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L&G 2008 Final Results Part 3

25th Mar 2009 07:00

RNS Number : 4204P

Legal & General Group Plc

25 March 2009

International Financial Reporting Standards

Page 29

Operating profit income statement

For the year ended 31 December 2008

2008

2007

Notes

£m

From continuing operations

Risk

3.01(a)

(603)

104

Savings

3.01(b)

112

Investment management

3.02

165

143

International

3.03

Group capital and financing

3.04

124

213

Operating (loss)/profit

(189)

658

Variation from longer term investment return

3.06

(1,239)

(90)

Release of 1996 Sub-fund

321

Property losses attributable to minority interests

(63)

(6)

(Loss)/profit from continuing operations before tax attributable to equity holders of the Company

(1,491)

883

Tax credit/(expense) attributable to equity holders of the Company

3.07

361

(165)

(Loss)/profit from ordinary activities after tax

(1,130)

718

Loss attributable to minority interests

3.15

(Loss)/profit attributable to equity holders of the Company

(1,067)

724

Earnings per share

3.08

Based on operating (loss)/profit from continuing operations after tax attributable to equity holders

of the Company

(2.18)

7.17

Based on (loss)/profit attributable to equity holders of the Company

(17.88)

11.24

Diluted earnings per share

3.08

Based on operating (loss)/profit from continuing operations after tax attributable to equity holders

of the Company

(2.18)

7.13

Based on (loss)/profit attributable to equity holders of the Company

(17.88)

11.18

This supplementary operating profit information provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business. Supplementary IFRS operating profit is one of the Group's key performance indicators. New IFRS 8 segmentation has been adopted for 2008 to further improve shareholders' understanding of the Group's performance. The comparatives have been reclassified to reflect these changes. Appendix I provides a reconciliation of this segmentation basis with that provided in prior periods. Operating profit for the Risk segment represents the net capital invested/released from the non profit Risk businesses (individual and group protection, and individual and bulk purchase annuities) and the operating profit of our General insurance business. This incorporates the total investment return on assets backing the liabilities of the non profit Risk businesses which in 2008 includes £650m of additional reserves for non profit annuity credit default, bringing the total reserve to £1.2bn. General insurance operating profit includes a longer term expected investment return on shareholders' funds. Operating profit for the Savings segment represents the net capital invested/released from the non profit Savings businesses (non profit investment bonds and non profit pensions (including SIPPs)), the with-profits transfer and the operating profit of our core retail investments business. Operating profit for the Investment management and International segments incorporates a longer term expected investment return on the shareholders' funds within the Investment management and Netherlands' operations. Investment return on Group capital incorporates a longer term expected investment return using longer term investment return assumptions applied to the average balance of Group invested assets (including interest bearing intra-group balances) calculated on a quarterly basis.

International Financial Reporting Standards

Page 30

Consolidated income statement

For the year ended 31 December 2008

2008

2007

Notes

£m

Revenue

Gross written premiums

3.09

5,895

4,793

Outward reinsurance premiums

(569)

(517)

Net change in provision for unearned premiums

Net premiums earned

5,327

4,283

Fees from fund management and investment contracts

740

640

Investment return

(37,749)

13,225

Operational income

Total revenue

(31,644)

18,202

Expenses

Claims and change in insurance liabilities

3,287

4,467

Reinsurance recoveries

(587)

(345)

Net claims and change in insurance liabilities

2,700

4,122

Change in provisions for investment contract liabilities

(33,313)

11,999

Acquisition costs

776

848

Finance costs

379

214

Other expenses

773

662

Transfers from unallocated divisible surplus1

(806)

(438)

Total expenses

(29,491)

17,407

(Loss)/profit before income tax

(2,153)

795

Income tax credit attributable to policyholder returns

662

(Loss)/profit from continuing operations before income tax attributable to equity holders of the Company

(1,491)

883

Total income tax credit/(expense)

1,023

(77)

Income tax credit attributable to policyholder returns

(662)

(88)

Income tax credit/(expense) attributable to equity holders

3.07

361

(165)

(Loss)/profit from ordinary activities after income tax

(1,130)

718

Attributable to:

Minority interests

(63)

(6)

Equity holders of the Company

(1,067)

724

Dividend distributions to equity holders of the Company during the year

367

369

Dividend distributions to equity holders of the Company proposed after the year end

120

247

Earnings per share

Based on (loss)/profit attributable to equity holders of the Company

3.08

(17.88)

11.24

Diluted earnings per share

Based on (loss)/profit attributable to equity holders of the Company

3.08

(17.88)

11.18

1. 2007 includes £321m release of 1996 Sub-fund.

International Financial Reporting Standards

Page 31

Consolidated balance sheet

As at 31 December 2008

2008

2007

Notes

£m

Assets

Investment in associates

Plant and equipment

Investment property

3,969

5,969

Financial investments

3.11

234,514

261,718

Reinsurers' share of contract liabilities

1,997

1,530

Purchased interest in long term businesses and other intangible assets

227

Deferred acquisition costs

2,112

1,696

Deferred tax asset

988

Income tax recoverable

Other assets

2,135

1,519

Cash and cash equivalents

10,688

8,737

Total assets

256,727

281,285

Equity

Share capital

147

157

Share premium account

936

927

Employee scheme shares

(46)

(42)

Capital redemption and other reserves

(42)

Retained earnings

2,593

4,345

Shareholders' equity

3.13

3,588

5,446

Minority interests

3.15

144

178

Total equity

3.16

3,732

5,624

Liabilities

Subordinated borrowings

3.14

1,657

1,461

Participating insurance contracts

3.17

9,384

11,663

Participating investment contracts

3.18

6,992

7,462

Unallocated divisible surplus

913

1,721

Value of in-force non-participating contracts

(171)

(276)

Participating contract liabilities

17,118

20,570

Non-participating insurance contracts

3.17

25,841

22,873

Non-participating investment contracts

3.18

196,698

224,906

Non-participating contract liabilities

222,539

247,779

Senior borrowings

3.14

2,314

1,327

Provisions

741

742

Deferred tax liabilities

259

296

Income tax liabilities

113

Payables and other financial liabilities

6,613

1,609

Other liabilities

997

852

Net asset value attributable to unit holders

752

912

Total liabilities

252,995

275,661

Total equity and liabilities

256,727

281,285

International Financial Reporting Standards

Page 32

Consolidated statement of recognised income and expense

For the year ended 31 December 2008

2008

2007

£m

Exchange differences on translation of overseas operations

139

Actuarial gains/(losses) on defined benefit pension schemes

(40)

Actuarial (gains)/losses on defined benefit pension schemes transferred to unallocated divisible surplus

(8)

Net change in financial investments designated as available-for-sale

(56)

Income/(expense) recognised directly in equity, net of tax

(19)

(Loss)/profit from ordinary activities after income tax

(1,130)

718

Total recognised income and expense

(1,037)

699

Attributable to:

Minority interests

(63)

(6)

Equity holders of the Company

(974)

705

International Financial Reporting Standards

Page 33

Consolidated cash flow statement

For the year ended 31 December 2008

2008

2007

Notes

£m

Cash flows from operating activities

(Loss)/profit from ordinary activities after income tax

(1,130)

718

Adjustments for non cash movements in net (loss)/profit for the period

Realised and unrealised losses/(gains) on financial investments and investment properties

48,376

(4,862)

Investment income

(10,086)

(7,797)

Interest expense

379

214

Income tax (credit)/expense

(1,023)

Other adjustments

Net decrease/(increase) in operational assets

Investments designated as held for trading or fair value through profit or loss

2,161

(8,322)

Investments designated as available-for-sale

(93)

(98)

Other assets

(1,702)

(230)

Net (decrease)/increase in operational liabilities

Insurance contracts

(1,479)

152

Transfer from unallocated divisible surplus

(798)

(455)

Investment contracts

(43,485)

17,686

Value of in-force non-participating contracts

105

115

Other liabilities

541

(73)

Cash used in operations

(8,157)

(2,829)

Interest paid

(377)

(214)

Interest received

5,214

4,202

Income tax paid

(208)

(244)

Dividends received

4,614

3,312

Net cash flows from operating activities

1,086

4,227

Cash flows from investing activities

Net acquisition of plant and equipment

(14)

(58)

Acquisitions (net of cash acquired)

3.10

1,004

Net cash flows from investing activities

990

(58)

Cash flows from financing activities

Dividend distributions to ordinary equity holders of the Company during the year

(367)

(369)

Proceeds from issue of ordinary share capital

Purchase of employee scheme shares

(9)

(5)

Purchase of shares under share buyback programme

3.12

(523)

(320)

Proceeds from borrowings

3,568

1,948

Repayment of borrowings

(2,960)

(1,637)

Net cash flows from financing activities

(281)

(379)

Net increase in cash and cash equivalents

1,795

3,790

Exchange gains on cash and cash equivalents

156

Cash and cash equivalents at 1 January

8,737

4,930

Cash and cash equivalents at 31 December

10,688

8,737

The Group's consolidated cash flow statement includes all cash and cash equivalent flows, including those relating to the UK long term funds.

International Financial Reporting Standards

Page 34

Notes to the Financial Statements

3.01 Risk and Savings operating profit

(a) Risk operating profit

2008

2007

£m

Non profit Risk1

(602)

184

General insurance

(2)

(67)

Other2

(13)

Total Risk operating (loss)/profit

(603)

104

1. Includes £650m of additional reserves for non profit annuity credit default, bringing the total reserve to £1.2bn. Non profit Risk includes individual and group protection, and individual and bulk purchase annuities.

2. Other comprises estate agencies and housing related business conducted through our regulated mortgage network. It also includes Nationwide Life Risk business and business unit costs of £3m (2007: £4m) allocated to the Risk business.

(b) Savings operating profit

2008

2007

£m

Non profit Savings1

(20)

With-profits business2

107

106

113

Core retail investments

Other3

(21)

(13)

Total Savings operating profit

112

1. Non profit Savings businesses includes non profit investment bonds and non profit pensions (including SIPPs).

2. With-profits business operating profit is the shareholders' share of policyholder bonuses.

3. Other includes Suffolk Life, operations in Ireland, Nationwide Life Savings business and business unit costs of £3m (2007: £4m), allocated to the Savings business.

2008

2007

Notes

£m

Non profit business operating (loss)/profit comprises:

Expected capital release on existing business

453

406

New business strain

(334)

(344)

Experience variances

3.01(d)

(315)

115

Changes to non-economic assumptions

3.01(e)

(660)

(137)

Changes to FSA reporting and capital rules

Movements in non-cash items

3.01(f)

380

Other

(4)

(445)

134

Tax gross-up

(177)

(622)

191

Attributable to:

Non profit Risk businesses

(602)

184

Non profit Savings businesses

(20)

Non profit business operating (loss)/profit represents the capital and profit generated in the period from the in-force non profit business if the embedded value assumptions are borne out in practice. The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model. Both new business strain and expected capital release exclude required solvency margin from the liability calculation as is required by the ABI SORP. On average, the capital invested in new non profit business, including solvency margin, is repaid from product cash flows in approximately 7 years.

International Financial Reporting Standards

Page 35

Notes to the Financial Statements

3.01 Risk and savings operating profit (continued)

An analysis of the experience variances, valuation assumption changes and non-cash items, all net of tax, is provided below:

(d) Experience variances

2008

2007

£m

Persistency

Mortality/morbidity

Expenses

(13)

BPA data loading

Project and development costs1

(95)

(44)

Investment2

(296)

134

Other

(315)

115

1. 2008 includes project and development costs of £95m relating to continued investment in internal and other customer facing systems.

2. 2008 includes £296m of negative investment variances, of which more than half arises from the deferral of tax relief on expenses as a result of movements in investment markets and is fully offset by a movement in the deferred tax asset element of non cash items. The remainder relates to the annuity business where the valuation basis was strengthened due to the reduction in gilt yields.

(e) Changes to valuation assumptions

2008

2007

£m

Persistency

Mortality/morbidity1

(26)

(121)

Expenses

(57)

(37)

Short term default allowance2

(650)

Other

(660)

(137)

1. 2007 includes £(214)m relating to the strengthening of assumptions for annuitant longevity on existing business, offset by £64m relating to changes to the assumptions for the proportions married.

2. 2008 includes a £650m increase in the non profit annuity credit default reserve. The tax effect of the short term default allowance is included in the deferred tax element of non-cash items.

(f) Movements in non-cash items

2008

2007

£m

Deferred tax

413

(30)

Deferred acquisition costs

114

Deferred income liabilities

(72)

Other

(83)

380

International Financial Reporting Standards

Page 36

Notes to the Financial Statements

3.02 Investment management operating profit

2008

2007

£m

Managed pension funds

117

103

Private equity

(1)

Property

Other income1

Legal & General Investment Management

172

147

Institutional unit trusts2

(7)

(4)

Total Investment management operating profit

165

143

1. Other income includes £35m of profits arising from the provision of investment management services charged to the Group's Risk and

Savings businesses (2007: £23m).

2. Investment management operating profit excludes core retail investments, of £nil (2007: £12m), which has been disclosed as part of

Savings. The comparatives have been reclassified accordingly.

3.03 International operating profit

2008

2007

£m

USA

Netherlands

France

Total International operating profit

Exchange rates are provided in Note 3.24.

3.04 Group capital and financing operating profit

2008

2007

£m

Investment return1

351

387

Interest expense2

(198)

(179)

Investment expenses

(5)

Unallocated corporate expenses

(9)

(11)

Defined benefit pension scheme3

(15)

Total Group capital and financing operating profit

124

213

1. The longer term expected investment return of £351m (2007: £387m) reflects an average return of 7% (2007: 7%) on the average balance of invested assets held within Group capital and financing (including interest bearing intra-group balances) calculated on a quarterly basis. The invested assets (including interest bearing intra-group balances) held within Group capital and financing amounted to £4.8bn at 31 December 2008 (2007: £5.7bn).

2. Interest expense excludes interest on non recourse financing (see Note 3.14).

3. The defined benefit pension scheme (expense)/income includes the actuarial gains and losses arising on annuity assets held by the schemes that have been purchased from Legal & General Assurance Society Limited. Under IFRS, these annuity assets cannot be classified as plan assets in accordance with IAS 19 and so the associated actuarial gains and losses cannot be taken to the statement of recognised income and expense (2008 expense: £15m; 2007 income: £4m). The 2007 comparative also includes income of £17m arising from a pension deficit reduction payment which was charged to the operating segments in 2008.

International Financial Reporting Standards

Page 37

Notes to the Financial Statements

3.05 General insurance operating profit, underwriting result and combined operating ratios

Operating

Under-

Combined

Operating

Under-

Combined

(loss)/

writing

operating

(loss)/

writing

operating

profit

result

ratio

profit

result

ratio

2008

2007

£m

From continuing operations

Household1

(12)

(26)

110

(86)

(101)

145

Other business2

(2)

(18)

108

(67)

(86)

131

1. Household business in 2007 includes a loss of £76m net of reinsurance as a result of flood related claims in June and July 2007.

2. Other business in 2007 includes £6m profit following the withdrawal from the healthcare business in the first quarter.

The combined operating ratio is:

	Net incurred claims	+	Expenses + Net commission		x 100
	Net earned premiums	+	Net written premiums		x 100

3.06 Variation from longer term investment return

2008

2007

£m

General insurance

(29)

(9)

Investment management

Netherlands

(11)

Group capital and financing1

(1,221)

(74)

Total variation from longer term investment return

(1,239)

(90)

Investment return is allocated to operating profit by reference to a longer term rate of investment return for the respective invested funds. The difference between the amount allocated to operating profit and actual investment return is the variation from longer term investment return analysed above.

1. Comprises £(1,096)m (2007: £(75)m) relating to Society shareholder capital and £(125)m (2007: £1m) predominantly relating to the Group's treasury function.

International Financial Reporting Standards

Page 38

Notes to the Financial Statements

3.07 Analysis of tax

Profit/(loss)

Tax

Profit/(loss)

Tax

before tax

(expense)/

before tax

(expense)/

credit

2008

2007

£m

From continuing operations

Risk

(603)

164

104

(34)

Savings

(7)

112

(33)

Investment management

165

(50)

143

(43)

International

(20)

(25)

Group capital and financing

124

(28)

213

(61)

Operating (loss)/profit

(189)

658

(196)

Variation from longer term investment return

(1,239)

302

(90)

Release of 1996 Sub-fund

321

Property losses attributable to minority interests

(63)

(6)

(Loss)/profit from continuing operations before tax/Tax

(1,491)

361

883

(165)

Only the element of total tax attributable to equity holders' profit/loss is shown explicitly in the analysis above; the tax attributable to policyholder returns is included within expenses in the operating profit income statement. No deferred tax is provided at the incremental rate on the undeclared surplus of £527m (2007: £2,047m) in Society's LTF represented by the Shareholder Retained Capital (SRC), on the grounds that, at the balance sheet date, no obligation to make a declaration of surplus actually exists and there is no expectation that such a declaration will occur. The maximum amount of incremental tax which would crystallise on such a declaration of surplus is estimated to be £nil (2007: £nil).

International Financial Reporting Standards

Page 39

Notes to the Financial Statements

3.08 Earnings per share

(a) Earnings per share

Loss

Tax

Loss

Earnings

Profit

Tax

Profit

Earnings

before tax

credit

after tax

per share

before tax

(expense)/

after tax

per share

credit

2008

2007

£m

Operating (loss)/profit from continuing

operations

(189)

(130)

(2.18)

658

(196)

462

7.17

Variation from longer term investment return

(1,239)

302

(937)

(15.70)

(90)

(59)

(0.91)

Release of 1996 Sub-fund

321

4.98

Earnings per share based on (loss)/profit

attributable to equity holders

(1,428)

361

(1,067)

(17.88)

889

(165)

724

11.24

(b) Diluted earnings per share

(i) Based on operating (loss)/profit from continuing operations after tax

Loss

Number

Earnings

Profit

Number

Earnings

after tax

of shares1

per share

after tax

of shares1

per share

2008

2007

£m

Operating (loss)/profit from continuing operations after tax

(130)

5,968

(2.18)

462

6,444

7.17

Net shares under options allocable for no further consideration2

(0.04)

Diluted earnings per share

(130)

5,990

(2.18)

462

6,478

7.13

(ii) Based on (loss)/profit attributable to equity holders

Loss

Number

Earnings

Profit

Number

Earnings

after tax

of shares1

per share

after tax

of shares1

per share

2008

2007

£m

(Loss)/profit attributable to equity holders of the Company

(1,067)

5,968

(17.88)

724

6,444

11.24

Net shares under options allocable for no further consideration2

(0.06)

Diluted earnings per share

(1,067)

5,990

(17.88)

724

6,478

11.18

The number of shares in issue at 31 December 2008 was 5,861,627,994 (2007: 6,296,321,160).

1. Weighted average number of shares. 2. Net shares under options allocable for no further consideration are anti-dilutive and have therefore been excluded from the diluted earnings per share calculation.

International Financial Reporting Standards

Page 40

Notes to the Financial Statements

3.09 Gross written premiums

2008

2007

£m

From continuing operations

Risk

Non-participating Risk business

4,038

3,105

General insurance

- Household

267

255

- Other business

Total Risk

4,334

3,412

Savings

Non-participating Savings business

Participating business

551

382

Total Savings

600

429

International

USA

397

345

Netherlands

278

259

France

286

348

Total International

961

952

Total gross written premiums

5,895

4,793

3.10 Acquisitions

Total net

Date of

Cash

Transaction

Total

assets

acquisition

paid

costs

cost

acquired

Company name

Notes

£m

Nationwide Life Limited

(i)

31/01/08

250

252

Nationwide Unit Trust Managers Limited

(ii)

31/01/08

Suffolk Life Group Plc

(iii)

06/05/08

The Group has acquired 100% of the shares of each company. No goodwill has arisen in respect of these acquisitions.

(i) Nationwide Life Limited The values of the purchased interest in long term business on acquired insurance and investment contracts have been calculated using discounted cash flow methodology. These were recognised on the balance sheet at £127m and £2m gross of tax respectively (with corresponding deferred tax liabilities of £19m and £1m). These intangible assets will be amortised in line with the expected emergence of profit from the business (over 12 years). Since 31 January 2008, Nationwide Life Limited has contributed a profit of £26m to consolidated loss before tax before amortisation of the purchased interest in long term business.(ii) Nationwide Unit Trust Managers Limited The value of the purchased interest in long term business on acquired investment contracts has been calculated using discounted cash flow methodology and recognised on the balance sheet at £29m gross of tax, with a corresponding deferred tax liability of £8m. This intangible asset will be amortised in line with the expected emergence of profit from the business (over 10 years). Since 31 January 2008, Nationwide Unit Trust Managers Limited has contributed a loss of £3m to consolidated loss before tax before amortisation of the purchased interest in long term business.(iii) Suffolk Life Group Plc The value of the purchased interest in long term business on acquired investment contracts has been calculated using discounted cash flow methodology and recognised on the balance sheet at £47m gross of tax, with a corresponding deferred tax liability of £13m. The value of the acquired customer relationship intangible has been calculated using the discounted cash flow methodology and recognised on the balance sheet at £15m gross of tax, with a corresponding deferred tax liability of £3m. The intangible assets will be amortised in line with the expected emergence of profit from the business (over 15 years). Since 6 May 2008, Suffolk Life Group Plc has contributed a profit of £2m to consolidated loss before tax before amortisation of the purchased intangibles.

International Financial Reporting Standards

Page 41

Notes to the Financial Statements

3.10 Acquisitions (continued)

(i) Nationwide Life Limited - Assets and liabilities at date of acquisition

Book value

Adjustments

Fair value

£m

Assets

Purchased interest in long term businesses and other intangible assets

129

Financial investments

1,276

Reinsurers' share of contract liabilities

286

Deferred acquisition costs

(15)

Income tax recoverable

(15)

Other assets

Cash and cash equivalents

599

Total assets

2,195

2,294

Liabilities

Non-participating contract liabilities

1,221

Tax liabilities

Other liabilities

801

(3)

798

Total liabilities

2,030

2,042

Net assets

165

252

Adjustments include the recognition of acquired intangibles and application of consistent Group accounting policies.

(ii) Nationwide Unit Trust Managers Limited - Assets and liabilities at date of acquisition

Book value

Adjustments

Fair value

£m

Assets

Purchased interest in long term businesses and other intangible assets

Deferred acquisition costs

(29)

Other assets

Cash and cash equivalents

Total assets

129

Liabilities

Provisions

Deferred income liabilities

(1)

Tax liabilities

Other liabilities

Total liabilities

Net assets

(4)

Adjustments include the recognition of acquired intangibles and application of consistent Group accounting policies.

International Financial Reporting Standards

Page 42

Notes to the Financial Statements

3.10 Acquisitions (continued)

(iii) Suffolk Life Group Plc - Assets and liabilities at date of acquisition

Book value

Adjustments

Fair value

£m

Assets

Purchased interest in long term businesses and other intangible assets

Plant and equipment

Investment property

503

Financial investments

1,763

(2)

1,761

Income tax recoverable

Other assets

Cash and cash equivalents

738

740

Total assets

3,066

3,128

Liabilities

Non-participating contract liabilities

2,893

Senior borrowings

153

Tax liabilities

Other liabilities

Total liabilities

3,049

3,065

Net assets

Adjustments include the recognition of acquired intangibles and application of consistent Group accounting policies.

International Financial Reporting Standards

Page 43

Notes to the Financial Statements

3.11 Financial investments

2008

2007

£m

Equities

107,408

149,567

Unit trusts

5,456

4,659

Debt securities

112,013

104,087

Accrued interest

1,607

1,363

Derivative assets1

6,130

694

Loans and receivables

1,900

1,348

234,514

261,718

1. Derivative assets include £3,765m (2007: £455m) held on behalf of unit linked policyholders. Non unit linked derivative assets have increased, primarily as a result of sterling interest rate hedging and the acquisition of assets backing guaranteed equity bond contacts with Nationwide Life.

3.12 Share capital and share premium

2008

Number of

2008

2007

Authorised share capital

£m

At 31 December: ordinary shares of 2.5p each

9,200,000,000

230

Number of

capital

premium

Issued share capital, fully paid

£m

As at 1 January 2008

6,296,321,160

157

927

Shares cancelled under share buyback programme1

(449,891,914)

(11)

Options exercised under share option schemes

- Executive share option scheme

640,846

- Savings related share option scheme

14,557,902

As at 31 December 2008

5,861,627,994

147

936

Number of

capital

premium

Issued share capital, fully paid

£m

As at 1 January 2007

6,532,261,961

163

923

Shares cancelled under share buyback programme1

(241,207,267)

(6)

Options exercised under share option schemes

- Executive share option scheme

1,961,215

- Savings related share option scheme

3,305,251

As at 31 December 2007

6,296,321,160

157

927

1. During the year, 449,891,914 shares (2007: 241,207,267 shares) were repurchased and cancelled under the share buyback programme

representing 7.1% (2007: 3.7%) of opening issued share capital, at a cost of £523m including expenses (2007: £320m).

There is one class of ordinary shares. 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.

International Financial Reporting Standards

Page 44

Notes to the Financial Statements

3.13 Segmental analysis of shareholders' equity

2008

2007

£m

Risk

General insurance

114

Other

(1)

Total Risk

101

113

Savings

Core retail investments

Other

Total Savings

Investment management

322

310

International

USA

932

643

Netherlands

135

112

France

193

130

Emerging markets

Total International

1,272

888

Group capital and financing

1,820

4,082

Shareholders' equity

3,588

5,446

At 31 December 2008, the Group adopted IFRS 8, 'Operating Segments'. The Group has five reporting segments comprising Risk, Savings, Investment management, International, and Group capital and financing. The Risk segment comprises individual and group protection, individual and bulk purchase annuities, and general insurance, together with estate agencies and the housing related business conducted through our regulated mortgage network. The Savings segment comprises non profit investment bonds, non profit pensions (including SIPPs), ISAs, retail unit trusts, and all with-profits products. 'Other' principally comprises the Group's interest in Cofunds. The Investment management segment comprises institutional fund management and institutional unit trust business. The International segment comprises businesses in the United States, France, the Netherlands and emerging markets. Shareholders' equity supporting the non profit Risk and Savings businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within Group capital and financing. This also includes capital within the Group's treasury function and unit trust funds and property partnerships, which are managed on behalf of clients but are required to be consolidated under IFRS, which do not constitute a separately reportable segment. Transactions between reportable segments are on normal commercial terms, and are included within the reported segments. The Group assesses performance and allocates resources on the basis of IFRS operating profit before tax, (set out in the Operating profit income statement). Segmental IFRS operating profit before tax is reconciled to the consolidated profit from continuing operations before tax attributable to equity holders and consolidated profit from ordinary activities after income tax. The Group considers additional performance measures in assessing the performance of the segments. These include new business levels (Notes 2.01-2.12) and EEV Reporting (Notes 4.01-4.17).

International Financial Reporting Standards

Page 45

Notes to the Financial Statements

3.14 Analysis of borrowings

2008

2007

£m

Subordinated borrowings

6.385% Sterling perpetual capital securities

692

620

5.875% Sterling undated subordinated notes

426

427

4.0% Euro subordinated notes 2025

539

414

Total subordinated borrowings

1,657

1,461

Senior borrowings

Sterling medium term notes 2031-2041

608

Euro commercial paper 2009

609

118

Bank loans 2009

160

Non recourse financing

- US Dollar Triple X securitisation 2025

369

266

- US Dollar Triple X securitisation 2037

308

223

- Sterling property partnership loans 2011

101

- Suffolk Life unit linked borrowings

159

Total senior borrowings

2,314

1,327

Total borrowings

3,971

2,788

Total borrowings (excluding non recourse financing)

3,034

2,200

Subordinated borrowings 6.385% Sterling perpetual capital securities In 2007, Legal & General Group Plc issued £600m of 6.385% sterling perpetual capital securities. Simultaneous with the issuance, the fixed coupon was swapped into six month LIBOR plus 0.94% per annum. These securities are callable at par on 2 May 2017 and every three months thereafter. If not called, the coupon from 2 May 2017 will be reset to three month LIBOR plus 1.93% per annum. For regulatory purposes these securities are treated as innovative tier I capital. These securities have been classified as liabilities as the interest payments become mandatory in certain circumstances. 5.875% Sterling undated subordinated notes In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% per annum. These notes are treated as upper tier II capital for regulatory purposes. These securities have been classified as liabilities as the interest payments become mandatory in certain circumstances. 4.0% Euro subordinated notes 2025 In 2005, Legal & General Group Plc issued €600m of 4.0% Euro dated subordinated notes. The proceeds were swapped into sterling. The notes are callable at par on 8 June 2015 and each year thereafter. If not called, the coupon from 8 June 2015 will reset to a floating rate of interest based on prevailing three month Euribor plus 1.7% per annum. These notes mature on 8 June 2025 and are treated as lower tier II capital for regulatory purposes. Non recourse financing US Dollar Triple X securitisation 2025 In 2004, a subsidiary of Legal & General America Inc issued US$550m of non recourse debt in the US capital markets to meet the Triple X reserve requirements of part of the US term insurance written up to 2005. It is secured on the cash flows related to that tranche of business. US Dollar Triple X securitisation 2037 In 2006, a subsidiary of Legal & General America Inc issued US$450m of non recourse debt in the US capital markets to meet the Triple X reserve requirements of part of the US term insurance written after 2005 and 2006. It is secured on the cash flows related to that tranche of business. Sterling property partnership loans 2011 The property partnership loans are secured on specific properties. Suffolk Life unit linked borrowings These borrowings relate solely to client investments. As at 31 December 2008, the Group had in place a £960m syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2012. Short term assets available at the holding company level exceeded the amount of non-unit linked short term borrowings of £763m (Euro Commercial Paper and Bank Loans). 2008 finance costs include £34m of interest payable on cash collateral lodged by counterpartiers in respect of certain derivative assets (2007: £nil).

3.15 Minority interests

Minority interests represent third party interests in property investment entities which are consolidated in the Group's results.

International Financial Reporting Standards

Page 46

Notes to the Financial Statements

3.16 Total equity

2008

2007

£m

As at 1 January

5,624

5,839

Total recognised income and expense

(1,037)

699

Issue of share capital

Share buyback

(523)

(320)

Net movements in employee scheme shares

(4)

Dividend distributions to equity holders of the Company during the year

(367)

(369)

Movements in minority interests including disposals

(230)

As at 31 December

3,732

5,624

3.17 Insurance contract liabilities

(a) Analysis of insurance contract liabilities

Gross

Reinsurance

Gross

Reinsurance

2008

2007

Notes

£m

Life and pensions participating insurance contracts

3.17(b)

9,384

(1)

11,663

(1)

Life and pensions non-participating insurance contracts

3.17(c)

25,582

(1,847)

22,568

(1,302)

General insurance contracts

3.17(d)

259

(11)

305

(19)

Insurance contract liabilities

35,225

(1,859)

34,536

(1,322)

(b) Movement in participating insurance contract liabilities

Gross

Reinsurance

Gross

Reinsurance

2008

2007

£m

As at 1 January

11,663

(1)

12,660

(1)

New liabilities in the year

333

219

Liabilities discharged in the year

(1,628)

(1,684)

Unwinding of discount rates

383

520

Effect of change in non-economic assumptions

(102)

Effect of change in economic assumptions

(1,348)

Other

(77)

As at 31 December

9,384

(1)

11,663

(1)

Gross

Reinsurance

Gross

Reinsurance

2008

2007

£m

As at 1 January

22,568

(1,302)

21,321

(1,237)

New liabilities in the year

3,020

(262)

2,463

(286)

Liabilities discharged in the year

(1,493)

(1,108)

Unwinding of discount rates

1,022

(88)

876

(126)

Effect of change in non-economic assumptions1

(87)

121

179

Effect of change in economic assumptions2

(1,366)

(26)

(902)

Foreign exchange adjustments

946

(82)

109

Acquisitions

1,172

(286)

Other

(200)

(1)

(192)

As at 31 December

25,582

(1,847)

22,568

(1,302)

1. In 2007, the Effect of change in non-economic assumptions includes an increase of approximately £214m relating to the strengthening of assumptions for annuitant longevity on existing business. This was largely offset by mortality and changes to expense assumptions on term business (on a gross of reassurance basis), which reflected improved experience. 2. In 2008, the Effect of changes in economic assumptions includes the impact arising from the current interest rate environment and increased credit spreads reducing liabilities, partially offset by the £650m of additional reserves for non profit annuity credit default, bringing the total reserve to £1.2bn.

International Financial Reporting Standards

Page 47

Notes to the Financial Statements

3.17 Insurance contract liabilities (continued)

(d) Analysis of General insurance contract liabilities

Gross

Reinsurance

Gross

Reinsurance

2008

2007

£m

Outstanding claims

(4)

132

(12)

Claims incurred but not reported

Unearned premiums

131

(7)

133

(7)

General insurance contract liabilities

259

(11)

305

(19)

(e) Movement in General insurance claim liabilities

Gross

Reinsurance

Gross

Reinsurance

2008

2007

£m

As at 1 January

172

(12)

137

(5)

Claims arising

231

(4)

323

(6)

Claims paid

(235)

(255)

(2)

Adjustments to prior year liabilities

(40)

(33)

As at 31 December

128

(4)

172

(12)

3.18 Investment contract liabilities

(a) Analysis of investment contract liabilities

Gross

Reinsurance

Gross

Reinsurance

2008

2007

£m

Participating investment contracts

6,992

(12)

7,462

(74)

Non-participating investment contracts

196,698

(126)

224,906

(134)

Investment contract liabilities

203,690

(138)

232,368

(208)

(b) Movement in investment contract liabilities

Gross

Reinsurance

Gross

Reinsurance

2008

2007

£m

As at 1 January

232,368

(208)

169,517

(227)

Reserves in respect of new business

38,583

(741)

75,969

(412)

Amounts paid on surrenders and maturities during the year

(36,852)

504

(24,706)

262

Investment return and related benefits

(33,500)

307

11,854

169

Management charges

(378)

(399)

Foreign exchange adjustments

527

133

Acquisitions

2,942

As at 31 December

203,690

(138)

232,368

(208)

International Financial Reporting Standards

Page 48

Notes to the Financial Statements

3.19 Value of policyholder assets held in Society and LGPL

2008

2007

£bn

With-profits business

24.0

29.5

Non profit business

30.4

30.7

54.4

60.2

3.20 Non-linked business and Society shareholder capital invested asset mix and investment return

Investment

With-profits

Non profit

Society

return

asset share

non par

other

shareholder

capital

As at 31 December 2008

Equities

(25)

(51)

Bonds

(5)

121

Property

(27)

Cash

100

Investment return (% pa)

(11)

(18)

(2)

(7)

(23)

Invested assets (£bn) net of derivative liabilities

12.5

2.3

2.1

18.8

2.9

Invested assets (£bn) gross of derivative liabilities

12.6

2.3

2.1

20.6

2.9

As at 31 December 2007

Equities

(43)

Bonds

129

Property

(5)

Cash

100

Investment return (% pa)

Invested assets (£bn) net of derivative liabilities

17.1

2.4

1.8

16.6

4.0

Invested assets (£bn) gross of derivative liabilities

17.1

2.4

1.8

17.1

4.0

All investment return percentages reflect average returns for the period.

In 2008, the percentage of Group capital invested in equities and property was 25% and 4% respectively (2007: 47% and 8%). An analysis

of Group capital can be found in Note 6.05.

International Financial Reporting Standards

Page 49

3.21 Sensitivities

General insurance sensitivity analysis

Impact on

pre-tax profit

equity

net of

reinsurance

2008

£m

Sensitivity test

Single storm event with 1 in 200 year probability

(50)

(36)

Subsidence event - worst claims ratio in last 30 years

(46)

(33)

Repeat of 1990 recession on ASU/DMI1/Household accounts

(39)

(28)

5% decrease in overall claims ratio

5% surplus over claims liabilities

1. Accident, sickness and unemployment (ASU)/Domestic mortgage indemnity (DMI)

3.22 Pension cost

The Legal & General Group UK Pension and Assurance Fund and the Legal & General Group UK Senior Pension Scheme are defined benefit pension arrangements and account for all UK and the majority of worldwide assets of, and contributions to, such arrangements. At 31 December 2008, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at £101m (2007: £130m). These amounts have been recognised in the financial statements with £59m charged against shareholder equity (2007: £77m) and £42m against the unallocated divisible surplus (2007: £53m).

International Financial Reporting Standards

Page 50

Notes to the Financial Statements

3.23 Contingent liabilities, guarantees and indemnities

Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance of actual experience from that assumed may result in such liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of such contracts, or the circumstances in which policyholders have entered into them (together in this paragraph "liabilities"). The extent of such liabilities is influenced by a number of factors including the actions and requirements of the FSA, ombudsman rulings, industry compensation schemes and court judgments. The continuing general profile and emphasis being given by the FSA and other bodies to the suitability of the past sales of endowment policies, in the context of some mortgage transactions, has led to the continuing receipt of claims from holders of endowment policies. Various Group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. Provision for liabilities continues to be made and is regularly reviewed. However, it is not possible to predict, with certainty, the extent and the timing of the financial impact to which these claims, litigation or issues may arise. The relevant members of the Group nevertheless ensure that each makes prudent provision, as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet all reasonably foreseeable eventualities. In 1975, Legal & General Assurance Society Limited (the Society) was required by the Institute of London Underwriters (ILU) to execute the ILU form of guarantee in respect of policies issued through the ILU's Policy Signing Office on behalf of NRG Victory Reinsurance Company Ltd (Victory), a company which was then a subsidiary of the Society. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to the Society against any liability the Society may have as a result of the ILU's requirement, and the ILU agreed that its requirement of the Society would not apply to policies written or renewed after the acquisition. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary of Berkshire Hathaway Inc. Whether the Society has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability, is uncertain. The Society has made no payment or provision in respect of this matter. Group companies have given indemnities and guarantees as a normal part of their operating activities or in relation to capital market transactions.

3.24 Foreign exchange rates

Principal rates of exchange used for translation are:

01.01.08-

01.01.07-

31.12.08

2008

31.12.07

2007

Average

Year end

Average

Year end

United States Dollar

1.85

1.44

2.00

1.99

Euro

1.26

1.03

1.46

1.36

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR PUUMGWUPBGBC

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