L&G FY 2014 results part 3 | RNS | Ticker

L&G FY 2014 results part 3

RNS Announcement

RNS Number : 4570G

Legal & General Group Plc

04 March 2015

Capital and Investments 67

4.01 Group regulatory capital
(a) Insurance Group's Directive (IGD)

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 a Group level, Legal & General must comply with the requirements of the IGD. The table below shows the estimated total Group capital resources, Group capital resources requirement and the Group surplus.
		At			At
		31.12.14			31.12.13
		£bn			£bn


Core tier 1		6.4			6.3
Innovative tier 1		0.6			0.6
Tier 2¹		1.7			1.2
Deductions		(1.0)			(0.8)


Group capital resources		7.7			7.3


Group capital resources requirement²		3.8			3.3


IGD surplus		3.9			4.0


Group capital resources requirement coverage ratio³		201%			221%


1. The Group issued £0.6bn subordinated notes constituting Lower Tier 2 Capital in June 2014. 2. Group capital resources requirement includes a With-profits Insurance Capital Component (WPICC) of £0.4bn (2013: £0.2bn).
3. Coverage ratio is calculated on unrounded values.

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

	At		At
	31.12.14		31.12.13
	£bn		£bn


Capital and reserves attributable to equity holders on an IFRS basis	6.0		5.6
Innovative tier 1	0.6		0.6
Tier 2	1.7		1.2
UK unallocated divisible surplus	0.7		1.1
Proposed dividends	(0.5)		(0.4)
Intangibles	(0.4)		(0.4)
Other regulatory adjustments¹	(0.4)		(0.4)


Group capital resources	7.7		7.3


1. Other regulatory adjustments include differences between accounting and regulatory bases.
The table below demonstrates how the Group's net cash generation reconciles to the IGD capital surplus position.¹

				At
				31.12.14
				£bn


IGD surplus at 1 January				4.0
Net cash generation				1.1
Dividends				(0.7)
New business capital deployed				(0.4)
Existing business capital release				0.2
New subordinated debt issued				0.6
Additional pension deficit repayments				(0.2)
Interest rate and market impacts				(0.3)
Other With-profits impacts				(0.2)
Other variances and regulatory adjustments				(0.2)


IGD surplus at 31 December				3.9



1. All IGD amounts are estimated, unaudited and after accrual of the final dividend of £496m in 2014 (2013: £408m).

Capital and Investments 68

4.01 Group regulatory capital (continued)
(b) IGD sensitivity analysis

The table below provides management estimates of the impact of changes in market conditions on the IGD surplus.

									Impact
									on surplus
									capital
									2014
									£bn


Sensitivity test
20% fall in equity values									(0.4)
40% fall in equity values									(1.0)
15% fall in property values									(0.2)
100bp increase in interest rates									0.4
100bp decrease in interest rates									(0.6)
100bp increase in credit spreads									(0.1)
100bp decrease in credit spreads									0.1


We have applied a consistent methodology to the IFRS sensitivity testing in Note 2.19.
The above sensitivity analysis does not reflect management actions which could be taken to reduce the impacts. In practice, the Group actively manages its asset and liability positions to respond to market movements. Additionally, the sensitivity tests are considered in isolation, although in practice there is likely to be a correlation between the scenarios.
The impacts of these stresses are not linear therefore these results should not be used to extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.
The interest rate sensitivity assumes a 100 basis point change in the gross redemption yield on fixed interest securities together with a 100 basis point change in the real yields on variable securities. For the UK long term funds, valuation interest rates are assumed to move in line with market yields adjusted to allow for the impact of PRA regulations. The interest rate sensitivities reflect the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the long term business.
Modelling improvements have been made in the year, which more accurately isolate the impacts of discrete assumptions changes. This, coupled with the increase in the Group's annuity liabilities, has led to an increase in the reported sensitivities to interest rates movements. Zero yield floors have not been applied in the estimation of the stresses, despite the low interest rate environment at the balance sheet date.

Capital and Investments 69

4.02 Group Economic Capital

Legal & General defines economic capital to be the amount of capital that the Board believes the Group needs to hold, over and above its liabilities, in order to meet its strategic objectives. This is not the same as regulatory capital which reflects regulatory rules and constraints. The Group's objectives include being able to meet its liabilities as they fall due whilst maintaining the confidence of our investors, rating agencies, customers and intermediaries.

Legal & General has invested considerable time and resource in developing a risk based capital model that is used to calculate the Group's Economic Capital Balance Sheet and support the management of risk within the Group. The Group continues to develop the economic capital model in light of developments in the Group's business model, refinements in modelling and the analysis of experience, emerging market practice and feedback from independent reviewers. The Group's economic capital position will reflect these changes as they are implemented. It is intended that this modelling framework, suitably adjusted for regulatory constraints, should also meet the needs of the Solvency II regime, due to come in to force on 1 January 2016. Our Economic Capital model has not been reviewed by the Prudential Regulatory Authority (PRA), nor will it be.

The economic capital numbers presented here do not represent our view of the Solvency II outcome for the Group. Solvency II has elements which are considered to be inconsistent with the Group's definition of economic capital, so there will be differences between the two balance sheets. Legal & General is engaged in discussions with the PRA and in 2015 we will make a formal application for approval of an internal model for use under Solvency II. As yet our Solvency II internal model has not been reviewed or approved by the PRA.

(a) Capital position

As at 31 December 2014 the Group had an economic capital surplus of £7.0bn (2013: £6.9bn), corresponding to an economic capital coverage ratio of 229% (2013: 251%). The economic capital position is as follows:

	2014	2013
	£bn	£bn


Eligible own funds	12.5	11.4
Economic capital requirement	5.5	4.5


Surplus	7.0	6.9


1-in-200 coverage ratio¹	229%	251%

1. Coverage ratio is calculated on unrounded values.
Further explanation of the underlying methodology and assumptions are set out in the sections below.

(b) Methodology

Eligible own funds are defined to be the excess of the value of assets over the liabilities. Subordinated debt issued by the Group is considered to be part of available capital, rather than a liability, as it is subordinate to policyholder claims.

Assets are valued at IFRS fair value with adjustments to remove intangibles, deferred acquisition costs and to value reassurers' share of technical provisions on a basis consistent with the liabilities on the Economic Capital Balance Sheet. The economic value of assets excluded from the IFRS Balance Sheet (e.g. present value of future with-profits transfers) is also included.

Liabilities are valued on a best estimate market consistent basis, with the application of an Economic Matching Adjustment for valuing annuity liabilities.

The Economic Capital Requirement is the amount of capital required to cover the 1-in-200 worst projected future outcome in the year following the valuation, allowing for realistic management and policyholder actions and the impact of the stress on the tax position of the Group. This allows for diversification between the different firms within the Group and between the risks that they are exposed to.

The liabilities include a Recapitalisation Cost to allow for the cost of recapitalising the balance sheet following the 1-in-200 stress in order to maintain confidence that our future liabilities will be met. This is calculated using a cost of capital that reflects the long term average rates at which it is expected that the Group could raise debt and allowing for diversification between all Group entities.

All material insurance firms, including Legal & General Assurance Society, Legal & General Insurance, Legal & General Pensions Management Company (PMC) (LGIM's insurance subsidiary) and Legal & General America (LGA) are incorporated into the Group's Economic Capital model assessment of required capital, assuming diversification of the risks between those firms.

Firms for which the capital requirements are less material, for example Legal & General France, Legal & General Netherlands and Suffolk Life, are valued on the firm's latest interpretation of the Solvency II Standard Formula basis. The business retained within Legal & General Pensions Limited, an internal Insurance Special Purpose Vehicle, has been valued on a "look through" basis and capital requirements calculated as if the business was not internally reassured. Non-insurance firms are included using their current regulatory surplus, without allowing for any diversification with the rest of the Group.

Allowance is made within the Economic Capital Balance Sheet for the Group's defined benefit pension scheme based upon the scheme's funding basis, and allowance is made within the capital requirement by stressing the funding position using the same economic capital basis as for the insurance firms.

The results and the model are unaudited but certain elements of the methodology, assumptions and processes have been reviewed by PwC.

Capital and Investments 70

4.02 Group Economic Capital (continued)

The calculation of the Economic Capital Balance Sheet and associated capital requirement requires a number of assumptions, including:

(i) assumptions required to derive the present value of best estimate liability cash flows. Non market assumptions are broadly the same as those used to derive the Group's EEV disclosures. Future investment returns and discount rates are based on market data where a deep and liquid market exists or using appropriate estimation techniques where this is not the case. The risk-free rates used to discount liabilities are market swap rates, with a 10 basis point deduction to allow for a credit risk adjustment;

(ii) assumptions regarding management actions and policyholder behaviour across the full range of scenarios. The only management actions allowed for are those that have been approved by the Board and are in place at the balance sheet date;

(iii) assumptions regarding the volatility of the risks to which the Group is exposed to are used to calculate Economic Capital Requirement. Assumptions have been set using a combination of historic market, demographic and operating experience data. In areas where data is not considered robust, expert judgement has been used; and

(iv) assumptions on the dependencies between risks, which are calibrated using a combination of historic data and expert judgement.

For annuities the liability discount rate includes an Economic Matching Adjustment. The Economic Matching Adjustment is derived using the same approach as the Solvency II matching adjustment, but any constraints we consider economically artificial, such as capping the yield on assets with a credit rating below BBB and any ineligibility of certain assets, have not been applied.

The other key assumption relating to the annuity business is the assumption of longevity. As for IFRS and EEV, Legal & General models base mortality and future improvement of mortality separately. For our Economic Capital assessment we believe it is appropriate to ensure that the balance sheet makes sufficient allowance to meet the 1 in 200 stress to longevity over the run off of the liabilities rather than just over a 1 year timeframe as required by Solvency II.

(d) Analysis of change

The table below shows the movement (net of tax) during the financial year in the Group's Economic Capital surplus.


								Economic
								Capital
								surplus
Analysis of movement from 1 January to 31 December 2014								£bn


Economic solvency position as at 1 January 2014								6.9
Operating experience¹								0.5
New business strain²								-
Non-operating experience³								(0.4)
Other capital movements:
Subordinated debt issuance								0.6
Dividends paid in the period								(0.6)


Economic solvency position as at 31 December 2014								7.0


1. Release of surplus generated by in-force business, model and assumption changes. 2. New business written in 2014 is broadly neutral on surplus. 3. Non-operating experience: changes in asset mix across the Group (with corresponding increase in Economic Capital Requirement), changes in pension scheme deficit (following completion of the triennial valuation) and other market movements.

Capital and Investments 71

4.02 Group Economic Capital (continued)
(e) Reconciliation of IFRS Shareholders' Equity to Economic Capital Eligible Own Funds

The table below gives a reconciliation of the Eligible own funds on an Economic Capital basis and the Group's IFRS shareholders' equity.

	2014	2013
	£bn	£bn


IFRS shareholders' equity at 31 December	6.0	5.6
Remove DAC, goodwill and other intangible assets and liabilities	(2.0)	(1.7)
Add subordinated debt treated as economic available capital¹	2.4	1.9
Insurance contract valuation differences²	6.6	6.2
Add value of shareholder transfers	0.3	0.3
Increase in value of net deferred tax liabilities (resulting from valuation differences)	(0.6)	(0.7)
Other	0.1	0.4
Adjustment - Basic own funds to Eligible own funds³	(0.3)	(0.6)


Eligible own funds at 31 December	12.5	11.4


1. Treated as available capital on the Economic Capital Balance Sheet as the liabilities are subordinate to policyholder claims. 2. Differences in the measurement of liabilities between IFRS and Economic Capital, offset by the inclusion of the recapitalisation cost. 3. Eligibility restrictions relating to the own funds of US captive reassurers and the UK With-profits fund.

The figures that appear in this note are all pre-accrual for the final dividend.

(f) Sensitivity analysis The following sensitivities are provided to give an indication of how the Group's economic capital surplus as at 31 December 2014 would have changed in a variety of adverse events. These are all independent stresses to a single risk. In practice the balance sheet is impacted by combinations of stresses and the combined impact can be larger than adding together the impacts of the same stresses in isolation. It is expected that, particularly for market risks, adverse stresses will happen together.

		Impact on
	Impact on	economic
	net of tax	capital
	capital	coverage
	surplus	ratio
	2014	2014
	£bn	%


Credit spread widens by 50bps (AAA-rated), 100bps (AA-rated), 150bps (A-rated), 200bps (BBB-rated), 250bps (BB-rated), 300bps (B-rated), 350bps (other rated) on Legal & General's corporate bond holdings, with no change in the firm's long term default expectations	(0.7)	(15)
A worsening in our expectation of future default and downgrade to 125% times our assumed best estimate level	(0.5)	(21)
20% fall in equity market	(0.4)	(4)
40% fall in equity markets	(0.7)	(9)
15% fall in property markets	(0.2)	(3)
100bps increase in risk free rates	-	9
100bps fall in risk free rates	0.1	(10)
1% reduction in annuitant base mortality	(0.1)	(2)

The above sensitivity analysis does not reflect management actions which could be taken to reduce the impacts. In practice, the Group actively manages its asset and liability positions to respond to market movements.
The impacts of these stresses are not linear therefore these results should not be used to extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.

Capital and Investments 72

4.02 Group Economic Capital (continued)
(g) Analysis of Group Economic Capital Requirement

The table below shows a breakdown of the Group's Economic Capital Requirement by risk type. The split is shown after the effects of diversification.

	2014	2013
	%	%


Interest Rate	6	5
Equity	15	16
Credit¹	44	44
Property²	4	8
Currency	3	(3)
Inflation	(2)	(1)
Total Market Risk³	70	69
Counterparty Risk	1	1
Life Mortality	-	1
Life Longevity⁴	10	12
Life Lapse⁵	5	7
Life Catastrophe	3	4
Non-life underwriting	1	2
Health underwriting	1	-
Expense	1	1
Total Insurance Risk	21	27
Operational Risk⁶	7	4
Miscellaneous	1	(1)


Total Economic Capital Requirement	100	100


1. Credit risk is Legal & General's most significant exposure, arising predominantly from the c£40bn portfolio of bonds backing the Group's annuity business. 2. During 2014, the Group improved the modelling of its sale and leaseback assets, resulting in a lower capital requirement. 3. The Group also has significant exposure to other market risks, primarily due to the investment holdings within the shareholder funds but also the risk to fee income from assets backing unit linked and with-profit Savings businesses. 4. Longevity risk is Legal & General's most significant insurance risk exposure, arising from the annuity book on which the majority of the longevity risk is retained. 5. Lapse risk is also a significant risk, primarily through the risk of mass lapse on investment management and savings businesses and the risk of non-renewal on the Group's protection businesses. 6. During 2014, Legal & General has improved its operational risk scenario analysis in response to internal and external feedback, which led to a revised calibration.

(h) Solvency II

The Economic Capital results set out above do not reflect the Solvency II regime. We anticipate that our Solvency II internal model will be approved in 2015, ready for use on the Solvency II go live date - 1 January 2016. We expect the final outcome on Solvency II to result in a lower Group capital surplus and solvency ratio than the Economic Capital basis.

Capital and Investments 73

4.03 Investment portfolio

	Market	Market
	value	value¹
	2014	2013
	£m	£m


Worldwide total assets	710,554	614,360
Client and policyholder assets	(638,117)	(553,251)
Non-unit linked with-profits assets	(15,242)	(17,391)


Investments to which shareholders are directly exposed	57,195	43,718


1. Comparative has been restated following the adoption of IFRS 10, further details are contained in Note 2.24.

Analysed by investment class:

			Other
			non profit		Other
		LGR	insurance	LGC	shareholder
		investments¹	investments	investments	investments	Total	Total
		2014	2014	2014	2014	2014	2013
	Note	£m	£m	£m	£m	£m	£m


Equities²		279	-	1,905	81	2,265	1,760
Bonds	4.05	40,737	2,546	1,620	908	45,811	35,697
Derivative assets³		3,827	14	98	1	3,940	2,307
Property		1,879	-	147	4	2,030	1,447
Cash (including cash
equivalents), loans & receivables		652	368	1,339	659	3,018	2,331


Financial investments		47,374	2,928	5,109	1,653	57,064	43,542


Other assets⁴		118	-	13	-	131	176


Total investments		47,492	2,928	5,122	1,653	57,195	43,718


1. LGR investments includes all business written in LGPL, including £0.6bn of non annuity assets held in LGPL.
2. Includes equity investment in CALA Group Limited.
3. Derivative assets are shown gross of derivative liabilities of £2.7bn (2013: £1.4bn). Exposures arise from the use of derivatives for efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management.
4. Other assets include finance lease debtors.

Capital and Investments 74

4.04 Direct Investments¹
(a) Analysed by asset class
	Direct¹	Traded²		Direct¹	Traded²
	Investments	securities	Total	Investments	securities	Total
	2014	2014	2014	2013	2013	2013
	£m	£m	£m	£m	£m	£m


Equities	318	1,947	2,265	202	1,558	1,760
Bonds	2,983	42,828	45,811	1,048	34,649	35,697
Derivative assets	-	3,940	3,940	-	2,307	2,307
Property	2,030	-	2,030	1,447	-	1,447
Cash (including cash
equivalents), loans & receivables	241	2,777	3,018	6	2,325	2,331
Other assets	131	-	131	176	-	176


	5,703	51,492	57,195	2,879	40,839	43,718


1. Direct Investments constitute an agreement with another party and represent an exposure to untraded and often less liquid asset classes. Direct Investments include physical assets, bilateral loans and private equity but exclude hedge funds.
2. Traded securities are defined by exclusion. If an instrument is not a Direct Investment, then it is classed as a traded security.

(b) Analysed by segment
	LGR	LGC	LGA	LGAS	Total
	2014	2014	2014	2014	2014
	£m	£m	£m	£m	£m


Equities	-	318	-	-	318
Bonds	2,586	168	229	-	2,983
Property	1,879	147	-	4	2,030
Cash (including cash
equivalents), loans & receivables	-	54	187	-	241
Other assets	118	13	-	-	131


	4,583	700	416	4	5,703


	LGR	LGC	LGA	LGAS	Total
	2013	2013	2013	2013	2013
	£m	£m	£m	£m	£m


Equities	-	202	-	-	202
Bonds	997	-	51	-	1,048
Property	1,294	149	-	4	1,447
Cash (including cash
equivalents), loans & receivables	-	-	6	-	6
Other assets	176	-	-	-	176


	2,467	351	57	4	2,879

(c) Movement in the year

	Carrying			Change in		Carrying
	value			market		value
	01.01.14	Additions	Disposals	value	Other	31.12.14
	£m	£m	£m	£m	£m	£m


Equities	202	132	(31)	18	(3)	318
Bonds	1,048	1,629	(82)	202	186	2,983
Property	1,447	794	(256)	45	-	2,030
Cash (including cash
equivalents), loans & receivables	6	230	(1)	6	-	241
Other assets	176	13	-	2	(60)	131


	2,879	2,798	(370)	273	123	5,703

Capital and Investments 75

4.05 Bond portfolio summary
(a) Analysed by sector
		LGR	LGR	Total	Total
		2014	2014	2014	2014
	Note	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.05(b)	7,760	19	9,249	20
Banks:
- Tier 1		24	-	26	-
- Tier 2 and other subordinated		559	1	621	1
- Senior		1,667	4	2,221	5
Financial Services:
- Tier 1		-	-	-	-
- Tier 2 and other subordinated		96	-	132	-
- Senior		946	2	1,138	3
Insurance:
- Tier 1		128	-	129	-
- Tier 2 and other subordinated		363	1	375	1
- Senior		624	2	704	2
Utilities		5,561	14	5,824	13
Consumer Services and Goods & Health Care		4,126	10	4,726	10
Technology and Telecoms		2,548	6	2,836	6
Industrials & Oil and Gas		4,306	11	4,928	11
Property		1,882	5	2,126	5
Asset backed securities:¹
- Traditional		722	2	1,234	3
- Securitisations and debentures		8,305	20	8,422	18
CDOs²		1,120	3	1,120	2


Total		40,737	100	45,811	100


1. Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies and debentures are securities with fixed redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio has had no reference entity defaults in 2014. The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.5%, on average across the reference portfolio, before the CDOs incur any default losses. Assuming an average recovery rate of 30%, then over 39% of the reference names would have to default before the CDOs incur any default losses. The CDOs are valued using an external valuation which is based on observable market inputs. This is then validated against the market valuation.

Capital and Investments 76

4.05 Bond portfolio summary (continued)
(a) Analysed by sector (continued)
		LGR	LGR	Total	Total
		2013	2013	2013	2013
	Note	£m	%	£m	%


Sovereigns, Supras and Sub-Sovereigns	4.05(b)	4,772	16	6,502	18
Banks:
- Tier 1		100	-	105	-
- Tier 2 and other subordinated		637	2	698	2
- Senior		1,406	5	2,169	6
Financial Services:
- Tier 1		2	-	5	-
- Tier 2 and other subordinated		206	1	251	1
- Senior		800	3	1,041	3
Insurance:
- Tier 1		144	1	152	-
- Tier 2 and other subordinated		579	2	625	2
- Senior		481	2	552	2
Utilities		4,013	13	4,329	12
Consumer Services and Goods & Health Care		3,128	10	3,716	10
Technology and Telecoms		1,995	7	2,333	7
Industrials & Oil and Gas		3,074	10	3,626	10
Property		981	3	1,053	3
Asset backed securities:¹
- Traditional		763	3	1,395	4
- Securitisations and debentures		5,839	19	6,047	17
CDOs²		1,098	3	1,098	3


Total		30,018	100	35,697	100


1. Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies and debentures are securities with fixed redemption profiles issued by firms typically secured on property.
2. The underlying reference portfolio has had no reference entity defaults in 2013. The CDOs are termed as super senior since default losses on the reference portfolio have to exceed 27.5%, on average across the reference portfolio, before the CDOs incur any default losses. Assuming an average recovery rate of 30%, then over 39% of the reference names would have to default before the CDOs incur any default losses. The CDO's are valued using an external valuation which is based on observable market inputs. This is then validated against the market valuation.

Capital and Investments 77

4.05 Bond portfolio summary (continued)
(b) Analysed by domicile

The tables below are based on the legal domicile of the security:
	LGR	Total	LGR	Total
	2014	2014	2013	2013
	£m	£m	£m	£m


Market value by region:
United Kingdom	20,055	21,021	13,099	14,178
USA	9,515	11,839	7,237	9,779
Netherlands	1,910	2,182	1,736	2,164
France	1,412	1,726	1,382	1,681
Germany	378	682	411	791
Greece	-	-	-	-
Ireland	276	303	234	271
Italy	301	429	636	786
Portugal	1	11	15	31
Spain	212	260	178	263
Russia	19	37	-	1
Rest of Europe	1,857	2,164	1,299	1,720
Brazil	139	157	83	86
Rest of World	3,542	3,880	2,610	2,848
CDOs	1,120	1,120	1,098	1,098


Total	40,737	45,811	30,018	35,697

Additional analysis of sovereign debt exposures

	Sovereigns, Supras and Sub-Sovereigns

	LGR	Total	LGR	Total
	2014	2014	2013	2013
	£m	£m	£m	£m


Market value by region:
United Kingdom	5,946	6,267	3,340	3,725
USA	536	772	282	664
Netherlands	5	153	10	194
France	1	138	90	220
Germany	204	417	212	472
Greece	-	-	-	-
Ireland	-	8	-	7
Italy	2	96	236	323
Portugal	-	9	-	16
Spain	-	10	-	14
Russia	19	28	-	1
Rest of Europe	765	922	474	660
Brazil	55	64	11	13
Rest of World	227	365	117	193


Total	7,760	9,249	4,772	6,502

Capital and Investments 78

4.05 Bond portfolio summary (continued)
(c) Analysed by credit rating

	LGR	LGR	Total	Total
	2014	2014	2014	2014
	£m	%	£m	%


AAA	1,936	5	3,451	8
AA	10,357	25	11,190	24
A	13,231	33	14,420	31
BBB	10,360	25	11,441	25
BB or below	630	2	853	2
Unrated: Bespoke CDOs¹	994	2	994	2
Other	3,229	8	3,462	8


	40,737	100	45,811	100



	LGR	LGR	Total	Total
	2013	2013	2013	2013
	£m	%	£m	%


AAA	1,378	5	3,144	9
AA	6,743	22	7,599	21
A	10,236	34	11,703	34
BBB	8,326	28	9,456	26
BB or below	603	2	874	2
Unrated: Bespoke CDOs¹	983	3	983	3
Other	1,749	6	1,938	5


	30,018	100	35,697	100


1. The CDOs are termed as super senior since default losses have to exceed 27.5%, on average across the reference portfolio, before the CDOs incur any default losses. The underlying reference portfolio had no reference entity defaults in 2013 or 2014. Losses are limited under the terms of the CDOs to assets and collateral invested.

4.06 Value of policyholder assets held in Society and LGPL

	2014	2013
	£m	£m


With-profits business	21,614	23,959
Non profit business	57,835	49,949


	79,449	73,908

European Embedded Value 79

Group embedded value - summary
	Covered business
		LGAS		Non-
	UK	overseas		covered
	business	business	LGA	business	Total
For the year ended 31 December 2014	£m	£m	£m	£m	£m


At 1 January 2014
Value of in-force business (VIF)	4,693	197	699	-	5,589
Shareholder net worth (SNW)	3,249	315	234	199	3,997


Embedded value at 1 January 2014	7,942	512	933	199	9,586
Exchange rate movements	-	(30)	44	(16)	(2)

Operating profit/(loss) after tax for the year	1,264	31	(68)	107	1,334
Non-operating profit/(loss) after tax for the year	709	(11)	(11)	(5)	682


Profit/(loss) for the year	1,973	20	(79)	102	2,016
Intra-group distributions¹	(641)	(30)	(46)	717	-
Dividends to equity holders of the Company	-	-	-	(580)	(580)
Transfer to non-covered business²	(26)	-	-	26	-
Other reserve movements including pension deficit³	389	-	(125)	(309)	(45)


Embedded value at 31 December 2014	9,637	472	727	139	10,975


Value of in-force business	6,118	147	518	-	6,783
Shareholder net worth	3,519	325	209	139	4,192



Embedded value per share (p)⁴					185


1. UK intra-group distributions primarily reflect a £675m dividend paid from LGAS to Group, and dividends of €35m (2013: €16m) from LGN and £5m from Nationwide Life (2013: £10m) paid to LGAS. Dividends of $76m (2013: $69m) from LGA and €2m (2013: €2m) from LGF were paid to Group.
2. The transfer to non-covered business represents the IFRS profits arising in the year from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
3. The other reserve movements primarily reflect the effect of reinsurance arrangement transactions between UK and US covered business, pension deficit movement, movement in the savings related share options scheme and intragroup capital contribution.
4. The number of shares in issue at 31 December 2014 was 5,942,070,229 (31 December 2013: 5,917,066,636).

Further analysis of the LGAS and LGR covered business can be found in Note 5.01.

European Embedded Value 80

Group embedded value - summary (continued)
	Covered business
		LGAS		Non-
	UK	overseas		covered
	business	business	LGA	business	Total
For the year ended 31 December 2013	£m	£m	£m	£m	£m


At 1 January 2013
Value of in-force business (VIF)	4,402	146	735	-	5,283
Shareholder net worth (SNW)	3,178	296	239	(96)	3,617


Embedded value at 1 January 2013	7,580	442	974	(96)	8,900
Exchange rate movements	-	9	(14)	(10)	(15)

Operating profit after tax for the year	804	16	70	168	1,058
Non-operating profit/(loss) for the year	222	60	(24)	(17)	241


Profit for the year	1,026	76	46	151	1,299
Intra-group distributions¹	(602)	(15)	(44)	661	-
Dividends to equity holders of the Company	-	-	-	(479)	(479)
Transfer to non-covered business²	(27)	-	-	27	-
Other reserve movements including pension deficit³	(35)	-	(29)	(55)	(119)


Embedded value at 31 December 2013	7,942	512	933	199	9,586


Value of in-force business	4,693	197	699	-	5,589
Shareholder net worth	3,249	315	234	199	3,997



Embedded value per share (p)⁴					162


1. UK intra-group distributions reflect a £625m dividend paid from LGAS to Group, and dividends of £10m paid to LGAS from subsidiaries (primarily Nationwide Life). Dividends of €16m from LGN were also paid to LGAS. Dividends of $69m from LGA and €2m from LGF were paid to the group.
2. The transfer to non-covered business represents the IFRS profits arising in the year from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
3. The other reserve movements reflect the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.
4. The number of shares in issue at 31 December 2013 was 5,917,066,636.

Further analysis of the LGAS and LGR covered business can be found in Note 5.01.

European Embedded Value 81

5.01 LGAS and LGR embedded value reconciliation

	Shareholder net worth				Total
	Free	Required		Value of	embedded
	surplus	capital	Total	in-force	value
For the year ended 31 December 2014	£m	£m	£m	£m	£m


At 1 January 2014	1,174	2,390	3,564	4,890	8,454
Exchange movement	(1)	(16)	(17)	(13)	(30)

Operating profit/(loss) after tax - UK business:
Contribution from new risks after cost of capital
- New business contribution¹	(340)	343	3	607	610
- Intragroup transfer from With-Profit to Non Profit Fund	-	-	-	80	80
- Expected return on VIF	-	-	-	317	317
- Expected transfer from VIF to SNW²	901	(213)	688	(688)	-
- Expected return on SNW	55	116	171	-	171
Generation of embedded value	616	246	862	316	1,178
- Experience variances	175	(83)	92	(6)	86
- Operating assumption changes	171	(109)	62	(36)	26
- Development costs	(26)	-	(26)	-	(26)
Variances	320	(192)	128	(42)	86
Operating profit after tax - LGAS overseas	4	3	7	24	31


Operating profit after tax - LGAS & LGR	940	57	997	298	1,295
Non-operating profit/(loss) after tax - UK business:
- Economic variances	(359)	219	(140)	851	711
- Other taxation impacts³	(12)	-	(12)	10	(2)

Non-operating profit/(loss) after tax - LGAS overseas	57	(7)	50	(61)	(11)
Non-operating profit/(loss) after tax - LGAS & LGR	(314)	212	(102)	800	698


Profit for the year - LGAS & LGR	626	269	895	1,098	1,993
Intra-group distributions⁴	(671)	-	(671)	-	(671)
Transfer to non-covered business⁵	(26)	-	(26)	-	(26)
Other reserve movements including pension deficit⁶	(125)	224	99	290	389


Embedded value at 31 December 2014	977	2,867	3,844	6,265	10,109


1. The UK free surplus reduction of £340m to finance new business primarily reflects £343m additional required capital in relation to new business.
2. The increase in UK free surplus of £901m from the expected transfer from the in-force non profit business includes £688m of operational cash generation and a £213m reduction in required capital. The £764m operational cash generation from LGAS and LGR per Note 2.01 also includes £29m dividend from LGN, £2m dividend from LGF and £44m primarily reflecting profit from non-covered business.
3. Reflects the impact of the change in treatment in deferred tax to align with IFRS by removing the effect of discounting.
4. Intra-group distributions primarily reflect £675m dividend paid from LGAS to Group and dividend of €35m from LGN and £5m from Nationwide to LGAS.
5. The transfer to non-covered business represents the IFRS profits arising in the year from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
6. The other reserve movements reflect the pension deficit movement, the effect of reinsurance arrangement transactions between UK and US covered business and intragroup capital contribution.

The value of in-force business of £6,265m is comprised of £5,925m of non profit business and £340m of with-profits business.

European Embedded Value 82

5.01 LGAS and LGR embedded value reconciliation (continued)

	Shareholder net worth				Total
	Free	Required		Value of	embedded
	surplus	capital	Total	in-force	value
For the year ended 31 December 2013	£m	£m	£m	£m	£m


At 1 January 2013	1,259	2,215	3,474	4,548	8,022
Exchange movement	3	3	6	3	9

Operating profit/(loss) after tax - UK business:
Contribution from new risks after cost of capital
- New business contribution¹	(324)	284	(40)	484	444
- Intragroup transfer from With-Profit to Non Profit Fund	-	-	-	-	-
- Expected return on VIF	-	-	-	266	266
- Expected transfer from VIF to SNW²	869	(181)	688	(688)	-
- Expected return on SNW	40	76	116	-	116
Generation of embedded value	585	179	764	62	826
- Experience variances	5	(9)	(4)	14	10
- Operating assumption changes	(24)	2	(22)	21	(1)
- Development costs	(31)	-	(31)	-	(31)
Variances	(50)	(7)	(57)	35	(22)
Operating profit after tax - LGAS overseas	7	1	8	8	16


Operating profit after tax - LGAS & LGR	542	173	715	105	820
Non-operating profit/(loss) after tax - UK business:
- Economic variances	109	(8)	101	80	181
- Effect of tax rate changes and other taxation impacts³	-	-	-	41	41

Non-operating profit after tax - LGAS overseas	20	-	20	40	60
Non-operating profit/(loss) after tax - LGAS & LGR	129	(8)	121	161	282


Profit for the year - LGAS & LGR	671	165	836	266	1,102
Intra-group distributions⁴	(617)	-	(617)	-	(617)
Transfer to non-covered business⁵	(27)	-	(27)	-	(27)
Other reserve movements including pension deficit⁶	(115)	7	(108)	73	(35)


Embedded value at 31 December 2013	1,174	2,390	3,564	4,890	8,454


1. The UK free surplus reduction of £324m to finance new business includes £40m new business strain and £284m additional required capital.
2. The increase in UK free surplus of £869m from the expected transfer from the in-force covered business includes £688m of operational cash generation and a £181m reduction in required capital. The £734m operational cash from LGAS and LGR per Note 2.01 also includes £2m and £14m remitted from LGF and LGN respectively, and £30m primarily reflecting IFRS profit from non covered business.
3. Reflects the implementation of the UK planned future reductions in corporation tax to 20% on 1 April 2015.
4. UK intra-group dividends reflect a £625m dividend paid from LGAS to Group and dividends of £10m paid to LGAS from subsidiaries (primarily Nationwide Life). Dividends of €16m from LGN were also paid to LGAS.
5. The transfer to non-covered business represents the IFRS profits arising in the year from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.
6. The other reserve movements reflect the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.

The value of in-force business of £4,890m is comprised of £4,454m of non profit business and £436m of with-profits business.

European Embedded Value 83

5.02 Analysis of shareholders' equity

			LGC
	LGAS and		and group
	LGR	LGIM	expenses	LGA	Total
As at 31 December 2014	£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity¹	847	541	3,770	870	6,028
Additional retained profit/(loss) on an EEV basis	6,227	-	(1,137)	(143)	4,947


Shareholders' equity on an EEV basis	7,074	541	2,633	727	10,975


Comprising:
Business reported on an IFRS basis	484	541	(886)	-	139

Business reported on an EEV basis:
Shareholder net worth
- Free surplus²	90		887	161	1,138
- Required capital to cover solvency margin	235		2,632	48	2,915
Value of in-force
- Value of in-force business³	6,870			529	7,399
- Cost of capital	(605)			(11)	(616)


1. Shareholders' equity supporting the UK non profit LGAS and LGR businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within the LGC and group expenses segment.
2. Free surplus is the value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date.
3. Value of in-force business includes a deduction for the time value of options and guarantees of £43m (2013: £23m).

Further analysis of shareholders' equity is included in Note 5.03.

			LGC
	LGAS and		and group
	LGR	LGIM	expenses	LGA	Total
As at 31 December 2013	£m	£m	£m	£m	£m


Analysed as:
IFRS basis shareholders' equity¹	783	421	3,622	816	5,642
Additional retained profit/(loss) on an EEV basis	4,830	-	(1,003)	117	3,944


Shareholders' equity on an EEV basis	5,613	421	2,619	933	9,586


Comprising:
Business reported on an IFRS basis	408	421	(630)	-	199

Business reported on an EEV basis:
Shareholder net worth
- Free surplus²	67		1,107	192	1,366
- Required capital to cover solvency margin	248		2,142	42	2,432
Value of in-force
- Value of in-force business³	5,398			711	6,109
- Cost of capital	(508)			(12)	(520)


1. Shareholders' equity supporting the UK non profit LGAS and LGR businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within the LGC and group expenses segment.
2. Free surplus is the value of any capital and surplus allocated to, but not required to support, the in-force covered business at the valuation date.
3. Value of in-force business includes a deduction for the time value of options and guarantees of £23m.

Further analysis of shareholders' equity is included in Note 5.03.

European Embedded Value 84

5.03 Segmental analysis of shareholders' equity

	Covered	Other		Covered	Other
	business	business		business	business
	EEV	IFRS		EEV	IFRS
	basis	basis	Total	basis	basis	Total
	2014	2014	2014	2013	2013	2013
	£m	£m	£m	£m	£m	£m


LGAS
- LGAS UK Protection and Savings	2,354	-	2,354	2,331	-	2,331
- LGAS overseas business	472	-	472	512	-	512
- General insurance and other	-	484	484	-	408	408


Total LGAS	2,826	484	3,310	2,843	408	3,251



LGR	3,764	-	3,764	2,362	-	2,362



LGIM	-	541	541	-	421	421




LGC and group expenses	3,519	(886)	2,633	3,249	(630)	2,619



LGA	727	-	727	933	-	933



Total	10,836	139	10,975	9,387	199	9,586

5.04 Reconciliation of shareholder net worth

	UK		UK
	covered		covered
	business	Total	business	Total
	2014	2014	2013	2013
	£m	£m	£m	£m


SNW of long term operations (IFRS basis)	4,693	5,889	4,291	5,443
Other assets (IFRS basis)	-	139	-	199


Shareholders' equity on the IFRS basis	4,693	6,028	4,291	5,642
Purchased interest in long term business	(46)	(49)	(52)	(59)
Deferred acquisition costs/deferred income liabilities	(201)	(1,255)	(223)	(1,129)
Deferred tax¹	(16)	444	(162)	232
Other²	(911)	(976)	(605)	(689)


Shareholder net worth on the EEV basis	3,519	4,192	3,249	3,997


1. Deferred tax represents all tax which is expected to be paid under current legislation. 2. Other primarily relates to the different treatment of annuities and LGA Triple X securitisation between the EEV and IFRS basis.

European Embedded Value 85

5.05 Profit/(loss) for the year

				LGC
		LGAS and		and group
		LGR	LGIM	expenses	LGA	Total
For the year ended 31 December 2014	Note	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new risks after cost of capital:
- contribution from new business	5.06	760			90	850
- intra-group transfer from With-Profit to Non Profit Fund		100			-	100
Contribution from in-force business:
- expected return¹		424			66	490
- experience variances ²		21			(23)	(2)
- operating assumption changes³		58			(241)	(183)
Development costs		(32)			-	(32)
Contribution from shareholder net worth		7		184	3	194


Operating profit/(loss) on covered business		1,338	-	184	(105)	1,417

Business reported on an IFRS basis^4,5,6		50	304	(190)	-	164


Total operating profit/(loss)		1,388	304	(6)	(105)	1,581
Economic variances⁷		893	(12)	(74)	(17)	790
Gains on non-controlling interests		-	-	7	-	7


Profit/(loss) before tax		2,281	292	(73)	(122)	2,378
Tax (expense)/credit on profit from ordinary activities		(372)	(63)	32	43	(360)
Other taxation impacts⁸		(2)	-	-	-	(2)


Profit/(loss) for the year		1,907	229	(41)	(79)	2,016



Operating profit attributable to:
LGAS		377
LGR		1,011



						p


Earnings per share
Based on profit attributable to equity holders of the Company						34.07

Diluted earnings per share
Based on profit attributable to equity holders of the Company						33.73


1. The expected return on in-force for LGAS and LGR is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK LGAS and LGR business was £4,693m in 2014 (£4,402m in 2013). This is adjusted for the effects of opening model changes of £(30)m (2013: £27m) to give an adjusted opening base VIF of £4,663m (2013: £4,429m). This is then multiplied by the opening risk discount rate of 6.8% (2013: 6.0%) and the result grossed up at the notional attributed tax rate of 20% (2013: 20%) to give a return of £397m (2013: £331m). The same approach has been applied for the LGAS overseas businesses.
2. LGAS and LGR variance primarily reflects UK cost of capital unwind and favourable mortality experience for bulk annuities. LGA experience variance primarily relates to adverse mortality experience within term assurance and universal life products respectively.
3. LGAS and LGR operating assumption change primarily reflects mortality assumptions changes for non-profit annuities. LGA operating assumption change primarily incorporates an adjustment to our mortality assumptions to reflect the changes in industry wide mortality tables (which were issued in the second half of 2014).
4. LGAS and LGR non-covered business primarily reflects GI operating profit of £59m (2013: £69m).
5. LGIM operating profit includes Retail Investments and excludes £32m (2013: £34m) of profits arising from the provision of investment management services at market referenced rates to the covered business on a look through basis and as a consequence are included in the LGAS and LGR covered business on an EEV basis.
6. LGC and group expenses non-covered business primarily reflects Group debt costs and investment projects and expenses, partly offset by investment returns from non-covered shareholder assets.
7. The LGAS and LGR positive variance has resulted from a number of factors including lower risk discount rate, favourable default experience and enhanced yield on annuity assets offset by a lower risk free rate. LGC and group expenses primarily reflects lower equity return from shareholder funds.
8. Other taxation impacts reflects the change in the treatment of deferred tax on in-force business to align with IFRS by removing the effect of discounting.

European Embedded Value 86

5.05 Profit/(loss) for the year (continued)

				LGC
		LGAS and		and group
		LGR	LGIM	expenses	LGA	Total
For the year ended 31 December 2013	Note	£m	£m	£m	£m	£m


Business reported on an EEV basis:
Contribution from new risks after cost of capital:
- contribution from new business	5.06	544			107	651
- intra-group transfer from With-Profit to Non Profit Fund		-			-	-
Contribution from in-force business:
- expected return¹		358			68	426
- experience variances ²		52			(23)	29
- operating assumption changes³		(9)			(52)	(61)
Development costs		(40)			-	(40)
Contribution from shareholder net worth		5		113	7	125


Operating profit on covered business		910	-	113	107	1,130

Business reported on an IFRS basis^4,5,6		47	270	(106)	-	211


Total operating profit		957	270	7	107	1,341
Economic variances⁷		250	(6)	8	(37)	215
Gains on non-controlling interests		-	-	13	-	13


Profit before tax		1,207	264	28	70	1,569
Tax (expense)/credit on profit from ordinary activities		(251)	(57)	21	(24)	(311)
Effect of tax rate changes and other taxation impacts⁸		41	-	-	-	41


Profit for the year		997	207	49	46	1,299



Operating profit attributable to:
LGAS		360
LGR		597



						p


Earnings per share
Based on profit attributable to equity holders of the Company						21.91

Diluted earnings per share
Based on profit attributable to equity holders of the Company						21.61


1. The expected return on in-force is based on the unwind of the risk discount rate on the opening, adjusted base value of in-force (VIF). The opening base VIF of the UK LGAS and LGR business was £4,402m in 2013. This is adjusted for the effects of opening model changes of £27m to give an adjusted opening base VIF of £4,429m. This is then multiplied by the opening risk discount rate of 6.0% and the result grossed up at the notional attributed tax rate of 20% to give a return of £331m. The same approach has been applied for the LGAS overseas businesses.
2. LGAS and LGR variance primarily reflects UK cost of capital unwind, bulk purchase annuity data loading, fewer retail protection lapses and better longevity experience. LGA experience variance primarily relates to adverse persistency experience and mortality experience within term assurance and universal life products respectively.
3. LGAS and LGR assumption changes primarily reflects mortality assumption changes in LGR. LGA assumption changes primarily relate to improved modelling of term business in the period after the end of the guaranteed level premium period.
4. LGAS and LGR non-covered business primarily reflects GI operating profit of £69m.
5. LGIM operating profit includes Retail Investments and excludes £34m of profits arising from the provision of investment management services at market referenced rates to the covered business on a look through basis and as a consequence are included in the LGAS and LGR covered business on an EEV basis.
6. LGC and group expenses non-covered business primarily reflects Group debt costs and investment projects and expenses, partly offset by investment returns from non-covered shareholder assets.
7. The LGAS and LGR positive variance has resulted from a number of factors including equity market outperformance, favourable default experience, actions to improve the yield on annuity assets and a lower risk margin offset by a higher risk free rate. The higher risk free rate has contributed to a negative variance in LGA.
8. Primarily reflects the implementation of the UK planned future reductions in the corporation tax rate to 20% on 1 April 2015.

European Embedded Value 87

5.06 New business by product¹

		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the year ended 31 December 2014	£m	£m		£m	£m	£m	%


UK Insurance	230	1,336	5.8	-	1,336	112	8.4
Overseas business	41	300	7.3	394	694	7	1.0
UK Savings	654	2,448	3.7	2,738	5,186	27	0.5


Total LGAS	925	4,084	4.4	3,132	7,216	146	2.0


LGR	n/a	-	n/a	6,578	6,578	614	9.3


LGA	91	907	10.0	-	907	90	9.9


Total new business	1,016	4,991	4.9	9,710	14,701	850	5.8
Cost of capital						108


Contribution from new business before cost of capital						958


1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at the point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.

		Present				Contri-
		value of	Capital-			bution
	Annual	annual	isation	Single		from new
	premiums	premiums	factor²	premiums	PVNBP	business³	Margin
For the year ended 31 December 2013	£m	£m		£m	£m	£m	%


UK Insurance	218	1,141	5.2	-	1,141	101	8.9
Overseas business	30	229	7.6	371	600	5	0.8
UK Savings	724	2,516	3.5	2,495	5,011	2	-


Total LGAS	972	3,886	4.0	2,866	6,752	108	1.6


LGR⁴	n/a	939	n/a	4,089	5,028	436	8.7


LGA	99	926	9.4	-	926	107	11.6


Total new business	1,071	5,751	5.4	6,955	12,706	651	5.1
Cost of capital						72


Contribution from new business before cost of capital						723


1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at the point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.
4. LGR includes present value of annual premiums for longevity insurance on a net of reinsurance basis to enable a more representative margin figure. The gross of reinsurance longevity insurance annual premium is £270m. The LGR PVNBP contribution from new business and margin are also inclusive of longevity insurance.

European Embedded Value 88

5.07 Sensitivities
In accordance with the guidance issued by the European Insurance CFO Forum in October 2005 the table below shows the effect of alternative assumptions on the long term embedded value and new business contribution.

Effect on embedded value as at 31 December 2014

		1%	1%			1%
		lower	higher	1%	1%	higher
	As	risk	risk	lower	higher	equity/
	pub-	discount	discount	interest	interest	property
	lished	rate	rate	rate	rate	yields
	£m	£m	£m	£m	£m	£m


LGAS and LGR¹	10,109	855	(724)	628	(488)	175
LGA	727	103	(85)	22	(21)	-


Total covered business	10,836	958	(809)	650	(509)	175




					5%	5%
		10%	10%		lower	lower
		lower	lower	10%	mortality	mortality
	As	equity/	main-	lower	(UK	(other
	pub-	property	tenance	lapse	annu-	busi-
	lished	values	expenses	rates	ities)	ness)
	£m	£m	£m	£m	£m	£m


LGAS and LGR¹	10,109	(302)	158	82	(428)	71
LGA	727	-	12	(2)	n/a	168


Total covered business	10,836	(302)	170	80	(428)	239



Effect on new business contribution for the year

		1%	1%			1%
		lower	higher	1%	1%	higher
	As	risk	risk	lower	higher	equity/
	pub-	discount	discount	interest	interest	property
	lished	rate	rate	rate	rate	yields
	£m	£m	£m	£m	£m	£m


LGAS and LGR¹	760	117	(96)	38	(29)	26
LGA	90	14	(11)	5	(5)	-


Total covered business	850	131	(107)	43	(34)	26




					5%	5%
		10%	10%		lower	lower
		lower	lower	10%	mortality	mortality
	As	equity/	main-	lower	(UK	(other
	pub-	property	tenance	lapse	annu-	busi-
	lished	values	expenses	rates	ities)	ness)
	£m	£m	£m	£m	£m	£m


LGAS and LGR¹	760	(7)	30	20	(97)	10
LGA	90	-	1	4	n/a	16


Total covered business	850	(7)	31	24	(97)	26


1. Includes LGC.

Opposite sensitivities are broadly symmetrical.

The above sensitivity analyses do not reflect management actions which could be taken to reduce the impacts. Sensitivity to changes in assumptions may not be linear, and as such, they should not be extrapolated to changes of a much larger order. A 2% higher risk discount rate would result in a £1,281m negative impact on UK embedded value and a £168m negative impact on UK new business contribution for the year.

European Embedded Value 89

5.08 Assumptions

UK assumptions

The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to the portfolio yield on the relevant backing assets held at market value at the end of the reporting period. The calculated return takes account of derivatives and other credit instruments in the investment portfolio. Indicative yields on the portfolio, excluding annuities within LGR, but after allowance for long term default risk, are shown below.

For LGR, separate returns are calculated for new and existing business. An indicative combined yield, after allowance for long term default risk and the following additional assumptions, is also shown below. These additional assumptions are:

i. Where cash balances and debt securities are held at the reporting date in excess of, or below strategic investment guidelines, then it is assumed that these cash balances or debt securities are immediately invested or disinvested at current yields.

ii. Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the proceeds reinvested in corporate bonds with a redemption yield of 0.70% p.a. (0.70% p.a. at 31 December 2013) greater than the swap rate at that time (i.e. the long term credit rate).

iii. Where reinvestment or disinvestment is necessary to rebalance the asset portfolio in line with projected outgo, this is also assumed to take place at the long term credit rate above the swap rate at that time.

The returns on fixed and index-linked securities are calculated net of an allowance for default risk which takes account of the credit rating, outstanding term of the securities. The allowance for corporate securities expressed as a level rate deduction from the expected returns for annuities was 21bps at 31 December 2014 (27bps at 31 December 2013).

UK covered business

i. Assets are valued at market value.

ii. Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders' portion of the with-profits business in accordance with established practice. The proportion of profits derived from with-profits business allocated to shareholders amounts to almost 10% throughout the projection.

iii. The value of in-force business reflects the cost, including administration expenses, of providing for benefit enhancement or compensation in relation to certain products.

iv. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses (excluding the development costs referred to below). These are normally reviewed annually.

An allowance is made for future mortality improvement. For new business, mortality assumptions may be modified to take certain scheme specific features into account.

v. Development costs relate to investment in strategic systems and development capability that are charged to the covered business. Projects charged to the non-covered business are included within Group investment projects in LGC and group expenses.

Overseas covered business

vi. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses.

European Embedded Value 90

5.08 Assumptions (continued)

Economic assumptions


			As at	As at		As at
			2014	2013		2012
			% p.a.	% p.a.		% p.a.
	Risk margin		3.3	3.4		3.7
	Risk free rate¹
	- UK		2.2	3.4		2.3
- Europe		0.6		2.2	1.7
	- US		2.2	3.1		1.8
	Risk discount rate (net of tax)
	- UK		5.5	6.8		6.0
	- Europe		3.9	5.6		5.4
	- US		5.5	6.5		5.5
	Reinvestment rate (US)		5.0	5.8		4.3
	Other UK business assumptions
	Equity risk premium		3.3	3.3		3.3
	Property risk premium		2.0	2.0		2.0

	Investment return (excluding annuities in LGR )
	- Fixed interest:
	-Gilts & non gilts		1.7 - 2.4	2.2 - 3.6		1.9 - 2.9
	- Equities		5.5	6.7		5.6
	- Property		4.2	5.4		4.3

	Long-term rate of return on non profit annuities in LGR		3.6	4.6		4.3

	Inflation²
	- Expenses/earnings		3.7	4.1		3.4
	- Indexation		3.2	3.6		2.9

1. The risk free rate is the gross redemption yield on the 15 year gilt index. The Europe risk free rate is the 10 year ECB AAA-rated Euro area central government bond par yield. The LGA risk free rate is the 10 year US Treasury effective yield.

2. The LGR inflation rate has been set with reference to a curve.

Tax

vii. The profits on the covered business, except for the profits on the Society shareholder capital held outside the long term fund, are calculated on an after tax basis and are grossed up by the notional attributed tax rate for presentation in the income statement. For the UK, the after tax basis assumes the annualised current tax rate of 21.5% and the subsequent enacted future reduction in corporation tax to 20% from 1 April 2015. The tax rate used for grossing up is the long term corporate tax rate in the territory concerned, which for the UK is 20% (31 December 2013: 20%) after taking into account the expected further rate reduction to 20% by 1 April 2015. The profits on the Society shareholder capital held outside the long term fund are calculated before tax and therefore tax is calculated on an actual basis.

US, Netherlands and France covered business profits are also grossed up using the long term corporate tax rates of the respective territories i.e. US is 35% (31 December 2013: 35%), France is 34.43% (31 December 2013: 34.43%) and Netherlands is 25% (31 December 2013: 25%).

European Embedded Value 91

5.08 Assumptions (continued)

Stochastic calculations

viii. The time value of options and guarantees is calculated using economic and non-economic assumptions consistent with those used for the deterministic embedded value calculations.

A single model has been used for UK and international business, with different economic assumptions for each territory reflecting the significant asset classes in each territory.

Government nominal interest rates are generated using a LIBOR Market Model projecting full yield curves at annual intervals. The model provides a good fit to the initial yield curve.

The total annual returns on equities and property are calculated as the return on 1 year bonds plus an excess return. The excess return is assumed to have a lognormal distribution. Corporate bonds are modelled separately by credit rating using stochastic credit spreads over the risk free rates, transition matrices and default recovery rates. The real yield curve model assumes that the real short rate follows a mean-reverting process subject to two normally distributed random shocks.

The significant asset classes are:

- UK with-profits business - equities, property and fixed rate bonds of various durations;

- UK annuity business - fixed rate and index-linked bonds of various durations; and

- International business - fixed rate bonds of various durations.

The risk discount rate is scenario dependent within the stochastic projection. It is calculated by applying the deterministic risk margin to the risk free rate in each stochastic projection.

European Embedded Value 92

5.08 Assumptions (continued)

Sensitivity calculations

ix. A number of sensitivities have been produced on alternative assumption sets to reflect the sensitivity of the embedded value and the new business contribution to changes in key assumptions. Relevant details relating to each sensitivity are:

· 1% variation in discount rate - a one percentage point increase/decrease in the risk margin has been assumed in each case (for example a 1% increase in the risk margin would result in a 4.3% risk margin).

· 1% variation in interest rate environment - a one percentage point increased/decreased parallel shift in the risk free curve with consequential impacts on fixed asset market values, investment return assumptions, risk discount rate, including consequential changes to valuation bases.

· 1% higher equity/property yields - a one percentage point increase in the assumed equity/property investment returns, excluding any consequential changes, for example, to risk discount rates or valuation bases, has been assumed in each case (for example a 1% increase in equity returns would increase assumed total equity returns from 5.5% to 6.5%).

· 10% lower equity/property market values - an immediate 10% reduction in equity and property asset values.

· 10% lower maintenance expenses, excluding any consequential changes, for example, to valuation expense bases or potentially reviewable policy fees (for example a 10% decrease on a base assumption of £10 per annum would result in a £9 per annum expense assumption).

· 10% lower assumed persistency experience rates, excluding any consequential changes to valuation bases, incorporating a 10% decrease in lapse, surrender and premium cessation assumptions (for example a 10% decrease on a base assumption of 7% would result in a 6.3% lapse assumption).

· 5% lower mortality and morbidity rates, excluding any consequential changes to valuation bases but including assumed product repricing action where appropriate (for example if base experienced mortality is 90% of a standard mortality table then, for this sensitivity, the assumption is set to 85.5% of the standard table).

The sensitivities for covered business allow for any material changes to the cost of financial options and guarantees but do not allow for any changes to reserving bases or capital requirements within the sensitivity calculation, unless indicated otherwise above.

European Embedded Value 93

5.09 Methodology

Basis of preparation

The supplementary financial information has been prepared in accordance with the European Embedded Value (EEV) Principles issued in May 2004 by the European Insurance CFO Forum.

The supplementary financial information has been reviewed by PricewaterhouseCoopers LLP and prepared with assistance from our consulting actuary Milliman in the USA.

Changes to accounting policy - IASB consolidation project

On 1 January 2014 the application of IFRS 10, 'Consolidated Financial Statements' became compulsory for entities reporting in the EU.

IFRS 10, 'Consolidated Financial Statements' defines the principal of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements. This states that an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The application of IFRS 10 has resulted in the Group consolidating a small number of investment vehicles which were not previously consolidated which impacted the gain attributable to non-controlling interest.

As a result, the prior year disclosure in the Group embedded value summary and Note 5.05 have been restated to reflect the adoption by the Group of IFRS 10, 'Consolidated Financial Statements'. The effect on amounts previously reported at 31 December 2013 is shown below. Embedded value at 31 December 2013 remains unaffected by the adoption.

							2013
							£m


Profit for the year as previously reported (after tax)							1,289
Gains on non-controlling interests
IFRS 10 'Consolidated Financial Statements' amendment							10


Revised profit for the year (after tax)							1,299

Covered business

The Group uses EEV methodology to value individual and group life assurance, pensions and annuity business written in the UK, Europe and the US. The UK covered business also includes non-insured self invested personal pension (SIPP) business.

The managed pension funds business has been excluded from covered business and is reported on an IFRS basis.

All other businesses are accounted for on the IFRS basis adopted in the primary financial statements.

There is no distinction made between insurance and investment contracts in our covered business as there is under IFRS.

European Embedded Value 94

5.09 Methodology (continued)

Description of methodology

The objective of EEV is to provide shareholders with realistic information on the financial position and current performance of the Group.

The methodology requires assets of an insurance company, as reported in the primary financial statements, to be attributed between those supporting the covered business and the remainder. The method accounts for assets in the covered business on an EEV basis and the remainder of the Group's assets on the IFRS basis adopted in the primary financial statements.

The EEV methodology recognises profit from the covered business as the total of:

i. cash transfers during the relevant period from the covered business to the remainder of the Group's assets; and

ii. the movement in the present value of future distributable profits to shareholders arising from the covered business over the relevant reporting period.

Embedded value

Shareholders' equity on the EEV basis comprises the embedded value of the covered business plus the shareholders' equity of other businesses, less the value included for purchased interests in long term business.

The embedded value is the sum of the shareholder net worth (SNW) and the value of the in-force business (VIF). SNW is defined as those amounts, within covered business (both within the long term fund and held outside the long term fund but used to support long term business), which are regarded either as required capital or which represent free surplus.

The VIF is the present value of future shareholder profits arising from the covered business, projected using best estimate assumptions, less an appropriate deduction for the cost of holding the required level of capital and the time value of financial options and guarantees (FOGs).

Service companies

All services relating to the UK covered business are charged on a cost recovery basis, with the exception of investment management services provided to Legal & General Pensions Limited (LGPL) and to Legal & General Assurance Society Limited (LGAS). Profits arising on the provision of these services are valued on a look through basis.

As the EEV methodology incorporates the future capitalised cost of these internal investment management services, the equivalent IFRS profits have been removed from the investment management (LGIM) segment and are instead included in the results of the LGAS and LGR segments on an EEV basis.

The capitalised value of future profits emerging from internal investment management services are therefore included in the embedded value and new business contribution calculations for the LGAS and LGR segments. However, the historical profits which have emerged continue to be reported in the shareholders' equity of the LGIM segment on an IFRS basis. Since the look through into service companies includes only future profits and losses, current intra-group profits or losses must be eliminated from the closing embedded value and in order to reconcile the profits arising in the financial period within each segment with the net assets on the opening and closing balance sheet, a transfer of IFRS profits for the period from the UK SNW is deemed to occur.

New business

New business premiums reflect income arising from the sale of new contracts during the reporting period and any changes to existing contracts, which were not anticipated at the outset of the contract.

In-force business comprises previously written single premium, regular premium, recurrent single premium contracts and payments in relation to existing longevity insurance. Longevity insurance product comprises the exchange of a stream of fixed leg payments for a stream of floating payments, with the value of the income stream being the difference between the two legs. New business annual premiums have been excluded for longevity insurance due to the unpredictable deal flow from this type of business.

New business contribution arising from the new business premiums written during the reporting period has been calculated on the same economic and operating assumptions used in the embedded value at the end of the financial period. This has then been rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.

The present value of future new business premiums (PVNBP) has been calculated and expressed at the point of sale. The PVNBP is equivalent to total single premiums plus the discounted value of regular premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the embedded value at the end of the financial period. The discounted value of longevity insurance regular premiums is calculated on a net of reinsurance basis to enable a more representative margin figure.

The new business margin is defined as new business contribution at the end of the reporting period divided by the PVNBP. The premium volumes and projection assumptions used to calculate the PVNBP are the same as those used to calculate new business contribution.

Intra-group reinsurance arrangements are in place between the US and UK businesses, and it is expected that these arrangements will be periodically extended to cover recent new business. LGA new business premiums and contribution reflect the groupwide expected impact of LGA directly-written business.

European Embedded Value 95

5.09 Methodology (continued)

Projection assumptions

Cash flow projections are determined using best estimate assumptions for each component of cash flow and for each policy group. Future economic and investment return assumptions are based on conditions at the end of the financial period. Future investment returns are projected by one of two methods. The first method is based on an assumed investment return attributed to assets at their market value. The second, which is used by LGA, where the investments of that subsidiary are substantially all fixed interest, projects the cash flows from the current portfolio of assets and assumes an investment return on reinvestment of surplus cash flows. The assumed discount and inflation rates are consistent with the investment return assumptions.

Detailed projection assumptions including mortality, morbidity, persistency and expenses reflect recent operating experience and are normally reviewed annually. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favourable changes in operating experience are not anticipated until the improvement in experience has been observed.

All costs relating to the covered business, whether incurred in the covered business or elsewhere in the Group, are allocated to that business. The expense assumptions used for the cash flow projections therefore include the full cost of servicing this business.

Tax

The projections take into account all tax which is expected to be paid, based on best estimate assumptions, applying current legislation and practice together with known future changes.

Allowance for risk

Aggregate risks within the covered business are allowed for through the following principal mechanisms:

i. setting required capital levels with reference to both the Group's internal risk based capital models, and an assessment of the strength of regulatory reserves in the covered business;

ii. allowing explicitly for the time value of financial options and guarantees within the Group's products; and

iii. setting risk discount rates by deriving a Group level risk margin to be applied consistently to local risk free rates.

Required capital and free surplus

Regulatory capital for the UK LGAS and LGR businesses is provided by assets backing the with-profits business or by the SNW. The SNW comprises all shareholders' capital within Society, including those funds retained within the long term fund and the excess assets in LGPL (collectively Society shareholder capital).

Society shareholder capital is either required to cover EU solvency margin or is free surplus as its distribution to shareholders is not restricted.

For UK with-profits business, the required capital is covered by the surplus within the with-profits part of the fund and no effect is attributed to shareholders except for the burn-through cost, which is described later. This treatment is consistent with the Principles and Practices of Financial Management for this part of the fund.

For UK non profit business, the required capital will be maintained at no less than the level of the EU minimum solvency requirement. This level, together with the margins for adverse deviation in the regulatory reserves, is, in aggregate, in excess of internal capital targets assessed in conjunction with the Individual Capital Assessment (ICA) and the with-profits support account.

The initial strains relating to new non profit business, together with the related EU solvency margin, are supported by releases from existing non profit business and the Society shareholder capital. As a consequence, the writing of new business defers the release of capital to free surplus. The cost of holding required capital is defined as the difference between the value of the required capital and the present value of future releases of that capital. For new business, the cost of capital is taken as the difference in the value of that capital assuming it was available for release immediately and the present value of the future releases of that capital. As the investment return, net of tax, on that capital is less than the risk discount rate, there is a resulting cost of capital which is reflected in the value of new business.

For LGA, the Company Action Level (CAL) of capital has been treated as required capital for modelling purposes. The CAL is the regulatory capital level at which the company would have to take prescribed action, such as submission of plans to the State insurance regulator, but would be able to continue operating on the existing basis. The CAL is currently twice the level of capital at which the regulator is permitted to take control of the business.

For LGN, required capital has been set at 104% of EU minimum solvency margin for all products without FOGs. For those products with FOGs, capital of between 104% and 339% of the EU minimum solvency margin has been used. These capital requirements have been scaled up by a factor of 1.042 at the total level to ensure the total requirement meets the 160% Solvency I from the capital policy for the EEV, for the NBVA no scaling is applied. The level of capital has been determined using risk based capital techniques.

For LGF, 100% of EU minimum solvency margin has been used for EV modelling purposes for all products both with and without FOGs. The level of capital has been determined using risk based capital techniques.

The contribution from new business for our international businesses reflects an appropriate allowance for the cost of holding the required capital.

European Embedded Value 96

5.09 Methodology (continued)

Financial options and guarantees

Under the EEV Principles an allowance for time value of FOGs is required where a financial option exists which is exercisable at the discretion of the policyholder. These types of option principally arise within the with-profits part of the fund and their time value is recognised within the with-profits burn-through cost described below. Additional financial options for non profit business exist only for a small amount of deferred annuity business where guaranteed early retirement and cash commutation terms apply when the policyholders choose their actual retirement date.

Further financial guarantees exist for non profit business, in relation to index-linked annuities where capped or collared restrictions apply. Due to the nature of these restrictions and the manner in which they vary depending on the prevailing inflation conditions, they are also treated as FOGs and a time value cost recognised accordingly.

The time value of FOGs has been calculated stochastically using a large number of real world economic scenarios derived from assumptions consistent with the deterministic EEV assumptions and allowing for appropriate management actions where applicable. The management action primarily relates to the setting of bonus rates. Future regular and terminal bonuses on participating business within the projections are set in a manner consistent with expected future returns available on assets deemed to back the policies within the stochastic scenarios.

In recognising the residual value of any projected surplus assets within the with-profits part of the fund in the deterministic projection, it is assumed that terminal bonuses are increased to exhaust all of the assets in the part of the fund over the future lifetime of the in-force with-profits policies. However, under stochastic modelling, there may be some extreme economic scenarios when the total projected assets within the with-profits part of the fund are insufficient to pay all projected policyholder claims and associated costs. The average additional shareholder cost arising from this shortfall has been included in the time value cost of financial options and guarantees and is referred to as the with-profits burn-through cost.

Economic scenarios have been used to assess the time value of the financial guarantees for non profit business by using the inflation rate generated in each scenario. The inflation rate used to project index-linked annuities will be constrained in certain real world scenarios, for example, where negative inflation occurs but the annuity payments do not reduce below pre-existing levels. The time value cost of FOGs allows for the projected average cost of these constrained payments for the index-linked annuities. It also allows for the small additional cost of the guaranteed early retirement and cash commutation terms for the minority of deferred annuity business where such guarantees have been written.

LGA FOGs relate to guaranteed minimum crediting rates and surrender values on a range of contracts, as well as impacts on no-lapse guarantees (NLG). The guaranteed surrender value of the contract is based on the accumulated value of the contract including accrued interest. The crediting rates are discretionary but related to the accounting income for the amortising bond portfolio. The majority of the guaranteed minimum crediting rates are between 3% and 4%. The assets backing these contracts are invested in US Dollar denominated fixed interest securities.

LGN separately provides for two types of guarantees: interest rate guarantees and maturity guarantees. Certain contracts provide an interest rate guarantee where there is a minimum crediting rate based on the higher of 1-year Euribor and the policy guarantee rate. This guarantee applies on a monthly basis. Certain other linked contracts provide a guaranteed minimum value at maturity where the maturity amount is the higher of the fund value and a guarantee amount. The fund values for both these contracts are invested in Euro denominated fixed interest securities.

For LGF, FOGs which have been separately provided for relate to guaranteed minimum crediting rates and surrender values on a range of contracts. The guaranteed surrender value of the contract is the accumulated value of the contract including accrued bonuses. The bonuses are based on the accounting income for the amortising bond portfolios plus income and releases from realised gains on any equity type investments. Policy liabilities equal guaranteed surrender values. In general, the guaranteed annual bonus rates are between 0% and 4.5%.

Risk free rate

The risk free rate is set to reflect both the pattern of the emerging profits under EEV and the relevant duration of the liabilities where backing assets reflect this assumption (e.g. equity returns). For the UK, it is set by reference to the gross redemption yield on the 15 year gilt index. For LGA, the risk free rate is the 10 year US Treasury effective yield, while the 10 year ECB AAA-rated Euro area central government bond par yield is used for LGN and LGF.

European Embedded Value 97

5.09 Methodology (continued)

Risk discount rate

The risk discount rate (RDR) is a combination of the risk free rate and a risk margin, which reflects the residual risks inherent in the Group's covered businesses, after taking account of prudential margins in the statutory provisions, the required capital and the specific allowance for FOGs.

The risk margin has been determined based on an assessment of the Group's weighted average cost of capital (WACC). This assessment incorporates a beta for the Group, which measures the correlation of movements in the Group's share price to movements in a relevant index. Beta values therefore allow for the market's assessment of the risks inherent in the business relative to other companies in the chosen index.

The WACC is derived from the Group's cost of equity and debt, and the proportion of equity to debt in the Group's capital structure measured using market values. Each of these three parameters is forward looking, although informed by historic information and appropriate judgements where necessary. The cost of equity is calculated as the risk free rate plus the equity risk premium for the chosen index multiplied by the Company's beta. Forward-looking or adjusted betas make allowance for the observed tendency for betas to revert to 1 and therefore a weighted average of the historic beta and 1 tends to be a better estimate of the Company's beta for the future period. We have computed the WACC using an arithmetical average of forward-looking betas against the FTSE 100 index.

The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and subordinated long term debt. All debt interest attracts tax relief at a rate of 20.1% (2013: 20.1%).

Whilst the WACC approach is a relatively simple and transparent calculation to apply, subjectivity remains within a number of the assumptions. Management believes that the chosen margin, together with the levels of required capital, the inherent strength of the Group's regulatory reserves and the explicit deduction for the cost of options and guarantees, is appropriate to reflect the risks within the covered business.

Analysis of profit

Operating profit is identified at a level which reflects an assumed longer term level of investment return.

The contribution to operating profit in a period is attributed to four sources:

i. new business;

ii. the management of in-force business;

iii. development costs; and

iv. return on shareholder net worth.

Further profit contributions arise from actual investment return differing from the assumed long term investment return (investment return variances), and from the effect of economic assumption changes. These are shown below operating profit.

The contribution from new business represents the value recognised at the end of each period from new business written in that period, after allowing for the actual cost of acquiring the business and of establishing the required technical provisions and reserves and after making allowance for the cost of capital. New business contributions are calculated using closing assumptions.

The contribution from in-force business is calculated using opening assumptions and comprises:

i. expected return - the discount earned from the value of business in-force at the start of the year;

ii. experience variances - the variance in the actual experience over the reporting period from that assumed in the value of business in-force as at the start of the year; and

iii. operating assumption changes - the effects of changes in future assumptions, other than changes in economic assumptions from those used in valuing the business at the start of the year. These changes are made prospectively from the end of the period.

Development costs relate to investment in strategic systems and development capability.

The contribution from shareholder net worth comprises the increase in embedded value based on assumptions at the start of the year in respect of the expected investment return on the Society shareholder capital.

Further profit contributions arise from investment return variances and the effect of economic assumption changes.

Economic variances represent:

i. the effect of actual investment performance and changes to investment policy on SNW and VIF business from that assumed at the beginning of the period; and

ii. the effect of changes in economic variables on SNW and VIF business from that assumed at the beginning of the period, which are beyond the control of management, including associated changes to valuation bases to the extent that they are reflected in revised assumptions.

European Embedded Value 98

Proforma 99


On 28 November 2014, the Group announced changes to its organisational structure effective from 1 January 2015. In terms of changes to the Group's segmental results, the only change is the move of the workplace savings business from the LGAS Savings division into LGIM. The proforma shown below restates the LGAS Savings and LGIM segmental information for the prior periods to reflect these changes. To reiterate, no other segmental changes have been made to the Group's results following this announcement.


	FY 2014				FY 2013
	Reported	Adjusted	Reported	Adjusted	Reported	Adjusted	Reported	Adjusted
	Savings	Savings	LGIM	LGIM	Savings	Savings	LGIM	LGIM
	£m	£m	£m	£m	£m	£m	£m	£m


Operational cash generation	140	127	262	275	164	152	239	251
New business strain	(43)	(14)		(29)	(58)	(22)		(36)


Net cash generation	97	113	262	246	106	130	239	215
Experience variances	(10)	(7)		(3)	(27)	(13)		(14)
Changes in valuation assumptions	8	3		5	11	2		9
Non-cash items and other	(20)	(22)		2	(22)	(29)		7
International and other	(1)	(1)		-	-	-		-


Operating profit after tax	74	86	262	250	68	90	239	217
Tax expense	16	19	74	71	21	28	65	58


Operating profit before tax	90	105	336	321	89	118	304	275
Investment variance	(19)	(24)	(12)	(7)	(55)	(47)	(6)	(14)


Profit before tax	71	81	324	314	34	71	298	261




	HY 2014				HY 2013
	Reported	Adjusted	Reported	Adjusted	Reported	Adjusted	Reported	Adjusted
	Savings	Savings	LGIM	LGIM	Savings	Savings	LGIM	LGIM
	£m	£m	£m	£m	£m	£m	£m	£m


Operational cash generation	71	64	125	132	82	76	119	125
New business strain	(23)	(8)		(15)	(31)	(14)		(17)


Net cash generation	48	56	125	117	51	62	119	108
Experience variances	(6)	(3)		(3)	(5)	(3)		(2)
Changes in valuation assumptions	(1)	-		(1)	11	(1)		12
Non-cash items and other	(6)	(10)		4	(22)	(12)		(10)
International and other	-	-		-	(1)	(1)		-


Operating profit after tax	35	43	125	117	34	45	119	108
Tax expense	9	11	34	32	11	14	33	30


Operating profit before tax	44	54	159	149	45	59	152	138
Investment variance	(18)	(18)	(5)	(5)	(35)	(27)	(2)	(10)


Profit before tax	26	36	154	144	10	32	150	128

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR VXLFBEXFEBBX

RNS metadata

Title: L&G FY 2014 results part 3
Time: 07:00:27
Date: 4 Mar 2015
Category: Results
ID: 4570G