L&G Half-year Report 2017 Part 2

Legal & General Group Plc

Half-year Results 2017 Part 2

 

IFRS and Release from Operations                                                                                                     Page 25

 

Operating profit

For the six months ended 30 June 2017

				Full year
		30.06.17	30.06.16	31.12.16
	Notes	£m	£m	£m
From continuing operations
Legal & General Retirement (LGR)	2.02	566	405	809
Legal & General Investment Management (LGIM)	2.03	194	171	366
Legal & General Capital (LGC)	2.05	142	135	257
Legal & General Insurance (LGI)	2.02	151	151	319
- UK and Other		94	108	234
- US		57	43	85
General Insurance	2.04	15	31	52
Savings	2.02	52	49	99
Operating profit from divisions		1,120	942	1,902
Group debt costs1		(92)	(86)	(172)
Group investment projects and expenses2	2.06	(40)	(34)	(102)
Kingswood office closure costs		-	(45)	(66)
Operating profit		988	777	1,562
Investment and other variances	2.07	169	50	13
Gains/(losses) on non-controlling interests		6	(1)	7
Profit before tax attributable to equity holders		1,163	826	1,582
Tax expense attributable to equity holders of the company	2.14	(211)	(159)	(317)
Profit for the period		952	667	1,265
Profit attributable to equity holders of the company		946	668	1,258
		p	p	p
Earnings per share3	2.10	15.94	11.27	21.22
Diluted earnings per share3	2.10	15.88	11.23	21.13
1. Group debt costs exclude interest on non recourse financing.
2. Group investment projects and expenses in H1 17 include restructuring costs of £12m (H1 16: £16m; FY 16: £54m).
3. All earnings per share calculations are based on profit attributable to equity holders of the company.

 

This supplementary operating profit information (one of the group's key performance indicators) provides further analysis of the results reported under IFRS and the group believes it provides shareholders with a better understanding of the underlying performance of the business in the year.

 

LGR represents worldwide pension risk transfer business (including longevity insurance), individual retirement and lifetime mortgages.

 

The LGIM segment represents institutional and retail investment management and workplace savings businesses.

 

LGC represents shareholder assets invested in direct investments, and traded and treasury assets.

 

LGI represents business in retail protection, group protection, networks, Legal & General Netherlands (LGN) (which was sold during April 2017) and protection business written in the USA (LGI US).

 

Savings represents business in platforms, SIPPs and mature savings including with-profits.

 

The General Insurance segment comprises short-term protection.

 

Operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Operating profit therefore reflects longer-term economic assumptions for the group's insurance businesses and shareholder funds, except for LGC's trading businesses (which reflects IFRS profit before tax) and LGI US (which excludes unrealised investment returns to align with the liability measurement under US GAAP). Variances between actual and smoothed investment return assumptions are reported below operating profit. Exceptional income and expenses which arise outside the normal course of business in the year, such as merger and acquisition, and start-up costs, are also excluded from operating profit.

 

During 2017, changes have been made to the organisational structure. Investment Discounts On Line Limited (the IDOL) has been transferred to LGI from LGR. Comparatives have been amended accordingly. The impact of this reclassification has been to reduce LGR H1 16 operating profit by £1m (FY 16: reduce by £2m), and increase LGI (UK and Other) H1 16 operating profit by £1m (FY 16: increase by £2m).

 

During 2016, the Insurance (excluding General Insurance) and LGA segments were combined to create the new Legal & General Insurance (LGI) segment. General Insurance is now presented as a separate segment.

 

 

 

IFRS and Release from Operations                                                                                                     Page 26

 

2.01 Reconciliation of release from operations to operating profit before tax

 

The table below provides an analysis of the release from operations by each of the group's business segments, together with a reconciliation to operating profit before tax.
					Changes					Operating
		New	Net		in			Operating		profit/
	Release	business	release	Exper-	valuation	Non-cash	Inter-	profit/	Tax	(loss)
	from	surplus/	from	ience	assump-	items and	national	(loss)	expense/	before
For the six months ended	operations1	(strain)	operations	variances	tions	other	and other2	after tax	(credit)	tax
30 June 2017	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR3	256	51	307	59	104	(3)	-	467	99	566
LGIM	165	(11)	154	-	(2)	1	-	153	41	194
- LGIM excluding Workplace
Savings (admin only)	153	-	153	-	-	-	-	153	41	194
- Workplace Savings (admin
only)4	12	(11)	1	-	(2)	1	-	-	-	-
LGC	119	-	119	-	-	-	-	119	23	142
LGI	166	3	169	(28)	23	(13)	(43)	108	43	151
- UK and Other3	86	3	89	(28)	23	(13)	4	75	19	94
- US	80	-	80	-	-	-	(47)	33	24	57
General Insurance	12	-	12	-	-	-	-	12	3	15
Savings	53	(2)	51	-	2	(11)	-	42	10	52
Total from divisions	771	41	812	31	127	(26)	(43)	901	219	1,120
Group debt costs	(74)	-	(74)	-	-	-	-	(74)	(18)	(92)
Group investment projects
and expenses	(14)	-	(14)	-	-	-	(18)	(32)	(8)	(40)
Total	683	41	724	31	127	(26)	(61)	795	193	988
Attributable to:
Retained business	683	41	724	31	127	(26)	(64)	792	192	984
Disposed operations	-	-	-	-	-	-	3	3	1	4
1. Release from operations includes dividends remitted from LGN of £nil (H1 16: £48m; FY 16: £70m) within the LGI (UK and Other) line and US dividends of £80m (H1 16: £61m; FY 16: £63m) within the LGI (US) line.
2. International and other includes £10m (H1 16: £13m; FY 16: £43m) of restructuring costs (£12m before tax) (H1 16: £16m before tax; FY 16: £54m before tax) within the Group investment projects and expenses line.
3. During 2017, changes have been made to the organisational structure. The IDOL business has been transferred to LGI from LGR. Comparatives have been amended accordingly. The impact of this reclassification has been to reduce LGR H1 16 release from operations by £1m (FY 16: reduce by £1m) and increase LGI (UK and Other) H1 16 release from operations by £1m (FY 16: increase by £1m).
4. This represents Workplace Savings admin only and excludes fund management profits.
Release from operations for LGR, LGIM, LGI and Savings represents the expected IFRS surplus generated in the year from the in-force non profit annuities, workplace savings, protection and savings businesses using best estimate assumptions. The LGIM release from operations also includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from LGN and LGI US and operating profit after tax from the remaining LGI businesses. The Savings release from operations includes the shareholders' share of bonuses on with-profits business and operating profit after tax from the other Savings businesses.
New business surplus/strain for LGR, LGIM, LGI and Savings represents the cost of acquiring new business and setting up prudent reserves in respect of the new business for UK non profit annuities, workplace savings, protection and savings, net of tax. The new business surplus and release from operations for LGR, LGIM, LGI and Savings exclude any capital held in excess of the prudent reserves from the liability calculation.
Net release from operations for LGR, LGIM, LGI and Savings is defined as release from operations less new business strain.
Release from operations and net release from operations for LGC and General Insurance represents the operating profit (net of tax).
See Note 2.02 for more detail on experience variances, changes to valuation assumptions and non-cash items.

 

 

 

IFRS and Release from Operations                                                                                                     Page 27

 

2.01 Reconciliation of release from operations to operating profit before tax (continued)

 

					Changes					Operating
		New	Net		in			Operating		profit/
	Release	business	release	Exper-	valuation	Non-cash	Inter-	profit/	Tax	(loss)
	from	surplus/	from	ience	assump-	items and	national	(loss)	expense/	before
For the six months ended	operations1	(strain)	operations	variances	tions	other	and other2	after tax	(credit)	tax
30 June 2016	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR3	204	79	283	(11)	48	13	-	333	72	405
LGIM	145	(11)	134	1	-	(1)	-	134	37	171
- LGIM excluding Workplace
Savings (admin only)	136	-	136	-	-	-	-	136	38	174
- Workplace Savings (admin
only)4	9	(11)	(2)	1	-	(1)	-	(2)	(1)	(3)
LGC	113	-	113	-	-	-	-	113	22	135
LGI	196	7	203	(16)	17	(13)	(87)	104	47	151
- UK and Other3	135	7	142	(16)	17	(13)	(44)	86	22	108
- US	61	-	61	-	-	-	(43)	18	25	43
General Insurance	25	-	25	-	-	-	-	25	6	31
Savings	51	(3)	48	-	5	(14)	-	39	10	49
Total from divisions	734	72	806	(26)	70	(15)	(87)	748	194	942
Group debt costs	(69)	-	(69)	-	-	-	-	(69)	(17)	(86)
Group investment projects
and expenses	(10)	-	(10)	-	-	-	(17)	(27)	(7)	(34)
Kingswood office closure costs5	-	-	-	-	-	-	(36)	(36)	(9)	(45)
Total	655	72	727	(26)	70	(15)	(140)	616	161	777
Attributable to:
Retained business	609	72	681	(26)	70	(12)	(96)	617	161	778
Disposed operations	46	-	46	-	-	(3)	(44)	(1)	-	(1)
1. Operational cash generation includes dividends remitted from LGN of £48m within the LGI (UK and Other) line and LGI (US) of £61m.
2. International and other includes £13m of restructuring costs (£16m before tax) within the group investment projects and expenses line.
3. LGI (UK and Other) includes the IDOL business which was previously reported in LGR. Comparatives have been restated accordingly.
4. This represents Workplace Savings admin only and excludes fund management profits.
5. The Kingswood office closure costs reflect expenditure in relation to rent and rates, as well as the write-off of previously capitalised expenditure.

 

 

 

IFRS and Release from Operations                                                                                                     Page 28

 

2.01 Reconciliation of release from operations to operating profit before tax (continued)

 

					Changes					Operating
		New	Net		in			Operating		profit/
	Release	business	release	Exper-	valuation	Non-cash	Inter-	profit/	Tax	(loss)
	from	surplus/	from	ience	assump-	items and	national	(loss)	expense/	before
For the year ended	operations1	(strain)	operations	variances	tions	other	and other2	after tax	(credit)	tax
31 December 2016	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	432	159	591	34	40	6	-	671	138	809
LGIM	308	(22)	286	(1)	-	-	-	285	81	366
- LGIM excluding Workplace
Savings (admin only)	290	-	290	-	-	-	-	290	82	372
- Workplace Savings (admin3
only)	18	(22)	(4)	(1)	-	-	-	(5)	(1)	(6)
LGC	214	-	214	-	-	-	-	214	43	257
LGI	318	23	341	(11)	5	(29)	(79)	227	92	319
- UK and Other	255	23	278	(11)	5	(29)	(57)	186	48	234
- US	63	-	63	-	-	-	(22)	41	44	85
General Insurance	42	-	42	-	-	-	-	42	10	52
Savings	104	(5)	99	4	8	(32)	-	79	20	99
Total from divisions	1,418	155	1,573	26	53	(55)	(79)	1,518	384	1,902
Group debt costs	(138)	-	(138)	-	-	-	-	(138)	(34)	(172)
Group investment projects
and expenses	(24)	-	(24)	-	-	-	(59)	(83)	(19)	(102)
Kingswood office closure costs4	-	-	-	-	-	-	(53)	(53)	(13)	(66)
Total	1,256	155	1,411	26	53	(55)	(191)	1,244	318	1,562
Attributable to:
Retained business	1,186	155	1,341	26	53	(50)	(133)	1,237	315	1,552
Disposed operations	70	-	70	-	-	(5)	(58)	7	3	10
1. Release from operations includes dividends remitted from LGN of £70m within the LGI (UK and Other) line and LGI (US) of £63m.
2. International and other includes £43m of restructuring costs (£54m before tax) within the Group investment projects and expenses line.
3. This represents Workplace Savings admin only and excludes fund management profits.
4. The Kingswood office closure costs reflect expenditure in relation to rent and rates, as well as the write-off of previously capitalised expenditure.

 

 

 

IFRS and Release from Operations                                                                                                     Page 29

 

2.02 Analysis of LGR, LGI and Savings operating profit

 

		LGR	LGI	Savings	LGR	LGI	Savings
		30.06.17	30.06.17	30.06.17	30.06.16	30.06.16	30.06.16
		£m	£m	£m	£m	£m	£m
Net release from operations		307	169	51	283	203	48
Experience variances
Persistency1		-	(13)	-	-	1	-
Mortality/morbidity2		3	(16)	-	2	(15)	-
Expenses		(6)	2	1	(7)	3	2
Project and development costs		(2)	(1)	(2)	(1)	(1)	-
Other3		64	-	1	(5)	(4)	(2)
Total experience variances		59	(28)	-	(11)	(16)	-
Changes to valuation assumptions
Persistency		-	-	-	-	-	5
Mortality/morbidity4		104	25	-	48	2	-
Expenses		-	-	-	-	25	-
Other		-	(2)	2	-	(10)	-
Total changes in valuation assumptions		104	23	2	48	17	5
Movement in non-cash items
Deferred tax		-	-	-	-	1	-
Acquisition expense tax relief 5		-	(9)	(1)	-	(13)	(2)
Deferred Acquisition Costs (DAC)6		-	-	(15)	-	-	(15)
Deferred Income Liabilities (DIL)6		-	-	5	-	-	6
Other		(3)	(4)	-	13	(1)	(3)
Total non-cash movement items and other		(3)	(13)	(11)	13	(13)	(14)
International and other7		-	(43)	-	-	(87)	-
Operating profit after tax		467	108	42	333	104	39
Tax gross up		99	43	10	72	47	10
Operating profit before tax		566	151	52	405	151	49
1. The H1 17 LGI persistency experience variance primarily reflects a higher number of group protection scheme renewals than anticipated, coupled with retail protection negative lapse experience and cancellations.
2. LGI mortality/morbidity experience variance in H1 17 primarily reflects adverse claims experience on the group protection book of business.
3. The H1 17 positive LGR other experience variance is primarily due to the £60m release of reserves from moving to finalised PRT scheme data, and a £16m model change to improve consistency between deferred and immediate annuity liability valuation models. This is partially offset by a £12m negative impact from prudent mortality experience assumptions during the period where full death data is not yet available.
4. The H1 17 LGR mortality/morbidity valuation assumption changes primarily reflect an update of the portfolio base mortality assumptions following the review of mortality rates seen over the last few years. The LGI mortality/morbidity valuation assumption changes reflects an improvement in individual protection mortality reserving basis modelling. The H1 16 mortality/morbidity valuation assumption change in LGR primarily reflects a change in the treatment to historic longevity insurance deals where future fees in excess of prudent estimates of longevity and expense experience are now included as an offset to IFRS reserves.
5. Net release from operations for LGI and Savings recognises tax relief from prior year acquisition expenses, which are spread evenly over seven years under relevant 'I-E' tax legislation in the period the cash flows actually occur. In contrast, operating profit typically recognises the value of these future cash flows in the same period as the underlying expense as deferred tax amounts. The reconciling amounts arising from these items are included in the table above. Following the removal of new retail protection business from the 'I-E' tax regime, and the removal of commission from new insured savings business under the Retail Distribution Review at the end of 2012, no material amount of deferred tax assets arise on new acquisition expenses and the value of these future cash flows for post-2013 acquisition expenses have been reflected within net release from operations. The residual prior year acquisition expenses will run off predictably to 2018.
6. The DAC in Savings represents the amortisation charges offset by new acquisition costs deferred in the year. The DIL reflects initial fees on insured savings business which relate to the future provision of services and are deferred and amortised over the anticipated period in which these services are provided.
7. LGI Other in H1 17 reflects the difference between the dividend (release from operations) remitted from LGA of £80m (H1 2016: dividends remitted from LGN of £48m and LGA of £61m) and the LGA and India operating profit after tax (H1 16: LGN, LGA and India operating profit after tax).

 

 

 

IFRS and Release from Operations                                                                                                     Page 30

 

2.02 Analysis of LGR, LGI and Savings operating profit (continued)

 

								LGR		LGI		Savings
								Full year		Full year		Full year
								31.12.16		31.12.16		31.12.16
								£m		£m		£m
Net release from operations								591		341		99
Experience variances
Persistency								2		(2)		-
Mortality/morbidity1								47		(34)		-
Expenses								(9)		4		7
Project and development costs								(21)		2		(4)
Other								15		19		1
Total experience variances								34		(11)		4
Changes to valuation assumptions
Persistency2								-		(52)		5
Mortality/morbidity3								40		4		-
Expenses4								-		53		-
Other								-		-		3
Total valuation assumption changes								40		5		8
Movement in non-cash items
Deferred tax								-		-		1
Acquisition expense tax relief 5								-		(27)		(3)
Deferred Acquisition Costs (DAC)6								-		-		(28)
Deferred Income Liabilities (DIL)6								-		-		9
Other								6		(2)		(11)
Total non-cash movement items								6		(29)		(32)
International and other7								-		(79)		-
Operating profit after tax								671		227		79
Tax gross up								138		92		20
Operating profit before tax								809		319		99
1. The LGR mortality/morbidity experience variance reflects higher than expected annuitant deaths experience over FY 16. LGI mortality/morbidity experience variance in FY 16 primarily reflects adverse claims experience on the group protection book of business.
2. The LGI persistency valuation assumption change in FY 16 is the result of a review of prudence within the lapse assumption for level and decreasing term assurance products.
3. The mortality/morbidity valuation assumption change in LGR primarily reflects a change in the treatment to historic longevity insurance deals where future fees in excess of prudent estimates of longevity and expense experience are now included as an offset to IFRS reserves.
4. The LGI expense valuation assumption change is the result of the reduction in unit costs following recent expense savings actions, together with a review of the prudence within renewal expenses on our protection products.
5. Net release from operations for LGI and Savings recognises tax relief from prior year acquisition expenses, which are spread evenly over seven years under relevant 'I-E' tax legislation in the period the cash flows actually occur. In contrast, operating profit typically recognises the value of these future cash flows in the same period as the underlying expense as deferred tax amounts. The reconciling amounts arising from these items are included in the table above. Following the removal of new retail protection business from the 'I-E' tax regime, and the removal of commission from new insured savings business under the Retail Distribution Review at the end of 2012, no material amount of deferred tax assets arise on new acquisition expenses and the value of these future cash flows for post-2013 acquisition expenses have been reflected within net release from operations. The residual prior year acquisition expenses will run off predictably to 2018.
6. The DAC in Savings represents the amortisation charges offset by new acquisition costs deferred in the year. The DIL reflects initial fees on insured savings business which relate to the future provision of services and are deferred and amortised over the anticipated period in which these services are provided.
7. LGI Other in FY 16 reflects the difference between the dividend (release from operations) remitted from LGN and LGI (US) of £70m and £63m respectively and the LGN, LGI (US) and India operating profit after tax.

 

 

 

IFRS and Release from Operations                                                                                                     Page 31

 

2.03 LGIM operating profit

 

							Full year
					30.06.17	30.06.16	31.12.16
					£m	£m	£m
Investment management revenue (excluding 3rd party market data)1					382	332	700
Investment management transactional revenue2					12	16	30
Investment management expenses (excluding 3rd party market data)1					(200)	(174)	(358)
Workplace Savings (admin only) operating loss3					-	(3)	(6)
Total LGIM operating profit					194	171	366
1. Investment management revenue and expenses excludes income and costs of £8m in relation to provision of 3rd party market data (H1 16: £5m each; FY 16: £14m each).
2. Transactional revenue includes execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees for property funds.
3. This represents Workplace Savings admin only and excludes fund management profits.

 

2.04 General Insurance operating profit and combined operating ratio 

								Full year
						30.06.17	30.06.16	31.12.16
						£m	£m	£m
General Insurance operating profit1						15	31	52
General Insurance combined operating ratio (%)2						95	85	89
1. The General Insurance operating profit includes the underwriting result and smoothed investment return.
2. The calculation of the General Insurance combined operating ratio incorporates claims, commission and expenses as a percentage of net earned premiums.

 

2.05 LGC operating profit

								Full year
						30.06.17	30.06.16	31.12.16
						£m	£m	£m
Direct investments						69	68	121
Traded portfolio including treasury operations						73	67	136
Total LGC operating profit						142	135	257

 

2.06 Group investment projects and central expenses

								Full year
						30.06.17	30.06.16	31.12.16
						£m	£m	£m
Group investment projects and central expenses						(28)	(18)	(48)
Restructuring costs1						(12)	(16)	(54)
Total group investment projects and expenses						(40)	(34)	(102)
1. Restructuring costs exclude the Kingswood office closure costs which have been presented separately.

 

 

 

IFRS and Release from Operations                                                                                                     Page 32

 

2.07 Investment and other variances

 

								Full year
						30.06.17	30.06.16	31.12.16
						£m	£m	£m
Investment variance1						198	58	147
M&A related2						6	(4)	(102)
Other3						(35)	(4)	(32)
Total investment and other variances						169	50	13
1. H1 17 investment variance is positive, primarily driven by the outperformance of UK equity markets to expectations. The defined benefit pension scheme variance of £111m contained within this line (H1 16: £31m; FY 16: £29m) primarily reflects the impact of the acquisition of annuities as an asset of the scheme from LGR, and the interest rate difference between the IAS 19 and annuity discount rates. A segmental analysis of Investment and other variances can be found in note 2.09 (a).
2. M&A related includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. H1 17 includes the £17m net gain resulting from the disposal of Legal & General Netherlands. (H1 16: includes the £4m net gain resulting from the disposal of subsidiaries during the period; FY 16: includes the £60m net loss resulting from the classification of Cofunds as held for sale (£64m loss) and the disposal of Suffolk Life (£4m gain)).
3. Other includes new business start-up costs and other non-investment related variance items.

 

 

 

IFRS and Release from Operations                                                                                                     Page 33

 

Consolidated Income Statement

For the six months ended 30 June 2017

 

				Full year
		30.06.17	30.06.16	31.12.16
	Notes	£m	£m	£m
Income
Gross written premiums	4.02	3,716	5,492	10,325
Outward reinsurance premiums		(866)	(719)	(1,573)
Net change in provision for unearned premiums		(11)	6	4
Net premiums earned		2,839	4,779	8,756
Fees from fund management and investment contracts		481	523	1,068
Investment return		15,457	36,978	67,824
Operational income		141	243	321
Total income	2.09	18,918	42,523	77,969
Expenses
Claims and change in insurance liabilities		3,449	11,377	17,896
Reinsurance recoveries		(494)	(1,454)	(2,745)
Net claims and change in insurance liabilities		2,955	9,923	15,151
Change in provisions for investment contract liabilities		13,618	30,569	58,578
Acquisition costs		377	375	793
Finance costs		106	98	198
Other expenses		468	748	1,569
Transfers to/(from) unallocated divisible surplus		84	(174)	(187)
Total expenses		17,608	41,539	76,102
Profit before tax		1,310	984	1,867
Tax expense attributable to policyholder returns		(147)	(158)	(285)
Profit before tax attributable to equity holders		1,163	826	1,582
Total tax expense		(358)	(317)	(602)
Tax expense attributable to policyholder returns		147	158	285
Tax expense attributable to equity holders	2.14	(211)	(159)	(317)
Profit for the period	2.09	952	667	1,265
Attributable to:
Non-controlling interests	2.20	6	(1)	7
Equity holders of the company		946	668	1,258
Dividend distributions to equity holders of the company during the period	2.16	616	592	830
Dividend distributions to equity holders of the company proposed after the period end	2.16	256	238	616
		p	p	p
Earnings per share1	2.10	15.94	11.27	21.22
Diluted earnings per share1	2.10	15.88	11.23	21.13
1. All earnings per share calculations are based on profit attributable to equity holders of the company.

 

 

 

IFRS and Release from Operations                                                                                                     Page 34

 

Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2017

 

		30.06.17	30.06.16	31.12.16
		£m	£m	£m
Profit for the period		952	667	1,265
Items that will not be reclassified subsequently to profit or loss
Actuarial losses on defined benefit pension schemes		(89)	(62)	(138)
Tax on actuarial losses on defined benefit pension schemes		16	12	17
Actuarial gains on defined benefit pension schemes transferred to unallocated divisible surplus		33	23	51
Tax on actuarial gains on defined benefit pension schemes transferred to unallocated divisible surplus		(6)	(4)	(6)
Total items that will not be reclassified to profit or loss subsequently		(46)	(31)	(76)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations		(44)	116	190
Movement in cross-currency hedge		20	-	-
Net change in financial investments designated as available-for-sale		28	66	(4)
Tax on net change in financial investments designated as available-for-sale		(10)	(23)	1
Total items that may be reclassified to profit or loss subsequently		(6)	159	187
Other comprehensive (expense)/income after tax		(52)	128	111
Total comprehensive income for the period		900	795	1,376
Total comprehensive income attributable to:
Non-controlling interests		6	(1)	7
Equity holders of the company		894	796	1,369

 

 

 

IFRS and Release from Operations                                                                                                     Page 35

 

Consolidated Balance Sheet

As at 30 June 2017

 

			30.06.17	30.06.161	31.12.161
		Notes	£m	£m	£m
Assets
Goodwill			11	79	11
Purchased interest in long term businesses and other intangible assets			133	251	155
Deferred acquisition costs			2,032	2,007	2,105
Investment in associates and joint ventures			305	237	283
Property, plant and equipment			69	97	76
Investment property		2.13/3.04	8,714	8,227	8,150
Financial investments		2.13/3.04	435,861	403,237	428,544
Reinsurers' share of contract liabilities			5,300	4,955	5,593
Deferred tax asset		2.14	5	5	5
Current tax recoverable			358	271	297
Other assets			11,262	10,900	5,022
Assets of operations classified as held for sale		2.12	-	-	2,265
Cash and cash equivalents			15,805	12,842	15,348
Total assets			479,855	443,108	467,854
Equity
Share capital		2.17	149	149	149
Share premium			985	978	981
Employee scheme treasury shares			(40)	(32)	(30)
Capital redemption and other reserves			211	211	212
Retained earnings			5,910	5,285	5,633
Attributable to owners of the parent			7,215	6,591	6,945
Non-controlling interests		2.20	350	292	338
Total equity			7,565	6,883	7,283
Liabilities
Participating insurance contracts			5,579	5,864	5,794
Participating investment contracts			5,180	5,260	5,271
Unallocated divisible surplus			719	693	661
Value of in-force non-participating contracts			(145)	(135)	(206)
Participating contract liabilities			11,333	11,682	11,520
Non-participating insurance contracts			61,097	58,437	60,779
Non-participating investment contracts			325,059	300,605	321,177
Non-participating contract liabilities			386,156	359,042	381,956
Core borrowings		2.18	3,499	3,064	3,071
Operational borrowings		2.19	553	411	430
Provisions			1,358	1,205	1,328
Deferred tax liabilities		2.14	840	729	813
Current tax liabilities			171	120	117
Payables and other financial liabilities		2.15	43,709	36,756	37,347
Other liabilities			509	617	594
Net asset value attributable to unit holders			24,162	22,599	21,573
Liabilities of operations classified as held for sale		2.12	-	-	1,822
Total liabilities			472,290	436,225	460,571
Total equity and liabilities			479,855	443,108	467,854
1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.

 

 

 

IFRS and Release from Operations                                                                                                     Page 36

 

Condensed Consolidated Statement of Changes in Equity

 

				Employee		Capital				Equity
				scheme		redemption				attributable			Non-
	Share	Share		treasury		and other		Retained		to owners			controlling		Total
	capital	premium		shares		reserves1		earnings		of the parent			interests		equity
For the six months ended 30 June 2017	£m	£m		£m		£m		£m		£m			£m		£m
As at 1 January 2017	149	981		(30)		212		5,633		6,945			338		7,283
Total comprehensive (expense)/income
for the period	-	-		-		(6)		900		894			6		900
Options exercised under share option
schemes	-	4		-		-		-		4			-		4
Net movement in employee scheme
treasury shares	-	-		(10)		(3)		1		(12)			-		(12)
Dividends	-	-		-		-		(616)		(616)			-		(616)
Movement in third party interests	-	-		-		-		-		-			6		6
Currency translation differences	-	-		-		8		(8)		-			-		-
As at 30 June 2017	149	985		(40)		211		5,910		7,215			350		7,565
1. Capital redemption and other reserves include Share-based payments £57m (H1 16: £64m; FY 16: £60m), Foreign exchange £99m (H1 16: £81m; FY 16: £135m), Capital redemption £17m (H1 16: £17m; FY 16: £17m), Available-for-sale reserves £17m (H1 16: £48m; FY 16: £(1)m) and Hedging reserves £21m (H1 16: £1m; FY 16: £1m).
					Employee		Capital				Equity
					scheme		redemption				attributable	Non-
	Share		Share		treasury		and other		Retained		to owners	controlling		Total
	capital		premium		shares		reserves		earnings		of the parent	interests		equity
For the six months ended 30 June 2016	£m		£m		£m		£m		£m		£m	£m		£m
As at 1 January 2016	149		976		(30)		89		5,220		6,404	289		6,693
Total comprehensive income/(expense)
for the period	-		-		-		159		637		796	(1)		795
Options exercised under share option
schemes	-		2		-		-		-		2	-		2
Net movement in employee scheme
treasury shares	-		-		(2)		(5)		(12)		(19)	-		(19)
Dividends	-		-		-		-		(592)		(592)	-		(592)
Movement in third party interests	-		-		-		-		-		-	4		4
Currency translation differences	-		-		-		(32)		32		-	-		-
As at 30 June 2016	149		978		(32)		211		5,285		6,591	292		6,883
				Employee		Capital				Equity
				scheme		redemption				attributable			Non-
	Share	Share		treasury		and other		Retained		to owners			controlling		Total
	capital	premium		shares		reserves		earnings		of the parent			interests		equity
For the year ended 31 December 2016	£m	£m		£m		£m		£m		£m			£m		£m
As at 1 January 2016	149	976		(30)		89		5,220		6,404			289		6,693
Total comprehensive income
for the year	-	-		-		187		1,182		1,369			7		1,376
Options exercised under share option scheme	-	5		-		--		-		5			-		5
Net movement in employee scheme
treasury shares	-	-		-		(9)-		6		(3)			-		(3)
Dividends	-	-		-		-		(830)		(830)			-		(830)
Movement in third party interests	-	-		-		-		-		-			42		42
Currency translation differences	-	-		-		(55)		55		-			-		-
As at 31 December 2016	149	981		(30)		212-		5,633		6,945			338		7,283

 

 

 

IFRS and Release from Operations                                                                                                     Page 37

 

Consolidated Cash Flow Statement

For the six months ended 30 June 2017

 

				Full year
		30.06.17	30.06.161	31.12.161
	Notes	£m	£m	£m
Cash flows from operating activities
Profit for the period		952	667	1,265
Adjustments for non cash movements in net profit for the period
Realised and unrealised (gains) on financial investments and investment properties		(9,588)	(31,213)	(53,262)
Investment income		(5,396)	(5,164)	(9,390)
Interest expense		106	98	198
Tax expense		358	317	602
Other adjustments		33	(7)	(45)
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss		418	485	(11,210)
Investments designated as available-for-sale		(4)	327	246
Other assets		(6,116)	(7,947)	(2,658)
Net increase/(decrease) in operational liabilities
Insurance contracts		259	8,921	12,910
Transfer to unallocated divisible surplus		57	(200)	(232)
Investment contracts		3,790	19,164	39,747
Value of in-force non-participating contracts		62	49	(22)
Other liabilities		10,517	10,674	17,023
Cash used in operations		(4,552)	(3,829)	(4,828)
Interest paid		(104)	(75)	(198)
Interest received		2,353	2,740	4,863
Tax paid2		(298)	(217)	(424)
Dividends received		2,851	2,622	4,676
Net cash flows from operating activities		250	1,241	4,089
Cash flows from investing activities
Net acquisition of plant, equipment and intangibles		(30)	(29)	(45)
Disposal of subsidiaries3	2.11	286	(340)	(272)
Investment in joint ventures		-	(17)	(63)
Net cash flows from/(used in) investing activities		256	(386)	(380)
Cash flows from financing activities
Dividend distributions to ordinary equity holders of the company during the period	2.16	(616)	(589)	(830)
Proceeds from issue of ordinary share capital		3	3	5
Purchase of employee scheme shares (net)		9	2	-
Proceeds from borrowings		1,211	253	219
Repayment of borrowings		(619)	(315)	(342)
Net cash flows used in financing activities		(12)	(646)	(948)
Net increase in cash and cash equivalents		494	209	2,761
Exchange (losses)/gains on cash and cash equivalents		(37)	89	182
Cash and cash equivalents at 1 January (before reallocation of held for sale cash)		15,348	12,544	12,544
Cash and cash equivalents (before reallocation of held for sale cash)		15,805	12,842	15,487
Cash and cash equivalents classified as held for sale	2.12	-	-	(139)
Cash and cash equivalents at 30 June/31 December		15,805	12,842	15,348
1. Following a review of certain short dated instruments held by the group, certain assets have been reclassified from Cash and Cash Equivalents to Financial Instruments as their tenure is greater than 3 months. These amounts totalled £6,114m at H1 16 and £10,369m at FY 16. There is a net nil impact on the Consolidated Income Statement. The reclassification has resulted in an adjustment to the Investments held for trading or designated as fair value through profit or loss in the Consolidated Cash Flow Statement of £2,408m at H1 16 and (£1,847m) at FY 16.
2. Tax comprises UK corporation tax paid of £151m (H1 16: £108m; FY 16: £249m), overseas corporate taxes of £8m (H1 16: £5m; FY 16: £16m), and withholding tax of £139m (H1 16: £104m; FY 16: £159m).
3. Net cash flows from disposals includes cash received of £286m (H1 16: £74m; FY 16: £144m) less cash and cash equivalents disposed of £nil (H1 16: £414m; FY 16: £416m).
The group's Consolidated Cash Flow Statement includes all cash and cash equivalent flows. The closing cash position includes £679m (H1 16: £601m; FY 16: £731m) relating to the with-profit fund policyholders and £12,687m (H1 16: £10,201m; FY 16: £11,764m) relating to unit-linked policyholders.

 

 

 

IFRS and Release from Operations                                                                                                     Page 38

 

2.08 Basis of preparation

 

The group's financial information for the six months ended 30 June 2017 has been prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority and with IAS 34, 'Interim Financial Reporting'. The group's financial information has also been prepared in line with the accounting policies and methods of computation which the group expects to adopt for the 2017 year end. These policies are consistent with the principal accounting policies which were set out in the group's 2016 consolidated financial statements which were consistent with IFRSs issued by the International Accounting Standards Board as adopted by the European Commission for use in the European Union.

 

The preparation of the interim management report includes the use of estimates and assumptions which affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial statements. The economic and non-economic actuarial assumptions used to establish the liabilities in relation to insurance and investment contracts are significant. For half-year financial reporting, economic assumptions have been updated to reflect market conditions. Non-economic assumptions are consistent with those used in the 31 December 2016 financial statements except for the changes outlined in Note 2.02.             

                               

The results for the six months ended 30 June 2017 are unaudited but have been reviewed by PricewaterhouseCoopers LLP. The interim results do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results from the full year 2016 have been taken from the group's 2016 Annual Report and Accounts, restated as described in footnote 1 of the Consolidated Cash Flow Statement. Therefore, these interim accounts should be read in conjunction with the 2016 Annual Report and Accounts that have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and adopted by the European Commission for use in the European Union. PricewaterhouseCoopers LLP reported on the 2016 financial statements, and their report was unqualified and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The group's 2016 Annual Report and Accounts has been filed with the Registrar of Companies.  

                                                                                                                               

Key technical terms and definitions

The interim management report refers to various key performance indicators, accounting standards and other technical terms. A comprehensive list of these definitions is contained within the glossary section of these interim financial statements.

 

Alternative performance measures

The group uses a number of alternative performance measures (APMs), including release from operations, net release from operations and operating profit, in the discussion of its business performance and financial position as the group believes that they provide a better indication of performance. Definitions of key APMs can be found in the glossary.

 

Future accounting developments

Revenue from Contracts with Customers

IFRS 15, 'Revenue from Contracts with Customers', issued in May 2014, is effective, for annual periods beginning on or after 1 January 2018.  This standard provides clear guidance over when and how much revenue should be recognised.  It provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for obligations as they are satisfied.  An assessment is currently on-going to determine the impact upon the group, focussing in particular on our investment management business including the assessment of performance fees.  The standard does not apply to business classified as insurance contracts. The group does not intend to early adopt this standard.

 

Insurance Contracts

IFRS 17, 'Insurance Contracts' was issued in May 2017 and is effective for annual periods beginning on or after 1 January 2021 (subject to EU endorsement).  The standard provides a comprehensive approach for accounting for insurance contracts including their valuation, income statement presentation and disclosure. The group has mobilised a project to assess the financial and operational implications of the standard.

 

Financial Instruments

In July 2014, the IASB issued IFRS 9, 'Financial Instruments' which is effective for annual periods beginning on or after 1 January 2018. The ISAB subsequently issued 'Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts' which allows entities which meet certain requirements to defer their implementation of IFRS 9 (subject to EU endorsement) until adoption of IFRS 17 or 1 January 2021, whichever is the earlier.  As disclosed in the 31 December 2016 financial statements, the group will qualify, and expects to apply this deferral of IFRS 9.

 

The impact of IFRS 9 on the group's financial statements will depend on the interaction of the asset classification and measurement with the insurance contract measurement at the date of transition, particularly for liabilities which are measured using locked in discount rates.

 

Leases

In January 2016, the IASB issued IFRS 16, 'Leases', effective for annual periods beginning on or after 1 January 2019, subject to EU endorsement. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a 'right-of-use asset' for virtually all lease contracts, bringing commitments in relation to operating leases (as currently defined in IAS 17, 'Leases') onto the balance sheet. The impact of the standard on lessor accounting is significantly smaller with the provisions remaining closely aligned to those in IAS 17 although the IASB have issued updated guidance on the definition of a lease. An assessment of the impacts of the standard on the group's financial statements will be completed in due course. The group does not intend to early adopt this standard.

 

Tax attributable to policyholders and equity holders

The total tax expense shown in the group's Consolidated Income Statement includes income tax borne by both policyholders and shareholders. This has been apportioned between that attributable to policyholders' returns and equity holders' profits. This represents the fact that the group's long-term business in the UK pays tax on policyholder investment return, in addition to the corporation tax charge charged on shareholder profit. The separate presentation is intended to provide more relevant information about the tax that the group pays on the profits that it makes.

 

For this apportionment, the equity holders' tax on long-term business is estimated by applying the statutory tax rate to profits attributed to equity holders. This is considered to approximate the corporation tax attributable to shareholders as calculated under UK tax rules. The balance of income tax associated with UK long-term business is attributed to income tax attributable to policyholders' returns and approximates the corporation tax attributable to policyholders as calculated under UK tax rules.

 

 

 

IFRS and Release from Operations                                                                                                     Page 39

 

2.09 Segmental analysis

 

 

Reportable segments

 

The group has six reportable segments comprising LGR, LGIM, LGC, LGI, Savings and General Insurance. Central group expenses and debt costs are reported separately.

 

LGR represents worldwide pension risk transfer business (including longevity insurance), individual retirement and lifetime mortgages.

 

The LGIM segment represents institutional and retail investment management and workplace savings businesses.

 

LGC represents shareholder assets in direct investments, and traded and treasury assets.

 

LGI represents UK retail protection, group protection and network business, Legal & General Netherlands (LGN) (which was sold during April 2017) and protection business written in the USA (LGI US).

 

Savings represents business in platforms, SIPPs, mature savings and with-profits.

 

The General Insurance segment comprises short-term protection.

 

During 2017, changes have been made to the organisational structure.  The IDOL business has been transferred to LGI from LGR.  Comparatives have been amended accordingly.  The impact of this reclassification has been to reduce LGR H1 16 release from operations by £1m (FY 16: reduce by £1m) and increase LGI (UK and Other) H1 16 release from operations by £1m (FY 16: increase by £1m).

 

During 2016, the Insurance (excluding General Insurance) and LGA segments were combined to create the new Legal & General Insurance (LGI) segment. General Insurance is now presented as a separate segment.

 

Transactions between reportable segments are on normal commercial terms, and are included within the reported segments.

 

 

 

IFRS and Release from Operations                                                                                                     Page 40

 

2.09 Segmental analysis (continued)

(a) Profit/(loss) for the period

 

							Group
							expenses
					General		and debt
	LGR	LGIM	LGC	LGI1	Insurance	Savings	costs	Total
For the six months ended 30 June 2017	£m	£m	£m	£m	£m	£m	£m	£m
Operating profit/(loss)	566	194	142	151	15	52	(132)	988
Investment and other variances1	38	(4)	52	7	6	(7)	77	169
Gains attributable to non-controlling interests	-	-	-	-	-	-	6	6
Profit/(loss) before tax attributable to
equity holders	604	190	194	158	21	45	(49)	1,163
Tax (expense)/credit attributable to equity holders of the company	(108)	(40)	(25)	(41)	(4)	(9)	16	(211)
Profit/(loss) for the period	496	150	169	117	17	36	(33)	952
							Group
							expenses
					General		and debt
	LGR2	LGIM	LGC	LGI2	Insurance	Savings1	costs	Total
For the six months ended 30 June 2016	£m	£m	£m	£m	£m	£m	£m	£m
Operating profit/(loss)	405	171	135	151	31	49	(165)	777
Investment and other variances1	63	(8)	60	(100)	10	4	21	50
Loss attributable to non-controlling interests	-	-	-	-	-	-	(1)	(1)
Profit/(loss) before tax attributable to
equity holders	468	163	195	51	41	53	(145)	826
Tax (expense)/credit attributable to equity holders of the company	(82)	(35)	(24)	(30)	(6)	(10)	28	(159)
Profit/(loss) for the period	386	128	171	21	35	43	(117)	667
							Group
							expenses
					General		and debt
	LGR2	LGIM	LGC	LGI2	Insurance	Savings1	costs	Total
For the year ended 31 December 2016	£m	£m	£m	£m	£m	£m	£m	£m
Operating profit/(loss)	809	366	257	319	52	99	(340)	1,562
Investment and other variances1	37	(32)	162	(124)	16	(51)	5	13
Gains attributable to non-controlling interests	-	-	-	-	-	-	7	7
Profit/(loss) before tax attributable to
equity holders	846	334	419	195	68	48	(328)	1,582
Tax (expense)/credit attributable to equity holders of the company	(148)	(68)	(52)	(72)	(13)	(22)	58	(317)
Profit/(loss) for the period	698	266	367	123	55	26	(270)	1,265
1. H1 17 Investment and other variances - LGI includes the £17m net gain resulting from the disposal of subsidiaries during the period (H1 16: Savings includes the £4m net gain resulting from the disposal of subsidiaries during the period; FY 16: Savings includes the £60m net loss resulting from the disposal of subsidiaries during the year).
2. During 2017, changes have been made to the organisational structure. The IDOL business has been transferred to LGI from LGR. Comparatives have been restated accordingly. The impact of this reclassification has been to reduce LGR H1 16 operating profit by £1m and profit before tax by £1m (FY 16: reduce LGR operating profit by £2m and profit before tax by £1m). LGI operating profit and profit before tax are showing corresponding increases.

 

 

 

IFRS and Release from Operations                                                                                                     Page 41

 

2.09 Segmental analysis (continued)

(b) Income

 

						LGC
				General		and
	LGR	LGIM1	LGI	Insurance	Savings	other2	Total
For the six months ended 30 June 2017	£m	£m	£m	£m	£m	£m	£m
Internal income	-	78	-	-	-	(78)	-
External income	2,810	12,988	896	167	1,436	621	18,918
Total income	2,810	13,066	896	167	1,436	543	18,918
						LGC
				General		and
	LGR3	LGIM1,4	LGI	Insurance	Savings4	other2,4	Total
For the six months ended 30 June 2016	£m	£m	£m	£m	£m	£m	£m
Internal income	-	66	-	-	-	(66)	-
External income	9,075	24,129	1,182	159	2,368	5,610	42,523
Total income	9,075	24,195	1,182	159	2,368	5,544	42,523
						LGC
				General		and
	LGR3	LGIM1,4	LGI	Insurance	Savings4	other2,4	Total
For the year ended 31 December 2016	£m	£m	£m	£m	£m	£m	£m
Internal income	-	139	-	-	-	(139)	-
External income	13,831	49,812	2,257	326	4,406	7,337	77,969
Total income	13,831	49,951	2,257	326	4,406	7,198	77,969
1. LGIM internal revenue relates to investment management services provided to other segments.
2. LGC and other includes LGC, inter-segmental eliminations and group consolidation adjustments.
3. During 2017, changes have been made to the organisational structure. The IDOL business has been transferred to LGI from LGR. Comparatives have been amended accordingly. The impact of this reclassification has been to reduce LGR H1 16 external income by £8m (FY 16: reduce by £20m) with corresponding increases in LGI external income.
4. An internal transaction (H1 16: £79m; FY 16: £175m) has been reclassified between LGIM, Savings and LGC and other internal and external income.

 

 

 

IFRS and Release from Operations                                                                                                     Page 42

 

2.10 Earnings per share

(a) Earning per share

 

			Adjusted	Adjusted			Adjusted	Adjusted
	Profit	Earnings	profit	earnings	Profit	Earnings	profit	earnings
	after tax	per share1	after tax	per share1,2	after tax	per share1	after tax	per share1,2
	30.06.17	30.06.17	30.06.17	30.06.17	30.06.16	30.06.16	30.06.16	30.06.16
	£m	p	£m	p	£m	p	£m	p
Operating profit after tax	795	13.40	795	13.40	616	10.39	616	10.39
Investment and other variances	151	2.54	134	2.26	52	0.88	48	0.81
Earnings per share based on profit
attributable to equity holders	946	15.94	929	15.66	668	11.27	664	11.20
							Adjusted	Adjusted
					Profit	Earnings	profit	earnings
					after tax	per share1	after tax	per share1,2
					Full year	Full year	Full year	Full year
					31.12.16	31.12.16	31.12.16	31.12.16
					£m	p	£m	p
Operating profit after tax					1,244	20.98	1,244	20.98
Investment and other variances					14	0.24	72	1.22
Earnings per share based on profit
attributable to equity holders					1,258	21.22	1,316	22.20
1. Earnings per share is calculated by dividing profit after tax derived from continuing operations by the weighted average number of ordinary shares in issue during the period, excluding employee scheme treasury shares.
2. Adjusted earnings per share has been calculated after excluding the net current year profit after tax of £17m, resulting from the disposal of L&G Netherlands. (H1 16: excluding the net gain of £4m, resulting from the disposal of Suffolk Life; FY 16: excluding the net loss after tax of £58m, resulting from the disposal of Suffolk Life and the classification of Cofunds as held for sale).

 

 

 

IFRS and Release from Operations                                                                                                     Page 43

 

2.10 Earnings per share (continued)

(b) Diluted earnings per share

 

							Adjusted	Adjusted
				Number	Profit	Earnings	profit	earnings
				of shares	after tax	per share1	after tax	per share1,2
				30.06.17	30.06.17	30.06.17	30.06.17	30.06.17
				m	£m	p	£m	p
Profit attributable to equity holders of the company				5,933	946	15.94	929	15.66
Net shares under options allocable for no further consideration				25	-	(0.06)	-	(0.06)
Diluted earnings per share				5,958	946	15.88	929	15.60
							Adjusted	Adjusted
				Number	Profit	Earnings	profit	earnings
				of shares	after tax	per share1	after tax	per share1,2
				30.06.16	30.06.16	30.06.16	30.06.16	30.06.16
				m	£m	p	£m	p
Profit attributable to equity holders of the company				5,927	668	11.27	664	11.20
Net shares under options allocable for no further consideration				22	-	(0.04)	-	(0.04)
Diluted earnings per share				5,949	668	11.23	664	11.16
							Adjusted	Adjusted
				Number	Profit	Earnings	profit	earnings
				of shares	after tax	per share1	after tax	per share1,2
				Full year	Full year	Full year	Full year	Full year
				31.12.16	31.12.16	31.12.16	31.12.16	31.12.16
				m	£m	p	£m	p
Profit attributable to equity holders of the company				5,929	1,258	21.22	1,316	22.20
Net shares under options allocable for no further consideration				24	-	(0.09)	-	(0.09)
Diluted earnings per share				5,953	1,258	21.13	1,316	22.11
1. For diluted earnings per share, the weighted average number of ordinary shares in issue, excluding employee scheme treasury shares, is adjusted to assume conversion of all potential ordinary shares, such as share options granted to employees.
2. Adjusted earnings per share has been calculated after excluding the net current year profit after tax of £17m, resulting from the disposal of Netherlands  (H1 16: excluding the net £4m gain resulting from the disposal of Suffolk Life; FY 16: excluding the net loss after tax of £58m, resulting from the disposal of Suffolk Life and the classification of Cofunds as held for sale).

 

 

 

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2.11 Disposals

 

During H1 17, the group made the following disposals:

 

-On 1 January 2017, the group completed the disposal of Cofunds Limited (Cofunds) to Aegon for £141m, net of transaction costs. The sale included the Investor Portfolio Service (IPS) platform as well as Cofunds' retail and institutional business. The group carrying  value of the investment was £141m  resulting in a net nil impact to the group. 

 

-On 6 April 2017, the group completed the sale of Legal & General Netherland Levensvervekering Maatschappij N.V. (LGN) to Chesnara plc (Chesnara) for €161.0m (£137m). The group carrying value of the investment was £118m, resulting in a current year profit £17m, net of transaction costs £2m.  A further £3m of transaction costs were incurred in the prior year.

 

 

 

2.12 Held for sale

In H1 17 no assets or liabilities have been classified as held for sale.   The FY 16 balances related to planned disposals of Investment property, LGN and Cofunds, which were disposed of in 2017 (detailed in note 2.11).
						30.06.17	30.06.16	31.12.16
						£m	£m	£m
Assets classified as held for sale
Purchased interest in long term business and other intangible assets						-	-	85
DAC						-	-	12
Property, plant and equipment						-	-	11
Investment property						-	-	95
Financial investments						-	-	1,861
Reinsurers' share of contract liabilities						-	-	1
Cash and cash equivalents						-	-	139
Other assets1						-	-	62
Total assets of the disposal groups						-	-	2,266
Liabilities classified as held for sale
Insurance contract liabilities						-	-	1,709
Tax liabilities						-	-	26
Payables and other financial liabilities						-	-	28
Other liabilities1						-	-	147
Total liabilities of the disposal groups						-	-	1,910
Total net assets of the disposal groups						-	-	356
1. Included in the FY 16 other assets is £1m, and in other liabilities, £88m, which are both balances with other group entities that are eliminated on the Consolidated Balance Sheet.

 

 

 

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2.13 Financial investments and investment property

 

					30.06.17	30.06.161	31.12.161
					£m	£m	£m
Equities					194,754	176,194	191,025
Unit trusts					7,584	6,594	6,969
Debt securities2					219,989	203,114	215,331
Accrued interest					1,449	1,403	1,536
Derivative assets3					11,513	15,424	13,121
Loans and receivables					572	508	562
Financial investments					435,861	403,237	428,544
Investment property4					8,714	8,227	8,150
Total financial investments and investment property					444,575	411,464	436,694
1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. A detailed analysis of debt securities, which shareholders are directly exposed to, is disclosed in note 4.06.
3. Derivatives are used to ensure 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. Derivative assets are shown gross of derivative liabilities and include £7,597m (H1 16: £9,543m; FY 16: £8,294m) held on behalf of unit linked policyholders.
4. A detailed analysis of investment property, which shareholders are directly exposed to, is disclosed in note 4.07.
(a) Fair value hierarchy
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.   Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the group's view of market assumptions in the absence of observable market information. The group utilises techniques that maximise the use of observable inputs and minimise the use of unobservable inputs.   The levels of fair value measurement bases are defined as follows: Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: fair values measured using valuation techniques for all inputs significant to the measurement other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: fair values measured using valuation techniques for any input for the asset or liability significant to the measurement that is not based on observable market data (unobservable inputs).   All of the group's level 2 assets have been valued using standard market pricing sources, such as iBoxx, IDC and Bloomberg, which use mathematical modelling and multiple source validation in order to determine "consensus" prices, except for bespoke CDO and swaps holdings (see below). In normal market conditions, we would consider these market prices to be observable market prices. Following consultation with our pricing providers and a number of their contributing brokers, we have considered that these prices are not from a suitably active market and have classified them as level 2.   CDOs are valued using an external valuation based on observable market inputs, which include CDX and iTraxx index tranches and CDS spreads on underlying reference entities. This valuation is then validated against the internal valuation. Accordingly, these assets have also been classified in level 2.
There have been no significant transfers between level 1 and level 2 for the period 30 June 2017 (30 June 2016: £nil; 31 December 2016: £nil).
The table on the following page presents the group's assets by IFRS 13 hierarchy levels.

 

 

 

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2.13 Financial investments and investment property (continued)

(a) Fair value hierarchy (continued)

 

					Total	Level 1	Level 2	Level 3
For the six months ended 30 June 2017					£m	£m	£m	£m
Shareholder
Equity securities					2,352	1,718	2	632
Debt securities					4,533	1,030	3,105	398
Accrued interest					24	6	15	3
Derivative assets					50	25	25	-
Investment property					200	-	-	200
Non profit non-unit linked
Equity securities					268	264	4	-
Debt securities					51,067	8,127	35,781	7,159
Accrued interest					469	40	417	12
Derivative assets					3,773	74	3,694	5
Investment property					2,687	-	-	2,687
With-profits
Equity securities					3,241	3,014	18	209
Debt securities					6,741	2,888	3,848	5
Accrued interest					56	18	38	-
Derivative assets					93	40	53	-
Investment property					740	-	-	740
Unit linked
Equity securities					196,477	192,628	3,370	479
Debt securities					157,648	105,951	51,690	7
Accrued interest					900	349	551	-
Derivative assets					7,597	607	6,990	-
Investment property					5,087	-	-	5,087
Total financial investments and investment property at fair value1					444,003	316,779	109,601	17,623
1. This table excludes loans and receivables of £572m, which are held at amortised cost.

 

 

 

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2.13 Financial investments and investment property (continued)

(a) Fair value hierarchy (continued)

 

					Total1	Level 11	Level 21	Level 3
For the six months ended 30 June 2016					£m	£m	£m	£m
Shareholder
Equity securities					2,331	2,025	-	306
Debt securities					5,255	2,317	2,581	357
Accrued interest					34	16	15	3
Derivative assets					62	6	56	-
Investment property					200	-	-	200
Non profit non-unit linked
Equity securities					56	52	4	-
Debt securities					47,675	7,124	37,108	3,443
Accrued interest					496	38	453	5
Derivative assets					5,661	325	5,326	10
Investment property					2,257	-	-	2,257
With-profits
Equity securities					3,607	3,382	1	224
Debt securities					7,122	3,696	3,416	10
Accrued interest					69	29	40	-
Derivative assets					158	40	118	-
Investment property					920	-	-	920
Unit linked
Equity securities					176,794	173,351	3,062	381
Debt securities					143,063	98,817	44,246	-
Accrued interest					803	295	508	-
Derivative assets					9,543	225	9,318	-
Investment property					4,850	-	-	4,850
Total financial investments and investment property at fair value2					410,956	291,738	106,252	12,966
1. H1 16 and FY 16 Cash Equivalents and Financial Investment values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. This table excludes loans and receivables of £508m, which are held at amortised cost.

 

 

 

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2.13 Financial investments and investment property (continued)

(a) Fair value hierarchy (continued)

 

					Total1	Level 11	Level 21	Level 3
For the year ended 31 December 2016					£m	£m	£m	£m
Shareholder
Equity securities					1,928	1,478	1	449
Debt securities					4,945	1,513	3,046	386
Accrued interest					31	7	21	3
Derivative assets					82	59	23	-
Investment property					162	-	-	162
Non profit non-unit linked
Equity securities					393	389	4	-
Debt securities					49,380	8,351	37,067	3,962
Accrued interest					496	42	448	6
Derivative assets					4,611	115	4,474	22
Investment property					2,442	-	-	2,442
With-profits
Equity securities					3,432	3,216	9	207
Debt securities					6,827	3,467	3,349	11
Accrued interest					63	22	41	-
Derivative assets					134	31	103	-
Investment property					738	-	-	738
Unit linked
Equity securities					192,242	188,769	3,028	445
Debt securities					154,178	106,224	47,954	-
Accrued interest					946	333	613	-
Derivative assets					8,294	332	7,962	-
Investment property					4,808	-	-	4,808
Total financial investments and investment property at fair value2					436,132	314,348	108,143	13,641
1. H1 16 and FY 16 Cash Equivalents and Financial Investment values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. This table excludes loans and receivables of £562m, which are held at amortised cost.

 

 

 

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2.13 Financial investments and investment property (continued)

(b) Assets measured at fair value based on level 3

 

Level 3 assets where internal models are used, represent a small proportion of assets to which shareholders are exposed. These comprise property, unquoted equities, untraded debt securities and securities where the broker methodology is unknown. Unquoted equities include suspended securities and investments in private equity and property vehicles. Untraded debt securities include private placements, commercial real estate loans, income strips and lifetime mortgages.

 

In many situations, inputs used to measure the fair value of an asset or liability may fall into different levels of the fair value hierarchy. In these situations, the group determines the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. As a result, both observable and unobservable inputs may be used in the determination of fair values that the group has classified within level 3.

 

The group determines the fair values of certain financial assets and liabilities based on quoted market prices, where available. The group also determines fair value based on estimated future cash flows discounted at the appropriate current market rate. As appropriate, fair values reflect adjustments for counterparty credit quality, the group's credit standing, liquidity and risk margins on unobservable inputs.

 

Where quoted market prices are not available, fair value estimates are made at a point in time, based on relevant market data, as well as the best information about the individual financial instrument. Illiquid market conditions have resulted in inactive markets for certain of the group's financial instruments. As a result, there is generally no or limited observable market data for these assets and liabilities. Fair value estimates for financial instruments deemed to be in an illiquid market are based on judgments regarding current economic conditions, liquidity discounts, currency, credit and interest rate risks, loss experience and other factors. These fair values are estimates and involve considerable uncertainty and variability as a result of the inputs selected and may differ significantly from the values that would have been used had a ready market existed, and the differences could be material. As a result, such calculated fair value estimates may not be realisable in an immediate sale or settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique could significantly affect these fair value estimates.

 

Fair values are subject to a control framework designed to ensure that input variables and outputs are assessed independent of the risk taker. These inputs and outputs are reviewed and approved by a valuation committee and validated independently as appropriate.

 

The group's policy is to re-assess the categorisation of financial assets at the end of each reporting period and to recognise transfers between levels at that point in time.

 

 

 

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2.13 Financial investments and investment property (continued)

(b) Assets measured at fair value based on level 3 (continued)

 

		Other				Other
		financial				financial
	Equity	invest-	Investment		Equity	invest-	Investment
	securities	ments1	property	Total	securities	ments1	property	Total
	30.06.17	30.06.17	30.06.17	30.06.17	30.06.16	30.06.16	30.06.16	30.06.16
	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January	1,101	4,390	8,150	13,641	863	1,456	8,082	10,401
Total gains / (losses) for the period
recognised in profit:
- in other comprehensive income	-	7	-	7	-	15	-	15
- realised and unrealised
(losses) / gains2	(23)	234	217	428	9	269	(51)	227
Purchases / Additions	156	1,283	402	1,841	260	586	283	1,129
Sales / Disposals	(34)	(39)	(166)	(239)	(244)	(112)	(87)	(443)
Transfers into level 33	118	1,714	101	1,933	26	1,670	-	1,696
Transfers out of level 33	-	(5)	-	(5)	(3)	(56)	-	(59)
Other	2	5	10	17	-	-	-	-
As at 30 June	1,320	7,589	8,714	17,623	911	3,828-	8,227	12,966
1. Other financial investments comprise debt securities, lifetime mortgages and derivative assets.
2. The realised and unrealised gains and losses have been recognised in investment return in the Consolidated Income Statement.
3. The group holds regular discussions with its pricing providers to determine whether transfers between levels of the fair value hierarchy have occurred. The above transfers occurred as a result of this process. In H1 17, transfers into level 3 include £874m of private placement and £795m of income strips, which were previously classified as level 2. In H1 16, transfers into level 3 included £1.6bn of commercial real estate loans, which were previously classified as level 2.
						Other
						financial
					Equity	invest-	Investment
					securities	ments1	property	Total
					Full year	Full year	Full year	Full year
					31.12.16	31.12.16	31.12.16	31.12.16
					£m	£m	£m	£m
As at 1 January					863	1,456	8,082	10,401
Total gains / (losses) for the year
recognised in profit:
- in other comprehensive income					-	5	-	5
- realised and unrealised
gains / (losses)2					40	350	(78)	312
Purchases / Additions					473	1,161	692	2,326
Sales / Disposals					(302)	(139)	(494)	(935)
Transfers into level 33					22	1,590	-	1,612
Transfers out of level 33					-	(33)	-	(33)
Transfers to held for sale					-	-	(53)	(53)
Other					5	-	1	6
As at 31 December					1,101	4,390	8,150	13,641
1. Other financial investments comprise debt securities, lifetime mortgages and derivative assets.
2. The realised and unrealised gains and losses have been recognised in investment return in the Consolidated Income Statement.
3. The group holds regular discussion with its pricing providers to determine whether transfers between levels of the fair value hierarchy have occurred. The above transfers occurred as result of this process. In 2016, transfers into level 3 included £1.6bn of commercial real estate loans, which were previously classified as level 2.

 

 

 

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2.13 Financial investments and investment property (continued)

(c) Effect of changes in significant unobservable inputs to reasonably possible alternative assumptions on level 3 assets

 

Fair values of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data. The following table shows the level 3 financial instruments carried at fair value as at the balance sheet date, the valuation basis, main assumptions used in the valuation of these instruments and reasonably possible increases or decreases in fair value based on reasonably possible alternative assumptions.
						Reasonably possible
						alternative assumptions
						Current	Increase	Decrease
						fair	in  fair	in fair
For the six months ended 30 June 2017					Main	value	value	value
Financial instruments and investment property					assumptions	£m	£m	£m
Assets
Shareholder
- Unquoted investments in property vehicles1			Property yield			565	15	(15)
- Untraded and other debt securities2			Cash flows; expected defaults			401	4	(4)
- Unquoted and other securities2			Cash flows; expected defaults			67	3	(3)
- Investment property1			Property yield			200	23	(23)
Non profit non-linked
- Lifetime mortgage loans			Market spreads; LTVs			1,433	77	(83)
- Untraded and other debt securities2			Cash flows; expected defaults			3,602	102	(100)
- Commercial real estate loans			Cash flows; expected defaults			2,136	43	(43)
- Investment property1			Cash flows; property yield			2,687	138	(138)
- Other			Cash flows			5	-	-
With-profits
- Unquoted investments in property vehicles1			Property yield			209	13	(13)
- Untraded and other debt securities2			Cash flows; expected defaults			5	-	-
- Investment property1			Cash flows; Property yield			740	38	(38)
Unit linked
- Unquoted investments in property vehicles1			Cash flows; Property yield			92	6	(6)
- Suspended securities			Estimated recoverable amount			26	-	-
- Untraded and other debt securities3			Cash flows; expected defaults			7	-	-
- Unquoted and other securities2			Cash flows; expected defaults			361	18	(18)
- Investment property1			Cash flows; Property yield			5,087	256	(256)
Total						17,623	736	(740)
1. Unquoted investments in property vehicles and direct holdings in investment property are valued using valuations provided by independent valuers on the basis of open market value as defined in the appraisal and valuation manual of the Royal Institute of Chartered Surveyors. Reasonably possible alternative valuations have been determined using alternative yields.
2. No reasonably possible increases or decreases in fair values have been given for securities where the broker valuation methodology is unknown.
3. Private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines. Reasonably possible alternative valuations have been determined using alternative price earnings multiples.

 

 

 

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2.13 Financial investments and investment property (continued)

(c) Effect of changes in significant unobservable inputs to reasonably possible alternative assumptions on level 3 assets (continued)

 

						Reasonably possible
						alternative assumptions
						Current	Increase	Decrease
						fair	in  fair	in fair
For the six months ended 30 June 2016					Main	value	value	value
Financial instruments and investment property					assumptions	£m	£m	£m
Assets
Shareholder
- Private equity investment vehicles1			Price earnings multiple			16	1	(1)
- Unquoted investments in property vehicles2			Property yield			283	1	(2)
- Asset backed securities			Cash flows; expected defaults			2	-	-
- Untraded and other debt securities3			Cash flows; expected defaults			358	2	(2)
- Unquoted and other securities3			Cash flows; expected defaults			7	-	-
- Investment property2			Property yield			200	10	(20)
Non profit non-linked
- Lifetime Mortgage loans				Market Spreads; LTV's		440	8	(7)
- Untraded and other debt securities3			Cash flows; expected defaults			1,197	-	-
- Commercial real estate loans			Cash flows; expected defaults			1,811	32	(32)
- Investment property2			Cash flows; Property yield			2,257	56	(113)
- Other			Cash flows			10	-	-
With-profits
- Private equity investment vehicles1			Price earnings multiple			17	-	-
- Unquoted investments in property vehicles2			Property yield			207	13	(25)
- Unquoted and other securities3			Cash flows; expected defaults			10	-	-
- Investment property2			Property yield			920	47	(92)
Unit linked
- Unquoted investments in property vehicles2			Property yield			369	19	(38)
- Private equity investment vehicles1			Price earnings multiple			1	-	-
- Suspended securities			Cash flows; expected defaults			11	-	-
- Investment property2			Property yield			4,850	247	(485)
Total						12,966	436	(817)
1. Private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines. Reasonably possible alternative valuations have been determined using alternative price earnings multiples.
2. Unquoted investments in property vehicles and direct holdings in investment property are valued using valuations provided by independent valuers on the basis of open market value as defined in the appraisal and valuation manual of the Royal Institute of Chartered Surveyors. Reasonably possible alternative valuations have been determined using alternative yields.
3. No reasonably possible increases or decreases in fair values have been given for securities where the broker valuation methodology is unknown.

 

 

 

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2.13 Financial investments and investment property (continued)

(c) Effect of changes in significant unobservable inputs to reasonably possible alternative assumptions on level 3 assets (continued)

 

						Reasonably possible
						alternative assumptions
						Current	Increase	Decrease
						fair	in  fair	in fair
For the year ended 31 December 2016					Main	value	value	value
Financial instruments and investment property					assumptions	£m	£m	£m
Assets
Shareholder
Unquoted investments in property vehicles1			Property yield			292	19	(19)
Untraded and other debt securities2			Cash flows; expected defaults			474	12	(12)
Unquoted and other securities2			Cash flows; expected defaults			72	2	(3)
Investment property1			Property yield			162	8	(9)
Non profit non-linked
Lifetime mortgage loans			Market spreads; LTVs			852	10	(18)
Untraded and other debt securities2			Cash flows; expected defaults			1,270	2	(2)
Commercial real estate loans			Cash flows; expected defaults			1,776	11	(16)
Investment property1			Property yield			2,442	127	(127)
Other			Cash flows			92	-	-
With-profits
Private equity investment vehicles			Price earnings multiple			8	-	-
Unquoted investments in property vehicles1			Property yield			200	12	(12)
Untraded and other debt securities2			Cash flows; expected defaults			10	-	-
Investment property1			Property yield			738	38	(38)
Unit linked
Unquoted investments in property vehicles1			Property yield			87	5	(5)
Untraded and other debt securities2			Cash flows; expected defaults			23	-	-
Unquoted and other securities2			Cash flows; expected defaults			335	17	(17)
Investment property1			Property yield			4,808	235	(235)
Total						13,641	498	(513)
1. Unquoted investments in property vehicles and direct holdings in investment property are valued using valuations provided by independent valuers on the basis of open market value as defined in the appraisal and valuation manual of the Royal Institute of Chartered Surveyors. Reasonably possible alternative valuations have been determined using alternative yields.
2. No reasonably possible increases or decreases in fair values have been given for securities where the broker valuation methodology is unknown.

 

 

 

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2.14 Tax

(a) Tax charge in the Consolidated Income Statement

 

The tax attributable to equity holders differs from the tax calculated at the standard UK corporation tax rate as follows:
								Full year
						30.06.17	30.06.16	31.12.16
						£m	£m	£m
Profit before tax attributable to equity holders						1,163	826	1,582
Tax calculated at 19.25% (H1 16: 20.00%; FY 16: 20.00%)						224	165	316
Adjusted for the effects of:
Recurring reconciling items:
Income not subject to tax						(6)	(4)	(12)
Higher/(lower) rate of tax on profits taxed overseas						3	4	7
Non-deductible expenses						-	2	4
Differences between taxable and accounting investment gains						(4)	(2)	(11)
Non-recurring reconciling items:
Income not subject to tax1						(4)	(1)	(1)
Non-deductible expenses						1	-	17
Differences between taxable and accounting investment gains						-	(3)	(14)
Adjustments in respect of prior years						(3)	-	13
Impact of reduction in UK corporate tax rate to 17% from 2020 on deferred tax balances						-	(2)	(2)
Tax attributable to equity holders						211	159	317
Equity holders' effective tax rate2						18.1%	19.2%	20.0%
1. Includes gains relating to M&A activity which are non taxable.
2. Equity holders' effective tax rate is calculated by dividing the tax attributable to equity holders over profit before tax attributable to equity holders. Refer to note 2.08 for detail on the methodology of the split of policyholder and equity holders' tax.

 

 

 

IFRS and Release from Operations                                                                                                     Page 55

 

2.14 Tax (continued)

(b) Deferred tax

 

						30.06.17	30.06.16	31.12.16
Deferred tax (liabilities)/assets						£m	£m	£m
Deferred acquisition expenses						(414)	(392)	(429)
- UK						(43)	(48)	(45)
- Overseas						(371)	(344)	(384)
Difference between the tax and accounting value of insurance contracts						(288)	(305)	(286)
- UK						(134)	(125)	(123)
- Overseas						(154)	(180)	(163)
Realised and unrealised gains on investments						(275)	(210)	(255)
Excess of depreciation over capital allowances						16	16	15
Excess expenses1						40	62	49
Accounting provisions and other						(51)	(29)	(51)
Trading losses2						63	88	80
Pension fund deficit						77	71	82
Purchased interest in long-term business						(3)	(25)	(13)
Net deferred tax liabilities						(835)	(724)	(808)
Analysed by:
- UK deferred tax asset
						2	5	5
- Overseas deferred tax asset						3	-	-
- UK deferred tax liability						(316)	(206)	(291)
- Overseas deferred tax liability						(524)	(523)	(522)
Net deferred tax liabilities3						(835)	(724)	(808)
1. The reduction in the UK deferred tax asset on excess expenses reflects the unwind of the spread acquisition expenses.
2. Trading losses include UK trade and US operating losses of £8m (H1 16: £7m; FY 16: £5m) and £55m (H1 16: £81m; FY 16: £75m) respectively. The reduction in the deferred tax asset primarily reflects utilisation of brought forward US operating losses against US profits.
3. On the Consolidated Balance Sheet, the net deferred tax liability has been split between an asset of £5m and a liability of £840m where the relevant items cannot be offset.

 

 

 

IFRS and Release from Operations                                                                                                     Page 56

 

2.15 Payables and other financial liabilities

 

								Full year
						30.06.17	30.06.16	31.12.16
						£m	£m	£m
Derivative liabilities						7,376	15,473	9,014
Repurchase agreements1						28,076	17,295	23,163
Other						8,257	3,988	5,170
Payables and other financial liabilities						43,709	36,756	37,347
1. The repurchase agreements are presented gross, however they and their related assets are subject to master netting arrangements.
Fair value hierarchy
								Amortised
				Total	Level 1	Level 2	Level 3	cost
As at 30 June 2017				£m	£m	£m	£m	£m
Derivative liabilities				7,376	482	6,894	-	-
Repurchase agreements				28,076	-	-	-	28,076
Other				8,257	2,550	15	179	5,513
Payables and other financial liabilities				43,709	3,032	6,909	179	33,589
								Amortised
				Total	Level 1	Level 2	Level 3	cost
As at 30 June 2016				£m	£m	£m	£m	£m
Derivative liabilities				15,473	5,519	9,954	-	-
Repurchase agreements				17,295	-	-	-	17,295
Other				3,988	522	14	174	3,278
Payables and other financial liabilities				36,756	6,041	9,968	174	20,573
								Amortised
				Total	Level 1	Level 2	Level 3	cost
As at 31 December 2016				£m	£m	£m	£m	£m
Derivative liabilities				9,014	884	8,130	-	-
Repurchase agreements				23,163	-	-	-	23,163
Other				5,170	806	8	177	4,179
Payables and other financial liabilities				37,347	1,690	8,138	177	27,342
Future commission costs are modelled using expected cash flows, incorporating expected future persistency. They have therefore been classified as level 3 liabilities. The entire movement in the balance has been reflected in the Consolidated Income Statement during the year. A reasonably possible alternative persistency assumption would have the effect of increasing the liability by £5m (H1 16: £4m; FY 16: £5m).
Significant transfers between levels   There have been no significant transfers between levels 1, 2 and 3 for the period ended 30 June 2017 (30 June 2016 and 31 December 2016: no significant transfers between levels 1, 2 and 3).

 

 

 

IFRS and Release from Operations                                                                                                     Page 57

 

2.16 Dividends 

 

								Full year
				Per1		Per1	Full year	Per1
			Dividend	share	Dividend	share	Dividend	share
			30.06.17	30.06.17	30.06.16	30.06.16	31.12.16	31.12.16
			£m	p	£m	p	£m	p
Ordinary share dividends paid in the period:
- Prior year final dividend			616	10.35	592	9.95	592	9.95
- Current year interim dividend			-	-	-	-	238	4.00
			616	10.35	592	9.95	830	13.95
Ordinary share dividend proposed2			256	4.30	238	4.00	616	10.35
1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.
2. The dividend proposed is not included as a liability in the Consolidated Balance Sheet.

 

 

2.17 Share capital

 

			Number of	Number of	Number of
			shares	shares	shares
					Full year
			30.06.17	30.06.16	31.12.16
As at 1 January			5,954,656,466	5,948,788,480	5,948,788,480
Options exercised under share option schemes:
- Savings related share option scheme			2,061,874	3,465,839	5,867,986
As at 30 June / 31 December			5,956,718,340	5,952,254,319	5,954,656,466
There is one class of ordinary shares of 2.5p each. All shares issued carry equal voting rights.
The holders of the company's ordinary shares are entitled to receive dividends which are authorised and are no longer at the discretion of the company.

 

 

 

IFRS and Release from Operations                                                                                                     Page 58

 

2.18 Core Borrowings

 

		Carrying	Fair	Carrying	Fair	Carrying	Fair
		amount	value	amount	value	amount	value
		30.06.17	30.06.17	30.06.16	30.06.16	31.12.16	31.12.16
		£m	£m	£m	£m	£m	£m
Subordinated borrowings
6.385% Sterling perpetual capital securities (Tier 1)		-	-	626	615	615	609
5.875% Sterling undated subordinated notes (Tier 2)		410	432	412	412	411	418
5.25% US Dollar subordinated notes 2047 (Tier 2)		658	700	-	-	-	-
5.55% US Dollar subordinated notes 2052 (Tier 2)		387	399	-	-	-	-
10% Sterling subordinated notes 2041 (Tier 2)		311	406	310	392	310	403
5.5% Sterling subordinated notes 2064 (Tier 2)		589	651	589	534	589	603
5.375% Sterling subordinated notes 2045 (Tier 2)		602	670	602	607	602	627
Client fund holdings of group debt1		(33)	(33)	(33)	(32)	(31)	(31)
Total subordinated borrowings		2,924	3,225	2,506	2,528	2,496	2,629
Senior borrowings
Sterling medium term notes 2031-2041		602	848	602	801	609	845
Client fund holdings of group debt1		(27)	(27)	(44)	(58)	(34)	(34)
Total senior borrowings		575	821	558	743	575	811
Total core borrowings		3,499	4,046	3,064	3,271	3,071	3,440
1. £60m (H1 16: £77m; FY 16: £65m) of the group's subordinated and senior borrowings are currently held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total core borrowings in the table above.
All of the group's core borrowings are measured using amortised cost. The presented fair values of the group's core borrowings reflect quoted prices in active markets and they are classified as level 1 in the fair value hierarchy.

 

Subordinated borrowings

 

6.385% Sterling perpetual capital securities

In 2007, Legal & General Group Plc issued £600m of 6.385% Sterling perpetual capital securities. These securities were called at par on 2 May 2017.

 

5.875% Sterling undated subordinated notes

In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% pa. These notes are treated as tier 2 own funds for Solvency II purposes.

 

5.25% US Dollar subordinated notes 2047

On 21 March 2017, Legal & General Group Plc issued $850m of 5.25% dated subordinated notes. The notes are callable at par on 21 March 2027 and every five years thereafter. If not called, the coupon from 21 March 2027 will be reset to the prevailing USD mid-swap rate plus 3.687% pa. These notes mature on 21 March 2047. They are treated as tier 2 own funds for Solvency II purposes.

 

5.55% US Dollar subordinated notes 2052

On 24 April 2017, Legal & General Group Plc issued $500m of 5.55% dated subordinated notes. The notes are callable at par on 24 April 2032 and every five years thereafter. If not called, the coupon from 24 April 2032 will be reset to the prevailing USD mid-swap rate plus 4.19% pa. These notes mature on 24 April 2052. They are treated as tier 2 own funds for Solvency II purposes.

 

10% Sterling subordinated notes 2041

In 2009, Legal & General Group Plc issued £300m of 10% dated subordinated notes. The notes are callable at par on 23 July 2021 and every five years thereafter. If not called, the coupon from 23 July 2021 will be reset to the prevailing five year benchmark gilt yield plus 9.325% pa. These notes mature on 23 July 2041. They are treated as tier 2 own funds for Solvency II purposes.

 

5.5% Sterling subordinated notes 2064

In 2014, Legal & General Group Plc issued £600m of 5.5% dated subordinated notes. The notes are callable at par on 27 June 2044 and every five years thereafter. If not called, the coupon from 27 June 2044 will be reset to the prevailing five year benchmark gilt yield plus 3.17% pa. These notes mature on 27 June 2064. They are treated as tier 2 own funds for Solvency II purposes.

 

5.375% Sterling subordinated notes 2045

In 2015, Legal & General Group Plc issued £600m of 5.375% dated subordinated notes. The notes are callable at par on 27 October 2025 and every five years thereafter. If not called, the coupon from 27 October 2025 will be reset to the prevailing five year benchmark gilt yield plus 4.58% pa. These notes mature on 27 October 2045. They are treated as tier 2 own funds for Solvency II purposes.

 

 

 

 

IFRS and Release from Operations                                                                                                     Page 59

 

2.19 Operational borrowings

 

		Carrying	Fair	Carrying	Fair	Carrying	Fair
		amount	value	amount	value	amount	value
		30.06.17	30.06.17	30.06.16	30.06.16	31.12.16	31.12.16
		£m	£m	£m	£m	£m	£m
Short term operational borrowings
Euro Commercial paper		322	322	103	103	216	216
Bank loans and overdrafts		20	20	69	69	6	6
Total short term operational borrowings		342	342	172	172	222	222
Non recourse borrowings
LGV 6/LGV 7 Private Equity Fund Limited Partnership		-	-	42	42	-	-
Consolidated Property Limited Partnerships		211	211	197	197	208	208
Total non recourse borrowings		211	211	239	239	208	208
Total operational borrowings		553	553	411	411	430	430

 

The presented fair values of the group's operational borrowings reflect observable market information and have been classified as level 2 in the fair value hierarchy.

 

Short term operational borrowings

 

Short term assets available at the holding company level exceeded the amount of short term operational borrowings of £342m (H1 16: £172m; FY 16: £222m.). Short term operational borrowings comprise Euro Commercial paper, bank loans and overdrafts.

 

Non recourse borrowings

 

LGV 6/LGV 7 Private Equity Fund Limited Partnerships

These borrowings were non recourse bank borrowings.

 

Consolidated Property Limited Partnerships

These borrowings are non recourse bank borrowings.

 

Syndicated credit facility

 

As at 30 June 2017, the group had in place a £1.00bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2021.

 

2.20 Non-controlling interests

 

Non-controlling interests represent third party interests in direct equity investments as well as investments in private equity and property investment vehicles which are consolidated in the group's results. The majority of the non-controlling interests in 2017 are in relation to investments in the Leisure Fund Unit Trust, the Performance Retail Unit Trust, the Legal & General UK Property Ungeared Fund Limited Partnership, and Thorpe Park Developments Limited.

 

2.21 Foreign exchange rates

 

Principal rates of exchange used for translation are:
Period end exchange rates						At 30.06.17	At 30.06.16	At 31.12.16
United States Dollar						1.30	1.34	1.24
Euro						1.14	1.20	1.17
						01.01.17 -	01.01.16 -	01.01.16 -
Average exchange rates						30.06.17	30.06.16	31.12.16
United States Dollar						1.26	1.43	1.36
Euro						1.16	1.28	1.22

 

 

 

IFRS and Release from Operations                                                                                                     Page 60

 

2.22 Related party transactions

 

There were no material transactions between key management and the Legal & General group of companies during the period. All transactions between the group and its key management are on commercial terms which are no more favourable than those available to employees in general. Contributions to the post-employment defined benefit plans were £36m (H1 16: £34m; FY 16: £75m) for all employees.
At 30 June 2017, 30 June 2016 and 31 December 2016 there were no loans outstanding to officers of the company.
Key management personnel compensation
The aggregate compensation for key management personnel, including executive and non-executive directors, is as follows:
						30.06.17	30.06.16	31.12.16
						£m	£m	£m
Salaries						2	2	9
Social security costs						1	1	2
Post-employment benefits						-	-	-
Share-based incentive awards						2	2	5
Key management personnel compensation						5	5	16
Number of key management personnel						16	16	15
The group has the following related party transactions:
- Annuity contracts issued by Society for consideration of £161m (H1 16: £4m; FY 16: £3m) purchased by the group's UK defined benefit pension schemes during the period, priced on an arm's length basis;
- Investments in venture capital, property and financial investments held via collective investment vehicles. All transactions between the group and these collective investment vehicles are on commercial terms which are no more favourable than those available to companies in general. The net investments into associate investment vehicles totalled £10m during the period (H1 16: 27m; FY 16: £47m). The group received investment management fees of £1m during the period (H1 16: £1m; FY 16: £2m). Distributions from these investment vehicles to the group totalled £15m (H1 16: £6m; FY 16: £20m);
- Loans outstanding from CALA at 30 June 2017 total £68m (30 June 2016: £63m; 31 December 2016: £65m);
- The equity investment in Pemberton is now fully drawn at £18m. A commitment of £220m was previously made to Pemberton's inaugural European Mid-Market Debt Fund, of which £125m was drawn as at 30 June 2017. In addition, a £50m commitment was made to the Pemberton U.K. Mid-Market Direct Lending Fund, of which £25m has been drawn down to date;
- Loans outstanding from MediaCity at 30 June 2017 total £55m (H1 2016: £55m; FY 2016: £55m);
- Preference shares outstanding from Thorpe Park at 30 June 2017 total £30m (H1 16: £12m; FY 16: £18m);
- A 50/50 joint venture in Access Development Partnership, developing build to rent properties. LGC has a total commitment of £150m, of which £28m has been drawn down to date;
- A 46% investment in Accelerated Digital Ventures, a venture investment company, for a total commitment of £34m, of which £17m has been drawn to date;
- Further contingent capital commitments of £2m for NTR Asset Management Europe DAC, with a total commitment of £5m. A commitment of £103m to the NTR Wind 1 Limited fund, of which £80m has been drawn to date;

 

 

 

IFRS and Release from Operations                                                                                                     Page 61

 

2.23 Pension costs

 

The Legal & General Group UK Pension and Assurance Fund and the Legal & General Group UK Senior Pension Scheme are defined benefit pension arrangements and account for all UK and the majority of worldwide assets of, and contributions to, such arrangements. The schemes were closed to future accrual on 31 December 2015. At 30 June 2017, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at £347m (30 June 2016: £306m; 31 December 2016: £374m). These amounts have been recognised in the financial statements with £219m charged against shareholder equity (30 June 2016: £193m; 31 December 2016: £236m) and £128m against the unallocated divisible surplus (30 June 2016: £113m; 31 December 2016: £138m).

 

2.24 Contingent liabilities, guarantees and indemnities

 

Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance between actual experience from that assumed may result in those liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of policyholder contracts, or the circumstances in which policyholders have entered into them. The extent of these liabilities is influenced by a number of factors including the actions and requirements of the PRA, FCA, ombudsman rulings, industry compensation schemes and court judgments.

 

Various group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. The relevant members of the group ensure that they make prudent provision as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet reasonably foreseeable eventualities. The provisions made are regularly reviewed. It is not possible to predict, with certainty, the extent and the timing of the financial impact of these claims, litigation or issues.

 

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

 

Group companies have given warranties, indemnities and guarantees as a normal part of their business and operating activities or in relation to capital market transactions or corporate disposals. Legal & General Group Plc has provided indemnities and guarantees in respect of the liabilities of group companies in support of their business activities including Pension Protection Fund compliant guarantees in respect of certain group companies' liabilities under the group pension fund and scheme. The Society has provided indemnities, a liquidity and expense risk agreement, a deed of support and a cash and securities liquidity facility in respect of the liabilities of group companies to facilitate the group's matching adjustment reorganisation pursuant to Solvency II.

 

 

 

IFRS and Release from Operations                                                                                                     Page 62

 

2.25 Independent review report to Legal & General Group Plc - IFRS

We have reviewed Legal & General Group Plc's consolidated interim financial statements (the "interim financial statements") in the Interim Management Statement of Legal & General Group Plc for the 6 month period ended 30 June 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

The interim financial statements comprise:

·      the Consolidated Balance Sheet as at 30 June 2017;

·      the Consolidated Income Statement and Consolidated Statement of Comprehensive Income for the period then ended;

·      the Consolidated Cash Flow Statement for the period then ended;

·      the Condensed Consolidated Statement of Changes in Equity for the period then ended; and

·      the explanatory notes to the interim financial statements (pages 25 to 61).

The interim financial statements included in the Interim Management Statement have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2.08 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

 

The Interim Management Statement, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Interim Management Statement in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the Interim Management Statement based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose.  We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

 

 

 

IFRS and Release from Operations                                                                                                     Page 63

 

2.25 Independent review report to Legal & General Group Plc - IFRS (continued)

 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the Interim Management Statement and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

 

PricewaterhouseCoopers LLP

Chartered Accountants

London

8 August 2017

 

a)    The maintenance and integrity of the Legal & General Group Plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.

b)    Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

 

 

 

 

 

 

IFRS and Release from Operations                                                                                                     Page 64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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