L&G 2009 Final Results Part 3

Cash Flow and Capital

Page 51

3.01 Operational cash generation1

The table below provides an analysis of the operational cash generated by each of the Group's business segments, together with a reconciliation to IFRS profit after tax.

Operational

New

Investment

IFRS

cash

business

Net

Inter-

gains and

profit

generation

strain

cash

national2

Variances

losses3

Other4

after tax

Year ended 31 December 2009

£m

£m

£m

£m

£m

£m

£m

£m

Total Risk operating profit

454

50

504

-

27

-

-

531

Total Savings operating profit

110

(77)

33

-

16

-

(8)

41

Investment management

operating profit

121

-

121

-

-

-

-

121

International

8

-

8

78

-

-

-

86

Group capital and financing

33

-

33

-

-

16

-

49

Investment projects

-

-

-

-

-

-

(23)

(23)

Operating profit

726

(27)

699

78

43

16

(31)

805

Investment variance

-

-

-

-

-

58

-

58

Property losses attributable

to minority interests

-

-

-

-

-

-

(19)

(19)

Total

726

(27)

699

78

43

74

(50)

844

Dividends paid in the year

(185)

Net cash available for reinvestment

514

Year ended 31 December 2008

Total Risk operating profit

379

(173)

206

-

(44)

-

(11)

151

Total Savings operating profit

138

(161)

(23)

-

28

-

12

17

Investment management

operating profit

115

-

115

-

-

-

-

115

International

-

-

-

39

-

-

-

39

Group capital and financing

22

-

22

-

-

74

11

107

Operating profit

654

(334)

320

39

(16)

74

12

429

Investment variance

-

-

-

-

-

(1,496)

-

(1,496)

Property losses attributable

to minority interests

-

-

-

-

-

-

(63)

(63)

Total

654

(334)

320

39

(16)

(1,422)

(51)

(1,130)

Dividends paid in the year

(239)

Net cash available for reinvestment

81

Variances5

Risk

Savings

Total NP

Risk

Savings

Total NP

£m

£m

£m

£m

£m

£m

Notes

2009

2009

2009

2008

2008

2008

Experience variances

2.02(b)/2.03(b)

113

(1)

112

2

(35)

(33)

Changes to valuation assumptions

2.02(b)/2.03(b)

169

9

178

(42)

32

(10)

Changes to FSA reporting

and capital rules

2.02(b)/2.03(b)

15

50

65

-

-

-

Movements in non-cash items

2.02(b)/2.03(b)

(229)

(64)

(293)

16

(14)

2

Other

2.02(b)/2.03(b)

(41)

22

(19)

(20)

45

25

Total

27

16

43

(44)

28

(16)

1. The operational cash generation analysed above is available to replenish the capital stock, reinvest back into the business and finance the dividend. In 2009, the business generated operational cashflow of £726m (2008: £654m) before investing £27m (2008: £334m) in non profit new business strain, resulting in net cash generated of £699m (2008: £320m). In 2009, £120m has been used to pay the 2008 final dividend and £65m to pay the half-year dividend, resulting in £514m (2008: £81m) being retained, augmenting the IGD surplus.

2. Profits arising in the international businesses that are not paid out in dividends are retained locally to support growth and are treated as not being available for distribution.

3. Investment gains and losses have been excluded from operational cash generation in order to reflect an expected net of tax income on shareholders' investments.

4. Other includes the removal of amortisation on acquired intangibles in our Savings business for 2009. Costs relating to one-off investment projects are also excluded for 2009. Other in 2008 reflects adjustments arising on restatement of the 2008 operating profit and minor definitional changes in net cash.

5. Non-recurring experience variances and assumption changes are absorbed directly by the Group's IGD surplus. Movements in non-cash items do not generate cash in the period and are therefore not available for distribution.

Cash Flow and Capital

Page 52

3.02 Regulatory capital resources

(a)

Insurance Group's Directive (IGD)

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 Group level, Legal & General must comply with the requirements of the IGD. The table below shows the estimated total Group capital resources, Group capital resources requirement and the surplus based on unaudited regulatory returns.

2009

2008

£bn

£bn

Core tier 1

4.8

3.9

Innovative tier 1

0.6

0.6

Upper tier 2

0.4

0.4

Lower tier 21

0.8

0.6

Deductions2

(1.0)

(1.1)

Group capital resources

5.6

4.4

Group capital resources requirement

2.5

2.6

IGD surplus3

3.1

1.8

Coverage ratio (Group capital resources / Group capital resources requirement)

2.24 times

1.69 times

1. The increase in lower tier 2 capital reflects £0.3bn of capital raised in July 2009 , which has been offset by foreign exchange movements in translating the Group's euro denominated lower tier 2 debt.

2. Deductions comprises inadmissible assets in L&G America of £0.8bn (2008: £0.8bn), in Society of £0.1bn (2008: £0.2bn) and in other subsidiaries of £0.1bn (2008: £0.1bn).

3. The IGD surplus is stated after accruing for the period end dividend.

A segmental analysis is given below.

2009

2008

£bn

£bn

Society long term fund1

2.1

1.9

Society shareholder capital

2.2

1.6

General insurance

0.1

0.1

France

0.2

0.2

Netherlands

0.2

0.2

Nationwide Life

0.1

0.1

USA

0.2

0.1

Investment management

0.3

0.3

Other2

0.9

1.3

Innovative tier 1

0.6

0.6

Tier 2

1.2

1.0

Debt

(2.5)

(3.0)

Group capital resources

5.6

4.4

Society long term fund1

2.1

2.1

Other

0.4

0.5

Group capital resources requirement

2.5

2.6

1. The Society long term fund (LTF) capital requirement of £2.1bn (2008: £2.1bn) is met by £2.1bn (2008: £1.9bn) of capital resources in the LTF and £nil (2008: £0.2bn) from other Society shareholder capital.

2. Other includes corporate assets held within the Group's Treasury function.

Cash Flow and Capital

Page 53

3.02 Regulatory capital resources (continued)

(a)

Insurance Group's Directive (IGD) (continued)

A reconciliation of the Group capital resources on an IGD basis to the capital and reserves attributable to the equity holders of the Company on an IFRS basis is given below.

2009

2008

£bn

£bn

Capital and reserves attributable to equity holders on an IFRS basis

4.2

3.6

Innovative tier 1

0.6

0.6

Tier 2

1.2

1.0

Proposed dividends

(0.2)

(0.1)

Additional capital available from Society

0.6

0.3

Adjustment to reflect regulatory value of the USA operation

(0.8)

(0.8)

Other regulatory adjustments

-

(0.2)

Group capital resources

5.6

4.4

(b)

With-profits realistic balance sheet

The table below summarises the realistic position of the with-profits part of Society's LTF:

2009

2008

£m

£m

With-profits surplus

841

641

Risk capital margin

241

373

Surplus

600

268

Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis (peak 2). The risk capital margin is calculated based on the most onerous capital requirement calculated after performing five stresses specified by the FSA. The surplus includes the present value of future shareholder transfers of £326m (2008: £212m) as a liability in the calculation.

(c)

Society capital surplus

Society is required to measure and monitor its capital resources on a regulatory basis.

2009

2009

2008

2008

Long term

General

Long term

General

business

insurance

business

insurance

£bn

£bn

£bn

£bn

Available capital resources - Tier 1

4.8

0.1

4.0

0.1

Insurance capital requirement

2.1

0.1

1.9

0.1

Capital requirements of regulated related undertakings

0.2

-

0.3

-

With-profits Insurance Capital Component

-

-

0.2

-

Capital resources requirement

2.3

0.1

2.4

0.1

Regulatory capital surplus

2.5

-

1.6

-

Movement in Society long term insurance capital requirement

2009

2008

Change

Pillar 1 capital requirement

£bn

£bn

£bn

Protection

0.6

0.5

0.1

Annuities

0.8

0.7

0.1

Non profit pensions and unit linked bonds

0.1

0.1

-

Non profit

1.5

1.3

0.2

With-profits

0.6

0.6

-

Long term insurance capital requirement

2.1

1.9

0.2

On a regulatory basis (peak 1), Society long term business regulatory capital surplus of £2.5bn (2008: £1.6bn) comprises capital resources within the long term fund of £2.1bn (2008: £1.9bn) and capital resources outside the long term fund of £2.7bn (2008: £2.1bn) less the capital resources requirement of £2.3bn (2008: £2.4bn).

The With-profits Insurance Capital Component (WPICC) is an additional capital requirement calculated if the surplus in the with-profits fund on a peak 2 basis is lower than on a peak 1 basis and represents the difference in the surplus between the two bases. It is calculated based on the most onerous risk capital margin stress referred to in 3.02 (b). A further adjustment is made to the Peak 2 surplus to remove the present value of future shareholder transfers which is treated as a liability in Society's with-profits realistic surplus. At 31 December 2009, this adjustment amounted to £326m (2008: £212m); however the adjustment to the WPICC has been restricted by £178m as the Peak 1 surplus is lower than the Peak 2 surplus.

Cash Flow and Capital

Page 54

3.03 Group capital resources

Share-

holders'

UK non

equity and

UK with-

profit

Overseas

Total

other

profits

and SRC1

LGPL

and PMC

life

activities

Total

As at 31 December 2009

£m

£m

£m

£m

£m

£m

£m

Ordinary shareholders' equity outside the LTF

-

157

703

1,553

2,413

492

2,905

Ordinary shareholders' equity in the LTF

-

1,291

-

-

1,291

-

1,291

Capital and reserves attributable to equity holders of

the Company

-

1,448

703

1,553

3,704

492

4,196

Adjustments onto regulatory basis:

Unallocated divisible surplus

1,249

-

-

35

1,284

-

1,284

Other2

(408)

(609)

-

(763)

(1,780)

(227)

(2,007)

Other qualifying capital:

Subordinated borrowings

-

-

-

-

-

1,815

1,815

Internal loans3

-

-

981

-

981

(981)

-

Proposed dividend

-

-

-

-

-

(160)

(160)

Total available capital resources

841

839

1,684

825

4,189

939

5,128

IFRS liability analysis:

UK participating liabilities on realistic basis

 - Options and guarantees

723

-

-

-

723

-

723

 - Other policyholder obligations

13,447

33

-

-

13,480

-

13,480

Overseas participating liabilities

-

-

-