L&G Half-year Report 2010 - Part 3

Cash Flow and Capital

Page 49

3.01

Operational cash generation1

The table below provides an analysis of the operational cash generated by each of the Group's business segments, together with a reconciliation to IFRS profit after tax.

Investment

IFRS

IFRS

Operational

New

gains

profit

Tax

profit

cash

business

Net

Inter-

and

/(loss)

expense/

/(loss)

Six months ended

generation

strain

cash

national2

Variances

losses3

Other4

after tax

credit

before tax

30 June 2010

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Total Risk operating profit

212

(10)

202

-

22

-

-

224

86

310

Total Savings operating profit

72

(34)

38

-

5

-

(5)

38

16

54

Investment management

operating profit

70

-

70

-

-

-

-

70

28

98

International

33

-

33

7

-

-

-

40

21

61

Group capital and financing

15

-

15

-

-

15

-

30

3

33

Investment projects

-

-

-

-

-

-

(10)

(10)

(4)

(14)

Operating profit

402

(44)

358

7

27

15

(15)

392

150

542

Investment variance

-

-

-

-

-

10

-

10

(14)

(4)

Property losses attributable to

-

-

minority interests

-

-

-

-

-

-

(1)

(1)

-

(1)

Total

402

(44)

358

7

27

25

(16)

401

136

537

Dividends paid in the year

(160)

Net cash available for reinvestment

198

Six months ended

30 June 2009

Total Risk operating profit

216

13

229

-

(70)

-

3

162

61

223

Total Savings operating profit

40

(44)

(4)

-

17

-

2

15

2

17

Investment management

operating profit

54

-

54

-

-

-

-

54

20

74

International

-

-

-

44

-

-

-

44

21

65

Group capital and financing

23

-

23

-

-

6

-

29

(4)

25

Operating profit

333

(31)

302

44

(53)

6

5

304

100

404

Investment variance

-

-

-

-

-

(375)

-

(375)

(152)

(527)

Property losses attributable to

minority interests

-

-

-

-

-

-

(20)

(20)

-

(20)

Total

333

(31)

302

44

(53)

(369)

(15)

(91)

(52)

(143)

Dividends paid in the year

(120)

Net cash available for reinvestment

182

Year ended

31 December 2009

Total Risk operating profit

454

50

504

-

27

-

-

531

204

735

Total Savings operating profit

106

(77)

29

-

16

-

(8)

37

13

50

Investment management

operating profit

125

-

125

-

-

-

-

125

47

172

International

8

-

8

78

-

-

-

86

41

127

Group capital and financing

33

-

33

-

-

16

-

49

8

57

Investment projects

-

-

-

-

-

-

(23)

(23)

(9)

(32)

Operating profit

726

(27)

699

78

43

16

(31)

805

304

1,109

Investment variance

-

-

-

-

-

58

-

58

(74)

(16)

Property losses attributable to

minority interests

-

-

-

-

-

-

(19)

(19)

-

(19)

Total

726

(27)

699

78

43

74

(50)

844

230

1,074

Dividends paid in the year

(185)

Net cash available for reinvestment

514

Cash Flow and Capital

Page 50

Variances5

Risk

Savings

Risk

Savings

Risk

Savings

£m

£m

£m

£m

£m

£m

Notes

30.06.10

30.06.10

30.06.09

30.06.09

31.12.09

31.12.09

Experience variances

2.01(c)/2.02(c)

(3)

9

22

(8)

113

(1)

Changes to valuation assumptions

2.01(d)/2.02(d)

98

(6)

(2)

15

169

9

Changes to FSA reporting and capital rules

2.01(b)/2.02(b)

-

-

-

38

15

50

Movements in non-cash items

2.01(e)/2.02(e)

(78)

3

(80)

1

(229)

(64)

Other

2.01(b)/2.02(b)

5

(1)

(10)

(29)

(41)

22

Total

22

5

(70)

17

27

16

1. The operational cash generation analysed above is available to replenish the capital stock, reinvest back into the business and finance the dividend. In H1 10, the business generated operational cash flow of £402m (FY 09: £726m, H1 09: £333m) before investing £44m (FY 09: £27m, H1 09: £31m) in non profit new business strain, resulting in net cash generated of £358m (FY 09: £699m, H1 09: £302m). In H1 10, £160m has been used to pay the 2009 final dividend, resulting in £198m (FY 09: £514m, H1 09: £182m) being retained, augmenting the IGD surplus.

2. Profits arising in the international businesses that are not paid out in dividends are retained locally to support growth and are treated as not being available for distribution.

3. Investment gains and losses have been excluded from operational cash generation in order to reflect an expected net of tax income on shareholders' investments.

4. Other includes the removal of amortisation on acquired intangibles in our Savings business. Costs relating to one-off investment projects are also excluded.

5. Non-recurring experience variances and assumption changes are absorbed directly by the Group's IGD surplus. Movements in non-cash items do not generate cash in the period and are therefore not available for distribution.

Cash Flow and Capital

Page 51

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 at 30.06.10.

At 30.06.10

At 30.06.09

At 31.12.09

£bn

£bn

£bn

Core tier 1

5.3

3.8

4.8

Innovative tier 1

0.6

0.6

0.6

Upper tier 2

0.4

0.4

0.4

Lower tier 2

0.8

0.5

0.8

Deductions1

(1.1)

(1.0)

(1.0)

Group capital resources

6.0

4.3

5.6

Group capital resources requirement

2.7

2.4

2.5

IGD surplus2

3.3

1.9

3.1

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

2.22

1.79

2.24

times

times

times

1. Deductions comprises inadmissible assets in L&G America of £0.9bn (FY 09: £0.8bn, H1 09: £0.8bn), in Society of £0.1bn (FY 09: £0.1bn, H1 09: £0.1bn) and in other subsidiaries of £0.1bn (FY 09: £0.1bn, H1 09: £0.1bn).

2. The IGD surplus is stated after accruing for the period end dividend.

A segmental analysis is given below.

At 30.06.10

At 30.06.09

At 31.12.09

£bn

£bn

£bn

Society long term fund1

2.1

1.8

2.1

Society shareholder capital

2.6

1.6

2.2

General insurance

0.1

0.1

0.1

France

0.2

0.1

0.2

Netherlands

0.2

0.2

0.2

Nationwide Life

0.1

0.1

0.1

USA

0.2

0.1

0.2

Investment management

0.4

0.3

0.3

Other2

0.9

1.1

0.9

Innovative tier 1

0.6

0.6

0.6

Tier 2

1.2

0.9

1.2

Debt

(2.6)

(2.6)

(2.5)

Group capital resources

6.0

4.3

5.6

Society long term fund1

2.3

2.0

2.1

Other

0.4

0.4

0.4

Group capital resources requirement

2.7

2.4

2.5

1. The Society long term fund (LTF) capital requirement of £2.3bn (FY09: £2.1bn) is met by £2.1bn (FY 09: £2.1bn) of capital resources in the LTF and £0.2bn (FY 09: £nil) from other Society shareholder capital.

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

Cash Flow and Capital

Page 52

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 30.06.10

At 30.06.09

At 31.12.09

£bn

£bn

£bn

Capital and reserves attributable to equity holders on an IFRS basis

4.5

3.3

4.2

Innovative tier 1

0.6

0.6

0.6

Tier 2

1.2

0.9

1.2

Proposed dividends

(0.1)

(0.1)

(0.2)

Additional capital available from Society

0.7

0.3

0.6

Adjustment to reflect regulatory value of the USA operation

(0.9)

(0.8)

(0.8)

Other regulatory adjustments

-

0.1

-

Group capital resources

6.0

4.3

5.6

(b)

With-profits realistic balance sheet

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

At 30.06.10

At 30.06.09

At 31.12.09

£bn

£bn

£bn

With-profits surplus

0.8

0.6

0.8

Risk capital margin

0.3

0.2

0.2

Surplus

0.5

0.4

0.6

Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis (peak 2). The risk capital margin is calculated based on the most onerous capital requirement calculated after performing five stresses specified by the FSA. The surplus includes the present value of future shareholder transfers of £0.2bn (FY 09: £0.3bn, H1 09: £0.2bn) as a liability in the calculation.

(c)

Society capital surplus

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