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L&G Half-year Report 2010 - Part 5

4th Aug 2010 07:02

RNS Number : 4830Q

Legal & General Group Plc

04 August 2010

European Embedded Value									Page 65
Consolidated income statement
For the six months ended 30 June 2010
									Full year
							30.06.10	30.06.09	31.12.09
								Restated1
					Notes		£m	£m	£m


From continuing operations
Risk					5.01		367	460	913
Savings2					5.01		61	24	77
Investment management2					5.08		81	62	144
International					5.09		61	87	170
Group capital and financing					5.10		33	23	47
Investment projects3							(14)	-	(32)


Operating profit							589	656	1,319
Variation from longer term investment return					5.11		(184)	(1,018)	(413)
Effect of economic assumption changes					5.12		179	(630)	(335)
Property losses attributable to minority interests							(1)	(20)	(19)


Profit/(loss) from continuing operations before tax							583	(1,012)	552
Tax (expense)/credit on profit/(loss) from ordinary activities					5.14		(161)	292	(114)
Tax impact of corporate restructure					5.01		-	-	59


Profit/(loss) for the period							422	(720)	497
Loss attributable to minority interests					2.17		1	20	19


Profit/(loss) attributable to equity holders of the Company							423	(700)	516




							p	p	p


Earnings per share					5.15

Based on operating profit from continuing operations after tax attributable to equity holders of the Company							7.21	8.26	16.28
Based on profit/(loss) attributable to equity holders of the Company							7.26	(12.02)	8.86

Diluted earnings per share					5.15

Based on operating profit from continuing operations after tax attributable to equity holders of the Company							7.13	8.25	16.19
Based on profit/(loss) attributable to equity holders of the Company							7.18	(12.02)	8.81


1. The H1 09 EEV comparatives have been restated to reflect the impact of the change in definition of IFRS operating profit on non covered business. The change has decreased H1 09 EEV operating profit by £1m and increased variation from longer term investment return by £1m. There is no impact on profit after tax or shareholders' equity.
2. The composition of the Savings and Investment management segments has changed. Institutional retail business is now included in the Savings segment. H1 09 and FY 09 have been amended accordingly in-line with the new definition. The effect has been to reduce Savings H1 09 operating profit by £4m and FY 09 operating profit by £5m with an offsetting increase in the Investment management segment's operating profit.
3. Investment projects relate to strategic investments including Solvency II.


European Embedded Value									Page 66
Consolidated statement of comprehensive income
For the six months ended 30 June 2010
									Full year
							30.06.10	30.06.09	31.12.09
							£m	£m	£m


Profit/(loss) for the period							422	(720)	497

Other comprehensive income after tax
Exchange differences on translation of overseas operations							10	(93)	(88)
Actuarial (losses) on defined benefit pension schemes							(17)	(52)	(90)
Actuarial losses on defined benefit pension schemes transferred to unallocated divisible surplus							12	36	62


Total comprehensive income/(expense) for the period							427	(829)	381



Total comprehensive income/(expense) attributable to:
Minority interests							(1)	(20)	(19)
Equity holders of the Company							428	(809)	400




Consolidated balance sheet
As at 30 June 2010

							At 30.06.10	At 30.06.09	At 31.12.09
					Notes		£m	£m	£m


Assets
Investments							288,298	252,431	290,550
Long term in-force business asset							2,623	2,466	2,645
Other assets							7,017	7,671	6,348


Total assets							297,938	262,568	299,543




Equity
Shareholders' equity					5.17/5.18		6,958	5,556	6,695
Minority interests					2.17		32	149	2


Total equity							6,990	5,705	6,697



Liabilities
Subordinated borrowings					2.16		1,875	1,552	1,870
Unallocated divisible surplus							1,179	902	1,284
Participating contract liabilities							16,035	15,302	16,176
Non-participating contract liabilities							258,866	227,752	263,085
Senior borrowings					2.16		1,455	1,933	1,407
Other liabilities and provisions							11,538	9,422	9,024


Total liabilities							290,948	256,863	292,846


Total equity and liabilities							297,938	262,568	299,543




European Embedded Value									Page 67
Notes to the Financial Statements
5.01	Profit/(loss) for the period

					Risk and	Investment	Inter-	Group	Total
					Savings	manage-	national	capital
						ment		and
								financing
For the six months ended 30 June 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		150		10		160
Contribution from in-force business:
- expected return1					201		59		260
- experience variances			5.07		67		(13)		54
- operating assumption changes			5.07		(9)		(2)		(11)
Development costs					(8)		-		(8)
Contribution from shareholder net worth2							11	72	83


Operating profit on covered business					401	-	65	72	538

Business reported on an IFRS basis:
General insurance			2.01(f)		14				14
Retail investments					17				17
Investment management3			5.08			81			81
Group capital and financing			5.10					(39)	(39)
Investment projects								(14)	(14)
Other4					(4)		(4)		(8)


Total operating profit					428	81	61	19	589
Variation from longer term investment return			5.11		(100)	(4)	31	(111)	(184)
Effect of economic assumption changes			5.12		139	-	40	-	179
Property losses attributable to minority interests					-	-	-	(1)	(1)


Profit/(loss) from continuing operations before tax					467	77	132	(93)	583
Tax (expense)/credit on profit from ordinary activities					(133)	(22)	(44)	38	(161)


Profit/(loss) for the period					334	55	88	(55)	422



Operating profit attributable to:
Risk					367
Savings					61


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 effects of opening model changes of £17m to give an adjusted opening base VIF of £3,696m. This is then multiplied by the opening risk discount rate of 8.0% for half a year and the result grossed up at the notional attributed tax rate of 28% to give a return of £201m.
2. The H1 10 Group capital and financing contribution from shareholder net worth (SNW) comprises £74m from the average return of 3% on the average balance of invested assets of £2.5bn and an adjustment for opening tax and other modelling changes of £1m; offset by pre-tax corporate expenses charged to shareholders' funds of £(3)m.
3. Investment management operating profit excludes £17m (H1 09: £12m; FY 09: £28m) 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.
4. In H1 10, Suffolk Life and business unit costs allocated to the Risk and Savings business are included in the EEV covered business operating profit. These are included within Other Risk and Other Savings within IFRS operating profit.


European Embedded Value									Page 68
Notes to the Financial Statements
5.01	Profit/(loss) for the period (continued)

					Risk and	Investment	Inter-	Group	Total
					Savings	manage-	national	capital
						ment		and
								financing
								Restated	Restated
For the six months ended 30 June 2009			Notes		£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new business after cost of capital			5.03/5.05		185		11		196
Contribution from in-force business:
- expected return					244		60		304
- experience variances			5.07		114		3		117
- operating assumption changes			5.07		(37)		5		(32)
Development costs					(18)		-		(18)
Contribution from shareholder net worth							8	61	69


Operating profit on covered business					488	-	87	61	636

Business reported on an IFRS basis:
General insurance			2.01(f)		6				6
Retail investments					(5)				(5)
Investment management1			5.08			62			62
Group capital and financing			5.10					(38)	(38)
Other2					(5)		-		(5)


Total operating profit					484	62	87	23	656
Variation from longer term investment return			5.11		(885)	(1)	(16)	(116)	(1,018)
Effect of economic assumption changes			5.12		(515)	-	(112)	(3)	(630)
Property losses attributable to minority interests					-	-	-	(20)	(20)


(Loss)/profit from continuing operations before tax					(916)	61	(41)	(116)	(1,012)
Tax credit/(expense) on profit from ordinary activities					255	(17)	15	39	292


(Loss)/profit for the period					(661)	44	(26)	(77)	(720)



Operating profit attributable to:
Risk					460
Savings					24


1. H1 09 Investment management operating profit excludes £12m 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.
2. In H1 09, Suffolk Life, International (Ireland) and business unit costs allocated to the Risk and Savings business are included in the EEV covered business operating profit. These are included within Other Risk and Other Savings within IFRS operating profit.


European Embedded Value									Page 69
Notes to the Financial Statements
5.01	Profit/(loss) for the period (continued)

					Risk and	Investment	Inter-	Group	Total
					Savings	manage-	national	capital
						ment		and
								financing
For the year ended 31 December 2009			Notes		£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new business after cost of capital			5.03/5.05		305		23		328
Contribution from in-force business:
- expected return					496		118		614
- experience variances			5.07		46		17		63
- operating assumption changes			5.07		156		1		157
Development costs					(30)		-		(30)
Contribution from shareholder net worth							16	125	141


Operating profit on covered business					973	-	175	125	1,273

Business reported on an IFRS basis:
General insurance			2.01(f)		17				17
Retail investments					4				4
Investment management1			5.08			144			144
Group capital and financing			5.10					(78)	(78)
Investment projects								(32)	(32)
Other2					(4)		(5)		(9)


Total operating profit					990	144	170	15	1,319
Variation from longer term investment return			5.11		(501)	(4)	62	30	(413)
Effect of economic assumption changes			5.12		(249)	-	(97)	11	(335)
Property losses attributable to minority interests					-	-	-	(19)	(19)


Profit from continuing operations before tax					240	140	135	37	552
Tax (expense)/credit on profit from ordinary activities					(67)	(37)	(43)	33	(114)
Tax impact of corporate restructure3					-	-	-	59	59


Profit for the year					173	103	92	129	497



Operating profit attributable to:
Risk					913
Savings					77


1. FY 09 Investment management operating profit excludes £28m 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.
2. In FY 09, Suffolk Life, International (Ireland) and business unit costs allocated to the Risk and Savings business are included in the EEV covered business operating profit. These are included within Other Risk and Other Savings within IFRS operating profit.
3. In 2009, in addition to current year investment return, £469m was released from the Shareholder Retained Capital and declared as surplus for tax purposes. As a result of the 2007 corporate restructure, this release along with current year movements did not give rise to any incremental tax and therefore resulted in a £59m benefit to embedded value.


European Embedded Value									Page 70
Notes to the Financial Statements
5.02	New business summary1

				APE2	PVNBP3	Margin4	APE	PVNBP	Margin
				30.06.10	30.06.10	30.06.10	30.06.09	30.06.09	30.06.09
		Notes		£m	£m	%	£m	£m	%


Risk		5.03		191	1,475	9.4	223	1,755	10.1
Savings		5.03		286	1,869	0.6	297	2,060	0.3
International		5.05		64	536	1.9	72	551	2.0


				541	3,880	4.1	592	4,366	4.5



							APE	PVNBP	Margin
							Full year	Full year	Full year
							31.12.09	31.12.09	31.12.09
		Notes					£m	£m	%


Risk		5.03					366	2,728	10.4
Savings		5.03					532	3,676	0.5
International		5.05					109	876	2.6


							1,007	7,280	4.5


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.


European Embedded Value									Page 71
5.03	Risk and Savings1 new business by product


			Annual	Present	Capital-	Single	PVNBP	Contri-	Margin
			premiums	value of	isation	premiums		bution
				annual	factor2			from new
				premiums				business3
For the six months ended 30 June 2010			£m	£m		£m	£m	£m	%


Protection			85	417	4.9	-	417	25	6.0
Annuities			-	-	-	1,058	1,058	114	10.8


Total Risk			85	417	4.9	1,058	1,475	139	9.4


Unit linked bonds4			-	-	-	273	273	2	0.7
Pensions, stakeholder and other non profit			114	431	3.8	684	1,115	(1)	(0.1)
With-profits savings			41	130	3.2	351	481	10	2.1


Total Savings			155	561	3.6	1,308	1,869	11	0.6


Total Risk and Savings			240	978	4.1	2,366	3,344	150	4.5
Cost of capital5								15


Contribution from new business before cost of capital								165





For the six months ended 30 June 2009


Protection			90	427	4.7	-	427	30	7.0
Annuities			-	-	-	1,328	1,328	148	11.1


Total Risk			90	427	4.7	1,328	1,755	178	10.1


Unit linked bonds			-	-	-	319	319	(5)	(1.6)
Pensions, stakeholder and other non profit			77	304	3.9	703	1,007	(4)	(0.4)
With-profits savings			68	241	3.5	493	734	16	2.2


Total Savings			145	545	3.8	1,515	2,060	7	0.3


Total Risk and Savings			235	972	4.1	2,843	3,815	185	4.8
Cost of capital								32


Contribution from new business before cost of capital								217




For the year ended 31 December 2009


Protection			180	866	4.8	-	866	68	7.9
Annuities			-	-	-	1,862	1,862	217	11.7


Total Risk			180	866	4.8	1,862	2,728	285	10.4


Unit linked bonds			-	-	-	677	677	(4)	(0.6)
Pensions, stakeholder and other non profit			144	515	3.6	1,289	1,804	(11)	(0.6)
With-profits savings			103	316	3.1	879	1,195	35	2.9


Total Savings			247	831	3.4	2,845	3,676	20	0.5


Total Risk and Savings			427	1,697	4.0	4,707	6,404	305	4.8
Cost of capital								40


Contribution from new business before cost of capital								345


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. For H1 10, business written through International (Ireland) has been removed from covered business. This business is now reported on an IFRS basis within Other savings, making the presentation comparable with the IFRS financial statements. If International (Ireland) had been removed from covered business in H1 09 and FY 09, the contribution from new business would be increased by £nil and £2m respectively. Comparatives have not been restated.
5. The H1 10 new business cost of capital is lower than H1 09 primarily reflecting the impact of a reduction in the risk margin from 4.5% at H1 09 to 3.2% at H1 10.


European Embedded Value									Page 72
Notes to the Financial Statements
5.04	Non profit internal rate of return (IRR) and payback period1 by product


				IRR	Payback	IRR	Payback	IRR	Payback
					period		period		period
				30.06.10	30.06.10	30.06.09	30.06.09	31.12.09	31.12.09
				%	years	%	years	%	years


Protection				15	5	16	5	17	5
Annuities2				>30		>30		>30
Unit linked bonds				9	8	6	9	8	9
Pensions, stakeholder and other non profit				7	13	7	12	6	14


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


5.05	International1 new business

					APE	PVNBP	Contri-	Cost of	Margin
							bution	capital
							from new
							business2
For the six months ended 30 June 2010					£m	£m	£m	£m	%


USA					22	162	2	2	1.4
Netherlands					10	92	1	1	1.2
France					32	282	7	1	2.3


Total					64	536	10	4	1.9




For the six months ended 30 June 2009


USA					29	204	8	4	4.2
Netherlands					13	113	1	2	0.6
France					30	234	2	3	0.9


Total					72	551	11	9	2.0




For the year ended 31 December 2009


USA					49	354	17	2	4.9
Netherlands					22	193	5	3	2.7
France					38	329	1	5	0.1


Total					109	876	23	10	2.6


1. Excludes core retail investments in France.
2. Contribution from new business is reported after the cost of capital.


5.06	International1 new business in local currency

		Annual	Present	Capital-	Single	PVNBP	Contri-	Cost of	Margin
		premiums	value of	isation	Premiums		bution	capital
			annual	factor			from new
			premiums				business2
For the six months ended 30 June 2010		m	m		m	m	m	m	%


USA		$33	$251	7.6	-	$251	$4	$3	1.4
Netherlands		€4	€29	7.2	€78	€107	€1	€1	1.2
France		€24	€182	7.6	€143	€325	€8	€1	2.3




For the six months ended 30 June 2009


USA		$43	$301	7.0	-	$301	$13	$6	4.2
Netherlands		€5	€32	6.5	€96	€128	€1	€2	0.6
France		€21	€142	6.7	€122	€264	€2	€3	0.9




For the year ended 31 December 2009


USA		$76	$553	7.3	-	$553	$27	$3	4.9
Netherlands		€9	€61	6.8	€157	€218	€6	€3	2.7
France		€15	€105	7.2	€264	€369	€1	€5	0.1


1. Excludes core retail investments in France.
2. Contribution from new business is reported after the cost of capital.


European Embedded Value									Page 73
Notes to the Financial Statements
5.07	Analysis of experience variances and operating assumption changes

			Risk and Savings				International
			Experience	Operating	Total		Experience	Operating	Total
			variances	assumption			variances	assumption
				changes				changes
For the six months ended 30 June 2010			£m	£m	£m		£m	£m	£m


Persistency			1	(2)	(1)		(1)	-	(1)
Mortality/morbidity			11	12	23		(9)	-	(9)
Expenses			6	(15)	(9)		(2)	(2)	(4)
Other			49	(4)	45		(1)	-	(1)


			67	(9)	58		(13)	(2)	(15)


Full experience investigations are not undertaken at the half-year. A conservative estimate is made of both positive and negative variances.

H1 10 Risk and Savings other experience variances principally includes £31m relating to one-off modelling improvements, with the remainder reflecting cost of capital releases on the value of in-force.


			Risk and Savings				International
			Experience	Operating	Total		Experience	Operating	Total
			variances	assumption			variances	assumption
				changes				changes
For the six months ended 30 June 2009			£m	£m	£m		£m	£m	£m


Persistency			(4)	(1)	(5)		1	-	1
Mortality/morbidity			5	-	5		4	6	10
Expenses			(5)	(31)	(36)		(1)	(4)	(5)
Other			118	(5)	113		(1)	3	2


			114	(37)	77		3	5	8


H1 09 Risk and Savings expense assumption changes primarily reflect assumed higher future investment expenses.

H1 09 Risk and Savings other experience variances principally include £57m relating to one-off modelling improvements and £39m reflecting a reassessment of future reserve releases as data is loaded onto the BPA system and other reserve releases.


			Risk and Savings				International
			Experience	Operating	Total		Experience	Operating	Total
			variances	assumption			variances	assumption
				changes				changes
For the year ended 31 December 2009			£m	£m	£m		£m	£m	£m


Persistency			(5)	(42)	(47)		(2)	(13)	(15)
Mortality/morbidity			(6)	114	108		13	26	39
Expenses			(19)	60	41		(7)	(12)	(19)
Other			76	24	100		13	-	13


			46	156	202		17	1	18


FY 09 Risk and Savings persistency operating assumption changes relate to the strengthening of lapse assumptions for individual protection and unit linked bond policies; partially offset by improved persistency for with-profits products.

FY 09 Risk and Savings mortality assumption changes relates to favourable annuitant mortality experience in 2009 which has been reflected in the latest three year average experience, and favourable individual protection mortality.

FY 09 Risk and Savings expense assumption changes primarily reflects the £76m impact of the cost reductions delivered in 2009; partially offset by the impact of assumed higher future investment expenses of £(29)m. Other smaller items have a net positive impact of £13m. Expense experience variances include the impact of redundancy costs as a result of the cost reduction programme and exceptional project expenses and other items; partially offset by the impact of lower maintenance expenses than assumed of £6m.

FY 09 Risk and Savings other experience variances includes £44m reflecting a reassessment of future reserve releases as data is loaded onto the BPA system and £43m relating to one-off modelling improvements.

FY 09 International mortality operating assumption changes primarily reflects improved claims ratios on group protection business in France, following positive experience in 2009.


European Embedded Value									Page 74
Notes to the Financial Statements
5.08	Investment management operating profit

									Full year
							30.06.10	30.06.09	31.12.09
							£m	£m	£m


Managed pension funds1							70	55	128
Private equity							(1)	(1)	(1)
Property							(1)	1	4
Other income2							13	7	13


Total Investment management operating profit							81	62	144


1. The managed pension funds business within Investment management has been reported on an IFRS basis as management believe IFRS to be the most appropriate reporting basis for the Investment management business.
2. Other income excludes £17m (H1 09: £12m; FY 09: £28m) 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, Savings and Group capital and financing covered business on an EEV basis.


5.09	International operating profit

									Full year
							30.06.10	30.06.09	31.12.09
							£m	£m	£m


USA							41	58	109
Netherlands							10	9	29
France							14	20	37
Other1							(4)	-	(5)


Total International operating profit							61	87	170


1. Other includes our joint venture operations in Egypt, the Gulf, India and business unit costs allocated to the International segment.

5.10	Group capital and financing operating profit1

									Full year
							30.06.10	30.06.09	31.12.09
								Restated
							£m	£m	£m


Business reported on an EEV basis							72	61	125

Business reported on an IFRS basis:
Investment return							23	30	53
Interest expense2							(59)	(65)	(127)
Unallocated corporate expenses							(3)	(3)	(4)


							(39)	(38)	(78)


Total Group capital and financing operating profit							33	23	47


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 2.16).


European Embedded Value									Page 75
Notes to the Financial Statements
5.11	Variation from longer term investment return
									Full year
							30.06.10	30.06.09	31.12.09
								Restated
							£m	£m	£m


Business reported on an EEV basis:
Risk and Savings1							(110)	(875)	(513)
International							31	(16)	62
Group capital and financing							(49)	(141)	(8)


							(128)	(1,032)	(459)
Business reported on an IFRS basis:
Risk and Savings							10	(10)	12
Investment management							(4)	(1)	(4)
Group capital and financing							(62)	25	38


							(184)	(1,018)	(413)


1. In H1 10, favourable market conditions have allowed the annuity business to reduce some of its credit exposure to corporate bonds, and in turn increase its UK sovereign debt holdings with negligible IFRS impact. However the yield on the gilts purchased is lower than the EEV reinvestment rate which is reflected in a negative investment variance of £(40)m. A £(25)m negative investment variance from the savings business and £(43)m negative variance due to an increased cost of capital arising from the reduction in the equity ratio for assets backing solvency capital have also contributed to the investment return variance.


5.12	Effect of economic assumption changes
									Full year
							30.06.10	30.06.09	31.12.09
							£m	£m	£m


Business reported on an EEV basis:
Risk and Savings1							139	(515)	(249)
International							40	(112)	(97)
Group capital and financing							-	(3)	11


							179	(630)	(335)


1. H1 10 Risk and Savings economic assumption changes primarily reflects the decrease in the UK risk margin from 3.5% to 3.2%.


5.13	Time value of options and guarantees
									Full year
							30.06.10	30.06.09	31.12.09
							£m	£m	£m


Risk and Savings							21	27	13
International							17	12	19


							38	39	32




European Embedded Value									Page 76
Notes to the Financial Statements
5.14	Tax

				Profit/	Tax	Profit/	Tax	Profit/	Tax
				(loss)	(expense)/	(loss)	(expense)/	(loss)	(expense)/
				before	credit	before	credit	before	credit
				tax		tax		tax
								Full year	Full year
				30.06.10	30.06.10	30.06.09	30.06.09	31.12.09	31.12.09
						Restated	Restated
				£m	£m	£m	£m	£m	£m


From continuing operations
Risk				367	(103)	460	(129)	913	(254)
Savings				61	(18)	24	(7)	77	(23)
Investment management				81	(23)	62	(17)	144	(38)
International				61	(20)	87	(29)	170	(57)
Group capital and financing				33	(9)	23	7	47	(8)
Investment projects				(14)	4	-	-	(32)	9


Operating profit				589	(169)	656	(175)	1,319	(371)
Variation from longer term investment return				(184)	62	(1,018)	282	(413)	158
Effect of economic assumption changes				179	(54)	(630)	185	(335)	99
Property losses attributable to minority interests				(1)	-	(20)	-	(19)	-


Profit/(loss) from continuing operations before tax / Tax				583	(161)	(1,012)	292	552	(114)


It is considered that the net effect of the government's proposed tax changes announced in the emergency budget, including a reduction in the corporation tax rate to 27% and an increase in the rate of VAT to 20%, will have an immaterial impact on the EEV results. The UK EEV calculations and the tax rate used for grossing up in the income statement are therefore based on a UK corporation tax rate of 28% (H1 09: 28%; FY 09: 28%).


5.15	Earnings per share
(a)	Earnings per share

		Profit/	Tax	Profit/	Per share	Profit/	Tax	Profit/	Per share
		(loss)	(expense)/	(loss)		(loss)	(expense)/	(loss)
		before	credit	after		before	credit	after
		tax		tax		tax		tax
		30.06.10	30.06.10	30.06.10	30.06.10	30.06.09	30.06.09	30.06.09	30.06.09
						Restated	Restated	Restated	Restated
		£m	£m	£m	p	£m	£m	£m	p


Operating profit from continuing
operations		589	(169)	420	7.21	656	(175)	481	8.26
Variation from longer term investment
return		(184)	62	(122)	(2.09)	(1,018)	282	(736)	(12.64)
Effect of economic assumption changes		179	(54)	125	2.14	(630)	185	(445)	(7.64)


Earnings per share based on profit/(loss)
attributable to equity holders		584	(161)	423	7.26	(992)	292	(700)	(12.02)



						Profit/	Tax	Profit/	Per share
						(loss)	(expense)/	(loss)
						before	credit	after
						tax		tax
						Full year	Full year	Full year	Full year
						31.12.09	31.12.09	31.12.09	31.12.09
						£m	£m	£m	p


Operating profit from continuing operations						1,319	(371)	948	16.28
Variation from longer term investment return						(413)	158	(255)	(4.38)
Effect of economic assumption changes						(335)	99	(236)	(4.05)
Tax impact of corporate restructure						-	59	59	1.01


Earnings per share based on profit/(loss)
attributable to equity holders						571	(55)	516	8.86



European Embedded Value									Page 77
Notes to the Financial Statements
5.15	Earnings per share (continued)
(b)	Diluted earnings per share
(i)	Based on operating profit from continuing operations after tax

				Profit	Number	Per share	Profit	Number	Per share
				after	of		after	of
				tax	shares1		tax	shares1
				30.06.10	30.06.10	30.06.10	30.06.09	30.06.09	30.06.09
							Restated		Restated
				£m	m	p	£m	m	p


Operating profit from continuing operations after tax				420	5,827	7.21	481	5,822	8.26
Net shares under options allocable for no further consideration				-	63	(0.08)	-	8	(0.01)


Diluted earnings per share				420	5,890	7.13	481	5,830	8.25



							Profit	Number	Per share
							after	of
							tax	shares1
							Full year	Full year	Full year
							31.12.09	31.12.09	31.12.09
							£m	m	p


Operating profit from continuing operations after tax							948	5,824	16.28
Net shares under options allocable for no further consideration							-	33	(0.09)


Diluted earnings per share							948	5,857	16.19



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

				Profit	Number	Per share	Loss	Number	Per share
				after tax	of shares1		after tax	of shares1
				30.06.10	30.06.10	30.06.10	30.06.09	30.06.09	30.06.09
				£m	m	p	£m	m	p


Profit/(loss) attributable to equity holders of the Company				423	5,827	7.26	(700)	5,822	(12.02)
Net shares under options allocable for no further consideration				-	63	(0.08)	-	8	-


Diluted earnings per share				423	5,890	7.18	(700)	5,830	(12.02)



							Profit	Number	Per share
							after tax	of shares1
							Full year	Full year	Full year
							31.12.09	31.12.09	31.12.09
							£m	m	p


Profit attributable to equity holders of the Company							516	5,824	8.86
Net shares under options allocable for no further consideration							-	33	(0.05)


Diluted earnings per share							516	5,857	8.81


The number of shares in issue at 30 June 2010 was 5,865,651,980 (30 June 2009: 5,861,679,365; 31 December 2009: 5,862,216,780).

1. Weighted average number of shares.

European Embedded Value									Page 78
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 six months ended 30 June 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			-	-	-	-	32	(22)	10


			1,067	1,521	3,679	6,267	1,478	(1,040)	6,705
Operating profit/(loss) for the period:
- New business contribution1			(129)	88	149	108
- Expected return on VIF			-	-	145	145
- Expected transfer from Non profit VIF to SNW2			335	(90)	(245)	-
- With-profits transfer			23	-	(23)	-
- Experience variances			7	-	40	47
- Operating assumption changes			85	-	(92)	(7)
- Development costs			(6)	-	-	(6)
- Expected return on SNW			21	34	-	55
Operating profit/(loss)			336	32	(26)	342	44	34	420
Non-operating profit/(loss) for the period:
- Investment variances			118	(1)	(220)	(103)
- Economic assumption changes			(4)	25	78	99
Non-operating profit/(loss) for the period:			114	24	(142)	(4)	47	(41)	2


Profit/(loss) for the period			450	56	(168)	338	91	(7)	422
Intra-group distributions3			84	-	-	84	(34)	(50)	-
Dividends to equity holders of the Company			-	-	-	-	-	(160)	(160)
Net movements in employee share schemes			-	-	-	-	-	(2)	(2)
Loss attributable to minority interests			-	-	-	-	-	1	1
Transfer to non-covered business4			(12)	-	-	(12)	-	12	-
Other reserve movements including pension deficit5			(153)	(25)	(14)	(192)	-	184	(8)


Embedded value			1,436	1,552	3,497	6,485	1,535	(1,062)	6,958



Represented by:
- Non profit					3,041
- With-profits					456


Value of in-force business			-	-	3,497	3,497	1,039	-	4,536
Shareholder net worth			1,436	1,552	-	2,988	496	(1,062)	2,422


1. The free surplus reduction of £129m to finance new business includes £44m IFRS new business strain and £88m additional required capital. Other items have a net positive impact of £3m.
2. The increase in free surplus of £335m from the expected transfer from the in-force non profit business includes £239m of IFRS operational cash generation and a £90m reduction in required capital. Other items have a net positive impact of £6m.
3. Intra-group distributions reflect dividends of £84m paid to Society from subsidiaries (primarily Nationwide Life) and a dividend of $50m from the USA paid to Group.
4. The transfer to non-covered business represents the IFRS profits arising in the period from the provision 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.
5. 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 79
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
								Restated	Restated
For the six months ended 30 June 2009			£m	£m	£m	£m	£m	£m	£m


At 1 January
Value of in-force business (VIF)			-	-	4,268	4,268	1,059	-	5,327
Shareholder net worth (SNW)			509	1,369	-	1,878	404	(1,088)	1,194


			509	1,369	4,268	6,146	1,463	(1,088)	6,521
Exchange rate movements			-	-	-	-	(177)	84	(93)


			509	1,369	4,268	6,146	1,286	(1,004)	6,428
Operating profit for the period:
- New business contribution1			(119)	95	157	133
- Expected return on VIF			-	-	175	175
- Expected transfer from Non profit VIF to SNW2			304	(61)	(243)	-
- With-profits transfer			21	-	(21)	-
- Experience variances			(54)	(4)	133	75
- Operating assumption changes			49	4	(75)	(22)
- Development costs			(13)	-	-	(13)
- Expected return on SNW			20	25	-	45
Operating profit			208	59	126	393	58	30	481
Non-operating (loss)/profit for the period:
- Investment variances			(588)	(4)	(144)	(736)
- Economic assumption changes			123	24	(521)	(374)
Non-operating (loss)/profit for the period:			(465)	20	(665)	(1,110)	(84)	(7)	(1,201)


(Loss)/profit for the period			(257)	79	(539)	(717)	(26)	23	(720)
Intra-group distributions			-	-	-	-	(2)	2	-
Dividends to equity holders of the Company			-	-	-	-	-	(120)	(120)
Net movements in employee share schemes			-	-	-	-	-	6	6
Loss attributable to minority interests			-	-	-	-	-	20	20
Transfer to non-covered business4			(8)	-	-	(8)	-	8	-
Other reserve movements including pension deficit			(36)	-	(6)	(42)	-	(16)	(58)


Embedded value			208	1,448	3,723	5,379	1,258	(1,081)	5,556


Represented by:
- Non profit					3,386
- With-profits					337


Value of in-force business			-	-	3,723	3,723	935	-	4,658
Shareholder net worth			208	1,448	-	1,656	323	(1,081)	898


1. The free surplus reduction of £119m to finance new business includes £31m IFRS new business strain and £95m additional required capital. Other items have a net positive impact of £7m.
2. The increase in free surplus of £304m from the expected return on the in-force non profit business includes £238m of IFRS operational cash generation and a £61m reduction in required capital. Other items have a net positive impact of £5m.
3. The transfer to non-covered business represents the IFRS profits arising in the period from the provision 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 80
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 2009			£m	£m	£m	£m	£m	£m	£m


At 1 January
Value of in-force business (VIF)			-	-	4,268	4,268	1,059	-	5,327
Shareholder net worth (SNW)			509	1,369	-	1,878	404	(1,088)	1,194


			509	1,369	4,268	6,146	1,463	(1,088)	6,521
Exchange rate movements			-	-	-	-	(153)	65	(88)


			509	1,369	4,268	6,146	1,310	(1,023)	6,433
Operating profit for the year:
- New business contribution1			(189)	155	253	219
- Expected return on VIF			-	-	358	358
- Expected transfer from Non profit VIF to SNW2			648	(147)	(501)	-
- With-profits transfer			46	-	(46)	-
- Experience variances			30	29	(31)	28
- Operating assumption changes			285	(23)	(152)	110
- Development costs			(21)	-	-	(21)
- Expected return on SNW			34	61	-	95
Operating profit/(loss)			833	75	(119)	789	117	42	948
Non-operating (loss)/profit for the year:
- Investment variances			(66)	2	(276)	(340)
- Economic assumption changes			(66)	75	(180)	(171)
- Tax impact of corporate restructure			59	-	-	59
Non-operating (loss)/profit for the year:			(73)	77	(456)	(452)	(21)	22	(451)


Profit/(loss) for the year			760	152	(575)	337	96	64	497
Capital movements			-	-	-	-	50	(50)	-
Intra-group distributions3			(154)	-	-	(154)	(10)	164	-
Dividends to equity holders of the Company			-	-	-	-	-	(185)	(185)
Net movements in employee share schemes			-	-	-	-	-	19	19
Loss attributable to minority interests			-	-	-	-	-	19	19
Transfer to non-covered business4			(20)	-	-	(20)	-	20	-
Other reserve movements including pension deficit			(28)	-	(14)	(42)	-	(46)	(88)


Embedded value			1,067	1,521	3,679	6,267	1,446	(1,018)	6,695


Represented by:
- Non profit					3,213
- With-profits					466


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


1. The free surplus reduction of £189m to finance new business includes £27m IFRS new business strain and £155m additional required capital. Other items have a net positive impact of £7m.
2. The increase in free surplus of £648m from the expected return on the in-force non profit business includes £496m of IFRS operational cash generation and a £147m reduction in required capital. Other items have a net positive impact of £5m.
3. Intra-group distributions comprise a £154m dividend paid from Society to Group, and distributions from the covered businesses of USA ($6m), Netherlands (€5m) and France (€3m).
4. The transfer to non-covered business represents the IFRS profits arising in the period from the provision 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 81
Notes to the Financial Statements
5.17	Analysis of shareholders' equity

					Risk and	Investment	Inter-	Group	Total
					Savings	manage-	national	capital
						ment		and
								financing
As at 30 June 2010					£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity1					258	370	1,473	2,366	4,467
Additional retained profit/(loss) on an EEV basis					3,497	-	95	(1,101)	2,491


Shareholders' equity on an EEV basis					3,755	370	1,568	1,265	6,958


Comprising:
Business reported on an IFRS basis					258	370	33	(1,723)	(1,062)

Business reported on an EEV basis:
Shareholder net worth
- Free surplus2							239	1,436	1,675
- Required capital to cover solvency margin							257	1,552	1,809
Value of in-force
- Value of in-force business					3,817		1,119		4,936
- Cost of capital					(320)		(80)		(400)



					Risk and	Investment	Inter-	Group	Total
					Savings	manage-	national	capital
						ment		and
								financing
As at 30 June 2009					£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity1					199	334	1,163	1,599	3,295
Additional retained profit/(loss) on an EEV basis					3,723	-	105	(1,567)	2,261


Shareholders' equity on an EEV basis					3,922	334	1,268	32	5,556


Comprising:
Business reported on an IFRS basis					199	334	10	(1,624)	(1,081)

Business reported on an EEV basis:
Shareholder net worth
- Free surplus2							84	208	292
- Required capital to cover solvency margin							239	1,448	1,687
Value of in-force
- Value of in-force business					4,128		1,028		5,156
- Cost of capital					(405)		(93)		(498)



					Risk and	Investment	Inter-	Group	Total
					Savings	manage-	national	capital
						ment		and
								financing
As at 31 December 2009					£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity1					233	305	1,372	2,286	4,196
Additional retained profit/(loss) on an EEV basis					3,679	-	108	(1,288)	2,499


Shareholders' equity on an EEV basis					3,912	305	1,480	998	6,695


Comprising:
Business reported on an IFRS basis					233	305	34	(1,590)	(1,018)

Business reported on an EEV basis:
Shareholder net worth
- Free surplus2							263	1,067	1,330
- Required capital to cover solvency margin							255	1,521	1,776
Value of in-force
- Value of in-force business					3,987		1,012		4,999
- Cost of capital					(308)		(84)		(392)


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 82
Notes to the Financial Statements
5.18	Segmental analysis of shareholders' equity

				Covered	Other	Total	Covered	Other	Total
				business	business		business	business
				EEV	IFRS		EEV	IFRS
				basis	basis		basis	basis
				At	At	At	At	At	At
				30.06.10	30.06.10	30.06.10	30.06.09	30.06.09	30.06.09
				£m	£m	£m	£m	£m	£m


Risk
- Risk reported on an EEV basis				2,381	-	2,381	2,688	-	2,688
- General insurance				-	137	137	-	95	95
- Other				-	(1)	(1)	-	(1)	(1)


Total Risk				2,381	136	2,517	2,688	94	2,782



Savings
- Savings reported on an EEV basis				1,116	-	1,116	1,035	-	1,035
- Retail investments				-	107	107	-	92	92
- Other				-	15	15	-	13	13


Total Savings				1,116	122	1,238	1,035	105	1,140



Investment management				-	370	370	-	334	334



International
- USA				1,002	-	1,002	777	-	777
- Netherlands				313	-	313	278	-	278
- France				220	-	220	203	-	203
- Emerging markets				-	33	33	-	10	10


Total International				1,535	33	1,568	1,258	10	1,268



Group capital and financing				2,988	(1,723)	1,265	1,656	(1,624)	32


				8,020	(1,062)	6,958	6,637	(1,081)	5,556



							Covered	Other	Total
							business	business
							EEV	IFRS
							basis	basis
							At	At	At
							31.12.09	31.12.09	31.12.09
							£m	£m	£m


Risk
- Risk reported on an EEV basis							2,530	-	2,530
- General insurance							-	120	120
- Other							-	-	-


Total Risk							2,530	120	2,650



Savings
- Savings reported on an EEV basis							1,149	-	1,149
- Retail investments							-	100	100
- Other							-	13	13


Total Savings							1,149	113	1,262



Investment management							-	305	305



International
- USA							904	-	904
- Netherlands							316	-	316
- France							226	-	226
- Emerging markets							-	34	34


Total International							1,446	34	1,480



Group capital and financing							2,588	(1,590)	998


							7,713	(1,018)	6,695



European Embedded Value									Page 83
Notes to the Financial Statements
5.19	Reconciliation of shareholder net worth

				UK	Total	UK	Total	UK	Total
				covered		covered		covered
				business		business		business
				At	At	At	At	At	At
				30.06.10	30.06.10	30.06.09	30.06.09	31.12.09	31.12.09
				£m	£m	£m	£m	£m	£m


SNW of long term operations (IFRS basis)				4,090	5,529	3,223	4,376	3,876	5,214
Other liabilities (IFRS basis)				-	(1,062)	-	(1,081)	-	(1,018)


Shareholders' equity on the IFRS basis				4,090	4,467	3,223	3,295	3,876	4,196
Purchased interest in long term business				(93)	(101)	(161)	(183)	(114)	(126)
Deferred acquisition costs/deferred income liabilities				(251)	(1,221)	(246)	(1,089)	(250)	(1,132)
Contingent loan1				(538)	(538)	(692)	(692)	(421)	(421)
Deferred tax2				(280)	58	(391)	(112)	(324)	(33)
Other3				60	(243)	(77)	(321)	(179)	(396)


Shareholder net worth on the EEV basis				2,988	2,422	1,656	898	2,588	2,088


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 sterling reserves, other long term reserves and the non profit result of LGPL under EEV compared with IFRS. Total business also includes the different treatment of the US Triple X securitisation on an EEV and IFRS basis.

European Embedded Value Page 84

Notes to the Financial Statements

5.20 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 total portfolio, after allowance for long term default risk, are shown below.

For annuities, separate returns are calculated for new and existing business.

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

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 30.06.09; 0.70% p.a. at 31.12.09) greater than the swap rate at that time (i.e. the long term credit rate).

Additionally 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 credit defaults over the short term. The allowance expressed as a level rate deduction from the expected returns was 35bp at 30 June 2010 (43bp at 30.06.09; 40bp at 31.12.09).

Economic assumptions

	30.06.10	30.06.09	31.12.09	31.12.08
	% p.a.	% p.a.	% p.a.	% p.a.

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

Investment return
- Gilts:
- Fixed interest	3.8	4.3	4.0	3.8
- RPI linked	4.1	4.2	4.5	3.7
- Non gilts:
- Fixed interest	3.9 - 5.8	4.4 - 7.6	4.4 - 6.2	4.2 - 8.2
- RPI linked	4.5 - 5.4	4.9 - 6.1	5.1 - 6.1	4.7 - 5.9
- Equities	7.6	7.8	8.0	7.3
- Property	6.1	6.3	6.5	5.8

Risk free rate1	4.1	4.3	4.5	3.8
Risk margin	3.2	4.5	3.5	4.5
Risk discount rate (net of tax)	7.3	8.8	8.0	8.3

Inflation
- Expenses/earnings	3.8	4.2	4.6	3.6
- Indexation	3.3	3.2	3.6	2.6

1. The risk free rate is the gross redemption yield on the 20 year gilt index.

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.

European Embedded Value Page 85

Notes to the Financial Statements

5.20 Assumptions (continued)

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 CMI Working Paper 30, projection MC, with a minimum annual improvement of 1.5% for future experience, and 2.0% for statutory reserving. Female annuitant mortality is assumed to improve in accordance with 75% of projection MC, with a minimum annual 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 89 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 24.5 years (30.06.09: 25.2 years; 31.12.09: 24.5 years). The expectation of life on the regulatory reserving basis is 25.7 years (30.06.09: 26.4 years; 31.12.09: 25.7 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:

	30.06.10	30.06.09	31.12.09	31.12.08
	% p.a.	% p.a.	% p.a.	% p.a.
USA
Reinvestment rate	4.4	5.3	5.1	5.4
Risk margin	3.2	4.5	3.5	4.5
Risk discount rate (net of tax)	6.5	8.0	7.4	6.8

Europe
Government bond return	2.8	3.8	3.6	3.5
Risk margin	3.2	4.5	3.5	4.5
Risk discount rate (net of tax)	6.0	8.3	7.1	8.0

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. The tax rate used for grossing up is the corporate tax rate in the territory concerned, which for the UK was 28% (H1 09 and FY 09: 28%). It is considered that the net effect of the government's proposed tax changes announced in the emergency budget, including a reduction in the corporation tax rate to 27% and an increase in the rate of VAT to 20%, will have an immaterial impact on the EEV results. 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.

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.

European Embedded Value Page 86

Notes to the Financial Statements

5.20 Assumptions (continued)

Summary statistics:

The following table sets out means and standard deviations (StDev) of future returns as at 30 June 2010 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	3.8%	4.0%	4.7%	4.1%
Corporate bonds	5.7%	4.1%	6.5%	4.3%
Property (excess returns)	1.9%	14.7%	2.0%	15.0%
Equities (excess returns)	3.5%	20.3%	3.5%	20.0%

European Business (Euro)
Long Government bonds3	3.1%	4.3%	3.8%	4.3%
Short Government bonds4	3.1%	3.7%	3.8%	6.9%

US Business (US Dollar)
Long Government bonds3	3.3%	5.5%	4.5%	5.6%

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 87

Notes to the Financial Statements

5.21 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.

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, as management believe IFRS to the most appropriate reporting basis for the investment management business.

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.

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.

European Embedded Value Page 88

Notes to the Financial Statements

5.21 Methodology (continued)

Department of Work and Pensions rebates have not been treated as recurring and are included in single premium new business when received.

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. The new business margin is defined as new business contribution at the end of the reporting period divided by the PVNBP. 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 in the US, 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 or expected future changes.

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.

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 Legal & General America, 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 Legal & General Netherlands, 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 175% of the EU minimum solvency margin has been used. The level of capital has been determined using risk based capital techniques.

European Embedded Value Page 89

Notes to the Financial Statements

5.21 Methodology (continued)

For Legal & General France, 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.

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.

In the US, 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 4% and 5%. The assets backing these contracts are invested in US Dollar denominated fixed interest securities.

In the Netherlands, there are two types of guarantees which have been separately provided for: 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.

In France, 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 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.

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 28%.

European Embedded Value Page 90

Notes to the Financial Statements

5.21 Methodology (continued)

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.

For the H1 10 results the risk margin was decreased to 3.2% (H1 09: 4.5%; FY 09: 3.5%). The decrease reflects the continued reduction in the market perceived company specific risks that were initially apparent in the dislocated market conditions at the end of 2008 and early in 2009.

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.

European Embedded Value Page 91

Independent review report to Legal & General Group Plc - EEV

Introduction

We have been engaged by the Company to review the supplementary financial information in the Half Year Report for the six months ended 30 June 2010, which comprises the Consolidated income statement, the Consolidated statement of comprehensive income, the Consolidated balance sheet as at 30 June 2010 and related notes prepared on the European Embedded Value ("EEV") basis on pages 65 to 90 ("the supplementary half year financial information"). We have read the other information contained in the Half Year Report and considered whether it contains any apparent misstatements or material inconsistencies with the supplementary half year financial information.

Directors' responsibilities

The Half Year Report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the supplementary half year financial information in accordance with the EEV basis set out in note 5.21.

Our responsibility

Our responsibility is to express to the Company a conclusion on the supplementary half year financial information in the Half Year Report based on our review. This report, including the conclusion, has been prepared for and only for the Company and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of supplementary financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the supplementary half year financial information in the Half Year Report for the six months ended 30 June 2010 is not prepared, in all material respects, in accordance with the EEV basis set out in note 5.21.

PricewaterhouseCoopers LLP Chartered Accountants London

3 August 2010

Notes:

(a) The Half Year Report is published on the website of Legal & General Group Plc, www.legalandgeneralgroup.com. The maintenance and integrity of the Legal & General Group Plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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