Become a Member

Track your favourite stocks
Create & monitor portfolios
Daily portfolio value

Company	Chg	Chg %
Quickpicks
£	%
Add shares to your quickpicks to display them here!

L&G Final Results - Parts 2 to 6

14th Mar 2012 07:00

RNS Number : 2935Z

Legal & General Group Plc

14 March 2012

International Financial Reporting Standards Page 45

Supplementary operating profit information

For the year ended 31 December 2011


		2011	2010
	Notes	£m	£m


From continuing operations
Risk	2.01(a)	561	560
Savings	2.02(a)	128	115
Investment management	2.03	234	206
International	2.04	137	102
Group capital and financing	2.05	52	58
Investment projects1		(56)	(39)


Operating profit		1,056	1,002
Asset related investment variances		(2)	185
Other investment variances		(95)	(95)


Variation from longer term investment return	2.06	(97)	90
Property losses attributable to non-controlling interests		(3)	-


Profit before income tax attributable to equity holders of the Company		956	1,092
Tax expense attributable to equity holders of the Company	2.07	(233)	(272)


Profit for the year		723	820



Attributable to:
Non-controlling interests		(3)	-
Equity holders of the Company		726	820



		p	p


Earnings per share	2.09
Based on operating profit from continuing operations after tax attributable to equity holders
of the Company		13.50	12.89
Based on profit attributable to equity holders of the Company		12.46	14.07

Diluted earnings per share	2.09
Based on operating profit from continuing operations after tax attributable to equity holders
of the Company		13.28	12.72
Based on profit attributable to equity holders of the Company		12.25	13.88



1. Investment projects predominantly relates to Solvency II and other strategic investments.

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 longevity insurance) 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 for the insured savings business reflects the investment returns that the business expects to make on the financial investments that back this business.

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 LGN 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.

International Financial Reporting Standards Page 46

Supplementary operating profit information

2.01 Risk

(a) Risk operating profit
		2011	2010
	Notes	£m	£m


Annuities1		287	364


Protection2		242	207
General insurance3	2.01(f)	42	(8)
Other		(10)	(3)


Total Housing and Protection		274	196


Total Risk operating profit	2.01(b)	561	560



1. The prior year annuities result includes a one-off benefit of £72m resulting from inflation modelling enhancements (see Note 2.01(d)) and an additional £25m in positive new business strain.
2. The protection result includes a £23m positive expense assumption change (see Note 2.01(d)) reflecting lower unit costs due to efficiency improvements.
3. The current year result reflects the benign weather experienced during the year, with actual experience being below the long term expectations. The prior year general insurance result was impacted by two severe cold weather events, which resulted in approximately £30m of additional weather related claims (see Note 2.01(f)).

(b) Analysis of Risk operating profit
			Housing			Housing
			and			and
		Annui-	Protec-		Annui-	Protec-
		ties	tion	Total	ties	tion	Total
		2011	2011	2011	2010	2010	2010
	Notes	£m	£m	£m	£m	£m	£m


Risk business segment operating profit comprises:
Operational cash generation		227	255	482	229	210	439
New business strain		35	(66)	(31)	60	(70)	(10)


Net cash generation		262	189	451	289	140	429
Experience variances	2.01(c)			22			67
Changes to valuation assumptions	2.01(d)			24			30
Movements in non-cash items	2.01(e)			(86)			(122)
Other				-			(1)


				411			403
Tax gross up				150			157


Total Risk operating profit				561			560



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 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:

International Financial Reporting Standards Page 47

Supplementary operating profit information

2.01 Risk (continued)

(c) Experience variances

	2011	2010
	£m	£m


Persistency	(4)	(3)
Mortality/morbidity1	(32)	(8)
Expenses	(2)	(1)
Bulk purchase annuity data loading	42	59
Project and development costs	(7)	(9)
Tax2	33	37
Other	(8)	(8)


	22	67



1. Mortality/morbidity in 2011 primarily relates to the group protection experience in H1 2011, driven by a number of high value claims. This has trended back to assumptions in H2 2011, and the total impact for the year was £35m.
2. This principally relates to the utilisation of brought forward tax losses.

(d) Changes to valuation assumptions

	2011	2010
	£m	£m


Persistency	(1)	(5)
Mortality/morbidity	(1)	(19)
Expenses1	28	(9)
Other2	(2)	63


	24	30



1. Expenses in 2011 relates to efficiency improvements in protection and annuities leading to lower unit costs. 2010 related to a change in the reserving basis for custodian fees.
2. Prior year Other reflects the £72m benefit from inflation modelling enhancement on the annuity business.

(e) Movements in non-cash items

	2011	2010
	£m	£m


Deferred tax	(77)	(125)
Other	(9)	3


	(86)	(122)

(f) General insurance operating profit/(loss)
	Net cash		Oper-	Net cash		Oper-
	gener-		ating	gener-		ating
	ation	Tax	profit	ation	Tax	profit
	2011	2011	2011	2010	2010	2010
	£m	£m	£m	£m	£m	£m


Household1	27	10	37	(10)	(4)	(14)
Other business	4	1	5	4	2	6


	31	11	42	(6)	(2)	(8)


1. The current year result reflects the benign weather experienced during the year, with actual experience being below long term expectations. The prior year general insurance result was impacted by two severe cold weather events, which resulted in approximately £30m of additional weather related claims.

International Financial Reporting Standards Page 48

Supplementary operating profit information

2.01 Risk (continued)

(g) General insurance underwriting result
	2011	2010
	£m	£m


Household1	23	(27)
Other business	4	5


	27	(22)


1. The current year result reflects the benign weather experienced during the year, with actual experience being below long term expectations. The prior year general insurance result was impacted by two severe cold weather events, which resulted in approximately £30m of additional weather related claims.

(h) General insurance combined operating ratio
	2011	2010
	%	%


Household1	90	109
Other business	75	77


	88	106


1. The current year result reflects the benign weather experienced during the year, with actual experience being below long term expectations. The prior year general insurance result was impacted by two severe cold weather events, which resulted in approximately £30m of additional weather related claims.

International Financial Reporting Standards Page 49

Supplementary operating profit information

2.02 Savings

(a) Savings operating profit
		2011	2010
	Note	£m	£m


Savings investments1		23	21
Insured savings2		36	31
With-profits3		69	63


Total Savings operating profit	2.02(b)	128	115



1. Savings investments operating profit includes £34m (2010: £29m) from our mutual funds business and the results from our structured SIPPs and platform businesses.
2. Insured savings includes non profit investment bonds and pensions (including workplace savings and SIPPs), Nationwide Life Savings business and International (Ireland).
3. With-profits business operating profit is the shareholders' share of total with-profits bonuses.

(b) Analysis of Savings operating profit
				Savings
		Insured	With-	invest-
		savings	profits	ments	Total
		2011	2011	2011	2011
	Notes	£m	£m	£m	£m


Savings business segment operating profit comprises:
Operational cash generation		101	51	22	174
New business strain		(63)	-	-	(63)


Net cash generation1		38	51	22	111
Insured savings
Experience variances	2.02(c)				(12)
Changes to valuation assumptions	2.02(d)				(5)
Movements in non-cash items	2.02(e)				6
Other					-
Savings investments
Movements in non-cash items and other					(6)


					94
Tax gross up					34


Total Savings operating profit					128


1. Insured savings net cash generation of £38m (2010: £1m) reflects the benefit of higher fees on higher opening asset values coupled with continued expense savings and commission savings resulting in a lower new business strain.

International Financial Reporting Standards Page 50

Supplementary operating profit information

2.02 Savings (continued)

(b) Analysis of Savings operating profit (continued)

				Savings
		Insured	With-	invest-
		savings	profits	ments	Total
		2010	2010	2010	2010
	Notes	£m	£m	£m	£m


Savings business segment operating profit comprises:
Operational cash generation		71	46	21	138
New business strain		(70)	-	-	(70)


Net cash generation		1	46	21	68
Insured savings
Experience variances	2.02(c)				10
Changes to valuation assumptions	2.02(d)				28
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


The insured savings operational cash generation represents the expected surplus 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 and the IFRS profit after tax of the Nationwide Life Savings business and International (Ireland). 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 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
	2011	2010
	£m	£m


Persistency	(1)	(3)
Mortality/morbidity	2	1
Expenses	1	3
Project and development costs1	(12)	(4)
Tax	(4)	14
Other	2	(1)


	(12)	10


1. The 2011 project and development costs related to auto-enrolment £7m, expenditure on distribution channel enhancements of £2m and other costs of £3m.

International Financial Reporting Standards Page 51

Suuplementary operating profit information

2.02 Savings (continued)

(d) Changes to valuation assumptions
	2011	2010
	£m	£m


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


	(5)	28



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
		2011	2010
	Note	£m	£m


Deferred tax		(6)	(39)
Deferred acquisition costs (DAC)	2.02(f)	(20)	(16)
Deferred income liabilities (DIL)		27	33
Other		5	1


		6	(21)

(f) Deferred acquisition cost movement, net of associated deferred tax
	2011	2010
	£m	£m


As at 1 January	612	628
Amortisation through income	(74)	(66)
Acquisition costs deferred	54	50


As at 31 December	592	612




The Group's balance sheet deferred acquisition costs of £2.1bn (2010: £2.0bn) is presented gross of associated deferred tax. The main contributors to the balance are LGA £1.0bn (2010: £1.0bn), non profit savings of £0.7bn (2010: £0.7bn), retail investments £0.1bn (2010: £0.1bn), savings with-profit £0.1bn (2010: £0.1bn) and other business totalling £0.2bn (2010: £0.1bn).

Expected amortisation profile:
	2011	2010
	£m	£m


Expected to be amortised within one year	65	69
Expected to be amortised between one year and five years	271	276
Expected to be amortised in over five years	256	267


	592	612

International Financial Reporting Standards Page 52

Supplementary operating profit information

2.03 Investment management


	2011	2010
	£m	£m


Pension funds (managed and segregated)	172	148
Other non-pension1	25	20
Investment management services for internal funds	37	38


Total Investment management operating profit	234	206



1. Other non-pension includes institutional segregated mandates, private equity and property (both in the UK and overseas). Interest income on shareholder funds of £9m (2010: £11m) on an average asset balance of £0.40 bn (2010: £0.37bn) has been included within other non-pension operating profit.

2.04 International


	2011	2010
	£m	£m



USA (LGA)	104	85


Netherlands (LGN)	21	20
France (LGF)	20	6


Total Europe operating profit	41	26
Other1	(8)	(9)


Total International operating profit2	137	102



1. Other includes our joint venture operations in Egypt, the Gulf, India and divisional overhead costs of £5m (2010: £5m).
2. In the year, the International division paid £51m (2010: £44m) of sustainable dividends to the Group, which has been included in net cash generation. In addition, the LGN business paid a special dividend of £29m and the LGA business remitted a further £52m of capital representing the repatriation of profits in 2010 from the redemption of external debt during the first quarter of 2011. These amounts have been excluded from the Group's net cash generation.

Exchange rates are provided in Note 2.18.

2.05 Group capital and financing


	2011	2010
	£m	£m


Investment return1	191	187
Interest expense2	(123)	(121)
Investment expenses	(5)	(3)
Unallocated corporate expenses	(11)	(5)


Total Group capital and financing operating profit	52	58



1. The increase in the average Group capital and financing assets has resulted in an increase in the smoothed investment return to £191m (2010: £187m). The smoothed investment return is calculated asset class by asset class and equates to an average smoothed investment return of 4.7% (2010: 5.8%) on the average balance of invested assets of £4.0bn (2010: £3.2bn). In GCF, the rate used to calculate the smoothed return on cash and LIBOR benchmarked bonds has been reduced. The cash rate previously used of 4% has been replaced with a 1 year LIBOR of 1%. This ensures our operating profit and cash metric maintains relevance in current macroeconomic conditions. This change has reduced operating profit by £52m, with an opposite impact on investment variance, and operational cash generation by £38m. It is our intention to continue with this prudent view in 2012.
2. Interest expense excludes interest on non recourse financing (see Note 2.14).

International Financial Reporting Standards Page 53

Supplementary operating profit information

2.06 Variation from longer term investment return


	2011	2010
	£m	£m


Risk1	172	102
Savings2	13	4
Investment management	(7)	(8)
International3	(21)	35
GCF asset related4	(159)	52


Asset related investment variances	(2)	185


Savings other investment variance5	(47)	(58)
Treasury related6	(68)	(72)
Defined benefit pension scheme7	20	35


Other investment variances	(95)	(95)


Total variation from longer term investment return	(97)	90



1. The positive investment variance has increased to £172m (2010: £102m). The contributing factors are: improved asset diversity which increased the risk adjusted yield, for example, sale and leaseback; no defaults in the portfolio; improved asset liability matching, for example, reinvestment into longer duration bonds; more efficient cash management and small one-off benefits from tax and interest rate movements.
2. The positive Savings asset related investment variance was driven by movements in the gilt portfolio backing non-linked reserves.
3. The International investment variance has arisen in LGN. The variance is caused by temporary timing differences in the valuation of the assets against the liabilities on the index linked margin business. The variance should be broadly neutral over the longer term.
4. The GCF asset related investment variance was primarily driven by a fall in equity markets which contributed £(139)m to the adverse investment variance. In GCF, the rate used to calculate the smoothed return on cash and LIBOR benchmarked bonds has been reduced. The cash rate previously used of 4% has been replaced with a 1 year LIBOR of 1%. This ensures our operating profit and cash metric maintains relevance in current macroeconomic conditions. This change has reduced operating profit by £52m, with an opposite impact on investment variance, and operational cash generation by £38m. It is our intention to continue with this prudent view in 2012.
5. Savings business other investment variance is primarily the difference between IFRS deferred policyholder tax and the amount included within the unit linked life funds.
6. Treasury related investment variance relates to derivative contracts which have not been designated within hedge accounting relationships resulting in short term income statement volatility which, in 2011, was caused by a decrease in the relevant long term interest rates.
7. 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.

2.07 Analysis of tax


	Profit/	Tax	Profit/	Tax
	(loss)	(exp-	(loss)	(exp-
	before	ense)/	before	ense)/
	tax	credit	tax	credit
	2011	2011	2010	2010
	£m	£m	£m	£m


Risk	561	(150)	560	(157)
Savings	128	(34)	115	(35)
Investment management	234	(45)	206	(44)
International	137	(47)	102	(25)
Group capital and financing	52	(8)	58	(1)
Investment projects	(56)	15	(39)	11


Operating profit/Tax expense	1,056	(269)	1,002	(251)
Variation from longer term investment return	(97)	42	90	(16)
Impact of change in UK tax rates	-	(6)	-	(5)
Property losses attributable to non-controlling interests	(3)	-	-	-


Profit for the period/Tax expense for the period	956	(233)	1,092	(272)


The equity holders' effective tax rate for the period is 24.4% (2010: 24.9%). This is mainly due to the release of tax provided in prior years in respect of disputed tax issues which are now resolved, which is partially offset by the impact of higher overseas tax rates on overseas profits.

International Financial Reporting Standards Page 54

Consolidated Income Statement

For the year ended 31 December 2011

		2011	2010
	Notes	£m	£m


Revenue
Gross written premiums	2.08	5,719	5,348
Outward reinsurance premiums		(620)	(590)
Net change in provision for unearned premiums		(18)	(14)


Net premiums earned		5,081	4,744
Fees from fund management and investment contracts		897	900
Investment return		12,143	32,671
Operational income		196	125


Total revenue		18,317	38,440


Expenses
Claims and change in insurance liabilities		7,173	7,567
Reinsurance recoveries		(493)	(621)


Net claims and change in insurance liabilities		6,680	6,946
Change in provisions for investment contract liabilities		9,306	28,154
Acquisition costs		780	770
Finance costs		165	168
Other expenses		1,010	905
Transfers (from)/to unallocated divisible surplus		(402)	190


Total expenses		17,539	37,133


Profit before tax		778	1,307
Tax income/(expense) attributable to policyholder returns		178	(215)


Profit before tax attributable to equity holders of the Company		956	1,092


Total tax expense		(55)	(487)
Tax (income)/expense attributable to policyholder returns		(178)	215


Tax expense attributable to equity holders	2.07	(233)	(272)


Profit for the year		723	820



Attributable to:
Non-controlling interests		(3)	-
Equity holders of the Company		726	820



Dividend distributions to equity holders of the Company during the year	2.10	298	238
Dividend distributions to equity holders of the Company proposed after the year end	2.10	279	201



		p	p


Earnings per share
Based on profit attributable to equity holders of the Company	2.09	12.46	14.07


Diluted earnings per share
Based on profit attributable to equity holders of the Company	2.09	12.25	13.88

International Financial Reporting Standards Page 55

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2011

	2011	2010
	£m	£m


Profit for the year	723	820

Other comprehensive income after tax
Exchange differences on translation of overseas operations	1	8
Actuarial (losses) on defined benefit pension schemes	(121)	(9)
Actuarial losses on defined benefit pension schemes transferred to unallocated divisible surplus	48	4
Net change in financial investments designated as available-for-sale	10	27


Total comprehensive income for the year	661	850



Total comprehensive income/(expense) attributable to:
Non-controlling interests	(3)	-
Equity holders of the Company	664	850

International Financial Reporting Standards Page 56

Consolidated Balance Sheet

As at 31 December 2011

		2011	2010
	Notes	£m	£m


Assets
Purchased interest in long term businesses and other intangible assets		148	157
Deferred acquisition costs		2,053	2,000
Investment in associates		60	57
Plant and equipment		78	64
Investment property		4,894	4,571
Financial investments	2.11	300,604	299,570
Reinsurers' share of contract liabilities		2,289	2,336
Deferred tax asset		493	495
Current tax recoverable		94	-
Other assets		1,893	1,587
Cash and cash equivalents		14,113	13,036


Total assets		326,719	323,873



Equity
Share capital	2.12	147	147
Share premium	2.12	941	938
Employee scheme treasury shares		(48)	(41)
Capital redemption and other reserves		101	79
Retained earnings		4,059	3,704


Shareholders' equity		5,200	4,827
Non-controlling interests		66	47


Total equity		5,266	4,874



Liabilities
Subordinated borrowings	2.14	1,921	1,897

Participating insurance contracts	2.15	8,750	9,383
Participating investment contracts	2.16	7,276	7,323
Unallocated divisible surplus		1,038	1,469
Value of in-force non-participating contracts		(242)	(377)


Participating contract liabilities		16,822	17,798



Non-participating insurance contracts	2.15	34,006	31,325
Non-participating investment contracts	2.16	251,345	253,426


Non-participating contract liabilities		285,351	284,751


Senior borrowings	2.14	1,329	1,435
Provisions	2.19	891	761
Deferred tax liabilities		403	356
Current tax liabilities		1	111
Payables and other financial liabilities		7,643	5,473
Other liabilities		933	954
Net asset value attributable to unit holders		6,159	5,463


Total liabilities		321,453	318,999


Total equity and liabilities		326,719	323,873

International Financial Reporting Standards Page 57

Consolidated Statement of Changes in Equity


			Employee	Capital
			scheme	redemption			Non-
	Share	Share	treasury	and other	Retained		controlling	Total
	capital	premium	shares	reserves	earnings	Total	interests	equity
For the year ended 31 December 2011	£m	£m	£m	£m	£m	£m	£m	£m


As at 1 January	147	938	(41)	79	3,704	4,827	47	4,874
Profit for the year	-	-	-	-	726	726	(3)	723
Exchange differences on translation of
overseas operations	-	-	-	1	-	1	-	1
Actuarial (losses) on defined benefit
pension schemes	-	-	-	-	(121)	(121)	-	(121)
Actuarial losses on defined benefit
pension schemes transferred to
unallocated divisible surplus	-	-	-	-	48	48	-	48
Net change in financial investments
designated as available-for-sale	-	-	-	10	-	10	-	10


Total comprehensive income/(expense)
for the year	-	-	-	11	653	664	(3)	661
Options exercised under
share option schemes:
- Executive share option schemes	-	1	-	-	-	1	-	1
- Savings related share option scheme	-	2	-	-	-	2	-	2
Shares purchased	-	-	(15)	-	-	(15)	-	(15)
Shares vested	-	-	8	(19)	-	(11)	-	(11)
Employee scheme treasury shares:
- Value of employee services	-	-	-	27	-	27	-	27
Share scheme transfers
to retained earnings	-	-	-	-	3	3	-	3
Dividends	-	-	-	-	(298)	(298)	-	(298)
Movement in third party interests	-	-	-	-	-	-	22	22
Currency translation differences	-	-	-	3	(3)	-	-	-


As at 31 December 2011	147	941	(48)	101	4,059	5,200	66	5,266

International Financial Reporting Standards Page 58

Consolidated Statement of Changes in Equity (continued)

			Employee	Capital
			scheme	redemption			Non-
	Share	Share	treasury	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:
- Executive 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
Share scheme transfers
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 2010	147	938	(41)	79	3,704	4,827	47	4,874

International Financial Reporting Standards Page 59

Consolidated Cash Flow Statement

For the year ended 31 December 2011

	2011	2010
	£m	£m


Cash flows from operating activities
Profit for the year	723	820
Adjustments for non cash movements in net profit for the period
Realised and unrealised gains on financial investments and investment properties	(3,014)	(23,673)
Investment income	(8,971)	(8,787)
Interest expense	165	168
Tax expense	55	487
Other adjustments	65	59
Net decrease/(increase) in operational assets
Investments held for trading or designated as fair value through profit or loss	3,736	(2,958)
Investments designated as available-for-sale	(29)	(39)
Other assets	(1,678)	(479)
Net increase in operational liabilities
Insurance contracts	2,075	2,746
Transfer (from)/to unallocated divisible surplus	(431)	186
Investment contracts	(2,068)	20,702
Value of in-force non-participating contracts	135	(10)
Other liabilities	2,243	4,968


Cash used in operations	(6,994)	(5,810)
Interest paid	(164)	(167)
Interest received	5,021	5,030
Tax paid1	(193)	(164)
Dividends received	3,872	3,818


Net cash flows from operating activities	1,542	2,707


Cash flows from investing activities
Net acquisition of plant and equipment	(26)	(17)
Acquisitions (net of cash acquired)2	(11)	(44)
Capital injection into overseas joint ventures	(5)	(8)


Net cash flows from investing activities	(42)	(69)


Cash flows from financing activities
Dividend distributions to ordinary equity holders of the Company during the year	(298)	(238)
Proceeds from issue of ordinary share capital	3	2
Purchase of employee scheme shares	(15)	(11)
Proceeds from borrowings	1,327	750
Repayment of borrowings	(1,428)	(758)


Net cash flows from financing activities	(411)	(255)


Net increase in cash and cash equivalents	1,089	2,383
Exchange (losses)/gains on cash and cash equivalents	(12)	3
Cash and cash equivalents at 1 January	13,036	10,650


Cash and cash equivalents at 31 December	14,113	13,036


1. Tax comprises UK corporation tax paid of £80m (2010: £59m) and overseas withholding tax of £113m (2010: £105m).
2. Net cash flows from acquisitions include total net identifiable assets acquired of £15m (2010: £52m) less cash and cash equivalents acquired of £4m (2010: £8m).

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 60

Notes to the Financial Statements

2.08 Gross written premiums on insurance contracts


	2011	2010
	£m	£m


From continuing operations
Risk
Non-participating Risk business	3,778	3,309
General insurance
- Household	283	259
- Other business	21	22


Total Risk	4,082	3,590

Savings
Non-participating Savings business	40	41
Participating business	488	609


Total Savings	528	650

International
USA (LGA)	522	502
Netherlands (LGN)	194	227
France (LGF)	393	379


Total International	1,109	1,108


Total gross written premiums	5,719	5,348

2.09 Earnings per share

(a) Earnings per share

	Profit	Tax	Profit	Earnings	Profit	Tax	Profit	Earnings
	before tax	expense	after tax	per share	before tax	expense	after tax	per share
	2011	2011	2011	2011	2010	2010	2010	2010
	£m	£m	£m	p	£m	£m	£m	p


Operating profit	1,056	(269)	787	13.50	1,002	(251)	751	12.89
Variation from longer term
investment return	(97)	42	(55)	(0.94)	90	(16)	74	1.27
Impact of change in UK tax rates	-	(6)	(6)	(0.10)	-	(5)	(5)	(0.09)


Earnings per share based on profit
attributable to equity holders	959	(233)	726	12.46	1,092	(272)	820	14.07

(b) Diluted earnings per share
(i) Based on operating profit after tax

	Profit	Number	Earnings	Profit	Number	Earnings
	after tax	of shares1	per share	after tax	of shares1	per share
	2011	2011	2011	2010	2010	2010
	£m	m	p	£m	m	p


Operating profit after tax	787	5,828	13.50	751	5,827	12.89
Net shares under options allocable for no further consideration	-	97	(0.22)	-	79	(0.17)


Diluted earnings per share	787	5,925	13.28	751	5,906	12.72

International Financial Reporting Standards Page 61

Notes to the Financial Statements

2.09 Earnings per share (continued)

(b) Diluted earnings per share (continued)

(ii) Based on profit attributable to equity holders

	Profit	Number	Earnings	Profit	Number	Earnings
	after tax	of shares1	per share	after tax	of shares1	per share
	2011	2011	2011	2010	2010	2010
	£m	m	p	£m	m	p


Profit attributable to equity holders of the Company	726	5,828	12.46	820	5,827	14.07
Net shares under options allocable for no further consideration	-	97	(0.21)	-	79	(0.19)


Diluted earnings per share	726	5,925	12.25	820	5,906	13.88


1. Weighted average number of shares.

The number of shares in issue at 31 December 2011 was 5,872,166,893 (31 December 2010: 5,866,669,323).

2.10 Dividends


	Per		Per
	share	Total	share	Total
	2011	2011	2010	2010
	p	£m	p	£m


Ordinary share dividends paid in the year
- Prior year final dividend	3.42	201	2.73	160
- Current year interim dividend	1.66	97	1.33	78


	5.08	298	4.06	238


Ordinary share dividend proposed1	4.74	279	3.42	201



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

2.11 Financial investments

	2011	2010
	£m	£m


Equities	134,594	149,056
Unit trusts	7,487	7,550
Debt securities1	149,711	136,858
Accrued interest	1,705	1,682
Derivative assets2	6,756	4,014
Loans and receivables	351	410


	300,604	299,570


There have been no significant transfers between levels 1, 2 and 3 of the fair value hierarchy (as prescribed in IFRS 7 'Financial Instruments: Disclosures') for the year ended 31 December 2011. Further details are provided in Note 4.07.

1. Detailed analysis of debt securities which shareholders are directly exposed to are disclosed in Note 4.02.
2. 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 £3,174m (2010: £2,217m) held on behalf of unit linked policyholders.

International Financial Reporting Standards Page 62

Notes to the Financial Statements

2.12 Share capital and share premium

		2011			2010
		Number of	2011		Number of	2010
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 2011			5,866,669,323		147	938
Options exercised under share option schemes
- Executive share option scheme				1,736,890	-	1
- Savings related share option scheme			3,760,680		-	2


As at 31 December 2011			5,872,166,893		147	941


					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


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. International Financial Reporting Standards Page 63 Notes to the Financial Statements
2.13 Segmental analysis of shareholders' equity

					2011	2010
					£m	£m


Risk
General insurance					148	120
Other					6	3


Total Risk					154	123



Savings
Savings investments					136	121
Other					19	21


Total Savings					155	142



Investment management					351	324



International
USA (LGA)1					1,054	1,281
Netherlands (LGN)2					118	165
France (LGF)					196	181
Emerging markets					39	37


Total International					1,407	1,664



Group capital and financing					3,133	2,574


Shareholders' equity					5,200	4,827


1. The decrease in LGA reflects the repayment of £244m of capital provided by Group to complete the first phase of the LGA capital restructuring programme in 2010 and £51m from the repatriation of profits from the capital restructuring driven by the redemption of external debt.
2. The decrease in LGN has been largely driven by the €35m special dividend paid to Group during the year.

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

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.

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, and 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 64

Notes to the Financial Statements

2.14 Borrowings

	2011	2010
	£m	£m


Subordinated borrowings
6.385% Sterling perpetual capital securities (Tier 1)	721	690
5.875% Sterling undated subordinated notes (Tier 2)	421	423
4.0% Euro subordinated notes 2025 (Tier 2)	483	488
10% Sterling subordinated notes 2041 (Tier 2)	309	308
Client fund holdings of Group debt1	(13)	(12)


Total subordinated borrowings	1,921	1,897



Senior borrowings
Sterling medium term notes 2031-2041	608	608
Euro Commercial paper	246	279
Bank loans/other	8	9
Client fund holdings of Group debt1	(51)	(45)


Total senior borrowings (excluding non recourse)	811	851


Total borrowings (excluding non recourse)	2,732	2,748



Non recourse
- US Dollar Triple X securitisation 2025	-	61
- US Dollar Triple X securitisation 2037	286	283
- Suffolk Life unit linked borrowings	136	154
- LGV 6/LGV 7 Private Equity Fund Limited Partnership	96	86


Total senior borrowings (including non recourse)	1,329	1,435


Total borrowings	3,250	3,332


1. £64m (2010: £57m) 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.

International Financial Reporting Standards Page 65

Notes to the Financial Statements

2.14 Borrowings (continued)

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.

Non recourse financing

US Dollar Triple X securitisation 2025

In 2004, a subsidiary of LGA 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 2011, all of the outstanding debt had been redeemed and cancelled.

US Dollar Triple X securitisation 2037

In 2006, a subsidiary of LGA 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/LGV7 Private Equity Fund Limited Partnership

These borrowings are non recourse bank borrowings.

Syndicated credit facility

As at 31 December 2011, the Group had in place a £1.00bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in October 2016. This facility which was entered into in October 2011 replaces syndicated and bilateral facilities totalling £1.02bn which had been due to expire in December 2012. No drawings were made under any of these facilities during 2011.

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 £254m (2010: £288m). They comprise Euro Commercial Paper and Bank Loans.

International Financial Reporting Standards Page 66

Notes to the Financial Statements

2.15 Insurance contract liabilities

(a) Analysis of insurance contract liabilities

			Re-		Re-
		Gross	insurance	Gross	insurance
		2011	2011	2010	2010
	Notes	£m	£m	£m	£m


Participating insurance contracts	2.15(b)	8,750	(1)	9,383	(1)
Non-participating insurance contracts1	2.15(c)	33,761	(2,110)	31,064	(2,096)
General insurance contracts	2.15(d)	245	(6)	261	(6)


Insurance contract liabilities		42,756	(2,117)	40,708	(2,103)


1. Excluding General insurance contracts.

During the year, the Group entered into prospective reinsurance arrangements which resulted in a profit of £173m (2010: £137m). This profit has been reflected in the consolidated income statement for the year.

(b) Movement in participating insurance contract liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2011	2011	2010	2010
	£m	£m	£m	£m


As at 1 January	9,383	(1)	9,404	(1)
New liabilities in the year	374	-	483	-
Liabilities discharged in the year	(1,435)	-	(1,273)	-
Unwinding of discount rates	85	-	69	-
Effect of change in non-economic assumptions	(26)	-	45	-
Effect of change in economic assumptions	357	-	658	-
Other	12	-	(3)	-


As at 31 December	8,750	(1)	9,383	(1)

International Financial Reporting Standards Page 67

Notes to the Financial Statements

2.15 Insurance contract liabilities (continued)

(c) Movement in non-participating insurance contract liabilities

		Re-		Re-
	Gross	insurance	Gross	insurance
	2011	2011	2010	2010
	£m	£m	£m	£m


As at 1 January	31,064	(2,096)	28,353	(1,902)
New liabilities in the year	2,687	(309)	2,122	(330)
Liabilities discharged in the year	(2,018)	144	(1,818)	163
Unwinding of discount rates	1,321	(123)	1,299	(125)
Effect of change in non-economic assumptions	(403)	389	(151)	108
Effect of change in economic assumptions1	1,133	(111)	1,277	(1)
Foreign exchange adjustments	(23)	(4)	(18)	(8)
Other	-	-	-	(1)


As at 31 December	33,761	(2,110)	31,064	(2,096)


1. The economic assumptions changes in 2011 principally reflect the reduction in risk free yields over the course of 2011.

(d) Analysis of General insurance contract liabilities
		Re-		Re-
	Gross	insurance	Gross	insurance
	2011	2011	2010	2010
	£m	£m	£m	£m


Outstanding claims	76	(1)	99	(1)
Claims incurred but not reported	17	-	28	-
Unearned premiums	152	(5)	134	(5)


General insurance contract liabilities	245	(6)	261	(6)




(e) Movement in General insurance claim liabilities
		Re-		Re-
	Gross	insurance	Gross	insurance
	2011	2011	2010	2010
	£m	£m	£m	£m


As at 1 January	127	(1)	110	(3)
Claims arising	172	-	199	(1)
Claims paid	(179)	-	(161)	3
Adjustments to prior year liabilities	(27)	-	(21)	-


As at 31 December	93	(1)	127	(1)

International Financial Reporting Standards Page 68

Notes to the Financial Statements

2.16 Investment contract liabilities

(a) Analysis of investment contract liabilities
		Re-		Re-
	Gross	insurance	Gross	insurance
	2011	2011	2010	2010
	£m	£m	£m	£m


Participating investment contracts	7,276	-	7,323	-
Non-participating investment contracts	251,345	(172)	253,426	(233)


Investment contract liabilities	258,621	(172)	260,749	(233)




(b) Movement in investment contract liabilities
		Re-		Re-
	Gross	insurance	Gross	insurance
	2011	2011	2010	2010
	£m	£m	£m	£m


As at 1 January	260,749	(233)	241,641	(181)
Reserves in respect of new business	28,500	(1,431)	30,088	(1,474)
Amounts paid on surrenders and maturities during the year	(39,419)	744	(38,647)	1,029
Investment return and related benefits	9,168	748	28,064	393
Management charges	(315)	-	(322)	-
Foreign exchange adjustments	(59)	-	(75)	-
Other	(3)	-	-	-


As at 31 December	258,621	(172)	260,749	(233)


Fair value movements of £(9,813)m (2010: £(27,604)m) are included within the income statement arising from movements in investment contract liabilities designated as FVTPL.

2.17 Sensitivity analysis



	Impact on		Impact on
	pre-tax	Impact on	pre-tax	Impact on
	profit	equity	profit	equity
	net of	net of	net of	net of
	re-	re-	re-	re-
	insurance	insurance	insurance	insurance
	2011	2011	2010	2010
UK long term business	£m	£m	£m	£m


Sensitivity test
1% increase in interest rates	49	36	35	25
1% decrease in interest rates	(142)	(104)	1	1
Credit spread widens by 100bps with no change in expected defaults	(52)	(38)	(76)	(55)
1% increase in inflation	37	28	17	12
Default of largest reinsurer	(694)	(510)	(681)	(490)
1% decrease in annuitant mortality	(76)	(55)	(66)	(47)


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.

International Financial Reporting Standards Page 69

Notes to the Financial Statements

2.17 Sensitivity analysis (continued)

The interest rate sensitivities reflect the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the UK long term business. This scenario does not reflect management action which could be taken to reduce the impact of a decrease in interest rates. In a scenario where the bases are not adjusted for regulatory restrictions i.e. changes to the reinvestment rate are ignored the sensitivity to a +/-1% interest rate movement would be +/-£7m.

* 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 1% reduction in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates.
* 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
	pre-tax	Impact on	pre-tax	Impact on
	profit	equity	profit	equity
	net of	net of	net of	net of
	re-	re-	re-	re-
	insurance	insurance	insurance	insurance
	2011	2011	2010	2010
General insurance	£m	£m	£m	£m


Sensitivity test
Single storm event with 1 in 200 year probability	(90)	(66)	(55)	(40)
Subsidence event - worst claims ratio in last 30 years	(41)	(30)	(39)	(28)
Economic downturn	(43)	(32)	(38)	(28)
5% decrease in overall claims ratio	9	7	9	6
5% surplus over claims liabilities	5	3	6	4

2.18 Foreign exchange rates

Principal rates of exchange used for translation are:

Year end exchange rates	2011	2010


United States Dollar	1.55	1.57
Euro	1.20	1.17



	01.01.11 -	01.01.10 -
Average exchange rates	31.12.11	31.12.10


United States Dollar	1.60	1.55
Euro	1.15	1.17

International Financial Reporting Standards Page 70

Notes to the Financial Statements

2.19 Provisions

(a) Analysis of provisions
			2011	2010
		Note	£m	£m


Retirement benefit obligations		(b)	871	748
Other provisions			20	13


			891	761




(b) Retirement benefit obligations
	Fund and		Fund and
	Scheme	Overseas	Scheme	Overseas
	2011	2011	2010	2010
	£m	£m	£m	£m


Gross pension obligations included in provisions	(870)	(1)	(749)	1
Annuity obligations insured by Society	583	-	514	-


Gross defined benefit pension deficit	(287)	(1)	(235)	1
Deferred tax on defined benefit pension deficit	72	-	66	-


Net defined benefit pension deficit	(215)	(1)	(169)	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 2011, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at £215m (2010: £169m). These amounts have been recognised in the financial statements with £128m charged against shareholder equity (2010: £100m) and £87m against the unallocated divisible surplus (2010: £69m).

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 71

Notes to the Financial Statements

2.21 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) as adopted by 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 has selected accounting policies which state fairly its financial position, financial performance and cash flows for a reporting period. The accounting policies have been consistently applied to all years presented, unless otherwise stated.

The Group presents its balance sheet in order of liquidity. This is considered to be more relevant than a before and 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.

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. The functional currency of the Group's foreign operations is the currency of the primary economic environment in which the entity operates. The assets and liabilities of all of the Group's foreign operations are translated into sterling, the Group's presentational currency, at the closing rate at the date of the balance sheet. The income and expenses for each income statement are translated at average exchange rates. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate component of shareholders' equity.

Use of estimates

The preparation of the financial statements includes the use of estimates and assumptions which affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant for the determination of fair values of investment property and unquoted and illiquid financial investments; the estimation of deferred acquisition costs; tax balances; and the estimation of insurance and investment contract liabilities. The basis of accounting for these areas is outlined in the respective notes to the financial statements.

Reportable segments

Under the requirements of IFRS 8, 'Operating Segments', operating and reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker, which has been identified as the Board of Legal & General Group Plc.

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

The Risk segment comprises individual and group protection, individual and bulk purchase annuities, longevity 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, retail platform businesses, and all with-profits products.

The Investment management segment comprises institutional fund management and LGIM America (LGIMA).

The International segment comprises Legal & General America (LGA), Legal & General France (LGF), Legal & General Netherlands (LGN) as well as our joint ventures in 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.

International Financial Reporting Standards Page 72

Notes to the Financial Statements

Blank Page

Net Cash and Capital Page 73


3.01 Operational cash generation

As presented in our H1 2011 results, the operational cash definition for the Group capital and financing segment was amended to be equal to the post-tax operating profit. At 2010, the operational cash definition for the group capital and financing segment represented the post-tax operating profit excluding expected gains/losses on equities. The change in definition aligns the treatment between equities and fixed income securities. The prior year operational cash generation has been amended accordingly and resulted in an increase of £32m. As mentioned in Note 2.05 the rate used to calculate the smoothed return on cash and LIBOR benchmarked bonds has been reduced. The cash rate previously used of 4% has been replaced with a 1 year LIBOR of 1%. This ensures our operating profit and cash metric maintains relevance in current macro economic conditions. The combined change in the methodology and assumption change is broadly neutral on the 2011 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 profit after tax.
							Investment
	Opera-				Changes		gains and			IFRS
	tional	New		Exper-	in		losses,	IFRS	Tax	profit/
	cash	busi-		ience	valuation	Non-	inter-	profit/	exp-	(loss)
	gene-	ness	Net	var-	assump-	cash	national	(loss)	ense/	before
For the year ended	ration	strain	cash	iances	tions	items	and other	after tax	(credit)	tax
31 December 2011	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m


Total Risk operating profit	482	(31)	451	22	24	(86)	-	411	150	561
Total Savings
operating profit	174	(63)	111	(12)	(5)	6	(6)	94	34	128
Investment management
operating profit	189	-	189	-	-	-	-	189	45	234
International	51	-	51	-	-	-	39	90	47	137
Group capital and financing	44	-	44	-	-	-	-	44	8	52
Investment projects	-	-	-	-	-	-	(41)	(41)	(15)	(56)


Operating profit	940	(94)	846	10	19	(80)	(8)	787	269	1,056


Investment variance	-	-	-	-	-	-	(55)	(55)	(42)	(97)
Impact of change
in UK tax rates	-	-	-	-	-	-	(6)	(6)	6	-
Property losses attributable
to non-controlling interests	-	-	-	-	-	-	(3)	(3)	-	(3)


Total	940	(94)	846	10	19	(80)	(72)	723	233	956



							Investment
	Opera-				Changes		gains and			IFRS
	tional	New		Exper-	in		losses,	IFRS	Tax	profit/
	cash	busi-		ience	valuation	Non-	inter-	profit/	exp-	(loss)
	gene-	ness	Net	var-	assump-	cash	national	(loss)	ense/	before
For the year ended	ration	strain	cash	iances	tions	items	and other	after tax	(credit)	tax
31 December 2010	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m


Total Risk operating profit	439	(10)	429	67	30	(122)	(1)	403	157	560
Total Savings
operating profit	138	(70)	68	10	28	(21)	(5)	80	35	115
Investment management								-
operating profit	162	-	162	-	-	-	-	162	44	206
International	44	-	44	-	-	-	33	77	25	102
Group capital and financing	57	-	57	-	-	-	-	57	1	58
Investment projects	-	-	-	-	-	-	(28)	(28)	(11)	(39)


Operating profit	840	(80)	760	77	58	(143)	(1)	751	251	1,002


Investment variance	-	-	-	-	-	-	74	74	16	90
Impact of change
in UK tax rates	-	-	-	-	-	-	(5)	(5)	5	-
Property losses attributable
to non-controlling interests	-	-	-	-	-	-	-	-	-	-


Total	840	(80)	760	77	58	(143)	68	820	272	1,092

Net Cash and Capital Page 74


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
	31.12.11	31.12.10
	£bn	£bn


Core tier 1	6.0	5.9
Innovative tier 1	0.6	0.6
Upper tier 2	0.4	0.4
Lower tier 2	0.8	0.8
Deductions1	(0.9)	(1.0)


Group capital resources	6.9	6.7


Group capital resources requirement2	3.1	3.0


IGD surplus	3.8	3.7



Coverage ratio (Group capital resources /	2.20	2.26
Group capital resources requirement)3	times	times


1. Deductions comprises inadmissible assets in (LGA) of £0.7bn (2010: £0.8bn), in Society of £0.1bn (2010: £0.1bn) and in other Group companies of £0.1bn (2010: £0.1bn). 2. The Group capital resources requirement includes a With-profits Insurance Capital Component (WPICC) of £0.4bn (2010: £0.3bn). 3. Coverage ratio is calculated on unrounded values.

A segmental analysis is given below.
	At	At
	31.12.11	31.12.10
	£bn	£bn


Society long term fund1	2.8	2.6
Society shareholder capital	2.4	2.5
General insurance	0.1	0.1
France (LGF)	0.2	0.2
Netherlands (LGN)	0.1	0.2
Nationwide Life	0.1	0.1
USA (LGA)	0.2	0.5
Investment management	0.3	0.3
Other2	1.5	1.1
Innovative tier 1	0.6	0.6
Tier 2	1.2	1.2
Debt	(2.6)	(2.7)


Group capital resources	6.9	6.7


Society long term fund1	2.8	2.6
Other	0.3	0.4


Group capital resources requirement	3.1	3.0


1. The Society LTF capital requirement of £2.8bn (2010: £2.6bn) is met by £2.8bn (2010: £2.9bn) of capital resources in the LTF and £nil (2010: £nil) of capital outside the LTF. 2. Other includes corporate assets held within the Group's treasury function.

Net Cash and Capital Page 75
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
			31.12.11	31.12.10
			£bn	£bn


Capital and reserves attributable to equity holders on an IFRS basis			5.2	4.8
Innovative tier 1			0.6	0.6
Tier 2			1.2	1.2
Proposed dividends			(0.3)	(0.2)
Additional capital available from Society			0.9	1.1
Adjustment to reflect regulatory value of the LGA operation			(0.7)	(0.8)
Other regulatory adjustments			-	-


Group capital resources			6.9	6.7




(b) With-profits realistic balance sheet
The table below summarises the realistic position of the with-profits part of Society's LTF:

			At	At
			31.12.11	31.12.10
			£bn	£bn


With-profits surplus			0.7	0.9
Risk capital margin			0.1	0.2


Surplus			0.6	0.7


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 £0.2bn (2010: £0.4bn) as a liability in the calculation.

(c) Society capital surplus
Society is required to measure and monitor its capital resources on a regulatory basis.

	At	At	At	At
	31.12.11	31.12.11	31.12.10	31.12.10
	Long	General	Long	General
	term	insu-	term	insu-
	business	rance	business	rance
	£bn	£bn	£bn	£bn


Available capital resources - Tier 1	5.6	0.1	5.6	0.1


Insurance capital requirement	2.4	0.1	2.3	0.1
Capital requirements of regulated related undertakings	0.2	-	0.2	-
With-profits Insurance Capital Component	0.4	-	0.3	-


Capital resources requirement	3.0	0.1	2.8	0.1


Regulatory capital surplus	2.6	-	2.8	-



Net Cash and Capital		Page 76
3.02 Regulatory capital resources (continued)
(c) Society capital surplus (continued)
Movement in Society long term insurance capital requirement
	At	At
	31.12.11	31.12.10
Pillar 1 capital requirement	£bn	£bn


Protection	0.7	0.6
Annuities	1.0	0.9
Non profit pensions and unit linked bonds	0.1	0.1


Non profit	1.8	1.6
With-profits	0.6	0.7


Long term insurance capital requirement	2.4	2.3


On a regulatory basis (Peak 1), Society long term business regulatory capital surplus of £2.6bn (2010: £2.8bn) comprises capital resources within the long term fund of £2.8bn (2010: £2.6bn) and capital resources outside the long term fund of £2.8bn (2010: £3.0bn) less the capital resources requirement of £3.0bn (2010: £2.8bn). 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 2011, this adjustment amounted to £0.2bn (2010: £0.4bn).


Asset Disclosures		Page 77
4.01 Investment portfolio

	Market		Market
	value		value
	2011		2010
	£m		£m


Worldwide assets under management	378,573		364,846
Client and policyholder assets	(320,228)		(310,546)
Non-unit linked with-profits assets1	(18,927)		(19,927)


Assets to which shareholders are directly exposed	39,418		34,373



Comprising:
Assets held to back the UK non-linked non profit business:
Legal & General Pensions Limited (LGPL)2	30,029		25,107
Other UK non profit insurance business	285		642
	30,314		25,749
Assets held to back other insurance businesses (including Triple-X reserves)	3,172		3,280
Group capital and financing assets3	4,344		3,656
Other shareholder assets3	1,588		1,688


	39,418		34,373


1. Includes assets backing participating business in LGF of £2,277m (2010: £2,304m).
2. LGPL is the main operating subsidiary for the UK's annuity business.
3. The presentation of shareholder assets has been amended to align the presentation with the Group's reporting segments. 2010 comparatives have been restated accordingly.

Analysed by asset class:
					Group
			Other UK		capital	Other
			non profit	Other	and	share-
			insurance	insurance	financing	holder
		LGPL	business	business	assets	assets	Total	Total
		2011	2011	2011	2011	2011	2011	2010
	Note	£m	£m	£m	£m	£m	£m	£m


Equities		-	-	-	905	8	913	975
Bonds	4.02	26,319	62	2,968	1,812	1,067	32,228	28,870
Derivative assets1		2,939	168	9	299	-	3,415	1,713
Property		486	-	-	107	13	606	275
Cash (including cash
equivalents)		285	55	195	1,221	500	2,256	2,540


		30,029	285	3,172	4,344	1,588	39,418	34,373


1. 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 78
4.02 Bond portfolio summary
(a) Analysed by sector
					LGPL	LGPL	Total	Total
					2011	2011	2011	2011
				Notes	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns					4,072	15	6,188	19
Banks:
- Tier 11				4.04	236	1	259	1
- Tier 2 and other subordinated				4.04	1,177	4	1,338	4
- Senior					1,463	5	2,234	7
Utilities					3,457	13	3,722	12
Consumer Services and Goods					2,557	10	2,928	9
Financial Services					941	4	1,179	4
Technology and Telecoms					1,902	7	2,209	7
Insurance					968	4	1,120	3
Industrials					1,265	5	1,515	5
Oil and Gas					1,614	6	1,837	6
Health Care					748	3	786	2
Property					577	2	640	2
Traditional and secured asset backed securities				4.03	4,344	17	5,275	16
CDO				4.02(d)	998	4	998	3


Total					26,319	100	32,228	100



					LGPL	LGPL	Total	Total
					2010	2010	2010	2010
				Notes	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns					3,042	13	5,034	17
Banks:
- Tier 11				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
Traditional and secured asset backed securities				4.03	3,996	17	4,920	16
CDO				4.02(d)	1,017	4	1,022	4


Total					23,433	100	28,870	100


1. Tier 1 holdings include £49m (2010: £55m) of preference shares.


	Asset Disclosures						Page 79
4.02 Bond portfolio summary
(b) Analysed by domicile
			LGPL	Total	LGPL	Total
			2011	2011	2010	2010
		Note	£m	£m	£m	£m


Market value by region
United Kingdom			10,387	11,758	9,246	10,517
USA			8,040	10,548	7,528	9,790
Netherlands			1,226	1,830	935	1,578
France			1,124	1,523	1,015	1,359
Italy			543	652	398	505
Germany			445	761	282	600
Ireland1			213	225	239	300
Spain			187	236	181	218
Belgium			23	79	-	-
Portugal			41	45	64	76
Greece			-	-	-	15
Europe - Other			994	1,324	1,197	1,483
Rest of World			2,098	2,249	1,331	1,407
CDO		4.02(d)	998	998	1,017	1,022


Total			26,319	32,228	23,433	28,870


1. Within LGPL, out of the £213m of bonds domiciled in Ireland, £187m relate to financing vehicles where the underlying exposure lies outside Ireland.

The table above is based on the legal domicile of the security.

Additional analysis of sovereign debt exposures

	Sovereigns, Supras and Sub-Sovereigns
	LGPL	Total	LGPL	Total
	2011	2011	2010	2010
	£m	£m	£m	£m


Market value by region
United Kingdom1	2,694	3,205	1,909	2,366
USA	380	782	276	524
Netherlands	15	468	28	553
France	119	317	117	251
Italy	201	281	77	189
Germany	143	386	131	359
Ireland	-	4	29	45
Spain	-	29	-	43
Belgium	-	40	-	31
Portugal	-	3	-	12
Greece	-	-	-	15
Europe - Other	448	602	413	543
Rest of World	72	71	62	103


Total	4,072	6,188	3,042	5,034


1. LGPL holds liquidity in the form of cash and cash equivalents of £285m (2010: £496m) and gilts of £2,694m (2010: £1,909m).



Asset Disclosures					Page 80

4.02 Bond portfolio summary (continued)
(c) Analysed by credit rating
	LGPL	LGPL	Total	Total
	2011	2011	2011	2011
	£m	%	£m	%


AAA	4,685	18	7,328	23
AA	2,896	11	3,657	11
A	9,710	37	11,290	35
BBB	6,876	26	7,721	24
BB or below	417	2	481	1
Unrated: Bespoke CDOs	872	3	872	3
Other1	863	3	879	3


	26,319	100	32,228	100



	LGPL	LGPL	Total	Total
	2010	2010	2010	2010
	£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
Other1	813	3	842	3


	23,433	100	28,870	100


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


Asset Disclosures					Page 81

4.02 Bond portfolio summary (continued)

(d) CDOs

The Group holds collateralised debt obligations (CDOs) with a market value of £998m at 31 December 2011 (2010: £1,022m).

These holdings include £846m (2010: £875m) 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 no substitutions were made in 2010 and substitutions in 2011 were limited. A breakdown of the underlying CDO reference portfolio by sector is provided below:

Sector

	2011	2010
	%	%

Banks	14	14
Utilities	10	10
Consumer Services & Goods	25	26
Financial Services	6	6
Technology & Telecoms	9	9
Insurance	6	6
Industrials	20	20
Oil & Gas	6	6
Health Care	4	3


	100	100

The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.5%, 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 27.5% 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 30.5% or if 43.6% 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 2010 or 2011.

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 during the year ended 31 December 2011 (2010: £nil). During the year, the Group received £nil (2010: £155m) of previously posted collateral.

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 £152m (2010: £147m) of CDO holdings includes a £26m (2010: £37m) exposure to an equity tranche of a bespoke CDO.



Asset Disclosures					Page 82

4.03 Traditional and secured asset backed securities summary
(a) By security
	LGPL	LGPL	Total	Total
	2011	2011	2011	2011
	£m	%	£m	%


Traditional asset backed securities:
Residential Mortgage-Backed Securities - Prime1	416	10	680	13
Residential Mortgage-Backed Securities - Sub-prime2	-	-	20	-
Commercial Mortgage-Backed Securities	245	6	450	9
Credit Card	2	-	134	3
Auto	11	-	113	2
Consumer Loans	37	1	40	1
Student Loans	20	-	26	-


	731	17	1,463	28


Securitisations and debentures:
Secured Bond	1,935	45	1,975	37
Commercial Property Backed Bonds	236	5	236	5
Infrastructure / Private Finance Initiative / Social housing	1,104	25	1,168	22
Whole Business Securitisation	299	7	302	6
Other secured holdings3	39	1	131	2


	3,613	83	3,812	72


Total traditional and secured asset backed securities	4,344	100	5,275	100

The two categories above are based on the following definitions: Traditional Asset Backed Securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Debentures are securities with fixed redemption profiles issues by firms typically secured on property and Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies.
	LGPL	LGPL	Total	Total
	2010	2010	2010	2010
	£m	%	£m	%


Traditional asset backed securities:
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


Securitisations and debentures:
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 holdings3	52	1	103	2


	3,216	81	3,293	66


Total traditional and secured asset backed securities	3,996	100	4,920	100


1. 56% (2010: 54%) of Prime RMBS holdings relate to UK mortgages. 2. 55% (2010: 52%) of Sub-prime RMBS holdings have a credit rating of AAA and 71% (2010: 54%) relate to the UK. 3. Other secured holdings in LGPL include covered bonds of £29m (2010: £17m).



Asset Disclosures					Page 83

4.03 Traditional and secured asset backed securities summary (continued)
(b) By credit rating
	LGPL	LGPL	Total	Total
	2011	2011	2011	2011
	£m	%	£m	%


AAA	802	18	1,411	27
AA	1,077	25	1,202	23
A	1,604	37	1,661	31
BBB	634	15	739	14
BB or below	81	2	114	2
Unrated	146	3	148	3


Total	4,344	100	5,275	100



	LGPL	LGPL	Total	Total
	2010	2010	2010	2010
	£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


Of the £733m (2010: £847m) of traditional ABS holdings held outside of LGPL, 65% are rated AAA (2010: 79%).

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


Asset Disclosures					Page 84

4.04 Group subordinated bank exposures

	Total	Total	Total	Total
	2011	2011	2010	2010
	£m	%	£m	%


Tier 1
United Kingdom1	139	9	244	10
USA	47	3	119	5
Europe	61	4	114	5
Others	12	1	36	2


Total tier 1	259	17	513	22

Lower tier 2
United Kingdom	586	36	806	35
USA	394	25	520	22
Europe	142	9	184	8
Others	68	4	79	3

Upper tier 2
United Kingdom	63	4	94	4
USA	1	-	19	1
Europe	39	2	55	3
Others	2	-	3	-

Other subordinated
United Kingdom	-	-	-	-
USA	43	3	51	2
Europe	-	-	-	-
Others	-	-	-	-


Total tier 2 and other subordinated	1,338	83	1,811	78


Total	1,597	100	2,324	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.

4.05 Value of policyholder assets held in Society and LGPL

			2011		2010
			£m		£m


With-profits business			24,862		26,442
Non profit business			42,516		40,244


			67,378		66,686



Asset Disclosures							Page 85

4.06 With-profits non-linked business invested asset mix and investment return


		UK with-
	Invest-	profits		UK with-		UK with-
	ment	asset		profits		profits
	return	share		non par		other
As at 31 December 2011	%	%		%		%


Equities	(8)	38		3		(47)
Bonds	9	40		88		139
Property	5	15		-		-
Cash	1	7		9		8


		100		100		100


Investment return (% pa)	4	2		8		19



Invested assets (£bn):
Net of derivative liabilities		12.4		2.4		1.8
Gross of derivative liabilities		12.5		2.4		1.8






As at 31 December 2010


Equities	13	40		3		(65)
Bonds	9	39		86		153
Property	17	15		-		(1)
Cash	1	6		11		13


		100		100		100


Investment return (% pa)	10	12		8		4



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


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


Asset Disclosures							Page 86

4.07 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 2011	£m	£m		£m		£m


Group capital and other insurance business
Equities	564	221		128		913
Bonds1	2,058	3,783		6		5,847
Derivative assets	13	295		-		308


	2,635	4,299		134		7,068


Non profit non-unit linked
Bonds1	3,440	22,941		-		26,381
Derivative assets	255	2,820		32		3,107


	3,695	25,761		32		29,488




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


	Level 1	Level 2		Level 3		Total
As at 31 December 2010	£m	£m		£m		£m


Group capital and other insurance business
Equities	730	115		130		975
Bonds1	2,093	3,134		9		5,236
Derivative assets	5	282		-		287


	2,828	3,531		139		6,498


Non profit non-unit linked
Bonds1	2,562	21,116		-		23,678
Derivative assets	78	1,348		-		1,426


	2,640	22,464		-		25,104


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 £2,862m (2010: £2,815m), as disclosed in Note 4.01.

Asset Disclosures

Page 87

4.07 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 arm's 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).

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. 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.

These CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the internal valuation. 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 no or 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 independent of the risk taker. These inputs and outputs are reviewed and approved by a valuation committee.

Significant transfers between levels

There have been no significant transfers between levels 1, 2 and 3 for the year ended 31 December 2011 (2010: No significant transfers between levels 1, 2 and 3).

Asset Disclosures

Page 88

Blank Page

European Embedded Value

Page 89

Consolidated Income Statement

For the year ended 31 December 2011

		2011	2010
	Notes	£m	£m


From continuing operations
Risk	5.01	801	663
Savings	5.01	228	204
Investment management	5.08	210	179
International	5.09	242	163
Group capital and financing	5.10	44	54
Investment projects1		(56)	(39)


Operating profit		1,469	1,224
Variation from longer term investment return	5.11	(111)	161
Effect of economic assumption changes	5.12	(21)	292
Property losses attributable to non-controlling interests		(3)	-


Profit before tax		1,334	1,677
Tax expense attributable to equity holders of the Company	5.14	(259)	(446)
Effect of tax rate changes	5.14	156	33


Profit for the year		1,231	1,264
Loss attributable to non-controlling interests		3	-


Profit attributable to equity holders of the Company		1,234	1,264




		p	p


Earnings per share	5.15

Based on operating profit after tax attributable to equity holders of the Company		19.08	15.52
Based on profit attributable to equity holders of the Company		21.17	21.71

Diluted earnings per share	5.15

Based on operating profit after tax attributable to equity holders of the Company		18.77	15.31
Based on profit attributable to equity holders of the Company		20.83	21.41


1. Investment projects predominately relates to Solvency II and other strategic investments.

European Embedded Value

Page 90

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2011

	2011	2010
	£m	£m


Profit for the year	1,231	1,264

Other comprehensive income after tax
Exchange differences on translation of overseas operations	(1)	(5)
Actuarial (losses) on defined benefit pension schemes	(70)	(5)
Actuarial losses on defined benefit pension schemes transferred to unallocated divisible surplus	48	4


Total comprehensive income for the year	1,208	1,258



Total comprehensive income/(expense) attributable to:
Non-controlling interests	(3)	-
Equity holders of the Company	1,211	1,258

Consolidated Balance Sheet

As at 31 December 2011

						2011		2010
				Notes		£m		£m


Assets
Investments						319,671		317,234
Long term in-force business asset						3,556		3,060
Other assets						6,900		6,482


Total assets						330,127		326,776




Equity
Shareholders' equity				5.17/5.18		8,608		7,730
Non-controlling interests						66		47


Total equity						8,674		7,777



Liabilities
Subordinated borrowings				2.14		1,921		1,897
Unallocated divisible surplus						1,038		1,469
Participating contract liabilities						15,784		16,329
Non-participating contract liabilities						285,351		284,751
Senior borrowings				2.14		1,329		1,435
Other liabilities and provisions						16,030		13,118


Total liabilities						321,453		318,999


Total equity and liabilities						330,127		326,776



European Embedded Value									Page 91
Notes to the Financial Statements
5.01 Profit/(loss) for the year
			Invest-				Group
			ment				capital
		Risk and	manage-		Inter-		and
		Savings	ment		national		financing			Total
For the year ended 31 December 2011	Notes	£m	£m		£m		£m			£m


Business reported on an EEV basis:
Contribution from new business after cost of capital	5.03/5.05	376			65					441
Contribution from in-force business:
- expected return1		387			107					494
- experience variances	5.07	112			125					237
- operating assumption changes	5.07	101			(68)					33
Development costs		(10)			-					(10)
Contribution from shareholder net worth					21		157			178


Operating profit on covered business		966	-		250		157			1,373

Business reported on an IFRS basis:
Risk non-covered business2		36								36
Savings non-covered business3		27								27
Investment management4	5.08		210							210
Group capital and financing	5.10						(113)			(113)
Investment projects5							(56)			(56)
International non-covered business6					(8)					(8)


Total operating profit		1,029	210		242		(12)			1,469
Variation from longer term investment return	5.11	124	(7)		(6)		(222)			(111)
Effect of economic assumption changes	5.12	43	-		(64)		-			(21)
Property losses attributable to non-controlling interests		-	-		-		(3)			(3)


Profit/(loss) before tax		1,196	203		172		(237)			1,334
Tax (expense)/credit on profit from ordinary activities		(279)	(38)		(63)		121			(259)
Effect of tax rate changes7		155	-		1		-			156


Profit/(loss) for the year		1,072	165		110		(116)			1,231



Operating profit attributable to:
Risk		801
Savings		228


1. The expected return on in-force is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the Risk and Savings business was £3,886m in 2011 (2010: £3,679m). This is adjusted for the effects of opening model changes of £200m (2010: £39m) to give an adjusted opening base VIF of £4,086m (2010: £3,718m). This is then multiplied by the opening risk discount rate of 7.3% and the result grossed up at the notional attributed tax rate of 23% (2010: 27%) to give a return of £387m (2010: £407m).
2. Risk non-covered business primarily reflects GI operating profit of £42m (see Note 2.01(f)).
3. Savings non-covered business mainly comprises Savings investments on an IFRS basis, adjusted for Suffolk Life, International (Ireland) and Nationwide.
4. Investment management operating profit excludes £24m (2010: £27m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Risk, Savings and Group capital and financing covered business on an EEV basis.
5. Investment projects predominately relates to Solvency II and other strategic investments.
6. International non-covered business includes our joint venture operations in Egypt, the Gulf, India and business unit costs of £5m (2010: £5m) allocated to the International segment.
7. Primarily reflects the implementation of the UK planned future reductions in corporation tax to 23% on 1 April 2014.



European Embedded Value							Page 92
Notes to the Financial Statements

5.01 Profit/(loss) for the year (continued)
				Invest-		Group
				ment		capital
			Risk and	manage-	Inter-	and
			Savings	ment	national	financing		Total
For the year ended 31 December 2010		Notes	£m	£m	£m	£m		£m


Business reported on an EEV basis:
Contribution from new business after cost of capital		5.03/5.05	333		44			377
Contribution from in-force business:
- expected return1			407		120			527
- experience variances		5.07	188		6			194
- operating assumption changes		5.07	(58)		(20)			(78)
Development costs			(15)		-			(15)
Contribution from shareholder net worth					22	138		160


Operating profit on covered business			855	-	172	138		1,165

Business reported on an IFRS basis:
Risk non-covered business2			(8)					(8)
Savings non-covered business3			20					20
Investment management4		5.08		179				179
Group capital and financing		5.10				(84)		(84)
Investment projects5						(39)		(39)
International non-covered business6					(9)			(9)


Total operating profit			867	179	163	15		1,224
Variation from longer term investment return		5.11	115	(8)	43	11		161
Effect of economic assumption changes		5.12	252	-	40	-		292
Property losses attributable to non-controlling interests			-	-	-	-		-


Profit/(loss) before tax			1,234	171	246	26		1,677
Tax (expense)/credit on profit from ordinary activities			(332)	(34)	(84)	4		(446)
Effect of tax rate changes			33	-	-	-		33


Profit for the year			935	137	162	30		1,264



Operating profit attributable to:
Risk			663
Savings			204


1. The expected return on in-force is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the Risk and Savings business was £3,679m in 2010. This is adjusted for the effects of opening model changes of £39m to give an adjusted opening base VIF of £3,718m. This is then multiplied by the opening risk discount rate of 8.0% and the result grossed up at the notional attributed tax rate of 27% to give a return of £407m.
2. Risk non-covered business primarily reflects GI operating profit of £(8)m (see note 2.01(f)).
3. Savings non-covered business mainly comprises Savings investments on an IFRS basis, adjusted for Suffolk Life, International (Ireland) and Nationwide.
4. Investment management operating profit excludes £27m of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis and as a consequence are included in the Risk, Savings and Group capital and financing covered business on an EEV basis.
5. Investment projects predominately relates to Solvency II and other strategic investments.
6. International non-covered business includes our joint venture operations in Egypt, the Gulf, India and business unit costs of £5m allocated to the International segment.


European Embedded Value							Page 93
Notes to the Financial Statements

5.02 New business summary1
		APE2	PVNBP3	Margin4	APE	PVNBP		Margin
		2011	2011	2011	2010	2010		2010
	Notes	£m	£m	%	£m	£m		%


Risk5	5.03	498	3,446	9.8	382	2,925		10.3
Savings	5.03	590	3,896	0.8	628	3,934		0.8
International	5.05	131	1,174	5.5	116	1,017		4.3


		1,219	8,516	5.1	1,126	7,876		4.8


1. Covered business only.
2. Annual Premium Equivalent (APE) comprises the new annual premiums together with 10% of single premiums.
3. The present value of new business premiums (PVNBP) on the EEV basis is defined as the present value of annual premiums plus single premiums for any given period. It is calculated using the same assumptions as for the contribution from new business but determined as at the point of sale.
4. The new business margin is defined as the contribution from new business (including the cost of solvency capital) divided by the PVNBP.
5. Longevity insurance has been excluded from the Risk PVNBP and new business margin measures. See Note 5.22.

5.03 Risk and Savings1 new business by product
		Present						Contri-
		value of	Capital-					bution
	Annual	annual	isation	Single				from new
	premiums	premiums	factor2	premiums			PVNBP	business3				Margin
For the year ended 31 December 2011	£m	£m		£m			£m	£m				%


Protection	177	931	5.3	-			931	86				9.3
Annuities	-	-	-	2,515			2,515	252				10.0
Longevity insurance4	70	n/a	n/a	-			n/a	7				n/a


Total Risk	247	931	5.3	2,515			3,446	345				9.8


Unit linked bonds	-	-	-	623			623	8				1.3
Pensions, stakeholder and other non profit	244	902	3.7	1,620			2,522	10				0.4
With-profits savings	69	226	3.3	525			751	13				1.8


Total Savings	313	1,128	3.6	2,768			3,896	31				0.8


Total Risk and Savings	560	2,059	4.2	5,283			7,342	376				5.0
Cost of capital								49


Contribution from new business before cost of capital								425




For the year ended 31 December 2010


Protection	175	860	4.9	-			860	55				6.4
Annuities	-	-	-	2,065			2,065	245				11.9
Longevity insurance4	-	n/a	n/a	-			n/a	-				n/a


Total Risk	175	860	4.9	2,065			2,925	300				10.3


Unit linked bonds	-	-	-	586			586	8				1.4
Pensions, stakeholder and other non profit	300	1,135	3.8	1,373			2,508	3				0.1
With-profits savings	71	232	3.3	608			840	22				2.6


Total Savings	371	1,367	3.7	2,567			3,934	33				0.8


Total Risk and Savings	546	2,227	4.1	4,632			6,859	333				4.9
Cost of capital								47


Contribution from new business before cost of capital								380


1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.
4. The PVNBP measure is not applicable. See Note 5.22.


European Embedded Value										Page 94
Notes to the Financial Statements

5.04 Non profit internal rate of return (IRR) and payback period1 by product

						Payback					Payback
					IRR	period			IRR		period
					2011	2011			2010		2010
					%	years			%		years


Protection					>15	4			15		5
Annuities2					>30				>30
Unit linked bonds					10	7			11		7
Pensions, stakeholder and other non profit					8	12			8		13


1. The payback period is calculated on an undiscounted basis.
2. Includes longevity insurance. Given negative strain on annuity business and an immediate IFRS payback, the IRR calculation is infinite.

5.05 International1 new business
													Contri-
													bution
													from new			Cost of
							APE			PVNBP			business2			capital				Margin
For the year ended 31 December 2011							£m			£m			£m			£m				%


USA (LGA)							69			637			69			2				10.7
Netherlands (LGN)							15			130			(2)			2				(1.3)
France (LGF)							47			407			(2)			6				(0.4)


Total							131			1,174			65			10				5.5




													Contri-
													bution
													from new			Cost of
							APE			PVNBP			business2			capital				Margin
For the year ended 31 December 2010							£m			£m			£m			£m				%


USA (LGA)							52			443			40			4				8.9
Netherlands (LGN)							18			166			2			2				1.4
France (LGF)							46			408			2			4				0.6


Total							116			1,017			44			10				4.3


1. Excludes core retail investments in LGF and new business from joint operations in Egypt, India and Gulf which are reported on an IFRS basis.
2. Contribution from new business is reported after the cost of capital.



European Embedded Value																		Page 95
Notes to the Financial Statements

5.06 International1 new business in local currency
		Present										Contri-
		value of		Capital-								bution
	Annual	annual		isation		Single						from new			Cost of
	premiums	premiums		factor		premiums			PVNBP			business2			capital		Margin
For the year ended 31 December 2011	m	m				m			m			m			m		%


USA (LGA)	$111	$1,028		9.3		-			$1,028			$110			$3		10.7
Netherlands (LGN)	€6	€40		6.7		€109			€149			(€2)			€2		(1.3)
France (LGF)	€27	€201		7.5		€267			€468			(€2)			€7		(0.4)




		Present										Contri-
		value of		Capital-								bution
	Annual	annual		isation		Single						from new			Cost of
	premiums	premiums		factor		premiums			PVNBP			business2			capital		Margin
For the year ended 31 December 2010	m	m				m			m			m			m		%


USA (LGA)	$80	$690		8.6		-			$690			$62			$7		8.9
Netherlands (LGN)	€7	€48		6.9		€146			€194			€3			€2		1.4
France (LGF)	€27	€203		7.5		€277			€480			€3			€5		0.6


1. Excludes core retail investments in LGF and new business from joint operations in Egypt, India and Gulf which are reported on an IFRS basis.
2. Contribution from new business is reported after the cost of capital.


European Embedded Value																		Page 96
Notes to the Financial Statements

5.07 Analysis of experience variances and operating assumption changes
			Risk and Savings								International
					Operating									Operating
			Experience		assumption						Experience			assumption
			variances		changes			Total			variances			changes					Total
For the year ended 31 December 2011			£m		£m			£m			£m			£m					£m


Persistency			5		9			14			3			(24)					(21)
Mortality/morbidity			(25)		(7)			(32)			(27)			(55)					(82)
Expenses			-		55			55			(7)			1					(6)
Other
- US capital restructure			15								163
- Bulk purchase annuity data loading			42								-
- UK cost of capital unwind			54								-
- Modelling changes and other experience variances			21								(7)
			132		44			176			156			10					166


			112		101			213			125			(68)					57


2011 Risk and Savings mortality experience variances primarily relates to our group protection business which was impacted by a number of high value claims which predominately occurred during H1 11.

2011 Risk and Savings expense operating assumption changes reflects the change in long term expense assumptions in protection business and changes in the modelled long term unit cost and investment expenses assumptions in non profit savings and pensions.

Adverse International persistency and mortality operating assumptions changes mainly relate to LGA term assurances in the period after the end of the ordinary level premium period when policyholders may choose to continue their policies at reviewable rates.

The domicile of a US captive structure was moved from Bermuda to Vermont which results in an acceleration of the emergence of surplus, and as a consequence increases the present value of the in-force business.

	Risk and Savings			International
		Operating			Operating
	Experience	assumption		Experience	assumption
	variances	changes	Total	variances	changes				Total
For the year ended 31 December 2010	£m	£m	£m	£m	£m				£m


Persistency	-	(16)	(16)	(1)	(14)				(15)
Mortality/morbidity	-	(28)	(28)	(12)	(13)				(25)
Expenses	(1)	1	-	(10)	(1)				(11)
Other
- US capital restructure	30			16
- Bulk purchase annuity data loading	59			-
- UK cost of capital unwind	54			-
- Modelling changes and other experience variances	46			13
	189	(15)	174	29	8				37


	188	(58)	130	6	(20)				(14)


2010 Risk and Savings persistency assumption changes relate to the strengthening of lapse assumptions for individual protection and non profit pensions. 2010 Risk and Savings mortality assumption changes reflect the strengthening of the annuity business mortality assumptions partially offset by favourable individual protection mortality. The 2010 US Capital restructuring programme involved replacing the Triple X financing solution with an internal reinsurance structure.


European Embedded Value							Page 97
Notes to the Financial Statements

5.08 Investment management operating profit
						2011		2010
						£m		£m


Pension funds (managed and segregated)1						172		148
Other non-pension2						25		20
Investment management services for internal funds3						13		11


Total Investment management operating profit						210		179


1. The managed pension funds business within Investment management has been reported on an IFRS basis as is consistent with prior years.
2. Other non-pension includes institutional segregated mandates, private equity and property (both in the UK and overseas). Interest income on shareholder funds of £9m (2010: £11m) has been included within other non-pension operating profit.
3. Investment management services for internal funds excludes £24m (2010: £27m) of profits arising from the provision of investment management services at market referenced rates to the covered business. These are reported on a look through basis within the Risk and Savings covered business on an EEV basis.

5.09 International operating profit
	2011	2010
	£m	£m


USA (LGA)1	242	129


Netherlands (LGN)2	6	52
France (LGF)	2	(9)


Total Europe operating profit	8	43
Other3	(8)	(9)


Total International operating profit	242	163


1. The significant increase in LGA operating profit reflects the improved new business contribution and the impact of the captive reinsurance structure, which was moved from Bermuda to Vermont during 2011.
2. The reduction in LGN operating profit reflects one-off modelling assumption changes in 2010, not repeated in 2011.
3. Other includes our joint venture operations in Egypt, the Gulf, India and business unit costs of £5m (2010: £5m) allocated to the International segment.

5.10 Group capital and financing operating profit1
	2011		2010
	£m		£m


Investment return	191		187
Interest expense2	(123)		(121)
Investment expenses	(5)		(3)
Unallocated corporate expenses	(11)		(5)
Other	(8)		(4)


Total Group capital and financing operating profit	44		54

Analysed as:
On an EEV basis	157		138
On an IFRS basis	(113)		(84)


1. Group capital and financing represents operating profit on the shareholder assets held within the covered business, reported on an embedded value basis, and operating profit on the shareholder assets held outside the covered business reported on an IFRS basis.
2. Interest expense excludes non recourse financing (see Note 2.14).


European Embedded Value		Page 98
Notes to the Financial Statements

5.11 Variation from longer term investment return
	2011		2010
	£m		£m


Business reported on an EEV basis:
Risk and Savings1	124		103
International	(6)		43
Group capital and financing2	(152)		82


	(34)		228
Business reported on an IFRS basis:
Risk and Savings	-		12
Investment management	(7)		(8)
Group capital and financing2	(70)		(71)


	(111)		161


1. The positive investment variance primarily reflects the annuity business. Contributing factors include: improved asset diversity which increased the risk adjusted yield, for example, sale and leaseback; no defaults in the portfolio; improved asset liability matching, for example, reinvestment into longer duration bonds; more efficient cash management and small one-off benefits from tax and interest rate movements. 2. Group capital and financing investment returns primarily consists of negative debt and equity related investment variance. (See Note 2.06).

5.12 Effect of economic assumption changes
	2011	2010
	£m	£m


Business reported on an EEV basis:
Risk and Savings1	43	252
International2	(64)	40


	(21)	292


1. Primarily reflects the increased value of in-force from the reduction in the risk discount rate from 7.3% to 6.2% partially offset by the lower future expected investment returns.
2. Includes the impact of the increase in risk margin from 3.3% to 3.7%.

5.13 Time value of options and guarantees
											2011				2010
											£m				£m


Risk and Savings1											21				15
International											10				13


											31				28


1. Includes £16m (2010: £10m) relating to UK with-profits business, and £5m (2010: £5m) relating to UK non profit business.


European Embedded Value														Page 99
Notes to the Financial Statements

5.14 Tax
					Profit/		Tax		Profit/			Tax
					(loss)		(exp-		(loss)			(exp-
					before		ense)/		before			ense)/
					tax		credit		tax			credit
					2011		2011		2010			2010
					£m		£m		£m			£m


From continuing operations
Risk					801		(187)		663			(179)
Savings					228		(54)		204			(54)
Investment management					210		(40)		179			(36)
International					242		(85)		163			(54)
Group capital and financing					44		(6)		54			(8)
Investment projects					(56)		15		(39)			11


Operating profit					1,469		(357)		1,224			(320)
Variation from longer term investment return					(111)		87		161			(43)
Effect of economic assumption changes					(21)		11		292			(83)
Property losses attributable to non-controlling interests					(3)		-		-			-
Effect of tax rate changes					-		156		-			33


Profit/(loss) before tax / Tax					1,334		(103)		1,677			(413)


The UK EEV calculations assume a tax basis which reflects the annualised current tax rate of 26.5% and the planned future reductions in corporation tax to 25% from 1 April 2012, 24% from 1 April 2013, and 23% from 1 April 2014 (previously a single tax rate was used: 2010: 27%). The tax rate used for grossing up in the income statement is based on a UK corporation tax rate of 23% (2010: 27%).


European Embedded Value														Page 100
Notes to the Financial Statements

5.15 Earnings per share
(a) Earnings per share
		Tax						Tax
		(exp-						(exp-
	Profit	ense)/	Profit	Per		Profit		ense)/		Profit			Per
	before tax	credit	after tax	share		before tax		credit		after tax			share
	2011	2011	2011	2011		2010		2010		2010			2010
	£m	£m	£m	p		£m		£m		£m			p


Operating profit	1,469	(357)	1,112	19.08		1,224		(320)		904			15.52
Variation from longer term
investment return	(111)	87	(24)	(0.41)		161		(43)		118			2.03
Effect of economic assumption changes	(21)	11	(10)	(0.17)		292		(83)		209			3.59
Effect of tax rate changes	-	156	156	2.67		-		33		33			0.57


Earnings per share based on profit
attributable to equity holders	1,337	(103)	1,234	21.17		1,677		(413)		1,264			21.71

(b) Diluted earnings per share
(i) Based on operating profit after tax

	Profit	Number	Per	Profit	Number	Per
	after tax	of shares1	share	after tax	of shares1	share
	2011	2011	2011	2010	2010	2010
	£m	m	p	£m	m	p


Operating profit after tax	1,112	5,828	19.08	904	5,827	15.52
Net shares under options allocable for no further consideration	-	97	(0.31)	-	79	(0.21)


Diluted earnings per share	1,112	5,925	18.77	904	5,906	15.31

(ii) Based on profit attributable to equity holders of the Company

		Profit		Number		Per		Profit		Number		Per
		after tax		of shares1		share		after tax		of shares1		share
		2011		2011		2011		2010		2010		2010
		£m		m		p		£m		m		p


Profit attributable to equity holders of the Company		1,234		5,828		21.17		1,264		5,827		21.71
Net shares under options allocable for no further consideration		-		97		(0.34)		-		79		(0.30)


Diluted earnings per share		1,234		5,925		20.83		1,264		5,906		21.41


1. Weighted average number of shares.

The number of shares in issue at 31 December 2011 was 5,872,166,893 (31 December 2010: 5,866,669,323).


European Embedded Value													Page 101
Notes to the Financial Statements

5.16 Group embedded value reconciliation
	Covered business
	UK		UK		UK		Total		Inter-		Non-			Total
	free		required		value of		UK		national		covered
	surplus		capital		in-force						business
For the year ended 31 December 2011	£m		£m		£m		£m		£m		£m			£m


At 1 January
Value of in-force business (VIF)	-		-		3,886		3,886		1,015		-			4,901
Shareholder net worth (SNW)	1,395		1,640		-		3,035		748		(954)			2,829


	1,395		1,640		3,886		6,921		1,763		(954)			7,730
Exchange rate movements	-		-		-		-		(4)		3			(1)


	1,395		1,640		3,886		6,921		1,759		(951)			7,729
Operating profit/(loss) for the year:
- New business contribution1	(258)		167		381		290
- Expected return on VIF	-		-		298		298
- Expected transfer from Non profit VIF to SNW2	745		(185)		(560)		-
- With-profits transfer	51		-		(51)		-
- Expected return on SNW	58		67		-		125
Generation of embedded value	596		49		68		713
- Experience variances	(52)		20		108		76
- Operating assumption changes	34		3		41		78
- Development costs	(8)		-		-		(8)
Variances	(26)		23		149		146


Operating profit after tax for the year	570		72		217		859		164		89			1,112
Non-operating profit/(loss) for the year:
- Investment variances	81		-		(47)		34
- Economic assumption changes	(65)		45		53		33
- Effect of UK Budget tax changes	-		-		155		155
Non-operating profit/(loss) for the year:	16		45		161		222		(48)		(55)			119


Profit for the year	586		117		378		1,081		116		34			1,231
Capital movements3	-		-		-		-		(262)		262			-
Intra-group distributions4	(437)		-		-		(437)		(82)		519			-
Dividends to equity holders of the Company	-		-		-		-		-		(298)			(298)
Net movements in employee share schemes	-		-		-		-		-		4			4
Loss attributable to non-controlling interests	-		-		-		-		-		3			3
Transfer to non-covered business5	(19)		-		-		(19)		-		19			-
Other reserve movements including pension deficit	(64)		-		(17)		(81)		-		20			(61)


Embedded value	1,461		1,757		4,247		7,465		1,531		(388)			8,608


Represented by:
- Non profit					3,808
- With-profits					439


Value of in-force business	-		-		4,247		4,247		1,130		-			5,377
Shareholder net worth	1,461		1,757		-		3,218		401		(388)			3,231


1. The free surplus reduction of £258m to finance new business includes £94m IFRS new business strain and £167m additional required capital. Other items have a net negative impact of £3m.
2. The increase in free surplus of £745m from the expected transfer from the in-force non profit business includes £560m of IFRS operational cash generation and a £185m reduction in required capital.
3. The capital movement of £262m primarily reflects the capital repayment from LGA in respect of Potomac securities of £271m.
4. UK intra-group distributions reflect a £500m dividend paid from Society to Group and dividends of £20m paid to Society from subsidiaries (primarily Nationwide Life). Dividends of $57m from LGA, €50m from LGN and €2m from LGF were also paid to the group.
5. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.



European Embedded Value							Page 102
Notes to the Financial Statements

5.16 Group embedded value reconciliation (continued)
	Covered business
	UK	UK	UK	Total	Interna-	Non-		Total
	free	required	value of	UK	tional	covered
	surplus	capital	in-force			business
For the year ended 31 December 2010	£m	£m	£m	£m	£m	£m		£m


At 1 January
Value of in-force business (VIF)	-	-	3,679	3,679	928	-		4,607
Shareholder net worth (SNW)	1,067	1,521	-	2,588	518	(1,018)		2,088


	1,067	1,521	3,679	6,267	1,446	(1,018)		6,695
Exchange rate movements	-	-	-	-	7	(12)		(5)


	1,067	1,521	3,679	6,267	1,453	(1,030)		6,690
Operating profit/(loss) for the year:
- New business contribution1	(258)	178	323	243
- Expected return on VIF	-	-	297	297
- Expected transfer from Non profit VIF to SNW2	688	(166)	(522)	-
- With-profits transfer	46	-	(46)	-
- Expected return on SNW	45	72	-	117
Generation of embedded value	521	84	52	657
- Experience variances	121	11	(7)	125
- Operating assumption changes	(14)	1	(28)	(41)
- Development costs	(11)	-	-	(11)
Variances	96	12	(35)	73


Operating profit after tax for the year	617	96	17	730	117	57		904
Non-operating profit/(loss) for the year:
- Investment variances	95	49	(6)	138
- Economic assumption changes	-	-	184	184
- Effect of UK Budget tax changes	-	-	33	33
Non-operating profit/(loss) for the year:	95	49	211	355	53	(48)		360


Profit for the year	712	145	228	1,085	170	9		1,264
Capital movements3	-	-	-	-	184	(184)		-
Intra-group distributions4	(207)	-	-	(207)	(44)	251		-
Dividends to equity holders of the Company	-	-	-	-	-	(238)		(238)
Net movements in employee share schemes	-	-	-	-	-	17		17
Transfer to non-covered business5	(19)	-	-	(19)	-	19		-
Other reserve movements including pension deficit6	(158)	(26)	(21)	(205)	-	202		(3)


Embedded value	1,395	1,640	3,886	6,921	1,763	(954)		7,730


Represented by:
- Non profit			3,372
- With-profits			514


Value of in-force business	-	-	3,886	3,886	1,015	-		4,901
Shareholder net worth	1,395	1,640	-	3,035	748	(954)		2,829


1. The free surplus reduction of £258m to finance new business includes £80m IFRS new business strain and £178m additional required capital.
2. The increase in free surplus of £688m from the expected transfer from the in-force non profit business includes £522m of IFRS operational cash generation and a £166m reduction in required capital.
3. The capital movement of £184m reflects the capital contribution made to LGA to enable the repurchase of Potomac securities.
4. UK intra-group distributions reflect a £300m dividend paid from Society to Group and dividends of £93m paid to Society from subsidiaries (primarily Nationwide Life). Dividends of $53m from LGA, €10m from LGN and €2m from LGF were also paid to the group.
5. The transfer to non-covered business represents the IFRS profits arising in the period from the provisions of investment management services by Legal & General Investment Management to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
6. Other reserve movements primarily comprise the transfer from the covered business of Nationwide Life following the Part VII transfer of the majority of the Insurance business in 2009.


European Embedded Value							Page 103
Notes to the Financial Statements

5.17 Analysis of shareholders' equity
				Invest-		Group
				ment		capital
			Risk and	manage-	Inter-	and
			Savings	ment	national	financing		Total
As at 31 December 2011			£m	£m	£m	£m		£m


Analysed as:
IFRS basis shareholders' equity1			309	351	1,407	3,133		5,200
Additional retained profit/(loss) on an EEV basis			4,247	-	163	(1,002)		3,408


Shareholders' equity on an EEV basis			4,556	351	1,570	2,131		8,608


Comprising:
Business reported on an IFRS basis			309	351	39	(1,087)		(388)

Business reported on an EEV basis:
Shareholder net worth
- Free surplus2					148	1,461		1,609
- Required capital to cover solvency margin					253	1,757		2,010
Value of in-force
- Value of in-force business			4,620		1,211			5,831
- Cost of capital			(373)		(81)			(454)




				Invest-		Group
				ment		capital
			Risk and	manage-	Inter-	and
			Savings	ment	national	financing		Total
As at 31 December 2010			£m	£m	£m	£m		£m


Analysed as:
IFRS basis shareholders' equity1			265	324	1,664	2,574		4,827
Additional retained profit/(loss) on an EEV basis			3,886	-	136	(1,119)		2,903


Shareholders' equity on an EEV basis			4,151	324	1,800	1,455		7,730


Comprising:
Business reported on an IFRS basis			265	324	37	(1,580)		(954)

Business reported on an EEV basis:
Shareholder net worth
- Free surplus2					501	1,395		1,896
- Required capital to cover solvency margin					247	1,640		1,887
Value of in-force
- Value of in-force business			4,220		1,090			5,310
- Cost of capital			(334)		(75)			(409)


1. 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 the Group capital and financing segment.
2. Free surplus is the value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date.

Further analysis of shareholders' equity is included in Note 5.18.


European Embedded Value							Page 104
Notes to the Financial Statements

5.18 Segmental analysis of shareholders' equity
		Covered	Other		Covered	Other
		business	business		business	business
		EEV	IFRS		EEV	IFRS
		basis	basis	Total	basis	basis		Total
		2011	2011	2011	2010	2010		2010
		£m	£m	£m	£m	£m		£m


Risk
- Risk reported on an EEV basis		2,995	-	2,995	2,563	-		2,563
- General insurance		-	148	148	-	120		120
- Other		-	6	6	-	3		3


Total Risk		2,995	154	3,149	2,563	123		2,686



Savings
- Savings reported on an EEV basis		1,252	-	1,252	1,323	-		1,323
- Savings investments		-	136	136	-	121		121
- Other		-	19	19	-	21		21


Total Savings		1,252	155	1,407	1,323	142		1,465



Investment management		-	351	351	-	324		324



International
- USA (LGA)		1,062	-	1,062	1,220	-		1,220
- Netherlands (LGN)		271	-	271	335	-		335
- France (LGF)		198	-	198	208	-		208
- Emerging markets		-	39	39	-	37		37


Total International		1,531	39	1,570	1,763	37		1,800



Group capital and financing		3,218	(1,087)	2,131	3,035	(1,580)		1,455


		8,996	(388)	8,608	8,684	(954)		7,730

5.19 Reconciliation of shareholder net worth
			UK		UK
			covered		covered
			business	Total	business		Total
			2011	2011	2010		2010
			£m	£m	£m		£m


SNW of long term operations (IFRS basis)			4,209	5,588	4,154		5,781
Other liabilities (IFRS basis)			-	(388)	-		(954)


Shareholders' equity on the IFRS basis			4,209	5,200	4,154		4,827
Purchased interest in long term business			(76)	(77)	(86)		(91)
Deferred acquisition costs/deferred income liabilities			(252)	(1,291)	(253)		(1,211)
Contingent loan1			(210)	(210)	(551)		(551)
Deferred tax2			(235)	163	(238)		85
Other3			(218)	(554)	9		(230)


Shareholder net worth on the EEV basis			3,218	3,231	3,035		2,829


1. On an EEV basis the contingent loan (between Society and LGPL) is modelled within the VIF. On an IFRS basis the contingent loan asset is included within the Group capital and financing net assets. 2. Deferred tax represents all tax which is expected to be paid under current legislation. 3. Other in the UK covered business relates primarily to the different treatment of annuities and non profit pension results under EEV compared with IFRS. Other total business also includes the different treatment of the LGA Triple X securitisation on an EEV and IFRS basis.


European Embedded Value						Page 105
Notes to the Financial Statements

5.20 Sensitivities
In accordance with the guidance issued by the European Insurance CFO Forum in October 2005 the table below shows the effect of alternative assumptions on the long term embedded value and new business contribution.

Effect on embedded value as at 31 December 2011

		1%	1%				1%
		lower	higher	1%	1%		higher
	As	risk	risk	lower	higher		equity/
	pub-	discount	discount	interest	interest		property
	lished	rate	rate	rate	rate		yields
	£m	£m	£m	£m	£m		£m


UK	7,465	515	(444)	204	(202)		121
International	1,531	147	(119)	37	(39)		5


Total covered business	8,996	662	(563)	241	(241)		126




					5%		5%
		10%	10%		lower		lower
		lower	lower	10%	mortality		mortality
	As	equity/	main-	lower	(UK		(other
	pub-	property	tenance	lapse	annu-		busi-
	lished	values	expenses	rates	ities)		ness)
	£m	£m	£m	£m	£m		£m


UK	7,465	(233)	83	87	(220)		50
International	1,531	(8)	21	10	n/a		150


Total covered business	8,996	(241)	104	97	(220)		200



Effect on new business contribution for the year

		1%	1%				1%
		lower	higher	1%	1%		higher
	As	risk	risk	lower	higher		equity/
	pub-	discount	discount	interest	interest		property
	lished	rate	rate	rate	rate		yields
	£m	£m	£m	£m	£m		£m


UK	376	54	(46)	21	(13)		11
International	65	15	(12)	3	(3)		-


Total covered business	441	69	(58)	24	(16)		11




					5%		5%
		10%	10%		lower		lower
		lower	lower	10%	mortality		mortality
	As	equity/	main-	lower	(UK		(other
	pub-	property	tenance	lapse	annu-		busi-
	lished	values	expenses	rates	ities)		ness)
	£m	£m	£m	£m	£m		£m


UK	376	(2)	11	9	(11)		4
International	65	-	2	1	n/a		18


Total covered business	441	(2)	13	10	(11)		22


Opposite sensitivities are broadly symmetrical.

Sensitivity to changes in assumptions may not be linear, and as such, they should not be extrapolated to changes of a much larger order. A 2% higher risk discount rate would result in a £824m negative impact on embedded value and a £90m negative impact on new business contribution for the year.

European Embedded Value

Page 106

Notes to the Financial Statements

5.21 Assumptions

UK assumptions

The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to the portfolio yield on the relevant backing assets held at market value at the end of the reporting period. The calculated return takes account of derivatives and other credit instruments in the investment portfolio. Indicative yields on the portfolio, excluding annuities within Legal & General Pensions Limited (LGPL), but after allowance for long term default risk, are shown below.

For LGPL annuities, separate returns are calculated for new and existing business. Indicative combined yields, after allowance for long term default risk and the following additional assumptions, are also shown below. These additional assumptions are:

i. Where cash balances are held at the reporting date in excess of, or below strategic investment guidelines, then it is assumed that these cash balances are immediately invested or disinvested at current yields.

ii. Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the proceeds reinvested in corporate bonds with a redemption yield 0.70% p.a. (0.70% p.a. at 31 December 2010) greater than the swap rate at that time (i.e. the long term credit rate).

iii. Where reinvestment or disinvestment is necessary to rebalance the asset portfolio in line with projected outgo, this is also assumed to take place at the long term credit rate above the swap rate at that time.

The returns on fixed and index-linked securities are calculated net of an allowance for default risk which takes account of the credit rating, outstanding term of the securities, and increase in the expectation of credit defaults over the economic cycle. The allowance for corporate securities expressed as a level rate deduction from the expected returns for annuities was 26bps at 31 December 2011 (29bps at 31 December 2010).

Economic assumptions

As at 31 December	2011	2010	2009
	% p.a.	% p.a.	% p.a.

Equity risk premium	3.3	3.5	3.5
Property risk premium	2.0	2.0	2.0

Investment return (excluding annuities in LGPL)
- Gilts:
- Fixed interest	1.8 - 2.5	3.4 - 4.0	4.0
- RPI linked	2.6	4.1	4.5
- Non gilts:
- Fixed interest	3.0 - 4.6	3.6 - 5.0	4.4 - 6.2
- Equities	5.8	7.5	8.0
- Property	4.5	6.0	6.5

Long-term rate of return on non profit annuities in LGPL	5.0	5.5	6.1

Risk free rate1	2.5	4.0	4.5
Risk margin	3.7	3.3	3.5
Risk discount rate (net of tax)	6.2	7.3	8.0

Inflation
- Expenses/earnings	3.5	4.1	4.6
- Indexation	3.0	3.6	3.6

1. The risk free rate is the gross redemption yield on the 15 year gilt index (15 year gilt index for 31 December 2010; 20 year gilt index for 31 December 2009).

European Embedded Value

Page 107

Notes to the Financial Statements

5.21 Assumptions (continued)

UK covered business

i. Assets are valued at market value.

ii. Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders' portion of the with-profits business. The proportion of profits derived from with-profits business allocated to shareholders has been assumed to be 10% throughout.

iii. The value of in-force business reflects the cost, including administration expenses, of providing for benefit enhancement or compensation in relation to certain products

iv. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses (excluding the development costs referred to below). These are normally reviewed annually.

An allowance is made for future improvements in annuitant mortality based on experience and externally published data. Male annuitant mortality is assumed to improve in accordance with 100% of CMI2009 Working Paper 41, with a Long Term Rate of improvement of 1.5% for future experience, and 2.0% for statutory reserving. Female annuitant mortality is assumed to improve in accordance with 100% of CMI2009, with a Long Term Rate of improvement of 1.0% for future experience and 1.5% for statutory reserving. In each case, the annual improvement is assumed to reduce linearly after age 85 to zero at age 120.

On this basis, the best estimate of the expectation of life for a new 65 year old Male CPA annuitant is 24.2 years (31 December 2010: 24.3 years). The expectation of life on the regulatory reserving basis is 25.8 years (31 December 2010: 26.0 years).

v. Development costs relate to investment in strategic systems and development capability that are charged to the covered business. Projects charged to the non-covered business are included within Investment projects in Group capital and financing.

International

vi. Key assumptions:

As at 31 December	2011	2010	2009
	% p.a.	% p.a.	% p.a.
LGA
Reinvestment rate	4.2	5.5	5.1
Risk free rate1 Risk margin	1.9 3.7	3.3 3.3	3.9 3.5
Risk discount rate (net of tax)	5.6	6.6	7.4

Europe
Risk free rate1	2.6	3.2	3.6
Risk margin	3.7	3.3	3.5
Risk discount rate (net of tax)	6.3	6.5	7.1

1. The LGA risk free rate is the 10 year US Treasury effective yield (10 year US Treasury effective yield for 31 December 2010 and 2009). The Europe risk free rate is the 10 year ECB AAA-rated euro area central government bond par yield (10 year ECB AAA-rated euro area central government bond par yield for 31 December 2010 and 2009).

vii. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses.

Tax

viii. The profits on the covered business, except for the profits on the Society shareholder capital held outside the long term fund, are calculated on an after tax basis and are grossed up by the notional attributed tax rate for presentation in the income statement. For the UK, the after tax basis assumes the annualised current tax rate of 26.5% and the subsequent planned future reductions in corporation tax to 25% from 1 April 2012, 24% from 1 April 2013, and 23% from 1 April 2014 (previously a single tax rate was used; 31 December 2010: 27%). The tax rate used for grossing up is the long term corporate tax rate in the territory concerned, which for the UK is 23% (31 December 2010: 27%) taking into account the expected further rate reductions to 23% by 1 April 2014. The profits on the Society shareholder capital held outside the long term fund are calculated before tax and therefore tax is calculated on an actual basis.

European Embedded Value

Page 108

Notes to the Financial Statements

5.21 Assumptions (continued)

Stochastic calculations

ix. The time value of options and guarantees is calculated using economic and non-economic assumptions consistent with those used for the deterministic embedded value calculations.

This section describes the models used to generate future investment simulations, and gives some sample statistics for the simulations used. A single model has been used for UK and international business, with different economic assumptions for each territory.

Government nominal interest rates are generated using a LIBOR Market Model projecting full yield curves at annual intervals. The model provides a good fit to the initial yield curve.

The total annual returns on equities and property are calculated as the return on 1 year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. Corporate bonds are modelled separately by credit rating using stochastic credit spreads over the risk free rates, transition matrices and default recovery rates. The real yield curve model assumes that the real short rate follows a mean-reverting process subject to two normally distributed random shocks.

Asset classes

The significant asset classes are:

- UK with-profits business - equities, property and fixed rate bonds of various durations;

- UK annuity business - fixed rate and index-linked bonds of various durations; and

- International business - fixed rate bonds of various durations.

Summary statistics:

The following table sets out means and standard deviations (StDev) of future returns as at 31 December 2011 for the most significant asset classes. Correlations between asset classes have been set based on an internal assessment of historical data.

	10-year return		20-year return
	Mean1	StDev2	Mean1	StDev2
UK Business (Sterling)
Government bonds	2.2%	3.1%	3.3%	3.3%
Corporate bonds	4.5%	3.6%	5.1%	3.8%
Property (excess returns)	2.0%	15.0%	2.1%	15.2%
Equities (excess returns)	3.3%	20.1%	3.4%	20.6%

European Business (Euro)
Long Government bonds3	2.7%	3.8%	3.2%	3.8%
Short Government bonds4	2.7%	3.2%	3.2%	5.8%

US Business (US Dollar)
Long Government bonds3	2.0%	4.3%	3.1%	4.5%

1. For asset classes other than for equities and property, mean returns are calculated as the mean return in excess of 1 year government bonds plus the mean return on 1 year government bonds. Mean excess returns for the equities and property are calculated as the mean return in excess of 1 year government bonds. Each mean return is derived by calculating the accumulated value of a unit asset invested to time n years for each simulation, averaging the resultant values across all simulations, then calculating the equivalent annual return required to give this average accumulation (by taking the nth root of the average accumulation and deducting 1).

2. Standard deviations are calculated by accumulating a unit investment for n years in each simulation, taking the natural logarithm of the result, calculating the variance of this statistic, dividing by n and taking the square root. Equities and property values use excess returns. The results are comparable to implied volatilities quoted in investment markets.

3. Long term bonds are defined to be 10 year par-coupon bonds.

4. Short term bonds are defined to be 1 year duration bonds.

Risk discount rate:

The risk discount rate is scenario dependent within the stochastic projection. It is calculated by applying the deterministic risk margin to the risk free rate in each stochastic projection.

European Embedded Value

Page 109

Notes to the Financial Statements

5.21 Assumptions (continued)

Sensitivity calculations

x. A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the embedded value and the new business contribution to changes in key assumptions. Relevant details relating to each sensitivity are:

·; 1% variation in discount rate - a one percentage point increase/decrease in the risk margin has been assumed in each case (for example a 1% increase in the risk margin would result in a 4.7% risk margin).

·; 1% variation in interest rate environment - a one percentage point increased/decreased parallel shift in the risk free curve with consequential impacts on fixed asset market values, investment return assumptions, risk discount rate, including consequential changes to valuation bases.

·; 1% higher equity/property yields - a one percentage point increase in the assumed equity/property investment returns, excluding any consequential changes, for example, to risk discount rates or valuation bases, has been assumed in each case (for example a 1% increase in equity returns would increase assumed total equity returns from 5.8% to 6.8%).

·; 10% lower equity/property market values - an immediate 10% reduction in equity and property asset values.

·; 10% lower maintenance expenses, excluding any consequential changes, for example, to valuation expense bases or potentially reviewable policy fees (a 10% decrease on a base assumption of £10 per annum would result in an £9 per annum expense assumption).

·; 10% lower assumed persistency experience rates, excluding any consequential changes to valuation bases, incorporating a 10% decrease in lapse, surrender and premium cessation assumptions (a 10% decrease on a base assumption of 7% would result in a 6.3% lapse assumption).

·; 5% lower mortality and morbidity rates, excluding any consequential changes to valuation bases but including assumed product repricing action where appropriate (for example if base experienced mortality is 90% of a standard mortality table then, for this sensitivity, the assumption is set to 85.5% of the standard table).

The sensitivities for covered business allow for any material changes to the cost of financial options and guarantees but do not allow for any changes to reserving bases or capital requirements within the sensitivity calculation, unless indicated otherwise above.

European Embedded Value

Page 110

Notes to the Financial Statements

5.22 Methodology

Basis of preparation

The supplementary financial statements have been prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 by the European Insurance CFO Forum.

The supplementary financial statements have been audited by PricewaterhouseCoopers LLP and prepared with assistance from our consulting actuaries; Towers Watson in the UK and Milliman in the USA.

Covered business

The Group uses EEV methodology to value individual and group life assurance, pensions and annuity business written in the UK, Continental Europe and the US. The UK covered business also includes non-insured self invested personal pension (SIPP) business.

The managed pension funds business has been excluded from covered business and is reported on an IFRS basis.

All other businesses are accounted for on the IFRS basis adopted in the primary financial statements.

There is no distinction made between insurance and investment contracts in our covered business as there is under IFRS.

Description of methodology

The objective of EEV is to provide shareholders with realistic information on the financial position and current performance of the Group.

The methodology requires assets of an insurance company, as reported in the primary financial statements, to be attributed between those supporting the covered business and the remainder. The method accounts for assets in the covered business on an EEV basis and the remainder of the Group's assets on the IFRS basis adopted in the primary financial statements.

The EEV methodology recognises profit from the covered business as the total of:

i. cash transfers during the relevant period from the covered business to the remainder of the Group's assets; and

ii. the movement in the present value of future distributable profits to shareholders arising from the covered business over the relevant reporting period.

Embedded value

Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the shareholders' equity of other businesses, less the value included for purchased interests in long term business.

The embedded value is the sum of the shareholder net worth (SNW) and the value of the in-force business (VIF). SNW is defined as those amounts, within covered business (both within the long term fund and held outside the long term fund but used to support long term business), which are regarded either as required capital or which represent free surplus.

The VIF is the present value of future shareholder profits arising from the covered business, projected using best estimate assumptions, less an appropriate deduction for the cost of holding the required level of capital and the time value of financial options and guarantees (FOGs).

Service companies

All services relating to the UK covered business are charged on a cost recovery basis, with the exception of investment management services provided to Legal & General Pensions Limited (LGPL) and to Legal & General Assurance Society Limited (Society). Profits arising on the provision of these services are valued on a look through basis.

As the EEV methodology incorporates the future capitalised cost of these internal investment management services, the equivalent IFRS profits have been removed from the Investment management segment and are instead included in the results of the Risk and Savings segments on an EEV basis.

The capitalised value of future profits emerging from internal investment management services are therefore included in the embedded value and new business contribution calculations for the Risk and Savings segments. However, the historical profits which have emerged continue to be reported in the shareholders' equity of the Investment management segment on an IFRS basis. Since the look through into service companies includes only future profits and losses, current intra-group profits or losses must be eliminated from the closing embedded value and in order to reconcile the profits arising in the financial period within each segment with the net assets on the opening and closing balance sheet, a transfer of IFRS profits for the period from the UK SNW is deemed to occur.

European Embedded Value

Page 111

Notes to the Financial Statements

5.22 Methodology (continued)

New business

New business premiums reflect income arising from the sale of new contracts during the reporting period and any changes to existing contracts, which were not anticipated at the outset of the contract.

In-force business comprises previously written single premium, regular premium and recurrent single premium contracts. Department of Work and Pensions rebates have not been treated as recurring and are included in single premium new business when received. Longevity insurance fixed leg payments have been treated as regular premiums.

New business contribution arising from the new business premiums written during the reporting period has been calculated on the same economic and operating assumptions used in the embedded value at the end of the financial period. This has then been rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.

The present value of future new business premiums (PVNBP) has been calculated and expressed at the point of sale. The PVNBP is equivalent to the total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end of the financial period, with the exception of longevity insurance. Longevity insurance product comprises the exchange of a stream of fixed leg payments for a stream of floating payments, with the value of the income stream being the difference between the two legs. For longevity insurance, PVNBP is not an appropriate measure of expected income stream and as such, the PVNBP has not been applied for this product.

The new business margin is defined as new business contribution at the end of the reporting period divided by the PVNBP, with the exception of longevity insurance. The new business margin has not been applied to longevity insurance for the reason above. The premium volumes and projection assumptions used to calculate the PVNBP are the same as those used to calculate new business contribution.

Projection assumptions

Cash flow projections are determined using best estimate assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on conditions at the end of the financial period. Future investment returns are projected by one of two methods. The first method is based on an assumed investment return attributed to assets at their market value. The second, which is used by LGA, where the investments of that subsidiary are substantially all fixed interest, projects the cash flows from the current portfolio of assets and assumes an investment return on reinvestment of surplus cash flows. The assumed discount and inflation rates are consistent with the investment return assumptions.

Detailed projection assumptions including mortality, morbidity, persistency and expenses reflect recent operating experience and are normally reviewed annually. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favourable changes in operating experience are not anticipated until the improvement in experience has been observed.

All costs relating to the covered business, whether incurred in the covered business or elsewhere in the Group, are allocated to that business. The expense assumptions used for the cash flow projections therefore include the full cost of servicing this business.

Tax

The projections take into account all tax which is expected to be paid, based on best estimate assumptions, applying current legislation and practice together with known future changes. No account has been taken of the proposals for regime change for life insurance companies in 2013 which are still in draft form.

Allowance for risk

Aggregate risks within the covered business are allowed for through the following principal mechanisms:

i. setting required capital levels with reference to both the Group's internal risk based capital models, and an assessment of the strength of regulatory reserves in the covered business;

ii. allowing explicitly for the time value of financial options and guarantees within the Group's products; and

iii. setting risk discount rates by deriving a Group level risk margin to be applied consistently to local risk free rates.

European Embedded Value

Page 112

Notes to the Financial Statements

5.22 Methodology (continued)

Required capital and free surplus

Regulatory capital for the Risk and Savings businesses is provided by assets backing the with-profits business or by the SNW. The SNW comprises all shareholders' capital within Society, including those funds retained within the long term fund and the excess assets in LGPL (collectively Society shareholder capital).

Society shareholder capital is either required to cover EU solvency margin or is free surplus as its distribution to shareholders is not restricted.

For UK with-profits business, the required capital is covered by the surplus within the with-profits part of the fund and no effect is attributed to shareholders except for the burn-through cost, which is described later. This treatment is consistent with the Principles and Practices of Financial Management for this part of the fund.

For UK non profit business, the required capital will be maintained at no less than the level of the EU minimum solvency requirement. This level, together with the margins for adverse deviation in the regulatory reserves, is, in aggregate, in excess of internal capital targets assessed in conjunction with the Individual Capital Assessment (ICA) and the with-profits support account.

The initial strains relating to new non profit business, together with the related EU solvency margin, are supported by releases from existing non profit business and the Society shareholder capital. As a consequence, the writing of new business defers the release of capital to free surplus. The cost of holding required capital is defined as the difference between the value of the required capital and the present value of future releases of that capital. For new business, the cost of capital is taken as the difference in the value of that capital assuming it was available for release immediately and the present value of the future releases of that capital. As the investment return, net of tax, on that capital is less than the risk discount rate, there is a resulting cost of capital which is reflected in the value of new business.

For LGA, the Company Action Level (CAL) of capital has been treated as required capital for modelling purposes. The CAL is the regulatory capital level at which the company would have to take prescribed action, such as submission of plans to the State insurance regulator, but would be able to continue operating on the existing basis. The CAL is currently twice the level of capital at which the regulator is permitted to take control of the business.

For LGN, required capital has been set at 100% of EU minimum solvency margin for all products without FOGs. For those products with FOGs, capital of between 100% and 212% of the EU minimum solvency margin has been used. The level of capital has been determined using risk based capital techniques.

For LGF, 100% of EU minimum solvency margin has been used for EV modelling purposes for all products both with and without FOGs. The level of capital has been determined using risk based capital techniques.

The contribution from new business for our International businesses reflects an appropriate allowance for the cost of holding the required capital.

Financial options and guarantees

Under the EEV Principles an allowance for time value of FOGs is required where a financial option exists which is exercisable at the discretion of the policyholder. These types of option principally arise within the with-profits part of the fund and their time value is recognised within the with-profits burn-through cost described below. Additional financial options for non profit business exist only for a small amount of deferred annuity business where guaranteed early retirement and cash commutation terms apply when the policyholders choose their actual retirement date.

Further financial guarantees exist for non profit business, in relation to index-linked annuities where capped or collared restrictions apply. Due to the nature of these restrictions and the manner in which they vary depending on the prevailing inflation conditions, they are also treated as FOGs and a time value cost recognised accordingly.

The time value of FOGs has been calculated stochastically using a large number of real world economic scenarios derived from assumptions consistent with the deterministic EEV assumptions and allowing for appropriate management actions where applicable. The management action primarily relates to the setting of bonus rates. Future regular and terminal bonuses on participating business within the projections are set in a manner consistent with expected future returns available on assets deemed to back the policies within the stochastic scenarios.

European Embedded Value

Page 113

Notes to the Financial Statements

5.22 Methodology (continued)

In recognising the residual value of any projected surplus assets within the with-profits part of the fund in the deterministic projection, it is assumed that terminal bonuses are increased to exhaust all of the assets in the part of the fund over the future lifetime of the in-force with-profits policies. However, under stochastic modelling, there may be some extreme economic scenarios when the total projected assets within the with-profits part of the fund are insufficient to pay all projected policyholder claims and associated costs. The average additional shareholder cost arising from this shortfall has been included in the time value cost of options and guarantees and is referred to as the with-profits burn-through cost.

Economic scenarios have been used to assess the time value of the financial guarantees for non profit business by using the inflation rate generated in each scenario. The inflation rate used to project index-linked annuities will be constrained in certain real world scenarios, for example, where negative inflation occurs but the annuity payments do not reduce below pre-existing levels. The time value cost of FOGs allows for the projected average cost of these constrained payments for the index-linked annuities. It also allows for the small additional cost of the guaranteed early retirement and cash commutation terms for the minority of deferred annuity business where such guarantees have been written.

LGA FOGs relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is based on the accumulated value of the contract including accrued interest. The crediting rates are discretionary but related to the accounting income for the amortising bond portfolio. The majority of the guaranteed minimum crediting rates are between 3% and 4%. The assets backing these contracts are invested in US Dollar denominated fixed interest securities.

LGN separately provides for two types of guarantees: interest rate guarantees and maturity guarantees. Certain contracts provide an interest rate guarantee where there is a minimum crediting rate based on the higher of 1-year Euribor and the policy guarantee rate. This guarantee applies on a monthly basis. Certain unit linked contracts provide a guaranteed minimum value at maturity where the maturity amount is the higher of the fund value and a guarantee amount. The fund values for both these contracts are invested in Euro denominated fixed interest securities.

For LGF, FOGs which have been separately provided for relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the contract including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios plus income and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed surrender values. Local statutory accounting rules require the establishment of a specific liability when the accounting income for a company is less than 125% of the guaranteed minimum credited returns, although this has never been required. In general, the guaranteed annual bonus rates are between 0% and 4.5%.

Risk free rate

The risk free rate is set to reflect both the pattern of the emerging profits under EEV and the relevant duration of the liabilities where backing assets reflect this assumption (e.g. equity returns). For the UK, it is set by reference to the gross redemption yield on the 15 year gilt index. For LGA, the risk free rate is the 10 year US Treasury effective yield, while the 10 year ECB AAA-rated Euro area central government bond par yield is used for LGN and LGF.

Risk discount rate

The risk discount rate (RDR) is a combination of the risk free rate and a risk margin, which reflects the residual risks inherent in the Group's covered businesses, after taking account of prudential margins in the statutory provisions, the required capital and the specific allowance for FOGs.

The risk margin has been determined based on an assessment of the Group's weighted average cost of capital (WACC). This assessment incorporates a beta for the Group, which measures the correlation of movements in the Group's share price to movements in a relevant index. Beta values therefore allow for the market's assessment of the risks inherent in the business relative to other companies in the chosen index.

The WACC is derived from the Group's cost of equity and debt, and the proportion of equity to debt in the Group's capital structure measured using market values. Each of these three parameters is forward looking, although informed by historic information. The cost of equity is calculated as the risk free rate plus the equity risk premium for the chosen index multiplied by the Company's beta. Forward-looking or adjusted betas make allowance for the observed tendency for betas to revert to 1 and therefore a weighted average of the historic beta and 1 tends to be a better estimate of the Company's beta for the future period. We have computed the WACC using an arithmetical average of forward-looking betas against the FTSE 100 index.

European Embedded Value

Page 114

Notes to the Financial Statements

5.22 Methodology (continued)

The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and subordinated long term debt. All debt interest attracts tax relief at a rate of 23%.

Whilst the WACC approach is a relatively simple and transparent calculation to apply, subjectivity remains within a number of the assumptions. Management believes that the chosen margin, together with the levels of required capital, the inherent strength of the Group's regulatory reserves and the explicit deduction for the cost of options and guarantees, is appropriate to reflect the risks within the covered business.

Analysis of profit

Operating profit is identified at a level which reflects an assumed longer term level of investment return.

The contribution to operating profit in a period is attributed to four sources:

i. new business;

ii. the management of in-force business;

iii. development costs; and

iv. return on shareholder net worth.

Further profit contributions arise from actual investment return differing from the assumed long term investment return (investment return variances), and from the effect of economic assumption changes.

The contribution from new business represents the value recognised at the end of each period from new business written in that period, after allowing for the actual cost of acquiring the business and of establishing the required technical provisions and reserves and after making allowance for the cost of capital. New business contributions are calculated using closing assumptions.

The contribution from in-force business is calculated using opening assumptions and comprises:

i. expected return - the discount earned from the value of business in-force at the start of the year;

ii. experience variances - the variance in the actual experience over the reporting period from that assumed in the value of business in-force as at the start of the year; and

iii. operating assumption changes - the effects of changes in future assumptions, other than changes in economic assumptions from those used in valuing the business at the start of the year. These changes are made prospectively from the end of the year.

Development costs relate to investment in strategic systems and development capability.

The contribution from shareholder net worth comprises the increase in embedded value based on assumptions at the start of the year in respect of the expected investment return on the Society shareholder capital.

Further profit contributions arise from investment return variances and the effect of economic assumption changes.

Investment return variances represent the effect of actual investment performance and changes to investment policy on SNW and VIF business from that assumed at the beginning of the period.

Economic assumption changes comprise the effect of changes in economic variables on SNW and VIF business from that assumed at the beginning of the period, which are beyond the control of management, including associated changes to valuation bases to the extent that they are reflected in revised assumptions.



New Business				Page 115
6.01 Investment management new business
			Increase/
	2011	2010	(decrease)
	£m	£m	%


Managed pension funds1
Pooled funds	22,094	19,898	11
Segregated funds	4,676	5,756	(19)


Total managed pension funds	26,770	25,654	4
Other funds2	6,711	8,440	(20)


Total new funds	33,481	34,094	(2)


Attributable to:
Legal & General Investment Management	32,844	32,642	1
Legal & General Retail Investments	637	1,452	(56)


LGIM net flows	2,983	6,564	(55)


1. New monies from pension fund clients of Legal & General Assurance (Pension Management) exclude £4.1bn (2010: £5.9bn) held through the year on a temporary basis, generally as part of portfolio reconstructions.
2. Includes segregated property, property partnerships, private equity partnerships and institutional clients funds managed by Legal & General Investment Management and institutional investments in unit trust funds managed by Legal & General Retail Investments. Due to the expected volatility of gross new business inflows into the sterling/euro liquidity funds, these are now excluded from the gross new business figures. This resulted in a reduction of £492m in 2010.

6.02 Investment management new business quarterly progression

	3	3	3	3	3	3	3	3
	months to	months to	months to	months to	months to	months to	months to	months to
	31.12.11	30.09.11	30.06.11	31.03.11	31.12.10	30.09.10	30.06.10	31.03.10
	£m	£m	£m	£m	£m	£m	£m	£m


Managed pension funds1
Pooled funds	4,084	5,219	6,712	6,079	3,569	4,009	4,936	7,384
Segregated funds	973	1,810	255	1,638	490	221	4,777	268


Total managed pension funds	5,057	7,029	6,967	7,717	4,059	4,230	9,713	7,652
Other funds	2,807	331	920	2,653	2,863	1,000	981	3,596


Total new funds	7,864	7,360	7,887	10,370	6,922	5,230	10,694	11,248


Attributable to:
Legal & General Investment
Management	7,741	7,251	7,764	10,088	6,577	4,907	10,305	10,853
Legal & General Retail Investments	123	109	123	282	345	323	389	395


LGIM net flows	(607)	586	1,005	1,999	(1,651)	(50)	4,938	3,327


1. New monies from pension fund clients of Legal & General Assurance (Pension Management) exclude £4.1bn (2010: £5.9bn) held through the year on a temporary basis, generally as part of portfolio reconstructions.

6.03 Legal & General Investment Management new business by investment approach

		2011		2010
		%		%


Indexed equities		44		47
Indexed bonds (including index linked funds and cash)		23		24
Active bonds (including index linked funds and cash)		14		12
Liability driven investments		18		15
Property		1		1
Active equities		-		1


Total		100		100




New Business					Page 116
6.04 Assets under management


	At		At
	2011		2010
	£m		£m


Legal & General Investment Management assets under management	371,211		353,520
Other assets under management1	7,362		11,326


Worldwide assets under management	378,573		364,846



1. Other assets under management comprises retail investments and additional funds managed overseas.



Legal & General Investment Management's assets under management are analysed below:

Represented by
Index tracking funds:
- UK equities	63,228		71,982
- Overseas equities	82,200		85,999
- Fixed interest	37,515		36,496
- Index linked	40,554		33,872
- Cash/deposits	671		188


Total index tracking funds	224,168		228,537
Actively managed funds	88,684		84,207
Liability driven investments	58,359		40,776


	371,211		353,520



By investment approach
Index equities	145,428		157,981
Index bonds (including index linked funds and cash)	78,740		70,556
Active bonds (including index linked funds and cash)	72,355		66,564
Liability driven investments	58,359		40,776
Active equities	7,229		9,137
Property	8,757		8,136
Private equity	343		370


	371,211		353,520



By source of business
Institutional assets under management1 :
- Managed pension funds pooled	205,174		206,400
- Liability driven investments	58,367		40,776
- Other	16,920		16,772
- Managed pension funds segregated	5,136		3,508


Total institutional assets under management	285,597		267,456
UK businesses (life and general insurance funds)	70,630		70,024
UK businesses (unit trusts - excluding life fund investment)	14,984		16,040


	371,211		353,520



1. Excludes institutional investments in unit trust funds.


New Business					Page 117
6.05 Savings net flows

		2011		2010
		£m		£m


Investments		2,490		4,149
Insured		424		476
With-profits		(1,736)		(1,480)


Total Savings net flows		1,178		3,145

6.06 Savings net flows quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.11	30.09.11	30.06.11	31.03.11	31.12.10	30.09.10	30.06.10	31.03.10
	£m	£m	£m	£m	£m	£m	£m	£m


Investments	165	622	804	899	985	1,106	1,123	935
Insured	200	4	107	113	211	163	74	28
With-profits	(381)	(568)	(387)	(400)	(483)	(369)	(290)	(338)


Total Savings net flows	(16)	58	524	612	713	900	907	625





New Business									Page 118
6.07 Worldwide new business

		Annual	Single		Annual	Single
		premiums	premiums	APE	premiums	premiums	APE	Increase/
		2011	2011	2011	2010	2010	2010	(decrease)
		£m	£m	£m	£m	£m	£m	%


Protection
- Individual		131	-	131	118	-	118	11
- Group		46	-	46	57	-	57	(19)


		177	-	177	175	-	175	1
Annuities
- Individual (non profit)		-	1,030	103	-	1,142	114	(10)
- Individual (with-profits)		-	24	2	-	26	3	(33)
- Bulk purchase		-	1,461	146	-	897	90	62


		-	2,515	251	-	2,065	207	21


Longevity insurance1		70	-	70	-	-	-	-


Total Risk		247	2,515	498	175	2,065	382	30



Investments2		68	6,200	688	26	6,169	643	7
Insured business		244	2,015	445	299	1,795	478	(7)
With-profits		69	525	122	71	608	132	(8)


Total Savings		381	8,740	1,255	396	8,572	1,253	-




- USA (LGA)		69	-	69	52	-	52	33
- Netherlands (LGN)		5	95	15	6	124	18	(17)
- France (LGF)		24	232	47	22	237	46	2
- India (26% share)		5	22	7	13	7	14	(50)
- Egypt (55% share)		9	-	9	10	-	10	(10)
- Gulf (50% share)		2	5	2	-	-	-	-


		114	354	149	103	368	140	6
France (LGF) retail investment business		-	46	5	-	60	6	(17)


Total International		114	400	154	103	428	146	5




Total worldwide new business		742	11,655	1,907	674	11,065	1,781	7


1. As announced on 9 January 2012, the Group entered into its first longevity insurance transaction during December 2011.
2. Investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business (see Note 6.01).


New Business									Page 119
6.08 Worldwide new business APE quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.11	30.09.11	30.06.11	31.03.11	31.12.10	30.09.10	30.06.10	31.03.10
	£m	£m	£m	£m	£m	£m	£m	£m


Protection
- Individual	33	33	32	33	30	31	29	28
- Group	7	10	14	15	15	14	14	14


	40	43	46	48	45	45	43	42
Annuities
- Individual (non profit)	21	31	30	21	24	30	33	27
- Individual (with-profits)	-	1	-	1	2	-	1	-
- Bulk purchase	119	3	22	2	36	9	30	15


	140	35	52	24	62	39	64	42


Longevity insurance	70	-	-	-	-	-	-	-


Total Risk	250	78	98	72	107	84	107	84



Investments1	133	184	195	176	157	143	179	164
Insured business	128	97	112	108	106	182	124	66
With-profits	26	25	35	36	29	27	39	37


Total Savings	287	306	342	320	292	352	342	267



- USA (LGA)	19	18	16	16	16	14	13	9
- Netherlands (LGN)	4	3	3	5	5	3	4	6
- France (LGF)	5	6	21	15	8	6	19	13
- India (26% share)	1	2	1	3	3	3	2	6
- Egypt (55% share)	3	3	2	1	2	3	5	-
- Gulf (50% share)	-	1	1	-	-	-	-	-


	32	33	44	40	34	29	43	34
France (LGF) retail investment business	2	1	1	1	1	1	1	3


Total International	34	34	45	41	35	30	44	37




Total worldwide new business	571	418	485	433	434	466	493	388


1. Investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business (see Note 6.01).


New Business									Page 120
6.09 Worldwide new business annual premium quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.11	30.09.11	30.06.11	31.03.11	31.12.10	30.09.10	30.06.10	31.03.10
	£m	£m	£m	£m	£m	£m	£m	£m


Protection
- Individual	33	33	32	33	30	31	29	28
- Group	7	10	14	15	15	14	14	14


	40	43	46	48	45	45	43	42
Annuities
- Individual (non profit)	-	-	-	-	-	-	-	-
- Individual (with-profits)	-	-	-	-	-	-	-	-
- Bulk purchase	-	-	-	-	-	-	-	-




Longevity insurance	70	-	-	-	-	-	-	-


Total Risk	110	43	46	48	45	45	43	42



Investments1	18	20	19	11	7	4	10	5
Insured business	72	51	62	59	47	138	81	33
With-profits	14	16	17	22	17	13	18	23


Total Savings	104	87	98	92	71	155	109	61



- USA (LGA)	19	18	16	16	16	14	13	9
- Netherlands (LGN)	1	2	1	1	1	2	1	2
- France (LGF)	-	-	15	9	2	-	12	8
- India (26% share)	1	1	1	2	2	3	2	6
- Egypt (55% share)	3	3	2	1	2	3	5	-
- Gulf (50% share)	1	-	1	-	-	-	-	-


	25	24	36	29	23	22	33	25
France (LGF) retail investment business	-	-	-	-	-	-	-	-


Total International	25	24	36	29	23	22	33	25




Total worldwide new business	239	154	180	169	139	222	185	128


1. Investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business (see Note 6.01).


New Business									Page 121
6.10 Worldwide new business single premium quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.11	30.09.11	30.06.11	31.03.11	31.12.10	30.09.10	30.06.10	31.03.10
	£m	£m	£m	£m	£m	£m	£m	£m


Protection
- Individual	-	-	-	-	-	-	-	-
- Group	-	-	-	-	-	-	-	-


	-	-	-	-	-	-	-	-
Annuities
- Individual (non profit)	212	313	293	212	243	298	334	267
- Individual (with-profits)	7	6	5	6	11	5	6	4
- Bulk purchase	1,190	31	217	23	361	89	298	149


	1,409	350	515	241	615	392	638	420


Longevity insurance	-	-	-	-	-	-	-	-


Total Risk	1,409	350	515	241	615	392	638	420



Investments1	1,153	1,632	1,761	1,654	1,513	1,377	1,692	1,587
Insured business	568	456	502	489	591	441	434	329
With-profits	112	96	177	140	113	144	207	144


Total Savings	1,833	2,184	2,440	2,283	2,217	1,962	2,333	2,060



- USA (LGA)	-	-	-	-	-	-	-	-
- Netherlands (LGN)	20	17	19	39	42	16	23	43
- France (LGF)	51	56	69	56	61	53	78	45
- India (26% share)	5	4	2	11	2	3	1	1
- Egypt (55% share)	-	-	-	-	-	-	-	-
- Gulf (50% share)	-	5	-	-	-	-	-	-


	76	82	90	106	105	72	102	89
France (LGF) retail investment business	13	15	9	9	11	9	11	29


Total International	89	97	99	115	116	81	113	118




Total worldwide new business	3,331	2,631	3,054	2,639	2,948	2,435	3,084	2,598


1. Investments excludes institutional investments in unit trust funds which are disclosed as part of institutional fund management new business (see Note 6.01).


New Business									Page 122
6.11 International new business in local currency

		Annual	Single		Annual	Single		Increase/
		premiums	premiums	APE	premiums	premiums	APE	(decrease)
		2011	2011	2011	2010	2010	2010	%


USA (LGA) ($m)		111	-	111	80	-	80	39

Netherlands (LGN) (€m)		6	109	17	7	146	22	(23)

France (LGF) (€m):
- Life and pensions		27	267	54	27	277	55	(2)
- Unit trusts		-	53	5	-	70	7	(29)

India (Rs m) - Group's 26% interest		373	1,629	536	934	459	980	(45)

Egypt (Pounds m) - Group's 55% interest		87	-	87	87	3	87	-

Gulf (US$m) - Group's 50% interest		3	9	4	-	-	-	-

6.12 UK APE by channel quarterly progression

	3	3	3	3	3	3	3	3
	months	months	months	months	months	months	months	months
	to	to	to	to	to	to	to	to
	31.12.11	30.09.11	30.06.11	31.03.11	31.12.10	30.09.10	30.06.10	31.03.10
	£m	£m	£m	£m	£m	£m	£m	£m


Retail IFA	137	173	170	166	166	150	164	156
Employee benefit consultants	300	84	120	104	118	178	145	84
Tied agents	8	9	13	8	11	9	12	8
Bancassurance	86	107	123	100	97	93	115	94
Direct	6	11	14	14	7	6	13	9


Total	537	384	440	392	399	436	449	351

6.13 UK APE by channel

	Annual	Single
	premiums	premiums	APE	% of
For the year ended 31 December 2011	£m	£m	£m	total


Retail IFA	81	5,649	646	37
Employee benefit consultants	394	2,140	608	35
Tied agents	30	77	38	2
Bancassurance	97	3,195	416	23
Direct	26	194	45	3


Total	628	11,255	1,753	100




	Annual	Single
	premiums	premiums	APE	% of
For the year ended 31 December 2010	£m	£m	£m	total


Retail IFA	75	5,610	636	39
Employee benefit consultants	389	1,360	525	32
Tied agents	29	110	40	3
Bancassurance	57	3,420	399	24
Direct	21	137	35	2


Total	571	10,637	1,635	100

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR UOVBRUSAOAAR

Related Shares:

FTSE 100 Latest

Value8,403.18

Change74.58