REG - Legal & General Grp - L&G Half Year Results 2023 Part 2
15/08/2023 07:00
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RNS Number : 2884J Legal & General Group Plc 15 August 2023
L&G Half year results 2023 Part 2
Independent review report to Legal & General Group Plc
Conclusion
We have been engaged by Legal & General Group Plc ("the company") to
review the condensed set of financial statements in the half-yearly financial
report for the six months ended 30 June 2023 which comprises the Consolidated
Income Statement, Consolidated Statement of Comprehensive Income, Consolidated
Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated
Statement of Cash Flows and the related explanatory notes.
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 2023 is not prepared, in all
material respects, in accordance with IAS 34 Interim Financial Reporting as
adopted for use in the UK and the Disclosure Guidance and Transparency Rules
("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity ("ISRE (UK) 2410") issued 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.
Conclusion relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention that causes us to believe that the directors
have inappropriately adopted the going concern basis of accounting, or that
the directors have identified material uncertainties relating to going concern
that have not been appropriately disclosed.
This conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410. However, future events or conditions may cause the company to
cease to continue as a going concern, and the above conclusions are not a
guarantee that the company will continue in operation.
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.
As disclosed in Note 4.01, the annual financial statements of the group are
prepared in accordance with UK-adopted international accounting standards.
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 for use in the UK.
In preparing the condensed set of financial statements, the directors are
responsible for assessing the company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to
liquidate the company or to cease operations, or have no realistic alternative
but to do so.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review. Our conclusions, including our conclusion relating to going concern,
are based on procedures that are less extensive than audit procedures, as
described in the Basis for conclusion section of this report.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the DTR of the
UK FCA. Our review has been undertaken so that we might state to the company
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 company for our review work, for this
report, or for the conclusions we have reached.
Philip Smart
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
14 August 2023
IFRS Disclosures on performance
2.01 IFRS 17 and IFRS 9 restatement
The group has applied IFRS 17, 'Insurance Contracts' and IFRS 9, 'Financial Instruments' for the first time from 1 January 2023. These standards have brought significant changes to the accounting for insurance and reinsurance contracts and financial instruments respectively, and have had a material impact on the group's financial statements in the period of initial application.
IFRS 17, 'Insurance Contracts' was originally issued in May 2017 by the IASB,
and subsequent amendments were issued in June 2020. Endorsement for use in the
UK was granted in May 2022. The standard replaced IFRS 4, 'Insurance
Contracts', and has been applied retrospectively, in line with the
transitional options provided for in the standard. IFRS 17 provides a
comprehensive approach for accounting for insurance contracts including their
measurement, income statement presentation and disclosure.
IFRS 9, 'Financial Instruments' was issued in July 2014 by the IASB, effective
for annual periods beginning on or after 1 January 2018. The IASB subsequently
issued 'Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS
4 Insurance Contracts' which allowed entities that met certain requirements to
defer their implementation of IFRS 9 until adoption of IFRS 17, 'Insurance
Contracts' 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
qualified for, and made use of this deferral option, and has therefore applied
IFRS 9 for the first time on 1 January 2023. The standard replaced 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
previous model based on incurred losses) and new requirements on hedge
accounting. IFRS 9 has been applied retrospectively.
Note 4.01 Basis of preparation includes the new accounting policies adopted by
the group for IFRS 17 and IFRS 9, together with information relating to the
transition to the new standards.
IFRS 17 and IFRS 9 have been applied retrospectively, and prior period
comparative information has been restated. These restatements resulted in
comparative figures for the financial year ended 31 December 2022 which are
not the group's statutory accounts for that financial year, but are derived
from those accounts. Therefore, prior periods comparative information is
unaudited. More information is provided in Note 4.01.
Restatements due to the implementation of IFRS 17 and IFRS 9 have been clearly
marked as such throughout this report.
As at the transition date of 1 January 2022, the impacts on the key line items in the group's Consolidated Balance Sheet are set out below. The restated balances are aligned to those disclosed in the Annual Report and Accounts for the year ended 31 December 2022, with some minor adjustments for rounding.
Balance sheet item 31 December Reclassification due to adoption of IFRS 9 and IFRS 17 Impact of the adoption of IFRS 9 Impact of the adoption of IFRS 17 1 January
2021 £m £m £m 2022
(as reported) (restated)
£m £m
Financial investments 538,374 (29) (716) - 537,629
Net insurance contract liabilities(1) (82,645) (199) - (6,185) (89,029)
Net deferred tax (liabilities)/assets (249) - 178 1,209 1,138
Other (444,994) 228 - (31) (444,797)
Equity attributable to owners of the parent 10,486 - (538) (5,007) 4,941
1. Net insurance contract liabilities reflect insurance contract assets
and liabilities, net of reinsurance contracts.
The adoption of the new accounting standards does not change the total profit
recognised over the life of the group's insurance contracts, nor the
underlying economics or cash generation of the group's businesses. It does not
change the group's strategy, solvency position nor dividend paying capacity or
appetite.
2.02 Operating profit(#)
Restated Restated
6 months 6 months Full year
2023 2022 2022
For the six month period to 30 June 2023 Notes £m £m £m
Legal & General Retirement Institutional (LGRI) 2.03 471 395 828
Legal & General Capital (LGC) 2.04 296 263 509
Legal & General Investment Management (LGIM) 2.05 142 200 340
Retail 2.03 230 295 416
- Insurance 108 164 165
- Retail Retirement 122 131 251
Operating profit from divisions 1,139 1,153 2,093
Group debt costs(1) (106) (108) (214)
Group investment projects and expenses (92) (87) (194)
Operating profit 941 958 1,685
Investment and other variances 2.06 (611) (261) (751)
Losses attributable to non-controlling interests (6) - (1)
Adjusted profit before tax attributable to equity holders 324 697 933
Tax expense attributable to equity holders 4.04 (14) (122) (88)
Profit for the period 3.01 310 575 845
Total tax expense 3.01 128 195 159
Profit before tax 3.01 438 770 1,004
Profit attributable to equity holders 316 575 846
Earnings per share:
Basic (pence per share)(2) 2.08 5.16 9.52 13.91
Diluted (pence per share)(2) 2.08 5.04 9.16 13.47
1. Group debt costs exclude interest on non-recourse financing.
2. All earnings per share calculations are based on profit attributable
to equity holders of the company.
This supplementary adjusted operating profit information (one of the group's
key performance indicators) provides additional analysis of the results
reported under IFRS, and the group believes that it provides stakeholders with
useful information to enhance their understanding of the performance of the
business in the period. While the calculation of adjusted operating profit has
been updated to reflect the accounting and presentational impacts of IFRS 17,
the key principles of what is measured by adjusted operating profit, as set
out below and except as noted, remain unchanged from the prior year.
Adjusted operating profit measures the pre-tax result excluding the impact of
investment volatility, economic assumption changes caused by changes in market
conditions or expectations and exceptional items. Key considerations in
relation to the calculation of adjusted operating profit for the group's
long-term insurance businesses and shareholder funds are set out below.
Exceptional income and expenses which arise outside the normal course of
business in the year, such as merger and acquisition and start-up costs, are
excluded from adjusted operating profit.
Long-term insurance
Adjusted operating profit reflects longer-term economic assumptions for the
group's retirement and insurance businesses. Variances between actual and
long-term expected investment return on traded and real assets are excluded
from adjusted operating profit, as well as economic assumption changes caused
by changes in market conditions or expectations (e.g. credit default and
inflation) and any difference between the actual allocated asset mix and the
target long-term asset mix on new pension risk transfer business. Assets held
for future new pension risk transfer business are excluded from the asset
portfolio used to determine the discount rate for annuities on insurance
contract liabilities. The impact of investment management actions that
optimise the yield of the assets backing the back book of annuity contracts is
now included within adjusted operating profit; prior to the implementation of
IFRS17 the impact of such actions was not included in operating profit.
For the group's long-term insurance businesses, reinsurance mismatches are
also excluded from adjusted operating profit. Reinsurance mismatches arise
where the reinsurance offset rules in IFRS 17 do not reflect management's view
of the net of reinsurance transaction. In particular, during a period of
reinsurance renegotiation, reinsurance gains cannot be recognised to offset
any inception losses on the underlying contracts where they are recognised
before the new reinsurance agreement is signed. In these circumstances, the
onerous contract losses are reduced to reflect the net loss (if any) after
reinsurance, and future contractual service margin (CSM) amortisation is
reduced over the duration of the contracts.
# All references to 'Operating profit' throughout this report represent
'Adjusted operating profit', an alternative performance measure defined in the
glossary.
2.02 Operating profit(#) (continued)
Shareholder funds
Shareholder funds include both the group's traded equity portfolio and certain
direct investments for which adjusted operating profit is based on the
long-term economic return expected to be generated. For these direct
investments, as well as for the group's traded equity portfolio, deviations
from such long-term economic return are excluded from adjusted operating
profit. Direct investments for which adjusted operating profit is reflected in
this way include the following:
• Development assets, predominantly in the specialist commercial real
estate and housing sectors within the LGC alternative asset portfolio: these
are assets under construction and contracted to either be sold to other parts
of the group or for other commercial usage, and on which LGC accepts
development risks and expects to realise profits once construction is
complete.
• 'Scale-up' investments, predominantly in the alternative finance
sector within the LGC alternative asset portfolio as well as the fintech
business within Retail: these are investments in early-stage ventures in a
fast-growing phase of their life cycle, but which have not yet reached a
steady-state level of earnings.
Shareholder funds also includes other direct investments for which adjusted
operating profit reflects the IFRS profit before tax. Direct investments for
which adjusted operating profit is reflected in this way include the
following:
• 'Start-up' investments: these are companies in the beginning stages of
their business lifecycle (i.e. typically less than 24 months) and which
therefore have limited operating history available and typically are in a
pre-revenue stage.
• Mature assets: these are companies in their final stages of business
lifecycle. They are stable businesses and have sustainable streams of income,
but the growth rate in their earnings is expected to remain less pronounced in
the future.
2.03 Analysis of LGRI and Retail operating profit(#)
LGRI Retail LGRI Retail LGRI Retail
6 months 6 months 6 months 6 months Full year Full year
2023 2023 2022 2022 2022 2022
£m £m £m £m £m £m
Amortisation of the CSM in the period(1) 266 210 239 206 522 425
Release of risk adjustment in the period 54 49 68 44 136 85
Experience variances 1 (18) 9 (6) 14 (92)
Development of losses on onerous contracts - (8) - (5) 1 (7)
Other expenses (66) (39) (65) (43) (131) (113)
Insurance investment margin(2) 213 49 139 38 277 60
Investment contracts and non-insurance operating profit 3 (13) 5 61 9 58
Total LGRI and Retail operating profit 471 230 395 295 828 416
1. Contractual service margin (CSM) amortisation for Retail has been
reduced by £8m (H1 22: £9m; FY 22: £17m) to exclude the impact of
reinsurance mismatches.
2. Insurance investment margin comprises the expected investment return
on assets backing insurance contract liabilities, the unwind of the discount
rate on insurance contract liabilities and the optimisation of the assets
backing the annuity back book.
2.04 LGC operating profit(#)
6 months 6 months Full year
2023 2022 2022
£m £m £m
Direct investments(1) 230 202 400
Traded investment portfolio including treasury assets(2) 66 61 109
Total LGC operating profit 296 263 509
1. Direct investments represents LGC's portfolio of assets across
specialist commercial real estate, clean energy, housing and alternative
finance. Direct investments includes operating profit in relation to CALA
Homes of £68m (H1 22: £98m; FY 22: £172m).
2. The traded investment portfolio holds a diversified set of exposures
across equities, fixed income, multi-asset funds and cash.
2.05 LGIM operating profit(#)
6 months 6 months Full year
2023 2022 2022
£m £m £m
Asset management revenue (excluding third-party market data)(1) 431 485 944
Asset management transactional revenue(2) 9 9 26
Asset management expenses (excluding third-party market data)(1) (298) (294) (630)
Total LGIM operating profit 142 200 340
1. Asset management revenue and expenses exclude income and costs of
£13m in relation to the provision of third-party market data (H1 22: £15m;
FY 22: £30m).
2. Transactional revenue from external clients includes execution fees,
asset transition income, trigger fees, arrangement fees on property
transactions and performance fees.
# All references to 'Operating profit' throughout this report represent
'Adjusted operating profit', an alternative performance measure defined in the
glossary.
2.06 Investment and other variances
Restated Restated
6 months 6 months Full year
2023 2022 2022
£m £m £m
LGRI and Retail
- Net impact of investment returns (less than)/in excess of expectation and (186) 66 (72)
change in liability discount rates
- Other (36) 8 -
Total LGRI and Retail (222) 74 (72)
LGC investment variance (163) (308) (428)
Other investment variance(1) (48) (8) (119)
Investment variance (433) (242) (619)
M&A related and other variances(2) (178) (19) (132)
Total investment and other variances (611) (261) (751)
1. Other investment variance includes the current service costs and net
interest expense of the group's defined benefit pension schemes.
2. M&A related and other variances includes gains and losses,
expenses and intangible amortisation relating to acquisitions, disposals and
restructuring as well as business start-up costs. The total for the 6 months
ended 30 June 2023 includes £163m of costs incurred relating to the announced
intent to cease production within the Modular Homes business and impairment of
the group's investment in Onto.
Investment variance includes differences between actual and long-term expected
investment return on traded and real assets (including development assets and
scale-up equity direct investments within LGC and Retail's Insurance
business), the impact of economic assumption changes caused by changes in
market conditions or expectations (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 the yield
associated with assets held for future new pension risk transfer business.
The long-term expected investment return is based on opening economic
assumptions applied to the assets at the start of the reporting year. The
assumptions underlying the calculation of the expected returns for traded
equity, commercial property and residential property are
based on market consensus forecasts and long-term historic average returns
expected to apply through the cycle.
The long-term expected investment returns are:
6 months 6 months Full year
2023 2022 2022
Equities 7% 7% 7%
Commercial property 5% 5% 5%
Residential property 3.5% 3.5% 3.5%
For fixed interest securities measured at FVTPL, the expected investment
returns are based on average prospective yields for the actual assets held
less an adjustment for credit risk (assessed on a best estimate basis). Where
securities are measured at amortised cost or FVOCI, the expected investment
return comprises interest income on an effective interest rate basis.
For equity direct investments, the LGC alternative asset portfolio and
Retail's Insurance business comprise investments in housing, specialist
commercial real estate, clean energy, alternative finance and fintech. Where
used for the determination of adjusted operating profit, the long-term
expected investment return is on average between 10% and 12%, in line with our
stated investment objectives. Rates of return specific to each asset are
determined at the point of underwriting and reviewed and updated annually. The
expected investment return includes assumptions on appropriate discount rates
and inflation as well as sector specific assumptions including retail and
commercial property yields and power prices.
2.07 Contractual service margin (CSM) analysis
Gross Gross Re- Re- Net Net
insurance insurance
LGRI Retail LGRI Retail LGRI Retail
£m £m £m £m £m £m
As at 1 January 2023 9,403 4,224 (1,718) 283 7,685 4,507
CSM recognised for services provided/received (313) (215) 47 (3) (266) (218)
Changes in estimates which adjust the CSM (105) 90 38 (42) (67) 48
Contracts initially recognised in the period 274 185 15 (22) 289 163
Finance expenses/(income) from insurance contracts 123 61 (21) 1 102 62
Effect of movements in exchange rates (12) (58) (1) 5 (13) (53)
As at 30 June 2023 9,370 4,287 (1,640) 222 7,730 4,509
Gross Gross Re- Re- Net Net
insurance insurance
LGRI Retail LGRI Retail LGRI Retail
£m £m £m £m £m £m
As at 1 January 2022 8,349 3,814 (1,294) 355 7,055 4,169
CSM recognised for services provided/received (273) (203) 34 (12) (239) (215)
Changes in estimates which adjust the CSM (31) 69 (11) 10 (42) 79
Contracts initially recognised in the period 245 169 86 (11) 331 158
Finance expenses/(income) from insurance contracts 95 46 (15) 4 80 50
Effect of movements in exchange rates 20 112 2 (14) 22 98
As at 30 June 2022 8,405 4,007 (1,198) 332 7,207 4,339
Gross Gross Re- Re- Net Net
insurance insurance
LGRI Retail LGRI Retail LGRI Retail
£m £m £m £m £m £m
As at 1 January 2022 8,349 3,814 (1,294) 355 7,055 4,169
CSM recognised for services provided/received (621) (418) 99 (24) (522) (442)
Changes in estimates which adjust the CSM 913 293 (621) (11) 292 282
Contracts initially recognised in the year 542 315 126 (28) 668 287
Finance expenses/(income) from insurance contracts 197 98 (29) 7 168 105
Effect of movements in exchange rates 23 122 1 (16) 24 106
As at 31 December 2022 9,403 4,224 (1,718) 283 7,685 4,507
2.08 Earnings per share
(i) Basic earnings per share
Restated Restated Restated Restated
After tax Per share(1) After tax Per share(1) After tax Per share(1)
6 months 6 months 6 months 6 months Full year Full year
2023 2023 2022 2022 2022 2022
£m p £m p £m p
Profit for the period attributable to equity holders 316 5.34 575 9.71 846 14.30
Less: coupon payable in respect of restricted Tier 1 convertible notes net of (11) (0.18) (11) (0.19) (23) (0.39)
tax relief
Total basic earnings 305 5.16 564 9.52 823 13.91
1. Basic earnings per share is calculated by dividing profit after tax
by the weighted average number of ordinary shares in issue during the year,
excluding employee scheme treasury shares.
(ii) Diluted earnings per share
After tax Weighted Per share(1)
average
number of
shares
For the six month period to 30 June 2023 £m m p
Profit for the period attributable to equity holders 316 5,913 5.34
Net shares under options allocable for no further consideration - 53 (0.05)
Conversion of restricted Tier 1 notes - 307 (0.25)
Total diluted earnings 316 6,273 5.04
Restated Weighted Restated
After tax average Per share(1)
number of
shares
For the six month period to 30 June 2022 £m m p
Profit for the period attributable to equity holders 575 5,922 9.71
Net shares under options allocable for no further consideration - 46 (0.07)
Conversion of restricted Tier 1 notes - 307 (0.48)
Total diluted earnings 575 6,275 9.16
Restated Weighted Restated
After tax average Per share(1)
number of
shares
For the year ended 31 December 2022 £m m p
Profit for the year attributable to equity holders 846 5,917 14.30
Net shares under options allocable for no further consideration - 55 (0.13)
Conversion of restricted Tier 1 notes - 307 (0.70)
Total diluted earnings 846 6,279 13.47
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.
2.09 Segmental analysis
The group has five reportable segments, comprising LGRI, LGC, LGIM, Retail
Retirement and Insurance as set out in Note 2.02. Group expenses and debt
costs continue to be reported separately. Transactions between segments are on
normal commercial terms and are included within the reported segments.
In the UK, annuity liabilities relating to LGRI and Retail Retirement are
backed by a single portfolio of assets, and once a transaction has been
completed the assets relating to any particular transaction are not tracked to
the related liabilities. Investment variance is allocated to the two
business segments based on the relative average size of the underlying
insurance contract liabilities for the period.
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 asset and liabilities are managed on a legal
entity rather than a 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
Retail and debt
LGRI LGC LGIM Retirement Insurance costs Total
For the six month period to 30 June 2023 £m £m £m £m £m £m £m
Operating profit/(loss)(#) 471 296 142 122 108 (198) 941
Investment and other variances (186) (291) (11) (39) (47) (37) (611)
Losses attributable to non-controlling interests - - - - - (6) (6)
Profit/(loss) before tax attributable to equity holders 285 5 131 83 61 (241) 324
Tax (expense)/credit attributable to equity holders (26) 19 (32) (5) (23) 53 (14)
Profit/(loss) for the period 259 24 99 78 38 (188) 310
Group
expenses
Retail and debt
LGRI LGC LGIM Retirement Insurance costs(1) Total
For the six month period to 30 June 2022 (Restated) £m £m £m £m £m £m £m
Operating profit/(loss)(#) 395 263 200 131 164 (195) 958
Investment and other variances(1) 17 (308) (7) 6 51 (20) (261)
Losses attributable to non-controlling interests - - - - - - -
Profit/(loss) before tax attributable to equity holders 412 (45) 193 137 215 (215) 697
Tax (expense)/credit attributable to equity holders (88) 2 (39) (28) (15) 46 (122)
Profit/(loss) for the period 324 (43) 154 109 200 (169) 575
Group
expenses
Retail and debt
LGRI LGC LGIM Retirement Insurance costs Total
For the year ended 31 December 2022 (Restated) £m £m £m £m £m £m £m
Operating profit/(loss)(#) 828 509 340 251 165 (408) 1,685
Investment and other variances (105) (428) (81) (36) 69 (170) (751)
Losses attributable to non-controlling interests - - - - - (1) (1)
Profit/(loss) before tax attributable to equity holders 723 81 259 215 234 (579) 933
Tax (expense)/credit attributable to equity holders (123) (26) (30) (32) (11) 134 (88)
Profit/(loss) for the year 600 55 229 183 223 (445) 845
1. Investment and other variances within Group expenses and debt costs
has been restated for the six month period to 30 June 2022. The restatement
reflects a change in approach for the consolidation of the annuities purchased
by the group's defined benefit pension schemes from Legal and General
Assurance Society Limited (as described in Note 4.15), to better reflect the
underlying economics of the pension scheme obligations in the Consolidated
Income Statement and Consolidated Statement of Comprehensive Income. The
change has no impact on the group's total equity as at 30 June 2022. The
approach is consistent with that applied for the six month period to 30 June
2023 and the year ended 31 December 2022.
# Operating profit for total continuing operations represents 'Adjusted
operating profit', an alternative performance measure defined in the glossary.
2.09 Segmental analysis (continued)
(ii) Revenue
(a) Total revenue - summary
Total revenue includes insurance revenue, fees from fund management and
investment contracts and other operational income from contracts with
customers. Further details on the components of insurance revenue are
disclosed in Note 4.13. Other operational income from contracts with customers
is a component of other operational income, and excludes the share of
profit/loss from associates and joint ventures, as well as gains/losses on
disposal of subsidiaries, associates, joint ventures and other operations.
Restated Restated
6 months 6 months Full year
2023 2022 2022
£m £m £m
Insurance revenue 4,647 4,234 8,708
Fees from fund management and investment contracts 409 461 899
Other operational income from contracts with customers 782 829 1,584
Total revenue 5,838 5,524 11,191
(b) Total revenue - internal/external analysis
Retail LGC and
LGRI LGIM(1,2) Retirement Insurance other(3) Total
For the six month period to 30 June 2023 £m £m £m £m £m £m
Internal revenue - 81 - - (81) -
External revenue 2,470 358 703 1,583 724 5,838
Total revenue 2,470 439 703 1,583 643 5,838
Retail LGC and
LGRI LGIM(1,2) Retirement Insurance other(3) Total
For the six month period to 30 June 2022 (Restated) £m £m £m £m £m £m
Internal revenue - 92 - - (92) -
External revenue 2,104 412 675 1,570 763 5,524
Total revenue 2,104 504 675 1,570 671 5,524
Retail LGC and
LGRI LGIM(1,2) Retirement Insurance other(3) Total
For the year ended 31 December 2022 (Restated) £m £m £m £m £m £m
Internal revenue - 178 - - (178) -
External revenue 4,518 801 1,334 3,086 1,452 11,191
Total revenue 4,518 979 1,334 3,086 1,274 11,191
1. LGIM internal income relates to investment management services
provided to other segments.
2. LGIM external income primarily includes fees from fund management.
3. LGC and other includes LGC income, inter-segmental eliminations and
group consolidation adjustments.
(c) Fees from fund management and investment contracts
Retail LGC and
LGIM Retirement other(1) Total
For the six month period to 30 June 2023 £m £m £m £m
Investment contracts - 51 - 51
Investment management fees 430 - (81) 349
Transaction fees 9 - - 9
Total fees from fund management and investment contracts 439 51 (81) 409
Retail LGC and
LGIM Retirement other(1) Total
For the six month period to 30 June 2022 £m £m £m £m
Investment contracts - 49 - 49
Investment management fees 495 - (92) 403
Transaction fees 9 - - 9
Total fees from fund management and investment contracts 504 49 (92) 461
Retail LGC and
LGIM Retirement other(1) Total
For the year ended 31 December 2022 £m £m £m £m
Investment contracts - 98 - 98
Investment management fees 953 - (178) 775
Transaction fees 26 - - 26
Total fees from fund management and investment contracts 979 98 (178) 899
1. LGC and other includes inter-segmental eliminations and group
consolidation adjustments.
2.09 Segmental analysis (continued)
(ii) Revenue (continued)
(d) Other operational income from contracts with customers
Retail LGC and
Retirement Insurance other Total
For the six month period to 30 June 2023 £m £m £m £m
House building - - 702 702
Professional services fees 4 27 22 53
Insurance broker - 27 - 27
Total other operational income from contracts with customers 4 54 724 782
Retail LGC and
Retirement Insurance other Total
For the six month period to 30 June 2022 £m £m £m £m
House building - - 763 763
Professional services fees 4 41 - 45
Insurance broker - 21 - 21
Total other operational income from contracts with customers 4 62 763 829
Retail LGC and
Retirement Insurance other Total
For the year ended 31 December 2022 £m £m £m £m
House building - - 1,429 1,429
Professional services fees 7 78 23 108
Insurance broker - 47 - 47
Total other operational income from contracts with customers 7 125 1,452 1,584
IFRS Primary Financial Statements
3.01 Consolidated Income Statement (unaudited)
Restated Restated
6 months 6 months Full year
2023 2022 2022
For the six month period to 30 June 2023 Notes £m £m £m
Insurance revenue 4.13 4,647 4,234 8,708
Insurance service expenses 4.13 (3,997) (3,646) (7,415)
Insurance service result before reinsurance contracts held 650 588 1,293
Net expense from reinsurance contracts held 4.13 (53) (8) (145)
Insurance service result 4.13 597 580 1,148
Investment return 8,288 (74,130) (98,352)
Finance income from insurance contracts issued 432 12,460 19,136
Finance income/(expense) from reinsurance contracts 67 (47) 24
Change in investment contract liabilities (8,208) 62,297 80,043
Insurance and investment result 1,176 1,160 1,999
Other operational income 758 846 1,646
Fees from fund management and investment contracts 2.09 409 461 899
Acquisition costs (55) (59) (103)
Other finance costs (173) (145) (290)
Other expenses (1,677) (1,493) (3,147)
Total other income and expenses (738) (390) (995)
Profit before tax 438 770 1,004
Tax expense attributable to policyholder returns (114) (73) (71)
Profit before tax attributable to equity holders 324 697 933
Total tax expense (128) (195) (159)
Tax expense attributable to policyholder returns 114 73 71
Tax expense attributable to equity holders 4.04 (14) (122) (88)
Profit for the period 310 575 845
Attributable to:
Non-controlling interests (6) - (1)
Equity holders 316 575 846
Dividend distributions to equity holders during the period 4.02 831 792 1,116
Dividend distributions to equity holders proposed after the period end 4.02 340 324 829
p p p
Total basic earnings per share(1) 2.08 5.16 9.52 13.91
Total diluted earnings per share(1) 2.08 5.04 9.16 13.47
1. All earnings per share calculations are based on profit attributable
to equity holders of the company.
3.02 Consolidated Statement of Comprehensive Income (unaudited)
Restated Restated
6 months 6 months Full year
2023 2022 2022
For the six month period to 30 June 2023 £m £m £m
Profit for the period 310 575 845
Items that will not be reclassified subsequently to profit or loss
Actuarial remeasurements on defined benefit pension schemes (2) 150 26
Tax expense on actuarial remeasurements on defined benefit pension schemes - (38) (6)
Total items that will not be reclassified subsequently to profit or loss (2) 112 20
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations (7) 6 (20)
Movement in cross-currency hedge 24 5 40
Tax on movement in cross-currency hedge (6) (1) (10)
Movement in financial investments measured at FVOCI 13 (96) (132)
Tax on movement in financial investments measured at FVOCI (2) 20 28
Insurance finance income for insurance contracts issued applying the OCI 95 1,212 1,753
option
Reinsurance finance expense for reinsurance contracts issued applying the OCI (104) (655) (1,030)
option
Tax on movement in finance income/(expense) for insurance and reinsurance 2 (147) (169)
contracts
Total items that may be reclassified subsequently to profit or loss 15 344 460
Other comprehensive income after tax 13 456 480
Total comprehensive income for the period 323 1,031 1,325
Total comprehensive income/(expense) for the period attributable to:
Non-controlling interests (6) - (1)
Equity holders 329 1,031 1,326
3.03 Consolidated Balance Sheet (unaudited)
Restated Restated
As at As at As at
30 Jun 2023 30 Jun 2022 31 Dec 2022
Notes £m £m £m
Assets
Goodwill 71 71 71
Other intangible assets 454 406 441
Deferred acquisition costs 5 5 7
Investment in associates and joint ventures accounted for using the equity 553 387 554
method
Property, plant and equipment 362 311 326
Investment property 4.03 9,227 10,976 9,372
Financial investments 4.03 454,967 462,807 446,558
Reinsurance contract assets 4.13 5,398 3,969 4,685
Deferred tax assets 4.04 1,367 1,283 1,469
Current tax assets 908 699 802
Receivables and other assets 11,922 17,634 13,202
Cash and cash equivalents 14,537 24,774 35,784
Total assets 499,771 523,322 513,271
Equity
Share capital 4.05 149 149 149
Share premium 4.05 1,027 1,017 1,018
Employee scheme treasury shares (143) (138) (144)
Capital redemption and other reserves 346 201 338
Retained earnings 3,214 3,908 3,751
Attributable to owners of the parent 4,593 5,137 5,112
Restricted Tier 1 convertible notes 4.06 495 495 495
Non-controlling interests 4.07 (35) (36) (29)
Total equity 5,053 5,596 5,578
Liabilities
Insurance contract liabilities 4.13 78,378 82,892 78,171
Reinsurance contract liabilities 4.13 138 13 52
Investment contract liabilities 299,135 305,780 286,830
Core borrowings 4.08 4,278 4,356 4,338
Operational borrowings 4.09 1,272 1,182 1,219
Provisions 4.15 1,626 781 890
Deferred tax liabilities 4.04 160 155 206
Current tax liabilities 68 81 69
Payables and other financial liabilities 4.11 91,056 95,824 93,905
Other liabilities 705 654 762
Net asset value attributable to unit holders 17,902 26,008 41,251
Total liabilities 494,718 517,726 507,693
Total equity and liabilities 499,771 523,322 513,271
3.04 Consolidated Statement of Changes in Equity (unaudited)
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 2023 capital premium shares reserves(1) earnings of the parent notes interests equity
£m £m £m £m £m £m £m £m £m
As at 1 January 2023 149 1,018 (144) 338 3,751 5,112 495 (29) 5,578
Profit for the period - - - - 316 316 - (6) 310
Exchange differences on translation of overseas operations - - - (7) - (7) - - (7)
Net movement in cross-currency hedge - - - 18 - 18 - - 18
Net actuarial remeasurements on defined benefit pension schemes - - - - (2) (2) - - (2)
Net movement in financial investments measured at FVOCI - - - 11 - 11 - - 11
Net insurance finance income/(expense) - - - (7) - (7) - - (7)
Total comprehensive income for the period - - - 15 314 329 - (6) 323
Options exercised under share option schemes - 9 - - - 9 - - 9
Shares purchased - - (13) - - (13) - - (13)
Shares vested - - 14 (35) - (21) - - (21)
Employee scheme treasury shares: - - - 28 - 28 - - 28
- Value of employee services
Share scheme transfers to retained earnings - - - - (9) (9) - - (9)
Dividends - - - - (831) (831) - - (831)
Coupon payable in respect of restricted Tier 1 convertible notes net of tax - - - - (11) (11) - - (11)
relief
Movement in third party interests - - - - - - - - -
As at 30 June 2023 149 1,027 (143) 346 3,214 4,593 495 (35) 5,053
1. Capital redemption and other reserves as at 30 June 2023 include
share-based payments £92m, foreign exchange £40m, capital redemption £17m,
hedging £92m, insurance and reinsurance finance £194m and financial assets
at FVOCI reserves £(89)m.
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 2022 capital premium shares reserves(1) earnings of the parent notes interests equity
£m £m £m £m £m £m £m £m £m
As at 1 January (as previously reported) 149 1,012 (99) 196 9,228 10,486 495 (38) 10,943
Impact of initial application of IFRS 17 - - - (334) (4,673) (5,007) - - (5,007)
Impact of initial application of IFRS 9 - - - 3 (541) (538) - - (538)
As at 1 January 2022 (Restated) 149 1,012 (99) (135) 4,014 4,941 495 (38) 5,398
Profit for the period - - - - 575 575 - - 575
Exchange differences on translation of overseas operations - - - 6 - 6 - - 6
Net movement in cross-currency hedge - - - 4 - 4 - - 4
Net actuarial remeasurements on defined benefit pension schemes - - - - 112 112 - - 112
Net movement in financial investments measured at FVOCI - - - (76) - (76) - - (76)
Net insurance finance income/(expense) - - - 410 - 410 - - 410
Total comprehensive income for the period - - - 344 687 1,031 - - 1,031
Options exercised under share option schemes - 5 - - - 5 - - 5
Shares purchased - - (50) - - (50) - - (50)
Shares vested - - 11 (33) - (22) - - (22)
Employee scheme treasury shares: - - - 25 - 25 - - 25
- Value of employee services
Share scheme transfers to retained earnings - - - - 10 10 - - 10
Dividends - - - - (792) (792) - - (792)
Coupon payable in respect of restricted Tier 1 convertible notes net of tax - - - - (11) (11) - - (11)
relief
Movement in third party interests - - - - - - - 2 2
As at 30 June 2022 (Restated) 149 1,017 (138) 201 3,908 5,137 495 (36) 5,596
1. Capital redemption and other reserves as at 30 June 2022 include
share-based payments £78m, foreign exchange £62m, capital redemption £17m,
hedging £52m, insurance and reinsurance finance £71m and financial assets at
FVOCI reserves £(79)m.
3.04 Consolidated Statement of Changes in Equity (unaudited) (continued)
Employee Capital Equity Restricted
scheme redemption attributable Tier 1 Non-
Share Share treasury and other Retained to owners convertible controlling Total
capital premium shares reserves(1) earnings of the parent notes interests equity
For the year ended 31 December 2022 £m £m £m £m £m £m £m £m £m
As at 1 January (as previously reported) 149 1,012 (99) 196 9,228 10,486 495 (38) 10,943
Impact of initial application of IFRS 17 - - - (334) (4,673) (5,007) - - (5,007)
Impact of initial application of IFRS 9 - - - 3 (541) (538) - - (538)
As at 1 January 2022 (Restated) 149 1,012 (99) (135) 4,014 4,941 495 (38) 5,398
Profit for the year - - - - 846 846 - (1) 845
Exchange differences on translation of overseas operations - - - (20) - (20) - - (20)
Net movement in cross-currency hedge - - - 30 - 30 - - 30
Net actuarial remeasurements on defined benefit pension schemes - - - - 20 20 - - 20
Net movement in financial investments measured at FVOCI - - - (104) - (104) - - (104)
Net insurance finance income/(expense) - - - 554 - 554 - - 554
Total comprehensive income for the year - - - 460 866 1,326 - (1) 1,325
Options exercised under share option schemes - 6 - - - 6 - - 6
Shares purchased - - (59) - - (59) - - (59)
Shares vested - - 14 (41) - (27) - - (27)
Employee scheme treasury shares: - - - 54 - 54 - - 54
- Value of employee services
Share scheme transfers to retained earnings - - - - 10 10 - - 10
Dividends - - - - (1,116) (1,116) - - (1,116)
Coupon payable in respect of restricted Tier 1 convertible notes net of tax - - - - (23) (23) - - (23)
relief
Movement in third party interests - - - - - - - 10 10
As at 31 December 2022 (Restated) 149 1,018 (144) 338 3,751 5,112 495 (29) 5,578
1. Capital redemption and other reserves as at 31 December 2022 include
share-based payments £99m, foreign exchange £44m, capital redemption £17m,
hedging £78m, insurance and reinsurance finance £205m and financial assets
at FVOCI reserves £(105)m.
3.05 Consolidated Statement of Cash Flows (unaudited)
Restated Restated
6 months 6 months Full year
2023 2022 2022
For the six month period to 30 June 2023 Notes £m £m £m
Cash flows from operating activities
Profit for the period 310 575 845
Adjustments for non-cash movements in net profit for the period
Net (gains)/losses on financial investments and investment property (2,125) 78,802 107,469
Investment income (6,163) (4,672) (9,117)
Interest expense 173 145 290
Tax expense 128 195 159
Other adjustments 116 88 113
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or (7,732) 14,750 22,052
loss
Investments measured at FVOCI 456 (518) (1,025)
Investments measured at amortised cost (233) (33) (93)
Other assets 1,334 (9,290) (5,194)
Net (decrease)/increase in operational liabilities
Insurance contracts (78) (10,354) (15,691)
Investment contracts 12,308 (67,182) (86,132)
Other liabilities (24,341) 2,492 (972)
Cash (utilised in)/generated from operations (25,847) 4,998 12,704
Interest paid (167) (139) (290)
Interest received 3,408 1,808 3,525
Rent received 224 185 404
Tax paid(1) (184) (376) (570)
Dividends received 2,338 2,491 4,691
Net cash flows from operations (20,228) 8,967 20,464
Cash flows from investing activities
Acquisition of property, plant and equipment, intangibles and other assets (171) (60) (187)
Acquisition of operations, net of cash acquired - (2) (2)
Investment in joint ventures and associates (44) (34) (101)
Disposal of joint ventures and associates 8 40 64
Net cash flows utilised in investing activities (207) (56) (226)
Cash flows from financing activities
Dividend distributions to ordinary equity holders during the period 4.02 (831) (792) (1,116)
Coupon payment in respect of restricted Tier 1 convertible notes, gross of tax 4.06 (14) (14) (28)
Options exercised under share option schemes 4.05 9 5 6
Treasury shares purchased for employee share schemes (13) (50) (59)
Payment of lease liabilities (32) (18) (44)
Proceeds from borrowings 4.10 408 385 945
Repayment of borrowings 4.10 (299) (210) (737)
Net cash flows utilised in financing activities (772) (694) (1,033)
Net (decrease)/increase in cash and cash equivalents (21,207) 8,217 19,205
Exchange gains on cash and cash equivalents (40) 70 92
Cash and cash equivalents at 1 January 35,784 16,487 16,487
Total cash and cash equivalents at 30 June/31 December 14,537 24,774 35,784
1. Tax paid comprises UK corporation tax of £38m (H1 22: £223m; FY 22:
£358m), withholding tax of £143m (H1 22: £147m; FY 22: £204m) and overseas
corporate tax of £3m (H1 22: £6m; FY 22: £8m).
IFRS Disclosure Notes
4.01 Basis of preparation
The group financial information for the six months ended 30 June 2023 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, a condensed set of
financial statements which comprises the Consolidated Income Statement,
Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet,
Consolidated Statement of Changes in Equity, Consolidated Statement of Cash
Flows and the related explanatory notes, has also been prepared in line with
the accounting policies which the group expects to adopt for the 2023 year
end. These policies are consistent with the principal accounting policies
which were set out in the group's 2022 consolidated financial statements,
except where policy changes have been outlined below in "New standards,
interpretations and amendments to published standards that have been adopted
by the group". Accounting policies are in line with UK-adopted international
accounting standards, as issued by the International Accounting Standards
Board and adopted by the UK Endorsement Board for use in the United Kingdom.
The preparation of the Interim Management Report includes the use of estimates
and assumptions which affect items reported in the Consolidated Balance Sheet
and Consolidated Income Statement and the disclosure of contingent assets and
liabilities at the date of the financial statements. The economic and
non-economic actuarial assumptions used to establish the liabilities in
relation to insurance represent an area of critical accounting judgement on
policy application. Following the implementation of IFRS 17, 'Insurance
Contracts' on 1 January 2023, economic and non-economic assumptions have been
updated in line with the new requirements, and applied for half year financial
reporting and retrospectively to comparative periods presented.
The results for the half year ended 30 June 2023 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 2022 and half year 2022 have been restated to reflect the retrospective
application of IFRS 17, 'Insurance Contracts' and IFRS 9, 'Financial
Instruments' from 1 January 2023, as outlined below in 'New standards,
interpretations and amendments to published standards that have been adopted
by the group'. The comparative figures for the financial year ended 31
December 2022 are not the group's statutory accounts for that financial year
but are derived from those accounts. Those accounts have been reported on by
the company's auditor and delivered to the registrar of companies. The report
of the auditor was (i) unqualified, (ii) did not include a reference to any
matters to which the auditor drew attention by way of emphasis without
qualifying their report, and (iii) did not contain a statement under section
498 (2) or (3) of the Companies Act 2006.
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 of these interim financial
statements.
Alternative performance measures
The group uses a number of alternative performance measures (APMs), including
adjusted operating profit, in the discussion of its business performance and
financial position, as the group believes that they, complemented with figures
determined according to other regulations, enhance understanding of the
group's performance. Definitions and further information in relation to the
group's APMs can be found in the Alternative Performance Measures section of
these interim financial statements.
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 split between tax attributable to policyholders' returns and equity
holders' profits. Policyholder tax comprises the tax suffered on policyholder
investment returns, while shareholder tax is corporation tax 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.
Climate change
At the current time, the group does not consider climate risk to represent a
significant area of judgement or of estimation uncertainty. As at 30 June
2023, no material impacts on the group's financial position, nor on the
valuation of assets or liabilities on the group's Consolidated Balance Sheet
as a result of climate change risk have been identified. Further detail on how
the group arrives at this determination is disclosed in the basis of
preparation of the group's 2022 consolidated financial statements.
(i) Going concern
The group's business activities, together with the factors likely to affect
its future development, performance and position in the current economic
environment are set out in this Interim Management Report. The financial
position of the group, its cash flows, liquidity position and borrowing
facilities as at 30 June 2023 are described in the IFRS Primary Financial
Statements and IFRS Disclosure Notes. Principal risks and uncertainties are
detailed on pages 23 to 26.
The directors have made an assessment of the group's going concern,
considering both the current performance and the outlook for a period of at
least, but not limited to, 12 months from the date of approval of the interim
financial information using the information available up to the date of issue
of this Interim Management Report.
The group manages and monitors its capital and liquidity, and applies various
stresses, including adverse inflation and interest rate scenarios, to those
positions to understand potential impacts from market downturns. Our key
sensitivities and the impacts on our capital position from a range of stresses
are disclosed in Note 6.01. These stresses 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 and that
it remains financially strong and well diversified.
Having reassessed the principal risks and uncertainties (both financial and
operational) in light of the current economic environment, as detailed on
pages 23 to 26, the directors are confident that the group and company will
have sufficient funds to continue to meet its liabilities as they fall due for
a period of, but not limited to, 12 months from the date of approval of the
financial statements and therefore have considered it appropriate to adopt the
going concern basis of accounting when preparing the financial statements.
(ii) New standards, interpretations and amendments to published standards that
have been adopted by the group
As introduced in Note 2.01 Restatement of financial information, the group has
applied IFRS 17, 'Insurance Contracts' and IFRS 9, 'Financial Instruments' on
1 January 2023.
4.01 Basis of preparation (continued)
IFRS 17, 'Insurance Contracts' - material accounting policies
Long term insurance contracts - initial measurement
Insurance contracts are contracts which transfer significant insurance risk to
the insurer at the inception of the contract. This is the case if, and only
if, an insured event could cause an insurer to make significant additional
payments in any scenario, other than a scenario which lacks commercial
substance. Such contracts remain insurance contracts until all rights and
obligations are extinguished or expire.
At inception, the group separates the following components from an insurance
or reinsurance contract and accounts for them as if they were stand-alone
financial instruments:
• derivatives embedded in the contract whose economic characteristics
and risks are not closely related to those of the host contract, and whose
terms would not meet the definition of an insurance or reinsurance contract as
a stand-alone instrument; and
• distinct investment components, i.e. investment components that are
not highly inter-related with the insurance components and for which contracts
with equivalent terms are sold, or could be sold, separately in the same
market or the same jurisdiction.
After separating any financial instrument components, the group separates any
promises to transfer to policyholders distinct goods or services other than
insurance coverage and investment services and accounts for them as separate
contracts with customers (i.e. not as insurance contracts). A good or service
is distinct if the policyholder can benefit from it either on its own or with
other resources that are readily available to the policyholder. A good or
service is not distinct and is accounted for together with the insurance
component if the cash flows and risks associated with the good or service are
highly inter-related with the cash flows and risks associated with the
insurance component, and the group provides a significant service of
integrating the good or service with the insurance component.
All of the group's in scope insurance contracts are accounted for under the
general measurement model which measures a group of insurance contracts as the
total of:
• fulfilment cash flows; and
• a contractual service margin (CSM) representing the unearned profit
the group will recognise as it provides services under the insurance contract.
Fulfilment cash flows
Fulfilment cash flows comprise unbiased and probability-weighted estimates of
future cash flows, discounted to present value to reflect the time value of
money and financial risks, plus a risk adjustment for non-financial risk. The
group's objective in estimating future cash flows is to determine the expected
value, or the probability weighted mean, of the full range of possible
outcomes, considering all reasonable and supportable information available at
the reporting date without undue cost or effort. The group estimates future
cash flows considering a range of scenarios which have commercial substance
and give a good representation of possible outcomes. The cash flows from each
scenario are probability-weighted and discounted using current assumptions.
When estimating future cash flows, the group includes all cash flows that are
within the contract boundary. The cash flows include:
• premiums and related cash flows;
• claims and benefits, including reported claims not yet paid, incurred
claims not yet reported and expected future claims;
• investment management costs incurred in the provision of an investment
return service or to enhance the benefits of an insurance contract;
• payments to policyholders resulting from embedded surrender value
options;
• an allocation of insurance acquisition cash flows attributable to the
portfolio to which the contract belongs;
• claims handling costs;
• policy administration and maintenance costs, including recurring
commissions that are expected to be paid to intermediaries for future
services;
• an allocation of fixed and variable overheads directly attributable to
fulfilling insurance contracts; and
• transaction-based taxes.
The group incorporates, in an unbiased way, all reasonable and supportable
information available without undue cost or effort about the amount, timing
and uncertainty of those future cash flows. The group estimates the
probabilities and amounts of future payments under existing contracts based on
information obtained, including:
• information about claims already reported by policyholders;
• other information about the known or estimated characteristics of the
insurance contracts;
• historical data about the group's own experience, supplemented when
necessary, with data from other sources (historical data is adjusted to
reflect current conditions); and
• current pricing information, when available.
The measurement of fulfilment cash flows includes insurance acquisition cash
flows which are allocated as a portion of premium to profit or loss (through
insurance revenue) over the period of the contract. Insurance acquisition cash
flows are considered for impairment at each reporting date.
Risk adjustment
The risk adjustment for non-financial risk for a group of insurance contracts
reflects the compensation that the group would require for bearing uncertainty
about the amount and timing of the cash flows that arises from non-financial
risk after diversification. We have calibrated the group's risk adjustment
using a Value at Risk (VAR) methodology. In some cases, the compensation for
risk on reinsured business is linked directly to the price paid for
reinsurance.
4.01 Basis of preparation (continued)
Discounting
The insurance contract fulfilment cash flows are discounted at rates that
reflect the characteristics of the insurance contract liabilities. These have
been determined using the top-down approach, starting from an appropriate
asset portfolio with deductions to remove risks in the assets that are not
present in the insurance liabilities.
Contractual service margin (CSM)
The group's CSM is a component of the asset or liability for the group of
insurance contracts that represents the unearned profit the group will
recognise as it provides services in the future. The group measures the CSM on
initial recognition at an amount that, unless the group of contracts is
onerous, results in no income or expenses arising from:
• initial recognition of the fulfilment cash flows;
• any cash flows arising from the contracts in the group at that date;
• the derecognition at the date of initial recognition of:
- any asset for insurance acquisition cash flows; and
- any other asset or liability previously recognised related to the group
of insurance contracts.
Recognition and level of aggregation
An insurance contract is recognised at the earliest of the following:
(a) the beginning of the coverage period;
(b) the date when the first payment from a policyholder becomes due; and
(c) for onerous contracts, when the contract becomes onerous.
The level of aggregation determines the unit of account at which IFRS 17
calculations are performed. This is determined firstly by dividing the
business written into portfolios. Portfolios comprise groups of contracts with
similar risks which are managed together. Portfolios are further divided based
on expected profitability at inception into three categories: onerous
contracts, contracts with no significant risk of subsequently becoming
onerous, and the remainder. IFRS 17 also requires that no group for level of
aggregation purposes may contain contracts issued more than one year apart.
Onerous contracts
For groups of contracts assessed as onerous, the group recognises a loss in
profit or loss for the net outflow, resulting in the carrying amount of the
liability for the group being equal to the fulfilment cash flows and the CSM
of the group being zero. A loss component is established by the group for the
liability for remaining coverage for an onerous group, which represents the
losses recognised.
Reinsurance contracts - initial measurement
The initial measurement of reinsurance contracts held follows the same
principles as those for insurance contracts issued, with the exception of the
following:
• reinsurance contracts are recognised from the earlier of the
following:
- the beginning of the coverage period; and
- the date the entity recognises an onerous group of underlying insurance
contracts, if the entity entered into the related reinsurance contract held in
the group of reinsurance contracts held at or before that date.
• measurement of the cash flows includes an allowance on a
probability-weighted basis for the effect of any non-performance by the
reinsurers, including the effects of collateral and losses from disputes;
• the group determines the risk adjustment for non-financial risk so
that it represents the amount of risk being transferred to the reinsurer;
• both day one gains and day one losses are not recognised at initial
recognition in the statement of financial position but are deferred into the
CSM and released to profit or loss as the reinsurer renders services, except
for any portion of a day 1 loss that relates to events before initial
recognition; and
• if the reinsurance contract is recognised prior to a loss-making
underlying contract, the reinsurance CSM can be adjusted to offset a portion
of the inception loss (the loss recovery component).
Long term insurance contracts - subsequent measurement
The group measures the carrying amount of a group of insurance contracts at
the end of each reporting period as the sum of:
(i) the liability for remaining coverage comprising fulfilment cash
flows related to future service allocated to the group at that date and the
CSM of the group at that date; and
(ii) the liability for incurred claims for the group reflecting the
fulfilment cash flows related to past service allocated to the group at that
date.
Contractual service margin - measurement
The CSM at the end of the reporting period represents the profit in the group
of insurance contracts that has not yet been recognised in profit or loss,
because it relates to future service to be provided.
For a group of insurance contracts the carrying amount of the CSM of that
group at the end of the reporting period equals the carrying amount at the
beginning of the reporting period adjusted for:
4.01 Basis of preparation (continued)
• the effect of any new contracts added;
• interest accreted on the carrying amount of the CSM during the
reporting period, measured at the discount rates at initial recognition;
• the changes in fulfilment cash flows relating to future service,
except to the extent that:
- such increases in the fulfilment cash flows exceed the current carrying
amount of the CSM, giving rise to a loss; or
- such decreases in the fulfilment cash flows are allocated to the loss
component of the liability for remaining coverage;
• the amount recognised as insurance revenue because of the transfer of
services in the period, determined by allocation of the contractual service
margin at the end of the period over the current and remaining coverage
period; and
• the effect of any currency exchange differences on the CSM.
The changes in fulfilment cash flows relating to future service that adjust
the CSM comprise of:
• experience adjustments that arise from the difference between the
premium receipts (net of refunds) and any related cash flows such as insurance
acquisition cash flows and insurance premium taxes and the estimate, at the
beginning of the period, of the amounts expected. Differences related to
premiums received (or due) in respect of current or past services are
recognised immediately in profit or loss while differences related to premiums
received (or due) for future services are adjusted in the CSM;
• changes in estimates of the present value of future cash flows in the
liability for remaining coverage, except those relating to the time value of
money and changes in financial risk (which are instead recognised in the
statement of profit or loss and other comprehensive income);
• differences between any investment component expected to become
payable in the period and the actual investment component that becomes payable
in the period; and
• changes in the risk adjustment for non-financial risk that relate to
future service.
Adjustments to the CSM noted above are measured at discount rates that reflect
the characteristics of the cash flows of the group of insurance contracts at
initial recognition (i.e. the weighted average of the rates applicable at the
date of initial recognition of contracts that joined a group over a 12-month
period).
Onerous contracts
Groups of contracts that were not onerous at initial recognition can
subsequently become onerous if assumptions and experience changes. The group
establishes a loss component for any onerous group depicting the future losses
recognised. The loss component is released based on a systematic allocation of
the subsequent changes in the fulfilment cash flows to: (i) the loss
component; and (ii) the liability for remaining coverage excluding the loss
component. The loss component is also updated for subsequent changes in
estimates of the fulfilment cash flows related to future service. The
systematic allocation of subsequent changes to the loss component results in
the total amounts allocated to the loss component being equal to zero by the
end of the coverage period of a group of contracts (since the loss component
will have materialised in the form of incurred claims). The loss component
ensures that over the duration of the contract, the correct amounts are
recognised as insurance revenue and insurance service expenses.
Contractual service margin - recognition
The amount of contractual service margin recognised in the income statement
for a group of insurance contracts reflects the insurance contract services
provided. The proportion of the CSM earned is calculated as the amount of
coverage units provided in the period divided by the sum of all the future and
current period coverage units. The group has elected to discount the future
coverage units in this calculation. The table below indicates the main
insurance contracts services provided under the group's insurance contracts
and selected coverage unit(s) used to measure those services.
Insurance contract Insurance service Coverage unit(s)
Immediate annuity Payment of insurance claims Expected annual claims payments
Deferred annuity Payment of insurance claims (payment phase) Expected annual claims payments
Investment return service (deferral phase) Expected investment return on backing assets
Lump sum death benefits (deferral phase) Sum assured
Longevity swaps Payment of floating leg of swap Expected annual floating leg payments
Retail Protection Potential mortality or morbidity claims Sum assured
Group Protection Potential mortality or morbidity claims Sum assured
Where a specific unit of account contains a mixture of services, and therefore
coverage units, it is necessary to weight the coverage units so that the
resulting profile of CSM release reflects the overall package of benefits
provided. This is particularly pertinent to units of account incorporating a
combination of immediate and deferred annuities. Under IFRS 17, deferred
annuities usually provide multiple services, split between the two phases of
benefit provision (the deferral phase and the payment phase). Significant
judgement is therefore required to combine the different coverage units so
that they fairly reflect the services provided. The weighting between the
deferral phase and the payment phase coverage units is calculated so that the
services provided in the deferral phase reflect the investment return provided
and the probability weighted delivery of any lump sum death benefits, both
adjusted so that all of the CSM is earned in the deferral phase for all
contracts which do not enter the payment phase either through transfer out,
withdrawal of funds or death.
Investment components
The group identifies the investment component of a contract by determining the
amount that it would be required to repay to the policyholder in all scenarios
with commercial substance. Investment components are not included in insurance
revenue and insurance service expenses.
4.01 Basis of preparation (continued)
Insurance finance income and expense
IFRS 17 requires an accounting policy decision as to whether to recognise all
finance income or expense in profit or loss, or whether to disaggregate the
income or expense that relates to changes in financial assumptions into other
comprehensive income. All finance income and expense will be included in
profit or loss except for protection business where this is disaggregated.
Changes in the risk adjustment for non-financial risk have been disaggregated
between insurance service result and insurance finance income and expenses.
Reinsurance contracts held - subsequent measurement
The subsequent measurement of reinsurance contracts held follows the same
principles as those for insurance contracts issued except that changes in the
fulfilment cash flows are recognised in profit or loss if the related changes
arising from the underlying ceded contracts are recognised in profit or loss.
Derecognition and contract modification of insurance contracts
The group derecognises a contract when it is extinguished, i.e. when the
specified obligations in the contract expire or are discharged or cancelled.
The group also derecognises a contract if its terms are modified in a way that
would have changed the accounting for the contract significantly had the new
terms always existed, in which case a new contract based on the modified terms
is recognised. If a contract modification does not result in derecognition,
then the group treats the changes in cash flows caused by the modification as
changes in estimates of fulfilment cash flows.
If a contract is derecognised because its terms are modified, then the CSM is
also adjusted for the premium that would have been charged had the group
entered into a contract with the new contract's terms at the date of
modification, less any additional premium charged for the modification. The
new contract recognised is measured assuming that, at the date of
modification, the group received the premium that it would have charged less
any additional premium charged for the modification.
Transition to IFRS 17
On transition to IFRS 17, the group has applied the full retrospective
approach unless impracticable. The full retrospective approach requires the
group to:
• identify, recognise and measure each group of insurance and
reinsurance contracts as if IFRS 17 had always applied;
• derecognise any existing balances that would not exist had IFRS 17
always applied; and
• recognise any resulting net difference in equity.
If it was impracticable to apply a full retrospective approach to a group of
contracts then the group has chosen between the modified retrospective
approach and the fair value approach. If the group could not obtain reasonable
and supportable information necessary to apply the modified retrospective
approach, then the fair value approach has been chosen.
The group has applied the following transition approaches to its material
insurance contract portfolios on transition to IFRS 17, by year of issue:
Transition approach Annuities UK Protection US Protection
Full retrospective 2021 2021 2021
Modified retrospective 2016-2020 2012-2020 2011-2020
Fair value Pre-2016 Pre-2012 Pre-2011
Full retrospective approach
The full retrospective approach has been determined to be impracticable where
the effects of retrospective application are not determinable because
information required has not been collected (or not with sufficient
granularity), application would require the application of hindsight, or
information is unavailable because of system migrations, data retention
requirements or other reasons. Specific examples include:
• historic calibration of IFRS 17 specific judgements, such as the scale
of the risk adjustment;
• expectations about a contract's profitability and risks of becoming
onerous required for identifying groups of contracts;
• information about historical cash flows and discount rates required
for determining the estimates of cash flows on initial recognition and their
subsequent changes on a retrospective basis;
• information required to allocate fixed and variable overheads to
groups of contracts, because the group's current accounting policies do not
require such information; and
• information about certain changes in assumptions and estimates because
they were not documented on an ongoing basis.
Modified retrospective approach
The objective of the modified retrospective approach is to achieve the closest
outcome to retrospective application possible using reasonable and supportable
information available without undue cost or effort.
The only modification applied by the group is that for some groups of
contracts issued before 2020, the risk adjustment for non-financial risk on
initial recognition has been determined by adjusting the amount at 1 January
2022 for the expected release of risk before that date. The expected release
has been determined with reference to the release of risk of similar contracts
that the group issued in 2022. This modification has been used to avoid the
application of hindsight to the calibration of the risk adjustment in prior
periods.
4.01 Basis of preparation (continued)
Fair value approach
The group has applied the fair value approach on transition for certain groups
of contracts as, prior to transition, it grouped contracts from multiple
cohorts and years into a single unit for accounting purposes. Obtaining
reasonable and supportable information to apply the full retrospective
approach was impracticable without undue cost or effort. The group has
determined the CSM of the liability for remaining coverage at the transition
date, as the difference between the fair value of the group of insurance
contracts and the fulfilment cash flows measured at that date. In determining
fair value, the group has applied the requirements of IFRS 13, 'Fair Value
Measurement', except for the demand deposit floor requirement. The fair value
attributed to the in-scope annuity business is calculated with reference to a
price generated using the group's pricing models and pricing assumptions at
the transition date. This incorporates an expected internal rate of return
that has been validated against relevant market transactions.
The group has aggregated contracts issued more than one year apart in
determining groups of insurance contracts under the fair value approach at
transition, applying the permitted transition simplification. The group did
not have reasonable and supportable information to aggregate groups into those
including only contracts issued within one year.
For portfolios of protection contracts, the group has elected to disaggregate
insurance finance income or expenses between amounts included in profit or
loss and amounts included in other comprehensive income. For these portfolios,
the cumulative amount of insurance finance income or expense recognised in
other comprehensive income at the transition date and has been reset to zero
in line with the provisions of the standard.
Financial impact of transition
The increase in insurance liabilities on adoption of IFRS 17 at 1 January 2022
can be attributed to the following:
Impact on net
insurance contract liabilities
on transition to IFRS 17
£m
Remeasurement of liabilities: the IFRS 17 cash flows are best estimate and 7,540
exclude all prudent margins included in the IFRS 4 liabilities. Removal of
these margins coupled with other changes to the insurance contract
measurement, including discount rates and the exclusion of non-attributable
expenses, results in a lower best estimate liability
Creation of a risk adjustment: IFRS 17 incorporates a specific risk adjustment (2,501)
for non-financial risk
Creation of CSM: determined using the transition approaches described above (11,224)
and reflecting the unearned profit of these contracts
Total (6,185)
IFRS 9, 'Financial Instruments' - material accounting policies
Recognition and derecognition
Initial recognition of financial assets and liabilities is on the trade date,
which is the date on which the group becomes a party to the contractual
provisions of the instrument. A financial asset or financial liability is
initially measured at fair value plus, for a financial asset
or financial liability not measured at fair value through profit or loss,
transaction costs that are directly attributable to its acquisition or issue.
When the fair value of financial assets and liabilities differs from the
transaction price on initial recognition, the group recognises the difference
as follows:
• when the fair value is evidenced by a quoted price in an active market
for an identical asset or liability (i.e. a Level 1 input) or based on a
valuation technique that uses only data from observable markets, the
difference is recognised as a gain or loss; and
• in all other cases, the difference is deferred and the timing of
recognition of deferred day one profit or loss is determined individually. It
is either amortised over the life of the instrument, deferred until the
instrument's fair value can be determined using market observable inputs or
realised through settlement.
Financial assets are derecognised only when the contractual rights to the cash
flows from the asset expire, or when the group transfers substantially all the
risks and rewards of ownership to another entity. This is the case for cash
collateral pledged, where the counterparty has contractual rights to receive
the cash flows generated, and which is derecognised from the Consolidated
Balance Sheet and a corresponding receivable recognised for its return.
The group enters into transactions whereby it transfers assets recognised in
its Consolidated Balance Sheet, but retains either all or substantially all of
the risks and rewards of the transferred assets. In these cases, the
transferred assets are not derecognised. Examples of such transactions are
repurchase agreements and non-cash collateral pledged, unless the group
defaults on its obligations under the relevant agreement.
In transactions in which the group neither retains nor transfers substantially
all of the risks and rewards of ownership of a financial asset and it retains
control over the asset, the group continues to recognise the asset to the
extent of its continuing involvement, determined by the extent to
which it is exposed to changes in the value of the transferred asset.
The group derecognises a financial liability when its contractual obligations
expire or are discharged or cancelled. The group also derecognises a financial
liability when its terms are modified and the cash flows of the modified
liability are substantially different, in which case a new financial liability
based on the modified terms is recognised at fair value.
On derecognition of a financial asset or financial liability, the difference
between the carrying amount at the date of derecognition and the consideration
received (including any new asset obtained less any new liability assumed) is
recognised in profit or loss.
Modification
If the terms of a financial asset are modified, then the group evaluates
whether the cash flows of the modified asset are substantially different. If
the cash flows are substantially different, then the contractual rights to
cash flows from the original financial asset are deemed to have expired. In
this case, the original financial asset is derecognised and a new financial
asset is recognised at fair value plus any eligible transaction costs.
4.01 Basis of preparation (continued)
Classification and measurement
Financial assets
The group classifies its financial investments on initial recognition as
measured at amortised cost (AC), fair value through Other Comprehensive Income
(FVOCI) and fair value through profit or loss (FVTPL).
The classification and measurement of financial assets depends on their
contractual cash flow characteristics and how they are managed (the entity's
business model). The contractual cash flow characteristics test aims to
identify those assets with cash flows consistent with a basic lending
arrangement, i.e. which are 'solely payments of principal and interest'
(SPPI). The business model test refers to how an entity manages its financial
assets with the objectives of generating cash flows. These factors determine
whether the financial assets are measured at amortised cost, FVOCI or FVTPL.
Assets are therefore typically characterised as follows:
• amortised cost: financial assets with contractual terms that give rise
solely to interest and principal cash flows, and which are held in a business
model whose objective is to hold the assets to collect their cash flows. They
are measured at amortised cost using the effective interest method. Interest
income, foreign exchange gains and losses and impairment are recognised in
profit or loss. Any gain or loss on derecognition is also recognised in profit
or loss;
• FVOCI: financial assets with contractual terms that give rise solely
to interest and principal cash flows, and which are held in a business model
whose objective is achieved by holding the assets to collect their cash flows
and selling them. Interest income calculated using the effective interest
method, foreign exchange gains and losses and impairment are recognised in
profit or loss. Other net gains and losses are recognised in other
comprehensive income. On derecognition, gains and losses accumulated in OCI
are reclassified to profit or loss;
• FVTPL: all other financial assets. Net gains and losses, including any
interest or dividend income and foreign exchange gains and losses, are
recognised in profit or loss, unless they arise from derivatives designated as
hedging instruments in net investment hedges.
Notwithstanding the above, on initial recognition the group may irrevocably
designate to FVTPL a financial asset that would otherwise be measured at
amortised cost or FVOCI if doing so eliminates or greatly reduces an
accounting mismatch.
In making the SPPI assessment, the group considers whether the contractual
cash flows are consistent with a basic lending arrangement (that is, interest
includes only consideration for the time value of money, credit risk, other
basic lending risks and a profit margin that is consistent with a basic
lending arrangement). This includes evaluating whether the financial asset
contains a contractual term that could change the timing or amount of
contractual cash flows such that it would not meet this condition. Examples of
such contractual terms to be considered are contingent events that would
change the amount or timing of cash flows, leverage features, prepayment and
extension features, non-recourse asset arrangements and features that modify
consideration for the time value of money (e.g. periodic reset of interest
rates).
The business model reflects how the group manages assets in order to generate
cash flows, i.e. it reflects whether the group's objective is solely to
collect the contractual cash flows from assets or to collect both the
contractual cash flows and cash flows arising from the sale of assets. If
neither of these is applicable (for example, financial assets are held for
trading purposes), the business model is 'other' and the financial asset is
measured at FVTPL. Factors considered by the group in determining the business
model for a group of assets include past experience on how the cash flows for
these assets were collected, how the asset's performance is evaluated and
reported to key management personnel, how risks are assessed and managed, and
how managers are compensated.
The objective of the group's business model for certain debt instruments, in
particular those instruments backing annuity or investment contract
liabilities, including surplus assets, is to fund its liabilities. Consistent
with the group's investment strategy their performance is evaluated on a total
return basis, as significant buying and selling activity is undertaken on a
regular basis to rebalance its portfolio and to ensure that contractual cash
flows from those assets are sufficient to settle the underlying liabilities.
These investments do not follow a 'held to collect' or 'held to collect and
sell' business model, and are therefore accounted for at FVTPL. This business
model is also applicable to reverse repurchase agreements and to derivatives.
Equity instruments are accounted for at FVTPL.
Certain debt securities are held in separate portfolios for longer-term yield.
These include long dated debt instruments backing annuities liabilities, but
in surplus to the IFRS 17 best estimate liability and risk adjustment, used to
manage interest and inflation rate exposure, as well as assets backing
protection liabilities. These assets represent instruments consistent with the
SPPI principles, and are accounted for at amortised cost or FVOCI depending on
the expected level of trading. Receivables are accounted for at amortised
cost.
Financial liabilities
The group classifies and subsequently measures financial liabilities at
amortised cost or FVTPL.
Non-participating investment contract liabilities are measured at FVTPL. This
is because these liabilities as well as the related assets are managed and
their performance is evaluated on a fair value basis. For unit linked
liabilities, fair value is determined by reference to the value of the
underlying net asset values of the group's unitised investment funds at the
balance sheet date. For non-linked liabilities, fair value is based on a
discounted cash flow analysis which incorporates an appropriate allowance for
credit default risk. Deposits collected and claims are not included in the
income statement but are added or deducted from investment contract
liabilities.
Borrowings are recognised initially at fair value, net of transaction costs.
Borrowings are subsequently stated at amortised cost. The difference between
the net proceeds and the redemption value is recognised in the income
statement over the borrowing period using the effective interest rate method.
Other financial liabilities include derivative liabilities, repurchase
agreements and trail commission, which are measured at FVTPL, while other
payable balances are measured at amortised cost.
4.01 Basis of preparation (continued)
Derivatives
Derivatives are initially recognised at fair value on the date on which the
derivative contract is entered into. The group's derivatives, other than those
designated as hedging instruments in net investment hedges, are instruments
held for trading, as they are held principally for the purpose of selling in
the near term or are part of a portfolio of financial instruments that are
managed together, and for which there is evidence of a recent actual pattern
of short-term profit-taking. They are therefore accounted for at FVTPL.
Derivatives may be embedded in another contractual arrangement. If such a
hybrid contract contains a host that is a financial asset, the group assesses
the entire contract for classification and measurement purposes. Otherwise,
the group accounts for an embedded derivative separately from the host
contract when:
• its economic characteristics and risks are not closely related to
those of the host contract;
• the terms of the embedded derivative would have met the definition of
a derivative if they were contained in a separate contract; and
• the hybrid contract is not measured at FVTPL.
These embedded derivatives are separately accounted for at FVTPL, unless the
group chooses to designate the entire hybrid contract at FVTPL.
A derivative embedded in a host insurance or reinsurance contract is not
accounted for separately from the host contract if the embedded derivative
itself meets the definition of an insurance or reinsurance contract.
Impairment
The group assesses on a forward-looking basis the expected credit loss (ECL)
associated with its financial assets measured at amortised cost and FVOCI, and
recognises a loss allowance for such losses at each reporting date. Expected
credit losses are defined as the present value of the difference between all
contractual cash flows that are due and all cash flows that the entity expects
to receive (i.e. the cash shortfall), weighted based on their probability of
occurrence. The loss allowance recognised under the new standard can be equal
to an amount corresponding to a 12-month ECL or a lifetime ECL. A lifetime ECL
is the ECL resulting from all possible default events over the expected life
of the financial asset; a 12-month ECL is the portion of lifetime ECL
resulting from default events on a financial asset that are possible within
the 12 months after the reporting date.
The group defines default on a financial asset as the inability to meet in
full and on time an original promise of expected cash flows, the amount and
timing of which are defined with certainty. Any breach of this promise, by any
amount or time (in excess of any potential planned grace period), constitutes
a default. This is consistent with the definition of default used for internal
credit risk management purposes.
The ECL model is run from the date of initial recognition of a financial
asset, and its output updated at every reporting period, even if no actual
loss events have taken place. The impact of updating the inputs of the ECL
model in the reporting period is recognised in profit or loss directly where
it affects the carrying value of financial assets at amortised cost, while for
assets at FVOCI an equal and opposite movement is recorded in other
comprehensive income.
In order to determine whether the group measures ECLs at an amount equal to
12-month ECL or lifetime ECL, at each reporting period the group is required
to assess which 'stage' a financial asset falls into. Stages reflect the
general pattern of deterioration in credit risk of a financial instrument that
ultimately defaults, as follows:
• Stage 1 includes financially healthy financial assets that are
expected to perform in line with their contractual terms, and which have no
signs of increased credit risk;
• Stage 2 includes financial assets for which a significant increase in
credit risk has occurred since initial recognition, but which are not
credit-impaired; and
• Stage 3 applies to credit-impaired financial instruments.
When financial assets are under Stage 1, 12-month ECLs are recognised. When
financial assets are under Stage 2 or 3, lifetime ECLs are recognised. An
instrument moves down (or up) the stages when a significant increase in credit
risk (SICR) has happened (or has reversed).
When determining whether the credit risk of a financial instrument has
increased significantly since initial recognition, the group considers
reasonable and supportable information, both qualitative and quantitative,
that is relevant and is available without undue cost or effort, including
forward-looking information at its disposal. Key indicators used in order to
determine whether a SICR has occurred (either in isolation or in combination)
are:
• deterioration in rating grade between origination date and reporting
date. The level of deterioration required by an individual asset is determined
using a relative rating matrix;
• exposure is identified on the investment managers' 'watchlist';
• exposure is identified on internal 'credit watchlists'; and
• a manual shift of an exposure to Stage 2 on an exceptional basis
(where required, using management judgement).
The provisions of IFRS 9 include a rebuttable presumption that the credit risk
on a financial asset has increased significantly since initial recognition
when contractual payments are more than 30 days past due, which is taken into
account for this assessment.
The group makes use of a practical expedient available in IFRS 9 whereby it
can be assumed that the credit risk on a financial instrument has not
increased significantly since initial recognition if the financial instrument
is determined to have low credit risk at the reporting date (e.g. investment
grade as determined by the group's asset managers). This allows recognition of
12-month ECLs as opposed to, potentially, lifetime ECLs. This is deemed to be
the case where assets that have been downgraded remain of good credit quality
(i.e. investment grade as determined by the group's asset managers) as at the
reporting date, to the extent that the group's internal credit risk ratings
are considered to be consistent with a globally understood definition of 'low
credit risk'.
4.01 Basis of preparation (continued)
The group estimates ECLs on its financial investments at amortised cost and
debt instruments at FVOCI by using the probability of default approach. Based
on this method, the ECLs are a probability-weighted estimate of the present
value of estimated cash shortfalls, i.e. the weighted average of credit
losses, with the respective risks of a default occurring used as the
weightings. For this purpose, the key elements to be calculated are the
Probability of Default (PD), i.e. the estimate of the likelihood of default
over a given time horizon (either 12 months or lifetime); the respective Loss
Given Default (LGD); and the Exposure at Default (EAD).
In order to determine 12-month or lifetime PDs the group's models utilise
historical data obtained from S&P and Moody's in order to evaluate
transitions (i.e. the probability that a security changes rating in a given
year) and defaults, plus scenario-specific annual scaling factors which adjust
the PDs for forward-looking information. The final PDs produced by the model
are unconditional, i.e. they incorporate both the probability of not
defaulting until the start of the period, and the subsequent probability of
default in that period, conditional on the position not having defaulted to
that point. This allows them to be summed over 12 months to provide 12-month
PD estimates, or over all remaining months to produce lifetime PD estimates.
LGD is the magnitude of the likely loss if there is a default, based on the
history of recovery rates of claims against defaulted counterparties, and
taking into account collateral values where applicable.
EAD represents the expected exposure in the event of a default. The group
estimates LGD based on the history of recovery rates of claims against
defaulted counterparties. Appropriate haircuts are applied to baseline
unsecured LGDs and used in conjunction with forecast collateral values to
estimate LGD for assets secured by collateral.
The group has adopted a simplified approach for trade receivables, contract
assets and finance and operating lease receivables. This allows measurement of
lifetime ECLs only, thereby removing the need to identify SICRs. For these
balances, the group makes use of provision matrices in order to calculate such
lifetime ECLs. This is a practical expedient allowed by IFRS 9 whereby
historical credit loss experience and fixed loss rates are applied to the
balances outstanding. Historical loss rates are adjusted to allow for forward
looking information.
Hedge accounting
The group uses hedge accounting, provided the prescribed criteria are met, to
recognise the offsetting effects of changes in the fair value or cash flow of
the derivative instrument and the hedged item. Hedge accounting can be applied
in order to:
• hedge the exposure to fair value movements of a recognised asset or
liability or an unrecognised firm commitment, or a component of any such item,
that is attributable to a particular risk and could affect the Consolidated
Income Statement;
• hedge the exposure to variability in cash flows attributable to a
particular risk associated with all, or a component of, a recognised asset or
liability, or a highly probable forecast transaction, that could affect the
Consolidated Income Statement; and
• hedge the exposure to the currency risk associated with a net
investment in a foreign operation.
The relationship between the hedging instrument and the hedged item, together
with the risk management objective and strategy for undertaking the hedge
transaction, are documented formally at the inception of the transaction. The
documentation includes identification of the hedging instrument, the hedged
item, the nature of the risk being hedged and how the group will assess
whether the hedging relationship meets the hedge effectiveness requirements
(including the analysis of sources of hedge ineffectiveness and how the hedge
ratio is determined). A hedging relationship qualifies for hedge accounting if
it meets all of the following effectiveness requirements:
• there is an economic relationship between the hedged item and the
hedging instrument;
• the effect of credit risk does not dominate the value changes that
result from that economic relationship; and
• the hedge ratio of the hedging relationship is the same as that
resulting from the quantity of the hedged item that the group actually hedges
and the quantity of the hedging instrument that the group actually uses to
hedge that quantity of hedged item.
Currently, the group hedges part of the foreign exchange translation exposure
on its net investment in certain overseas subsidiaries, using forward foreign
exchange contracts. It recognises the effective portion of the gain or loss on
the hedging items, together with the gain or loss on translation of the
foreign subsidiaries, in the Consolidated Statement of Comprehensive Income
and in a separate reserve within equity. Gains and losses accumulated in
equity are included in the Consolidated Income Statement on disposal of the
relevant hedged item.
Transition to IFRS 9
On transition, changes in accounting policies resulting from the adoption of
IFRS 9 have been applied retrospectively.
In line with IFRS 17 the group has chosen to restate comparative periods under
IFRS 9. While the standard does not apply to financial assets already
derecognised by 1 January 2023, the group has applied a 'classification
overlay' as allowed by the standard. When applying IFRS 9 and IFRS 17 at the
same time, the classification overlay permits presentation of comparative
information as if the classification, measurement and impairment requirements
of IFRS 9 had been applied to such assets, irrespective of derecognition date.
For the purpose of classification and measurement, financial assets' business
models have been assessed as at the date of initial application and have been
applied consistently in all periods presented. If an asset was in scope of the
classification overlay described above, the group aligned the classification
and measurement of each financial asset in the comparative periods with what
it expected it would have been on 1 January 2023. Such assessment was
performed based on reasonable and supportable information available at 1
January 2022, the transition date. Any difference between the IAS 39 carrying
amount of a financial asset and the carrying amount at the transition date
that results from applying IFRS 9 or the classification overlay was recognised
in opening retained earnings.
4.01 Basis of preparation (continued)
For the purpose of impairment, the group assessed whether as at 1 January 2023
there had been a SICR as compared to the date that a financial instrument was
initially recognised, and applied a 12-month or lifetime ECL accordingly. The
group chose to apply the impairment requirements of IFRS 9 consistently to all
of the applicable financial instruments on its books during the comparative
periods. To the extent the classification overlay applied and therefore an
asset was derecognised by 1 January 2023, any expected credit losses
recognised in the comparative periods were reversed upon disposal. The low
credit risk practical expedient described previously was also available for
the purpose of transition, and the group made use of this in line with set
criteria. On transition to IFRS 9, any additional provision recognised when
compared to IAS 39 was recognised in opening retained earnings. However, if
this related to a financial asset at FVOCI, an equal and opposite movement was
reflected in the OCI reserve.
Changes to hedge accounting policies have been applied prospectively from 1
January 2023. All hedging relationships designated under IAS 39 at 31 December
2022 met the criteria for hedge accounting under IFRS 9 at 1 January 2023 and
were therefore regarded as continuing hedging relationships.
Classification and measurement
The following table explains the original measurement categories under IAS 39
and the new measurement categories under IFRS 9 for each class of the group's
financial assets as at 1 January 2023, including the reasons for any
reclassifications out of the FVTPL category. No changes to classification and
measurement of financial liabilities have resulted from the implementation of
IFRS 9.
31 December 2022 Reclassification (before remeasurement) Remeasurement 1 January 2023
IAS 39 measurement IFRS 9 measurement
Category Amount ECL Other Category Amount
£m £m £m £m £m
Financial investments at FVTPL
Equity securities FVTPL 167,335 FVTPL 167,335
Debt securities FVTPL 217,613 (6,425) FVTPL 211,188
- To debt securities at amortised cost (5,946)
- To debt securities at FVOCI (479)
Loans FVTPL 14,283 FVTPL 14,283
Derivative assets - held for trading FVTPL 45,427 FVTPL 45,427
Total financial investments at FVTPL 444,658 (6,425) 438,233
Financial investments - available for sale
Debt securities AFS(1) 789 (789)
- To debt securities at amortised cost (789)
Total financial investments AFS 789 (789)
Financial investments at FVOCI
Debt securities 479 FVOCI 479
- From debt securities at FVTPL 479
Total financial investments at FVOCI 479 479
Total financial investments at fair value 445,447 (6,735) 438,712
Financial investments at amortised cost
Loans L&R(2) 28 (27)(3) AC 1
Debt securities 6,735 (35) 1,145 AC 7,845
- From debt securities AFS 789
- From debt securities at FVTPL 5,946
Total financial investments at amortised cost 28 6,735 (35) 1,118 7,846
Other financial assets
Reinsurance receivables L&R(2) 291 (291)(3) N/A
Insurance and intermediaries receivables L&R(2) 76 (76)(3) N/A
Other receivables L&R(2) 9,632 (9)(3) AC 9,623
Cash and cash equivalents L&R(2) 35,784 AC 35,784
Total other financial assets 45,783 (376) 45,407
Total financial assets 491,258 (35) 742 491,965
1. Available-for-sale. Under IAS 39, financial assets classified as
available-for-sale were measured at fair value with unrealised gains and
losses recognised in a separate reserve within equity.
2. Loans and receivables. Under IAS 39, loans and receivables were
non-derivative financial assets with fixed or determinable payments not quoted
in an active market. These excluded assets held for trading and those
designated as available-for sale or fair value through profit or loss.
3. Derecognition of balances that do not exist under IFRS 17 as they are
now included in the insurance contract liability on an IFRS 17 basis.
4.01 Basis of preparation (continued)
Remeasurement from FVTPL to amortised cost:
As part of the implementation of IFRS 9, the group has reassessed the
classification and measurement of certain financial assets backing annuity
liabilities, in order to better match interest rate and inflation
sensitivities to IFRS 17 liabilities, and reclassified a portion of its
portfolio of debt securities previously held at FVTPL. This is because, while
the best estimate liability and risk adjustment under IFRS 17 for annuities
are measured with current financial assumptions, the CSM is measured with
locked-in discount rates. Therefore, a sub-portfolio of long dated debt
instruments amounting to £5,603m (including accrued interest, as at 1 January
2023) backing annuity contracts but in surplus to the IFRS 17 best estimate
liability and risk adjustment, and passing the SPPI test, was separately
identified. Starting 1 January 2023 these assets have been used to manage
interest and inflation rate exposure. They are held to maturity in a 'held to
collect' business model and accounted for at amortised cost. Other assets
reclassified in the group's Insurance business, notably private placements and
commercial mortgage loans in the US business, were previously accounted for at
FVTPL in order to eliminate or reduce an accounting mismatch. Following the
implementation of IFRS 17 this is no longer required as finance income and
expense on the insurance liabilities that these assets are held to back are
presented in OCI. The assets pass the SPPI test and are held in a 'held to
collect' business model, and are therefore accounted for at amortised cost.
Had such assets remained at FVTPL after 1 January 2023, the group would have
recorded fair value losses in the Consolidated Income Statement of £425m
during the period. Interest income recognised in the Consolidated Income
Statement in the period was £52m, and the effective interest rate as at 1
January 2023 was 3.59%. The fair value as at 30 June 2023 of these assets is
£5,627m.
Remeasurement from FVTPL to FVOCI
Under IAS 39, bonds (including US Treasury bonds) backing certain protection
liabilities were held at FVTPL in order to eliminate or reduce an accounting
mismatch. Following the implementation of IFRS 17 this is no longer required,
as finance income and expense on the insurance liabilities that these assets
are held to back, are presented in OCI. The assets pass the SPPI test and are
held in a 'held to collect and sell' business model, and are therefore
accounted for at FVOCI.
Had such assets remained at FVTPL after 1 January 2023, the group would have
recorded fair value gains in the Consolidated Income Statement of £7m during
the period. Interest income recognised in the Consolidated Income Statement in
the period was £8m, and the effective interest rate as at 1 January 2023 was
2.75%. The fair value of these assets as at the end of the reporting period is
£427m.
Impairment
The following table reconciles the closing impairment allowance under IAS 39
as at 31 December 2022 with the opening loss allowance under IFRS 9 as at 1
January 2023 for financial assets subject to the impairment requirements of
IFRS 9.
31 December 2022 Remeasurement 1 January 2023
IAS 39 loan loss provision £m IFRS 9 loan loss provision
£m £m
Debt securities at FVOCI / Debt securities AFS - 3 3
Debt securities at amortised cost - 35 35
Other receivables 4 - 4
Total 4 38 42
Other standards
The group has also applied the following standards and amendments for the
first time in its six months reporting period commencing 1 January 2023, which
did not give rise to a material impact on the group's consolidated financial
statements.
• International Tax Reform - Pillar Two Model Rules (Amendments to IAS
12);
• Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12);
• Definition of Accounting Estimates (Amendments to IAS 8); and
• Disclosure of Accounting policies (Amendments to IAS 1 and IFRS
Practice Statement 2).
The group has not early adopted any standard, interpretation or amendment that
has been issued but is not yet effective.
4.02 Dividends and appropriations
Dividend Per share(1) Dividend Per share(1) Dividend Per share(1)
6 months 6 months 6 months 6 months Full year Full year
2023 2023 2022 2022 2022 2022
£m p £m p £m p
Ordinary dividends paid and charged to equity in the period:
- Final 2021 dividend paid in June 2022 - - 792 13.27 792 13.27
- Interim 2022 dividend paid in September 2022 - - - - 324 5.44
- Final 2022 dividend paid in June 2023 831 13.93 - - - -
Total dividends(2) 831 13.93 792 13.27 1,116 18.71
1. The dividend per share calculation is based on the number of equity
shares registered on the ex-dividend date.
2. The dividend proposed at 31 December 2022 was £829m based on the
current number of eligible equity shares on that date.
Subsequent to 30 June 2023, the directors declared an interim dividend of 5.71
pence per ordinary share. This dividend will be paid on 26 September 2023. It
will be accounted for as an appropriation of retained earnings in the year
ended 31 December 2023 and is not included as a liability in the Consolidated
Balance Sheet as at 30 June 2023.
4.03 Financial investments and investment property
Restated Restated
30 Jun 30 Jun 31 Dec
2023 2022 2022
£m £m £m
Equities(1) 177,368 182,847 167,335
Debt securities(2,3) 218,749 238,483 219,512
Derivative assets(4) 46,749 28,017 45,427
Loans(5) 12,101 13,460 14,284
Financial investments 454,967 462,807 446,558
Investment property 9,227 10,976 9,372
Total financial investments and investment property 464,194 473,783 455,930
1. Equity securities include investments in unit trusts of £18,522m (30
June 2022: £17,572m; 31 December 2022; £16,524m).
2. Debt securities include accrued interest of £1,691m (30 June 2022:
£1,497m; 31 December 2022: £1,635m) and include £7,545m (30 June 2022:
£7,775m; 31 December 2022: £7,845m) of assets valued at amortised cost.
3. A detailed analysis of debt securities to which shareholders are
directly exposed is disclosed in Note 7.03.
4. Derivatives are used for efficient portfolio management, particularly
the use of interest rate swaps, inflation swaps, currency swaps and foreign
exchange forward contracts for asset and liability management. Derivative
assets are shown gross of derivative liabilities of £49,939m (30 June 2022:
£34,044m; 31 December 2022: £51,190m).
5. Loans include £5m (30 June 2022: £72m; 31 December 2022: £1m) of
loans valued at amortised cost.
4.03 Financial investments and investment property (continued)
(i) 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 modelling
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 investment properties are valued by appropriately qualified
external valuers using unobservable inputs, resulting in all investment
property being classified as Level 3.
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. At 30 June 2023 debt securities totalling net £3.7bn
transferred from Level 1 to Level 2 in the fair value hierarchy (30 June 2022:
net £0.8bn from Level 1 to Level 2; 31 December 2022: net £6.0bn from Level
2 to Level 1).
Total Level 1 Level 2 Level 3
For the six month period to 30 June 2023 £m £m £m £m
Shareholder
Equity securities 3,077 1,171 13 1,893
Debt securities 65,818 22,701 25,882 17,235
Derivative assets 42,307 107 42,200 -
Loans at fair value 2,049 - 2,049 -
Investment property 5,762 - - 5,762
Total Shareholder 119,013 23,979 70,144 24,890
Unit linked
Equity securities 174,291 173,276 527 488
Debt securities 145,386 113,411 30,994 981
Derivative assets 4,442 136 4,306 -
Loans at fair value 10,047 - 10,047 -
Investment property 3,465 - - 3,465
Total Unit linked 337,631 286,823 45,874 4,934
Total financial investments and investment property at fair value 456,644 310,802 116,018 29,824
Debt securities at amortised cost(1) 6,300 - 42 6,258
Loans at amortised cost(1) 5 5 - -
1. This table includes debt securities and loans which are held at
amortised cost in the Consolidated Balance Sheet at a total value of £7,550m.
4.03 Financial investments and investment property (continued)
(i) Fair value hierarchy (continued)
Total Level 1 Level 2 Level 3
For the six month period to 30 June 2022 (Restated) £m £m £m £m
Shareholder
Equity securities 3,492 1,995 22 1,475
Debt securities 69,546 27,622 27,213 14,711
Derivative assets 25,071 6 25,065 -
Loans at fair value 1,701 - 1,701 -
Investment property 6,156 - - 6,156
Total Shareholder 105,966 29,623 54,001 22,342
Unit linked
Equity securities 179,355 178,691 25 639
Debt securities 161,162 129,689 30,836 637
Derivative assets 2,946 125 2,821 -
Loans at fair value 11,687 - 11,687 -
Investment property 4,820 - - 4,820
Total Unit linked 359,970 308,505 45,369 6,096
Total financial investments and investment property at fair value 465,936 338,128 99,370 28,438
Debt securities at amortised cost(1) 7,257 - 52 7,205
Loans at amortised cost(1) 72 72 - -
1. This table includes debt securities and loans which are held at
amortised cost in the Consolidated Balance Sheet at a total value of £7,847m.
Total Level 1 Level 2 Level 3
For the year ended 31 December 2022 (Restated) £m £m £m £m
Shareholder
Equity securities 3,071 1,236 41 1,794
Debt securities 63,928 17,239 31,295 15,394
Derivative assets 41,978 106 41,872 -
Loans at fair value 1,072 - 1,072 -
Investment property 5,644 - - 5,644
Total Shareholder 115,693 18,581 74,280 22,832
Unit linked
Equity securities 164,264 163,727 24 513
Debt securities 147,739 105,955 40,757 1,027
Derivative assets 3,449 164 3,285 -
Loans at fair value 13,211 - 13,211 -
Investment property 3,728 - - 3,728
Total Unit linked 332,391 269,846 57,277 5,268
Total financial investments and investment property at fair value 448,084 288,427 131,557 28,100
Debt securities at amortised cost(1) 6,717 - 44 6,673
Loans at amortised cost(1) 1 1 - -
1. This table includes debt securities and loans which are held at
amortised cost in the Consolidated Balance Sheet at a total value of £7,846m.
4.03 Financial investments and investment property (continued)
(ii) Level 3 assets measured at fair value
Level 3 assets, where modelling techniques are used, are comprised of
property, unquoted securities, 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, retirement interest only and other 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.
Restated
Other Other
Equity financial Investment Equity financial Investment Restated
securities investments property Total securities investments property Total
2023 2023 2023 2023 2022 2022 2022 2022
£m £m £m £m £m £m £m £m
As at 1 January 2,307 16,421 9,372 28,100 1,988 16,599 10,150 28,737
Total gains/(losses) for the period
- realised gains or (losses)(1) (19) (157) 2 (174) 6 (3) 30 33
- unrealised gains or (losses)(1) 3 (399) (510) (906) 144 (2,489) 571 (1,774)
Purchases/Additions 169 2,929 752 3,850 179 2,110 330 2,619
Sales/Disposals (78) (714) (425) (1,217) (266) (1,069) (105) (1,440)
Transfers into Level 3 6 241 - 247 67 - - 67
Transfers out of Level 3 (3) - - (3) (10) - - (10)
Foreign exchange rate movements (4) (105) 36 (73) 6 200 - 206
As at 30 June 2,381 18,216 9,227 29,824 2,114 15,348 10,976 28,438
Restated
Other
Equity financial Investment Restated
securities investments property Total
2022 2022 2022 2022
£m £m £m £m
As at 1 January 1,988 16,599 10,150 28,737
Total gains/(losses) for the year
- realised gains or (losses)(1) 28 (78) 81 31
- unrealised gains or (losses)(1) 83 (4,381) (1,796) (6,094)
Purchases/Additions 504 10,922 1,307 12,733
Sales/Disposals (381) (6,908) (377) (7,666)
Transfers into Level 3 84 72 - 156
Transfers out of Level 3 (41) - - (41)
Foreign exchange rate movements 42 195 7 244
As at 31 December 2,307 16,421 9,372 28,100
1. Amounts presented in realised and unrealised gains/(losses) are recognised
in Investment return in the Consolidated Income Statement.
4.03 Financial investments and investment property (continued)
(ii) Level 3 assets measured at fair value (continued)
Equity securities
Level 3 equity securities amount to £2,381m (30 June 2022: £2,114m; 31
December 2022: £2,307m), 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 which are often dependent on the
maturity of the underlying investment but can also depend on the
characteristics of individual assets. Such techniques include transaction
values underpinned by analysis of milestone achievement and cash runway for
early/start-up stage investments, discounted cash flow models for investments
at the next stage of development and earnings multiples for more mature
investments.
Other financial investments
Lifetime mortgage (LTM) loans and retirement interest only mortgages amount to
£4,937m (30 June 2022: £5,758m; 31 December 2022: £4,844m). Lifetime
mortgages are valued using a discounted cash flow model by projecting
best-estimate net asset proceeds and discounted using rates inferred from
current LTM loan pricing. The inferred illiquidity premiums for the majority
of the portfolio range between 100 and 250bps. 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. Lifetime mortgages include a no
negative equity guarantee (NNEG) to borrowers. This ensures that if there is a
shortfall between the sale proceeds of the property 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 short-term and
long-term property growth rates, property index volatility, voluntary early
repayments and longevity assumptions. The valuation as at 30 June 2023
reflects a combination of short-term and long-term property growth rate
assumptions equivalent to a flat rate of 2.9% annually, after allowing for the
effects of dilapidation. The values of the properties collateralizing the LTM
loans are updated from the date of the last property valuation to the
valuation date by indexing using UK regional house price indices.
Private credit loans (including commercial real estate loans) amount to
£9,446m (30 June 2022: £5,984m; 31 December 2022: £7,858m). Their valuation
is determined by discounted future cash flows which are based on the yield
curve of the LGIM approved comparable bonds and the initial spread, both of
which are agreed by IHS Markit who also provide an independent valuation of
comparable bonds. Unobservable inputs that go into the determination of
comparators include rating, sector, sub-sector, performance dynamics,
financing structure and duration of investment. Existing private credit
investments, which were executed as far back 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 7.4 years, with a weighted average life
of 10.1 years. Maturities in the portfolio currently extend out to 2061. The
private credit portfolio of assets has internal ratings assigned by an
independent credit team in line with internally developed methodologies. These
credit ratings range from AAA to BB-.
Private placements held by the US business amount to £1,309m (30 June 2022:
£976m; 31 December 2022: £1,320m). 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 2023 reflects illiquidity premiums between 20 and
70bps.
Income strip assets amount to £1,350m (30 June 2022: £1,580m; 31 December
2022: £1,414m). Their primary valuation is provided by appropriately
qualified external valuers 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 2023 reflects equivalent yield ranges between 3% and 9% and estimated
rental values (ERV) between £10 and £310 per sq.ft.
Commercial mortgage loans amount to £771m (30 June 2022: £814m; 31 December
2022: £768m) and are determined by incorporating credit risk for performing
loans at the portfolio level and adjusted 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 2023
reflects illiquidity premiums between 20 and 30bps.
Other debt securities which are not traded in an active market amount to
£403m (30 June 2022: £236m; 31 December 2022: £217m). They have been valued
using third party or counterparty valuations, and these prices are considered
to be unobservable due to infrequent market transactions.
Investment property
Level 3 investment property amounting to £9,227m (30 June 2022: £10,976m; 31
December 2022: £9,372m) 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 market sentiment based on historic transactional comparables. The
valuation of investment properties also includes 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 2023
reflects equivalent yield ranges between 2% and 20% and ERV between £1 and
£357 per sq.ft.
The table below shows the valuation of investment property by sector:
30 Jun 30 Jun 31 Dec
2023 2022 2022
£m £m £m
Retail 1,257 951 780
Leisure 460 505 461
Distribution 1,071 1,613 1,104
Office space 3,117 4,688 4,069
Industrial and other commercial 1,815 2,005 1,624
Accommodation 1,507 1,214 1,334
Total 9,227 10,976 9,372
4.03 Financial investments and investment property (continued)
(iii) 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 material, the group assesses the sensitivity of fair values of Level 3
investments to changes in unobservable inputs to reasonable alternative
assumptions. The table below shows the impact of applying these sensitivities
to the fair value of Level 3 assets as at 30 June 2023. Further disclosure on
how these sensitivities have been applied can be found in the descriptions
following the table.
Sensitivities
Fair value 30 June 2023 Positive Negative
£m impact impact
£m £m
Lifetime mortgages 4,937 176 (247)
Private credit portfolios 11,526 501 (501)
Investment property 9,227 748 (738)
Other investments(1) 4,134 478 (432)
Total Level 3 assets 29,824 1,903 (1,918)
1. Other investments include equity securities, income strip assets and other
traded debt securities.
The sensitivities are not a function of sensitising a single variable relating
to the valuation of the asset, but rather a function of flexing multiple
factors often at individual asset level. The following sets out a number of
key factors by asset type, and how they have been flexed to derive reasonable
alternative valuations.
Lifetime mortgages
Key assumptions used in the valuation of lifetime mortgage assets are listed
in Note 4.03 (ii) and sensitivities are applied to each assumption which are
used to derive the values in the above table. The most significant decrease in
value is an instantaneous 10% reduction in property valuations across the
portfolio which, applied in isolation produces a sensitised value of £(126)m.
The most significant increase in value is a 20bps reduction to the discount
rate which, applied in isolation produces a sensitised value of £124m.
Private credit portfolios
The sensitivity in the private credit portfolio has been determined through a
method which estimates investment spread value premium differences as compared
to the institutional investment market. Individual investment characteristics
of each holding, such as credit rating and duration are used to determine
spread differentials for the purposes of determining alternate values. Spread
differentials are determined to be lower for highly rated and/or shorter
duration assets as compared to lower rated and/or longer duration assets. A
significant component of the spread differential is in relation to the
selection of comparator bonds, which is the potential difference in spread of
the basket of relevant comparators determined by respective investors. If we
were to take an AA rated asset it may attract a spread differential of 15bps
on the selection of comparator bonds as opposed to 40bps for a similar
duration BBB rated asset. Applied in isolation the sensitivity used to reflect
the spread in comparator bond selection results in sensitised values of £166m
and £(166)m.
Investment property
Investment property holdings are valued 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 such, sensitivities are
calculated through a mixture of asset level and portfolio level methodologies
which make reference to individual investment characteristics of the holding
but do not flex individual assumptions used by the independent expert in
valuing the holdings. Each method is applied individually and aggregated with
equal weighting to determine the overall sensitivity determined for the
portfolio. One method is similar to that used in the private credit portfolio
as it determines the impact of an alternate property yield determined in
reference to credit ratings, remaining term and other characteristics of each
holding. In this methodology we would apply a lower yield sensitivity to a
highly rated and/or shorter remaining term asset compared with a lower rated
and/or longer remaining term asset. If we were to take an AA rated asset with
remaining term of 25 years in normal market conditions this would lead to a
15bps yield flex (as opposed to a 35bps yield flex for a BBB rated asset with
30 year remaining term). The methodology which leads to the most significant
sensitivity at the balance sheet date is related to an example in case law
where it was found that an acceptable margin of error in a valuation dispute
is 10% either way, subject to the valuation being undertaken with due care. If
this sensitivity were to be taken without a weighting it would produce
sensitised values of £593m and £(593)m.
It should be noted that some sensitivities described above are non-linear, and
larger or smaller impacts should not be interpolated or extrapolated from
these results.
4.04 Tax
(i) Tax expense in the Consolidated Income Statement
The tax expense attributable to equity holders differs from the tax calculated
on profit before tax at the standard UK corporation tax rate as follows:
Restated Restated
6 months 6 months Full year
2023 2022 2022
£m £m £m
Profit before tax attributable to equity holders 324 697 933
Tax calculated at 23.5%(1) 76 132 177
Adjusted for the effects of:
Recurring reconciling items:
Different rate of tax on profits and losses taxed overseas(2) (53) 29 9
Income not subject to tax (2) - (3)
Non-deductible expenses 8 - (4)
Differences between taxable and accounting investment gains (9) (6) (9)
Other taxes on property and foreign income 1 4 6
Unrecognised tax losses 1 1 17
Double tax relief(3) - - (20)
Non-recurring reconciling items:
Adjustments in respect of prior years(4) (6) (1) (21)
Impact of the revaluation of deferred tax balances(1) (2) (37) (64)
Tax expense/(credit) attributable to equity holders 14 122 88
Equity holders' effective tax rate 4.3% 17.5% 9.4%
1. The Finance Act 2021 increased the rate of corporation tax from 19%
to 25% from 1 April 2023. The prevailing rate of UK corporation tax for the
year has increased to 23.5% (H1 22: 19.0%; FY 22: 19.0%). The enacted tax rate
of 25% has been used in the calculation of UK deferred tax assets and
liabilities, as the rate of corporation tax that is expected to apply when the
majority of those deferred tax balances reverse.
2. The lower rate of tax on overseas profits and losses is principally
driven by the 0% rate of taxation arising in our Bermudan reinsurance company,
which provides the group with regulatory capital flexibility for both our PRT
business and our US term insurance business. This also includes the impact of
our US operations which are taxed at 21%.
3. Double tax relief represents a UK tax credit available for overseas
withholding tax suffered on dividend income.
4. Adjustments in respect of prior years relate to revisions of prior
estimates.
The Organisation for Economic Co-operation and Development (OECD) released a
framework in December 2021 to address concerns at a global level about tax
contributions of large multinational corporations, and to introduce a global
minimum tax rate of 15%. The UK has enacted legislation to implement these new
rules, which will take effect from 1 January 2024. Under these rules, the
group is expected to be liable to top-up tax on profits arising from our
operations in territories with low tax rates. The group is assessing the
impact of this in the UK and other territories in which it operates.
4.04 Tax (continued)
(ii) Deferred tax
Restated Restated
30 Jun 2023 30 Jun 2022 31 Dec 2022
Deferred tax (liabilities)/assets £m £m £m
Overseas deferred acquisition expenses(1) 116 110 116
Difference between the tax and accounting value of insurance contracts 413 515 487
- UK(2) 1,148 1,188 1,266
- Overseas (735) (673) (779)
Realised and unrealised gains on investments 128 79 145
Excess of depreciation over capital allowances 22 20 21
Accounting provisions and other 58 36 59
Trading losses(3) 474 410 463
Pension fund deficit (1) (42) (26)
Acquired intangibles (3) - (2)
Net deferred tax asset 1,207 1,128 1,263
Presented on the Consolidated Balance Sheet as:
- Deferred tax assets 1,367 1,283 1,469
- Deferred tax liabilities(4) (160) (155) (206)
Net deferred tax asset 1,207 1,128 1,263
1. Deferred tax assets arising on deferred acquisition expenses relate
solely to US balances as at 30 June 2023.
2. The UK deferred tax asset reflects the impact of transition to IFRS
17.
3. Trading losses consist solely of US operating losses. The losses are
not time restricted, and we expect to recover them over a period of 15 to 20
years, commensurate with the lifecycle of the underlying insurance contracts.
In reaching this conclusion, we have considered past results, the different
basis under which US companies are taxed, temporary differences that are
expected to generate future profits against which the deferred tax can be
offset, management actions, and future profit forecasts. The recoverability of
deferred tax assets is routinely reviewed by management.
4. The deferred tax liability is comprised of balances of £157m
relating to the US (H1 22: £155m; FY 22: £206m), and £3m relating to the UK
(H1 22: £nil; FY 22: £nil) that are not capable of being offset against
other deferred tax assets.
4.05 Share capital and share premium
Number of
Authorised share capital shares £m
At 30 June 2023, 30 June 2022 and 31 December 2022: ordinary shares of 2.5p 9,200,000,000 230
each
Share Share
Number of capital premium
Issued share capital, fully paid shares £m £m
As at 1 January 2023 5,973,253,500 149 1,018
Options exercised under share option schemes 4,560,068 - 9
As at 30 June 2023 5,977,813,568 149 1,027
Share Share
Number of capital premium
Issued share capital, fully paid shares £m £m
As at 1 January 2022 5,970,415,817 149 1,012
Options exercised under share option schemes 2,162,898 - 5
As at 30 June 2022 5,972,578,715 149 1,017
Options exercised under share option schemes 674,785 - 1
As at 31 December 2022 5,973,253,500 149 1,018
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.
4.06 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.
During the period coupon payments of £14m were made (H1 22: £14m; FY 22:
£28m). 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.
4.07 Non-controlling interests
Non-controlling interests represent third party interests in direct equity
investments, including private equity, which are consolidated in the group's
results.
As at 30 June 2023, non-controlling interests primarily represent third party
ownership in Thorpe Park Holdings, a mixed residential/commercial retail space
in which the group holds 50%.
4.08 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
2023 2023 2022 2022 2022 2022
£m £m £m £m £m £m
Subordinated borrowings
5.5% Sterling subordinated notes 2064 (Tier 2) 590 549 590 546 590 541
5.375% Sterling subordinated notes 2045 (Tier 2) 605 577 604 610 605 593
5.25% US Dollar subordinated notes 2047 (Tier 2) 678 648 707 690 712 665
5.55% US Dollar subordinated notes 2052 (Tier 2) 397 376 414 416 417 389
5.125% Sterling subordinated notes 2048 (Tier 2) 400 364 400 391 400 377
3.75% Sterling subordinated notes 2049 (Tier 2) 599 489 598 523 599 507
4.5% Sterling subordinated notes 2050 (Tier 2) 500 424 500 456 500 439
Client fund holdings of group debt (Tier 2)(1) (77) (69) (50) (46) (74) (67)
Total subordinated borrowings 3,692 3,358 3,763 3,586 3,749 3,444
Senior borrowings
Sterling medium term notes 2031-2041 603 613 602 707 609 649
Client fund holdings of group debt(1) (17) (16) (9) (10) (20) (19)
Total senior borrowings 586 597 593 697 589 630
Total core borrowings 4,278 3,955 4,356 4,283 4,338 4,074
1. £94m (30 June 2022: £59m; 31 December 2022: £94m) 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.
4.08 Core borrowings (continued)
Subordinated borrowings
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. 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. 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. 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. 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. 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. 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. These notes mature on 1 November 2050.
All of the above subordinated notes are treated as Tier 2 own funds for
Solvency II purposes unless stated otherwise.
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.
4.09 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
2023 2023 2022 2022 2022 2022
£m £m £m £m £m £m
Euro Commercial Paper 50 50 50 50 50 50
Bank loans and overdrafts 7 7 91 91 3 3
Non-recourse borrowings 1,050 1,050 1,004 1,004 910 910
Operational borrowings(1) 1,107 1,107 1,145 1,145 963 963
1. Unit linked borrowings with a carrying value of £165m (30 June 2022:
£37m; 31 December 2022: £256m) are excluded from the analysis above as the
risk is retained by policyholders. Operational borrowings including unit
linked borrowings are £1,272m (30 June 2022: £1,182m; 31 December 2022:
£1,219m).
Syndicated credit facility
The group has in place a £1.5bn syndicated committed revolving credit
facility provided by a number of its key relationship banks, maturing in
August 2028. No amounts were outstanding at 30 June 2023.
4.10 Movement in borrowings
30 Jun 30 Jun 31 Dec
2023 2022 2022
£m £m £m
As at 1 January 5,557 5,188 5,188
Cash movements:
- Proceeds from borrowings 408 265 691
- Repayment of borrowings (227) (210) (737)
- Net (decrease)/increase in bank loans and overdrafts (72) 120 254
Non-cash movements:
- Amortisation 1 1 2
- Foreign exchange rate movements (93) 184 201
- Other (24) (10) (42)
Core and operational borrowings 5,550 5,538 5,557
4.11 Payables and other financial liabilities
30 Jun 2023 30 Jun 2022 31 Dec 2022
£m £m £m
Derivative liabilities 49,939 34,044 51,190
Repurchase agreements(1) 28,347 47,103 31,533
Other financial liabilities(2) 12,770 14,677 11,182
Total payables and other financial liabilities 91,056 95,824 93,905
1. Repurchase agreements are presented gross, however they and their
related assets (included within debt securities) are subject to master netting
arrangements. The significant majority of repurchase agreements are unit
linked.
2. Other financial liabilities includes trail commission, lease
liabilities, FX spots and the value of short positions taken out to cover
reverse repurchase agreements. The value of short positions as at 30 June 2023
was £4,966m (30 June 2022: £4,779m; 31 December 2022: £4,960m). Other
financial liabilities have been restated for 30 June 2022 and 31 December
2022.
Fair value hierarchy
Amortised
Total Level 1 Level 2 Level 3 cost(1)
As at 30 June 2023 £m £m £m £m £m
Derivative liabilities 49,939 445 49,472 22 -
Repurchase agreements 28,347 - 28,347 - -
Other financial liabilities 12,770 4,933 29 - 7,808
Total payables and other financial liabilities 91,056 5,378 77,848 22 7,808
Amortised
Total Level 1 Level 2 Level 3 cost(1)
As at 30 June 2022 £m £m £m £m £m
Derivative liabilities 34,044 291 33,713 40 -
Repurchase agreements 47,103 - 47,103 - -
Other financial liabilities(2) 14,677 4,815 81 - 9,781
Total payables and other financial liabilities 95,824 5,106 80,897 40 9,781
Amortised
Total Level 1 Level 2 Level 3 cost(1)
As at 31 December 2022 £m £m £m £m £m
Derivative liabilities 51,190 448 50,717 25 -
Repurchase agreements 31,533 - 31,533 - -
Other financial liabilities(2) 11,182 4,319 253 - 6,610
Total payables and other financial liabilities 93,905 4,767 82,503 25 6,610
1. The carrying value of payables and other financial liabilities at
amortised cost approximates its fair value.
2. Other financial liabilities have been restated for 30 June 2022 and
31 December 2022.
Significant transfers between levels
There have been no significant transfers of liabilities between Levels 1, 2
and 3 for the period ended 30 June 2023 (30 June 2022 and 31 December 2022: no
significant transfers).
4.12 Long-term insurance valuation assumptions
The group's insurance assumptions, described below, relate to the UK insurance
(both annuities and protection) business and material lines of the US
insurance (both annuities and protection) business. Other non-UK businesses do
not constitute a material component of the group's operations and
consideration of geographically determined assumptions is therefore not
included.
The 31 December 2022 assumptions have been rebased to those used for the
preparation of the restated comparatives under IFRS 17 and hence differ from
the IFRS 4 assumptions published in the 2022 Annual Report and Accounts. For
the purpose of producing IFRS 17 best estimate liabilities, the group seeks to
make best estimate assumptions about future experience based on current market
conditions and recent experience.
(i) Mortality and morbidity
Mortality and morbidity assumptions for the UK businesses are set with
reference to standard tables drawn up by the Continuous Mortality
Investigation Bureau (CMI), a subsidiary of the Institute and Faculty of
Actuaries, and/or UK death registrations. US assumptions are set with
reference to standard tables drawn up by the American Academy of Actuaries.
Tables are based on industry-wide mortality and morbidity experience for
insured lives.
The group conducts statistical investigations of its mortality and morbidity
experience, the majority of which are carried out at least annually.
Investigations determine the extent to which the group's experience differs
from that underpinning the standard tables and suggest appropriate adjustments
which need to be made to the valuation assumptions.
The higher mortality experience observed in 2020 as a result of Covid-19 is
considered to be mostly exceptional and potential endemic impacts on long-term
mortality assumptions are still under investigation. Long-term mortality
assumptions have not been revised to reflect this experience. Most allowances
made in respect of higher expected short-term mortality were released in 2022.
In most cases, mortality rates are set separately for gender and smoker
status, and the percentage of mortality table will vary for the first 2-5
years of the policy's duration to allow for underwriting selection.
Demographic assumptions are generally updated on an annual basis and are
unchanged from those used at 31 December 2022.
Mortality tables 30 June 2023 31 December 2022
Non-linked individual assurance business
UK term assurances(1) 90% - 92% TM08/TF08 Sel 5 90% - 92% TM08/TF08 Sel 5
UK term assurances with terminal illness(1) 58% - 86% TM08/TF08 Sel 5 58% - 86% TM08/TF08 Sel 5
UK term assurances with critical illness(2) 89% - 132% ACL08 Sel 2 89% - 132% ACL08 Sel 2
US term assurances(3) Adjusted SOA 2014 VBT Adjusted SOA 2014 VBT
Whole of Life Protection Plan(4) Bespoke Tables based on TM08/TF08 and UK death registrations Bespoke Tables based on TM08/TF08 and UK death registrations
Whole of Life over 50(4) Bespoke Tables based on ELT15 and Whole of Life Protection Plan assumptions Bespoke Tables based on ELT15 and Whole of Life Protection Plan assumptions
Annuity business
UK Annuities in deferment(5) 75.7%-85.6% PNMA00/PNFA00 75.7%-85.6% PNMA00/PNFA00
UK Vested annuities(6)
Pension risk transfer 75.7%-85.6% PCMA00/PCFA00 75.7%-85.6% PCMA00/PCFA00
Other annuities 66.4%-105.5% PCMA00/PCFA00 66.4%-105.5% PCMA00/PCFA00
US annuities(7) Bespoke tables based on Bespoke tables based on
RP-2014 Healthy Annuitant Total table RP-2014 Healthy Annuitant Total table
1. Improvement assumptions applied of 1.0% p.a. for males and females.
2. Morbidity rates are assumed to deteriorate at a rate of 0.5% p.a. for
males and 0.75% p.a. for females.
3. Adjustments are made for gender, select period, smoker status, policy
size, policy duration and year, issue year and age.
4. Mortality rates are assumed to reduce based on CMI 2020 model with a
long-term annual improvement rate of 1.5% for males and 1.0% for females.
5. Table created by blending PCXA00 with PNXA00 tables. The base table
to be used for bulk purchase annuity policies in deferment is PNMA00 up to and
including age 55 and PCMA00 for age 65 and above for males. The identical
method is applied to females using PNFA00 and PCFA00.
6. Mortality rates are assumed to reduce according to an adjusted
version of the mortality improvement model CMI 2020 with the following
parameters:
Males: Long-term Rate of 1.5% p.a. up to age 85 tapering to 0% at 110.
Females: Long-term Rate of 1.0% p.a. up to age 85 tapering to 0% at 110.
Smoothing is applied to derive initial rates using a smoothing parameter (Sk)
value of 7.5 applied to Legal & General bespoke population data up to
2020. The resulting initial rates are then adjusted to reflect socio economic
class.
For individual annuities distributed through retail channels, a further
allowance is made for the effect of initial selection.
The basis above is applicable up to age 90. After age 90 the basis is blended
towards a bespoke table from age 105 onwards.
7. Improvement table is MP2018 for Females and MP2019 for Males.
4.12 Long-term insurance valuation assumptions (continued)
(ii) Valuation rates of interest and discount rates
The interest rates used to discount the cash flows for the purpose of valuing
insurance contract liabilities should reflect the timing and liquidity
characteristics of those insurance liability cash flows and current market
conditions. The valuation interest rate assumptions are derived as interest
rate curves with full term structure.
In deriving the valuation interest rate assumptions for annuity business, an
explicit allowance for risk is deducted from the yield on the assets backing
annuity liabilities. The allowance for risk comprises long-term assumptions
about defaults and the market risk premiums for taking credit risk. In the
case of lifetime mortgage assets a best estimate expectation of losses arising
from the no negative equity guarantee, and the market risk premiums for this
risk, are deducted from the yield. For the UK annuity business, the deduction
for risk of default for corporate bonds and direct investments equated to
40bps (31 December 2022: 42bps). For lifetime mortgages the deductions equated
to £0.3bn (31 December 2022: £0.3bn).
For US and UK protection business, the yield is calculated based on notional
asset portfolios of AA rated corporate bonds and cash, which reflect the
characteristics of the liability cashflows. An explicit allowance for risk is
deducted from the yield, to reflect the default risk associated with the
notional portfolio assets.
The discount rate curves used for the material product lines are shown below.
The discount rate curves are used to discount the cashflows on the underlying
contracts and the reinsurance cashflows on those contracts. The graph displays
the underlying spot rates:
4.12 Long-term insurance valuation assumptions (continued)
(iii) Persistency
The group monitors its persistency experience and carries out detailed
investigations annually. Persistency experience can be volatile and past
experience may not be an appropriate future indicator. The group tries to
balance past experience and assessments of potential future conditions in
setting assumptions about expected long-term average persistency levels.
Lapse Rates 30 June 2023 31 December 2022
UK Level term 2.0% - 29.1% 2.0% - 29.1%
UK Decreasing term 4.4% - 15.0% 4.4% - 15.0%
UK Accelerated critical illness cover 3.2% - 31.5% 3.2% - 31.5%
Pensions term 2.9% - 3.3% 2.9% - 3.3%
Whole of Life (conventional non profit) 0.6% - 8.5% 0.6% - 8.5%
US term - 10 year guarantee period 7.1% - 8.1% 7.1% - 8.1%
US term - 15 year guarantee period 4.2% - 5.8% 4.2% - 5.8%
US term - 20 year guarantee period 3.0% - 6.1% 3.0% - 6.1%
US term - 30 year guarantee period 2.1% - 6.5% 2.1% - 6.5%
US Universal Life 2.7% 2.7%
(iv) Expenses
The group monitors its expense experience and carries out detailed
investigations regularly to determine the expenses directly incurred in
writing and administering the different products and classes of business.
Adjustments may be made for known future changes in the administration
processes, in line with the group's business plan, as well as for changes in
allocations. An allowance for expense inflation in the future is also made in
line with best estimate inflation assumptions, taking account of both salary
and price information.
(v) Risk Adjustment
The group calculates its risk adjustment using a Provision for Adverse
Deviations (PADs) approach, where adjustments are applied to best estimate
non-financial risk assumptions to calculate the risk adjustment required over
and above the best estimate liability. The size of adjustments and approach
vary by risk depending on the group's attitude to the compensation required
for that risk. For the majority of risks, the group's view on the compensation
required for non-financial risks is calibrated to an 85th percentile
confidence level, calculated using a one-year Value-at-Risk (VaR) measure. The
calculation uses capital bases appropriate for the territory, the type of
business and how the risk is priced.
4.13 Insurance contracts
(i) Insurance service results
For the six month period to 30 June 2023 Annuities Protection Total
£m £m £m
Insurance revenue
Amounts relating to changes in liabilities for remaining coverage:
- CSM recognised for services provided 397 131 528
- Expected incurred claims and other insurance service expenses 2,536 1,319 3,855
- Change in the risk adjustment for non-financial risk for the risk expired 174 23 197
Recovery of insurance acquisition cashflows 8 65 73
Premium experience variance relating to past and current service 2 (8) (6)
Total insurance revenue 3,117 1,530 4,647
Total insurance service expenses (2,472) (1,525) (3,997)
Allocation of reinsurance premiums (1,310) (501) (1,811)
Amounts recoverable from reinsurers for incurred claims 1,139 619 1,758
Net (expense)/income from reinsurance contracts held (171) 118 (53)
Total insurance service result 474 123 597
For the six month period to 30 June 2022 Annuities Protection Total
£m £m £m
Insurance revenue
Amounts relating to changes in liabilities for remaining coverage:
- CSM recognised for services provided 347 129 476
- Expected incurred claims and other insurance service expenses 2,193 1,304 3,497
- Change in the risk adjustment for non-financial risk for the risk expired 181 19 200
Recovery of insurance acquisition cashflows 6 59 65
Premium experience variance relating to past and current service - (4) (4)
Total insurance revenue 2,727 1,507 4,234
Total insurance service expenses (2,156) (1,490) (3,646)
Allocation of reinsurance premiums (1,113) (396) (1,509)
Amounts recoverable from reinsurers for incurred claims 994 507 1,501
Net (expense)/income from reinsurance contracts held (119) 111 (8)
Total insurance service result 452 128 580
For the year ended 31 December 2022 Annuities Protection Total
£m £m £m
Insurance revenue
Amounts relating to changes in liabilities for remaining coverage:
- CSM recognised for services provided 788 251 1,039
- Expected incurred claims and other insurance service expenses 4,585 2,557 7,142
- Change in the risk adjustment for non-financial risk for the risk expired 359 31 390
Recovery of insurance acquisition cashflows 14 123 137
Premium experience variance relating to past and current service 2 (2) -
Total insurance revenue 5,748 2,960 8,708
Total insurance service expenses (4,494) (2,921) (7,415)
Allocation of reinsurance premiums (2,331) (803) (3,134)
Amounts recoverable from reinsurers for incurred claims 2,060 929 2,989
Net (expense)/income from reinsurance contracts held (271) 126 (145)
Total insurance service result 983 165 1,148
4.13 Insurance contracts (continued)
(ii) Insurance and reinsurance contracts
Assets Liabilities Assets Liabilities Assets Liabilities
30 Jun 30 Jun 30 Jun 30 Jun 31 Dec 31 Dec
2023 2023 2022 2022 2022 2022
£m £m £m £m £m £m
Insurance contracts issued
Annuities
Insurance contract balances - 74,061 - 77,944 - 73,686
Assets for insurance contract acquisition cash flows(1) - (39) - (18) - (20)
Protection
Insurance contract balances - 4,391 - 4,991 - 4,533
Assets for insurance contract acquisition cash flows(1) - (35) - (25) - (28)
Total insurance contracts issued - 78,378 - 82,892 - 78,171
Reinsurance contracts held
Annuities
Reinsurance contracts balances 3,174 13 1,376 4 2,467 -
Assets for insurance contract acquisition cash flows(1) 8 - 2 - 5 -
Protection
Reinsurance contracts balances 2,216 125 2,591 9 2,213 52
Assets for insurance contract acquisition cash flows(1) - - - - - -
Total reinsurance contracts held 5,398 138 3,969 13 4,685 52
1. In accordance with IFRS 17, assets for insurance and reinsurance
acquisition cash flows are presented within the carrying amount of the related
insurance and reinsurance contract liabilities.
4.14 Foreign exchange rates
Principal rates of exchange used for translation
are:
Period end exchange rates 30 Jun 2023 30 Jun 2022 31 Dec 2022
United States dollar 1.27 1.22 1.21
Euro 1.16 1.16 1.13
6 months 6 months Full year
Average exchange rates 2023 2022 2022
United States dollar 1.23 1.30 1.24
Euro 1.14 1.19 1.17
4.15 Provisions
(i) Analysis of provisions
30 Jun 2023 30 Jun 2022 31 Dec 2022
Notes £m £m £m
Other provisions 4.15(ii) 210 182 273
Retirement benefit obligations 4.15(iii) 1,416 599 617
Total provisions 1,626 781 890
(ii) Other provisions
Included within Other provisions are amounts relating to new and existing
M&A and restructuring transactions. These include costs that Legal &
General Investment Management (LGIM) is committed to incur on the extension of
its existing partnership with State Street announced in 2021, to increase the
use of Charles River technology across the front office and to deliver middle
office services going forward. Costs include the transfer of data and
operations to State Street, as well as the implementation of the new operating
model. The amounts included in the provision have been determined on a best
estimate basis by reference to a range of plausible scenarios, taking into
account the multi-year implementation period for the project. As at 30 June
2023, the outstanding provision was £75m (30 June 2022: £69m; 31 December
2022: £111m).
(iii) Retirement benefit obligations
Fund and CALA Homes Fund and CALA Homes Fund and CALA Homes
Scheme and Overseas Scheme and Overseas Scheme and Overseas
30 Jun 2023 30 Jun 2023 30 Jun 2022 30 Jun 2022 31 Dec 2022 31 Dec 2022
£m £m £m £m £m £m
Gross pension obligations included in provisions 1,411 5 594 5 612 5
Annuity obligations insured by LGAS (1,420) - (769) - (718) -
Gross defined benefit pension (surplus)/deficit (9) 5 (175) 5 (106) 5
Deferred tax on defined benefit pension (surplus)/deficit 2 (1) 44 (1) 27 (1)
Net defined benefit pension (surplus)/deficit (7) 4 (131) 4 (79) 4
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.
Assured Payment Policies (APPs), previously transacted between the group's
defined benefit pension schemes and Legal and General Assurance Society
Limited (LGAS), have now been surrendered and converted to annuity contracts.
Unlike APPs, these annuity contracts are not admissible as assets of the
schemes, and both the gross pension obligation and obligations insured by LGAS
have increased accordingly.
4.16 Contingent liabilities, guarantees and indemnities
Provision for the liabilities arising under contracts with policyholders is
based on certain assumptions. The variance between actual experience from that
assumed may result in those liabilities differing from the provisions made for
them. Liabilities may also arise in respect of claims relating to the
interpretation of policyholder contracts, or the circumstances in which
policyholders have entered into them. The extent of these liabilities is
influenced by a number of factors including the actions and requirements of
the PRA, FCA, ombudsman rulings, industry compensation schemes and court
judgments.
Various group companies receive claims and become involved in actual or
threatened litigation and regulatory issues from time to time. The relevant
members of the group ensure that they make prudent provision as and when
circumstances calling for such provision become clear, and that each has
adequate capital and reserves to meet reasonably foreseeable eventualities.
The provisions made are regularly reviewed. It is not possible to predict,
with certainty, the extent and the timing of the financial impact of these
claims, litigation or issues.
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. Legal and General Assurance
Society Limited 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.
4.17 Related party transactions
(i) Key management personnel transactions and compensation
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. There were no material transactions between key management and the
Legal & General group of companies during the period. Contributions to the
post-employment defined benefit plans were £128m (30 June 2022: £51m; 31
December 2022: £105m) for all employees.
At 30 June 2023, 30 June 2022 and 31 December 2022 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
2023 2022 2022
£m £m £m
Salaries 4 3 11
Share-based incentive awards 7 5 6
Key management personnel compensation 11 8 17
(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.
The group has the following material related party transactions:
• Assured Payment Policies (APPs), previously transacted between the
group's UK defined benefit pension schemes and Legal and General Assurance
Society Limited (LGAS), were surrendered at their carrying value of £839m and
converted into annuity contracts. An additional top-up consideration of
£178m, priced on an arm's length basis, was paid to LGAS by the defined
benefit pension schemes as part of the transaction, making a total
contribution for new annuities of £1,017m (30 June 2022: £nil; 31 December
2022: £61m); and
• Total payments by LGAS to the pension schemes for insured pension
benefits were £25m (30 June 2022: £29m; 31 December 2022: £56m).
Loans and commitments to related parties are made in the normal course of
business. As at 30 June 2023, the group had:
• Loans outstanding from related parties of £46m (30 June 2022: £20m;
31 December 2022: £58m), with a further commitment of £5m; and
• Total other commitments of £1,232m to related parties (30 June 2022:
£1,061m; 31 December 2022: £1,265m), of which £1,048m has been drawn (30
June 2022: £736m; 31 December 2022: £1,010m).
Asset flows and new business
5.01 LGIM total assets under management(1) (AUM)
Active Multi Real Total
Index strategies asset Solutions(2) assets AUM
For the six month period to 30 June 2023 £bn £bn £bn £bn £bn £bn
As at 1 January 2023 444.7 156.8 73.9 485.9 34.4 1,195.7
External inflows(3) 37.6 8.8 5.5 13.6 0.8 66.3
External outflows(3) (35.1) (9.2) (3.4) (10.6) (1.0) (59.3)
Overlay net flows - - - (19.3) - (19.3)
External net flows(4) 2.5 (0.4) 2.1 (16.3) (0.2) (12.3)
PRT transfers(5) (0.3) (0.3) - (4.5) - (5.1)
Internal net flows(6) (0.5) (3.1) (0.1) 0.1 1.7 (1.9)
Total net flows 1.7 (3.8) 2.0 (20.7) 1.5 (19.3)
Market movements 24.4 2.6 1.1 (32.4) (0.3) (4.6)
Other movements(7) (0.8) (1.7) - (11.2) - (13.7)
As at 30 June 2023 470.0 153.9 77.0 421.6 35.6 1,158.1
Assets attributable to:
External 1,068.6
Internal 89.5
Active Multi Real Total
Index strategies asset Solutions(2) assets AUM
For the six month period to 30 June 2022 £bn £bn £bn £bn £bn £bn
As at 1 January 2022 502.4 198.8 78.0 605.1 37.2 1,421.5
External inflows(3) 63.2 7.0 6.8 21.3 1.4 99.7
External outflows(3) (38.2) (4.2) (3.7) (12.5) (1.1) (59.7)
Overlay net flows - - - 25.6 - 25.6
External net flows(4) 25.0 2.8 3.1 34.4 0.3 65.6
PRT transfers(5) - - - (0.4) - (0.4)
Internal net flows(6) (0.4) 0.2 - (0.7) 0.4 (0.5)
Total net flows 24.6 3.0 3.1 33.3 0.7 64.7
Market movements (57.8) (25.2) (8.0) (102.4) (1.9) (195.3)
Other movements(7) 0.4 1.6 - (3.2) - (1.2)
As at 30 June 2022 469.6 178.2 73.1 532.8 36.0 1,289.7
Assets attributable to:
External 1,190.7
Internal 99.0
1. Assets under management (AUM) includes assets on our Investment Only
Platform that are managed by third parties, on which fees are earned.
2. Solutions include liability driven investments and £285.3bn (30 June
2022: £386.9bn) of derivative notionals associated with the Solutions
business.
3. External inflows and outflows include £2.1bn (30 June 2022: £2.3bn)
of external investments and £1.1bn (30 June 2022: £2.0bn) of redemptions in
the ETF business.
4. External net flows exclude movements in short-term Solutions assets,
as their maturity dates are determined by client agreements and are subject to
a higher degree of variability. The total value of these assets at 30 June
2023 was £62.3bn (30 June 2022: £68.8bn).
5. PRT transfers represent the reduction in AUM associated with UK
defined benefit pension schemes that transacted PRT business with LGRI in the
reporting period.
6. Internal net flows include flows associated with legacy Mature
Savings business that were sold to Reassure in 2020.
7. Other movements include movements of external holdings in money
market funds, other cash mandates and short-term solutions assets.
5.01 LGIM total assets under management(1) (AUM) (continued)
Active Multi Real Total
Index strategies asset Solutions(2) assets AUM
For the year ended 31 December 2022 £bn £bn £bn £bn £bn £bn
As at 1 January 2022 502.4 198.8 78.0 605.1 37.2 1,421.5
External inflows(3) 95.8 16.0 13.5 90.0 2.5 217.8
External outflows(3) (102.6) (23.5) (9.3) (27.2) (2.1) (164.7)
Overlay net flows - - - (3.5) - (3.5)
External net flows(4) (6.8) (7.5) 4.2 59.3 0.4 49.6
PRT transfers(5) (0.2) (0.4) - (2.5) - (3.1)
Internal net flows(6) (1.1) (0.4) (0.2) (1.2) 3.0 0.1
Total net flows (8.1) (8.3) 4.0 55.6 3.4 46.6
Market movements (50.2) (33.1) (8.1) (173.9) (6.2) (271.5)
Other movements(7) 0.6 (0.6) - (0.9) - (0.9)
As at 31 December 2022 444.7 156.8 73.9 485.9 34.4 1,195.7
Assets attributable to:
External 1,103.4
Internal 92.3
1. Assets under management (AUM) includes assets on our Investment Only
Platform that are managed by third parties, on which fees are earned.
2. Solutions include liability driven investments and £336.6bn of
derivative notionals associated with the Solutions business.
3. External inflows and outflows include £3.9bn of external investments
and £3.3bn of redemptions in the ETF business.
4. External net flows exclude movements in short-term Solutions assets,
as their maturity dates are determined by client agreements and are subject to
a higher degree of variability. The total value of these assets at 31 December
2022 was £69.1bn.
5. PRT transfers represent the reduction in AUM associated with UK
defined benefit pension schemes that transacted PRT business with LGRI in the
reporting period.
6. Internal net flows include flows associated with legacy Mature
Savings business that were sold to Reassure in 2020.
7. Other movements include movements of external holdings in money
market funds, other cash mandates and short-term solutions assets.
5.02 LGIM total external assets under management and net flows
Assets under management at Net flows for the six months ended(1)
30 Jun 30 Jun 31 Dec 30 Jun 30 Jun 31 Dec
2023 2022 2022 2023 2022 2022
£bn £bn £bn £bn £bn £bn
International(2) 371.8 377.0 363.6 (2.7) 34.5 (13.1)
UK Institutional
- Defined contribution 146.1 129.7 135.2 5.5 7.0 4.6
- Defined benefit 489.6 630.1 547.8 (17.3) 22.4 (10.0)
Wholesale(3) 51.2 45.5 48.3 1.3 1.4 2.2
ETF(4) 9.9 8.4 8.5 0.9 0.3 0.3
Total external 1,068.6 1,190.7 1,103.4 (12.3) 65.6 (16.0)
1. External net flows exclude movements in short-term solutions assets,
with maturity as determined by client agreements and are subject to a higher
degree of variability.
2. International assets are shown on the basis of client domicile. Total
International AUM including assets managed internationally on behalf of UK
clients amounted to £457bn as at 30 June 2023 (30 June 2022: £468bn; 31
December 2022: £441bn).
3. Wholesale represents assets from the Retail Intermediary business and
£0.3bn of assets from Personal Investing customers that did not migrate to
Fidelity International Limited.
4. ETF reflects external AUM and Flows invested on the platform. Total
AUM managed on the platform is £11.7bn ($14.9bn) in H1 23 (H1 22: £9.9bn
($12.0bn); FY 22: £10.2bn ($12.3bn)) and Flows of £1.0bn ($1.3bn) in H1 23
(H1 22: £0.6bn ($0.8bn); FY 22: £1.0bn ($1.3bn)) which include internal
investment from other LGIM asset classes.
5.03 Reconciliation of assets under management to Consolidated Balance Sheet
Restated Restated
30 Jun 2023 30 Jun 2022 31 Dec 2022
£bn £bn £bn
Assets under management(1) 1,158 1,290 1,196
Derivative notionals(2) (285) (387) (337)
Third party assets(3) (446) (429) (412)
Other(4) 52 24 45
Total financial investments, investment property and cash and cash equivalents 479 498 492
1. These balances are unaudited.
2. Derivative notionals are included in the assets under management
measure but are not for IFRS reporting and are thus removed.
3. Third party assets are those that LGIM manage on behalf of others
which are not included on the group's Consolidated Balance Sheet.
4. Other includes assets that are managed by third parties on behalf of
the group, other assets and liabilities related to financial investments,
derivative assets and pooled funds. It also includes measurement differences
between assets under management, which are on a market value basis, and total
investments on an IFRS basis.
5.04 Assets under administration
Workplace(1) Annuities(2) Workplace(1) Annuities(2) Workplace(1) Annuities(2)
30 Jun 2023 30 Jun 2023 30 Jun 2022 30 Jun 2022 31 Dec 2022 31 Dec 2022
£bn £bn £bn £bn £bn £bn
As at 1 January 66.6 72.4 65.7 89.9 65.7 89.9
Gross inflows 4.9 5.5 6.1 5.0 10.7 10.7
Gross outflows (1.9) - (1.8) - (3.4) -
Payments to pensioners - (3.6) - (2.4) - (5.0)
Net flows 3.0 1.9 4.3 2.6 7.3 5.7
Market and other movements 2.1 (1.7) (6.9) (13.7) (6.4) (23.2)
As at 30 June 71.7 72.6 63.1 78.8 66.6 72.4
1. Workplace assets under administration as at 30 June 2023 includes
£71.5bn (30 June 2022: £63.0bn; 31 December 2022: £66.4bn) of assets under
management included in Note 5.01.
2. Annuities assets under administration as at 30 June 2023 includes
£63.3bn (30 June 2022: £69.9bn; 31 December 2022: £63.8bn) of assets under
management included in Note 5.01.
5.05 LGRI new business
6 months 6 months 6 months Full year
30 Jun 30 Jun 31 Dec 31 Dec
2023 2022 2022 2022
£m £m £m £m
UK(1,2) 4,866 3,715 3,604 7,319
US 126 593 1,170 1,763
Bermuda - 141 318 459
Total LGRI new business 4,992 4,449 5,092 9,541
1. UK includes £nil (H1 22: £nil; H2 22: £93m) of Assured Payment
Policies (APPs).
2. UK includes a transaction with the group's UK defined benefit pension
schemes as disclosed in Note 4.17 Related party transactions.
5.06 Retail new business
6 months 6 months 6 months Full year
30 Jun 30 Jun 31 Dec 31 Dec
2023 2022 2022 2022
£m £m £m £m
Individual annuities 575 453 501 954
Lifetime mortgage loans and retirement interest only mortgages 163 338 294 632
Total Retail Retirement new business 738 791 795 1,586
UK Retail protection 76 85 86 171
UK Group protection 53 63 44 107
US protection(1) 70 48 56 104
Total Insurance new business 199 196 186 382
Total Retail new business 937 987 981 1,968
1. In local currency, US protection reflects new business of $87m for
2023 (H1 22: $62m; H2 22: $67m).
Capital
6.01 Group regulatory capital - Solvency II
The group complies with the requirements established by the Solvency II
Framework Directive, as adopted by the Prudential Regulation Authority (PRA)
in the UK and measures and monitors its capital resources on this basis.
The Solvency II results are estimated and unaudited. Further explanation of
the underlying methodology and assumptions are set out in the sections below.
The group calculates its Solvency II capital requirements using a Partial
Internal Model. The vast majority of the risk to which the group is exposed is
assessed on the Partial Internal Model basis approved by the PRA. Capital
requirements for a few smaller entities are assessed using the Standard
Formula basis on materiality grounds. The group's US insurance businesses and
Legal & General Reinsurance Company No. 2 are valued on a local statutory
basis, following the PRA's approval to use the Deduction and Aggregation
method of including these businesses in the group solvency II calculation.
The table below shows the group Own Funds, Solvency Capital Requirement (SCR)
and Surplus Own Funds, based on the Partial Internal Model, Matching
Adjustment and Transitional Measures on Technical Provisions (TMTP) as at 30
June 2023.
(i) Capital position
As at 30 June 2023, and on the above basis, the group had a surplus of
£9,161m (31 December 2022: £9,915m) over its Solvency Capital Requirement,
corresponding to a Solvency II capital coverage ratio of 230% (31 December
2022: 236%). The Solvency II capital position is as follows:
30 Jun 31 Dec
2023 2022
£m £m
Unrestricted Tier 1 Own Funds 12,631 13,393
Restricted Tier 1 Own Funds(1) 495 495
Tier 2 Subordinated liabilities 3,304 3,448
Eligibility restrictions (233) (110)
Solvency II Own Funds(2,3) 16,197 17,226
Solvency Capital Requirement (7,036) (7,311)
Solvency II surplus 9,161 9,915
SCR Coverage ratio 230% 236%
1. Restricted Tier 1 Own Funds represent Perpetual restricted Tier 1
contingent convertible notes.
2. Solvency II Own Funds do not include an accrual for the interim
dividend of £340m (31 December 2022: £829m) declared after the balance sheet
date.
3. Solvency II Own Funds allow for a Risk Margin of £2,729m (2022:
£2,753m) and TMTP of £1,901m (2022: £2,136m).
6.01 Group regulatory capital - Solvency II (continued)
(ii) Methodology and assumptions
The methodology, assumptions and Partial Internal Model underlying the
calculation of Solvency II Own Funds and associated capital requirements are
broadly consistent with those set out in the group's 2022 Annual Report and
Accounts and Full Year Results.
Non-market assumptions are consistent with those underlying the group's IFRS
disclosures, but with the removal of any margins for prudence. Future
investment returns and discount rates are those defined by the PRA, using
risk-free rates based on SONIA market swap rates for sterling denominated
liabilities. For annuities that are eligible, the liability discount rate
includes a Matching Adjustment. This Matching Adjustment varies between LGAS
and LGRe and by the currency of the relevant liabilities.
At 30 June 2023 the Matching Adjustment for UK GBP denominated liabilities was
144 basis points (31 December 2022: 141 basis points) after deducting an
allowance for the fundamental spread equivalent to 56 basis points (31
December 2022: 55 basis points).
(iii) Analysis of change
Operational Surplus Generation is the expected surplus generated from the
assets and liabilities in-force at the start of the year. It is based on
assumed real world returns and best estimate non-market assumptions. It
includes the impact of management actions to the extent that, at the start of
the year, these were reasonably expected to be implemented over the period.
New Business Strain is the cost of acquiring business and setting up Technical
Provisions and SCR (net of any premium income), on actual new business written
over the period. It is based on economic conditions at the point of sale.
The table below shows the movement (net of tax) during the six month period
ended 30 June 2023 in the group's Solvency II surplus.
6 months 6 months 6 months
30 Jun 2023 30 Jun 2023 30 Jun 2023
Own Funds SCR Surplus
£m £m £m
Opening Position 17,226 (7,311) 9,915
Operational Surplus Generation(1) 835 112 947
New business strain 188 (383) (195)
Net surplus generation 1,023 (271) 752
Operating variances(2) (543)
Mergers, acquisitions and disposals(3) (150)
Market movements(4) 18
Dividends paid(5) (831)
Total surplus movement (after dividends paid in the period) (1,029) 275 (754)
Closing Position 16,197 (7,036) 9,161
1. Operational Surplus Generation includes a £104m release of Risk
Margin and £(103)m amortisation of the TMTP.
2. Operating variances include the impact of experience variances,
changes to valuation assumptions, methodology changes and other management
actions including changes in asset mix. The net impact of operating variances
over the period was negative and predominantly reflects timing differences
which we expect to reverse in H2.
3. Mergers, acquisitions and disposals for the 6 months ended 30 June
2023 includes costs incurred relating to the announced intent to cease
production within the Modular Homes business and impairment of the group's
investment in Onto, along with the associated change in SCR.
4. Market movements represent the impact of changes in investment market
conditions during the period and changes to future economic assumptions. The
movement during the period primarily reflects the impact of rising rates on
the valuation of the balance sheet, partially offset by a number of other,
smaller variances.
5. Dividends paid are the amounts from the 2022 final dividend paid in
H1 2023.
6.01 Group regulatory capital - Solvency II (continued)
(iii) Analysis of change (continued)
The table below shows the movement (net of tax) during the year ended 31
December 2022 in the group's Solvency II surplus.
Full year Full year Full year
31 Dec 2022 31 Dec 2022 31 Dec 2022
Own Funds SCR Surplus
£m £m £m
Opening Position 17,561 (9,376) 8,185
Operational Surplus Generation(1) 1,409 396 1,805
New business strain 333 (685) (352)
Net surplus generation 1,742 (289) 1,453
Operating variances(2) (327)
Mergers, acquisitions and disposals -
Market movements(3) 1,720
Dividends paid(4) (1,116)
Total surplus movement (after dividends paid in the period) (335) 2,065 1,730
Closing Position 17,226 (7,311) 9,915
1. Operational Surplus Generation includes a £358m release of Risk
Margin and £(342)m amortisation of the TMTP.
2. Operating variances include the impact of experience variances,
changes to valuation assumptions, methodology changes and other management
actions including changes in asset mix.
3. Market movements represent the impact of changes in investment market
conditions over the year and changes to future economic assumptions.
4. Dividends paid are the amounts from the 2021 final dividend and the
2022 interim dividend.
(iv) Reconciliation of IFRS equity to Solvency II Own Funds
A reconciliation of the group's IFRS equity to Solvency II Own Funds is given
below:
Restated
30 Jun 31 Dec
( ) ( ) ( ) 2023 2022
( ) ( ) ( ) £m £m
IFRS equity(1) 5,088 5,607
CSM net of tax 9,812 9,766
IFRS equity plus CSM net of tax 14,900 15,373
Remove DAC, goodwill and other intangible assets and associated liabilities (502) (502)
Add IFRS carrying value of subordinated borrowings(2) 3,769 3,823
Insurance contract valuation differences(3) (1,793) (1,668)
Difference in value of net deferred tax liabilities 74 335
Other (18) (25)
Eligibility restrictions (233) (110)
Solvency II Own Funds(4) 16,197 17,226
1. IFRS equity represents equity attributable to owners of the parent
and restricted Tier 1 convertible debt note as per the Consolidated Balance
Sheet.
2. Treated as available capital on the Solvency II balance sheet as the
liabilities are subordinate to policyholder claims.
3. Differences in the measurement of technical provisions between IFRS
and Solvency II.
4. Solvency II Own Funds do not include an accrual for the interim
dividend of £340m (31 December 2022: £829m) declared after the balance sheet
date.
6.01 Group regulatory capital - Solvency II (continued)
(v) Sensitivity analysis
The following sensitivities are provided to give an indication of how the
group's Solvency II surplus as at 30 June 2023 would have changed in a variety
of adverse events. These are all independent stresses to a single risk. In
practice, the balance sheet is impacted by combinations of stresses and the
combined impact can be larger than adding together the impacts of the same
stresses in isolation. It is expected that, particularly for market risks,
adverse stresses will happen together.
Impact on Impact on Impact on Impact on
net of tax net of tax net of tax net of tax
Solvency II Solvency II Solvency II Solvency II
capital coverage capital coverage
surplus ratio surplus ratio
30 Jun 30 Jun 31 Dec 31 Dec
2023 2023 2022 2022
£bn % £bn %
100bps increase in risk-free rates(1) 0.3 15 0.5 18
100bps decrease in risk-free rates(1,2) (0.4) (16) (0.6) (19)
Credit spreads widen by 100bps assuming an escalating addition to ratings(3,4) 0.4 13 0.3 13
Credit spreads narrow by 100bps assuming an escalating deduction from (0.6) (17) (0.4) (16)
ratings(3,4)
Credit spreads widen by 100bps assuming a flat addition to ratings(3) 0.4 14 0.3 14
Credit spreads of sub investment grade assets widen by 100bps assuming a level (0.2) (7) (0.3) (7)
addition to ratings(3,5)
Credit migration(6) (0.7) (10) (0.8) (10)
25% fall in equity markets(7) (0.4) (3) (0.4) (3)
15% fall in property markets(8) (0.9) (11) (0.9) (11)
50bps increase in future inflation expectations (0.1) (4) (0.1) (3)
Substantially reduced Risk Margin(9) 0.6 8 0.5 7
1. Assuming a recalculation of the Transitional Measure on Technical
Provisions that partially offsets the impact on Risk Margin.
2. In the interest rate down stress negative rates are allowed, i.e.
there is no floor at zero rates.
3. The spread sensitivity applies to the group's corporate bond (and
similar) holdings, with no change in long-term default expectations.
Restructured lifetime mortgages are excluded as the underlying exposure is
mostly to property.
4. The stress for AA bonds is twice that for AAA bonds, for A bonds it
is three times, for BBB four times and so on, such that the weighted average
spread stress for the portfolio is 100 basis points. To give a 100bps increase
on the total portfolio, the spread stress increases in steps of 32bps, i.e.
32bps for AAA, 64bps for AA etc.
5. No stress for bonds rated BBB and above. For bonds rated BB and below
the stress is 100bps. The spread widening on the total portfolio is smaller
than 1bps as the group holds less than 1% in bonds rated BB and below. The
impact is primarily an increase in SCR arising from the modelled cost of
trading downgraded bonds back to a higher rating in the stress scenarios in
the SCR calculation.
6. Credit migration stress covers the cost of an immediate big letter
downgrade on 20% of all assets where the capital treatment depends on a credit
rating (including corporate bonds, and sale and leaseback rental strips;
lifetime mortgage senior notes are excluded). Downgraded assets in our
annuities portfolio are assumed to be traded to their original credit rating,
so the impact is primarily a reduction in Own Funds from the loss of value on
downgrade. The impact of the sensitivity will depend upon the market levels of
spreads at the balance sheet date.
7. This relates primarily to equity exposure in LGC but will also
include equity-based mutual funds and other investments that receive an equity
stress (for example, certain investments in subsidiaries). Some assets have
factors that increase or decrease the stress relative to general equity levels
via a beta factor.
8. Assets stressed include residual values from sale and leaseback, the
full amount of lifetime mortgages and direct investments treated as property.
9. Assuming a 2/3 reduction in the Risk Margin, allowing for offset from
an equivalent reduction in the Transitional Measure on Technical Provisions.
The above sensitivity analysis does not reflect all management actions which
could be taken to reduce the impacts. In practice, the group actively manages
its asset and liability positions to respond to market movements. Other than
in the interest rate and inflation stresses, we have not allowed for the
recalculation of TMTP. Allowance is made for the recalculation of the Loss
Absorbing Capacity of Deferred Tax for all stresses, assuming full capacity
remains available post stress.
The impacts of these stresses are not linear therefore these results should
not be used to interpolate or extrapolate the impact of a smaller or larger
stress. The results of these tests are indicative of the market conditions
prevailing at the balance sheet date. The results would be different if
performed at an alternative reporting date.
6.02 Estimated Solvency II new business contribution
(i) New business by product(1)
Management estimates of the present value of new business premium (PVNBP) and
the margin for selected lines of business are provided below:
Contribution Contribution
from new from new
PVNBP(2) business(3) Margin(4) PVNBP(2) business(3) Margin(4)
6 months 6 months 6 months Full year Full year Full year
2023 2023 2023 2022 2022 2022
£m £m % £m £m %
LGRI - UK annuity business(5) 4,050 326 8.0 6,484 575 8.9
Retail Retirement - UK annuity business 575 34 5.9 954 60 6.3
UK Protection Total 621 17 2.8 1,512 82 5.4
US Protection(6) 605 68 11.2 796 84 10.6
1. Selected lines of business only.
2. PVNBP excludes a quota share reinsurance single premium of £816m (31
December 2022: £835m) relating to LGRI new business.
3. The contribution from new business is defined as the present value at
the point of sale of expected future Solvency II surplus emerging from new
business written in the year using the risk discount rate applicable at the
end of the year.
4. Margin is based on unrounded inputs.
5. LGRI UK annuity business includes a transaction with the group's UK
defined benefit pension schemes as disclosed in Note 4.17 Related party
transactions.
6. In local currency, US protection business reflects PVNBP of $748m (31
December 2022: $985m) and a contribution from new business of $84m (31
December 2022: $104m).
(ii) Basis of preparation
Solvency II new business contribution reflects the portion of Solvency II
value added by new business written in the period. It has been calculated in a
manner consistent with principles and methodologies which were adopted in the
group's 2022 Annual Report and Accounts and Full Year Results.
Solvency II new business contribution has been calculated for the group's most
material insurance-related businesses, namely, LGRI, Retail Retirement and
Insurance.
Intra-group reinsurance arrangements are in place between US, UK and Bermudan
businesses and it is expected that these arrangements will be periodically
extended to cover recent new business. The US protection new business margin
assumes that the new business will continue to be reinsured in 2023 and looks
through the intra-group arrangements.
6.02 Estimated Solvency II new business contribution
(continued)
(iii) Assumptions
The key economic assumptions are as follows:
30 Jun 2023 31 Dec 2022
% %
Margin for Risk 4.1 4.4
Risk-free rate
- UK 3.9 3.6
- US 3.8 3.9
Risk discount rate (net of tax)
- UK 8.0 8.0
- US 7.9 8.3
Long-term rate of return on annuities 5.5 5.7
The future earnings are discounted using duration-based discount rates, which
is the sum of a duration-based risk-free rate and a flat margin for risk. The
risk-free rates have been based on a swap curve net of the PRA-specified
Credit Risk Adjustment. The risk-free rate shown above is a weighted average
based on the projected cash flows.
Other than updating for recent experience, all other economic and non-economic
assumptions and methodologies that would have a material impact on the margin
for these contracts are unchanged from those previously used by the group for
its European Embedded Value reporting, other than the cost of currency hedging
which has been updated to reflect current market conditions and hedging
activity in light of Solvency II. In particular:
• The assumed future pre-tax returns on fixed interest and RPI linked
securities are set by reference to the portfolio yield on the relevant backing
assets held at market value at the end of the reporting period. The calculated
return takes account of derivatives and other credit instruments in the
investment portfolio. The returns on fixed and index-linked assets are
calculated net of an allowance for default risk which takes account of the
credit rating and the outstanding term of the assets. The allowance for
corporate and other unapproved credit asset defaults within the new business
contribution is calculated explicitly for each bulk annuity scheme written,
and the weighted average deduction for business written in 2023 equates to a
level rate deduction from the expected returns for the overall annuities
portfolio of 20 basis points.
• Non-economic assumptions have been set at levels commensurate with
recent operating experience, including those for mortality, morbidity,
persistency and maintenance expenses (excluding development costs). An
allowance is made for future mortality improvement. For new business,
mortality assumptions may be modified to take certain scheme specific features
into account.
The profits on the new business are presented gross of tax.
(iv) Reconciliation of PVNBP to total LGRI and Retail new business
6 months Full year
2023 2022
Notes £bn £bn
PVNBP 6.02 (i) 5.9 9.7
Effect of capitalisation factor ( ) (1.1) (1.5)
New business premiums from selected lines 4.8 8.2
Other(1) 1.1 3.3
Total LGRI and Retail new business 5.05, 5.06 5.9 11.5
1. Other principally includes annuity sales in the US, lifetime mortgage
loans and retirement interest only mortgages, and quota share reinsurance
premiums.
Investments
7.01 Investment portfolio
Restated Restated
30 Jun 30 Jun 31 Dec
2023 2022 2022
£m £m £m
Worldwide total assets under management(1) 1,165,186 1,295,640 1,202,676
Client and policyholder assets (1,034,454) (1,175,344) (1,073,126)
Investments to which shareholders are directly exposed (market value) 130,732 120,296 129,550
Adjustment from market value to IFRS carrying value(2) 1,245 478 1,083
Investments to which shareholders are directly exposed (IFRS carrying value) 131,977 120,774 130,633
1. Worldwide total assets under management include LGIM AUM and other
group assets not managed by LGIM.
2. Adjustments reflect measurement differences for a portion of the
group's financial investments designated as amortised cost.
Analysed by investment class:
Other
Annuity(1) LGC(2) shareholder Restated Restated
investments investments investments Total Total Total
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 31 Dec
2023 2023 2023 2023 2022 2022
Notes £m £m £m £m £m £m
Equities 112 2,557 408 3,077 3,492 3,071
Bonds 7.03 69,361 1,354 2,648 73,363 77,321 71,773
Derivative assets(3) 42,033 274 - 42,307 25,071 41,978
Property 7.04 5,123 639 - 5,762 6,156 5,644
Loans(4) 1,727 287 40 2,054 1,773 1,073
Financial investments 118,356 5,111 3,096 126,563 113,813 123,539
Cash and cash equivalents 1,622 1,051 641 3,314 4,973 4,834
Other assets(5) 157 1,931 12 2,100 1,988 2,260
Total investments 120,135 8,093 3,749 131,977 120,774 130,633
1. Annuity investments includes products held within the LGRI and Retail
Retirement annuity portfolios, and includes lifetime mortgage loans &
retirement interest only mortgages.
2. LGC investments includes £89m (30 June 2022: £Nil; 31 December
2022: £95m) of Legal & General Reinsurance Company Limited's assets
managed by LGC, along with £169m (30 June 2022: £60m; 31 December 2022:
£122m) of bonds and equities that belong to other shareholder funds.
3. Derivative assets are shown gross of derivative liabilities of
£46.0bn (30 June 2022: £28.4bn; 31 December 2022: £46.1bn). Exposures arise
from use of derivatives for efficient portfolio management, particularly the
use of interest rate swaps, inflation swaps, currency swaps and foreign
exchange forward contracts for assets and liability management.
4. Loans include reverse repurchase agreements of £2,049m (30 June
2022: £1,701m; 31 December 2022: £1,072m).
5. Other assets include finance leases of £157m (30 June 2022: £85m;
31 December 2022: £110m), associates and joint ventures of £553m (30 June
2022: £387m; 31 December 2022: £554m) and the consolidated net asset value
of the group's investments in CALA Homes and other housing businesses.
7.02 Direct investments
(i) Total investments analysed by asset class
Restated Restated Restated Restated
Direct(1) Traded(2) Direct(1) Traded(2) Restated Direct(1) Traded(2) Restated
investments securities Total investments securities Total investments securities Total
30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 30 Jun 31 Dec 31 Dec 31 Dec
2023 2023 2023 2022 2022 2022 2022 2022 2022
£m £m £m £m £m £m £m £m £m
Equities 1,782 1,295 3,077 1,431 2,061 3,492 1,704 1,367 3,071
Bonds(3) 24,596 48,767 73,363 22,280 55,041 77,321 23,171 48,602 71,773
Derivative assets - 42,307 42,307 - 25,071 25,071 - 41,978 41,978
Property(4) 5,762 - 5,762 6,156 - 6,156 5,644 - 5,644
Loans 4 2,050 2,054 71 1,702 1,773 - 1,073 1,073
Financial investments 32,144 94,419 126,563 29,938 83,875 113,813 30,519 93,020 123,539
Cash and cash equivalents 213 3,101 3,314 116 4,857 4,973 56 4,778 4,834
Other assets 2,100 - 2,100 1,988 - 1,988 2,260 - 2,260
Total investments 34,457 97,520 131,977 32,042 88,732 120,774 32,835 97,798 130,633
1. Direct investments, which generally constitute an agreement with
another party, represent an exposure to untraded and often less volatile asset
classes. Direct investments also include physical assets, bilateral loans and
private equity, but excluded hedge funds.
2. Traded securities are defined by exclusion. If an instrument is not a
direct investment, then it is classed as a traded security.
3. Bonds include lifetime mortgage loans of £4,937m (30 June 2022:
£5,758m; 31 December 2022: £4,844m).
4. A further breakdown of property is provided in Note 7.04.
7.02 Direct investments (continued)
(ii) Direct investments analysed by asset portfolio
Annuity(1) Shareholder(2) Insurance(3) Total
30 Jun 30 Jun 30 Jun 30 Jun
2023 2023 2023 2023
£m £m £m £m
Equities 54 1,491 237 1,782
Bonds(4) 23,224 119 1,253 24,596
Property 5,123 639 - 5,762
Loans - 4 - 4
Financial investments 28,401 2,253 1,490 32,144
Other assets, cash and cash equivalents 157 2,136 20 2,313
Total direct investments 28,558 4,389 1,510 34,457
Annuity(1) Shareholder(2) Insurance(3) Total
30 Jun 30 Jun 30 Jun 30 Jun
2022 2022 2022 2022
£m £m £m £m
Equities 42 1,192 197 1,431
Bonds(4) 21,014 5 1,261 22,280
Property 5,632 524 - 6,156
Loans - 71 - 71
Financial investments 26,688 1,792 1,458 29,938
Other assets, cash and cash equivalents 94 2,010 - 2,104
Total direct investments (restated) 26,782 3,802 1,458 32,042
Annuity(1) Shareholder(2) Insurance(3) Total
31 Dec 31 Dec 31 Dec 31 Dec
2022 2022 2022 2022
£m £m £m £m
Equities 51 1,417 236 1,704
Bonds(4) 21,840 88 1,243 23,171
Property 5,037 607 - 5,644
Loans - - - -
Financial investments 26,928 2,112 1,479 30,519
Other assets, cash and cash equivalents 110 2,189 17 2,316
Total direct investments (restated) 27,038 4,301 1,496 32,835
1. Annuity includes products held within the LGRI and Retail Retirement
annuity portfolios.
2. Shareholder primarily includes the LGC direct investment portfolio
and £89m (30 June 2022: £Nil; 31 December 2022: £95m) of Legal &
General Reinsurance Company Limited's assets managed by LGC, along with £169m
(30 June 2022: £60m; 31 December 2022: £122m) of bonds and equities that
belong to other shareholder funds.
3. Insurance primarily includes assets backing the group's US protection
business.
4. Bonds include lifetime mortgage loans of £4,937m (30 June 2022:
£5,758m; 31 December 2022: £4,844m).
7.03 Bond portfolio summary
(i) Sectors analysed by credit rating
BB or
AAA AA A BBB below Other Total(2) Total(2)
As at 30 June 2023 £m £m £m £m £m £m £m %
Sovereigns, Supras and Sub-Sovereigns 908 6,259 857 101 2 2 8,129 11
Banks:
- Tier 1 - - - - - 1 1 -
- Tier 2 and other subordinated - 95 93 59 1 - 248 -
- Senior - 1,488 2,995 820 - - 5,303 7
- Covered 79 - - - - - 79 -
Financial Services:
- Tier 2 and other subordinated - 449 160 22 7 4 642 1
- Senior 139 235 610 714 - - 1,698 3
Insurance:
- Tier 2 and other subordinated 56 124 23 40 1 - 244 1
- Senior 9 183 294 393 - - 879 1
Consumer Services and Goods:
- Cyclical - 13 1,321 1,669 35 20 3,058 4
- Non-cyclical 293 836 2,988 3,075 78 - 7,270 10
- Healthcare 12 733 933 734 3 - 2,415 3
Infrastructure:
- Social 167 867 3,974 1,104 67 - 6,179 9
- Economic 264 148 967 3,758 59 - 5,196 7
Technology and Telecoms 121 331 1,382 2,610 12 3 4,459 6
Industrials - 58 664 668 24 - 1,414 2
Utilities 547 660 4,546 4,612 17 - 10,382 14
Energy - 13 370 916 32 - 1,331 2
Commodities - - 329 582 24 20 955 1
Oil and Gas - 500 673 316 14 60 1,563 2
Real estate - 20 2,171 2,066 31 - 4,288 6
Structured finance ABS / RMBS / CMBS / Other 565 912 538 575 45 8 2,643 3
Lifetime mortgage loans(1) 3,235 887 449 353 - 13 4,937 7
CDOs - 40 - 10 - - 50 -
Total £m 6,395 14,851 26,337 25,197 452 131 73,363 100
Total % 9 20 36 34 1 - 100
1. The credit ratings attributed to lifetime mortgage loans are
allocated in accordance with the internal Matching Adjustment structuring.
2. The group's bond portfolio is dominated by investments backing LGRI's
and Retail Retirement's annuity business. These account for £69,374m,
representing 95% of the total group portfolio.
7.03 Bond portfolio summary (continued)
(i) Sectors analysed by credit rating (continued)
BB or
AAA AA A BBB below Other Total(2) Total(2)
As at 30 June 2022 (Restated) £m £m £m £m £m £m £m %
Sovereigns, Supras and Sub-Sovereigns 1,696 8,059 1,184 292 11 1 11,243 15
Banks:
- Tier 1 - - - - - - - -
- Tier 2 and other subordinated - - 68 52 3 1 124 -
- Senior - 1,334 2,336 941 1 - 4,612 6
- Covered 120 - - - - - 120 -
Financial Services:
- Tier 2 and other subordinated - 118 50 32 - 17 217 -
- Senior 51 315 439 368 - - 1,173 2
Insurance:
- Tier 2 and other subordinated 59 175 32 51 - - 317 -
- Senior 5 166 416 462 - - 1,049 1
Consumer Services and Goods:
- Cyclical - 39 1,361 1,877 159 3 3,439 4
- Non-cyclical 323 886 2,536 3,733 247 - 7,725 10
- Healthcare - 612 808 761 4 - 2,185 3
Infrastructure:
- Social 184 895 3,750 927 79 - 5,835 8
- Economic 296 173 894 3,862 180 - 5,405 7
Technology and Telecoms 141 325 1,546 2,801 20 1 4,834 6
Industrials - 52 613 660 29 - 1,354 2
Utilities 386 628 4,735 5,537 28 - 11,314 15
Energy - - 347 765 16 - 1,128 1
Commodities - - 337 781 25 8 1,151 2
Oil and Gas - 505 873 320 226 24 1,948 3
Real estate - 23 1,973 1,729 108 - 3,833 5
Structured finance ABS / RMBS / CMBS / Other 539 772 460 695 32 - 2,498 3
Lifetime mortgage loans(1) 3,721 1,146 497 381 - 13 5,758 7
CDOs - 47 - 12 - - 59 -
Total £m 7,521 16,270 25,255 27,039 1,168 68 77,321 100
Total % 10 21 33 35 1 - 100
1. The credit ratings attributed to lifetime mortgage loans are
allocated in accordance with the internal Matching Adjustment structuring.
2. The group's bond portfolio is dominated by investments backing LGRI's
and Retail Retirement's annuity business. These account for £73,692m,
representing 95% of the total group portfolio.
7.03 Bond portfolio summary (continued)
(i) Sectors analysed by credit rating (continued)
BB or
AAA AA A BBB below Other Total(2) Total(2)
As at 31 December 2022 (Restated) £m £m £m £m £m £m £m %
Sovereigns, Supras and Sub-Sovereigns 1,718 5,561 844 111 7 3 8,244 12
Banks:
- Tier 1 - - - - - 1 1 -
- Tier 2 and other subordinated - - 83 66 3 - 152 -
- Senior - 1,179 2,300 996 2 - 4,477 6
- Covered 114 - - - - - 114 -
Financial Services:
- Tier 2 and other subordinated 32 94 52 20 7 4 209 -
- Senior 49 246 592 561 - - 1,448 2
Insurance:
- Tier 2 and other subordinated 53 138 23 53 - - 267 -
- Senior 6 186 342 407 - - 941 1
Consumer Services and Goods:
- Cyclical - 18 1,129 1,871 161 8 3,187 5
- Non-cyclical 310 830 2,441 3,322 166 - 7,069 10
- Healthcare - 634 916 754 4 - 2,308 3
Infrastructure:
- Social 170 808 3,580 1,173 70 - 5,801 8
- Economic 288 151 999 3,606 173 - 5,217 7
Technology and Telecoms 134 365 1,201 2,687 17 1 4,405 6
Industrials - 60 702 679 23 - 1,464 2
Utilities 531 582 4,699 4,997 27 - 10,836 15
Energy - - 351 802 42 - 1,195 2
Commodities - - 301 658 25 15 999 1
Oil and Gas - 483 805 310 67 52 1,717 3
Real estate - 24 2,004 1,984 91 2 4,105 6
Structured finance ABS / RMBS / CMBS / Other 683 855 566 587 22 8 2,721 4
Lifetime mortgage loans(1) 3,246 824 428 336 - 10 4,844 7
CDOs - 41 - 11 - - 52 -
Total £m 7,334 13,079 24,358 25,991 907 104 71,773 100
Total % 10 18 34 36 2 - 100
1. The credit ratings attributed to lifetime mortgage loans are
allocated in accordance with the internal Matching Adjustment structuring.
2. The group's bond portfolio is dominated by investments backing LGRI's
and Retail Retirement's annuity business. These account for £67,955m,
representing 95% of the total group portfolio.
7.03 Bond portfolio summary (continued)
(ii) Sectors analysed by domicile
Rest of
UK US EU the World Total
As at 30 June 2023 £m £m £m £m £m
Sovereigns, Supras and Sub-Sovereigns 6,127 1,283 266 453 8,129
Banks 1,521 1,979 1,021 1,110 5,631
Financial Services 302 595 1,266 177 2,340
Insurance 61 966 15 81 1,123
Consumer Services and Goods:
- Cyclical 335 2,155 360 208 3,058
- Non-cyclical 1,711 4,683 346 530 7,270
- Healthcare 278 2,078 59 - 2,415
Infrastructure:
- Social 5,269 690 144 76 6,179
- Economic 3,729 840 249 378 5,196
Technology and Telecoms 377 3,010 558 514 4,459
Industrials 194 783 295 142 1,414
Utilities 5,086 3,011 1,809 476 10,382
Energy 313 715 12 291 1,331
Commodities 46 402 132 375 955
Oil and Gas 248 425 542 348 1,563
Real estate 1,888 1,469 618 313 4,288
Structured finance ABS / RMBS / CMBS / Other 678 1,497 46 422 2,643
Lifetime mortgage loans 4,871 - 66 - 4,937
CDOs - - - 50 50
Total 33,034 26,581 7,804 5,944 73,363
7.03 Bond portfolio summary (continued)
(ii) Sectors analysed by domicile (continued)
Rest of
UK US EU the World Total
As at 30 June 2022 (Restated) £m £m £m £m £m
Sovereigns, Supras and Sub-Sovereigns 7,708 1,774 768 993 11,243
Banks 1,514 1,846 812 684 4,856
Financial Services 349 403 380 258 1,390
Insurance 101 1,131 19 115 1,366
Consumer Services and Goods:
- Cyclical 473 2,300 395 271 3,439
- Non-cyclical 1,894 5,316 355 160 7,725
- Healthcare 279 1,842 63 1 2,185
Infrastructure:
- Social 5,104 524 158 49 5,835
- Economic 3,855 881 264 405 5,405
Technology and Telecoms 403 3,080 699 652 4,834
Industrials 189 800 313 52 1,354
Utilities 6,341 2,583 1,877 513 11,314
Energy 327 634 1 166 1,128
Commodities 37 449 151 514 1,151
Oil and Gas 167 567 690 524 1,948
Real estate 2,019 935 573 306 3,833
Structured Finance ABS / RMBS / CMBS / Other 704 1,503 11 280 2,498
Lifetime mortgage loans 5,758 - - - 5,758
CDOs - - - 59 59
Total 37,222 26,568 7,529 6,002 77,321
7.03 Bond portfolio summary (continued)
(ii) Sectors analysed by domicile (continued)
Rest of
UK US EU the World Total
As at 31 December 2022 (Restated) £m £m £m £m £m
Sovereigns, Supras and Sub-Sovereigns 5,261 1,754 614 615 8,244
Banks 1,089 1,897 717 1,041 4,744
Financial Services 410 539 520 188 1,657
Insurance 108 1,007 20 73 1,208
Consumer Services and Goods:
- Cyclical 549 2,132 298 208 3,187
- Non-cyclical 1,830 4,775 296 168 7,069
- Healthcare 257 1,986 64 1 2,308
Infrastructure:
- Social 4,890 704 150 57 5,801
- Economic 3,756 833 256 372 5,217
Technology and Telecoms 363 2,963 577 502 4,405
Industrials 192 824 292 156 1,464
Utilities 5,656 2,840 1,855 485 10,836
Energy 294 671 13 217 1,195
Commodities 35 415 113 436 999
Oil and Gas 158 508 650 401 1,717
Real estate 2,011 1,228 636 230 4,105
Structured Finance ABS / RMBS / CMBS / Other 641 1,674 44 362 2,721
Lifetime mortgage loans 4,801 - 43 - 4,844
CDOs - - - 52 52
Total 32,301 26,750 7,158 5,564 71,773
7.03 Bond portfolio summary (continued)
(iii) Bond portfolio analysed by credit rating
Externally Internally
rated rated(1) Total
As at 30 June 2023 £m £m £m
AAA 2,828 3,567 6,395
AA 12,285 2,566 14,851
A 16,753 9,584 26,337
BBB 17,781 7,416 25,197
BB or below 219 233 452
Other 16 115 131
Total 49,882 23,481 73,363
Externally Internally
rated rated(1) Total
As at 30 June 2022 (Restated) £m £m £m
AAA 3,472 4,049 7,521
AA 13,469 2,801 16,270
A 17,268 7,987 25,255
BBB 19,964 7,075 27,039
BB or below 777 391 1,168
Other 19 49 68
Total 54,969 22,352 77,321
Externally Internally
rated rated(1) Total
As at 31 December 2022 (Restated) £m £m £m
AAA 3,741 3,593 7,334
AA 10,577 2,502 13,079
A 15,883 8,475 24,358
BBB 18,554 7,437 25,991
BB or below 529 378 907
Other 17 87 104
Total 49,301 22,472 71,773
1. Where external ratings are not available an internal rating has been
used where practicable to do so.
7.03 Bond portfolio summary (continued)
(iv) Sectors analysed by Direct investments and traded securities
Direct
investments Traded Total
As at 30 June 2023 £m £m £m
Sovereigns, Supras and Sub-Sovereigns 659 7,470 8,129
Banks 829 4,802 5,631
Financial Services 1,737 603 2,340
Insurance 98 1,025 1,123
Consumer Services and Goods:
- Cyclical 641 2,417 3,058
- Non-cyclical 629 6,641 7,270
- Healthcare 512 1,903 2,415
Infrastructure:
- Social 3,630 2,549 6,179
- Economic 3,945 1,251 5,196
Technology and Telecoms 213 4,246 4,459
Industrials 125 1,289 1,414
Utilities 1,960 8,422 10,382
Energy 460 871 1,331
Commodities 139 816 955
Oil and Gas 84 1,479 1,563
Real estate 2,857 1,431 4,288
Structured finance ABS / RMBS / CMBS / Other 1,141 1,502 2,643
Lifetime mortgage loans 4,937 - 4,937
CDOs - 50 50
Total 24,596 48,767 73,363
7.03 Bond portfolio summary (continued)
(iv) Sectors analysed by Direct investments and traded securities (continued)
Direct
investments Traded Total
As at 30 June 2022 (Restated) £m £m £m
Sovereigns, Supras and Sub-Sovereigns 770 10,473 11,243
Banks 739 4,117 4,856
Financial Services 515 875 1,390
Insurance 116 1,250 1,366
Consumer Services and Goods:
- Cyclical 580 2,859 3,439
- Non-cyclical 501 7,224 7,725
- Healthcare 287 1,898 2,185
Infrastructure:
- Social 3,092 2,743 5,835
- Economic 3,906 1,499 5,405
Technology and Telecoms 192 4,642 4,834
Industrials 100 1,254 1,354
Utilities 1,717 9,597 11,314
Energy 384 744 1,128
Commodities 70 1,081 1,151
Oil and Gas 65 1,883 1,948
Real estate 2,407 1,426 3,833
Structured Finance ABS / RMBS / CMBS / Other 1,081 1,417 2,498
Lifetime mortgage loans 5,758 - 5,758
CDOs - 59 59
Total 22,280 55,041 77,321
7.03 Bond portfolio summary (continued)
(iv) Sectors analysed by Direct investments and traded securities (continued)
Direct
investments Traded Total
As at 31 December 2022 (Restated) £m £m £m
Sovereigns, Supras and Sub-Sovereigns 816 7,428 8,244
Banks 787 3,957 4,744
Financial Services 941 716 1,657
Insurance 111 1,097 1,208
Consumer Services and Goods:
- Cyclical 598 2,589 3,187
- Non-cyclical 637 6,432 7,069
- Healthcare 443 1,865 2,308
Infrastructure:
- Social 3,300 2,501 5,801
- Economic 3,913 1,304 5,217
Technology and Telecoms 123 4,282 4,405
Industrials 120 1,344 1,464
Utilities 2,012 8,824 10,836
Energy 385 810 1,195
Commodities 67 932 999
Oil and Gas 89 1,628 1,717
Real estate 2,719 1,386 4,105
Structured Finance ABS / RMBS / CMBS / Other 1,266 1,455 2,721
Lifetime mortgage loans 4,844 - 4,844
CDOs - 52 52
Total 23,171 48,602 71,773
7.04 Property analysis
Property exposure within Direct investments by status
Annuity Shareholder(1) Total
As at 30 June 2023 £m £m £m %
Fully let(2) 4,566 492 5,058 87
Development 557 111 668 12
Land - 36 36 1
Total 5,123 639 5,762 100
Annuity Shareholder(1) Total
As at 30 June 2022 £m £m £m %
Fully let(2) 5,190 - 5,190 84
Development 442 403 845 14
Land - 121 121 2
Total 5,632 524 6,156 100
Annuity Shareholder(1) Total
As at 31 December 2022 £m £m £m %
Fully let(2) 4,568 462 5,030 89
Development 469 83 552 10
Land - 62 62 1
Total 5,037 607 5,644 100
1. The above analysis does not include assets related to the group's
investments in CALA Homes and other housing businesses, which are accounted
for as inventory within Receivables and other assets on the group's
Consolidated Balance Sheet and measured at the lower of cost and net
realisable value. At 30 June 2023, the group held a total of £2,022m (30 June
2022: £2,072m; 31 December 2022: £1,973m) of such assets.
2. £4.4bn (30 June 2022: £5.1bn; 31 December 2022: £4.5bn) fully let
property were let to corporate clients, out of which £3.9bn (30 June 2022:
£4.9bn; 31 December 2022: £4.0bn) were let to investment grade tenants.
Alternative Performance Measures
An alternative performance measure (APM) is a financial measure of historic or
future financial performance, financial position, or cash flows, other than a
financial measure defined under IFRS or the regulations of Solvency II. APMs
offer investors and stakeholders additional information on the company's
performance and the financial effect of 'one-off' events, and the group uses a
range of these metrics to enhance understanding of the group's performance.
However, APMs should be viewed as complementary to, rather than as a
substitute for, the figures determined according to other regulations. The
APMs used by the group are listed in this Note, along with their
definition/explanation, their closest IFRS or Solvency II measure and, where
relevant, the reference to the reconciliations to those measures.
The APMs used by the group may not be the same as, or comparable to, those
used by other companies, both in similar and different industries. The
calculation of APMs is consistent with previous periods, unless otherwise
stated.
APMs derived from IFRS measures
Adjusted operating profit
Adjusted operating profit is an APM that supports the internal performance
management and decision making of the group's operating businesses, and
accordingly underpins the remuneration outcomes of the executive directors and
senior management. The group considers this measure meaningful to stakeholders
as it enhances the understanding of the group's operating performance over
time by separately identifying non-operating items.
Adjusted operating profit measures the pre-tax result excluding the impact of
investment volatility, economic assumption changes caused by changes in market
conditions or expectations and exceptional items. Key considerations in
relation to the calculation of adjusted operating profit for the group's
long-term insurance businesses and shareholder funds are set out below.
Exceptional income and expenses which arise outside the normal course of
business in the year, such as merger and acquisition and start-up costs, are
excluded from adjusted operating profit.
Long-term insurance
Adjusted operating profit reflects longer-term economic assumptions for the
group's retirement and insurance businesses. Variances between actual and
long-term expected investment return on traded and real assets are excluded
from adjusted operating profit, as well as economic assumption changes caused
by changes in market conditions or expectations (e.g. credit default and
inflation) and any difference between the actual allocated asset mix and the
target long-term asset mix on new pension risk transfer business. Assets held
for future new pension risk transfer business are excluded from the asset
portfolio used to determine the discount rate for annuities on insurance
contract liabilities. The impact of investment management actions that
optimise the yield of the assets backing the back book of annuity contracts is
now included within adjusted operating profit.
For the group's long-term insurance businesses, reinsurance mismatches are
also excluded from adjusted operating profit. Reinsurance mismatches arise
where the reinsurance offset rules in IFRS 17 do not reflect management's view
of the net of reinsurance transaction. In particular, during a period of
reinsurance renegotiation, reinsurance gains cannot be recognised to offset
any inception losses on the underlying contracts where they are recognised
before the new reinsurance agreement is signed. In these circumstances, the
onerous contract losses are reduced to reflect the net loss (if any) after
reinsurance, and future contractual service margin (CSM) amortisation is
reduced over the duration of the contracts.
Shareholder funds
Shareholder funds include both the group's traded equity portfolio and certain
direct investments for which adjusted operating profit is based on the
long-term economic return expected to be generated. For these direct
investments, as well as for the group's traded equity portfolio, deviations
from such long-term economic return are excluded from adjusted operating
profit. Direct investments for which adjusted operating profit is reflected in
this way include the following:
• Development assets, predominantly in the specialist commercial real
estate and housing sectors within the LGC alternative asset portfolio: these
are assets under construction and contracted to either be sold to other parts
of the group or for other commercial usage, and on which LGC accepts
development risks and expects to realise profits once construction is
complete.
• 'Scale-up' investments, predominantly in the alternative finance
sector within the LGC alternative asset portfolio as well as the fintech
business within Retail: these are investments in early-stage ventures in a
fast-growing phase of their life cycle, but which have not yet reached a
steady-state level of earnings.
Shareholder funds also includes other direct investments for which adjusted
operating profit reflects the IFRS profit before tax. Direct investments for
which adjusted operating profit is reflected in this way include the
following:
• 'Start-up' investments: these are companies in the beginning stages of
their business lifecycle (i.e. typically less than 24 months), which therefore
have limited operating history available and typically are in a pre-revenue
stage.
• Mature assets: these are companies in their final stages of business
lifecycle. They are stable businesses and have sustainable streams of income,
but the growth rate in their earnings is expected to remain less pronounced in
the future.
Note 2.02 Operating profit reconciles adjusted operating profit with its
closest IFRS measure, which is profit before tax attributable to equity
holders. Further details on reconciling items between adjusted operating
profit and profit before tax attributable to equity holders are presented in
Note 2.06 Investment and other variances.
Return on Equity (ROE)
ROE measures the return earned by shareholders on shareholder capital retained
within the business. It is a measure of performance of the business, which
shows how efficiently we are using our financial resources to generate a
return for shareholders. ROE is calculated as IFRS profit after tax divided
by average IFRS shareholders' funds (by reference to opening and closing
shareholders' funds as provided in the IFRS Consolidated statement of changes
in equity for the period). In the current period, ROE was quantified using
annualised profit attributable to equity holders of £632m (30 June 2022:
£1,150m; 31 December 2022: £846m) and average equity attributable to the
owners of the parent of £4,853m (30 June 2022: £5,039m; 31 December 2022:
£5,027m), based on an opening balance of £5,112m and a closing balance of
£4,593m (30 June 2022: based on an opening balance of £4,941m and a closing
balance of £5,137m; 31 December 2022: based on an opening balance of £4,941m
and a closing balance of £5,112m).
Assets under Management
Assets under management represent funds which are managed by our fund managers
on behalf of investors. It represents the total amount of money investors have
trusted with our fund managers to invest across our investment products. AUM
include assets which are reported in the group Consolidated Balance Sheet as
well as third-party assets that LGIM manage on behalf of others, and assets
managed by third parties on behalf of the group.
Note 5.03 Reconciliation of assets under management to Consolidated Balance
Sheet reconciles AUM with Total financial investments, investment property and
cash and cash equivalents.
Adjusted profit before tax attributable to equity holders
Adjusted profit before tax attributable to equity holders measures the actual
distributable earnings before tax attributable to shareholders of the group.
It therefore incorporates actual investment returns experienced during the
year. Adjusted profit before tax attributable to equity holders is equal to
profit before tax attributable to equity holders plus the pre-tax results of
discontinued operations.
Note 2.02 Operating profit reconciles adjusted profit before tax attributable
to equity holders to profit for the year. In absence of discontinued
operations, adjusted profit before tax attributable to equity holders is equal
to profit before tax attributable to equity holders.
APMs derived from Solvency II measures
The group is required to measure and monitor its capital resources on a
regulatory basis and to comply with the minimum capital requirements of
regulators in each territory in which it operates. At a group level, Legal
& General has to comply with the requirements established by the Solvency
II Framework Directive, as adopted by the PRA.
Solvency II surplus
Solvency II surplus is the excess of Eligible Own Funds over the Solvency
Capital Requirements. It represents the amount of capital available to the
group in excess of that required to sustain it in a 1-in-200 year risk event.
The group's Solvency II surplus is based on the Partial Internal Model,
Matching Adjustment and Transitional Measures on Technical Provisions (TMTP).
Differences between the Solvency II surplus and its related regulatory basis
include the impact of TMTP recalculation when it is not approved by the PRA,
incorporating impacts of economic conditions as at the reporting date, and the
inclusion of unaudited profits (or losses) of financial firms, which are
excluded from regulatory Own Funds. This view of Solvency II is considered to
be representative of the shareholder risk exposure and the group's real
ability to cover the Solvency Capital Requirement (SCR) with Eligible Own
Funds. It also aligns with management's approach to dynamically manage its
capital position.
Further details on Solvency II surplus and its calculation are included in
Note 6.01 Group regulatory capital - Solvency II. This note also includes a
reconciliation between IFRS equity and Solvency II Own Funds.
Solvency II capital coverage ratio
Solvency II capital coverage ratio is one of the indicators of the group's
balance sheet strength. It is determined as Eligible Own Funds divided by the
SCR, and therefore represents the number of times the SCR is covered by
Eligible Own Funds. The group's Solvency II capital coverage ratio is based on
the Partial Internal Model, Matching Adjustment and TMTP.
Differences between the Solvency II capital coverage ratio and its related
regulatory basis include the impact of TMTP recalculation when it is not
approved by the PRA, incorporating impacts of economic conditions as at the
reporting date, and the inclusion of unaudited profits (or losses) of
financial firms, which are excluded from regulatory Own Funds. This view of
Solvency II is considered to be representative of the shareholder risk
exposure and the group's real ability to cover the SCR with Eligible Own
Funds. It also aligns with management's approach to dynamically manage its
capital position.
Further details on Solvency II capital coverage ratio and its calculation are
included in Note 6.01 Group regulatory capital - Solvency II.
Solvency II operational surplus generation
Solvency II operational surplus generation is the expected surplus generated
from the assets and liabilities in-force at the start of the year. It is based
on assumed real world returns and best estimate non-market assumptions, and it
includes the impact of management actions to the extent that, at the start of
the year, these were reasonably expected to be implemented over the year.
It excludes operating variances, such as the impact of experience variances,
changes to valuation assumptions, methodology changes and other management
actions including changes in asset mix. It also excludes market movements,
which represent the impact of changes in investment market conditions during
the period and changes to future economic assumptions. The group considers
this measure meaningful to stakeholders as it enhances the understanding of
its operating performance over time, and serves as an indicator on the
longer-term components of the movements in the group's Solvency II surplus.
Note 6.01 Group regulatory capital - Solvency II includes an analysis of
change for the group's Solvency II surplus, showing the contribution of
Solvency II operational surplus generation as well as other items to the
Solvency II surplus during the reporting period.
Glossary
* These items represent an alternative performance measure (APM)
Adjusted operating profit*
Refer to the alternative performance measures section.
Adjusted profit before tax attributable to equity holders*
Refer to the alternative performance measures section.
Alternative performance measures (APMs)
A financial measure of historic or future financial performance, financial
position, or cash flows, other than a financial measure defined under IFRS or
the regulations of Solvency II.
Annual premiums
Premiums that are paid regularly over the duration of the contract such as
protection policies.
Annuity
Regular payments from an insurance company made for an agreed period of time
(usually up to the death of the recipient) in return for either a cash lump
sum or a series of premiums which the policyholder has paid to the insurance
company during their working lifetime.
Assets under administration (AUA)
Assets administered by Legal & General, which are beneficially owned by
clients and are therefore not reported on the Consolidated Balance Sheet.
Services provided in respect of assets under administration are of an
administrative nature, including safekeeping, collecting investment income,
settling purchase and sales transactions and record keeping.
Assets under management (AUM)*
Refer to the alternative performance measures section.
Assured Payment Policy (APP)
A long-term contract under which the policyholder (a registered UK pension
scheme) pays a day-one premium and in return receives a contractually fixed
and/or inflation-linked set of payments over time from the insurer.
Back book acquisition
New business transacted with an insurance company which allows the business to
continue to utilise Solvency II transitional measures associated with the
business.
CAGR
Compound annual growth rate.
Common Contractual Fund (CCF)
An Irish regulated asset pooling fund structure. It enables institutional
investors to pool assets into a single fund vehicle with the aim of achieving
cost savings, enhanced returns and operational efficiency through economies of
scale. A CCF is an unincorporated body established under a deed where
investors are "co-owners" of underlying assets which are held pro rata with
their investment. The CCF is authorised and regulated by the Central Bank of
Ireland.
Contract boundaries
Cash flows are within the boundary of an insurance contract if they arise
from substantive rights and obligations that exist during the reporting period
in which the group can compel the policyholder to pay the premiums or has a
substantive obligation to provide the policyholder with insurance contract
services.
Contractual Service Margin (CSM)
The CSM represents the unearned profit the group will recognise for a group of
insurance contracts, as it provides services under the insurance contract. It
is a component of the asset or liability for the contracts and it results in
no income or expense arising from initial recognition of an insurance
contract. Therefore, together with the risk adjustment, the CSM provides a
view of both stored value of our in-force insurance business, and the growth
derived from new business in the current year. A CSM is not set up for groups
of contracts assessed as onerous.
The CSM is released as profit as the insurance services are provided.
Coverage Period
The period during which the group provides insurance contract services. This
period includes the insurance contract services that relate to all premiums
within the boundary of the insurance contract.
Credit rating
A measure of the ability of an individual, organisation or country to repay
debt. The highest rating is usually AAA. Ratings are usually issued by a
credit rating agency (e.g. Moody's or Standard & Poor's) or a credit
bureau.
Deduction and aggregation (D&A)
A method of calculating group solvency on a Solvency II basis, whereby the
assets and liabilities of certain entities are excluded from the group
consolidation. The net contribution from those entities to group Own Funds is
included as an asset on the group's Solvency II balance sheet. Regulatory
approval has been provided to recognise the (re)insurance subsidiaries in the
US and Bermuda on this basis.
Defined benefit pension scheme (DB scheme)
A type of pension plan in which an employer/sponsor promises a specified
monthly benefit on retirement that is predetermined by a formula based on the
employee's earnings history, tenure of service and age, rather than depending
directly on individual investment returns.
Defined contribution pension scheme (DC scheme)
A type of pension plan where the pension benefits at retirement are determined
by agreed levels of contributions paid into the fund by the member and
employer. They provide benefits based upon the money held in each individual's
plan specifically on behalf of each member. The amount in each plan at
retirement will depend upon the investment returns achieved as well as the
member and employer contributions.
Derivatives
Contracts usually giving a commitment or right to buy or sell assets on
specified conditions, for example on a set date in the future and at a set
price. The value of a derivative contract can vary. Derivatives can generally
be used with the aim of enhancing the overall investment returns of a fund by
taking on an increased risk, or they can be used with the aim of reducing the
amount of risk to which a fund is exposed.
Direct investments
Direct investments, which generally constitute an agreement with another
party, represent an exposure to untraded and often less volatile asset
classes. Direct investments also include physical assets, bilateral loans and
private equity, but exclude hedge funds.
Earnings per share (EPS)
A common financial metric which can be used to measure the profitability and
strength of a company over time. It is calculated as total shareholder profit
after tax divided by the weighted average number of shares outstanding during
the year.
Eligible Own Funds
The capital available to cover the group's Solvency Capital Requirement.
Eligible Own Funds comprise the excess of the value of assets over
liabilities, as valued on a Solvency II basis, plus high quality hybrid
capital instruments, which are freely available (fungible and transferable) to
absorb losses wherever they occur across the group.
Employee satisfaction index
The Employee satisfaction index measures the extent to which employees report
that they are happy working at Legal & General. It is measured as part of
our Voice surveys, which also include questions on commitment to the goals of
Legal & General and the overall success of the company.
ETF
LGIM's European Exchange Traded Fund platform.
Euro Commercial Paper
Short-term borrowings with maturities of up to 1 year typically issued for
working capital purposes.
Expected credit losses (ECL)
For financial assets measured at amortised cost or FVOCI, a loss allowance
defined as the present value of the difference between all contractual cash
flows that are due and all cash flows expected to be received (i.e. the cash
shortfall), weighted based on their probability of occurrence.
Fair value through other comprehensive income (FVOCI)
A financial asset that is measured at fair value in the Consolidated Balance
Sheet and reports gains and losses arising from movements in fair value within
the Consolidated Statement of Comprehensive Income as part of the total
comprehensive income or expense for the year.
Fair value through profit or loss (FVTPL)
A financial asset or financial liability that is measured at fair value in the
Consolidated Balance Sheet and reports gains and losses arising from movements
in fair value within the Consolidated Income Statement as part of the profit
or loss for the year.
Fulfilment cash flows
Fulfilment cash flows comprise unbiased and probability-weighted estimates of
future cash flows, discounted to present value to reflect the time value of
money and financial risks, plus the risk adjustment for non-financial risk.
Full year dividend
Full year dividend is the total dividend per share declared for the year
(including interim dividend but excluding, where appropriate, any special
dividend).
Generally accepted accounting principles (GAAP)
A widely accepted collection of guidelines and principles, established by
accounting standard setters and used by the accounting community to report
financial information.
Gross written premiums (GWP)
An industry measure of the life insurance premiums due and the general
insurance premiums underwritten in the reporting period, before any deductions
for reinsurance.
Insurance new business
New business arising from new policies written on retail protection products
and new deals and incremental business on group protection products.
Irish Collective Asset-Management Vehicle (ICAV)
A legal structure investment fund, based in Ireland and aimed at European
investment funds looking for a simple, tax-efficient investment vehicle.
Key performance indicators (KPIs)
These are measures by which the development, performance or position of the
business can be measured effectively. The group Board reviews the KPIs
annually and updates them where appropriate.
LGA
Legal & General America.
LGAS
Legal and General Assurance Society Limited.
LGC
Legal & General Capital.
LGIM
Legal & General Investment Management.
LGRI
Legal & General Retirement Institutional.
LGRI new business
Single premiums arising from pension risk transfers and the notional size of
longevity insurance transactions, based on the present value of the fixed leg
cash flows discounted at the SONIA curve.
Liability driven investment (LDI)
A form of investing in which the main goal is to gain sufficient assets to
meet all liabilities, both current and future. This form of investing is most
prominent in final salary pension plans, whose liabilities can often reach
into billions of pounds for the largest of plans.
Lifetime mortgages
An equity release product aimed at people aged 55 years and over. It is a
mortgage loan secured against the customer's house. Customers do not make any
monthly payments and continue to own and live in their house until they move
into long-term care or on death. A no negative equity guarantee exists such
that if the house value on repayment is insufficient to cover the outstanding
loan, any shortfall is borne by the lender.
Longevity
Measure of how long policyholders will live, which affects the risk profile of
pension risk transfer, annuity and protection businesses.
Matching adjustment
An adjustment to the discount rate used for annuity liabilities in Solvency II
balance sheets. This adjustment reflects the fact that the profile of assets
held is sufficiently well-matched to the profile of the liabilities, that
those assets can be held to maturity, and that any excess return over
risk-free (that is not related to defaults) can be earned regardless of asset
value fluctuations after purchase.
Morbidity rate
Rate of illness, influenced by age, gender and health, used in pricing and
calculating liabilities for policyholders of life products, which contain
morbidity risk.
Mortality rate
Rate of death, influenced by age, gender and health, used in pricing and
calculating liabilities for future policyholders of life and annuity products,
which contain mortality risks.
Net zero carbon
Achieving an overall balance between anthropogenic carbon emissions produced
and carbon emissions removed from the atmosphere.
Onerous contracts
An insurance contract is onerous at the date of initial recognition if the
fulfilment cash flows allocated to the contract, any previously recognised
acquisition cash flows and any cash flows arising from the contract at the
date of initial recognition, in total are a net outflow.
Open Ended Investment Company (OEIC)
A type of investment fund domiciled in the United Kingdom that is structured
to invest in stocks and other securities, authorised and regulated by the
Financial Conduct Authority (FCA).
Overlay assets
Derivative assets that are managed alongside the physical assets held by LGIM.
These instruments include interest rate swaps, inflation swaps, equity
futures and options. These are typically used to hedge risks associated with
pension scheme assets during the derisking stage of the pension life cycle.
Paris Agreement
An agreement within the United Nations Framework Convention on Climate Change
effective 4 November 2016. The Agreement aims to limit the increase in average
global temperatures to well below 2°C, preferably to 1.5°C, compared to
pre-industrial levels.
Pension risk transfer (PRT)
Bulk annuities bought by entities that run final salary pension schemes to
reduce their responsibilities by closing the schemes to new members and
passing the assets and obligations to insurance providers.
Persistency
Persistency is a measure of LGIM client asset retention, calculated as a
function of net flows and closing AUM. For insurance, persistency is the rate
at which policies are retained over time and therefore continue to contribute
premium income and asset under management.
Platform
Online services used by intermediaries and consumers to view and administer
their investment portfolios. Platforms usually provide facilities for buying
and selling investments (including, in the UK products such as Individual
Savings Accounts (ISAs), Self-Invested Personal Pensions (SIPPs) and life
insurance) and for viewing an individual's entire portfolio to assess asset
allocation and risk exposure.
Present value of future new business premiums (PVNBP)
PVNBP is equivalent to total single premiums plus the discounted value of
annual premiums expected to be received over the term of the contracts using
the same economic and operating assumptions used for the new business value at
the end of the financial period. The discounted value of longevity insurance
regular premiums and quota share reinsurance single premiums are calculated on
a net of reinsurance basis to enable a more representative margin figure.
PVNBP therefore provides an estimate of the present value of the premiums
associated with new business written in the year.
Proprietary assets
Total investments to which shareholders are directly exposed, minus derivative
assets, loans, and cash and cash equivalents.
Qualifying Investor Alternative Investment Fund (QIAIF)
An alternative investment fund regulated in Ireland targeted at sophisticated
and institutional investors, with minimum subscription and eligibility
requirements. Due to not being subject to many investment or borrowing
restrictions, QIAIFs present a high level of flexibility in their investment
strategy.
Real assets
Real assets encompass a wide variety of tangible debt and equity investments,
primarily real estate, infrastructure and energy. They have the ability to
serve as stable sources of long-term income in weak markets, while also
providing capital appreciation opportunities in strong markets.
Retail Retirement new business
Single premiums arising from annuity sales and individual annuity back book
acquisitions and the volume of lifetime and retirement interest only mortgage
lending.
Retirement Interest Only Mortgage (RIO)
A standard retirement mortgage available for non-commercial borrowers above 55
years old. A RIO mortgage is very similar to a standard interest-only
mortgage, with two key differences:
- The loan is usually only paid off on death, move into long-term care or sale
of the house.
- The borrowers only have to prove they can afford the monthly interest
repayments and not the capital remaining at the end of the mortgage term.
No repayment solution is required as repayment defaults to sale of property.
Return on Equity (ROE)*
Refer to the alternative performance measures section.
Risk adjustment
The risk adjustment reflects the compensation that the group would require for
bearing uncertainty about the amount and timing of the cash flows that arises
from non-financial risk after diversification. We have calibrated the group's
risk adjustment using a Value at Risk (VAR) methodology. In some cases, the
compensation for risk on reinsured business is linked directly to the price
paid for reinsurance. The risk adjustment is a component of the insurance
contract liability, and it is released as profit if experience plays out as
expected.
Risk appetite
The aggregate level and types of risk a company is willing to assume in its
exposures and business activities in order to achieve its business objectives.
Single premiums
Single premiums arise on the sale of new contracts where the terms of the
policy do not anticipate more than one premium being paid over its lifetime,
such as in individual and bulk annuity deals.
Société d'Investissement à Capital Variable (SICAV)
A publicly traded open-end investment fund structure offered in Europe and
regulated under European law.
Solvency II
The Solvency II regulatory regime is a harmonised prudential framework for
insurance firms in the EEA. This single market approach is based on economic
principles that measure assets and liabilities to appropriately align
insurers' risk with the capital they hold to safeguard the policyholders'
interest.
Solvency II capital coverage ratio*
Refer to the alternative performance measures section.
Solvency II capital coverage ratio - regulatory basis
The Eligible Own Funds on a regulatory basis divided by the group solvency
capital requirement. This represents the number of times the SCR is covered by
Eligible Own Funds.
Solvency II new business contribution
Reflects present value at the point of sale of expected future Solvency II
surplus emerging from new business written in the period using the risk
discount rate applicable at the end of the reporting period.
Solvency II Operational Surplus Generation*
Refer to the alternative performance measures section.
Solvency II risk margin
An additional liability required in the Solvency II balance sheet, to ensure
the total value of technical provisions is equal to the current amount a
(re)insurer would have to pay if it were to transfer its insurance and
reinsurance obligations immediately to another (re)insurer. The value of the
risk margin represents the cost of providing an amount of Eligible Own Funds
equal to the Solvency Capital Requirement (relating to non-market risks)
necessary to support the insurance and reinsurance obligations over the
lifetime thereof.
Solvency II surplus*
Refer to the alternative performance measures section.
Solvency II surplus - regulatory basis
The excess of Eligible Own Funds on a regulatory basis over the SCR. This
represents the amount of capital available to the company in excess of that
required to sustain it in a 1-in-200 year risk event.
Solvency Capital Requirement (SCR)
The amount of Solvency II capital required to cover the losses occurring in a
1-in-200 year risk event.
Specialised Investment Fund (SIF)
An investment vehicle regulated in Luxembourg targeted to well-informed
investors, providing a great degree of flexibility in organization, investment
policy and types of underlying assets in which it can invest.
Total shareholder return (TSR)
A measure used to compare the performance of different companies' stocks and
shares over time. It combines the share price appreciation and dividends paid
to show the total return to the shareholder.
Transitional Measures on Technical Provisions (TMTP)
An adjustment to Solvency II technical provisions to bring them into line with
the pre-Solvency II equivalent as at 1 January 2016 when the regulatory basis
switched over, to smooth the introduction of the new regime. This decreases
linearly over the 16 years following Solvency II implementation but may be
recalculated to allow for changes impacting the relevant business, subject to
agreement with the PRA.
Yield
A measure of the income received from an investment compared to the price paid
for the investment. It is usually expressed as a percentage.
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