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L&G 2010 Final Results Part 4

17th Mar 2011 07:00

RNS Number : 0981D

Legal & General Group Plc

17 March 2011

Asset Disclosures							Page 53
4.01 Investment portfolio
						Market	Market
						value	value
						At 31.12.10	At 31.12.09
				Notes		£bn	£bn


Worldwide funds under management						365	334
Client and policyholder assets						(311)	(283)
Non-unit linked with-profits assets1						(20)	(20)


Assets to which shareholders are directly exposed						34	31



Comprising:
Assets held to back the UK non-linked non profit business:
Legal & General Pensions Limited (LGPL)2						25.1	22.5
Other UK non profit insurance business						0.6	1.2
						25.7	23.7
Assets held to back other insurance businesses (including Triple-X reserves)3						3.3	3.2
Society shareholder capital				4.05		3.2	2.3
Other Group capital				4.05		2.2	1.9


						34.4	31.1


1. Includes assets backing participating business in France of £2bn (2009: £2bn).
2. LGPL is the main operating subsidiary for the UK's annuity business.
3. £0.8bn (2009: £0.8bn) of index linked assets within Legal & General Netherlands have been reclassified from client and policyholder assets to assets to which shareholders are directly exposed. 2009 comparatives have been reclassified accordingly.


Analysed by asset class:
		Other UK
		non profit	Other	Society	Other
		insurance	insurance	shareholder	Group
	LGPL	business	business	capital	capital	Total	Total
	At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.09
	£bn	£bn	£bn	£bn	£bn	£bn	£bn


Equities	-	-	-	1.0	-	1.0	0.9
Bonds1	23.4	0.2	2.9	1.2	1.2	28.9	26.5
Derivative assets2	1.1	0.3	-	-	0.3	1.7	1.5
Property	0.1	-	-	0.1	-	0.2	0.1
Cash (including cash equivalents)	0.5	0.1	0.4	0.9	0.7	2.6	2.1


	25.1	0.6	3.3	3.2	2.2	34.4	31.1


1. Further information can be found in Note 4.02.
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, credit default 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 54
4.02 Bond portfolio summary

(i) Analysed by sector
				LGPL	LGPL	Total	Total
				At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.10
			Notes	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns1				3,042	13	5,034	17
Banks - Tier 12			4.04	480	2	513	2
- Tier 2 and other subordinated			4.04	1,619	7	1,811	6
- Senior				1,448	6	2,168	8
Utilities				2,831	12	3,033	11
Consumer Services and Goods				2,160	9	2,503	9
Financial Services				776	3	1,036	4
Technology and Telecoms				1,538	7	1,768	6
Insurance				978	5	1,103	4
Industrials				1,124	5	1,299	4
Oil and Gas				1,321	6	1,509	5
Health Care				551	2	563	2
Property				552	2	588	2
ABS			4.03	3,996	17	4,920	16
CDO				1,017	4	1,022	4


Total				23,433	100	28,870	100



				LGPL	LGPL	Total	Total
				At 31.12.09	At 31.12.09	At 31.12.09	At 31.12.09
			Notes	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns1				1,241	6	2,916	11
Banks - Tier 12			4.04	459	2	528	2
- Tier 2 and other subordinated			4.04	1,854	9	2,078	8
- Senior				1,539	7	2,242	9
Utilities				2,811	13	3,009	11
Consumer Services and Goods				2,286	11	2,624	10
Financial Services				906	4	1,141	4
Technology and Telecoms				1,463	7	1,665	6
Insurance				1,067	5	1,219	5
Industrials				893	4	1,086	4
Oil and Gas				984	5	1,155	4
Health Care				590	3	608	2
Property				509	2	584	2
ABS			4.03	3,546	16	4,441	17
CDO				1,205	6	1,212	5


Total				21,353	100	26,508	100


1. The increase in Sovereigns, Supras and Sub-Sovereigns was the result of management action taken to de-risk the LGPL portfolio. This resulted in an increase in holdings of Treasury Gilts which lead to an increase in UK dominated bonds and an increase in holdings of AAA bonds, see tables 4.02 (ii) & (iii).
2. Tier 1 holdings include £55m (2009: £45m) of preference shares.

Asset Disclosures							Page 55
4.02 Bond portfolio summary (continued)

(ii) Analysed by domicile
				LGPL	LGPL	Total	Total
				At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.10
				£m	%	£m	%


United Kingdom				9,246	39	10,517	36
North America				7,528	32	9,790	34
Europe				5,302	23	7,130	25
Other				1,357	6	1,433	5


Total				23,433	100	28,870	100



				LGPL	LGPL	Total	Total
				At 31.12.09	At 31.12.09	At 31.12.09	At 31.12.09
				£m	%	£m	%


United Kingdom				7,825	36	9,192	35
North America				6,958	33	8,964	34
Europe				5,361	25	7,020	26
Other				1,209	6	1,332	5


Total				21,353	100	26,508	100


Within LGPL, all non-sterling denominated bonds are currency hedged back to sterling.


(iii) Analysed by credit rating
				LGPL	LGPL	Total	Total
				At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.10
				£m	%	£m	%


AAA				4,218	18	6,996	24
AA				2,444	10	3,092	11
A				8,949	39	10,125	35
BBB				5,718	24	6,424	22
BB or below				379	2	479	2
Unrated: Bespoke CDOs				912	4	912	3
Other				813	3	842	3


				23,433	100	28,870	100



				LGPL	LGPL	Total	Total
				At 31.12.09	At 31.12.09	At 31.12.09	At 31.12.09
				Restated	Restated	Restated	Restated
				£m	%	£m	%


AAA				2,404	11	5,086	19
AA				2,621	12	3,274	13
A				8,819	41	9,891	37
BBB				5,269	25	5,864	22
BB or below				378	2	425	2
Unrated: Bespoke CDOs				1,104	5	1,104	4
Other				758	4	864	3


				21,353	100	26,508	100


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

The methodology for analysing assets by credit rating has been amended in 2010 to present the average of the available external credit
ratings. This provides a more realistic view of the credit quality of the Group's assets. In previous periods, the credit ratings were presented
using the lowest of the available external credit ratings. 2009 comparatives have been restated accordingly.


Asset Disclosures							Page 56
4.02 Bond portfolio summary (continued)

(iv) CDOs

The Group holds collateralised debt obligations (CDO) with a market value of £1,022m at 31 December 2010 (2009: £1,212m).

These holdings include £875m (2009: £1,063m) relating to four CDOs that were constructed in 2007 and 2008 in accordance with terms
specified by Legal & General as part of a strategic review of the assets backing the annuity portfolio. These CDOs mature in 2017 and 2018.
The Group selected at outset and manages the reference portfolios underlying the CDOs to give exposure to globally diversified portfolios of
investment grade corporate bonds. The Group is able to substitute the constituents of the original reference portfolios with new reference
assets, allowing the management of the underlying credit risk although substitutions in 2009 were limited and no substitutions were made in
2010. A breakdown of the underlying CDO reference portfolio by sector is provided below:


Sector
						At 31.12.10	At 31.12.09
						%	%


Banks						14	14
Utilities						10	10
Consumer Services & Goods						26	26
Financial Services						6	6
Technology & Telecoms						9	9
Insurance						6	6
Industrials						20	20
Oil & Gas						6	6
Health Care						3	3


						100	100


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 30%, then over 39% 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. For illustration a £200m loss could be incurred if default losses to the reference portfolios exceeded 31% or if 44% of the
names in the diversified global investment grade portfolio defaulted, with an average 30% recovery rate. (All figures are averages across the
four CDOs.)

The underlying reference portfolio has had no reference entity defaults in 2009 or 2010.

Losses are limited under the terms of the CDOs to assets and collateral invested.

These CDOs also incorporate features under which, in certain circumstances, the Group can choose either to post additional cash collateral
or to allow wind up of the structures. These features are dependant on the portfolios' weighted average spreads, default experience to date
and time to maturity. No additional collateral was posted to any of the CDOs in 2010 (2009: £nil). During the year the Group received £155m
of previously posted collateral, which was the primary reason for the reduction in the CDOs market value.

These CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the
internal valuation.

For the purposes of valuing the non profit annuity regulatory and IFRS liabilities the yield on the CDOs is 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.

The balance of £147m of CDO holdings includes a £37m (2009: £41m) exposure to an equity tranche of a bespoke CDO.

Asset Disclosures							Page 57
4.03 Asset backed securities summary

(i) By security
				LGPL	LGPL	Total	Total
				At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.10
				£m	%	£m	%


Traditional ABS:
Residential Mortgage-Backed Securities - Prime1				453	11	714	15
Residential Mortgage-Backed Securities - Sub-prime2				-	-	18	-
Commercial Mortgage-Backed Securities				242	6	439	9
Credit Card				12	-	242	5
Auto				12	-	128	3
Consumer Loans				41	1	47	1
Student Loans				20	1	39	1


				780	19	1,627	34
Other:
Secured Bond				1,668	42	1,687	34
Commercial Property Backed Bonds				227	6	230	5
Infrastructure / Private Finance Initiative / Social housing				1,002	25	1,004	20
Whole Business Securitisation				267	7	269	5
Other secured holdings				52	1	103	2


				3,216	81	3,293	66


Total				3,996	100	4,920	100



				LGPL	LGPL	Total	Total
				At 31.12.09	At 31.12.09	At 31.12.09	At 31.12.09
				£m	%	£m	%


Traditional ABS:
Residential Mortgage-Backed Securities - Prime1				365	11	646	15
Residential Mortgage-Backed Securities - Sub-prime2				-	-	22	-
Commercial Mortgage-Backed Securities				230	7	376	8
Credit Card				17	-	297	7
Auto				2	-	83	2
Consumer Loans				47	1	56	1
Student Loans				31	1	51	1


				692	20	1,531	34
Other:
Secured Bond				1,413	39	1,431	32
Commercial Property Backed Bonds				211	6	211	5
Infrastructure / Private Finance Initiative / Social housing				945	27	946	21
Whole Business Securitisation				250	7	250	6
Other secured holdings3				35	1	72	2


				2,854	80	2,910	66


Total				3,546	100	4,441	100


1. 54% (2009: 64%) of Prime RMBS holdings relate to UK mortgages.
2. 52% (2009: 54%) of Sub-prime RMBS holdings have a credit rating of AAA and 54% (2009: 57%) relate to the UK.
3. Other secured holdings in LGPL include covered bonds of £17m (2009: £11m).

Asset Disclosures							Page 58
4.03 Asset backed securities summary (continued)

(ii) By credit rating
				LGPL	LGPL	Total	Total
				At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.10
				£m	%	£m	%


AAA				1,223	31	1,939	39
AA				788	20	848	17
A				1,263	31	1,314	27
BBB				567	14	626	13
BB or below				23	1	61	1
Unrated				132	3	132	3


Total				3,996	100	4,920	100



				LGPL	LGPL	Total	Total
				At 31.12.09	At 31.12.09	At 31.12.09	At 31.12.09
				Restated	Restated	Restated	Restated
				£m	%	£m	%


AAA				1,129	32	1,821	41
AA				739	21	675	15
A				1,002	28	1,120	25
BBB				540	15	563	13
BB or below				9	-	107	2
Unrated				127	4	155	4


Total				3,546	100	4,441	100


Of the £847m of traditional ABS holdings held outside of LGPL, 79% are rated AAA (2009: £839m of which 79% are rated AAA).

The credit ratings of monoline wrapped bonds are based on the rating of the underlying securities.

The methodology for analysing assets by credit rating has been amended in 2010 to present the average of the available external
credit ratings. This provides a more realistic view of the credit quality of the Group's assets. In previous periods the credit ratings were
presented using the lowest of the available external credit ratings. 2009 comparatives have been restated accordingly.

Asset Disclosures							Page 59
4.04 Group subordinated bank exposures

				Total	Total	Total	Total
				At 31.12.10	At 31.12.10	At 31.12.09	At 31.12.09
				£m	%	£m	%


Tier 1
United Kingdom1				244	10	224	8
North America				119	5	101	4
Europe				114	5	174	7
Others				36	2	29	1


Total tier 1				513	22	528	20

Lower tier 2
United Kingdom				806	35	853	33
North America				520	22	569	22
Europe				184	8	311	12
Others				79	3	79	3

Upper tier 2
United Kingdom				94	4	89	3
North America				19	1	24	1
Europe				55	3	73	3
Others				3	-	4	-

Other subordinated
United Kingdom				-	-	3	-
North America				51	2	72	3
Europe				-	-	1	-
Others				-	-	-	-


Total tier 2 and other subordinated				1,811	78	2,078	80


Total				2,324	100	2,606	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 60
4.05 Group capital asset mix

			Other			Other
		Society	Group		Society	Group
		shareholder	shareholder		shareholder	shareholder
		capital	assets	Total	capital	assets	Total
		At 31.12.10	At 31.12.10	At 31.12.10	At 31.12.09	At 31.12.09	At 31.12.09
		%	%	%	%	%	%


Equities		31	-	19	39	-	21
Bonds		38	54	43	35	58	46
Derivative assets		-	14	6	-	11	5
Property		3	-	2	4	-	2
Cash (including cash equivalents)		28	32	30	22	31	26


		100	100	100	100	100	100



Invested assets (£bn)		3.2	2.2	5.4	2.3	1.9	4.2



4.06 Value of policyholder assets held in Society and LGPL

						At 31.12.10	At 31.12.09
						£bn	£bn


With-profits business						26.4	25.6
Non profit business						40.2	35.9


						66.6	61.5








Asset Disclosures							Page 61
4.07 Non-linked business invested asset mix and investment return


				UK
				With-	UK	UK	UK non
				profits	With-	With-	linked
			Investment	asset	profits	profits	non profit
			return	share	non par	other	business
As at 31 December 2010			%	%	%	%	%


Equities			13	40	3	(65)	-
Bonds			10	39	86	153	97
Property			17	15	-	(1)	1
Cash			1	6	11	13	2


				100	100	100	100


Investment return (% pa)			10	12	8	4	10



Invested assets (£bn):
Net of derivative liabilities				13.8	2.4	1.5	24.5
Gross of derivative liabilities				14.0	2.4	1.5	25.7






As at 31 December 2009


Equities			19	37	4	(68)	-
Bonds			13	42	87	161	98
Property			3	13	1	-	-
Cash			2	8	8	7	2


				100	100	100	100


Investment return (% pa)			12	14	10	(19)	15



Invested assets (£bn):
Net of derivative liabilities				13.6	2.3	1.4	22.4
Gross of derivative liabilities				13.7	2.3	1.4	23.7


All investment return percentages reflect actual investment returns on average asset holdings for the period.




Asset Disclosures							Page 62
4.08 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 2010				£bn	£bn	£bn	£bn


Group capital and other insurance business
Equities				0.8	0.1	0.1	1.0
Bonds				2.1	3.2	-	5.3
Derivative assets				-	0.3	-	0.3


				2.9	3.6	0.1	6.6



Non profit non-unit linked
Equities				-	-	-	-
Bonds				2.6	21.0	-	23.6
Derivative assets				0.1	1.3	-	1.4


				2.7	22.3	-	25.0



				Fair value measurement at the
				end of the reporting period based on:


				Level 1	Level 2	Level 3	Total
As at 31 December 2009				£bn	£bn	£bn	£bn


Group capital and other insurance business
Equities				0.7	0.1	0.1	0.9
Bonds				1.7	3.0	-	4.7
Derivative assets				-	0.2	-	0.2


				2.4	3.3	0.1	5.8



Non profit non-unit linked
Equities				-	-	-	-
Bonds				1.0	20.8	-	21.8
Derivative assets				-	1.3	-	1.3


				1.0	22.1	-	23.1


Consolidated CDO holdings have been presented on a net basis within level 2.
The analysis excludes cash, loans and receivables and property investments of £2.8bn (2009: £2.2bn), as disclosed in note 4.01.




Asset Disclosures							Page 63
4.08 Analysis of fair value measurement bases (continued)

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arms length
transaction.

Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflects the Group's view of market assumptions in the absence of observable market
information. The Group utilises techniques that maximise the use of observable inputs and minimise the use of unobservable inputs.

The levels of fair value measurement bases are defined as follows:
Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 : fair values measured using valuation techniques for all inputs significant to the measurement other than quoted prices included
within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: fair values measured using valuation techniques for any input for the asset or liability significant to the measurement that is not
based on observable market data (unobservable inputs).

In current market conditions, the liquidity of financial instruments is lower 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 market 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 an external model which utilise market assumptions. The CDO
valuations have also been verified using an internal model. Accordingly, these assets have also been classified in level 2.

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

In many situations, inputs used to measure the fair value of an asset or liability may fall into different levels of the fair value hierarchy. In
these situations, the Group determines the level in which the fair value falls based upon the lowest level input that is significant to the
determination of the fair value. As a result, both observable and unobservable inputs may be used in the determination of fair values that the
Group has classified within level 3.

The Group determines the fair values of certain financial assets and liabilities based on quoted market prices, where available. The Group
also determines fair value based on estimated future cash flows discounted at the appropriate current market rate. As appropriate, fair
values reflect adjustments for counterparty credit quality, the Group's credit standing, liquidity and risk margins on unobservable inputs.

Where quoted market prices are not available, fair value estimates are made at a point in time, based on relevant market data, as well as the
best information about the individual financial instrument. Illiquid market conditions have resulted in inactive markets for certain of the Group's
financial instruments. As a result, there is generally limited observable market data for these assets and liabilities. Fair value estimates for
financial instruments deemed to be in an illiquid market are based on judgments regarding current economic conditions, liquidity discounts,
currency, credit and interest rate risks, loss experience and other factors. These fair values are estimates and involve considerable uncertainty
and variability as a result of the inputs selected and may differ significantly from the values that would have been used had a ready market
existed, and the differences could be material. As a result, such calculated fair value estimates may not be realisable in an immediate sale or
settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique could
significantly affect these fair value estimates.

Fair values are subject to a control framework designed to ensure that input variables and outputs are assessed independently of the risk taker.
These inputs and outputs are reviewed and approved by a valuation committee.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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