L&G Half-year Results Part 3a

European Embedded Value

Page 23

Consolidated income statement

Six months ended 30 June 2008

Full year

30.06.08

30.06.07

31.12.07

Notes

£m

£m

£m

From continuing operations

Life and pensions

3.01/3.02 

564 

551 

856 

Investment management

3.06 

111 

90 

196 

General insurance

4.03 

(4)

(38)

(67)

Other operational income

3.07 

(45)

(14)

(73)

Operating profit

626 

589 

912 

Variation from longer term investment return

3.08 

(538)

197 

116 

Effect of economic assumption changes

3.01 

(10)

(6)

57 

Property (expense)/income attributable to minority interests

(13)

17 

(6)

Corporate restructure

- 

- 

161 

Profit from continuing operations before tax attributable to equity holders

65 

797 

1,240 

Tax charge on profit from ordinary activities

3.09 

(9)

(218)

(327)

Effect of UK Budget tax changes

- 

93 

93 

Tax impact of corporate restructure

- 

- 

206 

Profit from ordinary activities after tax

56 

672 

1,212 

Loss/(profit) attributable to minority interests

4.15 

13 

(17)

6 

Profit attributable to equity holders of the Company

69 

655 

1,218 

p

p 

p 

Earnings per share 

3.10 

Based on operating profit from continuing operations after tax attributable to

equity holders

7.33 

6.62 

9.81 

Based on profit attributable to equity holders of the Company

1.14 

10.08 

18.90 

Diluted earnings per share

3.10 

Based on operating profit from continuing operations after tax attributable to

equity holders

7.30 

6.59 

9.76 

Based on profit attributable to equity holders of the Company

1.13 

10.03 

18.80 

European Embedded Value

Page 24

Consolidated balance sheet

As at 30 June 2008

At 30.06.08

At 30.06.07

At 31.12.07

Notes

£m

£m

£m

Assets

Investments

267,674 

235,303 

276,438 

Long term in-force business asset

3,331 

2,872 

3,041 

Other assets

6,567 

5,743 

4,828 

277,572 

243,918 

284,307 

Equity and liabilities

Shareholders' equity

3.12/3.13

7,781 

8,365 

8,468 

Minority interests

4.15

175 

456 

178 

Total equity

7,956 

8,821 

8,646 

Subordinated borrowings

4.14

1,444 

1,371 

1,461 

Unallocated divisible surplus

1,411 

2,277 

1,721 

Participating contract liabilities

17,230 

19,231 

18,849 

Non-participating contract liabilities

241,284 

205,771 

247,779 

Senior borrowings

4.14

1,742 

1,332 

1,327 

Other liabilities and provisions

6,505 

5,115 

4,524 

277,572 

243,918 

284,307 

Consolidated statement of recognised income and expense

Six months ended 30 June 2008

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

Exchange differences on translation of overseas operations

19 

(1)

18 

Actuarial gains/(losses) on defined benefit pension schemes

12 

36 

(23)

Actuarial (gains)/losses on defined benefit pension schemes transferred to unallocated divisible surplus

(8)

(25)

16 

Income recognised directly in equity, net of tax

23 

10 

11 

Profit from ordinary activities after tax

56 

672 

1,212 

Total recognised income and expense

79 

682 

1,223 

Attributable to:

Minority interests

(13)

17 

(6)

Equity holders of the Company

92 

665 

1,229 

European Embedded Value

Page 25

Notes to the Financial Statements

3.01 Profit from continuing operations after tax from covered business

UK1

Interna-

Life and

Investment

Total

tional

pensions

manage-

total

ment2

For the six months ended 30 June 2008

Notes

£m

£m

£m

£m

£m

Contribution from new business after cost of capital

178 

16 

194 

41 

235 

Contribution from in-force business:

- expected return3

149 

47 

196 

18 

214 

- experience variances 

3.03 

4 

(13)

(9)

23 

14 

- operating assumption changes

3.04 

18 

- 

18 

19 

37 

Development costs

(21)

- 

(21)

(1)

(22)

Contribution from shareholder net worth4

178 

8 

186 

4 

190 

Operating profit

506 

58 

564 

104 

668 

Variation from longer term investment return5

(442)

(48)

(490)

(68)

(558)

Effect of economic assumption changes

4 

(16)

(12)

2 

(10)

Profit from continuing operations before tax

68 

(6)

62 

38 

100 

Tax

(12)

3 

(9)

(10)

(19)

Profit from continuing operations after tax

56 

(3)

53 

28 

81 

For the six months ended 30 June 2007

Contribution from new business after cost of capital

165 

13 

178 

41 

219 

Contribution from in-force business:

- expected return

127 

40 

167 

15 

182 

- experience variances 

3.03 

74 

(6)

68 

13 

81 

- operating assumption changes

3.04 

(10)

- 

(10)

3 

(7)

Development costs

(10)

- 

(10)

(1)

(11)

Contribution from shareholder net worth

151 

7 

158 

4 

162 

Operating profit

497 

54 

551 

75 

626 

Variation from longer term investment return5

191 

(15)

176 

3 

179 

Effect of economic assumption changes

(12)

3 

(9)

3 

(6)

Profit from continuing operations before tax

676 

42 

718 

81 

799 

Tax

(189)

(13)

(202)

(23)

(225)

Effect of UK Budget tax changes

86 

- 

86 

7 

93 

Profit from continuing operations after tax

573 

29 

602 

65 

667 

1. On 31 January 2008 the Group acquired 100% of the shares of Nationwide Life. The results for Nationwide Life have been included in the profit from the covered business with effect from this date, and have contributed £9m to operating profit, and a £1m loss to profit after tax. On 6 May 2008 the Group acquired 100% of the shares of Suffolk Life. The results for Suffolk Life have been included in the profit from the covered business with effect from this date, and have contributed £5m to operating profit, and £4m to profit after tax. Further information on both acquisitions can be found in Note 4.09. 

2. For covered business, Investment management comprises managed pension funds and is included in the total Investment management operating profit of £111m (H1 07: £90m; FY 07: £196m).

3. The UK expected return on in-force is based on the unwind of the discount rate for six months on the opening, adjusted base value of in-force (VIF). The opening base VIF was £2,846m in 2008. This is adjusted for the effects of opening model changes (-£27m) to give an adjusted opening base VIF of £2,819m. This is then multiplied by the opening risk discount rate of 7.5% and the result grossed up at the notional attributed tax rate of 28% to give a return of £144m. This is added to the expected return on the in-force of businesses acquired in the year (£5m) to give a total UK expected return of £149m.

4. The 2008 UK contribution from shareholder net worth (SNW) of £178m is based on a mechanical calculation from opening balance sheet values. There are two elements to this calculation:

The first element reflects the pre-tax smoothed investment return of £136m on SNW assets, including £4m of smoothed investment return on businesses acquired during the year. This is offset by pre-tax corporate expenses charged to shareholders' funds of £7m.

The second element (£32m) is based on the unwind of the discount rate for six months on the opening contingent loan between Society and LGPL.

• The opening value of the contingent loan was £614m in 2008.

• This value is multiplied by the opening risk discount rate of 7.5% and the result grossed up at the notional attributed tax rate of 28% to give a return of £32m. 

Finally, the contribution from SNW includes an adjustment for opening tax and other modelling changes of £17m. 

5. UK life and pensions variation from longer term investment return comprises £25m (H1 07: £97m; FY 07: £246m) relating to the VIF business and negative £467m (H1 07: £94m; FY 07: negative £118m) relating to SNW.

European Embedded Value

Page 26

Notes to the Financial Statements

3.01 Profit from continuing operations after tax from covered business (continued)

UK

Interna-

Life and

Investment

Total

tional

pensions

manage-

total

ment1

For the year ended 31 December 2007

Notes

£m

£m

£m

£m

£m

Contribution from new business after cost of capital

321 

38 

359 

109 

468 

Contribution from in-force business:

- expected return

262 

80 

342 

30 

372 

- experience variances 

3.03 

98 

3 

101 

21 

122 

- operating assumption changes

3.04 

(239)

2 

(237)

9 

(228)

Development costs

(41)

- 

(41)

(2)

(43)

Contribution from shareholder net worth

319 

13 

332 

8 

340 

Operating profit

720 

136 

856 

175 

1,031 

Variation from longer term investment return2

128 

(8)

120 

4 

124 

Effect of economic assumption changes

70 

(18)

52 

5 

57 

Corporate restructure

161 

- 

161 

- 

161 

Profit from continuing operations before tax

1,079 

110 

1,189 

184 

1,373 

Tax

(287)

(32)

(319)

(52)

(371)

Effect of UK Budget tax changes

86 

- 

86 

7 

93 

Tax impact of corporate restructure

206 

- 

206 

- 

206 

Profit from continuing operations after tax

1,084 

78 

1,162 

139 

1,301 

1. For covered business, Investment management comprises managed pension funds and is included in the total Investment management operating profit of £111m (H1 07: £90m; FY 07: £196m).

2. UK life and pensions variation from longer term investment return comprises £25m (H1 07: £97m; FY 07: £246m) relating to the value of in-force business and negative £467m (H1 07: £94m; FY 07: negative £118m) relating to SNW.

3.02 Life and pensions operating profit

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

UK

506 

497 

720 

USA

26 

23 

75 

Netherlands

17 

19 

32 

France

15 

12 

29 

564 

551 

856 

European Embedded Value

Page 27

Notes to the Financial Statements

3.03 Analysis of experience variances

UK

Interna-

Life and

Investment

Total

tional

pensions

manage-

total

ment

For the six months ended 30 June 2008

£m

£m

£m

£m

£m

Persistency

3 

1 

4 

3 

7 

Mortality/morbidity

10 

(1)

9 

- 

9 

Expenses

(2)

(1)

(3)

1 

(2)

Other

(7)

(12)

(19)

19 

- 

4 

(13)

(9)

23 

14 

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

Investment management other experience variances of £19m relates primarily to the effect of higher than assumed fees and other income.

For the six months ended 30 June 2007

Persistency

(3)

(2)

(5)

6 

1 

Mortality/morbidity

5 

6 

11 

- 

11 

Expenses

(9)

(3)

(12)

(2)

(14)

Other

81 

(7)

74 

9 

83 

74 

(6)

68 

13 

81 

UK other experience variances of £81m principally comprise the impact of introducing market referenced fees for the investment management services provided to Society's with-profits business by Legal & General Investment Management (£88m) which are recognised on a look through basis.

Investment management other experience variance of £9m includes the effect of higher than assumed 'other income' and average fees.

For the year ended 31 December 2007

Persistency

(25)

(1)

(26)

5 

(21)

Mortality/morbidity

36 

16 

52 

- 

52 

Expenses

(19)

1 

(18)

(8)

(26)

Other

106 

(13)

93 

24 

117 

98 

3 

101 

21 

122 

2007 UK other experience variances of £106m principally comprise the impact of introducing market referenced fees for the investment management services provided to Society's with-profits business by Legal & General Investment Management (£83m), which are recognised on a look through basis.

2007 Investment management other experience variances of £24m relates primarily to the effect of higher than assumed 'other income' and average fees.

European Embedded Value

Page 27

Notes to the Financial Statements

3.04 Analysis of operating assumption changes

UK

Interna-

Life and

Investment

Total

tional

pensions

manage-

total

ment

For the six months ended 30 June 2008

£m

£m

£m

£m

£m

Persistency

(14)

- 

(14)

- 

(14)

Mortality/morbidity

- 

- 

- 

- 

- 

Expenses

43 

- 

43 

(8)

35 

Other

(11)

- 

(11)

27 

16 

18 

- 

18 

19 

37 

Full experience investigations are not undertaken at the half year. A conservative approach is taken when revising any future operating assumptions.

UK expense assumption changes primarily reflect unit cost efficiencies in the individual protection business.

Investment management other operating assumption changes of £27m primarily comprise the continuation of the ten year lapse rate assumption for all contracts through the extension of the modelling period (£12m), and higher fee and income assumptions (£15m).

For the six months ended 30 June 2007

Persistency

- 

- 

- 

- 

- 

Mortality/morbidity

- 

- 

- 

- 

- 

Expenses

(6)

- 

(6)

(9)

(15)

Other

(4)

- 

(4)

12 

8 

(10)

- 

(10)

3 

(7)

Investment management other operating assumption changes of £12m comprise the continuation of the ten year lapse assumption for all contracts through the extension of the modelling period. 

For the year ended 31 December 2007