31st Dec 2007 14:45
Legal & General - balance sheet changes Capital review: structural changes completed Legal & General is pleased to announce the implementation of the proposals setout on 8 November 2007(1), and the completion of the major structural componentsof our broad-ranging capital review. Regular review and communication of thebalance sheet will continue and we remain committed to returning any excesscapital to shareholders. The capital review has: -- put in place a modern, flexible capital structure, in support of long term earnings growth. -- delivered an uplift to embedded value of around £0.3bn(2). -- extended and enhanced the range of capital instruments used to finance our businesses, including the issue of £600m of Innovative Tier 1 capital in May 2007 -- addressed the level of excess capital through the initiation of a £1bn share buy-back programme. Andrew Palmer, Group Director (Finance), said "The completion in just over ayear of the major elements of our capital review reflects our commitment toeffective capital management. I am delighted that we have achieved so much insuch a short period of time. We now have a more modern, transparent capitalstructure, further enhancing our capability to finance the substantialopportunities we see ahead for Legal & General. Our £1bn share buy-back programme and dividend policy are unaffected by thisannouncement and we will continue to publish our Capital Balanced Scorecard witheach set of results, keeping the market informed of our capital position.Excellence in capital management and a commitment to a strong balance sheet are,we believe, attributes which set Legal & General apart. We will continue to workto ensure that the Group has the right amount of capital, of the right type andin the right place." Increased transfer for 2007 In addition to the implementation of the structural changes to the balancesheet, the Board expects, subject to market conditions and satisfactorycompletion of year-end valuations, to make an initial transfer of £1.7bn fromthe long term fund to Society's shareholders' funds for the year ending 31December 2007. This is higher than historic transfers and includes the reservesreleased by the implementation of new regulatory rules for term assurance in2006. Tax implications of the transfer are expected to be limited to theacceleration of payments of tax on any gains on the transferred assets. Weexpect to update the target ranges on our Capital Balanced Scorecard to reflecttoday's announcements, which are not expected to have an impact on ourassessment of excess capital. Assets transferred to Society's shareholders fundsremain available to meet our AA financial strength rating. As a result of the restructuring and as set out below, we are redefining IFRSoperating profit. Under this revised definition, operating profit at Interims2007 would have been £386m instead of the £342m reported. All financial impacts in this release are unaudited management estimates. Thenotes below provide further information on these changes. There will be abriefing for analysts at 9.30am on 10 January. (1) RIS dated 8 November 2007 "Policyholder Communication". Further detail isbelow in Notes to Editors "Structural changes implemented" (2) Includes benefits reported in the Preliminary Results 2006 Notes to Editors Structural changes implemented The proposals were set out on 8 November 2007, as follows: -- To merge the 1996 Sub-Fund, which wholly comprised shareholder assets (£316m at 30 June 2007), with shareholder retained capital ("SRC") within the long term fund. -- To establish alternative capital support for the with-profits business. This initially comprises £500m of shareholders' assets within Society and will gradually reduce to zero over a period not exceeding ten years. -- To remove the formula which determined distributions to shareholders from the UK non profit business, allowing management greater flexibility over transfers from the SRC. These changes are expected to have a broadly neutral effect on embedded valueand a small negative impact on new business profits as a result of an increasein the assumed cost of capital. This increased cost arises from the assumptionthat the solvency margin will be covered from all the shareholder assetssupporting the UK non profit life and pensions business with a higherfixed-interest component than previously assumed. The overall capitalrequirements of our business are not affected by these changes. The changes to the structure of the long term fund of Society summarised abovehave the following effects: 1) Merger of the 1996 Sub-Fund a) There is no material effect on EEV reporting from the merger of the 1996Sub-Fund with the other shareholders' assets in the long term fund as it alreadyforms part of the shareholder net worth. b) Under IFRS, the 1996 Sub-Fund is transferred from unallocated divisiblesurplus to the SRC. As a result, there will be a one-off profit below theoperating profit line amounting to the value of the 1996 Sub-Fund assets. c) There is no impact on our Insurance Groups Directive (IGD) and SocietyRegulatory surplus position from this change. 2) Alternative capital support There will be no impact on reported IGD and Society Regulatory surplus measures,and no impact on reported EEV or IFRS profitability. The alternative capital support for the with-profits business can be met fromwithin the existing solvency resources of Society and will not increase therequired capital modelled under EEV. 3) Removal of the transfer formula The transfer formula determined distributions from the non profit part ofSociety's long term fund to shareholders. The transfer was based on the embeddedvalue of the UK non profit life and pensions business and was described indetail on page 67 of our 2006 Annual Report and Accounts. It gave rise to atransfer of £272m net of tax for 2006. The removal of the transfer formula gives greater capital flexibility, and has anumber of financial reporting effects: a) Aggregation of shareholder assets within Society for reporting purposes The removal of the formula and the merger of the 1996 Sub-Fund with the SRCremove significant dividing lines between the pools of shareholder capitalwithin Society. From 2007, all the assets supporting the UK non profit life andpensions businesses will be aggregated for reporting purposes and designated 'UKLife and Pensions shareholder capital'. This comprises the SRC, the 1996Sub-Fund, the Society Shareholders' Capital (SSC) and shareholder capital heldwithin Legal & General Pensions Limited (LGPL). b) Impact on embedded value Definition of covered business assets Covered business, for EEV reporting purposes, will now include all assets in theUK Life and Pensions shareholder capital. Previously the covered businessincluded only those shareholder assets held within the long term fund and LGPL. Removal of discount The SRC was previously considered to be locked-in capital, and so was includedin shareholder net worth on a discounted basis reflecting an assumeddistribution over 20 years. The discount comprised the time value of money andassumed future tax on the modelled distributions. The SRC will no longer beconsidered as locked-in capital. Following the removal of the transfer formula all shareholder assets in excessof the required solvency margin will be held at face value, less an allowancefor tax on the assumed future distribution of assets remaining in the long termfund. Increased reported cost of capital The solvency margin will now be met from the total UK Life and Pensionsshareholder capital. As a result, the cost of capital will reflect a higherassumed fixed income asset mix than was previously the case. c) Impact on IFRS Redefinition of IFRS operating profit Under our previous structure, operating profit for the UK non profit life andpensions business was defined as the formula transfer. Following the removal of the formula, we have redefined IFRS operating profit toreflect underlying profits. From 2007, UK non profit life and pensions operating profit will be: -- The net contribution from all UK non profit Life and Pensions business, including expected inforce releases, new business strain and other reserving movements and variances. This was reported in note 5.02 of the Interim results 2007 and amounted to £153m for that period. -- The longer term investment return on total UK Life and Pensions shareholder capital. This will be calculated using opening embedded value assumptions for investment returns. There will be a corresponding reduction in Other Operating Income reflecting thereclassification of the longer term investment return on SSC assets. All other elements of operating profit remain unchanged. Under this revised definition, operating profit at Interims 2007 would have been£386m (unaudited estimate) instead of the reported £342m. Deferred tax on SRC It is expected that no incremental deferred tax will be provided in respect ofthe SRC remaining in the long term fund. 4) Value of the SRC The IFRS reported value of the SRC at 30 June 2007 was £3.3bn. This included£2.4bn of invested assets, split 63% equities, 3% bonds and 22% property and 12%cash. The remainder comprised other asset types, including contingent loan,deferred acquisition costs, deferred tax and other non cash items. Theregulatory value of the assets in the SRC was estimated at £2.5bn as at 30 June2007. Capital review November 2006: -- Set out the framework for the capital review. -- Introduced balanced scorecard measures for capital management to enable analysts and investors to monitor Legal & General's financial strength. -- Identified AA financial strength rating as a strategic differentiator and a key financial constraint. December 2006: -- Ceded the non-linked non profit pensions and annuity business of Society to a new, wholly owned, reinsurance subsidiary, LGPL. -- Implemented the FSA's Policy Statement 06/14 across its UK individual protection business. -- Reviewed the asset liability matching policy for annuity business during 2006 and made a number of investment changes to achieve a closer asset liability match. March 2007: -- Updated the market on our balanced scorecard. May 2007: -- Issued £600m Innovative tier 1 perpetual capital securities. Later awarded IFR 'Sterling Bond of the year' and 'Best Sterling Investment Grade Deal of the Year' by Credit Magazine. July 2007: -- Updated the market on our balanced scorecard. -- Announced and began a £1billion on-market share buyback, alongside an increase in interim dividend growth rate to 7.5%. November 2007: -- Converted LGPL to the UK's first Insurance Special Purpose Vehicle. December 2007: -- Merged the 1996 Sub-Fund and the SRC -- Created alternative capital support for the with-profits business -- Removed the transfer formula limiting transfers from the long term fund. About Legal & General Legal & General is a leading UK risk, savings and investment group. Founded over170 years ago, Legal & General today provides life assurance and other financialprotection products, annuities and long-term savings products including ISA'sand pensions. With over £250 billion in funds under management, it is also thelargest investor for UK pension funds. Legal & General has over 5.5 million UKcustomers. Our products are sold through over 30 bank and building societyrelationships, through Independent Financial Advisers and also directly tocustomers. Legal & General Assurance Society Limited, our principal operatingcompany, is one of Europe's top rated life companies for financial strength,with an AA+ rating from Standard & Poor's and Aa1 from Moody's. Enquiries to: Investors: \* TJonathan Maddock, Head of Investor Relations 020 3124 2150Nicola Marshall, Investor Relations Manager 020 3124 2151\* T Media: \* TJohn Godfrey, Corporate Communications Director 020 3124 2090Anthony Carlisle, Citigate Dewe Rogerson 07973 611888\* T Forward-looking statements: This document may contain certain forward-looking statements with respect tocertain of Legal & General Group Plc's plans and its current goals andexpectations relating to future financial condition, performance and results. Bytheir nature forward-looking statements involve risk and uncertainty becausethey relate to future events and circumstances which are beyond Legal & GeneralGroup Plc's control, including, among others, UK domestic and global economicand business conditions, market related risks such as fluctuations in interestrates and exchange rates, the policies and actions of governmental andregulatory authorities, the impact of competition, the timing impact and otheruncertainties of future mergers or combinations within relevant industries. As aresult, Legal & General Group Plc's actual future condition, performance andresults may differ materially from the plans, goals and expectations set out inLegal & General Group Plc's forward-looking statements. Legal & General GroupPlc does not undertake to update forward-looking statements contained in thisdocument or any other forward-looking statement it may make. Copyright Business Wire 2007Related Shares:
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