L&G 2010 Final Results Part 3

Net Cash and Capital

Page 61

3.01 Operational cash generation

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.

IFRS

IFRS

profit/

profit/

Operational

New

Investment

(loss)

Tax

(loss)

cash

business

Net

Inter-

gains and

after

expense/

before

generation

strain

cash

national

Variances

losses

Other

 tax

(credit)

tax

Year ended 31 December 2010

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Total Risk operating profit

439

(10)

429

-

(26)

-

-

403

157

560

Total Savings operating profit

138

(70)

68

-

21

-

(9)

80

35

115

Investment management

operating profit

162

-

162

-

-

-

-

162

44

206

International

44

-

44

33

-

-

-

77

25

102

Group capital and financing

25

-

25

-

-

32

-

57

1

58

Investment projects

-

-

-

-

-

-

(28)

(28)

(11)

(39)

Operating profit

808

(80)

728

33

(5)

32

(37)

751

251

1,002

Investment variance

-

-

-

-

-

74

-

74

16

90

Impact of change in UK tax rates

-

-

-

-

-

-

(5)

(5)

5

-

Property losses attributable

 to minority interests

-

-

-

-

-

-

-

-

-

-

Total

808

(80)

728

33

(5)

106

(42)

820

272

1,092

Dividends paid in the year

(238)

Net cash available for reinvestment

490

Year ended 31 December 2009

Total Risk operating profit

454

50

504

-

27

-

-

531

204

735

Total Savings operating profit

106

(77)

29

-

16

-

(8)

37

13

50

Investment management

operating profit

125

-

125

-

-

-

-

125

47

172

International

8

-

8

78

-

-

-

86

41

127

Group capital and financing

33

-

33

-

-

16

-

49

8

57

Investment projects

-

-

-

-

-

-

(23)

(23)

(9)

(32)

Operating profit

726

(27)

699

78

43

16

(31)

805

304

1,109

Investment variance

-

-

-

-

-

58

-

58

(74)

(16)

Property losses attributable

to minority interests

-

-

-

-

-

-

(19)

(19)

-

(19)

Total

726

(27)

699

78

43

74

(50)

844

230

1,074

Dividends paid in the year

(185)

Net cash available for reinvestment

514

Variances

Risk

Savings

Risk

Savings

£m

£m

£m

£m

Notes

31.12.10

31.12.10

31.12.09

31.12.09

Experience variances

2.01(c)/2.02(c)

67

10

113

(1)

Changes to valuation assumptions

2.01(d)/2.02(d)

30

28

169

9

Changes to FSA reporting and capital rules

2.01(b)/2.02(b)

-

-

15

50

Movements in non-cash items

2.01(e)/2.02(e)

(122)

(21)

(229)

(64)

Other

2.01(b)/2.02(b)

(1)

4

(41)

22

Total

(26)

21

27

16

Net Cash and Capital

Page 62

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.

At

At

31.12.10

31.12.09

£bn

£bn

Core tier 1

5.9

4.8

Innovative tier 1

0.6

0.6

Upper tier 2

0.4

0.4

Lower tier 2

0.8

0.8

Deductions1

(1.0)

(1.0)

Group capital resources

6.7

5.6

Group capital resources requirement2

3.0

2.5

IGD surplus3

3.7

3.1

Coverage ratio (Group capital resources / Group capital resources requirement)4

2.26 times

2.24 times

1. Deductions comprises inadmissible assets in Legal & General America of £0.8bn (2009: £0.8bn), in Society of £0.1bn (2009: £0.1bn) and in other subsidiaries of £0.1bn (2009: £0.1bn).

2. The Group capital resources requirement includes a With-profits Insurance Capital Component (WPICC) of £0.3bn (2009: £nil).

3. The IGD surplus is stated after accruing for the period end dividend and excludes £0.3bn of restricted assets in the Society long term fund (LTF).

4. Coverage ratio is calculated on unrounded values.

A segmental analysis is given below.

At

At

31.12.10

31.12.09

£bn

£bn

Society long term fund1

2.9

2.1

Society shareholder capital

2.2

2.2

General insurance

0.1

0.1

France

0.2

0.2

Netherlands

0.2

0.2

Nationwide Life

0.1

0.1

USA

0.5

0.2

Investment management

0.3

0.3

Other2

1.1

0.9

Innovative tier 1

0.6

0.6

Tier 2

1.2

1.2

Debt

(2.7)

(2.5)

Group capital resources

6.7

5.6

Society long term fund1

2.6

2.1

Other

0.4

0.4

Group capital resources requirement

3.0

2.5

1. The Society LTF capital requirement of £2.6bn (2009: £2.1bn) is met by £2.9bn (2009: £2.1bn) of capital resources in the LTF.

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

Net Cash and Capital

Page 63

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.

At

At

31.12.10

31.12.09

£bn

£bn

Capital and reserves attributable to equity holders on an IFRS basis

4.8

4.2

Innovative tier 1

0.6

0.6

Tier 2

1.2

1.2

Proposed dividends

(0.2)

(0.2)

Additional capital available from Society

1.1

0.6

Adjustment to reflect regulatory value of the USA operation

(0.8)

(0.8)

Other regulatory adjustments

-

-

Group capital resources

6.7

5.6

(b) With-profits realistic balance sheet

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

At

At

31.12.10

31.12.09

£bn

£bn

With-profits surplus

0.9

0.8

Risk capital margin

0.2

0.2

Surplus

0.7

0.6

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 £0.4bn (2009: £0.3bn) as a liability in the calculation.

(c) Society capital surplus

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

31.12.10

31.12.10

31.12.09

31.12.09

Long

Long

term

General

term

General

business

insurance

business

insurance

£bn

£bn

£bn

£bn

Available capital resources - Tier 1

5.6

0.1

4.8

0.1

Insurance capital requirement

2.3

0.1

2.1

0.1

Capital requirements of regulated related undertakings

0.2

-

0.2

-

With-profits Insurance Capital Component

0.3

-

-

-

Capital resources requirement

2.8

0.1

2.3

0.1

Regulatory capital surplus

2.8

-

2.5

-

Movement in Society long term insurance capital requirement

At

At

31.12.10

31.12.09

Pillar 1 capital requirement

£bn

£bn

Protection

0.6

0.6

Annuities

0.9

0.8

Non profit pensions and unit linked bonds

0.1

0.1

Non profit

1.6

1.5

With-profits

0.7

0.6

Long term insurance capital requirement

2.3

2.1

On a regulatory basis (peak 1), Society long term business regulatory capital surplus of £2.8bn (2009: £2.5bn) comprises capital resources within the long term fund of £2.9bn (2009: £2.1bn) and capital resources outside the long term fund of £2.7bn (2009: £2.7bn) less the capital resources requirement of £2.8bn (2009: £2.3bn).

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 2010, this adjustment amounted to £0.4bn (2009: £0.3bn).