14th Mar 2007 07:02
Legal & General Group PLC14 March 2007 Legal & General Group Plc Preliminary ResultsFor the year ended 31 December 2006 Stock Exchange Release - Part 114 March 2007 Excellent resultsGood progress on capital review • EEV(1) operating profit of £1,233m + 13%• UK new business contribution of £380m + 24%• IFRS(2) operating profit of £752m + 16%• EEV ordinary shareholders' equity of £7.9bn + 14%• IFRS ordinary shareholders' equity of £5.4bn + 27%• Recommended full year dividend of 5.55p + 5% Group Chief Executive, Tim Breedon, said: "Legal & General has delivered an excellent set of results, with record newbusiness and record profits. Strong underlying performance has been enhanced bythe first actions arising from the Group's capital review. The UK life and pensions market expanded strongly in 2006 due primarily to thepensions A-day effect and demand for individual savings products. Legal &General, however, strengthened its position across its annuities, protection,savings and investments businesses. This contributed to a significant rise inUK new business profits - up 24% to £380m on an EEV basis. In December, we implemented the first structural change arising from our capitalreview when we reinsured all of the Group's UK non profit pensions and annuitybusiness to a new subsidiary. In doing so, we believe we will increase thetransparency and flexibility for the whole of our non profit business. We willreport further on our capital review at the time of our Interim results in July. Today's results demonstrate the energy and momentum of Legal & General'sbalanced yet flexible business model - a model which continues to deliverprofitable growth. We also continue to invest in the expansion of our business,notably through the recent agreement to distribute our products through theNationwide - the UK's largest building society with over 11m customers - and thefurther development of our open architecture bond and pension products. With continued investment in our business, strong UK economic fundamentals and apositive environment for long term savings and investment, Legal & General iswell positioned to make further progress in 2007." (1) EEV: European Embedded Value (2) IFRS: International Financial Reporting Standards Financial highlights 2006 % changeEEV basis:UK new business contribution £380m +24%Worldwide life and pensions new business contribution £418m +26%Worldwide life and pensions operating profit £1,030m +14%Worldwide operating profit £1,233m +13%Profit from continuing operations after tax £1,446m +19%Ordinary shareholders' equity per share 121p +13%IFRS basis:UK life and pensions operating profit £517m +25%Worldwide operating profit £752m +16%Profit from continuing operations after tax £1,631m +61%Recommended full year dividend per share 5.55p +5% Overview of results Legal & General's 2006 preliminary results demonstrated the continued strengthof our core business and also reflected the first benefits of our wide-rangingcapital review. Profit from continuing operations after tax increased by 19% to£1,446m (2005: £1,212m) on an EEV basis and by 61% to £1,631m (2005: £1,012m) onan IFRS basis. Our worldwide operating profit on an EEV basis grew by 13% to £1,233m (2005:£1,092m). Worldwide contribution from new life and pensions business increasedby 26% to £418m (2005: £331m) and total experience and operating assumptionchanges were positive at £82m. UK life and pensions operating profit grew by 9%to £874m (2005: £801m), primarily reflecting increased new businesscontribution. Operating profit from our international businesses grew by 56% to£156m (2005: £100m), due principally to higher new business contribution and thebenefits of our second successful Triple X securitisation in the USA. On an IFRS basis, worldwide operating profit increased by 16% to £752m (2005:£647m), benefiting from higher contributions from both the UK non profit andwith-profits life and pensions businesses. With a record £21bn increase in newinstitutional funds under management in 2006 and a highly scalable platform, ourinvestment management business grew operating profits by 29% to £133m (2005:£103m). The benefits of the first phase of work carried out under our capital reviewwere also shown in the results. In accordance with the timetable laid out inour Capital and Cash Flow presentation in November 2006: • We created a new, wholly owned subsidiary, Legal & General Pensions Limited (LGP), to reinsure the Group's UK non linked non profit pensions and annuity business; • We implemented more realistic reserving for individual protection business, following the introduction of the FSA's Policy Statement (PS) 06/14; and • We enhanced asset liability matching for annuities. These developments together resulted in an increase in profit after tax on anEEV basis of £233m and, on an IFRS basis, of £1,089m. The full financialeffects of these actions are detailed in the "Significant impacts" sections inthe notes to these results. Also as indicated in November 2006, we have provided an update to the balancedscorecard of measures used to assess our capital position, and we will continueto do so on a regular basis. This can be found in the "Capital review" sectionbelow. Legal & General strengthened its position across its strategic markets in 2006,growing scale in bonds and pensions, extending its market leading position inprotection, and delivering record new bulk annuity and institutional fundmanagement volumes. Combining strong financial management with a flexible,resilient business model, we believe Legal & General is well placed for furthersuccess in 2007. UK distribution and product developments We believe open architecture technology will play an increasingly important rolein the evolution of the savings market. Legal & General has established astrong proposition through its alliance with the market leading Cofunds fundplatform. We see it as strategically important to continue developing acoherent, comprehensive savings product offering based on open architecture andto accelerate adoption of Cofunds platform technology among IFAs. Wesuccessfully launched our on-platform Portfolio Plus SIPP in April and added 40new funds to our Portfolio Bond during the year. We believe Legal & General'scompetitive products combined with an established fund platform create apowerful foundation for further profitable growth in sales of savings products.Cofunds reached £10bn of assets on its platform in 2006, with Legal & Generalproducts accounting for a substantial and growing share of new asset flows. Our many bank and building society relationships form further key components ofour balanced distribution strategy. The relationships we have established arevaried, ranging from the provision of single products, to fully integratedmulti-product propositions. We have the capabilities to flex our broad productrange, technology and administrative infrastructure to meet the differing needsof our partners. We continue to develop both existing and new relationships. In February 2007,we were pleased to enter into a strategic alliance with Nationwide BuildingSociety to supply life insurance, investment and pension products to theircustomers. This agreement builds further on our position as a partner providerof choice to many of the UK's leading banks and building societies. Outlook We remain confident in the fundamentals of the UK economy for 2007 and in theoutlook for the UK's savings, protection and investment markets. We expect the effects of A-day to continue to support the pensions market into2007. In addition, the increasing acceptance of open architecture, greaterflexibility for larger single premium contributions and more flexibility oncharging are improving the economics of this business. We see opportunities tobuild scale profitably by continuing to target the most attractive segments. In the bond market, we were pleased with the success of our efforts to promoteplatform usage among IFAs. We will continue to do so in 2007 and intend toextend our range of product wrappers, including the addition of an Internationalbond. Our additional unit allocation offer for customers is continuing in 2007,albeit currently at a lower level than the previous year. Whilst our competitive position in individual annuities remains strong, we willcontinue to focus on profitability rather than volumes and will only competewhere the required returns can be achieved. We expect to continue to winsignificant volumes of bulk annuity business in the coming year, althoughquarterly sales will fluctuate depending on the timing and size of businessreceived. We have seen new entrants to the bulk annuities market in the latterstages of 2006, with competition increasing especially for larger schemes, andwe expect this will continue in 2007. Legal & General's reputation andextensive risk pricing and administrative skills, developed over more than 20years, are widely recognised in the industry and provide significant competitiveadvantages. The housing market appears to remain robust, despite the increase in interestrates at the beginning of 2007. However the removal of Pensions Term Assuranceat the end of 2006 may dampen growth prospects in the protection market. Weexpect to strengthen our already market leading position in individualprotection during 2007, as we continue to develop distribution relationships -most recently with Nationwide Building Society - and to enhance our systems,processes and expertise. Protection new business margins in 2006 benefited fromthe implementation of lower regulatory reserving requirements. Although we havenot yet seen a substantial change in market pricing to reflect this, we wouldexpect margins to moderate from 2006 levels. Our capital review programme is progressing well and in line with the timetabledetailed in our presentation on Capital and Cash Flow in November 2006. Anupdate in respect of our capital position will be given with our Interim resultsin July. Enquiries: Investors: Andrew Palmer Group Director (Finance) 020 7528 6286Jonathan Maddock Head of Investor Relations 020 7528 6298Nicola Marshall Investor Relations Manager 020 7528 6263 Media:John Morgan Media Relations Director 020 7528 6213Anthony Carlisle Citigate Dewe Rogerson 07973 611888 Notes: • Issued share capital at 31 December 2006 was 6,532,261,961 shares of 2.5p. • A copy of this announcement can be found in "Results", under the "Financial information" section of our shareholder website at http://investor.legalandgeneral.com/results.cfm. • A presentation to analysts and fund managers will take place at 09.30 GMT today at Temple Court, 11 Queen Victoria Street, London EC4N 4TP. There will be a live audiocast of the presentation which can be accessed at http://investor.legalandgeneral.com/results.cfm. A replay will be available on this website later today. The presentation slides will be available after 09.20 GMT, also at http://investor.legalandgeneral.com/results.cfm. • There will be a live listen only teleconference link to the presentation. UK investors should dial 0800 6942 586 and overseas investors should dial +44 (0)1452 567 098. The conference ID number is 1956301. The European Union requires all listed companies to prepare their consolidatedfinancial statements using standards issued by the International AccountingStandards Board. The Group's statutory results have therefore been reported onan International Financial Reporting Standards basis. The Group's directorscontinue to believe that the supplementary accounts prepared using EuropeanEmbedded Value principles provide a more accurate and meaningful reflection ofthe Group's long term operations and their value to shareholders. The following financial statements were approved by a sub-committee of the Boardon 13 March 2007 and constitute non statutory accounts within the meaning ofSection 240 of the Companies Act 1985. The Group's financial statements for2006 include the auditors' unqualified report and do not contain a statementunder either Sections 237(2) or 237(3) of the Companies Act 1985. Financial calendar 2007:Event DateEx-dividend date for 2006 final dividend 18 April 2007Record date for 2006 final dividend 20 April 2007Q1 2007 New business results 26 April 2007Annual General Meeting 16 May 2007Payment date of 2006 final dividend 21 May 20072007 Interim results and Q2 2007 New business results 26 July 2007Ex-dividend date for 2007 interim dividend 5 September 2007Record date for 2007 interim dividend 7 September 2007Payment date for 2007 interim dividend 1 October 2007Q3 2007 New business results 17 October 2007 A Dividend Re-investment Plan is available to shareholders. Forward-looking statements: This document may contain certain forward-looking statements with respect tocertain of Legal & General Group Plc's plans and its current goals andexpectations relating to future financial condition, performance and results.By their nature, forward-looking statements involve risk and uncertainty becausethey relate to future events and circumstances which are beyond Legal & GeneralGroup Plc's control, including, among others, UK domestic and global economicand business conditions, market related risks such as fluctuations in interestrates and exchange rates, the policies and actions of regulatory authorities,the impact of competition and the policies and actions of governmental andregulatory authorities and the timing impact and other uncertainties of futureacquisition or combinations within relevant industries. As a result, Legal &General Group Plc's actual future condition, performance and results may differmaterially from the plans, goals and expectations set out in Legal & GeneralGroup Plc's forward-looking statements. Legal & General Group Plc does notundertake to update forward-looking statements contained in this document or anyother forward-looking statement it may make. Contents Page 2006 Business review 7 New business 15 European Embedded Value - Consolidated income statement 19 - Consolidated balance sheet 20 - Significant impacts 21 - Profit from continuing operations after tax from covered business 22 - Analysis of experience variances 23 - Analysis of operating assumption changes 24 - Variation from longer term investment return 24 - Time value of options and guarantees 24 - Investment management income statement 25 - Analysis of tax 25 - Earnings per share 26 - Embedded value reconciliation 27 - Analysis of ordinary shareholders' equity 29 - Sensitivities 31 - Assumptions 32 International Financial Reporting Standards - Operating profit income statement 35 - Consolidated income statement 36 - Consolidated balance sheet 37 - Consolidated cash flow statement 39 - Significant impacts 40 - Contribution from UK non profit business 41 - Analysis of tax 42 - Earnings per share 43 - Gross written premiums 44 - Segmental analysis 44 - Segmental analysis of ordinary shareholders' equity 45 - Borrowings 46 - Insurance contract liabilities 47 - Investment contract liabilities 48 - Non-linked invested asset mix and investment return 49 - Sensitivities 49 - Contingent liabilities, guarantees and indemnities 50 Capital and cash flow - Significant impacts 51 - Regulatory capital resources 52 - IFRS capital resources 54 - Group credit ratings 55 - Distributions to shareholders from Society's Long Term Fund 56 - Group cash flow statement 56 Appendices 57 2006 Business Review Consolidated Income Statements £m EEV IFRS 2006 2005 2006 2005Operating profit from:- Life and pensions 1,030 901 592 489- Investment management 181 136 133 103- General insurance 9 14 9 14- Other operational income(1) 13 41 18 41 Total operating profit 1,233 1,092 752 647Variation from longer term investment return 460 870 63 139Effect of economic assumption changes 2 8 N/A N/AContribution from UK non profit business N/A N/A 1,136 516Property income attributable to minority interests 67 81 67 81Corporate restructure (216) - N/A N/A Profit from continuing operations before tax attributable to equity holders 1,546 2,051 2,018 1,383Tax charge on profit from ordinary activities (422) (563) (387) (371)Effect of UK tax changes - (276) N/A N/AEEV tax impact of Corporate restructure 322 - N/A N/A Profit from continuing operations after tax 1,446 1,212 1,631 1,012Profit from discontinued operations - 13 - 13 Profit from ordinary activities after tax 1,446 1,225 1,631 1,025Profit attributable to minority interests (67) (81) (67) (81) Profit attributable to equity holders of the Company 1,379 1,144 1,564 944 Life and pensions operating profit - EEV basis UK life and pensions - Contribution from new business PVNBP (£m) Contribution (£m) Margin (%) 2006 2005 2006 2005 2006 2005 Protection 1,201 1,051 131 82 10.9 7.8Annuities 1,735 1,539 191 177 11.0 11.5Savings:- Unit linked bonds 2,612 2,082 51 49 2.0 2.3- Pensions - Stakeholder and other non 1,326 935 (10) (18) (0.7) (1.9)profit(2)With-profits 1,232 1,014 17 16 1.4 1.6 Contribution from new UK life and pensions 8,106 6,621 380 306 4.7 4.6business (1) On an IFRS basis, 2006 Other operational income included the elementrelating to Legal & General Pensions Limited, which is included in the coveredbusiness (2) Includes the re-categorisation of £18m APE (£3m annual premiums and £149msingle premiums) previously reported in with-profits individual pensions in the2006 Full Year New Business Results announcement of 25 January 2007. The total contribution from UK life and pensions new business was £380m, a 24%increase on 2005, with an aggregate margin of 4.7%. Protection margins grew by 3.1 percentage points to 10.9% in 2006. The newbusiness contribution included a net benefit of £33m in respect of ourimplementation of PS 06/14 and the lower resulting cost of financing. We alsosaw the benefits of increasing scale in reduced unit costs of businessacquisition. Our market share of individual protection business grew to over20% during the year (2005: 17%), extending our already market-leading position. The annuity business margin was 11.0% (2005: 11.5%). A higher proportion ofindividual annuity business was written in the second half of the year, leadingto a lower margin mix than that reported at Interims 2006. Individual annuitiesrepresented 41% of non profit annuity sales over the full year 2006 (H1 2006:30%, H2 2006: 49%; 2005: 43%). The cost of solvency capital on this businessincreased as a result of the creation of the new pensions and annuityreinsurance company, Legal & General Pensions Limited. This is explained infurther detail in the "Significant impacts" sections in the notes to theseresults. Unit linked bond margins decreased from 2.3% in 2005 to 2.0% in 2006. We tookthe strategic decision to compete to build scale and further enhance ouron-platform presence, particularly in the second half of the year. This includedan additional unit allocation promotion for customers, aimed at encouraging bondapplications processed on-platform. We estimate that we are now the secondlargest provider of unit linked bonds through the IFA channel in the UK. In thefourth quarter, 75% of our sales through IFAs were written on-platform. The margin on stakeholder and other non profit pensions improved to negative0.7% in 2006 (2005: negative 1.9%), supported by strong volume growth in abuoyant post A-Day market. The successful introduction of our SIPP product,much of which is written on the Cofunds platform, contributed to thisimprovement, together with increased volumes of revised stakeholder business,pension increments and reduced acquisition expenses. The with-profits new business margin decreased from 1.6% in 2005 to 1.4% in2006, mainly due to changes in business mix. UK life and pensions - Operating profit £m 2006 2005 Contribution from new business (after cost of capital) 380 306Contribution from in-force business:- Expected return 323 294- Experience variances 41 89- Operating assumption changes 5 (14)Development costs (21) (20)Contribution from shareholder net worth 146 146 Operating profit 874 801 The expected contribution from UK life and pensions in-force business increasedto £323m in 2006 (2005: £294m), reflecting the unwinding of a higher in-forcevalue at a lower opening risk discount rate of 7.1% (2005: 7.5%). The overall impact of experience variances and operating assumption changes waspositive at £46m (2005: positive £75m), which included the effect of releasesfrom reserves on protection business as a result of the adoption of PS 06/14. • Persistency: Total experience and operating assumption changes relating to persistency were negative £27m (2005: positive £32m). We experienced adverse persistency on with-profits bonds - mainly on those reaching their fifth anniversary. We strengthened our future assumptions as a result and have put in place a number of client retention initiatives. Pensions persistency was marginally negative. We saw a small increase in early retirements, although the impact of other pensions persistency effects was broadly neutral. There was a positive assumption change on protection business, reflecting improved persistency experience on certain segments of the book. • Mortality/morbidity: Total mortality/morbidity experience and operating assumption changes amounted to positive £5m in 2006 (2005: positive £25m). Positive experience on group risk and individual protection was the main contributor to a favourable £10m mortality/morbidity variance. Operating assumption changes were net negative £5m. This included a strengthening in future longevity assumptions on deferred annuities, partially offset by positive variances on individual protection and group income protection. Here we saw the benefit of our focus on active claims management feed through to improved claims experience. • Expenses: Total expense experience variances and operating assumption changes amounted to negative £78m in 2006 (2005: negative £30m), with assumption changes of negative £80m. In our individual protection business, we are investing further in systems andprocesses to ensure we continue to deliver a high quality of service to ourgrowing customer base, and to improve claims and persistency experience over thelong term. We have allowed for higher in-force costs as a result, giving riseto an assumption change of negative £33m. We have assumed a rise in investment management costs, leading to an assumptionchange of negative £40m. This reflects increased location expenses relating tothe move to new City premises in 2007 and further business investment, such asthe development of our structured solutions and US based fixed income teams.These latter are contributing to enhancements we are making to the management ofour substantial fixed income portfolios. • Other: Other experience and operating assumption changes totalled positive £146m (2005: positive £48m). The net in-force effect of the implementation of PS 06/14 and the termination of related financial reinsurance was positive £64m. Improved data management in the loading of bulk annuity liabilities onto our administration system led to further current and expected releases of margins for prudence. The EEV benefit of these releases was £56m. There was a positive assumption change of £34m, primarily relating to a reassessment of prior and future tax. This adjustment had a broadly neutral effect on the embedded value with the positive here being offset by a similar negative variance in the contribution from shareholder net worth. Development costs for 2006 of £21m (2005: £20m) related primarily to the ongoingdevelopment of the platform proposition, as we continued to expand the productsand services available. The contribution from shareholder net worth was unchanged at £146m (2005:£146m), after adjusting for the reassessment of prior and future tax mentionedabove. This reflected the unwinding at a lower discount rate of 7.1% (2005:7.5%) of a higher opening shareholder net worth. In addition, the contributionin respect of SRC and sub-fund was grossed up using a notional tax rate of 30%in 2006, compared with the 20% rate used historically, providing greaterconsistency. International life and pensions - Operating profit £m 2006 2005 Contribution from new business (after cost of capital) 38 25Contribution from in-force business:- Expected return 70 62- Experience variances 19 -- Operating assumption changes 17 (5)Contribution from shareholder net worth 12 18 Operating profit 156 100 Operating profit from our international life and pensions businesses grew to£156m in 2006 (2005: £100m), as a result of increased contribution from newbusiness, together with positive experience and operating assumption changestotalling £36m (2005: negative £5m). In the USA, new business and in-force results benefited from the effects of aTriple X securitisation, which was completed in the second half of 2006, leadingto an operating profit of £89m (2005: £24m). Operating profit in France of £22m(2005: £33m) reflected favourable net operating assumption changes, althoughthese were lower than in 2005. Adverse morbidity experience and assumption changes on protectionproducts were more than offset by favourable persistency assumption changes onsavings business. In the Netherlands, increased contribution from new businessand favourable persistency assumption changes on unit-linked productscontributed to an operating profit of £45m (2005: £43m). Life and pensions operating profit - IFRS basis £m 2006 2005UK life and pensions operating profit:- Distribution relating to non profit and shareholder net worth 388 312- Subordinated debt interest 34 37- With-profits business 95 66 517 415USA 58 52Netherlands 7 18France 10 4 Life and pensions operating profit 592 489 UK life and pensions - Operating profit UK life and pensions operating profit before tax increased by 25% to £517m in2006 (2005: £415m). Within this, the distribution in respect of the non profitbusiness and shareholder net worth increased to £388m (2005: £312m). Thedistribution is calculated by reference to the formula agreed with ourregulators in 1996. It reflected 7% of the increased adjusted shareholder networth embedded value, together with 5% of the lower adjusted non profit businessembedded value, as detailed in note 5.05. The movements in these embedded valuesincluded the effects of the capital review, which are summarised below and aredetailed in the "Significant impacts" sections in the notes to these results. Interest on the intra-group subordinated debt capital attributed to the SRCamounted to £34m in 2006, marginally down from £37m in 2005. The small decreasewas due to the early repayment of this subordinated debt to Legal & GeneralGroup Plc in December 2006, carried out as part of the Corporate restructuring.The external servicing cost of the related debt is reflected in interest expensereported within other operational income. The profit contribution from the with-profits business increased by 44% to £95m(2005: £66m), in line with increased with-profits bonuses announced in February2006. These were supported by strong gross investment returns of over 11% onassets backing with-profits policies (pre-tax and pre-charges) - the fourthconsecutive year of double digit returns. International life and pensions - Operating profit The IFRS operating profit from our international life and pensions businessesremained broadly stable at £75m (2005: £74m). In the USA, profits rose from £52min 2005 to £58m, mainly as a result of growth in the in-force book. Operatingprofit from our business in France benefited from a one-off realised gain on thesale of property, partially offset by increased morbidity claims on theprotection book. Higher interest rates resulted in higher unrealised losses andlower operating profit in the Netherlands, where operating profit declined from£18m in 2005 to £7m in 2006. Under IFRS, all assets but not all liabilities arevalued at fair value, leading to ongoing volatility in this line. Investment management operating profit - IFRS basis £m 2006 2005Investment management new business:- Institutional funds 20,650 17,134- Retail funds APE 664 315Operating profit:- Managed pension funds 96 74- Ventures 4 4- Property 6 4- Retail investments 11 7- Other external income 6 5- Other operational income 10 9 Operating profit 133 103 Cost/income ratio (institutional business) 37% 36% Following another outstanding year for new business generation, operating profitfrom our investment management business grew by 29% to £133m in 2006 (2005:£103m). We saw flat or increased contributions from every business line. Ourinstitutional business once again delivered strong new business growth whilecontinuing to operate at a low cost income ratio on external business of 37%(2005: 36%). This supported a 30% increase in profits from our managed pensionfund business to £96m (2005: £74m). Our retail investment business also saw thebenefits of growth on our scalable platform, increasing operating profit by 57%to £11m (2005: £7m). In 2006, among other initiatives, we opened a Chicago office to provide US fixedincome expertise in support of our UK products and expanded our team deliveringstructured solutions to customers, including liability driven investments. Weexpect to continue to invest in expanding our product range and expertise in2007. Funds under management grew by 14% to £233bn during 2006 (31 December 2005:£204bn), reflecting rising market values, strong new business flows andfavourable persistency. Business outflows, including benefits paid to pensionschemes, remained lower than the assumptions made in our EEV reporting, whichcan be found in our supplementary notes. General insurance operating profit - IFRS basis 2006 2005£m Operating Underwriting Operating Underwriting profit/(loss) result Profit result Household (9) (21) 7 (6)Other 18 13 7 1 Operating profit 9 (8) 14 (5) Gross written premiums declined by 3% in 2006 to £323m (2005: £334m). Wecontinued to increase our focus on the core household market, which offersgreater synergies with our existing protection franchise. We ceased writingmotor insurance business in 2006, resulting in £3m of closure costs and, inearly 2007, we decided to withdraw from the healthcare market. In both cases,we made arrangements with other insurers to offer our customers continuing coverfrom the next renewal date. Operating profit fell to £9m (2005: £14m) for the year and the combinedoperating ratio increased to 105% (2005: 101%). The household account reportedan operating loss of £9m (2005: £7m profit) as a result of deteriorating claimsexperience in the second half of the year, on-going competition in the brokerchannel and additional business development expenditure. The cost of householdclaims arising as a result of the January 2007 storms is currently estimated at£8m. Other operational income - IFRS basis £m 2006 2005Shareholders' other income:- Investment return on ordinary shareholders' equity 139 127- Interest expense (106) (75) 33 52Other operations (2) (5)Unallocated corporate and development expenses (13) (6) Other operational income 18 41 Other operational income decreased to £18m (2005: £41m). This was mainly as aresult of increased interest expense following the issuance of €600m ofsubordinated debt in June 2005 and the reclassification of £400m undatedsubordinated notes as debt in March 2006. The notes were required to be treatedas equity at the end of 2005 but were reclassified as debt following themodification of terms. Unallocated corporate and development expenses grew to£13m in 2006 (2005: £6m) largely relating to the implementation of the firstactions of the capital review and other corporate projects. Profit attributable to equity holders EEV IFRS£m 2006 2005 2006 2005 Operating profit 1,233 1,092 752 647Variation from longer term investment return 460 870 63 139Effect of economic assumption changes 2 8 N/A N/AContribution from UK non profit business N/A N/A 1,136 516Property income attributable to minority interests 67 81 67 81Corporate restructure (216) - N/A N/A Profit from continuing operations before tax attributable to equity holders 1,546 2,051 2,018 1,383Tax charge on profit from ordinary activities (422) (563) (387) (371)Effect of UK tax changes - (276) N/A N/AEEV tax impact of Corporate restructure 322 - N/A N/A Profit from continuing operations after tax 1,446 1,212 1,631 1,012Profit from discontinued operations - 13 - 13 Profit from ordinary activities after tax 1,446 1,225 1,631 1,025Profit attributable to minority interests (67) (81) (67) (81) Profit attributable to equity holders of the Company 1,379 1,144 1,564 944 EEV basis Profit attributable to equity holders of the company on an EEV basis increasedby 21% during the year to £1,379m (2005: £1,144m). The variation from longerterm investment return was £460m in 2006 (2005: £870m), reflecting strong equityand property investment performance, albeit below that seen in 2005. The financial effects of the capital review on an EEV basis are summarised inthe "Capital review" section below and further detail is provided in the "Significant impacts" sections in the notes to these results. IFRS basis Profit attributable to equity holders on an IFRS basis increased by 66% to£1,564m (2005: £944m). The main movement in the year related to thecontribution from UK non profit business which, after tax, increased from £368min 2005 to £972m in 2006. This included the effects of the implementation of PS06/14 and other actions carried out as part of the capital review. Capital review In November 2006, as part of a broad programme of communications to the market,we presented our capital management framework and our progress in conducting awide-ranging review of our capital structure. We have advanced according to thetimetable laid out at that presentation and provide an update on three keydevelopments below. The financial effects of these actions are summarised inthe table below and further detail is provided in the "Significant impacts"sections in the notes to these results. 1. Corporate restructuring - creation of pensions and annuity reinsurance company On 31 December 2006, the non linked non profit pensions and annuity business ofLegal & General Assurance Society Limited (Society) was ceded to a new, whollyowned, reinsurance subsidiary - Legal & General Pensions Limited (LGP). Webelieve this will provide greater capital transparency and flexibility, enhanceLegal & General's ability to compete in the annuity markets and ensure that bothour non profit life and pensions businesses are taxed appropriately. Legal &General Investment Management Limited provides investment services to LGP on amarket-related fee basis. 2. Implementation of changes to FSA reporting In 2006, the FSA introduced a more realistic reserving framework for certain nonprofit business, as detailed in PS 06/14. This framework was implemented forall our UK individual protection business. 3. Review of annuity investment policy During 2006, Legal & General undertook a review of its asset liability matchingpolicy for annuity business. Property assets backing annuity liabilities werereplaced with corporate bonds and we entered into inflation swaps to mitigatenegative inflation risk more effectively. As a result of these actions, weachieved a closer match between assets and liabilities, together with a lowercapital requirement and a higher valuation discount rate. Additionally, themargin within the reserves to cover an interest rate mismatch was reviewed andreduced. Summary of principal capital review developments Corporate Changes to FSA Annuity investment restructuring reporting policyIFRS Increase in SRC £502m(1) £496m £422m Profit after tax £171m £496m £422m EEV Operating profit - £97m £18m Profit before tax (£216m) £97m (£9m) Profit after tax £171m £68m (£6m) Capital(2) IGD surplus capital (£0.5bn) - - Society surplus capital (£0.5bn) £0.1bn £0.4bn (1) There was an offsetting negative in LGP (2) Management estimates based on draft regulatory returns Capital balanced scorecard measures At our Capital and Cash Flow presentation in November 2006, we indicated ourintention to update the market regularly on our balanced scorecard measures forcapital management. These are detailed in the following table: Range 2006 2005 IGD surplus capital £1-2bn £2.1bn £2.4bnSociety surplus capital £2.5-3.5bn £4.9bn £4.4bnEconomic Capital Strong AA Very strong AA Very strong AAReturn on Embedded Value Increase over medium term 12.5% 12.6% This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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