REG - Legal & General Grp - L&G Half Year Results 2020 Part 2
Legal & General Group Plc
Half Year Report 2020 Part 2
1. Independent review report to Legal & General Group Plc Page 29
Conclusion
We have been engaged by the Legal & General Group Plc ("the Group") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 which comprises the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash flows (pages 42 to 47) and the related explanatory notes to the interim financial statements (pages 31 to 41 and 48 to 67).
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.
The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the Group a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the Group in accordance with the terms of our engagement to assist the Group in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the Group those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group for our review work, for this report, or for the conclusions we have reached.
Rees Aronson
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
4 August 2020
Legal & General Group Plc
Half Year Report 2020 Part 2
Page 30
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Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 31
2.01 Operating profit#
For the six month period to 30 June 2020
6 months
6 months1
Full year1
2020
2019
2019
Notes
£m
£m
£m
From continuing operations
Legal & General Retirement (LGR)
2.03
721
655
1,569
- LGR Institutional (LGRI)
585
524
1,216
- LGR Retail (LGRR)
136
131
353
Legal & General Investment Management (LGIM)
2.04
196
192
394
Legal & General Capital (LGC)
2.05
123
173
363
Legal & General Insurance (LGI)
2.03
88
134
314
- UK and Other
57
93
223
- US (LGIA)
31
41
91
Operating profit from divisions:
From continuing operations
1,128
1,154
2,640
From discontinued operations2
26
19
11
Operating profit from divisions
1,154
1,173
2,651
Group debt costs3
(115)
(108)
(208)
Group investment projects and expenses
(72)
(60)
(157)
COVID-19 costs4
(21)
-
-
Operating profit
946
1,005
2,286
Investment and other variances
2.06
(644)
57
(150)
Losses on non-controlling interests
(17)
(9)
(24)
Adjusted profit before tax attributable to equity holders
285
1,053
2,112
Tax expense attributable to equity holders
4.05
(12)
(188)
(302)
Profit for the period
273
865
1,810
Profit attributable to equity holders
290
874
1,834
Earnings per share:
Basic (pence per share)5
2.07
4.89p
14.74p
30.92p
Diluted (pence per share)5
2.07
4.63p
14.66p
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 £13m for the six months ended 30 June 2020, and by £29m for the full year 2019.
2. Discontinued operations include the results of the Mature Savings division following the group's announcement to sell the business to ReAssure Limited (2019 included the results of the General Insurance division following its sale to Allianz, which completed on 31 December 2019).
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 the provision of IT spend on 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 period.
· LGR represents worldwide pension risk transfer business including longevity insurance (within LGRI), and individual retirement and lifetime mortgages (within LGRR).
· LGIM represents institutional and retail investment management and workplace savings businesses.
· LGC represents shareholder assets invested in direct investments primarily in the areas of housing, urban regeneration, clean energy and SME finance, as well as traded and treasury assets.
· LGI primarily represents UK and US retail protection business, UK group protection and Fintech business.
· Discontinued operations represent the results of the Mature Savings division following the group's announcement to sell the business to ReAssure Limited (2019 included the results of the General Insurance division following its sale to Allianz, which completed on 31 December 2019).
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) and LGIA's non-term business (which excludes unrealised investment returns to align with the liability measurement under US GAAP). 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 period, such as gains/losses from merger and acquisition, and start-up costs, are also excluded from operating profit.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 32
2.02 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 six month period
to 30 June 2020
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
LGR
329
98
427
27
143
21
-
618
103
721
- LGRI
246
71
317
20
143
21
-
501
84
585
- LGRR
83
27
110
7
-
-
-
117
19
136
LGIM
173
(11)
162
(5)
-
-
-
157
39
196
- LGIM (excluding
Workplace Savings)2
158
-
158
-
-
-
-
158
39
197
- Workplace Savings3
15
(11)
4
(5)
-
-
-
(1)
-
(1)
LGC
97
-
97
-
-
-
-
97
26
123
LGI
163
(1)
162
(25)
8
(5)
(81)
59
29
88
- UK and Other
69
(1)
68
(25)
8
(5)
-
46
11
57
- US (LGIA)
94
-
94
-
-
-
(81)
13
18
31
From continuing operations
762
86
848
(3)
151
16
(81)
931
197
1,128
From discontinued operations4
21
-
21
-
-
-
-
21
5
26
Total from divisions
783
86
869
(3)
151
16
(81)
952
202
1,154
Group debt costs
(93)
-
(93)
-
-
-
-
(93)
(22)
(115)
Group investment projects and expenses
(25)
-
(25)
-
-
-
(30)
(55)
(17)
(72)
COVID-19 costs5
-
-
-
-
-
-
(17)
(17)
(4)
(21)
Total
665
86
751
(3)
151
16
(128)
787
159
946
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. Discontinued operations include the results of the Mature Savings division following the group's announcement to sell the business to ReAssure Limited.
5. COVID-19 costs reflect incremental operational expenses incurred as a result of COVID-19 and include the provision of IT spend on remote working solutions.
Release from operations for LGR, LGIM - Workplace Savings and LGI UK and Other represents the expected IFRS surplus generated in the period from the in-force non-profit annuities, workplace savings and UK protection businesses using best estimate assumptions. The LGIM release from operations also includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from LGIA. The release from operations within discontinued operations primarily reflects the unwind of expected profits after tax under the risk transfer agreement with ReAssure Limited from the Mature Savings business.
New business surplus/strain for LGR, LGIM - Workplace Savings and LGI UK and Other represents the cost of acquiring new business and setting up prudent reserves in respect of the new business for UK non-profit annuities, workplace savings and protection, net of tax. The new business surplus and release from operations for LGR, LGIM and LGI excludes any capital held in excess of the prudent reserves from the liability calculation.
LGR's new business metrics are presented based on a target long-term asset portfolio. At certain period ends, depending upon the quantum and timing of pension risk transfer (PRT) volumes, we may continue to source high quality assets to support that business after the period end, as appropriate, taking into account the alternative risks and rewards of traded credit. At period end, any difference between the actual assets and the long-term asset mix is reflected in investment variance.
Net release from operations for LGR, LGIM - Workplace Savings, LGI and discontinued operations is defined as release from operations plus new business surplus/(strain).
Release from operations and net release from operations for LGC and LGIM (excluding workplace savings) represents the operating profit (net of tax).
See Note 2.03 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.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 33
2.02 Reconciliation of release from operations to operating profit# before tax (continued)
Changes in
valuation assump- tions
Operating profit/ (loss) after tax
Operating profit/ (loss) before
tax
New business surplus/ (strain)
Net
release from operations
Release from operations1
Exper- ience variances
Non-cash items
Other
Tax expense/ (credit)
For the six month period
to 30 June 2019
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
LGR
303
185
488
(37)
33
58
-
542
113
655
- LGRI
212
165
377
(37)
33
61
-
434
90
524
- LGRR
91
20
111
-
-
(3)
-
108
23
131
LGIM2
168
(11)
157
(3)
-
(1)
-
153
39
192
- LGIM (excluding
Workplace Savings)3
155
-
155
-
-
-
-
155
39
194
- Workplace Savings4
13
(11)
2
(3)
-
(1)
-
(2)
-
(2)
LGC
142
-
142
-
-
-
-
142
31
173
LGI
171
(1)
170
(21)
18
(2)
(59)
106
28
134
- UK and Other
84
(1)
83
(21)
18
(2)
-
78
15
93
- US (LGIA)
87
-
87
-
-
-
(59)
28
13
41
From continuing operations
784
173
957
(61)
51
55
(59)
943
211
1,154
From discontinued operations5
15
-
15
-
-
-
-
15
4
19
Total from divisions
799
173
972
(61)
51
55
(59)
958
215
1,173
Group debt costs
(87)
-
(87)
-
-
-
-
(87)
(21)
(108)
Group investment projects and expenses2
(19)
-
(19)
-
-
-
(26)
(45)
(15)
(60)
Total
693
173
866
(61)
51
55
(85)
826
179
1,005
1. Release from operations within US (LGIA) includes £81m of dividends from the US.
2. As described in Note 2.01, 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 £10m and Workplace Savings operating profit by £3m.
3. LGIM (excluding Workplace Savings) includes profits on fund management services.
4. Workplace Savings represents administration business only.
5. Discontinued operations include the results of the Mature Savings and General Insurance divisions following the group's announcements to sell these businesses to ReAssure Limited and Allianz respectively. The sale of the General Insurance division completed on 31 December 2019.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 34
2.02 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)
94
-
94
-
-
-
-
94
(3)
91
From continuing operations
1,500
300
1,800
(70)
434
75
4
2,243
397
2,640
From discontinued operations5
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 2.01, 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. Discontinued operations include the results of the Mature Savings and General Insurance divisions following the group's announcement to sell these businesses to ReAssure Limited and Allianz respectively. The sale of the General Insurance business completed on 31 December 2019.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 35
2.03 Analysis of LGR and LGI operating profit
For the six month period to 30 June 2020
LGR
LGI
LGR
LGI
LGR
LGI
6 months
6 months
6 months
6 months
Full year
Full year
2020
2020
2019
2019
2019
2019
£m
£m
£m
£m
£m
£m
Net release from operations
427
162
488
170
925
252
Experience variances
- Persistency
3
(11)
-
(13)
(4)
(9)
- Mortality/morbidity
33
(17)
5
(8)
6
(5)
- Expenses
(3)
(5)
(9)
(1)
(23)
-
- Project and development costs
(4)
-
(4)
(1)
(12)
-
- Other
(2)
8
(29)
2
(20)
3
Total experience variances
27
(25)
(37)
(21)
(53)
(11)
Changes to valuation assumptions
- Persistency
-
-
-
-
-
(16)
- Mortality/morbidity
19
4
-
5
352
39
- Expenses
-
-
-
-
5
-
- Other1
124
4
33
13
33
21
Total changes to valuation assumptions
143
8
33
18
390
44
Movement in non-cash items
- Acquisition expense tax relief
-
(2)
-
(1)
-
(2)
- Other2
21
(3)
58
(1)
91
(10)
Total movement in non-cash items
21
(5)
58
(2)
91
(12)
Other
-
(81)
-
(59)
-
4
Operating profit after tax
618
59
542
106
1,353
277
Tax gross up
103
29
113
28
216
37
Operating profit before tax
721
88
655
134
1,569
314
1. The £124m positive Other assumption change in LGR reflects a reduction in the assumed late retirement factors applied to deferred annuities.
2. 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.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 36
2.04 LGIM operating profit
6 months
6 months
Full year
2020
20195
20195
£m
£m
£m
Asset management revenue (excluding 3rd party market data)1,2
458
425
889
Asset management transactional revenue3
9
9
23
Asset management expenses (excluding 3rd party market data)1,2
(270)
(240)
(514)
Workplace Savings operating loss4
(1)
(2)
(4)
Total LGIM operating profit
196
192
394
1. Asset management revenue and expenses exclude income and costs of £13m in relation to the provision of third party market data (H1 19: £11m, FY 19: £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 2.01, 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 (H1 19: £10m; FY19: £23m) and reduced the Workplace Savings operating result (H1 19: £3m; FY19: £6m).
2.05 LGC operating profit
6 months
6 months
Full year
2020
2019
2019
£m
£m
£m
Direct investments1
36
99
217
Traded investment portfolio including treasury assets2
87
74
146
Total LGC operating profit
123
173
363
1. Direct Investments represents LGC's portfolio of assets across future cities (including urban regeneration and clean energy), housing and SME finance.
2. The traded investment portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash.
2.06 Investment and other variances
6 months
6 months
Full year
2020
2019
2019
£m
£m
£m
Investment variance1
(599)
84
(27)
M&A related and other variances
(45)
(27)
(123)
Total investment and other variances
(644)
57
(150)
1. 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 investment variance for the six months ended 30 June 2020 is a loss of £599m which is broadly made up of three significant items: 1) £483m 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 rates; 2) £307m in LGC, reflecting unrealised losses on our traded equity portfolio and valuation markdowns on certain retail assets; 3) offset partially by a positive variance of £96m 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.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 37
2.07 Earnings per share
(a) Basic earnings per share
After tax
Per share1
After tax
Per share1
After tax
Per share1
6 months
6 months
6 months
6 months
Full year
Full year
2020
2020
2019
2019
2019
2019
£m
p
£m
p
£m
p
Profit for the period attributable to equity holders
290
4.89
874
14.74
1,834
30.92
Less: earnings derived from discontinued operations
(19)
(0.32)
(27)
(0.46)
(23)
(0.39)
Basic earnings derived from continuing operations
271
4.57
847
14.28
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 period, excluding employee scheme treasury shares.
(b) Diluted earnings per share
After tax
Weighted
average
number of
shares
Per share1
For the six month period to 30 June 2020
£m
m
p
Profit for the period attributable to equity holders
290
5,930
4.89
Net shares under options allocable for no further consideration
-
33
(0.03)
Conversion of restricted tier 1 notes
-
307
(0.23)
Total diluted earnings
290
6,270
4.63
Less: diluted earnings derived from discontinued operations
(19)
-
(0.30)
Diluted earnings derived from continuing operations
271
6,270
4.33
After tax
Weighted
average
number of
shares
Per share1
For the six month period to 30 June 2019
£m
m
p
Profit for the period attributable to equity holders
874
5,931
14.74
Net shares under options allocable for no further consideration
-
30
(0.08)
Total diluted earnings
874
5,961
14.66
Less: diluted earnings derived from discontinued operations
(27)
-
(0.45)
Diluted earnings derived from continuing operations
847
5,961
14.21
After tax
Weighted
average
number of
shares
Per share1
For the six month period to 31 December 2019
£m
m
p
Profit for the period 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 notes.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 38
2.08 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 2.01. 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 division, and for 2019 the General Insurance division, which have been classified as discontinued following the group's announcements to sell these businesses to ReAssure Limited and Allianz respectively.
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.
(i) Profit/(loss) for the period
Group
expenses
Total
and debt
continuing
LGR
LGIM
LGC
LGI
costs1
operations
For the six month period to 30 June 2020
£m
£m
£m
£m
£m
£m
Operating profit/(loss)#
721
196
123
88
(208)
920
Investment and other variances
80
(3)
(307)
(483)
71
(642)
Losses attributable to non-controlling interests
-
-
-
-
(17)
(17)
Profit/(loss) before tax attributable to equity holders
801
193
(184)
(395)
(154)
261
Tax (expense)/credit attributable to equity holders
(99)
(21)
33
70
10
(7)
Profit/(loss) for the period
702
172
(151)
(325)
(144)
254
Group
expenses
Total
and debt
continuing
LGR
LGIM2
LGC
LGI
costs2
operations
For the six month period to 30 June 2019
£m
£m
£m
£m
£m
£m
Operating profit/(loss)#
655
192
173
134
(168)
986
Investment and other variances
(17)
(5)
105
(134)
94
43
Losses attributable to non-controlling interests
-
-
-
-
(9)
(9)
Profit/(loss) before tax attributable to equity holders
638
187
278
-
(83)
1,020
Tax (expense)/credit attributable to equity holders
(110)
(39)
(36)
-
3
(182)
Profit/(loss) for the period
528
148
242
-
(80)
838
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 £21m of incremental costs incurred as a result of COVID-19.
2. As described in Note 2.01, 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 £13m for the six months ended 30 June 2020, and by £29m for the full year 2019.
# Operating profit for total continuing operations represents 'Group adjusted operating profit', an alternative performance measure defined in the glossary.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 39
2.08 Segmental analysis (continued)
(ii) Revenue
(a) Total revenue
6 months
6 months
Full year
2020
2019
2019
£m
£m
£m
Total income
17,419
48,450
66,786
Adjusted for:
Share of loss/(profit) from associates and joint ventures net of tax
23
(6)
(17)
Gain on acquisition and disposal of subsidiaries, associates and joint ventures
-
(43)
(51)
Total revenue from continuing operations1
17,442
48,401
66,718
1. Continuing operations exclude the results of the Mature Savings division, and for 2019 the General Insurance division,which have been classified as discontinued operations.
(b) Total income
LGC and
Total continuing
LGR
LGIM1,2
LGI
other3
operations
For the six month period to 30 June 2020
£m
£m
£m
£m
£m
Internal income
-
102
-
(102)
-
External income
6,530
(1,812)
1,016
11,685
17,419
Total income
6,530
(1,710)
1,016
11,583
17,419
LGC and
Total continuing
LGR
LGIM1,2
LGI
other3
operations
For the six month period to 30 June 2019
£m
£m
£m
£m
£m
Internal income
-
89
-
(89)
-
External income
10,602
25,376
1,141
11,331
48,450
Total income
10,602
25,465
1,141
11,242
48,450
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.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 40
2.08 Segmental analysis (continued)
(c) Fees from fund management and investment contracts
LGC and other1
Total continuing
LGIM
LGI
operations
For the six month period to 30 June 2020
£m
£m
£m
£m
Investment contracts
38
-
-
38
Investment management fees
467
-
(96)
371
Transaction fees
9
-
-
9
Total fees from fund management and investment contracts2
514
-
(96)
418
LGC and other1
Total continuing
LGIM
LGI
operations
For the six month period to 30 June 2019
£m
£m
£m
£m
Investment contracts
34
-
-
34
Investment management fees
431
-
(74)
357
Transaction fees
10
-
(1)
9
Total fees from fund management and investment contracts2
475
-
(75)
400
LGC and other1
Total continuing
LGIM
LGI
operations
For the year ended 31 December 2019
£m
£m
£m
£m
Investment contracts
73
1
-
74
Investment management fees
903
-
(166)
737
Transaction fees
23
-
-
23
Total fees from fund management and investment contracts2
999
1
(166)
834
1. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
2. Fees from fund management and investment contracts are a component of Total revenue from continuing operations disclosed in Note 2.08 (ii)(a).
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosures on performance and Release from operations Page 41
2.08 Segmental analysis (continued)
(d) Other operational income from contracts with customers
LGC and other
Total continuing
LGR
LGIM
LGI
operations
For the six month period to 30 June 2020
£m
£m
£m
£m
£m
House building
-
-
-
220
220
Professional services fees
1
1
33
-
35
Insurance broker
-
-
13
-
13
Total other operational income from contracts with customers1
1
1
46
220
268
LGC and other
Total continuing
LGR
LGIM
LGI
operations
For the six month period to 30 June 2019
£m
£m
£m
£m
£m
House building
-
-
-
454
454
Professional services fees
1
1
43
-
45
Insurance broker
-
-
17
-
17
Total other operational income from contracts with customers1
1
1
60
454
516
LGC and other
Total continuing
LGR
LGIM
LGI
operations
For the year ended 31 December 2019
£m
£m
£m
£m
£m
House building
-
-
-
1,056
1,056
Professional services fees
2
2
91
-
95
Insurance broker
-
-
34
-
34
Total other operational income from contracts with customers1
2
2
125
1,056
1,185
1. Total other operational income from contract with customers is a component of Total revenue from continuing operations disclosed in Note 2.08 (ii)(a) and excludes the share of profit/loss from associates and joint ventures and gain on acquisition and disposal of subsidiaries, associates and joint ventures.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Primary Financial Statements Page 42
3.01 Consolidated Income Statement
6 months
6 months
Full year
2020
2019
2019
For the six month period to 30 June 2020
Notes
£m
£m
£m
Income
Gross written premiums
5,497
8,745
15,203
Outward reinsurance premiums
(1,303)
(1,522)
(3,452)
Net change in provision for unearned premiums
10
-
(66)
Net premiums earned
4,204
7,223
11,685
Fees from fund management and investment contracts
418
400
834
Investment return
12,552
40,262
53,014
Other operational income
245
565
1,253
Total income
2.08
17,419
48,450
66,786
Expenses
Claims and change in insurance contract liabilities
8,366
12,368
19,005
Reinsurance recoveries
(1,957)
(1,971)
(3,502)
Net claims and change in insurance contract liabilities
6,409
10,397
15,503
Change in investment contract liabilities
9,190
35,412
45,809
Acquisition costs
438
395
805
Finance costs
155
137
269
Other expenses
885
1,048
2,244
Total expenses
17,077
47,389
64,630
Profit before tax
342
1,061
2,156
Tax expense attributable to policyholder returns
(81)
(41)
(72)
Profit before tax attributable to equity holders
261
1,020
2,084
Total tax expense
(88)
(223)
(369)
Tax expense attributable to policyholder returns
81
41
72
Tax expense attributable to equity holders
4.05
(7)
(182)
(297)
Profit after tax from continuing operations
2.08
254
838
1,787
Profit after tax from discontinued operations1
4.02
19
27
23
Profit for the period
273
865
1,810
Attributable to:
Non-controlling interests
(17)
(9)
(24)
Equity holders
290
874
1,834
Dividend distributions to equity holders during the period
4.03
754
704
998
Dividend distributions to equity holders proposed after the period end
4.03
294
294
753
p
p
p
Total basic earnings per share2
2.07
4.89
14.74
30.92
Total diluted earnings per share2
2.07
4.63
14.66
30.75
Basic earnings per share derived from continuing operations2
2.07
4.57
14.28
30.53
Diluted earnings per share derived from continuing operations2
2.07
4.33
14.21
30.36
1. Discontinued operations include the results of the Mature Savings division, following the group's announcement to sell the business to ReAssure Limited. (2019 included the results of the General Insurance division following its sale to Allianz, which completed on 31 December 2019).
2. All earnings per share calculations are based on profit attributable to equity holders of the company.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Primary Financial Statements Page 43
3.02 Consolidated Statement of Comprehensive Income
6 months
6 months
Full year
2020
2019
2019
For the six month period to 30 June 2020
£m
£m
£m
Profit for the period
273
865
1,810
Items that will not be reclassified subsequently to profit or loss
Actuarial losses on defined benefit pension schemes
(146)
(69)
(62)
Tax on actuarial losses on defined benefit pension schemes
45
13
11
Total items that will not be reclassified subsequently to profit or loss
(101)
(56)
(51)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations
56
3
(67)
Movement in cross-currency hedge
75
27
13
Tax on movement in cross-currency hedge
(11)
(5)
(1)
Movement in financial investments designated as available-for-sale
(8)
65
72
Tax on movement in financial investments designated as available-for-sale
1
(11)
(15)
Total items that may be reclassified subsequently to profit or loss
113
79
2
Other comprehensive income/(expense) after tax
12
23
(49)
Total comprehensive income for the period
285
888
1,761
Total comprehensive income for the period attributable to:
Continuing operations
266
861
1,738
Discontinued operations
19
27
23
Total comprehensive income/(expense) for the period attributable to:
Non-controlling interests
(17)
(9)
(24)
Equity holders
302
897
1,785
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Primary Financial Statements Page 44
3.03 Consolidated Balance Sheet
As at
As at
As at
30 Jun 2020
30 Jun 2019
31 Dec 2019
As at 30 June 2020
Notes
£m
£m
£m
Assets
Goodwill
68
62
64
Purchased interest in long term businesses and other intangible assets
221
158
190
Deferred acquisition costs
49
74
75
Investment in associates and joint ventures accounted for using the equity method
328
362
324
Property, plant and equipment
291
291
298
Investment property
4.04
8,041
7,140
7,695
Financial investments
4.04
513,584
471,118
498,376
Reinsurers' share of contract liabilities
6,530
5,413
5,810
Deferred tax assets
4.05
10
7
8
Current tax assets
508
476
468
Receivables and other assets
15,986
10,706
8,532
Assets of operations classified as held for sale
4.02
23,968
27,194
24,844
Cash and cash equivalents
21,700
14,224
13,923
Total assets
591,284
537,225
560,607
Equity
Share capital
4.06
149
149
149
Share premium
4.06
1,003
998
1,000
Employee scheme treasury shares
(76)
(62)
(65)
Capital redemption and other reserves
383
300
250
Retained earnings
7,453
7,376
8,033
Attributable to owners of the parent
8,912
8,761
9,367
Restricted tier 1 convertible notes
4.07
495
-
-
Non-controlling interests
4.08
34
66
55
Total equity
9,441
8,827
9,422
Liabilities
Non-participating insurance contract liabilities
82,792
73,869
77,317
Non-participating investment contract liabilities
327,380
315,603
320,594
Core borrowings
4.09
4,651
3,514
4,091
Operational borrowings
4.10
1,195
1,051
1,020
Provisions
4.13
1,336
1,202
1,220
UK deferred tax liabilities
4.05
186
193
189
Overseas deferred tax liabilities
4.05
184
197
182
Current tax liabilities
-
175
107
Payables and other financial liabilities
4.11
101,665
75,527
84,039
Other liabilities
540
719
804
Net asset value attributable to unit holders
33,883
24,909
31,507
Liabilities of operations classified as held for sale
4.02
28,031
31,439
30,115
Total liabilities
581,843
528,398
551,185
Total equity and liabilities
591,284
537,225
560,607
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Primary Financial Statements Page 45
3.04 Condensed 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 six month period to 30 June 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)
250
8,033
9,367
-
55
9,422
Total comprehensive income for the period
-
-
-
113
189
302
-
(17)
285
Options exercised under share option schemes
-
3
-
-
-
3
-
-
3
Net movement in employee scheme treasury shares
-
-
(11)
(6)
11
(6)
-
-
(6)
Dividends
-
-
-
-
(754)
(754)
-
-
(754)
Restricted tier 1 convertible notes2
-
-
-
-
-
-
495
-
495
Movement in third party interests
-
-
-
-
-
-
-
(4)
(4)
Currency translation differences
-
-
-
26
(26)
-
-
-
-
As at 30 June 2020
149
1,003
(76)
383
7,453
8,912
495
34
9,441
1. Capital redemption and other reserves as at 30 June 2020 include share-based payments £79m, foreign exchange £150m, capital redemption £17m, hedging reserves £96m and available-for-sale reserves £41m.
2. See Note 4.07 for details.
Employee
Capital
Equity
scheme
redemption
attributable
Non-
Share
Share
treasury
and other
Retained
to owners
controlling
Total
For the six month period to 30 June 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
Total comprehensive income for the period
-
-
-
79
818
897
(9)
888
Options exercised under share option schemes
-
6
-
-
-
6
-
6
Net movement in employee scheme treasury shares
-
-
(10)
(7)
(1)
(18)
-
(18)
Dividends
-
-
-
-
(704)
(704)
-
(704)
Movement in third party interests
-
-
-
-
-
-
3
3
Currency translation differences
-
-
-
(2)
2
-
-
-
As at 30 June 2019
149
998
(62)
300
7,376
8,761
66
8,827
1. Capital redemption and other reserves as at 30 June 2019 include share-based payments £74m, foreign exchange £122m, capital redemption £17m, hedging reserves £42m and available-for-sale reserves £45m.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Primary Financial Statements Page 46
3.04 Condensed 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
Total comprehensive income for the year
-
-
-
2
1,783
1,785
(24)
1,761
Options exercised under share option schemes
-
8
-
-
-
8
-
8
Net movement in employee scheme treasury shares
-
-
(13)
4
1
(8)
-
(8)
Dividends
-
-
-
-
(998)
(998)
-
(998)
Movement in third party interests
-
-
-
-
-
-
7
7
Currency translation differences
-
-
-
14
(14)
-
-
-
As at 31 December 2019
149
1,000
(65)
250
8,033
9,367
55
9,422
1. Capital redemption and other reserves as at 31 December 2019 include share-based payments £85m, foreign exchange £68m, capital redemption £17m, hedging reserves £32m and available-for-sale reserves £48m.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Primary Financial Statements Page 47
3.05 Consolidated Statement of Cash Flows
6 months
6 months
Full year
2020
2019
2019
For the six month period to 30 June 2020
Notes
£m
£m
£m
Cash flows from operating activities
Profit for the period
273
865
1,810
Adjustments for non cash movements in net profit for the period
Net (gains)/losses on financial investments and investment property
(6,969)
(37,069)
(45,516)
Investment income
(4,578)
(5,588)
(10,501)
Interest expense
179
164
322
Tax expense
(17)
411
598
Other adjustments
18
62
117
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss
6,032
413
(18,031)
Investments designated as available-for-sale
(35)
97
(179)
Other assets
(8,098)
(6,033)
(4,660)
Net increase/(decrease) in operational liabilities
Insurance contracts
5,187
9,157
13,089
Investment contracts
6,789
22,524
27,514
Other liabilities
5,537
7,472
21,313
Net increase/(decrease) in held for sale net liabilities
(1,181)
223
1,206
Cash from/(utilised in) operations
3,137
(7,302)
(12,918)
Interest paid
(127)
(140)
(263)
Interest received
2,469
2,532
5,047
Tax paid1
(279)
(219)
(540)
Dividends received
2,284
2,819
5,389
Net cash flows from/(utilised in) operations
7,484
(2,310)
(3,285)
Cash flows from investing activities
Net acquisition of plant, equipment, intangibles and other assets
(42)
(28)
(89)
Net disposal/(acquisition) of operations, net of cash (transferred)/acquired
1
76
198
Net disposal/(investment) in associates and joint ventures
-
(88)
29
Net cash flows generated/(utilised) from investing activities
(41)
(40)
138
Cash flows from financing activities
Dividend distributions to ordinary equity holders during the period
4.03
(754)
(704)
(998)
Options exercised under share option schemes
4.06
3
6
8
Treasury shares purchased for employee share schemes
(22)
(10)
(20)
Payment of lease liabilities
(18)
(12)
(33)
Proceeds from borrowings
869
151
1,309
Repayment of borrowings
(237)
(593)
(958)
Proceeds from issuance of Restricted tier 1 convertible notes, net of associated expenses
495
-
-
Net cash flows from/(utilised in) financing activities
336
(1,162)
(692)
Net (decrease)/increase in cash and cash equivalents
7,779
(3,512)
(3,839)
Exchange gains/(losses) on cash and cash equivalents
26
1
(16)
Cash and cash equivalents at 1 January (before reallocation of held for sale cash)
14,233
18,088
18,088
Total cash and cash equivalents
22,038
14,577
14,233
Less: cash and cash equivalents of operations classified as held for sale
4.02
(338)
(353)
(310)
Cash and cash equivalents at 30 June/31 December
21,700
14,224
13,923
1. Tax comprises UK corporation tax paid of £203m (H1 19: £126m; FY 19: £381m), withholding tax of £95m (H1 19: £105m; FY 19: £166m) and an overseas corporate tax refund of £19m (H1 19: £12m; FY 19: £7m).
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 48
4.01 Basis of preparation
The group financial information for the six months ended 30 June 2020 has been prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority and with IAS 34, 'Interim Financial Reporting'. The group's financial information has also been prepared in line with the accounting policies which the group expects to adopt for the 2020 year end. These policies are consistent with the principal accounting policies which were set out in the group's 2019 consolidated financial statements, except where changes have been outlined below in "New standards, interpretations and amendments to published standards that have been adopted by the group". These are consistent with IFRSs issued by the International Accounting Standards Board as adopted by the European Commission for use in the European Union.
The preparation of the interim management report includes the use of estimates and assumptions which affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial statements. The economic and non-economic actuarial assumptions used to establish the liabilities in relation to insurance and investment contracts are significant. For half-year financial reporting, economic assumptions have been updated to reflect market conditions. Non-economic assumptions are consistent with those used in the 31 December 2019 financial statements, except as disclosed in Note 2.03.
The results for the half year ended 30 June 2020 are unaudited but have been reviewed by KPMG LLP. The interim results do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results from the full year 2019 have been taken from the group's 2019 Annual Report and Accounts. Therefore, these interim accounts should be read in conjunction with the 2019 Annual Report and Accounts that have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and adopted by the European Commission for use in the European Union. KPMG LLP reported on the 2019 financial statements, and their report was unqualified and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The group's 2019 Annual Report and Accounts has been filed with the Registrar of Companies.
Key technical terms and definitions
The interim management report refers to various key performance indicators, accounting standards and other technical terms. A comprehensive list of these definitions is contained within the glossary section of these interim financial statements.
Alternative performance measures
The group uses a number of alternative performance measures (APMs), including net release from operations and group adjusted operating profit, in the discussion of its business performance and financial position, as the group believes that they provide a better understanding of its underlying performance. Definitions of key APMs can be found in 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.
(a) Going concern
The group's business activities, together with the factors likely to affect its future development, performance and position in the current economic climate are set out in this Interim Management Report. The financial position of the group, its cash flows, capital and liquidity position and borrowing facilities are described in the Group Results. Principal risks and uncertainties are detailed on pages 24 to 25.
The Directors have made an assessment of the group's going concern, considering both the current performance and the group's outlook, which takes account of the current and future impact of the COVID-19 pandemic, using the information available up to the date of issue of this Interim Management Report.
The group manages and monitors its capital and liquidity under various stresses and adverse scenarios to understand the expected impact of market downturns, and the impact of a number of such capital stresses is disclosed on page 77. Our liquidity risk appetite requires sufficient sources of liquidity to be maintained to withstand liquidity shocks defined by a 1 in 200 scenario, and as a result of COVID-19 we have actively tested this through a series of simulations based upon an extreme but possible adverse scenario lasting twelve months. In addition, the group has tested the resilience of the balance sheet under a range of adverse scenarios which may arise as a result of the economic consequences of COVID-19. These scenarios of increasing severity ranged from short term market disruption to a persistence of the crisis into late 2021 and beyond with no successful vaccine development. These stresses, including the additional COVID-19 scenarios, and taking account of the wide range of management actions that are available, do not give rise to any material uncertainties over the ability of the group to continue as a going concern. Based upon the available information, the directors consider that the group has the plans and resources to manage its business risks successfully as it has a diverse range of businesses and remains financially strong despite the current increased uncertainty. Furthermore, in June 2020, the group completed the issuance of £500m of Restricted Tier 1 debt as an additional measure of prudence and to deliver further balance sheet strengthening, both to protect against longer-term economic uncertainty but also to enable the group to take advantage of opportunities as they arise.
Having reassessed the principal risks and uncertainties (both financial and operational) in light of COVID-19 and the current economic climate, as detailed on pages 24 to 25, the directors consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 49
4.01 Basis of preparation (continued)
(b) New standards, interpretations and amendments to published standards that have been adopted by the group
The group has applied the following standards and amendments for the first time in its six months reporting period commencing 1 January 2020.
Amendments to IFRS 3 - Business Combinations
These amendments, issued in October 2018, provide more guidance on the definition of a business. These amendments did not have any material impact on the group's consolidated financial statements.
Amendments to IAS 1 - Presentation of Financial Statements and IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors: 'Definition of Material'
These amendments, issued in October 2018, clarify the definition of 'material', and align the definition used in the Conceptual Framework and the standards themselves. These amendments did not have any material impact on the group's consolidated financial statements.
Amendments to References to the Conceptual Framework in IFRS Standards
These amendments, issued in March 2018, update the current conceptual framework with the aim to assist preparers of financial reports to develop consistent accounting policies for transactions. These amendments did not have any material impact on the group's consolidated financial statements.
Amendments to IFRS 9 - Financial Instruments, IAS 39 - Financial Instruments: Recognition and Measurement, and IFRS 7 - Financial Instruments: Disclosures: 'Interest Rate Benchmark Reform'
These amendments were issued in September 2019. They modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. These amendments did not have any material impact on the group's consolidated financial statements.
Amendment to IFRS 16 Leases: 'COVID-19-Related Rent Concessions'
The amendment, issued in May 2020, provides an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification. Lessees can elect to account for such rent concessions in the same way as they would if they were not lease modifications. This amendment did not have any material impact on the group's consolidated financial statements.
(c) Future accounting developments
IFRS 17 - Insurance Contracts
IFRS 17, 'Insurance Contracts' was originally issued in May 2017 and subsequent amendments were issued in June 2020. The standard is expected to be effective for annual periods beginning on or after 1 January 2023. This reflects a two year delay to the original 2017 timetable confirmed by the IASB in their June 2020 amendments and remains subject to endorsement for use in the UK. The standard will be applied retrospectively, subject to the transitional options provided for in the standard, and provides a comprehensive approach for accounting for insurance contracts including their measurement, income statement presentation and disclosure. The group has mobilised a project to assess the financial and operational implications of the standard, and work will continue throughout the remainder of 2020 to ensure technical compliance and to develop the required system and operational capability to implement the standard.
IFRS 9 - Financial Instruments
In July 2014, the IASB issued IFRS 9, 'Financial Instruments' which is effective for annual periods beginning on or after 1 January 2018. The standard replaces IAS 39 'Financial Instruments: Recognition and Measurement'. It includes new principles around classification and measurement of financial instruments, introduces an impairment model based on expected credit losses (replacing the current model based on incurred losses) and new requirements on hedge accounting. The IASB subsequently issued 'Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts' which allows entities which meet certain requirements to defer their implementation of IFRS 9 until adoption of IFRS 17 or 1 January 2021, whichever is the earlier. In June 2020 the IASB agreed to extend the temporary exemption in IFRS 4 from applying IFRS 9 to annual reporting periods beginning on or after 1 January 2023. The group qualifies for, and is making use of, this deferral option.
The group has mobilised a project to assess the impact of IFRS 9 on its financial instruments, and work is on-going to develop the policies and operational changes required for the implementation of the standard, with a focus on the new expected credit losses impairment model.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 50
4.02 Assets and liabilities of operations classified as held for sale
Mature Savings
On 6 December 2017 the group announced the sale of its Mature Savings business to ReAssure Limited for a consideration of £650m. As part of the transaction, on 1 January 2018 the group entered into a risk transfer agreement with ReAssure Limited, whereby the group transferred all economic risks and rewards of the Mature Savings business to ReAssure Limited. The risk transfer agreement operates until the business is transferred under a court approved scheme under Part VII of the Financial Services and Markets Act 2000. The sale is expected to complete in the second half of 2020 following the completion of the Part VII transfer. As the legal transfer of the business has not yet occurred the Mature Savings business has been classified as held for sale on the Group's balance sheet as at 30 June 2020. The profit arising from the Mature Savings business in accordance with the risk transfer agreement has been recognised as "Profit after tax from discontinued operations" in the Consolidated Income Statement. Up until the Part VII this primarily reflects the unwind of expected underlying profits, which will offset the final profit on disposal.
4.03 Dividends and appropriations
Dividend
Per share1
Dividend
Per share1
Dividend
Per share1
6 months
6 months
6 months
6 months
Full year
Full year
2020
2020
2019
2019
2019
2019
£m
p
£m
p
£m
p
Ordinary dividends paid and charged to equity in the period:
- Final 2018 dividend paid in June 2019
-
-
704
11.82
704
11.82
- Interim 2019 dividend paid in September 2019
-
-
-
-
294
4.93
- Final 2019 dividend paid in June 2020
754
12.64
-
-
-
-
Total dividends
754
12.64
704
11.82
998
16.75
1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.
Subsequent to 30 June 2020, the directors declared an interim dividend of 4.93 pence per ordinary share. This dividend will be paid on 24 September 2020. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2020 and is not included as a liability in the Consolidated Balance Sheet as at 30 June 2020.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 51
4.04 Financial investments and investment property
30 Jun 2020
30 Jun 2019
31 Dec 2019
£m
£m
£m
Equities1
189,798
192,387
200,365
Debt securities2
299,168
275,086
286,916
Accrued interest
1,551
1,617
1,647
Derivative assets3
25,207
13,198
14,828
Loans4
19,357
12,861
16,814
Financial investments
535,081
495,149
520,570
Investment property
9,334
8,706
9,107
Total financial investments and investment property
544,415
503,855
529,677
Less: financial investments and investment property of operations classified as held for sale
(22,790)
(25,597)
(23,606)
Financial investments and investment property
521,625
478,258
506,071
1. Equity securities include investments in unit trusts of £13,615m (30 June 2019: £13,122m; 31 December 2019: £13,046m).
2. A detailed analysis of debt securities to which shareholders are directly exposed is disclosed in Note 7.03.
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 £27,550m (30 June 2019: £11,778m; 31 December 2019: £13,113m).
4. Loans include £444m (30 June 2019: £447m; 31 December 2019: £437m) of loans valued at amortised cost.
(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 IHS Markit, ICE and Bloomberg, or Index Providers such as Barclays, Merrill Lynch or JPMorgan. Each uses mathematical modeling and multiple source validation in order to determine consensus prices, with the exception of OTC Derivative holdings; OTCs are marked to market using an in-house system (Lombard Oberon), external vendor (IHS Markit), internal model or Counterparty Broker marks. 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 therefore classified them as Level 2.
The group's policy is to re-assess categorisation of financial assets at the end of each reporting period and to recognise transfers between levels at that point in time.
There have been no significant transfers between Level 1 and Level 2 in the six month period to 30 June 2020 (30 June 2019; 31 December 2019: No significant transfers). Transfers into and out of Level 3 are disclosed in Note 4.04 (b).
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 52
4.04 Financial investments and investment property (continued)
(a) Fair value hierarchy (continued)
Total
Level 1
Level 2
Level 3
For the six month period to 30 June 2020
£m
£m
£m
£m
Shareholder
Equity securities
2,622
1,476
-
1,146
Debt securities
4,570
1,433
2,304
833
Accrued interest
21
6
12
3
Derivative assets
293
6
287
-
Loans at fair value
569
-
569
-
Investment property
234
-
-
234
Non profit non-unit linked
Equity securities
190
186
-
4
Debt securities
75,867
9,689
46,570
19,608
Accrued interest
539
27
461
51
Derivative assets
22,095
-
22,095
-
Loans at fair value
1,309
-
1,309
-
Investment property
4,016
-
-
4,016
With-profits
Equity securities
2,846
2,664
-
182
Debt securities
4,922
1,534
3,388
-
Accrued interest
38
8
30
-
Derivative assets
295
3
292
-
Loans at fair value
450
-
450
-
Investment property
455
-
-
455
Unit linked
Equity securities
184,140
183,466
21
653
Debt securities
213,809
152,925
60,598
286
Accrued interest
953
435
518
-
Derivative assets
2,524
174
2,350
-
Loans at fair value
16,585
-
16,585
-
Investment property
4,629
-
-
4,629
Total financial investments and investment property at fair value1,2
543,971
354,032
157,839
32,100
1. This table excludes loans (including accrued interest) of £444m, which are held at amortised cost.
2. This table includes financial investments of £21,497m and investment property of £1,293m relating to assets of operations classified as held for sale.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 53
4.04 Financial investments and investment property (continued)
(a) Fair value hierarchy (continued)
Total
Level 1
Level 2
Level 3
For the six month period to 30 June 2019
£m
£m
£m
£m
Shareholder
Equity securities
2,624
1,629
-
995
Debt securities
4,319
1,601
2,040
678
Accrued interest
32
13
13
6
Derivative assets
110
104
6
-
Loans at fair value
234
-
234
-
Investment property
203
-
-
203
Non profit non-unit linked
Equity securities
156
152
-
4
Debt securities
66,387
7,314
43,723
15,350
Accrued interest
520
25
464
31
Derivative assets
11,523
-
11,523
-
Loans at fair value
726
-
726
-
Investment property
3,131
-
-
3,131
With-profits
Equity securities
3,191
2,998
-
193
Debt securities
5,598
1,636
3,962
-
Accrued interest
47
11
36
-
Derivative assets
68
8
60
-
Loans at fair value
396
-
396
-
Investment property
520
-
-
520
Unit linked
Equity securities
186,416
183,682
2,070
664
Debt securities
198,782
140,904
57,601
277
Accrued interest
1,018
493
525
-
Derivative assets
1,497
200
1,297
-
Loans at fair value
11,058
-
11,058
-
Investment property
4,852
-
-
4,852
Total financial investments and investment property at fair value1,2
503,408
340,770
135,734
26,904
1. This table excludes loans (including accrued interest) of £447m, which are held at amortised cost.
2. This table includes financial investments of £24,031m and investment property of £1,566m relating to assets of operations classified as held for sale.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 54
4.04 Financial investments and investment property (continued)
(a) Fair value hierarchy (continued)
Total
Level 1
Level 2
Level 3
For the year ended 31 December 2019
£m
£m
£m
£m
Shareholder
Equity securities
2,670
1,579
-
1,091
Debt securities
5,059
1,038
3,175
846
Accrued interest
22
6
13
3
Derivative assets
108
3
105
-
Loans at fair value
632
-
632
-
Investment property
254
-
-
254
Non profit non-unit linked
Equity securities
194
158
32
4
Debt securities
69,530
8,281
43,342
17,907
Accrued interest
531
29
464
38
Derivative assets
11,448
-
11,444
4
Loans at fair value
630
-
630
-
Investment property
3,798
-
-
3,798
With-profits
Equity securities
3,103
2,908
-
195
Debt securities
5,468
1,590
3,878
-
Accrued interest
44
11
33
-
Derivative assets
115
8
107
-
Loans at fair value
397
-
397
-
Investment property
507
-
-
507
Unit linked
Equity securities
194,398
191,687
1,966
745
Debt securities
206,859
144,072
62,512
275
Accrued interest
1,050
499
551
-
Derivative assets
3,157
202
2,955
-
Loans at fair value
14,718
-
14,718
-
Investment property
4,548
-
-
4,548
Total financial investments and investment property at fair value1,2
529,240
352,071
146,954
30,215
1. This table excludes loans (including accrued interest) of £437m, which are held at amortised cost.
2. This table includes financial investments of £22,194m and investment property of £1,412m relating to assets of operations classified as held for sale.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 55
4.04 Financial investments and investment property (continued)
(b) Level 3 assets measured at fair value
Level 3 assets, where internal models are used, comprise property, unquoted equities, untraded debt securities and securities where unquoted prices are provided by a single broker. Unquoted securities include suspended securities, investments in private equity and property vehicles. Untraded debt securities include private placements, commercial real estate loans, income strips and lifetime mortgages.
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.
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 and validated independently as appropriate.
Asset valuation approach at 30 June 2020
While recognising the volatility within asset markets, our approach to the valuation of assets as at 30 June 2020 was substantially consistent with our usual processes, policies and methodologies. However, we have applied increased focus on the valuation of those assets more directly impacted by the COVID-19 pandemic, particularly Level 3 assets. Given the diversity of our portfolio, the impact has been varied with certain asset classes and market sectors more exposed to the impact of COVID-19 than others. In assessing the valuation of such assets, in line with applicable standards and guidance (including compliance with Royal Institution of Chartered Surveyors (RICS) and International Private Equity and Venture Capital (IPEV) guidelines), we have both projected the short-term impact on earnings and cash flows of the current market volatility, while continuing to review the assets' ability to deliver longer term returns aligned to their investment cases.
Equity securities
Level 3 equity securities amount to £1,985m (30 June 2019: £1,856m; 31 December 2019: £2,035m), of which the majority is made up of holdings in investment property vehicles and private investment funds. They are valued at the proportion of the group's holding of the Net Asset Value reported by the investment vehicles. Other equity securities are valued by a number of third party specialists using a range of techniques, including latest round of funding and discounted cash flow models.
Other financial investments
Lifetime mortgage (LTM) loans amount to £5,478m (30 June 2019: £3,990m; 31 December 2019: £4,733m). They are valued using a discounted cash flow model by projecting best-estimate net asset proceeds and discounting using rates inferred from current LTM pricing. The inferred illiquidity premiums for the majority of the portfolio range between 100 and 350bps. This ensures the value of loans at outset is consistent with the purchase price of the loan, and achieves consistency between new and in-force loans. The sensitivity disclosure in 4.04 (c) highlights the illiquidity premiums as the most significant unobservable input and reflects, among other assumptions, a variation in the inferred illiquidity premium of 20bps. The mortgages include a no negative equity guarantee (NNEG) to borrowers. This ensures that if there is a shortfall between the sale proceeds of the house and the outstanding loan balance on redemption of the loan, the value of the loan will be reduced by this amount. The NNEG on loan redemption is valued as a series of put options, which we calculate using a variant of the Black-Scholes formula. Key assumptions in the valuation of lifetime mortgages include long-term property growth rates, property index volatility, voluntary early repayments and longevity assumptions. The valuation as at 30 June 2020 reflects a long-term property growth rate assumption of RPI + 0.1%, after allowing for the effects of dilapidation.
Private credit loans (including commercial real estate loans) amount to £11,661m (30 June 2019: £9,421m; 31 December 2019: £10,998m). Their valuation is outsourced to IHS Markit who use discounted future cash flows based on a yield curve.
The discount factors take into consideration the yield of the LGIM approved comparable bond and the initial spread agreed by both parties. Unobservable inputs that go into the determination of comparators include: rating, sector, sub-sector, performance dynamics, financing structure and duration of investment. The sensitivity disclosure in 4.04 (c) highlights credit spreads as the most significant unobservable input and reflects, among other assumptions, a variation in the discount rate applied of 20bps. Existing private credit investments, which were executed back as far as 2011, are subject to a range of interest rate formats, although the majority are fixed rate. The weighted average duration of the portfolio is 11.1 years, with a weighted average life of 16.3 years. Maturities in the portfolio currently extend out to 2064. The private credit portfolio of assets is not externally rated but has internal ratings assigned by an independent credit team in line with internally developed methodologies. These credit ratings range from AAA to B.
Income strip assets amount to £1,400m (30 June 2019: £1,258m; 31 December 2019: £1,326m). Their valuation is outsourced to Knight Frank and CBRE who apply a yield to maturity to discounted future cash flows to derive valuations. The overall valuation takes into account the property location, tenant details, tenure, rent, rental break terms, lease expiries and underlying residual value of the property. The valuation as at 30 June 2020 reflects equivalent yield ranges between 2% and 7% and estimated rental values (ERV) between £10 and £337 per sq.ft.
Private placements held by the US business amount to £1,530m (30 June 2019: £1,043m; 31 December 2019: £1,344m). They are valued using a pricing matrix comprised of a public spread matrix, internal ratings assigned to each holding, average life of each holding, and a premium spread matrix. These are added to the risk-free rate to calculate the discounted cash flows and establish a market value for each investment grade private placement. The valuation as at 30 June 2020 reflects illiquidity premiums between 10 and 70bps.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 56
4.04 Financial investments and investment property (continued)
(b) Level 3 assets measured at fair value (continued)
Commercial mortgage loans amount to £469m (30 June 2019: £357m; 31 December 2019: £414m) and are determined by incorporating credit risk for performing loans at the portfolio level and for loans identified to be distressed at the loan level. The projected cash flows of each loan are discounted along stochastic risk free rate paths and are inclusive of an Option Adjusted Spread (OAS), derived from current internal pricing on new loans, along with the best observable inputs. The valuation as at 30 June 2020 reflects illiquidity premiums between 20 and 40bps.
Other debt securities which are not traded in an active market have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.
Investment property
Level 3 investment property amounting to £9,334m (30 June 2019: £8,706m; 31 December 2019: £9,107m) is valued with the involvement of external valuers. All property valuations are carried out in accordance with the latest edition of the Valuation Standards published by the Royal Institute of Chartered Surveyors, and are undertaken by appropriately qualified valuers as defined therein. Whilst transaction evidence underpins the valuation process, the definition of market value, including the commentary, in practice requires the valuer to reflect the realities of the current market. In this context valuers must use their market knowledge and professional judgement and not rely only upon historic market sentiment based on historic transactional comparables.
The valuation of investment properties also include an income approach that is based on current rental income plus anticipated uplifts, where the uplift and discount rates are derived from rates implied by recent market transactions. These inputs are deemed unobservable. The valuation as at 30 June 2020 reflects equivalent yield ranges between 2% and 18% and ERV between £1 and £356 per sq.ft. The sensitivity disclosure in 4.04 (c) highlights equivalent yields as the most significant unobservable input and reflects, among other assumptions, a variation in the yield of between 50-75bps, depending upon whether the valuation is subject to a "material valuation uncertainty" clause as per VPS3 and VPG10 of the RICS Red Book Global.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 57
4.04 Financial investments and investment property (continued)
(b) Level 3 assets measured at fair value (continued)
Other
Other
financial
financial
Equity
invest-
Investment
Equity
invest-
Investment
securities
ments
property
Total
securities
ments
property
Total
2020
2020
2020
2020
2019
2019
2019
2019
£m
£m
£m
£m
£m
£m
£m
£m
As at 1 January
2,035
19,073
9,107
30,215
1,757
13,915
8,608
24,280
Total gains/(losses) for the period
- in other comprehensive income
-
(44)
-
(44)
-
23
23
- realised and unrealised gains/(losses)1
(37)
1,038
(256)
745
38
907
(19)
926
Purchases / Additions
76
1,603
577
2,256
173
2,608
359
3,140
Sales / Disposals
(72)
(868)
(94)
(1,034)
(105)
(1,054)
(250)
(1,409)
Transfers into Level 3
44
5
-
49
2
-
-
2
Transfers out of Level 3
(61)
(26)
-
(87)
-
(57)
-
(57)
Other
-
-
-
-
(9)
-
8
(1)
As at 30 June
1,985
20,781
9,334
32,100
1,856
16,342
8,706
26,904
Other
financial
Equity
invest-
Investment
securities
ments
property
Total
2019
2019
2019
2019
£m
£m
£m
£m
As at 1 January
1,757
13,915
8,608
24,280
Total gains/(losses) for the period
- in other comprehensive income
-
20
-
20
- realised and unrealised gains / (losses)1
50
1,314
(86)
1,278
Purchases / Additions
416
5,680
1,187
7,283
Sales / Disposals
(199)
(1,850)
(675)
(2,724)
Transfers into Level 3
21
5
73
99
Transfers out of Level 3
(10)
(11)
-
(21)
As at 31 December
2,035
19,073
9,107
30,215
1. Realised and unrealised gains and losses are recognised in investment return in the Consolidated Income Statement.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 58
4.04 Financial investments and investment property (continued)
(c) Effect of changes in 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.
Where possible, the group assesses the sensitivity of fair values of Level 3 investments to changes in unobservable inputs to reasonable alternative assumptions. As outlined above, Level 3 investments are valued using internally-modelled valuations or by independent third parties. Where internally-modelled valuations are used, sensitivities are determined by adjusting various inputs of the model and assigning them a weighting. Where independent third parties are used, sensitivities are determined as outlined below:
· Unquoted investments in property vehicles and direct holdings in investment property are valued using valuations provided by independent valuers on the basis of open market value as defined in the appraisal and valuation manual of the Royal Institute of Chartered Surveyors (RICS). As a result of the current response to COVID-19, which has meant that independent valuers have been faced with a challenging set of circumstances on which to base judgment around valuation, a number of valuations (equating to c.12% of Level 3 assets, including unit linked) have been reported on the basis of "material valuation uncertainty" as per VPS3 and VPG10 of the RICS Red Book Global. Consequently, less certainty and a higher degree of caution should be attached to the valuations provided than would normally be the case. The independent valuers have confirmed that the inclusion of "material valuation uncertainty" clauses does not mean that the valuations cannot be relied upon. Rather, the clause is used to be clear and transparent with all parties that, in the context of the current environment, less certainty can be attached to valuations than would otherwise be the case.
· For LTMs, the response to COVID-19 has led to increased dispersion in pricing which, coupled with both the general market uncertainty, has resulted in a higher level of uncertainty associated with these assets at the balance sheet date.
· Private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines. Reasonably possible alternative valuations have been determined by stressing key assumptions used in the valuation models.
The table below shows the sensitivity of the fair value of Level 3 asset valuations as at 30 June 2020 to changes in unobservable inputs to a reasonable alternative. In light of COVID-19, we have reviewed and reflected changes in those sensitivities, and further disclosure in how these sensitivities have been applied can be found in note 4.04 (b).
Sensitivities
Fair value
30 June 2020
£m
Most significant unobservable input
Positive Impact
£m
Negative Impact
£m
Lifetime mortgages
5,478
Illiquidity premium
493
(493)
Private credit loans
11,661
Credit spreads
758
(758)
Investment property
9,334
Equivalent yields
720
(821)
Other investments
5,627
Various
412
(455)
Total Level 3 assets
32,100
2,383
(2,527)
The above table demonstrates that the effect of a change in one or more unobservable inputs to reasonable alternative assumptions would result in a change in the fair value of Level 3 assets of +7/- 8% (30 June 2019: +/-6%; 31 December 2019: +/-6%). While the table demonstrates the effect of these changes in isolation, there may in reality be a correlation between the unobservable inputs and other factors. It should also be noted that some of these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 59
4.05 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
Continuing
operations
Total
operations
Total
operations
Total
6 months
6 months
6 months
6 months
Full year
Full year
2020
2020
2019
2019
2019
2019
£m
£m
£m
£m
£m
£m
Profit before tax attributable to equity holders
261
285
1,020
1,053
2,084
2,112
Tax calculated at 19.00%
50
54
194
200
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
(49)
(49)
(11)
(11)
(117)
(117)
Non-deductible expenses
6
6
1
1
2
2
Differences between taxable and accounting investment gains
(2)
(2)
-
-
(10)
(10)
Adjustments for non-controlling interests
3
3
-
-
4
4
Foreign tax
2
2
-
-
6
6
Unrecognised tax losses
1
1
2
2
14
14
Non-recurring reconciling items:
Income not subject to tax
-
-
(2)
(2)
(6)
(6)
Non-deductible expenses
2
2
-
-
6
6
Adjustments in respect of prior years2
(14)
(14)
(2)
(2)
9
9
Impact of the revaluation of deferred tax balances3
7
7
1
1
(2)
(2)
Other
1
2
-
-
(1)
(1)
-
-
Tax attributable to equity holders
7
12
182
188
297
302
Equity holders' effective tax rate4
2.7%
4.2%
17.8%
17.9%
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 our business with regulatory capital flexibility for both our PRT business and our US term insurance business. This is partially offset by the tax rate of 21% that applies to our US operations.
2. 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.
4. Equity holders' effective tax rate is calculated by dividing the tax attributable to equity holders over profit before tax attributable to equity holders.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 60
4.05 Tax (continued)
(b) Deferred tax
30 Jun 2020
30 Jun 2019
31 Dec 2019
Deferred tax (liabilities)/assets
£m
£m
£m
Deferred acquisition expenses
50
29
35
- UK
(40)
(40)
(40)
- Overseas
90
69
75
Difference between the tax and accounting value of insurance contracts
(690)
(635)
(630)
- UK
(232)
(228)
(198)
- Overseas
(458)
(407)
(432)
Unrealised gains on investments
(57)
(175)
(184)
Excess of depreciation over capital allowances
18
12
15
Excess expenses
19
20
20
Accounting provisions and other
(59)
(32)
(44)
Trading losses1
257
179
217
Pension fund deficit
34
35
28
Acquired intangibles
(2)
(2)
(2)
Total net deferred tax liabilities
(430)
(569)
(545)
Less: net deferred tax liabilities of operations classified as held for sale
70
186
182
Net deferred tax liabilities
(360)
(383)
(363)
Analysed by:
- UK deferred tax assets
5
2
3
- UK deferred tax liabilities
(186)
(193)
(189)
- Overseas deferred tax assets
5
5
5
- Overseas deferred tax liabilities2
(184)
(197)
(182)
Net deferred tax liabilities
(360)
(383)
(363)
1. Trading losses include UK trade and US operating losses of £5m (H1 19: £3m; FY 19: £4m) and £252m (H1 19: £176m; FY 19: £213m) respectively.
2. Overseas deferred tax liability is wholly comprised of US balances as at 30 June 2020.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 61
4.06 Share capital and share premium
Number of
Authorised share capital
shares
£m
At 30 June 2020, 30 June 2019 and 31 December 2019: ordinary shares of 2.5p each
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
1,225,772
-
3
As at 30 June 2020
5,966,575,379
149
1,003
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
3,497,185
-
6
As at 30 June 2019
5,964,265,419
149
998
Options exercised under share option schemes
1,084,188
-
2
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.
4.07 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 owners of the parent. 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.
4.08 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.
No individual non-controlling interest is considered to be material on the basis of the period end carrying value or share of profit or loss.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 62
4.09 Core borrowings
Carrying
Carrying
Carrying
amount
Fair value
amount
Fair value
amount
Fair value
30 Jun
30 Jun
30 Jun
30 Jun
31 Dec
31 Dec
2020
2020
2019
2019
2019
2019
£m
£m
£m
£m
£m
£m
Subordinated borrowings
10% Sterling subordinated notes 2041 (Tier 2)
312
339
312
364
312
353
5.5% Sterling subordinated notes 2064 (Tier 2)
589
688
589
684
589
726
5.375% Sterling subordinated notes 2045 (Tier 2)
603
672
602
673
603
691
5.25% US Dollar subordinated notes 2047 (Tier 2)
693
733
661
706
648
704
5.55% US Dollar subordinated notes 2052 (Tier 2)
407
435
388
419
380
405
5.125% Sterling subordinated notes 2048 (Tier 2)
399
442
399
445
399
459
3.75% Sterling subordinated notes 2049 (Tier 2)
598
595
-
-
598
613
4.5% Sterling subordinated notes 2050 (Tier 2)
499
521
-
-
-
-
Client fund holdings of group debt (Tier 2)1
(43)
(47)
(31)
(34)
(38)
(44)
Total subordinated borrowings
4,057
4,378
2,920
3,257
3,491
3,907
Senior borrowings
Sterling medium term notes 2031-2041
603
896
603
868
609
877
Client fund holdings of group debt1
(9)
(13)
(9)
(13)
(9)
(13)
Total senior borrowings
594
883
594
855
600
864
Total core borrowings
4,651
5,261
3,514
4,112
4,091
4,771
1. £52m (30 June 2019: £40m; 31 December 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.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 63
4.09 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.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 64
4.10 Operational borrowings
Carrying
Carrying
Carrying
amount
Fair value
amount
Fair value
amount
Fair value
30 Jun
30 Jun
30 Jun
30 Jun
31 Dec
31 Dec
2020
2020
2019
2019
2019
2019
£m
£m
£m
£m
£m
£m
Euro Commercial Paper
100
100
354
354
200
200
Non recourse borrowings
1,000
1,000
657
657
842
842
Bank loans and overdrafts
104
104
58
58
-
-
Total operational borrowings1
1,204
1,204
1,069
1,069
1,042
1,042
Less: liabilities of operations classified as held for sale
(30)
(30)
(29)
(29)
(29)
(29)
Operational borrowings
1,174
1,174
1,040
1,040
1,013
1,013
1. Unit linked borrowings with a carrying value of £21m (30 June 2019: £11m; 31 December: £7m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,195m (30 June 2019: £1,051m; 31 December 2019: £1,020m).
Syndicated Credit Facility
As at 30 June 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 2022. No amounts were outstanding at 30 June 2020.
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 65
4.11 Payables and other financial liabilities
30 Jun 2020
30 Jun 2019
31 Dec 2019
£m
£m
£m
Derivative liabilities
27,550
11,778
13,113
Repurchase agreements1
55,309
46,994
56,884
Other financial liabilities2
19,544
17,353
14,476
Total payables and other financial liabilities
102,403
76,125
84,473
Less: Payables and other liabilities of operations classified as held for sale
(738)
(598)
(434)
Payables and other financial liabilities
101,665
75,527
84,039
1. The repurchase agreements are presented gross, however they and their related assets (included within debt securities) are subject to master netting arrangements. The vast majority of the repurchase agreements are unit linked.
2. Other financial liabilities includes trail commission, FX spots, lease liabilities, reinsurance payables and collateral repayable on short position reverse repurchase agreements. The value of collateral repayable on short position reverse repurchase agreements was £5,882m (30 June 2019: £6,114m; 31 December 2019: £7,673m).
Fair value hierarchy
Amortised
Total
Level 1
Level 2
Level 3
cost
As at 30 June 2020
£m
£m
£m
£m
£m
Derivative liabilities
27,550
232
27,301
17
-
Repurchase agreements
55,309
-
55,309
-
-
Other financial liabilities
19,544
6,552
61
138
12,793
Total payables and other financial liabilities
102,403
6,784
82,671
155
12,793
Amortised
Total
Level 1
Level 2
Level 3
cost
As at 30 June 2019
£m
£m
£m
£m
£m
Derivative liabilities
11,778
276
11,500
2
-
Repurchase agreements
46,994
-
46,994
-
-
Other financial liabilities
17,353
5,854
14
577
10,908
Total payables and other financial liabilities
76,125
6,130
58,508
579
10,908
Amortised
Total
Level 1
Level 2
Level 3
cost
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
Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as Level 3 liabilities. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (30 June 2019 and 31 December 2019: Increase of £4m).
Significant transfers between levels
There have been no significant transfers of liabilities between Levels 1, 2 and 3 for the period ended 30 June 2020 (30 June 2019 and 31 December 2019: no significant transfers).
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 66
4.12 Foreign exchange rates
Principal rates of exchange used for translation are:
Period end exchange rates
30 Jun 2020
30 Jun 2019
31 Dec 2019
United States dollar
1.24
1.27
1.33
Euro
1.10
1.12
1.18
6 months
6 months
Full year
Average exchange rates
2020
2019
2019
United States dollar
1.26
1.29
1.28
Euro
1.14
1.15
1.14
4.13 Retirement benefit obligations
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.
As at 30 June 2020, the combined obligation arising from these arrangements has been estimated at £1,199m (30 June 2019: £1,139m; 31 December 2019: £1,083m). The retirement benefit obligations are a component of Provisions on the Consolidated Balance Sheet. The after tax deficit, net of annuity obligations insured by Legal and General Assurance Society, has been calculated to be £122m (30 June 2019: £161m; 31 December 2019: £115m).
Legal & General Group Plc
Half Year Report 2020 Part 2
IFRS Disclosure Notes Page 67
4.14 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.
4.15 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 period. 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 £47m (30 June 2019: £40m; 31 December 2019: £86m) for all employees.
At 30 June 2020, 30 June 2019 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:
6 months
6 months
Full year
2020
2019
2019
£m
£m
£m
Salaries
3
3
12
Share-based incentive awards
4
3
7
Key management personnel compensation
7
6
19
(ii) Services provided to and by related parties
All transactions between the group and associates, joint ventures and other related parties during the period 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 (30 June 2019: £78m; 31 December 2019: £78m) purchased by the group's UK defined benefit pension schemes during the period, priced on an arm's length basis;
- Loans outstanding from related parties at 30 June 2020 of £86m (30 June 2019: £81m; 31 December 2019: £83m), with a further commitment of £15m;
- The group has total other commitments of £1,253m to related parties (30 June 2019: £1,178m; 31 December 2019: £1,213m), of which £820m has been drawn at 30 June 2020 (30 June 2019: £821m; 31 December 2019: £749m).
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.ENDIR KKQBDKBKBCFK
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