L&G HY 09 Results Part 3

International Financial Reporting Standards

Page 33

Operating profit income statement

For the six months ended 30 June 2009

Full year

30.06.09

30.06.08

31.12.08

Notes

£m

£m

£m

From continuing operations

Risk1

3.01(a)

(128)

75 

(603)

Savings2

3.01(b)

(5)

111 

66 

Investment management

3.02

70 

91 

165 

International

3.03

65 

48 

59 

Group capital and financing

3.04

29 

66 

124 

Operating profit/(loss)

31 

391 

(189)

Variation from longer term investment return

3.06 

(154)

(422)

(1,239)

Property losses attributable to minority interests

(20)

(13)

(63)

Loss from continuing operations before tax attributable to 

equity holders of the Company

(143)

(44)

(1,491)

Tax credit attributable to equity holders of the Company

3.07 

52 

17 

361 

Loss from ordinary activities after tax

(91)

(27)

(1,130)

Loss attributable to minority interests

3.15 

20 

13 

63 

Loss attributable to equity holders of the Company

(71)

(14)

(1,067)

p

p

p

Earnings per share

3.08 

Based on operating profit/(loss) from continuing operations 

after tax attributable to equity holders of the Company

0.58 

4.61 

(2.18)

Based on loss attributable to equity holders of the Company

(1.22)

(0.23)

(17.88)

Diluted earnings per share

3.08 

Based on operating profit/(loss) from continuing operations 

after tax attributable to equity holders of the Company

0.58 

4.59 

(2.18)

Based on loss attributable to equity holders of the Company

(1.22)

(0.23)

(17.88)

This supplementary operating profit information provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business. Supplementary IFRS operating profit is one of the Group's key performance indicators.

Operating profit for the Risk segment represents the net capital invested/released from the non profit Risk businesses (individual and group protection, and individual and bulk purchase annuities) and the operating profit of our General insurance business. This incorporates the total investment return on assets backing the liabilities of the non profit Risk businesses. General insurance operating profit includes a longer term expected investment return on shareholders' funds.

Operating profit for the Savings segment represents the net capital invested/released from the non profit Savings businesses (non profit investment bonds and non profit pensions (including SIPPs)), the with-profits transfer and the operating profit of our core retail investments business. 

Operating profit for the Investment management and International segments incorporates a longer term expected investment return on the shareholders' funds within the Investment management and Netherlands' operations.

Investment return on Group capital incorporates a longer term expected investment return using longer term investment return assumptions applied to the average balance of Group invested assets (including interest bearing intra-group balances) calculated on a quarterly basis.

1. The H1 09 Risk operating loss includes negative investment experience variances of £359m which primarily reflect the net effect of strengthening the credit default provision (£55m), the impact of action taken to sell a number of credits (£75m) and the impact on investment performance of the holdings in cash during a period when credit spreads have narrowed (£206m). The FY 08 Risk operating loss included £650m of additional reserves for non profit annuity credit default. 

2. The H1 08 Savings operating profit included one-off reserving benefits that have not been repeated in H1 09.

International Financial Reporting Standards

Page 34

Consolidated income statement

For the six months ended 30 June 2009

Full year

30.06.09

30.06.08

31.12.08

Notes

£m

£m

£m

Revenue

Gross written premiums

3.09

3,110 

3,301 

5,895 

Outward reinsurance premiums

(283)

(269)

(569)

Net change in provision for unearned premiums

3 

(1)

1 

Net premiums earned

2,830 

3,031 

5,327 

Fees from fund management and investment contracts

345 

358 

740 

Investment return

(1,778)

(17,196)

(37,749)

Operational income

44 

22 

38 

Total revenue

1,441 

(13,785)

(31,644)

Expenses

Claims and change in insurance liabilities

3,132 

1,748 

3,287 

Reinsurance recoveries

(345)

(370)

(587)

Net claims and change in insurance liabilities

2,787 

1,378 

2,700 

Change in provisions for investment contract liabilities

(2,209)

(15,434)

(33,313)

Acquisition costs

358 

354 

776 

Finance costs

148 

189 

379 

Other expenses

401 

425 

773 

Transfers from unallocated divisible surplus

30 

(313)

(806)

Total expenses

1,515 

(13,401)

(29,491)

Loss before income tax 

(74)

(384)

(2,153)

Income tax (expense)/credit attributable to policyholder returns

(69)

340 

662 

Loss from continuing operations before income tax attributable

 to equity holders of the Company

(143)

(44)

(1,491)

Total income tax (expense)/credit

(17)

357 

1,023 

Income tax expense/(credit) attributable to policyholder returns

69 

(340)

(662)

Income tax credit attributable to equity holders

3.07

52 

17 

361 

Loss from ordinary activities after income tax

(91)

(27)

(1,130)

Loss from ordinary activities after income tax attributable to:

Minority interests

(20)

(13)

(63)

Equity holders of the Company

(71)

(14)

(1,067)

Dividend distributions to equity holders of the Company during the period

120 

248 

367 

Dividend distributions to equity holders of the Company proposed after the period end

65 

115 

120 

p

p

p

Earnings per share

Based on loss attributable to equity holders of the Company

3.08

(1.22)

(0.23)

(17.88)

Diluted earnings per share

Based on loss attributable to equity holders of the Company

3.08

(1.22)

(0.23)

(17.88)

International Financial Reporting Standards

Page 35

Consolidated statement of comprehensive income

For the six months ended 30 June 2009

Full year

30.06.09

30.06.08

31.12.08

£m

£m

£m

Loss from ordinary activities after income tax

(91)

(27)

(1,130)

Other comprehensive income after tax

Exchange differences on translation of overseas operations

(75)

8 

139 

Actuarial (losses)/gains on defined benefit pension schemes

(89)

20 

18 

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

unallocated divisible surplus

36 

(8)

(8)

Net change in financial investments designated as available-for-sale

20 

(19)

(56)

Total comprehensive expense

(199)

(26)

(1,037)

Total comprehensive expense attributable to:

Minority interests

(20)

(13)

(63)

Equity holders of the Company

(179)

(13)

(974)

International Financial Reporting Standards

Page 36

Consolidated balance sheet

As at 30 June 2009

At 30.06.09

At 30.06.08

At 31.12.08

Notes

£m

£m

£m

Assets

Investment in associates

21 

13 

14 

Plant and equipment

71 

78 

75 

Investment property

3,501 

5,595 

3,969 

Financial investments

3.11

237,771 

251,247 

234,514 

Reinsurers' share of contract liabilities

2,125 

1,981 

1,997 

Purchased interest in long term businesses and other intangible assets

205 

225 

227 

Deferred acquisition costs

1,985 

1,795 

2,112 

Deferred tax asset

1,081 

276 

988 

Income tax recoverable

11 

5 

8 

Other assets

2,398 

2,432 

2,135 

Cash and cash equivalents

11,138 

10,819 

10,688 

Total assets

260,307 

274,466 

256,727 

Equity

Share capital

147 

149 

147 

Share premium account

936 

934 

936 

Employee scheme shares

(42)

(46)

(46)

Capital redemption and other reserves

3 

(65)

(42)

Retained earnings

2,251 

3,703 

2,593 

Shareholders' equity

3.13

3,295 

4,675 

3,588 

Minority interests

3.15

149 

175 

144 

Total equity

3,444 

4,850 

3,732 

Liabilities

Subordinated borrowings

3.14

1,552 

1,444 

1,657 

Participating insurance contracts

8,881 

10,386 

9,384 

Participating investment contracts

6,689 

7,099 

6,992 

Unallocated divisible surplus

902 

1,411 

913 

Value of in-force non-participating contracts

(268)

(255)

(171)

Participating contract liabilities

16,204 

18,641 

17,118 

Non-participating insurance contracts

26,720 

24,879 

25,841 

Non-participating investment contracts

201,032 

216,405 

196,698 

Non-participating contract liabilities

227,752 

241,284 

222,539 

Senior borrowings

3.14

1,933 

1,742 

2,314 

Provisions

855 

742 

741 

Deferred tax liabilities

252 

197 

259 

Income tax liabilities

155 

18 

5 

Payables and other financial liabilities

6,168 

3,805 

6,613 

Other liabilities

835 

819 

997 

Net asset value attributable to unit holders

1,157 

924 

752 

Total liabilities

256,863 

269,616 

252,995 

Total equity and liabilities

260,307 

274,466 

256,727 

International Financial Reporting Standards

Page 37

Consolidated statement of changes in equity

Capital

Share

Employee

redemption

Share

premium

scheme

and other

Retained

Minority

Total

capital

account

shares

reserves

earnings

Total

interests

equity

For the six months ended 30 June 2009

£m

£m

£m

£m

£m

£m

£m

£m

As at 1 January

147 

936 

(46)

(42)

2,593 

3,588 

144 

3,732 

Total comprehensive expense for the period

- 

- 

- 

(55)

(124)

(179)

(20)

(199)

Net movement in employee scheme shares

- 

- 

4 

7 

(5)

6 

- 

6 

Dividends

- 

- 

- 

- 

(120)

(120)

- 

(120)

Movement in third party interests

- 

- 

- 

- 

- 

- 

25 

25 

Currency translation differences

- 

- 

- 

93 

(93)

- 

- 

- 

As at 30 June

147 

936 

(42)

3 

2,251 

3,295 

149 

3,444 

For the six months ended 30 June 2008

As at 1 January

157 

927 

(42)

59 

4,345 

5,446 

178 

5,624 

Total comprehensive expense for the period

- 

- 

- 

(11)

(2)

(13)

(13)

(26)

Share buyback1

(8)

- 

- 

8 

(408)

(408)

- 

(408)

Closed period share buyback reserve

- 

- 

- 

(100)

- 

(100)

- 

(100)

Options exercised under share option schemes:

- 

7 

- 

- 

- 

7 

- 

7 

Net movement in employee scheme shares

- 

- 

(4)

(9)

4 

(9)

- 

(9)

Dividends

- 

- 

- 

- 

(248)

(248)

- 

(248)

Movement in third party interests

- 

- 

- 

- 

- 

- 

10 

10 

Currency translation differences

- 

- 

- 

(12)

12 

- 

- 

- 

As at 30 June

149 

934 

(46)

(65)

3,703 

4,675 

175 

4,850 

For the year ended 31 December 2008

As at 1 January

157 

927 

(42)

59 

4,345 

5,446 

178 

5,624 

Total comprehensive income/(expense) for the period

- 

- 

- 

83 

(1,057)

(974)

(63)

(1,037)

Share buyback1

(11)

- 

- 

11 

(523)

(523)

- 

(523)

Options exercised under share option schemes:

1 

9 

- 

- 

- 

10 

- 

10 

Net movement in employee scheme shares

- 

- 

(4)

(3)

3 

(4)

- 

(4)

Dividends

- 

- 

- 

- 

(367)

(367)

- 

(367)

Movement in third party interests

- 

- 

- 

- 

- 

- 

29 

29 

Currency translation differences

- 

- 

- 

(192)

192 

- 

- 

- 

As at 31 December

147 

936 

(46)

(42)

2,593 

3,588 

144 

3,732 

1. During 2008, shares were repurchased and cancelled under a share buyback programme at a cost of £523m (H1 08: £408m) including expenses.

International Financial Reporting Standards

Page 38

Consolidated cash flow statement

For the six months ended 30 June 2009

Full year

30.06.09

30.06.08

31.12.08

Notes

£m

£m

£m

Cash flows from operating activities

Loss from ordinary activities after income tax

(91)

(27)

(1,130)

Adjustments for non cash movements in net loss for the period

Realised and unrealised losses on financial investments and 

investment properties

6,553 

22,801 

48,376 

Investment income

(4,656)

(5,304)

(10,086)

Interest expense

148 

189 

379 

Income tax expense/(credit)

17 

(357)

(1,023)

Other adjustments

36 

38 

77 

Net (increase)/decrease in operational assets

Investments designated as held for trading or fair value through profit or loss

(7,763)

167 

2,161 

Investments designated as available-for-sale

(54)

(44)

(93)

Other assets

(711)

(950)

(1,702)

Net increase/(decrease) in operational liabilities

Insurance contracts

858 

(579)

(1,479)

Transfer to unallocated divisible surplus

(15)

(305)

(798)

Investment contracts

(728)

(20,186)

(43,485)

Value of in-force non-participating contracts

(97)

20 

105 

Other liabilities

2,905 

1,292 

541 

Cash used in operating activities

(3,598)

(3,245)

(8,157)

Interest paid

(148)

(196)

(377)

Interest received

2,529 

2,609 

5,214 

Income tax received/(paid)

91 

(165)

(208)

Dividends received

2,096 

2,463 

4,614 

Net cash flows from operating activities

970 

1,466 

1,086 

Cash flows from investing activities

Net acquisition of plant and equipment

(5)

(10)

(14)

Acquisitions (net of cash acquired)

3.10

- 

1,004 

1,004 

Capital injection into Gulf joint venture

(8)

- 

- 

Net cash flows from investing activities

(13)

994 

990 

Cash flows from financing activities

Dividend distributions to equity holders of the Company during the year

(120)

(248)

(367)

Proceeds from issue of share capital

- 

7 

10 

Purchase of employee scheme shares

(2)

(8)

(9)

Purchase of shares under share buyback programme

- 

(408)

(523)

Proceeds from borrowings

1,451 

983 

3,568 

Repayment of borrowings

(1,768)

(723)

(2,960)

Net cash flows from financing activities

(439)

(397)

(281)

Net increase in cash and cash equivalents

518 

2,063 

1,795 

Exchange (losses)/gains on cash and cash equivalents

(68)

19 

156 

Cash and cash equivalents at 1 January

10,688 

8,737 

8,737 

Cash and cash equivalents at 30 June / 31 December

11,138 

10,819 

10,688 

The Group's consolidated cash flow statement includes all cash and cash equivalent flows, including those relating to the UK long term fund policyholders.

International Financial Reporting Standards

Page 39

Notes to the Financial Statements

3.01 Risk and Savings operating profit

(a) Risk operating profit

Full year

30.06.09

30.06.08

31.12.08

£m

£m

£m

Non profit Risk1

(141)

86 

(602)

General insurance

6 

(4)

(2)

Other2

7 

(7)

1 

Total Risk operating (loss)/profit

(128)

75 

(603)

1. The H1 09 Risk operating loss includes negative investment experience variances of £359m which primarily reflect the net effect of strengthening the credit default provision (£55m), the impact of action taken to sell a number of credits (£75m) and the impact on investment performance of the holdings in cash during a period when credit spreads have narrowed (£206m). FY 08 included £650m of additional reserves for non profit annuity credit default. 

2. Other comprises estate agencies and housing related business conducted through our regulated mortgage network. It also includes Nationwide Life Risk business and business unit costs of £2m (H1 08: £1m; FY 08: £3m) allocated to the Risk business.

(b) Savings operating profit

Full year

30.06.09

30.06.08

31.12.08

£m

£m

£m

Non profit Savings1

(20)

51 

(20)

With-profits business2

29 

60 

107 

9 

111 

87 

Core retail investments

(1)

2 

- 

Other3

(13)

(2)

(21)

Total Savings operating (loss)/profit

(5)

111 

66 

1. Non profit Savings businesses includes non profit investment bonds and non profit pensions (including SIPPs). The H1 08 Savings operating profit included one-off reserving benefits that have not been repeated in H1 09.

2. With-profits business operating profit is the shareholders' share of policyholder bonuses.

3. Other includes Suffolk Life, operations in Ireland, Nationwide Life Savings business and business unit costs of £2m (H1 08: £1m; FY 08: £3m), allocated to the Savings business.

(c) Analysis of net capital released from Risk and Savings non profit business

Full year

30.06.09

30.06.08

31.12.08

Notes

£m

£m

£m

Non profit business operating (loss)/profit comprises:

Operational cash generation

238 

234 

453 

New business strain

(31)

(233)

(334)

Experience variances

3.01(d)

(352)

(23)

(315)

Changes to valuation assumptions

3.01(e)

13 

(8)

(660)

Changes to FSA reporting and capital rules

38 

- 

- 

Movements in non-cash items

3.01(f)

25 

92 

380 

Other

(46)

36 

31 

(115)

98 

(445)

Tax gross-up

(46)

39 

(177)

(161)

137 

(622)

Attributable to:

Non profit Risk businesses

(141)

86 

(602)

Non profit Savings businesses

(20)

51 

(20)

Non profit business operational cash generation represents the capital and profit expected to be generated in the period from the in-force non profit business if the embedded value and valuation 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 operational cash generation exclude required solvency margin from the liability calculation as is required by the ABI SORP. 

In 2006, the FSA introduced a more realistic reserving framework for certain non profit business (Policy statement (PS) 06/14). In 2009, the Group has chosen to implement PS 06/14 rule changes relating to the calculation of the regulatory sterling reserves on non profit unit linked contracts. The impact of this is reflected within changes to FSA reporting and capital rules above. However, sterling reserves are eliminated from IFRS reporting and the corresponding reduction is reported through Other. 

International Financial Reporting Standards

Page 40

Notes to the Financial Statements

3.01 Risk and Savings operating profit (continued)

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

(d) Experience variances

Full year

30.06.09

30.06.08

31.12.08

£m

£m

£m

Persistency

(11)

- 

7 

Mortality/morbidity

(2)

11 

25 

Expenses

(24)

5 

11 

BPA data loading

35 

23 

22 

Project and development costs1

(26)

(29)

(95)

Investment2

(351)

24 

(296)

Other

27 

(57)

11 

(352)

(23)

(315)

1. Project and development costs of £26m (H1 08: £29m; FY 08: £95m) relate to continued investment in internal and other customer facing systems. 

2. H1 09 includes £351m of negative investment variances which primarily reflect the net effect of strengthening the credit default provision (£55m), the impact of action taken to sell a number of credits (£75m) and the impact on investment performance of the holdings in cash during a period when credit spreads have narrowed (£206m). FY 08 included £296m of negative investment variances, of which more than half arose from the deferral of tax relief on expenses as a result of movements in investment markets and was fully offset by a movement in the deferred tax asset element of non cash items. The remainder related to the annuity business where the valuation basis was strengthened due to the reduction in gilt yields.

(e) Changes to valuation assumptions

Full year

30.06.09

30.06.08

31.12.08

£m

£m

£m

Persistency

- 

- 

12 

Mortality/morbidity

- 

(4)

(26)

Expenses

(1)

(10)

(57)

Short term default allowance1

- 

- 

(650)

Other

14 

6 

61 

13 

(8)

(660)

1. FY 08 included a £650m increase in the non profit annuity credit default reserve. The tax effect of the short term default allowance was included in the deferred tax element of non-cash items.

(f) Movement in non-cash items

Full year

30.06.09

30.06.08

31.12.08

£m

£m

£m

Deferred tax

9 

77 

413 

Deferred acquisition costs

(4)

33 

20 

Deferred income liabilities

27 

(1)

30 

Other

(7)

(17)

(83)

25 

92 

380 

International Financial Reporting Standards

Page 41

Notes to the Financial Statements

3.02 Investment management operating profit

Full year

30.06.09

30.06.08

31.12.08

£m

£m

£m

Managed pension funds

55 

63 

117 

Private equity

(1)

- 

(1)

Property

1 

4 

4 

Other income1

19 

27 

52 

Legal & General Investment Management

74 

94 

172 

Institutional unit trusts2

(4)

(3)

(7)

Total Investment management operating profit

70 

91 

165 

1. Other income includes £12m of profits arising from the provision of investment management services charged to the Group's Risk and Savings businesses (H1 08: £19m; FY 08: £35m).

2. Investment management operating profit excludes core retail investments, of £(1)m (H1 08: £2m; FY 08: £nil), which has been disclosed as part of Savings. The comparatives have been reclassified accordingly.

3.03 International operating profit

Full year

30.06.09

30.06.08

31.12.08

£m

£m

£m

USA

45 

30 

39 

Netherlands

16 

8 

6 

France

4 

10 

14 

Total International operating profit

65 

48 

59 

Exchange rates are provided in Note 3.20.

3.04 Group capital and financing operating profit

Full year

30.06.09

30.06.08

31.12.08

Restated

Restated

£m

£m

£m

Investment return1,2

95 

164 

298 

Interest expense2,3

(65)

(70)

(145)

Investment expenses

(2)

(3)

(5)

Unallocated corporate expenses

(3)

(6)

(9)

Defined benefit pension scheme4

4 

(19)

(15)

Total Group capital and financing operating profit

29 

66 

124 

1. The longer term expected investment return of £95m (H1 08: £164m; FY 08: £298m) reflects an average return of 3% (H1 08: 3%; FY 08: 7%) on the average balance of invested assets held within Group capital and financing calculated on a quarterly basis. The invested assets held within Group capital and financing amounted to £2.7bn at 30 June 2009 (30 June 2008: £4.5bn; 31 December 2008: £3.9bn). 

2. The smoothed investment return has been restated to exclude interest received on intra-group balances of £26m at 30 June 2008 and £53m at 31 December 2008, with a corresponding reduction in interest expense.

3. Interest expense excludes interest on non-recourse financing (see Note 3.14).

4. The defined benefit pension scheme income/(expense) includes the actuarial gains and losses arising on annuity assets held by the schemes that have been purchased from Legal & General Assurance Society Limited. Under IFRS, these annuity assets cannot be classified as plan assets in accordance with IAS 19 and so the associated actuarial gains and losses cannot be taken to the statement of comprehensive income (H1 09 income: £4m; H1 08 expense: £19m; FY 08 expense: £15m). 

International Financial Reporting Standards

Page 42

Notes to the Financial Statements

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

(a) Operating profit

Full year

30.06.09