non covered business operating profit primarily
reflect LGIM business excluding Workplace savings, GI
and LGC non covered business.
5. The UK covered business positive variance has
resulted from a number of factors including lower risk
discount rate, favourable default experience and
enhanced yield on annuity assets offset by a lower risk
free rate. Non covered variance primarily reflects lower
equity return from shareholder funds.
6. Other taxation impacts reflects the change in the
treatment of deferred tax on in-force business to align
with IFRS by removing the effect of discounting.
7. LGIM figures are the Workplace Savings results, other
areas of LGIM are not included in covered business.
European Embedded Value
95
5.04 New business by product1
Present Contri-
value of Capital- bution
Annual annual isation Single from new
premiums premiums factor2 premiums PVNBP business3 Margin
For the six months ended 30 June 2015 £m £m £m £m £m %
UK Insurance 119 638 5.4 - 638 54 8.5
Overseas Insurance 37 69 1.9 195 264 - -
Insurance 156 707 4.5 195 902 54 6.0
Savings 26 78 3.0 786 864 5 0.6
LGR4 n/a - n/a 1,292 1,292 93 7.2
LGIM5 324 1,286 4.0 277 1,563 3 0.2
LGA 41 404 9.9 - 404 41 10.1
Total new business 547 2,475 4.5 2,550 5,025 196 3.9
Cost of capital 40
Contribution from new business before cost of capital 236
Present Contri-
value of Capital- bution
Annual annual isation Single from new
premiums premiums factor2 premiums PVNBP business3 Margin
For the six months ended 30 June 2014 £m £m £m £m £m %
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