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L&G 2010 Final Results Part 2

17th Mar 2011 07:00

RNS Number : 0979D

Legal & General Group Plc

17 March 2011

International Financial Reporting Standards									Page 39
Supplementary operating profit income statement
For the year ended 31 December 2010

								2010	2009
						Notes		£m	£m


From continuing operations
Risk						2.01(a)		560	735
Savings						2.02(a)		115	50
Investment management						2.03		206	172
International						2.04		102	127
Group capital and financing						2.06		58	57
Investment projects1								(39)	(32)


Operating profit								1,002	1,109
Variation from longer term investment return						2.07		90	(16)
Property losses attributable to non-controlling interests								-	(19)


Profit before income tax attributable to equity holders of the Company								1,092	1,074
Tax expense attributable to equity holders of the Company						2.08		(272)	(230)


Profit for the year								820	844



Attributable to:
Non-controlling interests						2.15		-	(19)
Equity holders of the Company								820	863



								p	p


Earnings per share						2.09
Based on profit attributable to equity holders of the Company								14.07	14.82


Diluted earnings per share						2.09
Based on profit attributable to equity holders of the Company								13.88	14.73


1. Investment projects relate to strategic investments including Solvency II.

This supplementary operating profit information (one of the Group's key performance indicators) provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business.

Operating profit for the Risk segment represents the profit from the annuities business (individual and bulk purchase annuities) and the profit from the housing and protection businesses (general insurance, and individual and group protection business). Operating profit reflects the investment returns that the business expects to make on the financial investments that back this business and on shareholder funds retained within our general insurance business.

Operating profit for the Savings segment represents the profit from the insured Savings businesses (non profit investment bonds and non profit pensions (including SIPPs)), the with-profits transfer and the profit of our Savings investments business. Operating profit reflects the investment returns that the business expects to make on the financial investments that back this business.

The composition of the Savings and Investment management segments has changed. Institutional retail investment business is now included in the Savings segment; the net effect was to reduce Savings 2009 operating profit by £5m with an offsetting increase in the Investment management segment's operating profit.

Operating profit for the Investment management and International segments includes 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 monthly basis. Profits or losses arising from actuarial movements on annuities held by the Group's defined benefit pension schemes are excluded from operating profit. Profits or losses arising on the elimination of own debt holdings are also excluded from operating profit.

Changes have been made to the presentation of certain notes to improve transparency. The comparatives have been amended accordingly.


International Financial Reporting Standards									Page 40
Consolidated Income Statement
For the year ended 31 December 2010

								2010	2009
						Notes		£m	£m


Revenue
Gross written premiums								5,348	5,275
Outward reinsurance premiums								(590)	(574)
Net change in provision for unearned premiums								(14)	11


Net premiums earned								4,744	4,712
Fees from fund management and investment contracts								900	786
Investment return								32,671	38,201
Operational income								125	91


Total revenue								38,440	43,790


Expenses
Claims and change in insurance liabilities								7,567	7,614
Reinsurance recoveries								(621)	(520)


Net claims and change in insurance liabilities								6,946	7,094
Change in provisions for investment contract liabilities								28,154	33,186
Acquisition costs								770	780
Finance costs								168	179
Other expenses								905	882
Transfers to unallocated divisible surplus								190	430


Total expenses								37,133	42,551


Profit before income tax								1,307	1,239
Income tax expense attributable to policyholder returns								(215)	(165)


Profit before income tax attributable to equity holders of the Company								1,092	1,074


Total income tax expense								(487)	(395)
Income tax expense attributable to policyholder returns								215	165


Income tax expense attributable to equity holders						2.08		(272)	(230)


Profit for the year								820	844



Attributable to:
Non-controlling interests								-	(19)
Equity holders of the Company								820	863



Dividend distributions to equity holders of the Company during the year						2.12		238	185
Dividend distributions to equity holders of the Company proposed after the year end						2.12		201	160



								p	p


Earnings per share
Based on profit attributable to equity holders of the Company						2.09		14.07	14.82


Diluted earnings per share
Based on profit attributable to equity holders of the Company						2.09		13.88	14.73




International Financial Reporting Standards									Page 41
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2010

								2010	2009
								£m	£m


Profit for the year								820	844

Other comprehensive income after tax
Exchange differences on translation of overseas operations								8	(63)
Actuarial (losses) on defined benefit pension schemes								(9)	(154)
Actuarial losses on defined benefit pension schemes transferred to unallocated divisible surplus								4	62
Net change in financial investments designated as available-for-sale								27	66


Total comprehensive income for the year								850	755



Total comprehensive income attributable to:
Non-controlling interests								-	(19)
Equity holders of the Company								850	774




International Financial Reporting Standards									Page 42
Consolidated Balance Sheet
As at 31 December 2010

								2010	2009
						Notes		£m	£m


Assets
Purchased interest in long term businesses and other intangible assets								157	146
Deferred acquisition costs								2,000	1,957
Investment in associates								57	45
Plant and equipment								64	61
Investment property								4,571	3,839
Financial investments						2.10		299,570	276,016
Reinsurers' share of contract liabilities								2,336	2,093
Deferred tax asset								495	796
Income tax recoverable								-	1
Other assets								1,587	1,440
Cash and cash equivalents								13,036	10,650


Total assets								323,873	297,044



Equity
Share capital						2.11		147	147
Share premium						2.11		938	936
Employee scheme shares								(41)	(38)
Capital redemption and other reserves								79	41
Retained earnings								3,704	3,110


Shareholders' equity								4,827	4,196
Non - controlling interests						2.15		47	2


Total equity								4,874	4,198



Liabilities
Subordinated borrowings						2.14		1,897	1,870

Participating insurance contracts						2.16		9,383	9,404
Participating investment contracts						2.17		7,323	7,139
Unallocated divisible surplus								1,469	1,284
Value of in-force non-participating contracts								(377)	(367)


Participating contract liabilities								17,798	17,460


Non-participating insurance contracts						2.16		31,325	28,583
Non-participating investment contracts						2.17		253,426	234,502


Non-participating contract liabilities								284,751	263,085


Senior borrowings						2.14		1,435	1,407
Provisions						2.19		761	757
Deferred tax liabilities								356	303
Income tax liabilities								111	140
Payables and other financial liabilities								5,473	5,003
Other liabilities								954	892
Net asset value attributable to unit holders								5,463	1,929


Total liabilities								318,999	292,846



Total equity and liabilities								323,873	297,044




International Financial Reporting Standards									Page 43
Consolidated Statement of Changes in Equity
					Capital
				Employee	redemption			Non-
		Share	Share	scheme	and other	Retained		controlling	Total
		capital	premium	shares	reserves	earnings	Total	interests	equity
For the year ended 31 December 2010		£m	£m	£m	£m	£m	£m	£m	£m


As at 1 January		147	936	(38)	41	3,110	4,196	2	4,198
Profit for the year		-	-	-	-	820	820	-	820
Exchange differences on translation of
overseas operations		-	-	-	8	-	8	-	8
Actuarial (losses) on defined benefit pension
schemes		-	-	-	-	(9)	(9)	-	(9)
Actuarial losses on defined benefit pension
schemes transferred to unallocated divisible
surplus		-	-	-	-	4	4	-	4
Net change in financial investments
designated as available-for-sale		-	-	-	27	-	27	-	27


Total comprehensive income for the year		-	-	-	35	815	850	-	850
Options exercised under share option schemes:
- Savings related share option scheme		-	2	-	-	-	2	-	2
Shares purchased		-	-	(11)	-	-	(11)	-	(11)
Shares vested		-	-	8	(18)	-	(10)	-	(10)
Employee scheme treasury shares:
- Value of employee services		-	-	-	30	-	30	-	30
Transfer to retained earnings		-	-	-	-	8	8	-	8
Dividends		-	-	-	-	(238)	(238)	-	(238)
Movement in third party interests		-	-	-	-	-	-	45	45
Currency translation differences		-	-	-	(9)	9	-	-	-


As at 31 December		147	938	(41)	79	3,704	4,827	47	4,874



For the year ended 31 December 2009


As at 1 January		147	936	(46)	(42)	2,593	3,588	144	3,732
Profit for the year		-	-	-	-	863	863	(19)	844
Exchange differences on translation of
overseas operations		-	-	-	(63)	-	(63)	-	(63)
Actuarial (losses) on defined benefit pension
schemes		-	-	-	-	(154)	(154)	-	(154)
Actuarial losses on defined benefit pension
schemes transferred to unallocated divisible
surplus		-	-	-	-	62	62	-	62
Net change in financial investments
designated as available-for-sale		-	-	-	66	-	66	-	66


Total comprehensive income/(expense)
for the year		-	-	-	3	771	774	(19)	755
Shares purchased		-	-	(2)	-	-	(2)	-	(2)
Shares vested		-	-	10	(18)	-	(8)	-	(8)
Employee scheme treasury shares:
- Value of employee services		-	-	-	21	-	21	-	21
Transfer to retained earnings		-	-	-	-	8	8	-	8
Dividends		-	-	-	-	(185)	(185)	-	(185)
Movement in third party interests		-	-	-	-	-	-	(123)	(123)
Currency translation differences		-	-	-	77	(77)	-	-	-


As at 31 December		147	936	(38)	41	3,110	4,196	2	4,198





International Financial Reporting Standards									Page 44
Consolidated Cash Flow Statement
For the year ended 31 December 2010

								2010	2009
								£m	£m


Cash flows from operating activities
Profit for the year								820	844
Adjustments for non-cash movements in net profit for the year
Realised and unrealised gains on financial investments and investment properties								(23,673)	(29,180)
Investment income								(8,787)	(8,813)
Interest expense								168	179
Income tax expense								487	395
Other adjustments								59	104
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss								(2,958)	(5,822)
Investments designated as available-for-sale								(39)	(61)
Other assets								(479)	477
Net increase/(decrease) in operational liabilities
Insurance contracts								2,746	3,143
Transfer to unallocated divisible surplus								186	368
Investment contracts								20,702	29,337
Value of in-force non-participating contracts								(10)	(196)
Other liabilities								4,968	1,121


Cash used in operations								(5,810)	(8,104)
Interest paid								(167)	(160)
Interest received								5,030	5,074
Income tax (paid)/received								(164)	52
Dividends received								3,818	3,896


Net cash flows from operating activities								2,707	758


Cash flows from investing activities
Net acquisition of plant and equipment								(17)	(7)
Acquisitions (net of cash acquired)1								(44)	-
Capital injections into associates and joint ventures								(8)	(36)


Net cash flows from investing activities								(69)	(43)


Cash flows from financing activities
Dividend distributions to ordinary equity holders of the Company during the year								(238)	(185)
Proceeds from issue of ordinary share capital								2	-
Purchase of employee scheme shares								(11)	(2)
Proceeds from borrowings								750	2,124
Repayment of borrowings								(758)	(2,629)


Net cash flows from financing activities								(255)	(692)


Net increase in cash and cash equivalents								2,383	23
Exchange gains/(losses) on cash and cash equivalents								3	(61)
Cash and cash equivalents at 1 January								10,650	10,688


Cash and cash equivalents at 31 December								13,036	10,650


1. Net cash flows from acquisitions include total net identifiable assets acquired of £52m (2009: £nil) less cash and cash equivalents acquired of £8m (2009: £nil).

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


International Financial Reporting Standards									Page 45
Supplementary operating profit information
2.01 Risk

(a) Risk operating profit
								2010	2009
						Notes		£m	£m


Annuities								364	545


Protection								207	172
General Insurance								(8)	17
Other1								(3)	1


Total Housing and Protection								196	190


Total Risk operating profit						2.01(b)		560	735


1. Other comprises estate agencies and housing related business conducted through our regulated mortgage network and business unit costs of £3m (2009: £3m) allocated to the Risk business. In July 2009, an insurance business transfer of Nationwide Life business was made to Legal & General Assurance Society Limited (Society). Operating profit associated with the business was included in Other prior to the transfer; post transfer operating profit is recorded in Protection.

(b) Analysis of Risk operating profit
					Housing			Housing
					and			and
				Annuities	Protection	Total	Annuities	Protection	Total
				2010	2010	2010	2009	2009	2009
		Notes		£m	£m	£m	£m	£m	£m


Risk business segment operating profit comprises:
	Operational cash generation			229	210	439	235	219	454
	New business strain			60	(70)	(10)	129	(79)	50


	Net cash generation			289	140	429	364	140	504
	Experience variances	2.01(c)				67			113
	Changes to valuation assumptions	2.01(d)				30			169
	Changes to FSA reporting and capital rules					-			15
	Movements in non-cash items	2.01(e)				(122)			(229)
	Other					(1)			(41)


						403			531
	Tax gross up	2.08				157			204


Total Risk operating profit						560			735


The annuities and protection (non profit business) operational cash generation represents the expected surplus to be generated in the period from the in-force non profit business which is broadly equivalent to the expected release of profit from the non profit Risk business using best estimate assumptions. 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 operational cash generation exclude required solvency margin from the liability calculation as is required by the ABI SORP.

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

(c) Experience variances

								2010	2009
								£m	£m


Persistency								(3)	(9)
Mortality/morbidity								(8)	(9)
Expenses								(1)	1
Bulk purchase annuity data loading								59	48
Project and development costs1								(9)	(21)
Tax2								37	79
Other								(8)	24


								67	113


1. In 2010, project and development costs primarily relate to investment in the Group protection policy administration systems.
2. The current tax credit principally relates to the utilisation of brought forward tax losses.


International Financial Reporting Standards									Page 46
Supplementary operating profit information
2.01 Risk (continued)
(d) Changes to valuation assumptions

								2010	2009
								£m	£m


Persistency								(5)	(5)
Mortality/morbidity1								(19)	101
Expenses2								(9)	54
Other3								63	19


								30	169


1. Mortality/morbidity includes the release of £43m relating to reserving benefits within individual protection. This was offset by a £59m strengthening of the mortality assumptions within the annuity business.
2. The negative expense assumption reflects a change in reserving basis for custodian fees of £11m.
3. Other reflects the benefit from inflation modelling enhancement on deferred annuity business.

(e) Movements in non-cash items

								2010	2009
								£m	£m


Deferred tax								(125)	(221)
Other								3	(8)


								(122)	(229)



(f) General insurance operating (loss)/profit
				Net cash	Tax	Operating	Net cash	Tax	Operating
				generation	gross up	(loss)/profit	generation	gross up	profit
				2010	2010	2010	2009	2009	2009
				£m	£m	£m	£m	£m	£m


Household1				(10)	(4)	(14)	9	3	12
Other business				4	2	6	4	1	5


				(6)	(2)	(8)	13	4	17


1. The 2010 Household operating loss reflects the impact of two periods of severe cold weather, which has resulted in an additional £30m of weather related claims.

(g) General insurance combined operating ratios

								2010	2009
								%	%


Household1								109	98
Other business								77	79


								106	96


1. The 2010 Household combined operating ratio reflects the impact of two periods of severe cold weather. If these events are excluded the underlying combined ratio is 97%.


International Financial Reporting Standards									Page 47
Supplementary operating profit information
2.02 Savings

(a) Savings operating profit

								2010	2009
						Notes		£m	£m


Insured business1								31	(11)
With-profits business2								63	64
Savings investments3								21	(3)


Total Savings operating profit						2.02(b)		115	50


1. Insured business (previously reported as Non profit Savings) includes non profit investment bonds and pensions (including SIPPs), Nationwide Life Savings business and International (Ireland). The Nationwide Life Savings business and the International (Ireland) business were previously reported in Other. Prior period comparatives have been amended.
2. With-profits business operating profit is the shareholders' share of total with-profits bonuses.
3. Savings investments (previously reported as Retail investments) operating profit includes retail and institutional unit trusts, Suffolk Life and business unit costs allocated to the Savings segment of £1m (2009: £3m). The Institutional unit trust business was previously reported in the Investment management segment. Prior period comparatives have been amended. The impact has been to reduce Savings investments 2009 operating profit by £5m.

(b) Analysis of Savings operating profit


						Insured		Savings
						business	With-profit	investments	Total
						2010	2010	2010	2010
			Notes			£m	£m	£m	£m


Savings cash generation
	Operational cash generation					71	46	21	138
	New business strain					(70)	-	-	(70)


	Net cash generation					1	46	21	68
Insured business
	Experience variances		2.02(c)						10
	Changes to valuation assumptions		2.02(d)						28
	Changes to FSA reporting and capital rules								-
	Movements in non-cash items		2.02(e)						(21)
	Other								4
Savings investments
	Movements in non-cash items and other								(9)


									80
	Tax gross up								35


Total Savings operating profit									115



						Insured		Savings
						business	With-profit	Investments	Total
						2009	2009	2009	2009
			Notes			£m	£m	£m	£m



	Operational cash generation					55	46	5	106
	New business strain					(77)	-	-	(77)


	Net cash generation					(22)	46	5	29
Insured business
	Experience variances		2.02(c)						(1)
	Changes to valuation assumptions		2.02(d)						9
	Changes to FSA reporting and capital rules								50
	Movements in non-cash items		2.02(e)						(65)
	Other								22
Savings investments
	Movements in non-cash items and other								(7)


									37
	Tax gross up								13


Total Savings operating profit									50




International Financial Reporting Standards									Page 48
Supplementary operating profit information
2.02 Savings (continued)
(b) Analysis of Savings operating profit (continued)

The insured business operational cash generation represents the expected surplus to be generated in the period from the in-force investment bonds and pensions business (non profit Savings) which is broadly equivalent to the expected release of profit from non profit Savings business using best estimate assumptions. 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 operational cash generation exclude required solvency margin from the liability calculation as is required by the ABI SORP.

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

(c) Experience variances

								2010	2009
								£m	£m


Persistency								(3)	(1)
Mortality/morbidity								1	-
Expenses								3	-
Project and development costs1								(4)	(23)
Tax2								14	22
Other								(1)	1


								10	(1)


1. In 2009, project and development costs related principally to continued investment in internal and other customer facing systems.
2. The current tax credit principally relates to the utilisation of brought forward tax losses.

(d) Changes to valuation assumptions

								2010	2009
								£m	£m


Persistency								-	1
Mortality/morbidity								2	(2)
Expenses								3	(1)
Other1								23	11


								28	9


1. In 2010, Other assumption changes includes £12m from the recognition of the benefit of tax exempt UK dividend income.

(e) Movements in non-cash items

								2010	2009
						Notes		£m	£m


Deferred tax								(39)	(33)
Deferred acquisition costs						2.02(f)		(16)	(5)
Deferred income liabilities								33	35
Other1								1	(62)


								(21)	(65)


1. In 2009, Other includes the elimination of £55m of sterling reserves following the adoption of PS06/14.


International Financial Reporting Standards									Page 49
Supplementary operating profit information
2.02 Savings (continued)
(f) Deferred acquisition cost movement, net of associated deferred tax

								2010	2009
								£m	£m


As at 1 January								628	633
Amortisation through income								(66)	(67)
Acquisition costs deferred								50	62


As at 31 December								612	628



Balance sheet deferred acquisition costs also include amounts relating to the Group's overseas, general insurance, retail investments and with-profits businesses and is presented gross of associated deferred tax.

Expected amortisation profile:

								2010	2009
								£m	£m


Expected to be amortised within one year								69	61
Expected to be amortised between one year and five years								276	244
Expected to be amortised in over five years								267	323


								612	628



2.03 Investment management

								2010	2009
								£m	£m


Pension funds (managed and segregated)								148	128
Other non-pension1								20	16
Investment management services for internal funds								38	28


Total Investment management operating profit2								206	172


1. Other non-pension includes institutional segregated mandates, private equity and property (both in the UK and overseas). The increase has been driven by non-pension segregated mandates.
2. Investment management operating profit no longer includes institutional unit trusts which are now included within the Savings segment. Prior period comparatives have been amended. The impact has been to increase Investment management 2009 operating profit by £5m.


2.04 International

								2010	2009
								£m	£m



USA								85	86


Netherlands1								20	42
France								6	4


Total Europe operating profit								26	46
Other2								(9)	(5)


Total International operating profit3								102	127


1. The reduction in Netherlands' profit was driven by tougher trading conditions and a reduction in interest margins. The 2009 result had benefited from volatile bond markets which have since started to normalise.
2. Other includes our joint venture operations in Egypt, the Gulf, India and business unit costs of £5m (2009: £4m) allocated to the International segment.
3. In 2010, the International division paid £44m (2009: £8m) of dividends to the Group.

Exchange rates are provided in Note 2.05.


2.05 Foreign exchange rates
Principal rates of exchange used for translation are:
						01.01.10-		01.01.09-
						31.12.10	2010	31.12.09	2009
						Average	Year end	Average	Year end


United States Dollar						1.55	1.57	1.57	1.62
Euro						1.17	1.17	1.12	1.13




International Financial Reporting Standards									Page 50
Supplementary operating profit information
2.06 Group capital and financing

								2010	2009
								£m	£m


Investment return1								187	191
Interest expense2								(121)	(127)
Investment expenses								(3)	(3)
Unallocated corporate expenses								(5)	(4)


Total Group capital and financing operating profit								58	57


1. The longer term expected investment return of £187m (2009: £191m) reflects an average return of 5.8% (2009: 6.4%) on the average balance of invested assets of £3.2bn (2009: £3.0bn) held within Group capital and financing calculated on a monthly basis. The invested assets held within Group capital and financing amounted to £3.3bn (2009: £2.8bn).
2. Interest expense excludes interest on non recourse financing (see Note 2.14).

2.07 Variation from longer term investment return

								2010	2009
								£m	£m


Risk1								102	(218)
Savings2								(54)	127
Investment management								(8)	(4)
International3								35	26
Group capital and financing
	Asset related4							52	24
	Debt related5							(72)	15
	Defined benefit pension scheme6							35	14


Total variation from longer term investment return								90	(16)


1. In 2010, Risk business investment variance reflects the positive experience of £180m, partly offset by changes to interest rates and changes to modelling of liability and asset data.
2. Savings business investment variance includes the difference between IFRS deferred policyholder tax and the amount included within the unit linked life funds.
3. The International investment variance includes a £28m (2009: £18m) benefit from the US Capital restructuring programme, which involved replacing the Triple X financing solution with an internal reinsurance structure. The benefit was the result of purchasing the Potomac Trust Capital Class A Money Market Securities (used to fund the Triple X solution) at a discount.
4. Group capital and financing operating profit incorporates an assumed long term investment return. The asset related investment variance reflects the difference between the assumed return and actual return on Society shareholder capital and the Group's treasury assets.
5. The Group manages its exposure to interest rate movements on debt issued with a series of interest rate swaps to lock into a fixed funding cost. The Group does not hold an active trading position in such derivative contracts. For contracts which have not been designated within hedge accounting relationships there is resulting short term income statement volatility which in 2010, primarily as a result of a decrease in the relevant long term interest rates, amounted to £(62)m (2009: £23m). In addition the elimination of Legal & General debt owned by the Group is £(8)m (2009: £6m) and other small items have an impact of £(2)m (2009: £(14)m).
6. The defined benefit pension scheme investment variance includes the actuarial gains and losses and valuation difference arising on annuity assets held by the defined benefit pension schemes that have been purchased from Legal & General Assurance Society Limited.



2.08 Analysis of tax

						Profit/(loss)	Tax	Profit/(loss)	Tax
						before tax	(expense)/	before tax	(expense)/
							credit		credit
						2010	2010	2009	2009
						£m	£m	£m	£m


From continuing operations
Risk						560	(157)	735	(204)
Savings						115	(35)	50	(13)
Investment management						206	(44)	172	(47)
International						102	(25)	127	(41)
Group capital and financing						58	(1)	57	(8)
Investment projects						(39)	11	(32)	9


Operating profit/(loss)						1,002	(251)	1,109	(304)
Variation from longer term investment return						90	(16)	(16)	74
Impact of change in UK tax rates						-	(5)	-	-
Property losses attributable to non-controlling interests						-	-	(19)	-


Profit/(loss) for the period/Tax (expense)/credit for the period						1,092	(272)	1,074	(230)


The equity holders' effective tax rate for the period is 24.9% (2009: 21.4%). The principal reason for this increase relates to the recognition of a previously unrecognised deferred tax asset in 2009.


International Financial Reporting Standards									Page 51
Notes to the Financial Statements

2.09 Earnings per share

(a) Earnings per share

		Profit	Tax	Profit	Earnings	Profit/(loss)	Tax	Profit	Earnings
		before tax	expense	after tax	per share	before tax	expense	after tax	per share
		2010	2010	2010	2010	2009	2009	2009	2009
		£m	£m	£m	p	£m	£m	£m	p



Earnings per share based on profit
attributable to equity holders		1,092	(272)	820	14.07	1,093	(230)	863	14.82



(b) Diluted earnings per share


				Profit	Number	Earnings	Profit	Number	Earnings
				after tax	of shares1	per share	after tax	of shares1	per share
				2010	2010	2010	2009	2009	2009
				£m	m	p	£m	m	p


Profit attributable to equity holders of the Company				820	5,827	14.07	863	5,824	14.82
Net shares under options allocable for no further consideration				-	79	(0.19)	-	33	(0.09)


Diluted earnings per share				820	5,906	13.88	863	5,857	14.73


1. Weighted average number of shares.

The number of shares in issue at 31 December 2010 was 5,866,669,323 (31 December 2009: 5,862,216,780).


International Financial Reporting Standards									Page 52
Notes to the Financial Statements
2.10 Financial investments

								2010	2009
								£m	£m


Equities								149,056	139,296
Unit trusts								7,550	6,329
Debt securities								136,858	123,511
Accrued interest								1,682	1,688
Derivative assets1								4,014	3,749
Loans and receivables								410	1,443


								299,570	276,016


1. Derivative exposures arise from efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps, foreign exchange forward contracts for asset and liability management and the matching of Guaranteed Equity Bonds within the Nationwide portfolio. Derivative assets are shown gross of derivative liabilities and include £2,217m (2009: £2,160m) held on behalf of unit linked policyholders.

2.11 Share capital and share premium

					2010			2009
					Number of	2010		Number of	2009
Authorised share capital					shares	£m		shares	£m


At 31 December: ordinary shares of 2.5p each				9,200,000,000		230	9,200,000,000		230



								Share	Share
							Number of	capital	premium
Issued share capital, fully paid							shares	£m	£m


As at 1 January 2010						5,862,216,780		147	936
Options exercised under share option schemes
- Executive share option scheme							295,065	-	-
- Savings related share option scheme						4,157,478		-	2


As at 31 December 2010						5,866,669,323		147	938


								Share	Share
							Number of	capital	premium
Issued share capital, fully paid							shares	£m	£m


As at 1 January 2009						5,861,627,994		147	936
Options exercised under share option schemes
- Executive share option scheme							20,000	-	-
- Savings related share option scheme						568,786		-	-


As at 31 December 2009						5,862,216,780		147	936


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.

2.12 Dividends

						Per share	Total	Per share	Total
						2010	2010	2009	2009
						p	£m	p	£m


Ordinary share dividends paid in the year						4.06	238	3.16	185
Ordinary share dividend proposed¹						3.42	201	2.73	160


1. The proposed current year dividend has not been included as a liability in the balance sheet.


International Financial Reporting Standards									Page 53
Notes to the Financial Statements
2.13 Segmental analysis of shareholders' equity

								2010	2009
								£m	£m


Risk
General insurance								120	120
Other								3	-


Total Risk								123	120



Savings
Savings investments								121	66
Other								21	13


Total Savings								142	79



Investment management								324	339



International
USA1								1,281	1,002
Netherlands								165	158
France								181	178
Emerging markets								37	34


Total International								1,664	1,372



Group capital and financing								2,574	2,286


Shareholders' equity								4,827	4,196


1. The increase in the USA reflects the capital provided by Group to complete the first phase of the US capital restructuring programme. The increase is temporary and will reverse during quarter 1 of 2011.

The Group has five reporting segments comprising Risk, Savings, Investment management, International, and Group capital and financing.

The composition of the Savings and Investment management segments has changed. Institutional retail business is now included in the Savings segment; the net effect was to reduce Savings 2009 operating profit by £5m with an offsetting increase in the Investment management segment's operating profit.

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. 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.


International Financial Reporting Standards									Page 54
Notes to the Financial Statements
2.14 Analysis of borrowings

								31.12.10	31.12.09
								£m	£m


Subordinated borrowings
6.385% Sterling perpetual capital securities (Tier 1)								690	666
5.875% Sterling undated subordinated notes (Tier 2)								423	425
4.0% Euro subordinated notes 2025 (Tier 2)								488	498
10% Sterling subordinated notes 2041 (Tier 2)								308	308
Client fund holdings of Group debt1								(12)	(27)


Total subordinated borrowings								1,897	1,870


Senior borrowings
Sterling medium term notes 2031-2041								608	608
Euro Commercial paper 2011								279	98
Bank loans/other								9	12
Non recourse financing
- US Dollar Triple X securitisation 2025								61	262
- US Dollar Triple X securitisation 2037								283	274
- Suffolk Life unit linked borrowings								154	158
- LGV 6 Private Equity Fund Limited Partnership								86	40
Client fund holdings of Group debt1								(45)	(45)


Total senior borrowings								1,435	1,407


Total borrowings								3,332	3,277


Total borrowings (excluding non recourse financing)								2,748	2,543


1. £57m (2009: £72m) of the Group's subordinated and senior debt is currently held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total borrowings in the tables above.

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% pa. 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% pa. For regulatory purposes these securities are treated as innovative tier 1 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% pa. These notes are treated as upper tier 2 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% pa. These notes mature on 8 June 2025 and are treated as lower tier 2 capital for regulatory purposes.

10% Sterling subordinated notes 2041
On 16 July 2009, Legal & General Group Plc issued £300m of 10% dated subordinated notes. The notes are callable at par on 23 July 2021 and every five years thereafter. If not called, the coupon from 23 July 2021 will be reset to the prevailing five year benchmark gilt yield plus 9.325% pa. These notes mature on 23 July 2041 and are treated as lower tier 2 capital for regulatory purposes.


International Financial Reporting Standards									Page 55
Notes to the Financial Statements
2.14 Analysis of borrowings (continued)

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. As at 31 December 2010, $443m of the outstanding debt had been bought back.

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.

Suffolk Life unit linked borrowings
These borrowings relate solely to client investments.

LGV6 Private Equity Fund Limited Partnership
These borrowings are non recourse bank borrowings.

Syndicated credit facility

As at 31 December 2010, 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. The Group also had in place a £60m bilateral committed revolving credit facility from one of its key relationship banks also maturing in December 2012. No drawings were made under these facilities during 2010.

Holding company short term assets

Short term assets available at the holding company level exceeded the amount of non-unit linked short term borrowings of £288m (Euro Commercial Paper and Bank Loans).


2.15 Non-controlling interests
Non-controlling interests represent third party interests in property investment vehicles which are consolidated in the Group's results. The increase in the non-controlling interests in 2010 arises from the Group's acquisitions in Performance Retail Unit Trust and L&G UK Property Ungeared Fund Limited Partnership which has increased the Group's ownership to above 50%.


International Financial Reporting Standards									Page 56
Notes to the Financial Statements
2.16 Insurance contract liabilities
(a) Analysis of insurance contract liabilities

						Gross	Reinsurance	Gross	Reinsurance
						2010	2010	2009	2009
					Notes	£m	£m	£m	£m


Participating insurance contracts					2.16(b)	9,383	(1)	9,404	(1)
Non-participating insurance contracts1					2.16(c)	31,064	(2,096)	28,353	(1,902)
General insurance contracts					2.16(d)	261	(6)	230	(9)


Insurance contract liabilities						40,708	(2,103)	37,987	(1,912)


1. Excluding General insurance contracts.

(b) Movement in participating insurance contract liabilities

						Gross	Reinsurance	Gross	Reinsurance
						2010	2010	2009	2009
						£m	£m	£m	£m


As at 1 January						9,404	(1)	9,384	(1)
New liabilities in the year						483	-	658	-
Liabilities discharged in the year						(1,273)	-	(1,157)	-
Unwinding of discount rates						69	-	92	-
Effect of change in non-economic assumptions						45	-	48	-
Effect of change in economic assumptions						658	-	430	-
Other						(3)	-	(51)	-


As at 31 December						9,383	(1)	9,404	(1)



(c) Movement in non-participating insurance contract liabilities

						Gross	Reinsurance	Gross	Reinsurance
						2010	2010	2009	2009
						£m	£m	£m	£m


As at 1 January						28,353	(1,902)	25,582	(1,847)
New liabilities in the year						2,122	(330)	2,339	(312)
Liabilities discharged in the year						(1,818)	163	(2,004)	136
Unwinding of discount rates						1,299	(125)	1,233	(103)
Effect of change in non-economic assumptions						(151)	108	(319)	188
Effect of change in economic assumptions1						1,277	(1)	1,871	(2)
Foreign exchange adjustments						(18)	(8)	(363)	33
Acquisitions						-	-	-	-
Other						-	(1)	14	5


As at 31 December						31,064	(2,096)	28,353	(1,902)


1. The economic assumptions changes in 2010 principally reflect the narrowing of credit spreads. Movements in credit spreads also increased the value of the corresponding backing assets.


International Financial Reporting Standards									Page 57
Notes to the Financial Statements
2.16 Insurance contract liabilities (continued)
(d) Analysis of General insurance contract liabilities

						Gross	Reinsurance	Gross	Reinsurance
						2010	2010	2009	2009
						£m	£m	£m	£m


Outstanding claims						99	(1)	87	(3)
Claims incurred but not reported						28	-	23	-
Unearned premiums						134	(5)	120	(6)


General insurance contract liabilities						261	(6)	230	(9)



(e) Movement in General insurance claim liabilities

						Gross	Reinsurance	Gross	Reinsurance
						2010	2010	2009	2009
						£m	£m	£m	£m


As at 1 January						110	(3)	128	(4)
Claims arising						199	(1)	188	(1)
Claims paid						(161)	3	(177)	2
Adjustments to prior year liabilities						(21)	-	(29)	-


As at 31 December						127	(1)	110	(3)




2.17 Investment contract liabilities
(a) Analysis of investment contract liabilities

						Gross	Reinsurance	Gross	Reinsurance
						2010	2010	2009	2009
						£m	£m	£m	£m


Participating investment contracts						7,323	-	7,139	(1)
Non-participating investment contracts						253,426	(233)	234,502	(180)


Investment contract liabilities						260,749	(233)	241,641	(181)




(b) Movement in investment contract liabilities

						Gross	Reinsurance	Gross	Reinsurance
						2010	2010	2009	2009
						£m	£m	£m	£m


As at 1 January						241,641	(181)	203,690	(138)
Reserves in respect of new business						30,088	(1,474)	37,618	(750)
Amounts paid on surrenders and maturities during the year						(38,647)	1,029	(32,382)	571
Investment return and related benefits						28,064	393	33,221	136
Management charges						(322)	-	(313)	-
Foreign exchange adjustments						(75)	-	(193)	-


As at 31 December						260,749	(233)	241,641	(181)




International Financial Reporting Standards									Page 58
Notes to the Financial Statements
2.18 Sensitivity analysis

						Impact on	Impact on	Impact on	Impact on
						pre-tax profit	equity	pre-tax profit	equity
						net of	net of	net of	net of
						reinsurance	reinsurance	reinsurance	reinsurance
						2010	2010	2009	2009
UK long term business						£m	£m	£m	£m


Sensitivity test
1% increase in interest rates						(62)	(44)	(92)	(66)
1% decrease in interest rates						64	46	71	51
Credit spread widens by 100bps with no change in expected defaults						(120)	(86)	(141)	(101)
1% increase in inflation						17	12	(3)	(2)
Default of largest reinsurer						(681)	(490)	(589)	(424)
5% decrease in annuitant mortality						(321)	(231)	(281)	(202)


The table above shows the impact on pre-tax profit and equity, net of reinsurance, under each sensitivity scenario for the non-participating business written in the non profit part of the UK LTF.

* In calculating the alternative values, all other assumptions are left unchanged. In practice, items of the Group's experience may be correlated.
* The Group seeks to actively manage its asset and liability position. A change in market conditions may lead to changes in the asset allocation or charging structure which may have a more, or less, significant impact on the value of the liabilities. The analysis also ignores any second order effects of the assumption change, including the potential impact on the Group asset and liability position and any second order tax effects.
* These stresses use the assets that back the liabilities. Any excess assets have not been stressed in these calculations.
* The sensitivity of the profit to changes in assumptions may not be linear. They should not be extrapolated to changes of a much larger order.
* The change in interest rate test assumes a 100 basis point change in the gross redemption yield on fixed interest securities together with a 100 basis point change in the real yields on variable securities. Valuation interest rates are assumed to move in line with market yields adjusted to allow for the impact of FSA regulations.
* In the sensitivity for credit spreads corporate bond yields have increased by 100bps, gilt and approved security yields unchanged, and there has been no adjustment to the default assumptions.
* The inflation stress adopted is a 1% pa increase in inflation resulting in a 1% pa reduction in real yield and no change to the nominal yield. In addition the expense inflation rate is increased by 1% pa.
* The reinsurer stress shown is equal to the technical provisions ceded to that insurer.
* The annuitant mortality stress is a 5% reduction in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates (so for example a rate that was 80% of a standard table would become 76% of that standard table).
* Default of largest reinsurer: The largest reinsurer was deduced at an entity level by mathematical reserves ceded. The largest reinsurer is Swiss Re. The increase in reserves is consistent with the reinsured reserves.



						Impact on	Impact on	Impact on	Impact on
						pre-tax profit	equity	pre-tax profit	equity
						net of	net of	net of	net of
						reinsurance	reinsurance	reinsurance	reinsurance
						2010	2010	2009	2009
General insurance						£m	£m	£m	£m


Sensitivity test
Single storm event with 1 in 200 year probability						(55)	(40)	(50)	(36)
Subsidence event - worst claims ratio in last 30 years						(39)	(28)	(41)	(29)
Economic downturn						(38)	(28)	(39)	(28)
5% decrease in overall claims ratio						9	6	8	6
5% surplus over claims liabilities						6	4	5	4




International Financial Reporting Standards									Page 59
Notes to the Financial Statements
2.19 Provisions

(i) Analysis of provisions
								2010	2009
							Notes	£m	£m


Retirement benefit obligations							(ii)	748	746
Other provisions								13	11


								761	757



(ii) Retirement benefit obligations
						Fund and		Fund and
						Scheme	Overseas	Scheme	Overseas
						2010	2010	2009	2009
						£m	£m	£m	£m


Gross pension obligations included in provisions						(749)	1	(747)	1
Annuity obligations insured by Society						514	-	465	-


Gross defined benefit pension deficit						(235)	1	(282)	1
Deferred tax on defined benefit pension deficit						66	-	79	-


Net defined benefit pension deficit						(169)	1	(203)	1


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 2010, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at £169m (2009: £203m). These amounts have been recognised in the financial statements with £100m charged against shareholder equity (2009: £121m) and £69m against the unallocated divisible surplus (2009: £82m).

2.20 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 FSA, 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.

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 business and operating activities or in relation to capital market transactions. Legal & General Group plc has provided indemnities and guarantees in respect of the liabilities of Group companies in support of their business activities including Pension Protection Fund compliant guarantees in respect of certain Group companies' liabilities under the Group pension fund and scheme.


International Financial Reporting Standards									Page 60
Notes to the Financial Statements
2.21 Basis of preparation

Basis of preparation
The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and as adopted by the European Commission (EC) for use in the European Union and with those parts of the UK Companies Act 2006 applicable to companies reporting under IFRS. The Group's financial statements also comply with IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations as issued by the IASB. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss.

The Group presents its balance sheet in order of liquidity. This is considered to be more relevant than a before or after 12 months presentation, given the long term nature of the Group's core business. However, for each asset and liability line item which combines amounts expected to be recovered or settled before and after 12 months from the balance sheet date, disclosure of the split is made by way of a note.

Financial assets and financial liabilities are disclosed gross in the balance sheet unless a legally enforceable right of offset exists and there is an intention to settle recognised amounts on a net basis. Income and expenses are not offset in the income statement unless required or permitted by any accounting standard or IFRIC interpretation, as detailed in the applicable accounting policies of the Group.

IFRS 3 (revised), "Business combinations", and consequential amendments to IAS 27, "Consolidated and separate financial statements", IAS 28, "Investments in associates", and IAS 31, "Interests in joint ventures", have been applied prospectively to business combinations made during 2010. The revised standard continues to apply the acquisition method to business combinations but has made some changes, including the requirement to expense all acquisition related costs.


Reportable segments

The Group has five reporting segments comprising Risk, Savings, Investment management, International, and Group capital and financing. The composition of the Savings and Investment management segments has changed. Institutional retail business is now included in retail investments as part of the Savings segment; previously this was reported in the Investment management segment. Comparative information has been amended to reflect the change.

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.

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 supplementary operating profit before tax. Segmental IFRS supplementary 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.

This information is provided by RNS

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END

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