L&G Half-year Results Part 4b

International Financial Reporting Standards

Page 48

Notes to the Financial Statements

4.01 Life and pensions operating profit

(a) Analysis of life and pensions operating profit

Full year

30.06.08

30.06.07

31.12.07

Restated

Notes

£m

£m

£m

Net capital released from non profit business

4.01(b)

95 

153 

161 

Investment return1

154 

154 

317 

Other expenses

(10)

(15)

(27)

Non profit business

239 

292 

451 

With-profits business

60 

50 

106 

UK

299 

342 

557 

USA

30 

32 

59 

Netherlands

8 

4 

11 

France

10 

5 

16 

347 

383 

643 

1. The smoothed investment return of £154m reflects an average return of 3% (H1 2007: 3%, FY 2007: 7%) on the average balance of invested assets held within Society Shareholder Capital (SSC) (including interest bearing intra group balances) calculated on a quarterly basis. The invested assets (including interest bearing intra group balances) held within the SSC amounted to £4.5bn at 30 June 2008 (H1 2007: £4.6bn, FY 2007: £4.7bn).

(b) Analysis of net capital released from non profit business

Full year

30.06.08

30.06.07

31.12.07

Notes

£m

£m

£m

Net capital released from non profit business comprises:

New business

- Strain before financing arrangements

(237)

(142)

(344)

Existing business

- Expected capital release, before financing arrangements

241 

211 

406 

Experience variances

4.01(c)

(27)

49 

115 

Changes to non-economic assumptions

4.01(d)

(7)

(6)

(137)

Changes to FSA reporting and capital rules

- 

- 

37 

Movements in non-cash items

4.01(e)

95 

7 

74 

Other

3 

(12)

(38)

68 

107 

113 

Tax gross-up

27 

46 

48 

95 

153 

161 

Expected capital release represents the capital and profit generated in the period from the in-force non profit business if the embedded value assumptions are borne out in practice. The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model. 

Both new business strain and expected capital release exclude required solvency margin, as this is not accounted for under IFRS. On average, the capital invested in new non profit business, including solvency margin, is repaid from product cash flows in approximately 7 years.

International Financial Reporting Standards

Page 49

Notes to the Financial Statements

4.01 Life and pensions operating profit (continued)

An analysis of the experience variances, non-economic assumption changes and non-cash items, all net of tax, is provided below:

(c) Experience variances

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

Persistency

- 

1 

10 

Mortality/morbidity

11 

5 

22 

Expenses

(24)

(27)

(57)

BPA data loading

23 

12 

3 

Investment

20 

67 

134 

Tax1

(55)

(4)

10 

Other

(2)

(5)

(7)

(27)

49 

115 

1. The current tax credit for the period was lower than expected as a result of the fall in investment markets. The consequent unrelieved expenses gave rise to a deferred tax credit, reflected in non-cash items (Note 4.01(e)).

(d) Changes to non-economic assumptions

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

Mortality/morbidity1

(4)

- 

(121)

Expenses

(9)

(1)

(37)

Other

6 

(5)

21 

(7)

(6)

(137)

1. FY 07 includes £(214)m relating to the strengthening of assumptions for annuitant longevity on existing business, offset by £64m relating to changes to the assumptions for the proportions married.

(e) Movements in non-cash items

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

Non linked deferred tax

82 

(18)

(17)

Deferred acquisition costs

31 

64 

114 

Deferred income liabilities

(1)

(42)

(72)

Other

(17)

3 

49 

95 

7 

74 

4.02 Investment management operating profit

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

Managed pension funds

63 

51

103

Property

4 

5

6

Retail investments

(1)

6

8

Other income1

27

11

38

93 

73 

155 

1. Other income includes £19m of profits arising from the provision of investment management services charged to the Group's UK life and pensions businesses (H1 07: £4m (LGPL only); FY 07: £23m).

International Financial Reporting Standards

Page 50

Notes to the Financial Statements

4.03 General insurance operating profit, underwriting result and combined operating ratios

(a) Operating profit

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

Household1

(7)

(52)

(86)

Other business2

3 

14 

19 

(4)

(38)

(67)

1. Household business in 2007 includes a loss of £76m (H1 07: £40m) net of reinsurance as a result of flood related claims in June and July 2007.

2. Other business in 2007 includes £6m profit (H1 07: £6m) following the withdrawal from the healthcare business in the first quarter.

(b) Underwriting result

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

Household

(14)

(59)

(101)

Other business

3 

11 

15 

(11)

(48)

(86)

(c) Combined operating ratio

Full year

30.06.08

30.06.07

31.12.07

%

%

%

Household

110 

153 

145 

Other business1

88 

68 

74 

107 

134 

131 

1. Other business combined ratio in 2007 includes the £6m profit following the withdrawal from the healthcare business in the first quarter.

The combined operating ratio is:

Net incurred claims

+

Expenses + Net commission

X 100

Net earned premiums

Net written premiums

4.04 Other operational income

Full year

30.06.08

30.06.07

31.12.07

Restated

£m

£m

£m

Shareholders' other income

Investment return on shareholders' equity1

29 

27 

51 

Interest expense2

(66)

(55)

(119)

(37)

(28)

(68)

Other operations3

(1)

1 

1 

Unallocated corporate and development expenses

(7)

(5)

(6)

(45)

(32)

(73)

1. Investment return on shareholders' equity excludes investment return on Society shareholder capital, which is included in UK life and pensions.

2. Interest expense relates to average borrowings, excluding non recourse financing (see Note 4.14).

3. Principally the regulated mortgage network and Cofunds.

International Financial Reporting Standards

Page 51

Notes to the Financial Statements

4.05 Variation from longer term investment return

Full year

30.06.08

30.06.07

31.12.07

Restated

£m

£m

£m

UK life and pensions

(425)

92 

(75)

Netherlands

(13)

(12)

(11)

Investment management

(4)

(1)

4 

General insurance

(11)

(9)

(9)

Other operational income

31 

26 

1 

(422)

96 

(90)

Investment return is allocated to operating profit by reference to a longer term rate of investment return for the respective invested funds. The difference between the amount allocated to operating profit and actual investment return is the variation from longer term investment return analysed above.

4.06 Analysis of tax

Profit

Profit/(loss)

Profit

before tax

Tax

before tax

Tax

before tax

Tax

Full year

Full year

30.06.08

30.06.08

30.06.07

30.06.07

31.12.07

31.12.07

Restated

Restated

£m

£m

£m

£m

£m

£m

From continuing operations

UK life and pensions

299 

(89)

342 

(119)

557 

(173)

International life and pensions

48 

(15)

41 

(13)

86 

(25)

347 

(104)

383 

(132)

643 

(198)

Investment management

93 

(22)

73 

(23)

155 

(47)

General insurance

(4)

1 

(38)

12 

(67)

19 

Other operational income

(45)

14 

(32)

12 

(73)

30 

Operating profit

391 

(111)

386 

(131)

658 

(196)

Variation from longer term investment return

(422)

128 

96 

(39)

(90)

31 

Property income attributable to minority interests

(13)

- 

17 

- 

(6)

- 

Release of 1996 Sub-fund

- 

- 

- 

- 

321 

- 

(Loss)/profit from continuing operations before tax / Tax

(44)

17 

499 

(170)

883 

(165)

Only the element of total tax attributable to equity holders' profit is shown explicitly in the analysis above; the tax attributable to policyholder returns is included within expenses in the operating profit income statement.

Deferred tax is provided at the incremental rate on the undeclared surplus in Society's LTF represented by the Shareholder Retained Capital (SRC). At 30 June 2008 and 31 December 2007, the incremental rate in respect of the undeclared surplus of £1,892m (December 2007: £2,047m) was zero.  At 30 June 2007, no deferred tax was provided, on the grounds that, at the balance sheet date, no obligation to make a declaration of surplus actually existed and there was no expectation that such a declaration would occur. The maximum amount of incremental tax which would have crystallised on such a declaration of surplus at 30 June 2007 was estimated to be £295m.

International Financial Reporting Standards

Page 52

Notes to the Financial Statements

4.07 Earnings per share

(a) Earnings per share

Profit

Tax

Profit

Earnings

Profit

Tax

Profit

Earnings

before tax

(charge)/

after tax

per share

before tax

(charge)/

after tax

per share

credit

credit

30.06.08

30.06.08

30.06.08

30.06.08

30.06.07

30.06.07

30.06.07

30.06.07

Restated

Restated

Restated

Restated

£m

£m

£m

p

£m

£m

£m

p

Operating profit from continuing operations

391 

(111)

280 

4.61 

386 

(131)

255 

3.93 

Variation from longer term investment return

(422)

128 

(294)

(4.84)

96 

(39)

57 

0.87 

Earnings per share based on (loss)/profit 

attributable to equity holders

(31)

17 

(14)

(0.23)

482 

(170)

312 

4.80 

Profit

Tax

Profit

Earnings

before tax

charge

after tax

per share

Full year

Full year

Full year

Full year

31.12.07

31.12.07

31.12.07

31.12.07

£m

£m

£m

p

Operating profit from continuing operations

658 

(196)

462 

7.17 

Variation from longer term investment return

(90)

31 

(59)

(0.91)

Release of 1996 Sub-fund

321 

- 

321 

4.98 

Earnings per share based on profit 

attributable to equity holders

889 

(165)

724 

11.24 

(b) Diluted earnings per share

(i) Based on operating profit from continuing operations after tax

Profit

Number

Earnings

Profit

Number

Earnings

after tax

of shares1

per share

after tax

of shares1

per share

30.06.08

30.06.08

30.06.08

30.06.07

30.06.07

30.06.07

Restated

Restated

£m

m

p

£m

m

p

Operating profit from continuing operations after tax

280 

6,073 

4.61 

255 

6,493 

3.93 

Net shares under options allocable for no further consideration

- 

22 

(0.02)

- 

37 

(0.02)

Diluted earnings per share

280 

6,095 

4.59 

255 

6,530 

3.91 

Profit

Number

Earnings

after tax

of shares1

per share

Full year

Full year

Full year

31.12.07

31.12.07

31.12.07

£m

m

p

Operating profit from continuing operations after tax

462 

6,444 

7.17 

Net shares under options allocable for no further consideration

- 

34 

(0.04)

Diluted earnings per share

462 

6,478 

7.13 

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

Profit

Number

Earnings

Profit

Number

Earnings

after tax

of shares1

per share

after tax

of shares1

per share

30.06.08

30.06.08

30.06.08

30.06.07

30.06.07

30.06.07

£m

m

p

£m