L&G Half-year Results Part 5

Capital and Cash Flow

Page 63

5.01 Regulatory capital resources

(a) Insurance Group's Directive

The Group is required to measure and monitor its capital resources on a regulatory basis and to comply with the minimum capital requirements of regulators in each territory in which it operates. At Group level, Legal & General must comply with the requirements of the IGD. This is a very prudent measure of capital resources as it excludes any amount of surplus capital within a long term fund (£0.5bn for Society at 30 June 2008). The table below shows the total Group capital resources, Group capital resources requirement and the surplus (half-year figures are estimates). 

At 30.06.08

At 30.06.07

At 31.12.07

£bn

£bn

£bn

Core tier I 

5.1 

5.8 

7.1 

Innovative tier I 

0.6 

0.6 

0.6 

Upper tier II

0.4 

0.4 

0.4 

Lower tier II

0.4 

0.4 

0.4 

Deductions

(0.2)

(0.1)

(0.2)

Group capital resources

6.3 

7.1 

8.3 

Group capital resources requirement

2.9 

4.5 

4.2 

IGD surplus

3.4 

2.6 

4.1 

A segmental analysis is given below.

At 30.06.08

At 30.06.07

At 31.12.07

£bn

£bn

£bn

Society long term fund

2.5 

3.6 

3.9 

Society shareholder capital1

3.2 

0.5 

3.1 

LGPL

-

1.5 

- 

General insurance

0.1 

0.1 

0.1 

France

0.1 

0.1 

0.1 

Netherlands

0.2 

0.1 

0.1 

USA

0.1 

0.1 

0.1 

Investment management

0.4 

0.3 

0.3 

Other2

0.8 

1.5 

1.4 

Innovative tier I 

0.6 

0.6 

0.6 

Tier II

0.8 

0.8 

0.8 

Debt

(2.5)

(2.1)

(2.2)

Group capital resources

6.3 

7.1 

8.3 

Society long term fund

2.5 

3.6 

3.9 

LGPL

-

0.6 

- 

Other

0.4 

0.3 

0.3 

Group capital resources requirement

2.9 

4.5 

4.2 

1. Includes capital resources of LGPL for H1 08 and FY 07 and excludes shareholder capital held within Society's long term fund for all periods.

2. Other reflects general corporate assets held at Group level including those used to support the ongoing share buyback programme.

A reconciliation of the Group capital resources on an IGD basis to the capital and reserves attributable to the equity holders of the Company on an IFRS basis is given below.

At 30.06.08

At 30.06.07

At 31.12.07

£bn

£bn

£bn

Capital and reserves attributable to equity holders on an IFRS basis

4.7 

5.5 

5.4 

Innovative tier I 

0.6 

0.6 

0.6 

Tier II 

0.8 

0.8 

0.8 

Proposed dividends

(0.1)

- 

(0.2)

Additional capital available from Society

0.9 

0.7 

2.2 

Adjustment to reflect regulatory value of the USA operation

(0.6)

(0.5)

(0.5)

Group capital resources

6.3 

7.1 

8.3 

Capital and Cash Flow

Page 64

5.01 Regulatory capital resources (continued)

(b) Society capital surplus

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

At 30.06.08

At 30.06.08

At 30.06.07

At 30.06.07

At 31.12.07

At 31.12.07

Long term

General

Long term

General

Long term

General

business

insurance

business

insurance

business

insurance

£bn

£bn

£bn

£bn

£bn

£bn

Tier I 

6.6 

0.1 

8.9 

0.1 

8.4 

0.1 

Available capital resources

6.6 

0.1 

8.9 

0.1 

8.4 

0.1 

Insurance capital requirement

2.0 

0.1 

1.7 

- 

1.9 

0.1 

With-Profits Insurance Capital Component

0.5 

- 

2.0 

- 

2.0 

- 

Capital requirements of regulated related undertakings

0.2 

- 

0.7 

0.1 

0.1 

- 

Capital resources requirement

2.7 

0.1 

4.4 

0.1 

4.0 

0.1 

Regulatory capital surplus

3.9 

-

4.5 

- 

4.4 

- 

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

At 30.06.08

At 30.06.07

At 31.12.07

£bn

£bn

£bn

With-profits surplus

928 

1,174 

1,047 

Risk capital margin

185 

236 

262 

Surplus

743 

938 

785 

Society is required to maintain a surplus in the with-profits part of the fund on a realistic basis (peak 2). If the surplus on a realistic basis is lower than the surplus using peak 1 solvency rules, then a further capital requirement, the With-Profits Insurance Capital Component (WPICC) is required. At 30 June 2008, the WPICC reflects a deduction for the value of shareholder transfers of £330m (30.06.07: £499m; 31.12.07: £396m) within the Risk Capital Margin calculation.

Capital and Cash Flow

Page 65

5.02 IFRS capital resources

(a) Group capital resources

The Group's total capital resources of £7.5bn on an IFRS basis, comprise equity holders' capital (£4.7bn) (see Note 4.13), subordinated debt (£1.4bn) and unallocated divisible surplus (£1.4bn).

(b) Society capital resources

Society has been allocated capital of £4.8bn, £2.8bn is held outside any long term fund of which £0.3bn is within LGPL; the remainder of £2.0bn is held within Society's long term fund. An analysis of the movement in Society Shareholder Capital (SSC) on the IFRS basis is provided in the table below:

Society

 Shareholder Capital

Notes

Gross

Tax

Net

30.06.08

£m

£m

£m

As at 1 January

4,832 

Investment return

(271)

84 

(187)

With-profits distribution

60 

(17)

43 

Capital invested in subsidiaries

63 

- 

63 

Net capital released from non profit business

4.01(b)

95 

(27)

68 

Movement included in the statement of recognised income and expense

11 

(3)

8 

Other

(5)

2 

(3)

As at 30 June

4,824 

The total net capital released from the non profit business is £95m, which comprises the net capital invested in LGPL non profit business of £11m (net of tax £8m) and the net capital released from Society of £106m (net of tax £76m).

30.06.07

As at 1 January

5,520 

Investment return

263 

(106)

157 

With-profits distribution

50 

(15)

35 

Repayment of subordinated loan capital

(602)

- 

(602)

Net capital released from non profit business

4.01(b)

153 

(46)

107 

Distribution to Group Plc

(400)

- 

(400)

Movement included in the statement of recognised income and expense

38 

(12)

26 

Other

(18)

5 

(13)

As at 30 June

4,830 

The total net capital released from the non profit business is £153m, which comprises the net capital released from LGPL non profit business of £76m (net of tax £53m) and the net capital released from Society of £77m (net of tax £54m).

Full year 31.12.07

As at 1 January

5,520 

Investment return

242 

(70)

172 

With-profits distribution

106 

(32)

74 

Repayment of subordinated loan capital

(602)

- 

(602)

Capital invested in subsidiaries

(27)

- 

(27)

Net capital released from non profit business

4.01(b)

161 

(48)

113 

Release of 1996 Sub-fund

321 

- 

321 

Distribution to Group Plc

(728)

- 

(728)

Movement included in the statement of recognised income and expense

(13)

(3)

(16)

Other

2 

3 

5 

As at 31 December

4,832 

The total net capital released from the non profit business is £161m, which comprises the net capital contributed to LGPL non profit business of £167m (net of tax £117m) and the net capital released from Society of £328m (net of tax £230m).

Capital and Cash Flow

Page 66

5.03 Group credit ratings

Society continues to be one of the two highest rated European life assurers. The financial strength ratings from Standard & Poor's, Moody's and A.M.Best were maintained at AA+, Aa1 and A+ respectively, all with stable outlooks.

The Group's current long term and short term debt ratings are, from Standard & Poor's, AA- and A1+ and, from Moody's, A1 and P1.

5.04 Parent company cash flow statement

The table below shows the cash flows in the year relating to the Group's parent company.

Full year

30.06.08

30.06.07

31.12.07

£bn

£bn

£bn

Dividends received:

UK life and pensions1

- 

400 

728 

Investment management

- 

- 

71 

Other

1 

- 

1 

1 

400 

800 

Dividend distributions to equity holders of the Company during the year

(248)

(248)

(369)

Repayment of intra-group subordinated debt1

-

605 

602 

Proceeds from issue of equity

7 

3 

4 

Proceeds from issue of subordinated borrowings

-

595 

595 

Proceeds/(repayment) from issue of commercial paper

219 

- 

(249)

Capital injected into subsidiaries2

(374)

(46)

(90)

Purchase of shares under share buyback programme

(408)

- 

(320)

Maturity of investments

85 

- 

- 

Working capital movements

46 

(369)

(84)

Net cash (outflow)/inflow

(672)

940 

889 

1. The parent company holds sufficient distributable reserves at H1 08 to finance the interim dividend to shareholders. Subsidiary dividends will be paid in the second half of the year to finance the 2008 final and 2009 interim dividends to shareholders. In June 2007, a first interim dividend of £400m was paid from brought forward distributable reserves to finance part of Group Plc's £1bn on-market share buyback programme, with the balance financed when Society repaid £602m subordinated debt to Group Plc. A further dividend of £328m was paid in December 2007 in support of Group Plc's full year 2007 and half-year 2008 dividends to shareholders.

2. Includes capital injected for purchase of Nationwide Life Limited, Nationwide Unit Trust Managers Limited and Suffolk Life Group Plc. Also includes 

capital contributions of £9m to other subsidiaries.