L&G 2008 Final Results Part 6

Asset Disclosures

Page 71

6.01 Investment portfolio

2008

2007

Market

Market

value

value

Notes

£bn

£bn

Worldwide funds under management

280 

312 

Client and policyholder assets

(233)

(264)

Non-unit linked With-profits fund assets1

(19)

(23)

Assets to which shareholders are directly exposed

28 

25 

Comprising:

Assets held to back the UK non-linked non profit business:

Legal & General Pensions Limited (LGPL)

18.7 

16.6 

Other UK non profit insurance business2

1.9 

0.5 

3.20

20.6 

17.1 

Assets held to back other insurance businesses (including Triple-X reserves)

2.5 

1.8 

Society shareholder capital

3.20/6.05

2.9 

4.0 

Other Group shareholder assets

6.05

2.3 

2.1 

28.3 

25.0 

1. Includes assets backing participating business in France of £2bn (2007 restated: £2bn).

2. Includes £1.5bn of assets held within Nationwide Life, acquired during the year.

Analysed by asset class:

LGPL

Other UK non profit insurance business

Other insurance business

Society shareholder capital

Other Group shareholder assets

Total

As at 31 December 2008

Notes

£bn

£bn

£bn

£bn

£bn

£bn

Equities1

- 

0.1 

- 

1.3 

- 

1.4 

Property

- 

- 

- 

0.2 

- 

0.2 

Bonds 

6.02

17.1 

0.5 

2.1 

0.7 

1.0 

21.4 

Derivative assets2

1.3 

0.7 

- 

- 

0.3 

2.3 

Cash (including cash equivalents)

0.3 

0.6 

0.4 

0.7 

1.0 

3.0 

18.7 

1.9 

2.5 

2.9 

2.3 

28.3 

1. Since the year end the Group has reduced shareholder exposure to equity investments by £0.4bn through disposals.

2. Derivative assets are shown gross of derivative liabilities. Exposures arise from: a. The use of derivatives for efficient portfolio management, especially the use of interest rate swaps, inflation swaps and foreign exchange forward contracts for asset and liability management.

b. Derivatives matching Guaranteed Equity Bonds within the Nationwide Life portfolio.

Asset Disclosures

Page 72

6.02 Bond portfolio summary

(i) Analysed by sector

LGPL

Total

As at 31 December 2008

Notes

£m 

%

£m 

%

Sovereigns, Supras and Sub-Sovereigns

1,317 

8 

2,517 

12 

Banks

- Tier 11

6.04

594 

3 

650 

3 

- Tier 2 and other subordinated

6.04

2,207 

13 

2,410 

11 

- Senior

1,096 

6 

1,815 

8 

Utilities

2,033 

12 

2,291 

11 

Consumer Services & Goods

1,627 

9 

1,829 

8 

Financial Services

894 

5 

989 

5 

Technology & Telecoms

940 

6 

1,172 

5 

Insurance

775 

5 

904 

4 

Industrials

557 

3 

784 

4 

Oil & Gas

549 

3 

611 

3 

Health Care

484 

3 

541 

3 

Property

443 

3 

516 

2 

ABS 

6.03

2,572 

15 

3,389 

16 

CDO 

991 

6 

1,004 

5 

Total

17,079 

100 

21,422 

100 

1. Tier 1 holdings include £75m of preference shares.

(ii) Analysed by domicile

LGPL

Total

As at 31 December 2008

£m 

%

£m 

%

United Kingdom

7,694 

45 

8,996 

42 

North America

4,831 

28 

6,833 

32 

Europe

3,868 

23 

4,821 

22 

Other

686 

4 

772 

4 

Total

17,079 

100 

21,422 

100 

Within the UK non profit annuity business all non-sterling denominated bonds are currency hedged back to sterling.

(iii) Analysed by credit rating

LGPL

Total

As at 31 December 2008

£m

%

£m

%

AAA

2,571 

15 

4,616 

22 

AA

1,893 

11 

2,359 

11 

A

7,064 

42 

8,180 

38 

BBB

3,779 

22 

4,385 

20 

BB or below

168 

1 

183 

1 

Unrated: Bespoke CDOs

878 

5 

878 

4 

Other

726 

4 

821 

4 

17,079 

100 

21,422 

100 

Other unrated bonds have been assessed and rated internally and are all categorised as investment grade.

Asset Disclosures

Page 73

6.02 Bond portfolio summary (continued)

As at 31 December 2008

(iv) CDOs

Total Group holds collateralised debt obligations (CDO) with a market value of £1,004m.

These holdings include £126m in traded CDOs and £34m exposure to an equity tranche of a bespoke CDO. The current market value of the equity tranche is approximately equal to the present value of future interest payable on the notes.

The balance of £844m relates to a further four CDOs that were constructed in 2007 and 2008 in accordance with terms specified by Legal & General. These CDOs mature in 2017 and 2018. The Group selects the reference portfolios underlying the CDOs to give exposure to globally diversified portfolios of investment grade corporate bonds.

The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 28%, on average across the four CDOs, before the CDOs incur any default losses. Assuming an average recovery rate of 33%, then over 42% of the reference names would have to default before the CDOs incur any default losses.

Beyond 28% of default losses on the reference portfolio, losses to the CDO would occur at a rate that is a multiple of the loss rate on the reference portfolio. Losses are limited under the terms of the CDOs to assets and collateral invested. For illustration a £200m loss could be reached if default losses to the reference portfolios exceeded 32% or if 48% of the names in the diversified global investment grade portfolio defaulted, with an average 33% recovery rate. (All figures are averages across the four CDOs.)

These CDOs are valued using an internal valuation which is based on market inputs. This is then validated against the counterparty valuation and, at the year end, validated by independent external consultants.

For the purposes of valuing the non profit annuity regulatory and IFRS liabilities the yield on the CDOs are included within the calculation of the yield used to calculate the valuation discount rate for the annuity liabilities. An allowance for the risks, including default, is also made. For EEV purposes, the yield on the CDOs, reduced by the realistic default assumption, is similarly included in assumed future investment returns.

Asset Disclosures

Page 74

6.03 Asset backed securities summary 

(i) By security

LGPL 

LGPL 

Total

Total 

As at 31 December 2008

£m 

%

£m 

%

Traditional ABS:

RMBS - Prime1

292 

12 

593

17 

RMBS - Sub-prime2

- 

- 

30

1 

CMBS

137 

5 

284

8 

Credit Card

36 

1 

267

8 

Auto

- 

- 

82

2 

Student Loan

20 

1 

30

1 

485 

19 

1,286 

37 

Other:

Secured Bond

1,061 

41 

1,068

31 

Commercial Property Backed Bonds

155 

6 

155

5 

Infrastructure / PFI / Social housing

640 

25 

641

19 

Whole Business Securitisation

220 

9 

221

7 

Other secured holdings3

11 

- 

18

1 

2,087 

81 

2,103 

63 

Total

2,572 

100 

3,389 

100 

1. 87% of Prime RMBS holdings relate to UK mortgages.

2. 90% of Sub-prime RMBS holdings have a credit rating of AAA and 49% relate to the UK.

3. Other includes covered bonds (£9m) and non investment grade monoline wrapped securities (£2m).

(ii) By credit rating

LGPL 

LGPL 

Total

Total 

As at 31 December 2008

£m 

%

£m 

%

AAA

947

37 

1,703

51 

AA

553

21 

581

17 

A

713

28 

721

21 

BBB

340

13 

359

11 

BB or below

14

1 

16

- 

Unrated

5

- 

9

- 

Total

2,572 

100

3,389 

100

Of the £801m of traditional ABS holdings held outside of LGPL, 93% are rated AAA.

The credit ratings of monoline wrapped bonds are based on the rating of the underlying securities. No credit is taken for 

the wrap.

Asset Disclosures

Page 75

6.04 Group subordinated bank exposures

Market

Total 

value

As at 31 December 2008

£m 

%

Tier 1

United Kingdom1

448 

15 

North America

102 

3 

Europe

88 

3 

Others

12 

- 

Total tier 1

650 

21 

Lower Tier 2

United Kingdom

760 

25 

North America

668 

22 

Europe

255 

8 

Others

71 

2 

Upper Tier 2

United Kingdom

474 

16 

North America

3 

- 

Europe

142 

5 

Others

9 

- 

Other subordinated

United Kingdom

10 

- 

North America

18 

1 

Europe

- 

- 

Others

- 

- 

Total tier 2 and other subordinated

2,410 

79 

Total 

3,060 

100 

1. The exposure to UK tier 1 debt includes issuances from the UK subsidiaries of European banks where there is no explicit 

parental guarantee.

Asset Disclosures

Page 76

6.05 Shareholder asset mix

Other

Other

Society

Group

Society

Group

shareholder

shareholder

shareholder

shareholder

capital

assets

Total

capital

assets

Total

2008

2008

2008

2007

2007

2007

%

%

%

%

%

%

Equities

43

2

25

69

3

47

Property

6

- 

4

12

- 

8

Bonds

23

50

35

12

59

28

Derivative assets

1

12

6

- 

4

1

Cash (including cash equivalents)

27

36

30

7

34

16

100

100

100

100

100

100

Invested assets (£bn)

2.9 

2.3 

5.2 

4.0 

2.1 

6.1 

6.06 Fair value hierarchy

(i) Analysis of fair value measurement bases

Fair value measurement at the

end of the reporting period based on:

Level 1

Level 2

Level 3

Total

As at 31 December 2008

£bn

£bn

£bn

£bn

Shareholder

Equity securities

1.1 

- 

0.2 

1.3 

Bonds 

1.2 

2.6 

- 

3.8 

Derivative assets

- 

0.3 

- 

0.3 

2.3 

2.9 

0.2 

5.4 

Non profit non-unit linked

Equity securities

0.1 

- 

- 

0.1 

Bonds 

1.1 

16.5 

- 

17.6 

Derivative assets

- 

2.0 

- 

2.0 

1.2 

18.5 

- 

19.7 

The levels of fair value measurement bases are defined as follows:

Level 1: fair values measured using quoted prices in an active market for identical assets or liabilities.

Level 2: fair values measured using valuation techniques for which all inputs significant to the measurement are based on observable market data.

Level 3: fair values measured using valuation techniques for which any input significant to the measurement is not based on observable market data.

Level 1 financial instruments principally include listed equity instruments, government and certain supranational institution bonds and exchange traded futures and options.

Level 2 financial instruments principally include listed corporate bonds, commercial paper, and derivative instruments which are not exchange traded.

Level 3 financial instruments principally include unquoted equities, including investments in venture capital, and suspended securities.

In current market conditions, the liquidity of financial instruments is less than it has been in the past. All of the Group's level 2 assets have been valued using standard market pricing sources, such as iBoxx, IDC and Bloomberg except for bespoke CDO and swaps holdings (see below). In normal market conditions we would consider these prices to be observable market prices. However, 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 prudently classified them as level 2. 

Our holdings in bespoke CDOs and swaps are priced using industry standard internal models which utilise market assumptions. The CDO valuations have also been verified using externally provided prices. The models used have also been verified by independent external consultants and reviewed by our auditors. Accordingly these assets have also been classified in level 2.

Level 3 assets, where internal models are used represent a small proportion of assets to which shareholders are exposed and reflect unquoted equities including investments in venture capital, and suspended securities.