L&G Half-year Results Part 4d

International Financial Reporting Standards

Page 58

Notes to the Financial Statements

4.12 Share capital and share premium

Share

Share

Number of

capital

premium

Issued share capital, fully paid

shares

£m

£m

As at 1 January 2008

6,296,321,160 

157 

927 

Shares cancelled under share buyback programme1

(329,936,896)

(8)

- 

Options exercised under share option schemes

- Executive share option scheme 

550,346 

- 

- 

- Savings related share option scheme

12,075,304 

- 

7 

As at 30 June 2008

5,979,009,914 

149 

934 

Share

Share

Number of

capital

premium

Issued share capital, fully paid

shares

£m

£m

As at 1 January 2007

6,532,261,961 

163 

923 

Options exercised under share option schemes

- Executive share option scheme 

1,659,031 

- 

2 

- Savings related share option scheme

1,596,379 

- 

1 

As at 30 June 2007

6,535,517,371 

163 

926 

Share

Share

Number of

capital

premium

Issued share capital, fully paid

shares

£m

£m

As at 1 January 2007

6,532,261,961 

163 

923 

Shares cancelled under share buyback programme

(241,207,267)

(6)

- 

Options exercised under share option schemes

- Executive share option scheme

1,961,215 

- 

2 

- Savings related share option scheme 

3,305,251 

- 

2 

As at 31 December 2007

6,296,321,160 

157 

927 

1. During the period, 329,936,896 shares were repurchased and cancelled under the share buyback programme representing 5.2% of opening issued share capital, at a cost of £408m including expenses. At 29 July 2008, a further 37,963,364 ordinary shares had been purchased for cancellation at a total cost of £37m including expenses.

There is one class of ordinary shares. All shares issued carry equal voting rights.

The holders of the Company's ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings of the Company. 

4.13 Segmental analysis of ordinary shareholders' equity

At 30.06.08

At 30.06.07

At 31.12.07

£m

£m

£m

Society shareholder capital

4,824 

4,830 

4,832 

General insurance

98 

136 

114 

Netherlands

104 

93 

107 

France

146 

112 

130 

Total Society shareholders' equity

5,172 

5,171 

5,183 

USA

650 

598 

643 

Investment management

469 

361 

349 

Corporate funds1

(1,616)

(615)

(729)

Shareholders' equity

4,675 

5,515 

5,446 

1. Corporate funds includes general corporate assets held at Group level including those used to support the ongoing share buyback programme, subordinated borrowings and senior borrowings.

International Financial Reporting Standards

Page 59

Notes to the Financial Statements

4.14 Analysis of borrowings

At 30.06.08

At 30.06.07

At 31.12.07

£m

£m

£m

Subordinated borrowings

6.385% Sterling perpetual capital securities

589 

580 

620 

5.875% Sterling undated subordinated notes

427 

428 

427 

4.0% Euro subordinated notes 2025

428 

363 

414 

Total subordinated borrowings

1,444 

1,371 

1,461 

Senior borrowings

Sterling medium term notes 2031-2041

602 

602 

608 

Euro commercial paper 

347 

114 

118 

Bank loans 

54 

18 

13 

Non recourse financing

- US Dollar Triple X securitisation 2025

266 

264 

266 

- US Dollar Triple X securitisation 2037

223 

220 

223 

- Suffolk Life linked borrowings

152 

- 

- 

- Sterling property partnership loans 2011

98 

114 

99 

Total senior borrowings

1,742 

1,332 

1,327 

Total borrowings

3,186 

2,703 

2,788 

Total borrowings (excluding non recourse financing)

2,447 

2,105 

2,200 

Subordinated borrowings

For regulatory purposes the sterling perpetual capital securities are treated as innovative tier I capital, the sterling undated subordinated notes as upper tier II capital and the Euro subordinated notes as lower tier II capital.

6.385% Sterling perpetual capital securities

In 2007, Legal & General Group Plc issued £600m of 6.385% sterling perpetual capital securities. These securities are callable on 2 May 2017 and every three months thereafter. If not called, the coupon from 2 May 2017 will be reset to three month LIBOR plus 1.93% per annum. Simultaneous with the issuance, the fixed coupon was swapped into six month LIBOR plus 0.94% per annum.

5.875% Sterling undated subordinated notes

These notes are callable on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% per annum. 

4.0% Euro subordinated notes 2025

These notes are callable on 8 June 2015 and each year thereafter. If not called, the coupon from 8 June 2015 will reset to a floating rate of interest based on prevailing three month Euribor plus 1.7% per annum. The proceeds were swapped into sterling.

Non recourse financing

US Dollar Triple X securitisations

This non recourse debt was issued by a subsidiary of Legal & General America Inc in the US capital markets to meet the Triple X reserve requirements on the US term insurance business. They are secured on the cash flows related to this business.

Suffolk Life linked borrowings

These borrowings relate solely to client investments.

Sterling property partnership loans 2011

These loans are secured on specific properties. 

4.15 Minority interests

Minority interests represent third party interests in property investment vehicles which are consolidated in the Group's results. 

International Financial Reporting Standards

Page 60

Notes to the Financial Statements

4.16 Total equity

Full year

30.06.08

30.06.07

31.12.07

£m

£m

£m

As at 1 January

5,624 

5,839 

5,839 

Total recognised income and expense

(26)

361 

699 

Issue of share capital

7 

3 

4 

Share buyback

(408)

- 

(320)

Closed period share buyback reserve

(100)

- 

- 

Net movements in employee scheme shares

(9)

(9)

1 

Dividend distributions to equity holders of the Company during the period

(248)

(248)

(369)

Movements in minority interests including disposals

10 

25 

(230)

As at 30 June / 31 December

4,850 

5,971 

5,624 

4.17 Value of policyholder assets held in Society and LGPL

At 30.06.08

At 30.06.07

At 31.12.07

£bn

£bn

£bn

With-profits business 

26.8 

30.1 

29.5 

Non profit business

31.3 

28.1 

30.7 

58.1 

58.2 

60.2 

4.18 Non-linked business and Society shareholder capital invested asset mix and investment return

Investment

With-profits

With-profits

With-profits

Non profit

Society

return

asset share

non par

other

shareholder

capital

As at 30 June 2008

%

%

%

%

%

%

Equities

(10)

43 

4 

(41)

- 

67 

Bonds

(3)

37 

80 

131 

98 

14 

Property

(6)

17 

2 

- 

- 

8 

Cash

3 

3 

14 

10 

2 

11 

100 

100 

100 

100 

100 

Investment return (%)

(5)

(7)

(4)

1 

(3)

(3)

Invested assets (£bn)

14.8 

2.3 

1.7 

18.2 

3.7 

As at 30 June 2007

Equities

9 

50 

5 

(50)

- 

68 

Bonds

(4)

28 

81 

127 

99 

10 

Property

4 

19 

2 

1 

- 

13 

Cash

3 

3 

12 

22 

1 

9 

100 

100 

100 

100 

100 

Investment return (%)

- 

4 

(2)

(9)

(4)

5 

Invested assets (£bn)

18.1 

2.4 

1.6 

15.0 

4.3 

As at 31 December 2007

Equities

9 

45 

4 

(43)

- 

69 

Bonds

1 

35 

83 

129 

99 

12 

Property

(5)

17 

2 

- 

- 

12 

Cash

5 

3 

11 

14 

1 

7 

100 

100 

100 

100 

100 

Investment return (%)

3 

4 

3 

6 

- 

6 

Invested assets (£bn)

17.1 

2.4 

1.8 

16.6 

4.0 

All investment return percentages reflect average returns for the period.

International Financial Reporting Standards

Page 61

Notes to the Financial Statements

4.19 Pension cost

The Legal & General Group UK Pension and Assurance Fund and the Legal & General Group UK Senior Pension Scheme are defined benefit pension arrangements and account for all UK and the majority of worldwide assets of, and contributions to, such arrangements. At 30 June 2008, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at £135m (H1 07: £75m; FY 07: £130m). These amounts have been recognised in the financial statements with £80m charged against shareholder equity (H1 07: £45m; FY 07: £77m) and £55m against unallocated divisible surplus (H1 07: £30m; FY 07: £53m).

4.20 Contingent liabilities, guarantees and indemnities

Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance of actual experience from that assumed may result in such liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of such contracts, or the circumstances in which policyholders have entered into them (together in this paragraph "liabilities"). The extent of such liabilities is influenced by a number of factors including the actions and requirements of the Financial Services Authority (FSA), by ombudsman rulings, by industry compensation schemes and by court judgements. The continuing general profile and emphasis being given by the FSA and other bodies to the suitability of the past sales of endowment policies in the context of some mortgage transactions has led to the continuing receipt of claims from holders of endowment policies.

The recent Consultation Paper 08/11 issued by the FSA proposes certain changes which would preclude the discharge out of any with-profits fund of compensation and redress (including for mis-selling claims) to holders of policies allocated to such with-profits fund. The effect of the FSA's proposals appears to be that the cost of such payments would in future, have to be met out of assets attributable to the shareholders. These proposals are only currently at a consultation stage and the Group is intending to make representations in respect of these. Until the extent of the actual rule changes becomes clearer, it is not possible to say with any reasonable certainty what the financial impact on the Group will be. 

Various Group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. Provision for liabilities continues to be made and is regularly reviewed. However, it is not possible to predict, with certainty, the extent and the timing of the financial impact to which these claims, litigation or issues may give rise. The relevant members of the Group nevertheless consider that each makes prudent provision, as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet all reasonably foreseeable eventualities. 

In 1975, Legal & General Assurance Society Limited ("the Society") was required by the Institute of London Underwriters (ILU) to execute the ILU form of guarantee in respect of policies issued through the ILU's Policy Signing Office on behalf of NRG Victory Reinsurance Company Ltd (Victory), a company which was then a subsidiary of the Society. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to the Society against any liability the Society may have as a result of the ILU's requirement, and the ILU agreed that its requirement of the Society would not apply to policies written or renewed after the acquisition. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary of Berkshire Hathaway Inc. Whether the Society has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability is uncertain. The Society has made no payment or provision in respect of this matter.

The Society has been discussing with Her Majesty's Revenue & Customs the application of certain tax legislation specific to life assurance companies for the years 1999 to 2006. It has not been possible to reach agreement and a reference will be made in 2009 to the Special Commissioners. The maximum exposure is estimated to be £230m. No amount is included in respect of this issue in the income tax provision at 30 June 2008, as the Group's view, supported by leading tax counsel, is that no amount will be payable.

Group companies have given indemnities and guarantees, including interest rate guarantees, as a normal part of their operating activities or in relation to capital market transactions.

4.21 Events after the balance sheet date

Since 30 June 2008, additional shares have been purchased under the Company's buyback programme. At 29 July 2008, a further 37,963,364 ordinary shares (representing 0.6% of Legal & General Group Plc's issued share capital at 30 June 2008) had been purchased for cancellation at a total cost of £37m including expenses, at an average cost of 96.9p per share. Cumulatively, a total of 609,107,527 shares have been repurchased at a total cost of £764m.

4.22 Foreign exchange rates

Period end exchange rates

At 30.06.08

At 30.06.07

At 31.12.07

United States Dollar

1.99 

2.01 

1.99 

Euro

1.26 

1.49 

1.36 

01.01.08-

01.01.07-

01.01.07-

Average exchange rates

30.06.08

30.06.07

31.12.07

United States Dollar

1.97 

1.97 

2.00 

Euro

1.29 

1.48 

1.46 

International Financial Reporting Standards

Page 62

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