L&G Half Year Results 2019 Part 2

Legal & General Group Plc

2019 Half Year Results Part 2

 

1 Independent review report to Legal & General Group Plc                                   Page 29

 

Conclusion 

We have been engaged by the Legal & General Group Plc ("the Group") to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 which comprises the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Condensed Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows (pages 42 to 47) and the related explanatory notes to the interim financial statements (pages 31 to 41 and  48 to 66).

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").   

Scope of review 

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 UK.  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.  We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

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.

The impact of uncertainties due to the UK exiting the European Union on our review

Uncertainties related to the effects of Brexit are relevant to understanding our review of the condensed financial statements. Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. An interim review cannot be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit. 

Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the EU.  The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU. 

Our responsibility 

Our responsibility is to express to the Group a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Group in accordance with the terms of our engagement to assist the Group in meeting the requirements of the DTR of the UK FCA.  Our review has been undertaken so that we might state to the Group those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group for our review work, for this report, or for the conclusions we have reached. 

 

 

 

Rees Aronson

for and on behalf of KPMG LLP 

Chartered Accountants 

15 Canada Square

London

E14 5GL

6 August 2019 

 

 

 

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IFRS Disclosures on performance and Release from operations                                Page 31

 

2.01 Operating profit^#

For the six month period to 30 June 2019

 

			6 months	6 months	Full year
			2019	2018	2018
		Notes	£m	£m	£m
From continuing operations
Legal & General Retirement (LGR)		2.03	655	480	1,548
- LGR Institutional (LGRI)			524	361	1,149
- LGR Retail (LGRR)			131	119	399
Legal & General Investment Management (LGIM)		2.04	205	203	407
Legal & General Capital (LGC)		2.05	173	172	322
Legal & General Insurance (LGI)		2.03	134	154	308
- UK and Other			93	136	246
- US (LGIA)			41	18	62
Operating profit from divisions:
From continuing operations			1,167	1,009	2,585
From discontinued operations1			19	50	79
Operating profit from divisions			1,186	1,059	2,664
Group debt costs2			(108)	(97)	(203)
Group investment projects and central expenses			(73)	(53)	(126)
Operating profit			1,005	909	2,335
Investment and other variances		2.06	57	32	(188)
(Losses)/gains on non-controlling interests			(9)	1	(19)
Adjusted profit before tax attributable to equity holders			1,053	942	2,128
Tax expense attributable to equity holders		4.06	(188)	(170)	(320)
Profit for the period			865	772	1,808
Profit attributable to equity holders			874	771	1,827
			p	p	p
Total basic earnings per share3		2.07	14.74	13.00	30.79
Total diluted earnings per share3		2.07	14.66	12.94	30.64
1. Operating profit from discontinued divisions reflects the operating profit of the Mature Savings and General Insurance divisions following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.
2. Group debt costs exclude interest on non-recourse financing.
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 period.

 

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

·     LGIM represents institutional and retail investment management and workplace savings businesses.

·     LGC represents shareholder assets invested in direct investments primarily in the areas of housing, urban regeneration, clean energy and SME finance, as well as traded and treasury assets.

·     LGI primarily represents UK and US retail protection business, UK group protection and Fintech business.

·     Discontinued operations represent businesses that have either been sold or announced to sell subject to formal transfer, namely Mature Savings (including with-profits) and General Insurance.

 

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 the operating profit for LGC's trading businesses (which reflects the IFRS profit before tax) and LGIA's non-term business (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, which include any differences between investment return on actual assets and the target long-term asset mix. Exceptional income and expenses which arise outside the normal course of business in the period, such as gains/losses from merger and acquisition, and start-up costs, are also excluded from operating profit

 

 

# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

 

 

 

IFRS Disclosures on performance and Release from operations                                Page 32

 

2.02 Reconciliation of release from operations to operating profit^# before tax

 

					Changes in valuation assump- tions			Operating profit/ (loss) after tax		Operating profit/ (loss) before tax
		New business surplus/ (strain)	Net release from operations
	Release from operations1			Exper- ience variances		Non-cash items	Other		Tax expense/ (credit)
For the six month period
to 30 June 2019	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	303	185	488	(37)	33	58	-	542	113	655
- LGRI	212	165	377	(37)	33	61	-	434	90	524
- LGRR	91	20	111	-	-	(3)	-	108	23	131
LGIM	175	(11)	164	-	-	(1)	-	163	42	205
- LGIM (excluding
Workplace Savings)2	162	-	162	-	-	-	-	162	42	204
- Workplace Savings3	13	(11)	2	-	-	(1)	-	1	-	1
LGC	142	-	142	-	-	-	-	142	31	173
LGI	171	(1)	170	(21)	18	(2)	(59)	106	28	134
- UK and Other	84	(1)	83	(21)	18	(2)	-	78	15	93
- US (LGIA)	87	-	87	-	-	-	(59)	28	13	41
From continuing operations	791	173	964	(58)	51	55	(59)	953	214	1,167
From discontinued operations4	15	-	15	-	-	-	-	15	4	19
Total from divisions	806	173	979	(58)	51	55	(59)	968	218	1,186
Group debt costs	(87)	-	(87)	-	-	-	-	(87)	(21)	(108)
Group investment projects and expenses	(19)	-	(19)	-	-	-	(36)	(55)	(18)	(73)
Total	700	173	873	(58)	51	55	(95)	826	179	1,005
1. Release from operations within US (LGIA) includes £81m of dividends from the US.
2. LGIM (excluding Workplace Savings) includes profits on fund management services.
3. Workplace Savings represents administration business only.
4. Discontinued operations include the results of the Mature Savings and General Insurance divisions following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.
Release from operations for LGR, LGIM - Workplace Savings and LGI represents the expected IFRS surplus generated in the period from the in-force non profit annuities, workplace savings and UK protection businesses using best estimate assumptions. The LGIM (excluding Workplace Savings) release from operations includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from LGIA. The release from operations within discontinued operations primarily reflects the unwind of expected profits after tax under the risk transfer agreement with ReAssure Limited (a subsidiary of Swiss Re) from the Mature Savings business, and the operating profit (net of tax) from the General Insurance business.
New business surplus/strain for LGR, LGIM - Workplace Savings and LGI 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 and protection, net of tax. The new business surplus and release from operations for LGR, LGIM and LGI excludes any capital held in excess of the prudent reserves from the liability calculation.
LGR's new business metrics are presented based on a target long term asset portfolio. The six months period to 30 June 2019 has seen record pension risk transfer (PRT) volumes, and as a result we continue to source high quality assets to support this business in 2019, as appropriate, taking into account the alternative risk and rewards of traded credit. At period end, any difference between the actual assets and the target long-term asset mix is reflected in investment variance.
Net release from operations for LGR, LGIM - Workplace Savings, LGI and discontinued operations is defined as release from operations plus new business surplus/(strain).
Release from operations and net release from operations for LGC and LGIM (excluding Workplace Savings) represent the operating profit (net of tax) of these divisions.
See Note 2.03 for more detail on experience variances, changes to valuation assumptions and non-cash items.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

 

 

IFRS Disclosures on performance and Release from operations                                Page 33

 

2.02 Reconciliation of release from operations to operating profit^# before tax (continued)

 

					Changes in valuation assump- tions			Operating profit/ (loss) after tax		Operating profit/ (loss) before tax
		New business surplus/ (strain)	Net release from operations
	Release from operations1			Exper- ience variances		Non-cash items	Other		Tax expense/ (credit)
For the six month period
to 30 June 2018	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	275	23	298	51	57	(6)	-	400	80	480
- LGRI	192	12	204	50	54	(7)	-	301	60	361
- LGRR	83	11	94	1	3	1	-	99	20	119
LGIM	177	(13)	164	(1)	-	(1)	-	162	41	203
- LGIM (excluding
Workplace Savings)2	161	-	161	-	-	-	-	161	40	201
- Workplace Savings3	16	(13)	3	(1)	-	(1)	-	1	1	2
LGC	138	-	138	-	-	-	-	138	34	172
LGI	165	(8)	157	31	8	(9)	(76)	111	43	154
- UK and Other	88	(8)	80	31	8	(9)	1	111	25	136
- US (LGIA)	77	-	77	-	-	-	(77)	-	18	18
From continuing operations	755	2	757	81	65	(16)	(76)	811	198	1,009
From discontinued operations4	17	-	17	(3)	-	26	-	40	10	50
Total from divisions	772	2	774	78	65	10	(76)	851	208	1,059
Group debt costs	(79)	-	(79)	-	-	-	-	(79)	(18)	(97)
Group investment projects and expenses	(15)	-	(15)	-	-	-	(25)	(40)	(13)	(53)
Total	678	2	680	78	65	10	(101)	732	177	909
1. Release from operations within the US (LGIA) includes £77m of dividends from the US.
2. LGIM (excluding Workplace Savings) includes profits on fund management services.
3. Workplace Savings represents administration business only.
4. Discontinued operations include the results of the Mature Savings and General Insurance divisions following the group's announcement to sell these businesses to Swiss Re and Allianz respectively.

 

# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

 

 

IFRS Disclosures on performance and Release from operations                                Page 34

 

2.02 Reconciliation of release from operations to operating profit^# before tax (continued)

 

					Changes in valuation assump- tions			Operating profit/ (loss) after tax		Operating profit/ (loss) before tax
		New business surplus/ (strain)	Net release from operations
	Release from operations1			Exper-		Non-cash items	Other		Tax expense/ (credit)
				ience
For the year ended				variances
31 December 2018	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	551	217	768	33	444	40	-	1,285	263	1,548
- LGRI	379	188	567	22	324	43	-	956	193	1,149
- LGRR	172	29	201	11	120	(3)	-	329	70	399
LGIM	354	(25)	329	(3)	(1)	1	-	326	81	407
- LGIM (excluding
Workplace Savings)2	323	-	323	-	-	-	-	323	81	404
- Workplace Savings3	31	(25)	6	(3)	(1)	1	-	3	-	3
LGC	261	-	261	-	-	-	-	261	61	322
LGI	258	(22)	236	24	35	(19)	(7)	269	39	308
- UK and Other	181	(22)	159	24	35	(19)	1	200	46	246
- US (LGIA)	77	-	77	-	-	-	(8)	69	(7)	62
From continuing operations	1,424	170	1,594	54	478	22	(7)	2,141	444	2,585
From discontinued operations4	44	-	44	(6)	-	26	-	64	15	79
Total from divisions	1,468	170	1,638	48	478	48	(7)	2,205	459	2,664
Group debt costs	(164)	-	(164)	-	-	-	-	(164)	(39)	(203)
Group investment projects and expenses	(34)	-	(34)	-	-	-	(68)	(102)	(24)	(126)
Total	1,270	170	1,440	48	478	48	(75)	1,939	396	2,335
1. Release from operations within US (LGIA) includes £77m of dividends from the US.
2. LGIM (excluding Workplace Savings) includes profits on fund management services.
3. Workplace Savings represents administration business only.
4. Discontinued operations include the result of the Mature Savings and General Insurance divisions following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

 

 

IFRS Disclosures on performance and Release from operations                                Page 35

 

2.03 Analysis of LGR and LGI operating profit

 

	LGR	LGI	LGR	LGI	LGR	LGI
	6 months	6 months	6 months	6 months	Full year	Full year
	2019	2019	2018	2018	2018	2018
	£m	£m	£m	£m	£m	£m
Net release from operations	488	170	298	157	768	236
Experience variances
- Persistency	-	(13)	3	(9)	8	(12)
- Mortality/morbidity	5	(8)	9	(12)	73	(7)
- Expenses	(9)	(1)	(6)	3	(13)	2
- Project and development costs	(4)	(1)	(3)	-	(11)	-
- Other1	(29)	2	48	49	(24)	41
Total experience variances	(37)	(21)	51	31	33	24
Changes to valuation assumptions
- Persistency	-	-	-	-	-	(4)
- Mortality/morbidity2	-	5	57	10	444	25
- Expenses	-	-	-	-	-	17
- Other3	33	13	-	(2)	-	(3)
Total changes to valuation assumptions	33	18	57	8	444	35
Movement in non-cash items
- Acquisition expense tax relief	-	(1)	-	(5)	-	(11)
- Other4	58	(1)	(6)	(4)	40	(8)
Total movement in non-cash items	58	(2)	(6)	(9)	40	(19)
Other	-	(59)	-	(76)	-	(7)
Operating profit after tax	542	106	400	111	1,285	269
Tax gross up	113	28	80	43	263	39
Operating profit before tax	655	134	480	154	1,548	308
1. Other experience variances for LGR predominantly reflects an update to the liability valuation model for deferred annuitants and increased prudence in reserves where death experience is out of date. The positive variance for the six months ended 30 June 2018 reflect the impact of an improvement in the quality of the scheme data relating to bulk annuities.
2. In 2018, LGR reviewed the longevity trend assumptions and made a mortality release of £57m in H1 18 and £444m in H2 18. In 2019, as in previous years, LGR are reviewing the current longevity trend assumptions against the CMI 2017 experience data and intend to make any amendments as necessary in H2 19.
3. LGR Other changes to valuation assumptions reflect a change in assumption on the future exercise of an option within a longevity swap contract.
4. LGR Other movement in non-cash items is driven by the capitalisation and unwind of future asset management profits on activity managed by LGIM, and is a function of new business volumes.

 

 

IFRS Disclosures on performance and Release from operations                                Page 36

 

2.04 Analysis of LGIM operating profit

 

				6 months	6 months	Full year
				2019	2018	2018
				£m	£m	£m
Asset management revenue (excluding 3rd party market data)1,2				425	401	820
Asset management transactional revenue from external clients3				9	13	27
Asset management expenses (excluding 3rd party market data)1,2				(230)	(213)	(443)
Workplace Savings operating profit4				1	2	3
Total LGIM operating profit				205	203	407
1. Asset management revenue and expenses exclude income and costs of £11m in relation to the provision of third party market data (H1 18: £8m; FY 18: £19m).
2. The ETF operating result is included as part of asset management revenue and expenses, which represents a change in the presentation from previous periods. Asset management revenue (excluding 3rd party market data) and Asset management expenses (excluding 3rd party market data) have therefore been restated for the six months ended 30 June 2018 and for the full year ended 31 December 2018 to reflect this change.
3. Transactional revenue earned from external clients including execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees for property funds.
4. Workplace Savings represents administration business only.

 

2.05 Analysis of LGC operating profit

 

				6 months	6 months	Full year
				2019	2018	2018
				£m	£m	£m
Direct investments1				99	104	188
Traded investment portfolio including treasury assets2				74	68	134
Total LGC operating profit				173	172	322
1. Direct Investments represents LGC's portfolio of assets across future cities (including urban regeneration and clean energy), housing and SME finance.
2. The traded investment portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash.

 

2.06 Investment and other variances

				6 months	6 months	Full year
				2019	2018	2018
				£m	£m	£m
Investment variance1				84	54	(126)
M&A related and other variances2				(27)	(22)	(62)
Total investment and other variances				57	32	(188)
1. Investment variance includes differences between actual and smoothed investment return on traded and real assets, economic assumption changes (e.g. credit default and inflation) and the impact of any difference between the actual allocated asset mix and the target long-term asset mix on new pension risk transfer business written during the period and held at a period end.
2. M&A related and other variances includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. H1 19 includes a £43m gain on the disposal of the group's stake in IndiaFirst Life Insurance Company Limited (H1 18 and FY 18 included the recognition of a one-off profit of £20m arising on the stepped acquisition of CALA Homes).

 

 

IFRS Disclosures on performance and Release from operations                                Page 37

 

2.07 Earnings per share

 

 (a) Basic earnings per share

 

				After tax	Per share1	After tax	Per share1	After tax	Per share1
				6 months	6 months	6 months	6 months	Full year	Full year
				2019	2019	2018	2018	2018	2018
				£m	p	£m	p	£m	p
Profit for the period attributable to equity holders				874	14.74	771	13.00	1,827	30.79
Less: earnings derived from discontinued operations				(27)	(0.46)	(33)	(0.56)	(43)	(0.72)
Basic earnings derived from continuing operations				847	14.28	738	12.44	1,784	30.07
1. Basic earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the period, excluding employee scheme treasury shares.

 

(b) Diluted earnings per share

 

					After tax	Weighted average number of shares	Per share1
For the six month period to 30 June 2019					£m	m	p
Profit for the period attributable to equity holders					874	5,931	14.74
Net shares under options allocable for no further consideration					-	30	(0.08)
Total diluted earnings					874	5,961	14.66
Less: diluted earnings derived from discontinued operations					(27)	-	(0.45)
Diluted earnings derived from continuing operations					847	5,961	14.21
					After tax	Weighted average number of shares	Per share1
For the six month period to 30 June 2018					£m	m	p
Profit for the period attributable to equity holders					771	5,933	13.00
Net shares under options allocable for no further consideration					-	25	(0.06)
Total diluted earnings					771	5,958	12.94
Less: diluted earnings derived from discontinued operations					(33)	-	(0.55)
Diluted earnings derived from continuing operations					738	5,958	12.39
					After tax	Weighted average number of shares	Per share1
For the year ended 31 December 2018					£m	m	p
Profit for the period attributable to equity holders					1,827	5,933	30.79
Net shares under options allocable for no further consideration					-	29	(0.15)
Total diluted earnings					1,827	5,962	30.64
Less: diluted earnings derived from discontinued operations					(43)	-	(0.72)
Diluted earnings derived from continuing operations					1,784	5,962	29.92
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.

 

 

IFRS Disclosures on performance and Release from operations                                Page 38

 

2.08 Segmental analysis

 

Reportable segments

 

The group has four reportable segments that are continuing operations, comprising LGR, LGIM, LGC and LGI, as set out in Note 2.01. Group central expenses and debt costs are reported separately. Transactions between reportable segments are on normal commercial terms, and are included within the reported segments.

 

Reporting of assets and liabilities by reportable segment has not been included, as this is not information that is provided to key decision makers on a regular basis.  The group's assets and liabilities are managed on a legal entity rather than reportable segment basis, in line with regulatory requirements.

 

Financial information on the reportable segments is further broken down where relevant in order to better explain the drivers of the group's results.

 

(i) Profit/(loss) for the period
					Group
					expenses	Total
					and debt	continuing
	LGR	LGIM	LGC	LGI	costs	operations1
For the six month period to 30 June 2019	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	655	205	173	134	(181)	986
Investment and other variances	(17)	(5)	105	(134)	94	43
Losses attributable to non-controlling interests	-	-	-	-	(9)	(9)
Profit/(loss) before tax attributable to equity holders	638	200	278	-	(96)	1,020
Tax (expense)/credit attributable to equity holders	(110)	(42)	(36)	-	6	(182)
Profit/(loss) for the period	528	158	242	-	(90)	838
					Group
					expenses	Total
					and debt	continuing
	LGR	LGIM	LGC	LGI	costs	operations1
For the six month period to 30 June 2018	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	480	203	172	154	(150)	859
Investment and other variances	85	(4)	(90)	(37)	86	40
Gains attributable to non-controlling interests	-	-	-	-	1	1
Profit/(loss) before tax attributable to equity holders	565	199	82	117	(63)	900
Tax (expense)/credit attributable to equity holders	(102)	(39)	(14)	(35)	29	(161)
Profit/(loss) for the period	463	160	68	82	(34)	739
					Group
					expenses	Total
					and debt	continuing
	LGR	LGIM	LGC	LGI	costs	operations1
For the year ended 31 December 2018	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	1,548	407	322	308	(329)	2,256
Investment and other variances	95	(4)	(273)	(1)	22	(161)
Losses attributable to non-controlling interests	-	-	-	-	(19)	(19)
Profit/(loss) before tax attributable to equity holders	1,643	403	49	307	(326)	2,076
Tax (expense)/credit attributable to equity holders	(267)	(81)	13	(39)	63	(311)
Profit/(loss) for the year	1,376	322	62	268	(263)	1,765
1. Total continuing operations exclude the results of the Mature Savings and General Insurance divisions which have been classified as discontinued following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.
# All references to 'Operating profit' throughout this report represent 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

 

 

IFRS Disclosures on performance and Release from operations                                Page 39

 

2.08 Segmental analysis (continued)

 

 (ii) Revenue

 

(a) Total revenue
					6 months	6 months	Full year
					2019	2018	2018
					£m	£m	£m
Total income					48,450	2,307	894
Less:
Share of profit from associates and joint ventures, net of tax					(6)	(3)	(15)
Gain on disposal/acquisition of subsidiaries, associates and joint ventures					(43)	(20)	(20)
Total revenue from continuing operations1					48,401	2,284	859
1. Total revenue from continuing operations excludes the revenue of the Mature Savings and General Insurance divisions which have been classified as discontinued following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.

 

(b) Total income
				LGC and	Total continuing
	LGR	LGIM1,2	LGI	other3	operations4
For the six month period to 30 June 2019	£m	£m	£m	£m	£m
Internal income	-	89	-	(89)	-
External income	10,602	25,376	1,141	11,331	48,450
Total income	10,602	25,465	1,141	11,242	48,450
				LGC and	Total continuing
	LGR	LGIM1,2	LGI	other3	operations4
For the six month period to 30 June 2018	£m	£m	£m	£m	£m
Internal income	-	81	-	(81)	-
External income	(101)	1,324	1,073	11	2,307
Total income	(101)	1,405	1,073	(70)	2,307
				LGC and	Total continuing
	LGR	LGIM1,2	LGI	other3	operations4
For the year ended 31 December 2018	£m	£m	£m	£m	£m
Internal income	-	172	-	(172)	-
External income	8,507	(10,654)	1,742	1,299	894
Total income	8,507	(10,482)	1,742	1,127	894
1. LGIM internal income relates to investment management services provided to other segments.
2. LGIM external income primarily includes fees from fund management and investment returns on unit linked funds.
3. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
4. Total continuing operations exclude the results of the Mature Savings and General Insurance divisions which have been classified as discontinued following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.

 

 

IFRS Disclosures on performance and Release from operations                                Page 40

 

2.08 Segmental analysis (continued)

 

(c) Fees from fund management and investment contracts
					LGC and other1	Total continuing
			LGIM	LGI		operations2
For the six month period to 30 June 2019			£m	£m	£m	£m
Investment contracts			34	-	-	34
Investment management fees			431	-	(74)	357
Transaction fees			10	-	(1)	9
Total fees from fund management and investment contracts3			475	-	(75)	400
					LGC and other1	Total continuing
			LGIM	LGI		operations2
For the six month period to 30 June 2018			£m	£m	£m	£m
Investment contracts			38	1	-	39
Investment management fees			393	-	(53)	340
Transaction fees			16	-	(1)	15
Total fees from fund management and investment contracts3			447	1	(54)	394
					LGC and other1	Total continuing
			LGIM	LGI		operations2
For the year ended 31 December 2018			£m	£m	£m	£m
Investment contracts			75	1	-	76
Investment management fees			813	-	(114)	699
Transaction fees			42	-	(15)	27
Total fees from fund management and investment contracts3			930	1	(129)	802
1. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
2. Total continuing operations exclude the results of the Mature Savings and General Insurance divisions which have been classified as discontinued following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.
3. Fees from fund management and investment contracts are a component of Total revenue from continuing operations disclosed in Note 2.08(ii)(a).

 

 

IFRS Disclosures on performance and Release from operations                                Page 41

 

2.08 Segmental analysis (continued)

 

(d) Other operational income from contracts with customers
							LGC and other1	Total continuing
				LGR	LGIM	LGI		operations2
For the six month period to 30 June 2019				£m	£m	£m	£m	£m
House building				-	-	-	454	454
Professional services fees				1	1	43	-	45
Insurance broker				-	-	17	-	17
Total other operational income from contracts with customers3				1	1	60	454	516
							LGC and other1	Total continuing
				LGR	LGIM	LGI		operations2
For the six month period to 30 June 2018				£m	£m	£m	£m	£m
House building				-	-	-	501	501
Professional services fees				-	1	77	(2)	76
Insurance broker				-	-	11	-	11
Total other operational income from contracts with customers3				-	1	88	499	588
							LGC and other1	Total continuing
				LGR	LGIM	LGI		operations2
For the year ended 31 December 2018				£m	£m	£m	£m	£m
House building				-	-	-	981	981
Professional services fees				3	3	155	-	161
Insurance broker				-	-	29	-	29
Total other operational income from contracts with customers3				3	3	184	981	1,171
1. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
2. Total continuing operations exclude the results of the Mature Savings and General Insurance divisions which have been classified as discontinued following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.
3. Total other operational income from contracts with customers is a component of Total revenue from continuing operations disclosed in Note 2.08(ii)(a).

 

 

IFRS Primary Financial Statements                                                                                          Page 42

 

3.01 Consolidated Income Statement

For the six month period to 30 June 2019

                         

			6 months	6 months	Full year
			2019	2018	2018
		Notes	£m	£m	£m
Income
Gross written premiums			8,745	2,563	12,843
Outward reinsurance premiums			(1,522)	(859)	(2,114)
Net premiums earned			7,223	1,704	10,729
Fees from fund management and investment contracts		2.08	400	394	802
Investment return			40,262	(407)	(11,843)
Other operational income			565	616	1,206
Total income		2.08	48,450	2,307	894
Expenses
Claims and change in insurance contract liabilities			12,368	846	8,370
Reinsurance recoveries			(1,971)	(1,127)	(1,051)
Net claims and change in insurance contract liabilities			10,397	(281)	7,319
Change in investment contract liabilities			35,412	292	(11,304)
Acquisition costs			395	371	780
Finance costs			137	113	238
Other expenses			1,048	852	1,732
Total expenses			47,389	1,347	(1,235)
Profit before tax			1,061	960	2,129
Tax expense attributable to policyholder returns			(41)	(60)	(53)
Profit before tax attributable to equity holders			1,020	900	2,076
Total tax expense			(223)	(221)	(364)
Tax expense attributable to policyholder returns			41	60	53
Tax expense attributable to equity holders		4.06	(182)	(161)	(311)
Profit after tax from continuing operations		2.08	838	739	1,765
Profit after tax from discontinued operations1		4.03	27	33	43
Profit for the period			865	772	1,808
Attributable to:
Non-controlling interests			(9)	1	(19)
Equity holders			874	771	1,827
Dividend distributions to equity holders during the period		4.04	704	658	932
Dividend distributions to equity holders proposed after the period end		4.04	294	274	704
			p	p	p
Total basic earnings per share2		2.07	14.74	13.00	30.79
Total diluted earnings per share2		2.07	14.66	12.94	30.64
Basic earnings per share derived from continuing operations2		2.07	14.28	12.44	30.07
Diluted earnings per share derived from continuing operations2		2.07	14.21	12.39	29.92
1. Discontinued operations reflect the results of the Mature Savings and General Insurance divisions following the group's announcements to sell these businesses to Swiss Re and Allianz respectively.
2. All earnings per share calculations are based on profit attributable to equity holders of the company.

 

 

IFRS Primary Financial Statements                                                                                          Page 43

 

3.02 Consolidated Statement of Comprehensive Income

For the six month period to 30 June 2019

 

	6 months	6 months	Full year
	2019	2018	2018
	£m	£m	£m
Profit for the period	865	772	1,808
Items that will not be reclassified subsequently to profit or loss
Actuarial (losses)/gains on defined benefit pension schemes	(69)	143	117
Tax on actuarial (losses)/gains on defined benefit pension schemes	13	(26)	(22)
Total items that will not be reclassified subsequently to profit or loss	(56)	117	95
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations	3	13	62
Movement in cross-currency hedge	27	9	34
Tax on movement in cross-currency hedge	(5)	(2)	(5)
Movement in financial investments designated as available-for-sale	65	(41)	(36)
Tax on movement in financial investments designated as available-for-sale	(11)	9	5
Total items that may be reclassified subsequently to profit or loss	79	(12)	60
Other comprehensive income after tax	23	105	155
Total comprehensive income for the period	888	877	1,963
Total comprehensive income for the period attributable to:
Continuing operations	861	844	1,920
Discontinued operations	27	33	43
Total comprehensive income for the period attributable to:
Non-controlling interests	(9)	1	(19)
Equity holders	897	876	1,982

 

 

IFRS Primary Financial Statements                                                                                          Page 44

 

3.03 Consolidated Balance Sheet

As at 30 June 2019

 

		As at	As at	As at
		30 Jun 2019	30 Jun 20181	31 Dec 2018
	Notes	£m	£m	£m
Assets
Goodwill		62	65	65
Purchased interest in long term businesses and other intangible assets		158	194	223
Deferred acquisition costs		74	128	140
Investment in associates and joint ventures accounted for using the equity method		362	51	259
Property, plant and equipment		291	63	57
Investment property	4.05	7,140	7,231	6,965
Financial investments	4.05	471,118	428,117	430,498
Reinsurers' share of contract liabilities		5,413	5,761	4,737
Deferred tax assets	4.06	7	7	7
Current tax assets		476	388	418
Receivables and other assets		10,706	9,383	5,593
Assets of operations classified as held for sale	4.03	27,194	21,932	26,234
Cash and cash equivalents		14,224	20,178	17,321
Total assets		537,225	493,498	492,517
Equity
Share capital	4.07	149	149	149
Share premium	4.07	998	990	992
Employee scheme treasury shares		(62)	(52)	(52)
Capital redemption and other reserves		300	158	230
Retained earnings		7,376	6,483	7,261
Attributable to owners of the parent		8,761	7,728	8,580
Non-controlling interests	4.08	66	77	72
Total equity		8,827	7,805	8,652
Liabilities
Non-participating insurance contract liabilities		73,869	59,713	64,707
Non-participating investment contract liabilities		315,603	302,280	293,080
Core borrowings	4.09	3,514	3,489	3,922
Operational borrowings	4.10	1,051	957	1,026
Provisions		1,202	1,153	1,140
UK deferred tax liabilities	4.06	193	73	144
Overseas deferred tax liabilities	4.06	197	235	185
Current tax liabilities		175	255	171
Payables and other financial liabilities	4.11	75,527	59,152	62,548
Other liabilities		719	438	619
Net asset value attributable to unit holders		24,909	25,434	26,481
Liabilities of operations classified as held for sale	4.03	31,439	32,514	29,842
Total liabilities		528,398	485,693	483,865
Total equity and liabilities		537,225	493,498	492,517
1. Following a change in accounting policy for LGIA term assurance reserves during 2018, the initial best estimate impacts of the change to certain balance sheet items have been refined.The overall impact is an increase in reinsurers' share of contract liabilities and the group's retained earnings of £27m.  Further details on the change in accounting policy are provided in Note 4.01.

 

 

IFRS Primary Financial Statements                                                                                          Page 45

 

3.04 Condensed Consolidated Statement of Changes in Equity

			Employee	Capital		Equity
			scheme	redemption		attributable	Non-
	Share	Share	treasury	and other	Retained	to owners	controlling	Total
For the six month period to 30 June 2019	capital	premium	shares	reserves1	earnings	of the parent	interests	equity
	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2019	149	992	(52)	230	7,261	8,580	72	8,652
Total comprehensive income for the period	-	-	-	79	818	897	(9)	888
Options exercised under share option schemes	-	6	-	-	-	6	-	6
Net movement in employee scheme treasury shares	-	-	(10)	(7)	(1)	(18)	-	(18)
Dividends	-	-	-	-	(704)	(704)	-	(704)
Movement in third party interests	-	-	-	-	-	-	3	3
Currency translation differences	-	-	-	(2)	2	-	-	-
As at 30 June 2019	149	998	(62)	300	7,376	8,761	66	8,827
1. Capital redemption and other reserves as at 30 June 2019 include share-based payments £74m, foreign exchange £122m, capital redemption £17m, hedging reserves £42m and available-for-sale reserves £45m.

 

			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 month period to 30 June 2018	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2018	149	988	(40)	168	6,224	7,489	76	7,565
Change in accounting policy2	-	-	-	-	27	27	-	27
Restated as at 1 January 2018	149	988	(40)	168	6,251	7,516	76	7,592
Total comprehensive income for the period	-	-	-	(12)	888	876	1	877
Options exercised under share option schemes	-	2	(12)	(22)	-	(32)	-	(32)
Net movement in employee scheme treasury shares	-	-	-	23	3	26	-	26
Dividends	-	-	-	-	(658)	(658)	-	(658)
Movement in third party interests	-	-	-	-	-	-	-	-
Currency translation differences	-	-	-	1	(1)	-	-	-
Restated as at 30 June 20182	149	990	(52)	158	6,483	7,728	77	7,805
1. Capital redemption and other reserves as at 30 June 2018 include share-based payments £70m, foreign exchange £83m, capital redemption £17m, hedging reserves £(2)m and available-for-sale reserves £(10)m.
2. During H2 18 the calculation of the retrospective impact of the change in accounting policy for LGIA term assurance reserves was refined, as described in Note 4.01. Change in accounting policy reflects the results of this refinement and consequently Retained earnings attributable to owners of the parent have been restated.

 

 

IFRS Primary Financial Statements                                                                                          Page 46

 

3.04 Condensed Consolidated Statement of Changes in Equity (continued)

			Employee	Capital		Equity
			scheme	redemption		attributable	Non-
	Share	Share	treasury	and other	Retained	to owners	controlling	Total
For the year ended 31 December 2018	capital	premium	shares	reserves1	earnings	of the parent	interests	equity
	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2018	149	988	(40)	168	6,251	7,516	76	7,592
Total comprehensive income for the year	-	-	-	60	1,922	1,982	(19)	1,963
Options exercised under share option schemes	-	4	-	-	-	4	-	4
Net movement in employee scheme treasury shares	-	-	(12)	12	10	10	-	10
Dividends	-	-	-	-	(932)	(932)	-	(932)
Movement in third party interests	-	-	-	-	-	-	15	15
Currency translation differences	-	-	-	(10)	10	-	-	-
As at 31 December 2018	149	992	(52)	230	7,261	8,580	72	8,652
1. Capital redemption and other reserves as at 31 December 2018 include share-based payments £81m, foreign exchange £121m, capital redemption £17m, hedging reserves £20m and available-for-sale reserves £(9)m.

 

 

IFRS Primary Financial Statements                                                                                          Page 47

 

3.05 Consolidated Statement of Cash Flows

For the six month period to 30 June 2019

 

		6 months	6 months	Full year
		2019	2018	2018
	Notes	£m	£m	£m
Cash flows from operating activities
Profit for the period		865	772	1,808
Adjustments for non cash movements in net profit for the period
Net (gains)/losses on financial investments and investment properties		(37,069)	6,025	23,132
Investment income		(5,588)	(5,386)	(10,182)
Interest expense		164	140	293
Tax expense		411	210	210
Other adjustments		62	105	183
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss		413	7,306	(10,381)
Investments designated as available-for-sale		97	387	(248)
Other assets		(6,033)	(2,012)	1,258
Net increase/(decrease) in operational liabilities
Insurance contracts		9,157	(2,001)	3,257
Investment contracts		22,524	(13,370)	(22,571)
Other liabilities		7,472	5,923	12,057
Net increase/(decrease) in held for sale net liabilities		223	(538)	(8,500)
Cash utilised in operations		(7,302)	(2,439)	(9,684)
Interest paid		(140)	(142)	(215)
Interest received		2,532	1,816	4,841
Tax paid1		(219)	(286)	(504)
Dividends received		2,819	2,802	5,201
Net cash flows from operating activities		(2,310)	1,751	(361)
Cash flows from investing activities
Net acquisition of plant, equipment, intangibles and other assets		(28)	(97)	(401)
Net disposal/(acquisition) of operations	4.02	76	326	326
Investment in joint ventures and associates		(88)	-	(130)
Net cash flows utilised in investing activities		(40)	229	(205)
Cash flows from financing activities
Dividend distributions to ordinary equity holders during the period	4.04	(704)	(658)	(932)
Issue of ordinary share capital	4.07	6	2	4
Exercise of employee scheme shares (net)		(10)	12	12
Payment of lease liabilities		(12)	-	-
Proceeds from borrowings		151	148	960
Repayment of borrowings		(593)	(11)	(325)
Movement in non-controlling interests		-	1	-
Net cash flows utilised in financing activities		(1,162)	(506)	(281)
Net (decrease)/increase in cash and cash equivalents		(3,512)	1,474	(847)
Exchange gains/(losses) on cash and cash equivalents		1	6	16
Cash and cash equivalents at 1 January		18,088	18,919	18,919
Total cash and cash equivalents		14,577	20,399	18,088
Less: cash and cash equivalents of operations classified as held for sale	4.03	(353)	(221)	(767)
Cash and cash equivalents at 30 June/31 December		14,224	20,178	17,321
1. Tax comprises UK corporation tax paid of £126m (H1 18: £170m; FY 18: £359m), overseas corporate taxes of £(12)m (H1 18: £23m; FY 18: £25m), and withholding tax of £105m (H1 18: £93m; FY 18: £120m).

 

 

IFRS Disclosure Notes                                                                                                               Page 48

 

4.01 Basis of preparation

 

The group financial information for the six months ended 30 June 2019 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 which the group expects to adopt for the 2019 year end. These policies are consistent with the principal accounting policies which were set out in the group's 2018 consolidated financial statements, except where changes have been outlined below in "New standards, interpretations and amendments to published standards that have been adopted by the group". These are 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 2018 financial statements.     

                               

The results for the half year ended 30 June 2019 are unaudited but have been reviewed by KPMG 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 2018 have been taken from the group's 2018 Annual Report and Accounts, restated as described in the changes in accounting policy section below. Therefore, these interim accounts should be read in conjunction with the 2018 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. KPMG LLP reported on the 2018 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 2018 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 net release from operations and group adjusted operating profit, in the discussion of its business performance and financial position, as the group believes that they provide a better understanding of its underlying performance. Definitions of key APMs can be found in the glossary.

 

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.

 

(a) New standards, interpretations and amendments to published standards that have been adopted by the group

 

The group has applied the following standards and amendments for the first time in its six months reporting period commencing 1 January 2019.

 

IFRS 16 - Leases

IFRS 16, 'Leases', issued in January 2016, became effective from 1 January 2019, and replaced all previous lease requirements and guidance under IFRS, including IAS 17, 'Leases', IFRIC 4, 'Determining Whether an Arrangement Contains a Lease', SIC-15, 'Operating Leases - Incentives' and SIC-27, 'Evaluating the Substance of Transactions in the Legal Form of a Lease'. 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 many commitments in relation to operating leases (as previously defined in IAS 17) onto the balance sheet.

 

The group has adopted IFRS 16 by using the modified retrospective approach, and therefore did not restate comparative financial information. At the date of the initial application the group recognised a lease liability and a right-of-use asset of an equal amount (adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the group Consolidated Balance Sheet immediately before the date of initial application), as allowed by the standard. Additionally, on transition, the group has elected to apply the standard only to those contracts that were previously assessed as leases under IAS 17 and IFRIC 4. The group also has elected to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. The implementation of IFRS 16 did not have a material impact on the group financial statements. The new accounting policy of the group upon adoption of IFRS 16 is disclosed below.

 

 

IFRS Disclosure Notes                                                                                                               Page 49

 

4.01 Basis of preparation (continued)

 

 (a) New standards, interpretations and amendments to published standards that have been adopted by the group (continued)

 

Under IFRS 16, a lease is a contract that conveys the right to use an identified asset, for a period of time in exchange for consideration.

 

The group takes many assets on lease, including head office accommodation, cars, IT equipment and investment properties. The group has elected to take the exemptions available on lease contracts for which the lease terms end within 12 months as of the commencement date, and lease contracts for which the underlying asset is of low value. Such leases are not recognised on the group consolidated balance sheet. 

 

As a lessee, the group recognises leases on the balance sheet as 'right-of-use' assets and lease liabilities. The right-of-use assets' value is initially recognised as the calculated value of the lease liabilities with several additional adjustments, including initial direct costs. The initial measurement of the lease liabilities is made up of the present value of lease payments to be made over the lease term, including fixed and variable lease payments and excluding lease incentive receivables. The group policy is to use the incremental borrowing rates as a discount rate for calculating the lease liabilities. The right-of use assets are subsequently accounted for in accordance with the cost model in IAS 16 - Property, Plant and Equipment or as investment property under IAS 40 - Investment Property. The lease liabilities are unwound over the term of the lease giving rise to an interest expense. Additionally, the liabilities are reduced when lease payments are made. The group reassesses the valuation of lease liabilities and right-of-use assets if certain events occur that modify the original assumptions used to calculate the lease balances upon initial recognition.

 

As a lessor, the group accounts for leases as either operating or finance leases depending on whether the lease transfers substantially all the risks and rewards incidental to ownership of the underlying asset to the lessee. Operating leases are recorded as assets on the balance sheet and lease income recognised on a straight line basis over the lease term. For finance leases, the group derecognises the underlying asset and records a receivable equal to the net investment in the lease. Finance income is recognised over the lease term based on a pattern reflecting a constant periodic rate of return on the net investment in the lease.

 

IFRIC Interpretation 23 - Uncertainty over Income Tax Treatments

IFRIC 23, 'Uncertainty over Income Tax Treatments' was issued in June 2017. The Interpretation clarifies the application of recognition and measurement requirements in IAS 12, 'Income Taxes' when there is uncertainty over income tax treatments. The implementation of IFRIC 23 did not have a material impact on the group consolidated financial statements.

 

Amendments to IAS 19 - Employee Benefits

These amendments were issued in February 2018. The amendments require entities to use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment or settlement; they also clarify how the requirements for accounting for a plan amendment, curtailment or settlement affect the asset ceiling requirements. These amendments did not have any material impact on the group's consolidated financial statements.

 

Annual Improvements to IFRS Standards 2015-2017 Cycle

These improvements were issued in December 2017 and consist of minor amendments affecting IFRS 3 'Business combinations', IFRS 11, 'Joint arrangements', IAS 12, 'Income taxes' and IAS 23, 'Borrowing costs'. These amendments did not have any material impact on the group's consolidated financial statements.

 

Amendments to IAS 28 - Investments in Associates and Joint Ventures

These amendments, titled 'Long-term Interests in Associates and Joint Ventures', were issued in October 2017. The amendments clarify the accounting for long-term interests in an associate or joint venture, which in substance form part of the net investment in the associate or joint venture, but to which equity accounting is not applied. These amendments did not have any material impact on the group's consolidated financial statements.

 

 

IFRS Disclosure Notes                                                                                                               Page 50

 

4.01 Basis of preparation (continued)

 

 (b) Changes in accounting policy

 

LGIA (Legal & General Insurance America) Term Assurance

During 2018 the group changed its accounting policy for term assurance liabilities on business transacted by its US subsidiaries, which was previously based on recognised actuarial methods reflecting US GAAP. From 1 January 2018, the group calculated such liabilities on the basis of current information using the gross premium valuation method, which is in line with how similar products are accounted for in other parts of the business.

 

The group reported an initial best estimate of the impact of this change in accounting policy in the interim report for the six months ended 30 June 2018, and continued to refine that impact during the second half of 2018 as disclosed in the accounts for the year ended 31 December 2018. The final impact on each line item of the comparative Consolidated Balance Sheet as at 30 June 2018 is shown in the table below:

	As reported at		As restated at
	30 Jun 2018	Adjustments	30 Jun 2018
	£m	£m	£m
Reinsurers' share of contract liabilities	5,734	27	5,761
Retained earnings	6,456	27	6,483

 

(c) Future accounting developments

 

IFRS 17 - Insurance Contracts

IFRS 17, 'Insurance Contracts' was issued in May 2017 and is expected to be effective for annual periods beginning on or after 1 January 2022.  This reflects the one year delay proposed by the IASB in their June 2019 exposure draft and is subject to subsequent endorsement for use in the EU.  The standard will be applied retrospectively, subject to the transitional options provided for in the standard, and provides a comprehensive approach for accounting for insurance contracts including their measurement, income statement presentation and disclosure. The group has mobilised a project to assess the financial and operational implications of the standard, and work will continue throughout the remainder of 2019 to ensure technical compliance and to develop the required system capability to implement the standard.

 

IFRS 9 - Financial Instruments and Amendments to IFRS 4 - Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts

In July 2014, the IASB issued IFRS 9, 'Financial Instruments' which is effective for annual periods beginning on or after 1 January 2018. The standard replaces IAS 39 'Financial Instruments: Recognition and Measurement'. It includes new principles around classification and measurement of financial instruments, introduces an impairment model based on expected credit losses (replacing the current model based on incurred losses) and new requirements on hedge accounting. The IASB 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 until adoption of IFRS 17 or 1 January 2021, whichever is the earlier. In June 2019 the IASB proposed to extend the fixed expiry date of the temporary exemption in IFRS 4 from applying IFRS 9 by one year. Entities eligible for the exemption will be required to apply IFRS 9 for annual periods beginning on or after 1 January 2022, to align with the proposed delay in the adoption date of IFRS 17. As disclosed in the 2018 annual report and accounts, the group qualified for the deferral of IFRS 9 and is making use of this option.

 

The group has mobilised a project to assess the impact of IFRS 9 on its financial instruments, in particular around the classification and measurement of financial assets backing insurance contract liabilities expected to be measured using locked-in discount rates under IFRS 17, and impairment.

 

 

IFRS Disclosure Notes                                                                                                               Page 51

 

4.02 Disposals

 

 

On 7 February 2019, the group completed the disposal of its stake in IndiaFirst Life Insurance Company Limited ("IndiaFirst Life") to an affiliate of Warburg Pincus LLC for INR 7.1bn (c.£76m at GBP:INR 1:92). The disposal resulted in a current period pre-tax gain of £43m, net of transaction costs. The operations of IndiaFirst Life have not been classified as discontinued operations since they do not represent a major line of business of the group.

 

4.03 Assets and liabilities of operations classified as held for sale

Mature Savings On 6 December 2017 the group announced the sale of its Mature Savings business to the ReAssure division of Swiss Re Limited ('Swiss Re') for a consideration of £650m. As part of the transaction, on 1 January 2018 the group entered into a risk transfer agreement with Swiss Re, whereby the group transfers all economic risks and rewards of the Mature Savings business to Swiss Re from that date. The risk transfer agreement operates until the business is transferred under a court approved scheme under Part VII of the Financial Services and Markets Act 2000, which is expected to complete in H2 2019. The consideration of £650m was received in 2018.   As a result of the transaction, the Mature Savings business has been classified as held for sale. Profit arising from the Mature Savings business in accordance with the risk transfer agreement has been presented as "Profit after tax from discontinued operations" in the Consolidated Income Statement.
General Insurance On 31 May 2019 the group announced that it had agreed to sell its General Insurance business to Allianz Holdings plc. The financial consideration from the proposed sale consists of a base price of £242 million payable at completion with potential further payments over a three year period from ongoing commercial arrangements.The proposed transaction, which is subject to regulatory approvals, is expected to complete in the second half of 2019.   As a result of the announcement, the General Insurance business has been classified as held for sale. Profit arising from the General Insurance business has been presented as "Profit after tax from discontinued operations" in the Consolidated Income Statement.

 

4.04 Dividends and appropriations

		Dividend	Per share1	Dividend	Per share1	Dividend	Per share1
		6 months	6 months	6 months	6 months	Full year	Full year
		2019	2019	2018	2018	2018	2018
		£m	p	£m	p	£m	p
Ordinary dividends paid and charged to equity in the period:
- Final 2017 dividend paid in June 2018		-	-	658	11.05	658	11.05
- Interim 2018 dividend paid in September 2018		-	-	-	-	274	4.60
- Final 2018 dividend paid in June 2019		704	11.82	-	-	-	-
Total dividends		704	11.82	658	11.05	932	15.65
1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.
Subsequent to 30 June 2019, the directors declared an interim dividend for 2019 of 4.93 pence per ordinary share. This dividend will be paid on 26 September 2019. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2019 and is not included as a liability in the Consolidated Balance Sheet as at 30 June 2019.

 

 

IFRS Disclosure Notes                                                                                                               Page 52

 

4.05 Financial investments and investment property

 

				30 Jun 2019	30 Jun 2018	31 Dec 2018
				£m	£m	£m
Equity securities1				192,387	191,540	177,566
Debt securities2				275,086	233,977	254,452
Accrued interest				1,617	1,502	1,635
Derivative assets3				13,198	10,132	10,065
Loans4				12,861	10,271	9,662
Financial investments				495,149	447,422	453,380
Investment property				8,706	8,505	8,608
Total financial investments and investment property				503,855	455,927	461,988
Less: financial investments and investment property of operations classified as held for sale				(25,597)	(20,579)	(24,525)
Financial investments and investment property				478,258	435,348	437,463
1. Equity securities include investments in unit trusts of £13,122m (30 June 2018: £10,005m; 31 December 2018: £10,553m).
2. A detailed analysis of debt securities to which shareholders are directly exposed, is disclosed in Note 7.03.
3. Derivatives are used for efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management. Derivative assets are shown gross of derivative liabilities of £11,778m (30 June 2018: £7,652m; 31 December 2018 £7,791m).
4. Loans includes £447m (30 June 2018: £443m; 31 December 2018: £456m) of loans valued at amortised cost.

(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).

 

The group's financial assets are valued, where possible, using standard market pricing sources, such as IHS Markit, ICE and Bloomberg, or Index Providers such as Barclays, Merrill Lynch or JPMorgan. Each uses mathematical modelling and multiple source validation in order to determine consensus prices, with the exception of OTC Derivative holdings; OTCs are marked to market using an in-house system (Lombard Oberon), external vendor (IHS Markit), internal model or counterparty broker marks. In normal market conditions, we would consider these market prices to be observable and therefore classify them as Level 1. However, where inputs to the valuation have been sourced from a market that is not suitably active the prices have been classified as Level 2. Refer to Note 4.06 (b) for Level 3 methodology.

 

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

 

There have been no significant transfers between Level 1 and Level 2 in the six month period to 30 June 2019 (30 June 2018; 31 December 2018: No significant transfers). Transfers into and out of Level 3 are disclosed in Note 4.05 (b).

 

 

IFRS Disclosure Notes                                                                                                               Page 53

 

4.05 Financial investments and investment property (continued)

 

(a) Fair value hierarchy (continued)
					Total	Level 1	Level 2	Level 3
As at 30 June 2019					£m	£m	£m	£m
Shareholder
Equity securities					2,624	1,629	-	995
Debt securities					4,319	1,601	2,040	678
Accrued interest					32	13	13	6
Derivative assets					110	104	6	-
Loans at fair value					234	-	234	-
Investment property					203	-	-	203
Non profit non-unit linked
Equity securities					156	152	-	4
Debt securities					66,387	7,314	43,723	15,350
Accrued interest					520	25	464	31
Derivative assets					11,523	-	11,523	-
Loans at fair value					726	-	726	-
Investment property					3,131	-	-	3,131
With-profits
Equity securities					3,191	2,998	-	193
Debt securities					5,598	1,636	3,962	-
Accrued interest					47	11	36	-
Derivative assets					68	8	60	-
Loans at fair value					396	-	396	-
Investment property					520	-	-	520
Unit linked
Equity securities					186,416	183,682	2,070	664
Debt securities					198,782	140,904	57,601	277
Accrued interest					1,018	493	525	-
Derivative assets					1,497	200	1,297	-
Loans at fair value					11,058	-	11,058	-
Investment property					4,852	-	-	4,852
Total financial investments and investment property at fair value1,2					503,408	340,770	135,734	26,904
1. This table excludes loans (including accrued interest) of £447m, which are held at amortised cost.
2. This table includes financial investments of £24,031m and investment property of £1,566m classified as assets of operations classified as held for sale.

 

 

IFRS Disclosure Notes                                                                                                               Page 54

 

4.05 Financial investments and investment property (continued)

 

(a) Fair value hierarchy (continued)
					Total	Level 1	Level 2	Level 3
As at 30 June 2018					£m	£m	£m	£m
Shareholder
Equity securities					2,317	1,535	-	782
Debt securities					4,947	1,688	2,886	373
Accrued interest					32	15	14	3
Derivative assets					12	4	8	-
Loans at fair value					352	-	352	-
Investment property					109	-	-	109
Non profit non-unit linked
Equity securities					285	281	4	-
Debt securities					50,406	6,641	33,373	10,392
Accrued interest					441	29	391	21
Derivative assets					4,213	-	4,181	32
Loans at fair value					573	-	398	175
Investment property					2,791	-	-	2,791
With-profits
Equity securities					3,276	3,087	-	189
Debt securities					6,083	1,746	4,333	4
Accrued interest					50	14	36	-
Derivative assets					57	4	53	-
Loans at fair value					117	-	117	-
Investment property					551	-	-	551
Unit linked
Equity securities					185,662	185,009	36	617
Debt securities					172,541	120,048	52,484	9
Accrued interest					979	439	540	-
Derivative assets					5,850	218	5,632	-
Loans at fair value					8,786	-	8,786	-
Investment property					5,054	-	-	5,054
Total financial investments and investment property at fair value1,2					455,484	320,758	113,624	21,102
1. This table excludes loans of £443m, which are held at amortised cost.
2. This table includes financial investments of £19,306m and investment property of £1,273m classified as assets of operations classified as held for sale.

 

 

IFRS Disclosure Notes                                                                                                               Page 55

 

4.05 Financial investments and investment property (continued)

 

(a) Fair value hierarchy (continued)
					Total	Level 1	Level 2	Level 3
As at 31 December 2018					£m	£m	£m	£m
Shareholder
Equity securities					2,322	1,432	-	890
Debt securities					5,708	1,851	3,199	658
Accrued interest					33	15	15	3
Derivative assets					18	7	11	-
Loans at fair value					371	-	371	-
Investment property					166	-	-	166
Non profit non-unit linked
Equity securities					205	194	1	10
Debt securities					56,864	7,031	36,937	12,896
Accrued interest					491	20	446	25
Derivative assets					4,393	-	4,336	57
Loans at fair value					486	-	486	-
Investment property					2,930	-	-	2,930
With-profits
Equity securities					2,936	2,742	-	194
Debt securities					5,988	1,707	4,277	4
Accrued interest					52	15	37	-
Derivative assets					51	5	46	-
Loans at fair value					45	-	45	-
Investment property					520	-	-	520
Unit linked
Equity securities					172,103	169,414	2,026	663
Debt securities					185,892	131,679	53,941	272
Accrued interest					1,059	502	557	-
Derivative assets					5,603	428	5,175	-
Loans at fair value					8,304	-	8,304	-
Investment property					4,992	-	-	4,992
Total financial investments and investment property at fair value1,2					461,532	317,042	120,210	24,280
1. This table excludes loans (including accrued interest) of £456m, which are held at amortised cost.
2. This table includes financial investments of £22,882m and investment property of £1,643m classified as assets of operations classified as held for sale.

 

 

IFRS Disclosure Notes                                                                                                               Page 56

 

4.05 Financial investments and investment property (continued)

 

(b) Level 3 assets measured at fair value

Level 3 assets, where internal models are used, comprise property, unquoted equities, untraded debt securities and securities where unquoted prices are provided by a single broker. Unquoted securities include suspended securities, 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.

Equity securities

Level 3 equity securities amount to £1,856m (30 June 2018: £1,588m; 31 December 2018: £1,757m), of which the majority is made up of holdings of investment property vehicles and private investment funds. They are valued at the proportion of the group's holding of the Net Asset Value reported by the investment vehicles. Other equity securities are valued by a number of third party specialists using a range of techniques, including latest round of funding and discounted cash flow models.

Other financial investments

Other level 3 financial investments comprise of various debt securities (including lifetime mortgages), accrued interest and derivative assets.

Lifetime mortgage (LTM) loans amount to £3,990m (30 June 2018: £2,674m; 31 December 2018 £3,227m). They are valued using a discounted cash flow model by projecting best-estimate net asset proceeds and discounting using rates inferred from current LTM pricing. The inferred illiquidity premiums for the majority of the portfolio range between 100 and 350bps. This ensures the value of loans at outset is consistent with the purchase price of the loan, and achieves consistency between new and in-force loans. Inputs to the model include property growth rates and voluntary early redemptions. The valuation as at 30 June 2019 reflects a long-term property growth rate assumption of RPI + 0.5%.

Private credit loans (including commercial real estate loans) amount to £9,421m (30 June 2018: £6,765m; 31 December 2018: £8,001m). Their valuation is outsourced to IHS Markit who use discounted future cash flows based on a yield curve. The discount factors take into consideration the z-spread of the LGIM approved comparable bond and the initial spread agreed by both parties. Unobservable inputs that go into the determination of comparators, include: rating, sector, sub-sector, performance dynamics, financing structure and duration of investment. Existing private credit investments which were executed back as far as 2011, are subject to a range of interest rate formats, although the majority are fixed rate. The weighted average duration of the portfolio is 11.7 years, with a weighted average life of 16.5 years. Maturities in the portfolio currently extend out to 2064. The private credit portfolio of assets is not externally rated but has internal ratings assigned by an independent credit team in line with internally developed methodologies. These credit ratings range from AAA to B.

Income strip assets amount to £1,258m (30 June 2018: £1,190m; 31 December 2018: £1,248m). Their valuation is outsourced to Knight Frank and CBRE who apply a yield to maturity to discounted future cash flows to derive valuations. The overall valuation takes into account the property location, tenant details, tenure, rent, rental break terms, lease expiries and underlying residual value of the property. The valuation as at 30 June 2019 reflects equivalent yield ranges between 2% and 6% and estimated rental values (ERV) between £10 and £27 per sq. ft.

Private placements held by the US business amount to £1,043m (30 June 2018: £525m; 31 December 2018: £938m). They are valued using a pricing matrix comprised of a public spread matrix, internal ratings assigned to each holding, average life of each holding, and a premium spread matrix. These are added to the risk-free rate to calculate the discounted cash flows and establish a market value for each investment grade private placement. The valuation as at 30 June 2019 reflects illiquidity premiums between 10 and 75bps.

Commercial mortgage loans amount to £357m (30 June 2018: £175m; 31 December 2018: £275m) and are determined by incorporating credit risk for performing loans at the portfolio level and for loans identified to be distressed at the loan level. The projected cash flows of each loan are discounted along stochastic risk free rate paths and are inclusive of an Option Adjusted Spread (OAS), derived from current internal pricing on new loans, along with the best observable inputs. The valuation as at 30 June 2019 reflects illiquidity premiums between 20 and 40bps.

Other debt securities which are not traded in an active market have been valued using third party or counterparty valuations. These prices are considered to be unobservable due to infrequent market transactions.

Investment property

Level 3 investment property amounting to £8,706m (30 June 2018: £8,505m; 31 December 2018: £8,608m) is valued with the involvement of external valuers. All property valuations are carried out in accordance with the latest edition of the Valuation Standards published by the Royal Institute of Chartered Surveyors, and are undertaken by appropriately qualified valuers as defined therein. Whilst transaction evidence underpins the valuation process, the definition of market value, including the commentary, in practice requires the valuer to reflect the realities of the current market. In this context valuers must use their market knowledge and professional judgement and not rely only upon historic market sentiment based on historic transactional comparables.

The valuation of investment properties also include an income approach that is based on current rental income plus anticipated uplifts, where the uplift and discount rates are derived from rates implied by recent market transactions. These inputs are deemed unobservable. The valuation as at 30 June 2019 reflects equivalent yield ranges between 1% and 10% and ERV between £1 and £134 per sq. ft.

 

 

IFRS Disclosure Notes                                                                                                               Page 57

 

4.05 Financial investments and investment property (continued)

 

(b) Level 3 assets measured at fair value (continued)
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 reassess the categorisation of financial assets at the end of each reporting period and to recognise transfers between levels at that point in time.
		Other				Other
		financial				financial
	Equity	invest-	Investment		Equity	invest-	Investment
	securities	ments	property	Total	securities	ments	property	Total
	2019	2019	2019	2019	2018	2018	2018	2018
	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January	1,757	13,915	8,608	24,280	1,451	9,888	8,337	19,676
Total gains/(losses) for the period recognised in profit:
- in other comprehensive income	-	-	(34)	(34)	7	(113)	-	(106)
- realised and unrealised gains / (losses)1	38	930	15	983	41	20	70	131
Purchases / Additions	173	2,608	359	3,140	147	1,338	397	1,882
Sales / Disposals	(105)	(1,054)	(250)	(1,409)	(47)	(214)	(299)	(560)
Transfers into Level 3	2	-	-	2	-	90	-	90
Transfers out of Level 3	-	(57)	-	(57)	(11)	-	-	(11)
Other	(9)	-	8	(1)	-	-	-	-
As at 30 June	1,856	16,342	8,706	26,904	1,588	11,009	8,505	21,102
						Other
						financial
					Equity	invest-	Investment
					securities	ments	property	Total
					2018	2018	2018	2018
					£m	£m	£m	£m
As at 1 January					1,451	9,888	8,337	19,676
Total gains / (losses) for the year recognised in profit:
- in other comprehensive income					1	(18)	-	(17)
- realised and unrealised gains / (losses)1					35	(92)	50	(7)
Purchases / Additions					519	5,521	1,153	7,193
Sales / Disposals					(375)	(1,707)	(904)	(2,986)
Transfers into Level 3					126	295	-	421
Transfers out of Level 3					-	-	-	-
Other					-	28	(28)	-
As at 31 December					1,757	13,915	8,608	24,280
1. Realised and unrealised gains and losses are recognised in Investment return in the Consolidated Income Statement.

 

 

IFRS Disclosure Notes                                                                                                               Page 58

 

4.05 Financial investments and investment property (continued)

 

 (c) Effect on changes in assumptions on Level 3

 

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.

 

Where possible, the group assesses the sensitivity of fair values of Level 3 investments to changes in unobservable inputs to reasonable alternative assumptions. As outlined above, Level 3 investments are valued using internally-modelled valuations or independent third parties. Where internally-modelled valuations are used, sensitivities are determined by adjusting various inputs of the model and assigning them a weighting. Where independent third parties are used, sensitivities are determined as outlined below:

·      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.

·      Private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines. Reasonably possible alternative valuations have been determined by stressing key assumptions used in the valuation models.

 

The group is therefore able to perform a sensitivity analysis for its Level 3 investments, which amount to £26.9bn (30 June 2018: £21.1bn; 31 December 2018: £24.3bn). The effect of changes in significant unobservable valuation inputs to reasonable alternative assumptions would result in a change in fair value of +/- £1.7bn (30 June 2018: +/-£1.0bn; 31 December 2018: +/-£1.6bn), which represents 6% (30 June 2018: 5%; 31 December 2018: 7%) of the total value of Level 3 investments, including investment property.

 

Of the total sensitivity impact, +/- £1.0bn (30 June 2018: +/- £0.8bn; 31 December 2018: +/-£0.9bn) relates to Level 3 financial assets (excluding investment property), which represents 5% (30 June 2018: 6%; 31 December 2018: 6%) of total Level 3 financial assets and 4% (30 June 2018: 4%; 31 December 2018: 4%) of total Level 3 investments.

 

 

IFRS Disclosure Notes                                                                                                               Page 59

 

4.06 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:
		Continuing		Continuing		Continuing
		operations	Total	operations	Total	operations	Total
		6 months 2019	6 months 2019	6 months 2018	6 months 2018	Full year 2018	Full year 2018
		£m	£m	£m	£m	£m	£m
Profit before tax attributable to equity holders		1,020	1,053	900	942	2,076	2,128
Tax calculated at 19.00%		194	200	171	179	394	404
Adjusted for the effects of:
Recurring reconciling items:
Income not subject to tax		(1)	(1)	(1)	(1)	-	-
Higher/(lower) rate of tax on overseas profits		(11)	(11)	12	12	(55)	(55)
Non-deductible expenses		1	1	-	-	5	5
Differences between taxable and accounting investment gains		-	-	(1)	(1)	(4)	(4)
Property income attributable to non-controlling interests		-	-	(1)	(1)	-	-
Unrecognised tax losses		2	2	-	-	-	-
Non-recurring reconciling items:
Income not subject to tax		(2)	(2)	(4)	(4)	(10)	(10)
Non-deductible expenses		-	-	1	1	5	5
Adjustments in respect of prior years		(2)	(2)	(15)	(15)	(35)	(36)
Impact of reduction in UK and US corporate tax rates on deferred tax balances		1	1	2	2	11	11
Other		-	-	(3)	(2)	-	-
Tax expense attributable to equity holders		182	188	161	170	311	320
Equity holders' effective tax rate1		17.8%	17.9%	17.9%	18.0%	15.0%	15.0%
1. 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 4.01 for details on the methodology of the split of policyholder and equity holders' tax.

 

 

IFRS Disclosure Notes                                                                                                               Page 60

 

4.06 Tax (continued)

(b) Deferred tax
				30 Jun 2019	30 Jun 2018	31 Dec 2018
Deferred tax (liabilities)/assets				£m	£m	£m
Deferred acquisition expenses				29	14	25
- UK				(40)	(38)	(40)
- Overseas				69	52	65
Difference between the tax and accounting value of insurance contracts				(635)	(377)	(577)
- UK				(228)	(74)	(171)
- Overseas				(407)	(303)	(406)
Realised and unrealised gains on investments				(175)	(243)	(72)
Excess of depreciation over capital allowances				12	14	12
Excess expenses				20	22	21
Accounting provisions and other				(32)	(11)	(28)
Trading losses1				179	29	163
Pension fund deficit				35	39	41
Acquired intangibles				(2)	(24)	(4)
Total net deferred tax liabilities				(569)	(537)	(419)
Less: net deferred tax liabilities of operations classified as held for sale				186	236	97
Net deferred tax liabilities
				(383)	(301)	(322)
Analysed by:
- UK deferred tax assets
				2	2	2
- UK deferred tax liabilities				(193)	(73)	(144)
- Overseas deferred tax assets				5	5	5
- Overseas deferred tax liabilities2				(197)	(235)	(185)
Net deferred tax liabilities				(383)	(301)	(322)
1. Trading losses include UK trade and US operating losses of £3m (H1 18: £2m; FY 18: £4m) and £176m (H1 18: £27m; FY 18: £159m) respectively.
2. Overseas deferred tax liability is wholly comprised of US balances as at 30 June 2019.

 

 

IFRS Disclosure Notes                                                                                                               Page 61

 

4.07 Share capital and share premium

 

						Number of
Authorised share capital						shares	£m
As at 30 June 2019, 30 June 2018 and 31 December 2018: ordinary shares of 2.5p each					9,200,000,000		230
						Share	Share
					Number of	capital	premium
Issued share capital, fully paid					shares	£m	£m
As at 1 January 2019				5,960,768,234		149	992
Options exercised under share option schemes				3,497,185		-	6
As at 30 June 2019				5,964,265,419		149	998
						Share	Share
					Number of	capital	premium
Issued share capital, fully paid					shares	£m	£m
As at 1 January 2018				5,958,438,193		149	988
Options exercised under share option schemes				1,435,336		-	2
As at 30 June 2018				5,959,873,529		149	990
Options exercised under share option schemes				894,705		-	2
As at 31 December 2018				5,960,768,234		149	992
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 as declared and are entitled to one vote per share at shareholder meetings of the company.

 

 

4.08 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.

 

No individual non-controlling interest is considered to be material on the basis of the period end carrying value or share of profit or loss.

 

 

IFRS Disclosure Notes                                                                                                               Page 62

 

4.09 Core borrowings

 

		Carrying		Carrying		Carrying
		amount	Fair value	amount	Fair value	amount	Fair value
		30 Jun	30 Jun	30 Jun	30 Jun	31 Dec	31 Dec
		2019	2019	2018	2018	2018	2018
		£m	£m	£m	£m	£m	£m
Subordinated borrowings
5.875% Sterling undated subordinated notes (Tier 2)		-	-	405	415	405	409
10% Sterling subordinated notes 2041 (Tier 2)		312	364	311	380	312	366
5.5% Sterling subordinated notes 2064 (Tier 2)		589	684	589	629	589	569
5.375% Sterling subordinated notes 2045 (Tier 2)		602	673	603	657	603	627
5.25% US Dollar subordinated notes 2047 (Tier 2)		661	706	640	617	659	612
5.55% US Dollar subordinated notes 2052 (Tier 2)		388	419	376	361	387	356
5.125% Sterling subordinated notes 2048 (Tier 2)		399	445	-	-	399	401
Client fund holdings of group debt1		(31)	(34)	(27)	(29)	(31)	(30)
Total subordinated borrowings		2,920	3,257	2,897	3,030	3,323	3,310
Senior borrowings
Sterling medium term notes 2031-2041		603	868	603	812	609	824
Client fund holdings of group debt1		(9)	(13)	(11)	(14)	(10)	(13)
Total senior borrowings		594	855	592	798	599	811
Total core borrowings		3,514	4,112	3,489	3,828	3,922	4,121
1. £40m (30 June 2018: £38m; 31 December 2018: £41m) 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.
The presented fair values of the group's core borrowings reflect quoted prices in active markets and they have been classified as level 1 in the fair value hierarchy.

 

Subordinated borrowings

 

5.875% Sterling undated subordinated notes

In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes were called at par on 1 April 2019. Effective from the notification on 4 February 2019 of the intention to redeem, the notes were no longer 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% p.a. These notes mature on 23 July 2041.

 

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% p.a. These notes mature on 27 June 2064.

 

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% p.a. These notes mature on 27 October 2045.

 

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 US Dollar mid-swap rate plus 3.687% p.a. These notes mature on 21 March 2047.

 

 

IFRS Disclosure Notes                                                                                                               Page 63

 

4.09 Core borrowings (continued)

 

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 US Dollar mid-swap rate plus 4.19% p.a. These notes mature on 24 April 2052.

 

5.125% Sterling subordinated notes 2048

On 14 November 2018, Legal & General Group Plc issued £400m of 5.125% dated subordinated notes. The notes are callable at par on 14 November 2028 and every five years thereafter. If not called, the coupon from 14 November 2028 will be reset to the prevailing five year benchmark gilt yield plus 4.65% p.a. These notes mature on 14 November 2048.

 

All of the above subordinated notes are treated as tier 2 own funds for Solvency II purposes unless otherwise stated.

 

Senior borrowings

 

Between 2000 and 2002 Legal & General Finance Plc issued £600m of senior unsecured Sterling medium term notes 2031-2041 at coupons between 5.75% and 5.875%. These notes have various maturity dates between 2031 and 2041.

 

 

 

4.10 Operational borrowings

	Carrying				Carrying				Carrying
	amount		Fair value		amount		Fair value		amount		Fair value
	30 Jun		30 Jun		30 Jun		30 Jun		31 Dec		31 Dec
	2019		2019		2018		2018		2018		2018
	£m		£m		£m		£m		£m		£m
Short term operational borrowings
Euro Commercial Paper	354		354		497		497		293		293
Non recourse borrowings	657		657		251		251		617		617
Bank loans and overdrafts	58		58		200		200		83		83
Total operational borrowings1	1,069		1,069		948		948		993		993
Less: liabilities of operations classified as held for sale	(29)		(29)		-		-		(28)		(28)
Operational borrowings	1,040		1,040		948		948		965		965
1. Unit linked borrowings with a carrying value of £11m (30 June 2018: £9m; 31 December 2018: £61m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,051m (30 June 2018: £957m; 31 December 2018: £1,026m).
Syndicated credit facility   As at 30 June 2019, the group had in place a £1.0bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2022. No amounts were outstanding at 30 June 2019.

 

 

IFRS Disclosure Notes                                                                                                               Page 64

 

4.11 Payables and other financial liabilities

 

					30 Jun 2019	30 Jun 2018	31 Dec 2018
					£m	£m	£m
Derivative liabilities					11,778	7,652	7,791
Repurchase agreements1					46,994	36,919	43,775
Other financial liabilities2					17,353	15,016	11,406
Total payables and other financial liabilities					76,125	59,587	62,972
Less: liabilities of operations classified as held for sale					(598)	(435)	(424)
Payables and other financial liabilities					75,527	59,152	62,548
1. Repurchase agreements are presented gross, however they and their related assets (included within debt securities) are subject to master netting arrangements. The vast majority of the repurchase agreements are unit linked.
2. Other financial liabilities includes trail commission, FX spots and collateral repayable on short position reverse repurchase agreements. The value of collateral repayable on short position reverse repurchase agreements was £6,114m (2018: £4,883m).
(a) Fair value hierarchy
			Total	Level 1	Level 2	Level 3	Amortised              cost
As at 30 June 2019			£m	£m	£m	£m	£m
Derivative liabilities			11,778	276	11,500	2	-
Repurchase agreements			46,994	-	46,994	-	-
Other financial liabilities			17,353	5,854	14	577	10,908
Total payables and other financial liabilities			76,125	6,130	58,508	579	10,908
							Amortised
			Total	Level 1	Level 2	Level 3	cost
As at 30 June 2018			£m	£m	£m	£m	£m
Derivative liabilities			7,652	1,312	6,340	-	-
Repurchase agreements			36,919	-	36,919	-	-
Other financial liabilities			15,016	5,580	25	126	9,285
Total payables and other financial liabilities			59,587	6,892	43,284	126	9,285
							Amortised
			Total	Level 1	Level 2	Level 3	cost
As at 31 December 2018			£m	£m	£m	£m	£m
Derivative liabilities			7,791	337	7,452	2	-
Repurchase agreements			43,775	-	43,775	-	-
Other financial liabilities			11,406	4,718	35	496	6,157
Total payables and other financial liabilities			62,972	5,055	51,262	498	6,157
Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as a Level 3 liability. The entire movement in the balance has been reflected in the Consolidated Income Statement during the period. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (30 June 2018 and 31 December 2018: Increase of £4m).
There have been no significant transfers of payables and other financial liabilities between Levels 1, 2 and 3 for the period ended 30 June 2019 (30 June 2018 and 31 December 2018: no significant transfers).

 

 

IFRS Disclosure Notes                                                                                                               Page 65

 

4.12 Foreign exchange rates

 

The principal rates of exchange used for translation are:
Period end exchange rates			30 Jun 2019	30 Jun 2018	31 Dec 2018
United States dollar			1.27	1.32	1.28
Euro			1.12	1.13	1.11
			6 months	6 months	Full year
Average exchange rates			2019	2018	2018
United States dollar			1.29	1.38	1.34
Euro			1.15	1.14	1.13

 

4.13 Retirement benefit obligations

 

The Legal & General Group UK Pension and Assurance Fund (Fund) and the Legal & General Group UK Senior Pension Scheme (Scheme) account for the majority of the UK and worldwide assets of, and contributions to, such arrangements. The Fund and Scheme were closed to future accrual on 31 December 2015.
As at 30 June 2019, the combined obligation arising from these arrangements has been estimated at £1,139m (30 June 2018: £1,095m; 31 December 2018: £1,091m). The retirement benefit obligations is a component of Provisions on the Consolidated Balance Sheet. The after tax deficit, net of annuity obligations insured by Legal and General Assurance Society, has been calculated to be £161m (30 June 2018: £179m; 31 December 2018: £192m).

 

4.14 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 and General Assurance Society Limited (LGAS) 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 LGAS. 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 LGAS against any liability LGAS may have as a result of the ILU's requirement, and the ILU agreed that its requirement of LGAS 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 LGAS has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability is uncertain. LGAS 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. LGAS 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 Disclosure Notes                                                                                                               Page 66

 

4.15 Related party transactions

 

(a) Key management personnel transactions and compensation
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 £40m (H1 18: £39m; FY 18: £84m) for all employees.
At 30 June 2019, 30 June 2018 and 31 December 2018 there were no loans outstanding to officers of the company.
The aggregate compensation for key management personnel, including executive and non-executive directors, is as follows:
				6 months	6 months	Full year
				2019	20181	2018
				£m	£m	£m
Salaries				3	3	10
Post-employment benefits				-	-	-
Share-based incentive awards				3	2	6
Key management personnel compensation				6	5	16
Number of key management personnel				16	15	15
1. Key management personnel compensation for the six months ended 30 June 2018 has been restated to correctly reflect certain compensation excluded from the disclosure. The restatement has no impact on either Total expenses or Profit before income tax in the group's Consolidated Statement of Comprehensive Income for the six months ended 30 June 2018.

 

(b) Services provided to and by related parties

All transactions between the group and associates, joint ventures and other related parties during the year are on commercial terms which are no more favourable than those available to companies in general. Transactions between the group and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Loans and commitments to related parties are made in the normal course of business.

The group has the following material related party transactions:

- Annuity contracts issued by Legal and General Assurance Society Limited for consideration of £78m (H1 18: 59m; FY 18: £59m) purchased by the group's UK defined benefit pension schemes during the period, priced on an arm's length basis;

- Loans outstanding from related parties, including preference shares, at 30 June 2019 of £81m (30 June 2018: £163m; 31 December 2018 of £201m);

- Total other commitments of £1,178m to related parties (30 June 2018: £787m; 31 December 2018: £837m), of which £821m has been drawn at 30 June 2019 (30 June 2018: £430m; 31 December 2018: £507m).

 

 

Asset and premium flows                                                                                                         Page 67

 

5.01 LGIM Total assets under management (AUM)

 

		Global
		fixed		Real	Active	Total
	Index	income	Solutions1	assets	equities	AUM
For the six month period to 30 June 2019	£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2019	310.2	162.6	510.5	27.1	5.1	1,015.5
External inflows	60.8	5.6	15.3	0.8	0.1	82.6
External outflows	(26.1)	(4.7)	(12.4)	(0.8)	(0.1)	(44.1)
Overlay net flows	-	-	22.0	-	-	22.0
ETF net flows	(0.2)	-	-	-	-	(0.2)
External net flows2	34.5	0.9	24.9	-	-	60.3
Internal net flows	(0.1)	(1.9)	3.3	1.2	(0.1)	2.4
Total net flows	34.4	(1.0)	28.2	1.2	(0.1)	62.7
Cash management movements3	-	0.5	-	-	-	0.5
Market and other movements2	45.5	10.8	(2.3)	1.2	0.6	55.8
As at 30 June 20194	390.1	172.9	536.4	29.5	5.6	1,134.5
Assets attributable to:
External5						1,032.7
Internal						101.8
1. As at 30 June 2019, Solutions include liability driven investments, multi-asset funds and £301.9bn of derivative notionals associated with the Solutions business.
2. External net flows exclude movements in short-term solutions assets, with maturity as determined by client agreements and are subject to a higher degree of variability. The total value of these assets as at 30 June 2019 was £49.4bn and the movement in these assets is included in market and other movements for Solutions assets.
3. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.
4. AUM includes assets on our Investment Only Platform that are managed by third parties, on which fees are earned.
5. As part of the sale of the Mature Savings business to Swiss Re, a further £0.5bn (31 December 2018: £5.5bn) of assets have been reclassified from the Internal channel to External channel.

 

 

Asset and premium flows                                                                                                         Page 68

 

5.01 LGIM Total assets under management (AUM) (continued)

 

 

		Global
		fixed		Real	Active	Total
	Index	income	Solutions1	assets	equities	AUM
For the six month period to 30 June 2018	£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2018	340.9	148.8	462.7	23.8	7.1	983.3
Canvas acquisition2	2.4	-	-	-	-	2.4
External inflows	22.4	8.7	18.2	0.6	0.5	50.4
External outflows	(41.2)	(2.2)	(8.7)	(0.5)	(0.1)	(52.7)
Overlay net flows	-	-	16.7	-	-	16.7
ETF net flows	0.2	-	-	-	-	0.2
External net flows3	(18.6)	6.5	26.2	0.1	0.4	14.6
Internal net flows	(0.3)	(2.5)	(0.3)	0.6	(0.1)	(2.6)
Total net flows	(18.9)	4.0	25.9	0.7	0.3	12.0
Cash management movements4	-	1.0	-	-	-	1.0
Market and other movements3	1.9	(1.4)	(14.9)	0.8	(0.3)	(13.9)
At 30 June 2018	326.3	152.4	473.7	25.3	7.1	984.8
Assets attributable to:
External						888.8
Internal						96.0
1. As at 30 June 2018 Solutions include liability driven investments, multi-asset funds, and include £277.2bn of derivative notionals associated with the Solutions business.
2. The acquisition of Canvas was completed in March 2018.
3. External net flows exclude movements in short-term solutions assets, with maturity as determined by client agreements and are subject to a higher degree of variability. The total value of these assets as at 30 June 2018 was £48.3bn and the movement in these assets is included in market and other movements for Solutions assets.
4. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.

 

 

Asset and premium flows                                                                                                         Page 69

 

5.01 LGIM Total assets under management (AUM) (continued)

 

		Global
		fixed		Real	Active	Total
	Index	income	Solutions1	assets	equities	AUM
For the year ended 31 December 2018	£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2018	340.9	148.8	462.7	23.8	7.1	983.3
Canvas acquisition2	2.4	-	-	-	-	2.4
External inflows	54.2	15.7	33.8	1.5	0.6	105.8
External outflows	(69.0)	(6.2)	(16.1)	(1.6)	(0.2)	(93.1)
Overlay net flows	-	-	29.9	-	-	29.9
ETF net flows	-	-	-	-	-	-
External net flows3	(14.8)	9.5	47.6	(0.1)	0.4	42.6
Internal net flows	(0.7)	1.8	(0.7)	2.5	(0.3)	2.6
Total net flows	(15.5)	11.3	46.9	2.4	0.1	45.2
Cash management movements4	-	(0.5)	-	-	-	(0.5)
Market and other movements3	(17.6)	3.0	0.9	0.9	(2.1)	(14.9)
As at 31 December 2018	310.2	162.6	510.5	27.1	5.1	1,015.5
Assets attributable to:
External5						921.7
Internal						93.8
1. As at 31 December 2018, Solutions include liability driven investments, multi-asset funds and £303.9bn of derivative notionals associated with the Solutions business.
2. The acquisition of Canvas was completed in March 2018.
3. External net flows exclude movements in short-term solutions assets, with maturity as determined by client agreements and are subject to a higher degree of variability. The total value of these assets as at 31 December 2018 was £60.1bn and the movement in these assets is included in market and other movements for Solutions assets.
4. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.
5. As part of the sale of the Mature Savings business to Swiss Re £5.5bn of assets have been re-classified from the Internal channel to External channel.