L&G Half Year Results 2020 Part 2

 

Legal & General Group Plc

Half Year Report 2020 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 2020 which comprises the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the 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 67). 

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 2020 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.  

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

4 August 2020

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

                                                                                                                                           Page 30

 

 

 

 

 

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Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosures on performance and Release from operations                                 Page 31

 

2.01 Operating profit^#

For the six month period to 30 June 2020

			6 months	6 months1	Full year1
			2020	2019	2019
		Notes	£m	£m	£m
From continuing operations
Legal & General Retirement (LGR)		2.03	721	655	1,569
- LGR Institutional (LGRI)			585	524	1,216
- LGR Retail (LGRR)			136	131	353
Legal & General Investment Management (LGIM)		2.04	196	192	394
Legal & General Capital (LGC)		2.05	123	173	363
Legal & General Insurance (LGI)		2.03	88	134	314
- UK and Other			57	93	223
- US (LGIA)			31	41	91
Operating profit from divisions:
From continuing operations			1,128	1,154	2,640
From discontinued operations2			26	19	11
Operating profit from divisions			1,154	1,173	2,651
Group debt costs3			(115)	(108)	(208)
Group investment projects and expenses			(72)	(60)	(157)
COVID-19 costs4			(21)	-	-
Operating profit			946	1,005	2,286
Investment and other variances		2.06	(644)	57	(150)
Losses on non-controlling interests			(17)	(9)	(24)
Adjusted profit before tax attributable to equity holders			285	1,053	2,112
Tax expense attributable to equity holders		4.05	(12)	(188)	(302)
Profit for the period			273	865	1,810
Profit attributable to equity holders			290	874	1,834
Earnings per share:
Basic (pence per share)5		2.07	4.89p	14.74p	30.92p
Diluted (pence per share)5		2.07	4.63p	14.66p	30.75p
1. 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to Legal & General Investment Management (LGIM) within Operating profit from divisions. This has reduced LGIM operating profit by £13m for the six months ended 30 June 2020, and by £29m for the full year 2019.
2. Discontinued operations include the results of the Mature Savings division following the group's announcement to sell the business to ReAssure Limited (2019 included the results of the General Insurance division following its sale to Allianz, which completed on 31 December 2019).
3. Group debt costs exclude interest on non recourse financing.
4. COVID-19 costs reflect incremental operational expenses incurred as a result of COVID-19 and include the provision of IT spend on remote working solutions.
5. 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 the results of the Mature Savings division following the group's announcement to sell the business to ReAssure Limited (2019 included the results of the General Insurance division following its sale to Allianz, which completed on 31 December 2019).

 

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 long-term expected 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.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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 2020	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	329	98	427	27	143	21	-	618	103	721
- LGRI	246	71	317	20	143	21	-	501	84	585
- LGRR	83	27	110	7	-	-	-	117	19	136
LGIM	173	(11)	162	(5)	-	-	-	157	39	196
- LGIM (excluding
Workplace Savings)2	158	-	158	-	-	-	-	158	39	197
- Workplace Savings3	15	(11)	4	(5)	-	-	-	(1)	-	(1)
LGC	97	-	97	-	-	-	-	97	26	123
LGI	163	(1)	162	(25)	8	(5)	(81)	59	29	88
- UK and Other	69	(1)	68	(25)	8	(5)	-	46	11	57
- US (LGIA)	94	-	94	-	-	-	(81)	13	18	31
From continuing operations	762	86	848	(3)	151	16	(81)	931	197	1,128
From discontinued operations4	21	-	21	-	-	-	-	21	5	26
Total from divisions	783	86	869	(3)	151	16	(81)	952	202	1,154
Group debt costs	(93)	-	(93)	-	-	-	-	(93)	(22)	(115)
Group investment projects and expenses	(25)	-	(25)	-	-	-	(30)	(55)	(17)	(72)
COVID-19 costs5	-	-	-	-	-	-	(17)	(17)	(4)	(21)
Total	665	86	751	(3)	151	16	(128)	787	159	946
1. Release from operations within US (LGIA) includes £84m 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 division following the group's announcement to sell the business to ReAssure Limited.
5. COVID-19 costs reflect incremental operational expenses incurred as a result of COVID-19 and include the provision of IT spend on remote working solutions.
Release from operations for LGR, LGIM - Workplace Savings and LGI UK and Other 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 release from operations also includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from 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 from the Mature Savings business.
New business surplus/strain for LGR, LGIM - Workplace Savings and LGI UK and Other 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. At certain period ends, depending upon the quantum and timing of pension risk transfer (PRT) volumes, we may continue to source high quality assets to support that business after the period end, as appropriate, taking into account the alternative risks and rewards of traded credit. At period end, any difference between the actual assets and the 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) represents the operating profit (net of tax).
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.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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 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
LGIM2	168	(11)	157	(3)	-	(1)	-	153	39	192
- LGIM (excluding
Workplace Savings)3	155	-	155	-	-	-	-	155	39	194
- Workplace Savings4	13	(11)	2	(3)	-	(1)	-	(2)	-	(2)
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	784	173	957	(61)	51	55	(59)	943	211	1,154
From discontinued operations5	15	-	15	-	-	-	-	15	4	19
Total from divisions	799	173	972	(61)	51	55	(59)	958	215	1,173
Group debt costs	(87)	-	(87)	-	-	-	-	(87)	(21)	(108)
Group investment projects and expenses2	(19)	-	(19)	-	-	-	(26)	(45)	(15)	(60)
Total	693	173	866	(61)	51	55	(85)	826	179	1,005
1. Release from operations within US (LGIA) includes £81m of dividends from the US.
2. As described in Note 2.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £10m and Workplace Savings operating profit by £3m.
3. LGIM (excluding Workplace Savings) includes profits on fund management services.
4. Workplace Savings represents administration business only.
5. Discontinued operations include the results of the Mature Savings and General Insurance divisions following the group's announcements to sell these businesses to ReAssure Limited and Allianz respectively. The sale of the General Insurance division completed on 31 December 2019.

 

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

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosures on performance and Release from operations                                 Page 34

 

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

 

					Changes					Operating
		New	Net		in			Operating		profit/
	Release	business	release	Exper-	valuation			profit/	Tax	(loss)
	from	surplus/	from	ience	assump-	Non-cash		(loss)	expense/	before
For the year ended	operations1	(strain)	operations	variances	tions	items	Other	after tax	(credit)	tax
31 December 2019	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
LGR	598	327	925	(53)	390	91	-	1,353	216	1,569
- LGRI	418	265	683	(40)	313	88	-	1,044	172	1,216
- LGRR	180	62	242	(13)	77	3	-	309	44	353
LGIM2	348	(20)	328	(6)	-	(4)	-	318	76	394
- LGIM (excluding Workplace
Savings)3	321	-	321	-	-	-	-	321	77	398
- Workplace Savings4	27	(20)	7	(6)	-	(4)	-	(3)	(1)	(4)
LGC	295	-	295	-	-	-	-	295	68	363
LGI	259	(7)	252	(11)	44	(12)	4	277	37	314
- UK and Other	165	(7)	158	(11)	44	(12)	4	183	40	223
- US (LGIA)	94	-	94	-	-	-	-	94	(3)	91
From continuing operations	1,500	300	1,800	(70)	434	75	4	2,243	397	2,640
From discontinued operations5	9	-	9	-	-	-	-	9	2	11
Total from divisions	1,509	300	1,809	(70)	434	75	4	2,252	399	2,651
Group debt costs	(168)	-	(168)	-	-	-	-	(168)	(40)	(208)
Group investment projects
and expenses2	(44)	-	(44)	-	-	-	(79)	(123)	(34)	(157)
Total	1,297	300	1,597	(70)	434	75	(75)	1,961	325	2,286
1. Release from operations within US (LGIA) includes £81m of dividends from the US.
2. As described in Note 2.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £23m and Workplace Savings operating profit by £6m.
3. LGIM (excluding Workplace Savings) includes profits on fund management services.
4. Workplace Savings represents administration business only.
5. Discontinued operations include the results of the Mature Savings and General Insurance divisions following the group's announcement to sell these businesses to ReAssure Limited and Allianz respectively. The sale of the General Insurance business completed on 31 December 2019.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosures on performance and Release from operations                                 Page 35

 

2.03 Analysis of LGR and LGI operating profit

For the six month period to 30 June 2020

 

	LGR	LGI	LGR	LGI	LGR	LGI
	6 months	6 months	6 months	6 months	Full year	Full year
	2020	2020	2019	2019	2019	2019
	£m	£m	£m	£m	£m	£m
Net release from operations	427	162	488	170	925	252
Experience variances
- Persistency	3	(11)	-	(13)	(4)	(9)
- Mortality/morbidity	33	(17)	5	(8)	6	(5)
- Expenses	(3)	(5)	(9)	(1)	(23)	-
- Project and development costs	(4)	-	(4)	(1)	(12)	-
- Other	(2)	8	(29)	2	(20)	3
Total experience variances	27	(25)	(37)	(21)	(53)	(11)
Changes to valuation assumptions
- Persistency	-	-	-	-	-	(16)
- Mortality/morbidity	19	4	-	5	352	39
- Expenses	-	-	-	-	5	-
- Other1	124	4	33	13	33	21
Total changes to valuation assumptions	143	8	33	18	390	44
Movement in non-cash items
- Acquisition expense tax relief	-	(2)	-	(1)	-	(2)
- Other2	21	(3)	58	(1)	91	(10)
Total movement in non-cash items	21	(5)	58	(2)	91	(12)
Other	-	(81)	-	(59)	-	4
Operating profit after tax	618	59	542	106	1,353	277
Tax gross up	103	29	113	28	216	37
Operating profit before tax	721	88	655	134	1,569	314
1. The £124m positive Other assumption change in LGR reflects a reduction in the assumed late retirement factors applied to deferred annuities.
2. LGR Other movement in non-cash items is driven by the net effect of the capitalisation and unwind of future asset management profits on activity managed by LGIM, and is a function of new business volumes and movements in the main unit cost assumptions.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosures on performance and Release from operations                                 Page 36

 

2.04 LGIM operating profit

 

				6 months	6 months	Full year
				2020	20195	20195
				£m	£m	£m
Asset management revenue (excluding 3rd party market data)1,2				458	425	889
Asset management transactional revenue3				9	9	23
Asset management expenses (excluding 3rd party market data)1,2				(270)	(240)	(514)
Workplace Savings operating loss4				(1)	(2)	(4)
Total LGIM operating profit				196	192	394
1. Asset management revenue and expenses exclude income and costs of £13m in relation to the provision of third party market data (H1 19: £11m, FY 19: £24m).
2. The ETF operating result is included as part of asset management revenue and expenses.
3. Transactional revenue from external clients includes execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees.
4. Workplace Savings represents administration business.
5. As described in Note 2.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. For the respective 2019 periods this has increased Asset management expenses (H1 19: £10m; FY19: £23m) and reduced the Workplace Savings operating result (H1 19: £3m; FY19: £6m).

 

2.05 LGC operating profit

				6 months	6 months	Full year
				2020	2019	2019
				£m	£m	£m
Direct investments1				36	99	217
Traded investment portfolio including treasury assets2				87	74	146
Total LGC operating profit				123	173	363
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
				2020	2019	2019
				£m	£m	£m
Investment variance1				(599)	84	(27)
M&A related and other variances				(45)	(27)	(123)
Total investment and other variances				(644)	57	(150)
1. Investment variance includes differences between actual and long term expected investment return on traded and real assets, economic assumption changes (e.g. credit default and inflation), the impact of any difference between the actual allocated asset mix and the target long-term asset mix on new pension risk transfer business, and excludes the yield associated with assets held for future new pension risk transfer business from the valuation discount rate. The investment variance for the six months ended 30 June 2020 is a loss of £599m which is broadly made up of three significant items: 1) £483m in LGI, reflecting a reduction in the discount rate used to calculate protection liabilities, the rate being linked to UK government bond and US Treasury yields rates; 2) £307m in LGC, reflecting unrealised losses on our traded equity portfolio and valuation markdowns on certain retail assets; 3) offset partially by a positive variance of £96m in respect of the defined benefit pension scheme, reflecting the impact of the acquisition of annuity assets from LGR, and the beneficial rate difference between the IAS19 and annuity discount rates.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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
				2020	2020	2019	2019	2019	2019
				£m	p	£m	p	£m	p
Profit for the period attributable to equity holders				290	4.89	874	14.74	1,834	30.92
Less: earnings derived from discontinued operations				(19)	(0.32)	(27)	(0.46)	(23)	(0.39)
Basic earnings derived from continuing operations				271	4.57	847	14.28	1,811	30.53
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 2020					£m	m	p
Profit for the period attributable to equity holders					290	5,930	4.89
Net shares under options allocable for no further consideration					-	33	(0.03)
Conversion of restricted tier 1 notes					-	307	(0.23)
Total diluted earnings					290	6,270	4.63
Less: diluted earnings derived from discontinued operations					(19)	-	(0.30)
Diluted earnings derived from continuing operations					271	6,270	4.33
					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 31 December 2019					£m	m	p
Profit for the period attributable to equity holders					1,834	5,932	30.92
Net shares under options allocable for no further consideration					-	33	(0.17)
Total diluted earnings					1,834	5,965	30.75
Less: diluted earnings derived from discontinued operations					(23)	-	(0.39)
Diluted earnings derived from continuing operations					1,811	5,965	30.36
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 and conversion of restricted tier 1 notes.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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.

 

Continuing operations exclude the results of the Mature Savings division, and for 2019 the General Insurance division, which have been classified as discontinued following the group's announcements to sell these businesses to ReAssure Limited and Allianz respectively.

 

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	costs1	operations
For the six month period to 30 June 2020	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	721	196	123	88	(208)	920
Investment and other variances	80	(3)	(307)	(483)	71	(642)
Losses attributable to non-controlling interests	-	-	-	-	(17)	(17)
Profit/(loss) before tax attributable to equity holders	801	193	(184)	(395)	(154)	261
Tax (expense)/credit attributable to equity holders	(99)	(21)	33	70	10	(7)
Profit/(loss) for the period	702	172	(151)	(325)	(144)	254
					Group
					expenses	Total
					and debt	continuing
	LGR	LGIM2	LGC	LGI	costs2	operations
For the six month period to 30 June 2019	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	655	192	173	134	(168)	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	187	278	-	(83)	1,020
Tax (expense)/credit attributable to equity holders	(110)	(39)	(36)	-	3	(182)
Profit/(loss) for the period	528	148	242	-	(80)	838
					Group
					expenses	Total
					and debt	continuing
	LGR	LGIM2	LGC	LGI	costs2	operations
For the year ended 31 December 2019	£m	£m	£m	£m	£m	£m
Operating profit/(loss)#	1,569	394	363	314	(365)	2,275
Investment and other variances	43	(9)	91	(234)	(58)	(167)
Losses attributable to non-controlling interests	-	-	-	-	(24)	(24)
Profit/(loss) before tax attributable to equity holders	1,612	385	454	80	(447)	2,084
Tax (expense)/credit attributable to equity holders	(234)	(75)	(75)	12	75	(297)
Profit/(loss) for the year	1,378	310	379	92	(372)	1,787
1. Group expenses and debt costs include £21m of incremental costs incurred as a result of COVID-19.
2. As described in Note 2.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £13m for the six months ended 30 June 2020, and by £29m for the full year 2019.
# Operating profit for total continuing operations represents 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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
								2020		2019		2019
								£m		£m		£m
Total income								17,419		48,450		66,786
Adjusted for:
Share of loss/(profit) from associates and joint ventures net of tax								23		(6)		(17)
Gain on acquisition and disposal of subsidiaries, associates and joint ventures								-		(43)		(51)
Total revenue from continuing operations1								17,442		48,401		66,718
1. Continuing operations exclude the results of the Mature Savings division, and for 2019 the General Insurance division,which have been classified as discontinued operations.
(b) Total income
									LGC and		Total continuing
			LGR		LGIM1,2		LGI		other3		operations
For the six month period to 30 June 2020			£m		£m		£m		£m		£m
Internal income			-		102		-		(102)		-
External income			6,530		(1,812)		1,016		11,685		17,419
Total income			6,530		(1,710)		1,016		11,583		17,419
									LGC and		Total continuing
			LGR		LGIM1,2		LGI		other3		operations
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		operations
For the year ended 31 December 2019			£m		£m		£m		£m		£m
Internal income			-		188		-		(188)		-
External income			16,385		43,836		1,593		4,972		66,786
Total income			16,385		44,024		1,593		4,784		66,786
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.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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		operations
For the six month period to 30 June 2020			£m	£m	£m	£m
Investment contracts			38	-	-	38
Investment management fees			467	-	(96)	371
Transaction fees			9	-	-	9
Total fees from fund management and investment contracts2			514	-	(96)	418
					LGC and other1	Total continuing
			LGIM	LGI		operations
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 contracts2			475	-	(75)	400
					LGC and other1	Total continuing
			LGIM	LGI		operations
For the year ended 31 December 2019			£m	£m	£m	£m
Investment contracts			73	1	-	74
Investment management fees			903	-	(166)	737
Transaction fees			23	-	-	23
Total fees from fund management and investment contracts2			999	1	(166)	834
1. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
2. Fees from fund management and investment contracts are a component of Total revenue from continuing operations disclosed in Note 2.08 (ii)(a).

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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 other	Total continuing
				LGR	LGIM	LGI		operations
For the six month period to 30 June 2020				£m	£m	£m	£m	£m
House building				-	-	-	220	220
Professional services fees				1	1	33	-	35
Insurance broker				-	-	13	-	13
Total other operational income from contracts with customers1				1	1	46	220	268
							LGC and other	Total continuing
				LGR	LGIM	LGI		operations
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 customers1				1	1	60	454	516
							LGC and other	Total continuing
				LGR	LGIM	LGI		operations
For the year ended 31 December 2019				£m	£m	£m	£m	£m
House building				-	-	-	1,056	1,056
Professional services fees				2	2	91	-	95
Insurance broker				-	-	34	-	34
Total other operational income from contracts with customers1				2	2	125	1,056	1,185
1. Total other operational income from contract with customers is a component of Total revenue from continuing operations disclosed in Note 2.08 (ii)(a) and excludes the share of profit/loss from associates and joint ventures and gain on acquisition and disposal of subsidiaries, associates and joint ventures.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Primary Financial Statements                                                                              Page 42

 

3.01 Consolidated Income Statement

		6 months		6 months		Full year
		2020		2019		2019
For the six month period to 30 June 2020	Notes	£m		£m		£m
Income
Gross written premiums		5,497		8,745		15,203
Outward reinsurance premiums		(1,303)		(1,522)		(3,452)
Net change in provision for unearned premiums		10		-		(66)
Net premiums earned		4,204		7,223		11,685
Fees from fund management and investment contracts		418		400		834
Investment return		12,552		40,262		53,014
Other operational income		245		565		1,253
Total income	2.08	17,419		48,450		66,786
Expenses
Claims and change in insurance contract liabilities		8,366		12,368		19,005
Reinsurance recoveries		(1,957)		(1,971)		(3,502)
Net claims and change in insurance contract liabilities		6,409		10,397		15,503
Change in investment contract liabilities		9,190		35,412		45,809
Acquisition costs		438		395		805
Finance costs		155		137		269
Other expenses		885		1,048		2,244
Total expenses		17,077		47,389		64,630
Profit before tax		342		1,061		2,156
Tax expense attributable to policyholder returns		(81)		(41)		(72)
Profit before tax attributable to equity holders		261		1,020		2,084
Total tax expense		(88)		(223)		(369)
Tax expense attributable to policyholder returns		81		41		72
Tax expense attributable to equity holders	4.05	(7)		(182)		(297)
Profit after tax from continuing operations	2.08	254		838		1,787
Profit after tax from discontinued operations1	4.02	19		27		23
Profit for the period		273		865		1,810
Attributable to:
Non-controlling interests		(17)		(9)		(24)
Equity holders		290		874		1,834
Dividend distributions to equity holders during the period	4.03	754		704		998
Dividend distributions to equity holders proposed after the period end	4.03	294		294		753
		p		p		p
Total basic earnings per share2	2.07	4.89		14.74		30.92
Total diluted earnings per share2	2.07	4.63		14.66		30.75
Basic earnings per share derived from continuing operations2	2.07	4.57		14.28		30.53
Diluted earnings per share derived from continuing operations2	2.07	4.33		14.21		30.36
1. Discontinued operations include the results of the Mature Savings division, following the group's announcement to sell the business to ReAssure Limited. (2019 included the results of the General Insurance division following its sale to Allianz, which completed on 31 December 2019).
2. All earnings per share calculations are based on profit attributable to equity holders of the company.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Primary Financial Statements                                                                              Page 43

 

3.02 Consolidated Statement of Comprehensive Income

 

	6 months	6 months	Full year
	2020	2019	2019
For the six month period to 30 June 2020	£m	£m	£m
Profit for the period	273	865	1,810
Items that will not be reclassified subsequently to profit or loss
Actuarial losses on defined benefit pension schemes	(146)	(69)	(62)
Tax on actuarial losses on defined benefit pension schemes	45	13	11
Total items that will not be reclassified subsequently to profit or loss	(101)	(56)	(51)
Items that may be reclassified subsequently to profit or loss
Exchange differences on translation of overseas operations	56	3	(67)
Movement in cross-currency hedge	75	27	13
Tax on movement in cross-currency hedge	(11)	(5)	(1)
Movement in financial investments designated as available-for-sale	(8)	65	72
Tax on movement in financial investments designated as available-for-sale	1	(11)	(15)
Total items that may be reclassified subsequently to profit or loss	113	79	2
Other comprehensive income/(expense) after tax	12	23	(49)
Total comprehensive income for the period	285	888	1,761
Total comprehensive income for the period attributable to:
Continuing operations	266	861	1,738
Discontinued operations	19	27	23
Total comprehensive income/(expense) for the period attributable to:
Non-controlling interests	(17)	(9)	(24)
Equity holders	302	897	1,785

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Primary Financial Statements                                                                              Page 44

 

3.03 Consolidated Balance Sheet

 

		As at	As at	As at
		30 Jun 2020	30 Jun 2019	31 Dec 2019
As at 30 June 2020	Notes	£m	£m	£m
Assets
Goodwill		68	62	64
Purchased interest in long term businesses and other intangible assets		221	158	190
Deferred acquisition costs		49	74	75
Investment in associates and joint ventures accounted for using the equity method		328	362	324
Property, plant and equipment		291	291	298
Investment property	4.04	8,041	7,140	7,695
Financial investments	4.04	513,584	471,118	498,376
Reinsurers' share of contract liabilities		6,530	5,413	5,810
Deferred tax assets	4.05	10	7	8
Current tax assets		508	476	468
Receivables and other assets		15,986	10,706	8,532
Assets of operations classified as held for sale	4.02	23,968	27,194	24,844
Cash and cash equivalents		21,700	14,224	13,923
Total assets		591,284	537,225	560,607
Equity
Share capital	4.06	149	149	149
Share premium	4.06	1,003	998	1,000
Employee scheme treasury shares		(76)	(62)	(65)
Capital redemption and other reserves		383	300	250
Retained earnings		7,453	7,376	8,033
Attributable to owners of the parent		8,912	8,761	9,367
Restricted tier 1 convertible notes	4.07	495	-	-
Non-controlling interests	4.08	34	66	55
Total equity		9,441	8,827	9,422
Liabilities
Non-participating insurance contract liabilities		82,792	73,869	77,317
Non-participating investment contract liabilities		327,380	315,603	320,594
Core borrowings	4.09	4,651	3,514	4,091
Operational borrowings	4.10	1,195	1,051	1,020
Provisions	4.13	1,336	1,202	1,220
UK deferred tax liabilities	4.05	186	193	189
Overseas deferred tax liabilities	4.05	184	197	182
Current tax liabilities		-	175	107
Payables and other financial liabilities	4.11	101,665	75,527	84,039
Other liabilities		540	719	804
Net asset value attributable to unit holders		33,883	24,909	31,507
Liabilities of operations classified as held for sale	4.02	28,031	31,439	30,115
Total liabilities		581,843	528,398	551,185
Total equity and liabilities		591,284	537,225	560,607

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Primary Financial Statements                                                                              Page 45

 

3.04 Condensed Consolidated Statement of Changes in Equity

 

 

			Employee	Capital		Equity	Restricted
			scheme	redemption		attributable	Tier 1	Non-
	Share	Share	treasury	and other	Retained	to owners	convertible	controlling	Total
For the six month period to 30 June 2020	capital	premium	shares	reserves1	earnings	of the parent	notes	interests	equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2020	149	1,000	(65)	250	8,033	9,367	-	55	9,422
Total comprehensive income for the period	-	-	-	113	189	302	-	(17)	285
Options exercised under share option schemes	-	3	-	-	-	3	-	-	3
Net movement in employee scheme treasury shares	-	-	(11)	(6)	11	(6)	-	-	(6)
Dividends	-	-	-	-	(754)	(754)	-	-	(754)
Restricted tier 1 convertible notes2	-	-	-	-	-	-	495	-	495
Movement in third party interests	-	-	-	-	-	-	-	(4)	(4)
Currency translation differences	-	-	-	26	(26)	-	-	-	-
As at 30 June 2020	149	1,003	(76)	383	7,453	8,912	495	34	9,441
1. Capital redemption and other reserves as at 30 June 2020 include share-based payments £79m, foreign exchange £150m, capital redemption £17m, hedging reserves £96m and available-for-sale reserves £41m.
2. See Note 4.07 for details.

 

			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.

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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 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 year	-	-	-	2	1,783	1,785	(24)	1,761
Options exercised under share option schemes	-	8	-	-	-	8	-	8
Net movement in employee scheme treasury shares	-	-	(13)	4	1	(8)	-	(8)
Dividends	-	-	-	-	(998)	(998)	-	(998)
Movement in third party interests	-	-	-	-	-	-	7	7
Currency translation differences	-	-	-	14	(14)	-	-	-
As at 31 December 2019	149	1,000	(65)	250	8,033	9,367	55	9,422
1. Capital redemption and other reserves as at 31 December 2019 include share-based payments £85m, foreign exchange £68m, capital redemption £17m, hedging reserves £32m and available-for-sale reserves £48m.

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Primary Financial Statements                                                                              Page 47

 

3.05 Consolidated Statement of Cash Flows

 

		6 months	6 months	Full year
		2020	2019	2019
For the six month period to 30 June 2020	Notes	£m	£m	£m
Cash flows from operating activities
Profit for the period		273	865	1,810
Adjustments for non cash movements in net profit for the period
Net (gains)/losses on financial investments and investment property		(6,969)	(37,069)	(45,516)
Investment income		(4,578)	(5,588)	(10,501)
Interest expense		179	164	322
Tax expense		(17)	411	598
Other adjustments		18	62	117
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss		6,032	413	(18,031)
Investments designated as available-for-sale		(35)	97	(179)
Other assets		(8,098)	(6,033)	(4,660)
Net increase/(decrease) in operational liabilities
Insurance contracts		5,187	9,157	13,089
Investment contracts		6,789	22,524	27,514
Other liabilities		5,537	7,472	21,313
Net increase/(decrease) in held for sale net liabilities		(1,181)	223	1,206
Cash from/(utilised in) operations		3,137	(7,302)	(12,918)
Interest paid		(127)	(140)	(263)
Interest received		2,469	2,532	5,047
Tax paid1		(279)	(219)	(540)
Dividends received		2,284	2,819	5,389
Net cash flows from/(utilised in) operations		7,484	(2,310)	(3,285)
Cash flows from investing activities
Net acquisition of plant, equipment, intangibles and other assets		(42)	(28)	(89)
Net disposal/(acquisition) of operations, net of cash (transferred)/acquired		1	76	198
Net disposal/(investment) in associates and joint ventures		-	(88)	29
Net cash flows generated/(utilised) from investing activities		(41)	(40)	138
Cash flows from financing activities
Dividend distributions to ordinary equity holders during the period	4.03	(754)	(704)	(998)
Options exercised under share option schemes	4.06	3	6	8
Treasury shares purchased for employee share schemes		(22)	(10)	(20)
Payment of lease liabilities		(18)	(12)	(33)
Proceeds from borrowings		869	151	1,309
Repayment of borrowings		(237)	(593)	(958)
Proceeds from issuance of Restricted tier 1 convertible notes, net of associated expenses		495	-	-
Net cash flows from/(utilised in) financing activities		336	(1,162)	(692)
Net (decrease)/increase in cash and cash equivalents		7,779	(3,512)	(3,839)
Exchange gains/(losses) on cash and cash equivalents		26	1	(16)
Cash and cash equivalents at 1 January (before reallocation of held for sale cash)		14,233	18,088	18,088
Total cash and cash equivalents		22,038	14,577	14,233
Less: cash and cash equivalents of operations classified as held for sale	4.02	(338)	(353)	(310)
Cash and cash equivalents at 30 June/31 December		21,700	14,224	13,923
1. Tax comprises UK corporation tax paid of £203m (H1 19: £126m; FY 19: £381m), withholding tax of £95m (H1 19: £105m; FY 19: £166m) and an overseas corporate tax refund of £19m (H1 19: £12m; FY 19: £7m).

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 48

 

4.01 Basis of preparation

 

The group financial information for the six months ended 30 June 2020 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 2020 year end. These policies are consistent with the principal accounting policies which were set out in the group's 2019 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 2019 financial statements, except as disclosed in Note 2.03.

                               

The results for the half year ended 30 June 2020 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 2019 have been taken from the group's 2019 Annual Report and Accounts. Therefore, these interim accounts should be read in conjunction with the 2019 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 2019 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 2019 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) Going concern

 

The group's business activities, together with the factors likely to affect its future development, performance and position in the current economic climate are set out in this Interim Management Report. The financial position of the group, its cash flows, capital and liquidity position and borrowing facilities are described in the Group Results. Principal risks and uncertainties are detailed on pages 24 to 25.

 

The Directors have made an assessment of the group's going concern, considering both the current performance and the group's outlook, which takes account of the current and future impact of the COVID-19 pandemic, using the information available up to the date of issue of this Interim Management Report.

 

The group manages and monitors its capital and liquidity under various stresses and adverse scenarios to understand the expected impact of market downturns, and the impact of a number of such capital stresses is disclosed on page 77. Our liquidity risk appetite requires sufficient sources of liquidity to be maintained to withstand liquidity shocks defined by a 1 in 200 scenario, and as a result of COVID-19 we have actively tested this through a series of simulations based upon an extreme but possible adverse scenario lasting twelve months. In addition, the group has tested the resilience of the balance sheet under a range of adverse scenarios which may arise as a result of the economic consequences of COVID-19. These scenarios of increasing severity ranged from short term market disruption to a persistence of the crisis into late 2021 and beyond with no successful vaccine development. These stresses, including the additional COVID-19 scenarios, and taking account of the wide range of management actions that are available, do not give rise to any material uncertainties over the ability of the group to continue as a going concern. Based upon the available information, the directors consider that the group has the plans and resources to manage its business risks successfully as it has a diverse range of businesses and remains financially strong despite the current increased uncertainty. Furthermore, in June 2020, the group completed the issuance of £500m of Restricted Tier 1 debt as an additional measure of prudence and to deliver further balance sheet strengthening, both to protect against longer-term economic uncertainty but also to enable the group to take advantage of opportunities as they arise.

 

Having reassessed the principal risks and uncertainties (both financial and operational) in light of COVID-19 and the current economic climate, as detailed on pages 24 to 25, the directors consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 49

 

4.01 Basis of preparation (continued)

 

(b) 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 2020.

 

Amendments to IFRS 3 - Business Combinations

These amendments, issued in October 2018, provide more guidance on the definition of a business. These amendments did not have any material impact on the group's consolidated financial statements.

 

Amendments to IAS 1 - Presentation of Financial Statements and IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors: 'Definition of Material'

These amendments, issued in October 2018, clarify the definition of 'material', and align the definition used in the Conceptual Framework and the standards themselves. These amendments did not have any material impact on the group's consolidated financial statements.

 

Amendments to References to the Conceptual Framework in IFRS Standards

These amendments, issued in March 2018, update the current conceptual framework with the aim to assist preparers of financial reports to develop consistent accounting policies for transactions. These amendments did not have any material impact on the group's consolidated financial statements.

 

Amendments to IFRS 9 - Financial Instruments, IAS 39 - Financial Instruments: Recognition and Measurement, and IFRS 7 - Financial Instruments: Disclosures: 'Interest Rate Benchmark Reform'

These amendments were issued in September 2019. They modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the IBOR reform. These amendments did not have any material impact on the group's consolidated financial statements.

 

Amendment to IFRS 16 Leases: 'COVID-19-Related Rent Concessions'

The amendment, issued in May 2020, provides an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification. Lessees can elect to account for such rent concessions in the same way as they would if they were not lease modifications. This amendment did not have any material impact on the group's consolidated financial statements.

 

(c) Future accounting developments

 

IFRS 17 - Insurance Contracts

IFRS 17, 'Insurance Contracts' was originally issued in May 2017 and subsequent amendments were issued in June 2020.  The standard is expected to be effective for annual periods beginning on or after 1 January 2023.  This reflects a two year delay to the original 2017 timetable confirmed by the IASB in their June 2020 amendments and remains subject to endorsement for use in the UK.  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 2020 to ensure technical compliance and to develop the required system and operational capability to implement the standard.

 

IFRS 9 - Financial Instruments

In July 2014, the IASB issued IFRS 9, 'Financial Instruments' which is effective for annual periods beginning on or after 1 January 2018. The 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 2020 the IASB agreed to extend the temporary exemption in IFRS 4 from applying IFRS 9 to annual reporting periods beginning on or after 1 January 2023. The group qualifies for, and is making use of, this deferral option.

 

The group has mobilised a project to assess the impact of IFRS 9 on its financial instruments, and work is on-going to develop the policies and operational changes required for the implementation of the standard, with a focus on the new expected credit losses impairment model.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 50

 

4.02 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 ReAssure Limited for a consideration of £650m. As part of the transaction, on 1 January 2018 the group entered into a risk transfer agreement with ReAssure Limited, whereby the group transferred all economic risks and rewards of the Mature Savings business to ReAssure Limited. 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. The sale is expected to complete in the second half of 2020 following the completion of the Part VII transfer.  As the legal transfer of the business has not yet occurred the Mature Savings business has been classified as held for sale on the Group's balance sheet as at 30 June 2020. The profit arising from the Mature Savings business in accordance with the risk transfer agreement has been recognised as "Profit after tax from discontinued operations" in the Consolidated Income Statement. Up until the Part VII this primarily reflects the unwind of expected underlying profits, which will offset the final profit on disposal.

 

4.03 Dividends and appropriations

		Dividend	Per share1	Dividend	Per share1	Dividend	Per share1
		6 months	6 months	6 months	6 months	Full year	Full year
		2020	2020	2019	2019	2019	2019
		£m	p	£m	p	£m	p
Ordinary dividends paid and charged to equity in the period:
- Final 2018 dividend paid in June 2019		-	-	704	11.82	704	11.82
- Interim 2019 dividend paid in September 2019		-	-	-	-	294	4.93
- Final 2019 dividend paid in June 2020		754	12.64	-	-	-	-
Total dividends		754	12.64	704	11.82	998	16.75
1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.
Subsequent to 30 June 2020, the directors declared an interim dividend of 4.93 pence per ordinary share. This dividend will be paid on 24 September 2020. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2020 and is not included as a liability in the Consolidated Balance Sheet as at 30 June 2020.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 51

 

4.04 Financial investments and investment property

 

				30 Jun 2020	30 Jun 2019	31 Dec 2019
				£m	£m	£m
Equities1				189,798	192,387	200,365
Debt securities2				299,168	275,086	286,916
Accrued interest				1,551	1,617	1,647
Derivative assets3				25,207	13,198	14,828
Loans4				19,357	12,861	16,814
Financial investments				535,081	495,149	520,570
Investment property				9,334	8,706	9,107
Total financial investments and investment property				544,415	503,855	529,677
Less: financial investments and investment property of operations classified as held for sale				(22,790)	(25,597)	(23,606)
Financial investments and investment property				521,625	478,258	506,071
1. Equity securities include investments in unit trusts of £13,615m (30 June 2019: £13,122m; 31 December 2019: £13,046m).
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 £27,550m (30 June 2019: £11,778m; 31 December 2019: £13,113m).
4. Loans include £444m (30 June 2019: £447m; 31 December 2019: £437m) 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).

 

All of the group's Level 2 assets have been valued 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 modeling 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 market prices. Following consultation with our pricing providers and a number of their contributing brokers, we have considered that these prices are not from a suitably active market and have therefore classified them as Level 2.

 

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 2020 (30 June 2019; 31 December 2019: No significant transfers). Transfers into and out of Level 3 are disclosed in Note 4.04 (b).

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 52

 

4.04 Financial investments and investment property (continued)

 

(a) Fair value hierarchy (continued)
					Total	Level 1	Level 2	Level 3
For the six month period to 30 June 2020					£m	£m	£m	£m
Shareholder
Equity securities					2,622	1,476	-	1,146
Debt securities					4,570	1,433	2,304	833
Accrued interest					21	6	12	3
Derivative assets					293	6	287	-
Loans at fair value					569	-	569	-
Investment property					234	-	-	234
Non profit non-unit linked
Equity securities					190	186	-	4
Debt securities					75,867	9,689	46,570	19,608
Accrued interest					539	27	461	51
Derivative assets					22,095	-	22,095	-
Loans at fair value					1,309	-	1,309	-
Investment property					4,016	-	-	4,016
With-profits
Equity securities					2,846	2,664	-	182
Debt securities					4,922	1,534	3,388	-
Accrued interest					38	8	30	-
Derivative assets					295	3	292	-
Loans at fair value					450	-	450	-
Investment property					455	-	-	455
Unit linked
Equity securities					184,140	183,466	21	653
Debt securities					213,809	152,925	60,598	286
Accrued interest					953	435	518	-
Derivative assets					2,524	174	2,350	-
Loans at fair value					16,585	-	16,585	-
Investment property					4,629	-	-	4,629
Total financial investments and investment property at fair value1,2					543,971	354,032	157,839	32,100
1. This table excludes loans (including accrued interest) of £444m, which are held at amortised cost.
2. This table includes financial investments of £21,497m and investment property of £1,293m relating to assets of operations classified as held for sale.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 53

 

4.04 Financial investments and investment property (continued)

 

(a) Fair value hierarchy (continued)
					Total	Level 1	Level 2	Level 3
For the six month period to 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 relating to assets of operations classified as held for sale.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 54

 

4.04 Financial investments and investment property (continued)

 

(a) Fair value hierarchy (continued)
					Total	Level 1	Level 2	Level 3
For the year ended 31 December 2019					£m	£m	£m	£m
Shareholder
Equity securities					2,670	1,579	-	1,091
Debt securities					5,059	1,038	3,175	846
Accrued interest					22	6	13	3
Derivative assets					108	3	105	-
Loans at fair value					632	-	632	-
Investment property					254	-	-	254
Non profit non-unit linked
Equity securities					194	158	32	4
Debt securities					69,530	8,281	43,342	17,907
Accrued interest					531	29	464	38
Derivative assets					11,448	-	11,444	4
Loans at fair value					630	-	630	-
Investment property					3,798	-	-	3,798
With-profits
Equity securities					3,103	2,908	-	195
Debt securities					5,468	1,590	3,878	-
Accrued interest					44	11	33	-
Derivative assets					115	8	107	-
Loans at fair value					397	-	397	-
Investment property					507	-	-	507
Unit linked
Equity securities					194,398	191,687	1,966	745
Debt securities					206,859	144,072	62,512	275
Accrued interest					1,050	499	551	-
Derivative assets					3,157	202	2,955	-
Loans at fair value					14,718	-	14,718	-
Investment property					4,548	-	-	4,548
Total financial investments and investment property at fair value1,2					529,240	352,071	146,954	30,215
1. This table excludes loans (including accrued interest) of £437m, which are held at amortised cost.
2. This table includes financial investments of £22,194m and investment property of £1,412m relating to assets of operations classified as held for sale.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 55

 

4.04 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.
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.
Asset valuation approach at 30 June 2020
While recognising the volatility within asset markets, our approach to the valuation of assets as at 30 June 2020 was substantially consistent with our usual processes, policies and methodologies. However, we have applied increased focus on the valuation of those assets more directly impacted by the COVID-19 pandemic, particularly Level 3 assets. Given the diversity of our portfolio, the impact has been varied with certain asset classes and market sectors more exposed to the impact of COVID-19 than others. In assessing the valuation of such assets, in line with applicable standards and guidance (including compliance with Royal Institution of Chartered Surveyors (RICS) and International Private Equity and Venture Capital (IPEV) guidelines), we have both projected the short-term impact on earnings and cash flows of the current market volatility, while continuing to review the assets' ability to deliver longer term returns aligned to their investment cases.
Equity securities
Level 3 equity securities amount to £1,985m (30 June 2019: £1,856m; 31 December 2019: £2,035m), of which the majority is made up of holdings in 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
Lifetime mortgage (LTM) loans amount to £5,478m (30 June 2019: £3,990m; 31 December 2019: £4,733m). 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. The sensitivity disclosure in 4.04 (c) highlights the illiquidity premiums as the most significant unobservable input and reflects, among other assumptions, a variation in the inferred illiquidity premium of 20bps. The mortgages include a no negative equity guarantee (NNEG) to borrowers. This ensures that if there is a shortfall between the sale proceeds of the house and the outstanding loan balance on redemption of the loan, the value of the loan will be reduced by this amount. The NNEG on loan redemption is valued as a series of put options, which we calculate using a variant of the Black-Scholes formula. Key assumptions in the valuation of lifetime mortgages include long-term property growth rates, property index volatility, voluntary early repayments and longevity assumptions. The valuation as at 30 June 2020 reflects a long-term property growth rate assumption of RPI + 0.1%, after allowing for the effects of dilapidation.
Private credit loans (including commercial real estate loans) amount to £11,661m (30 June 2019: £9,421m; 31 December 2019: £10,998m). 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 yield 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. The sensitivity disclosure in 4.04 (c) highlights credit spreads as the most significant unobservable input and reflects, among other assumptions, a variation in the discount rate applied of 20bps. 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 11.1 years, with a weighted average life of 16.3 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 £1,400m (30 June 2019: £1,258m; 31 December 2019: £1,326m). 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 2020 reflects equivalent yield ranges between 2% and 7% and estimated rental values (ERV) between £10 and £337 per sq.ft.
Private placements held by the US business amount to £1,530m (30 June 2019: £1,043m; 31 December 2019: £1,344m). 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 2020 reflects illiquidity premiums between 10 and 70bps.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 56

 

4.04 Financial investments and investment property (continued)

 

(b) Level 3 assets measured at fair value (continued)

Commercial mortgage loans amount to £469m (30 June 2019: £357m; 31 December 2019: £414m) 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 2020 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 £9,334m (30 June 2019: £8,706m; 31 December 2019: £9,107m) 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 2020 reflects equivalent yield ranges between 2% and 18% and ERV between £1 and £356 per sq.ft. The sensitivity disclosure in 4.04 (c) highlights equivalent yields as the most significant unobservable input and reflects, among other assumptions, a variation in the yield of between 50-75bps, depending upon whether the valuation is subject to a "material valuation uncertainty" clause as per VPS3 and VPG10 of the RICS Red Book Global.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 57

 

4.04 Financial investments and investment property (continued)

 

(b) Level 3 assets measured at fair value (continued)
		Other				Other
		financial				financial
	Equity	invest-	Investment		Equity	invest-	Investment
	securities	ments	property	Total	securities	ments	property	Total
	2020	2020	2020	2020	2019	2019	2019	2019
	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January	2,035	19,073	9,107	30,215	1,757	13,915	8,608	24,280
Total gains/(losses) for the period
- in other comprehensive income	-	(44)	-	(44)	-	23		23
- realised and unrealised gains/(losses)1	(37)	1,038	(256)	745	38	907	(19)	926
Purchases / Additions	76	1,603	577	2,256	173	2,608	359	3,140
Sales / Disposals	(72)	(868)	(94)	(1,034)	(105)	(1,054)	(250)	(1,409)
Transfers into Level 3	44	5	-	49	2	-	-	2
Transfers out of Level 3	(61)	(26)	-	(87)	-	(57)	-	(57)
Other	-	-	-	-	(9)	-	8	(1)
As at 30 June	1,985	20,781	9,334	32,100	1,856	16,342	8,706	26,904
						Other
						financial
					Equity	invest-	Investment
					securities	ments	property	Total
					2019	2019	2019	2019
					£m	£m	£m	£m
As at 1 January					1,757	13,915	8,608	24,280
Total gains/(losses) for the period
- in other comprehensive income					-	20	-	20
- realised and unrealised gains / (losses)1					50	1,314	(86)	1,278
Purchases / Additions					416	5,680	1,187	7,283
Sales / Disposals					(199)	(1,850)	(675)	(2,724)
Transfers into Level 3					21	5	73	99
Transfers out of Level 3					(10)	(11)	-	(21)
As at 31 December					2,035	19,073	9,107	30,215
1. Realised and unrealised gains and losses are recognised in investment return in the Consolidated Income Statement.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 58

 

4.04 Financial investments and investment property (continued)

 

 (c) Effect of changes in assumptions on Level 3 assets

 

Fair values of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data.

 

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 by 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 (RICS). As a result of the current response to COVID-19, which has meant that independent valuers have been faced with a challenging set of circumstances on which to base judgment around valuation, a number of valuations (equating to c.12% of Level 3 assets, including unit linked) have been reported on the basis of "material valuation uncertainty" as per VPS3 and VPG10 of the RICS Red Book Global. Consequently, less certainty and a higher degree of caution should be attached to the valuations provided than would normally be the case. The independent valuers have confirmed that the inclusion of "material valuation uncertainty" clauses does not mean that the valuations cannot be relied upon. Rather, the clause is used to be clear and transparent with all parties that, in the context of the current environment, less certainty can be attached to valuations than would otherwise be the case.

 

·      For LTMs, the response to COVID-19 has led to increased dispersion in pricing which, coupled with both the general market uncertainty, has resulted in a higher level of uncertainty associated with these assets at the balance sheet date.

 

·      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 table below shows the sensitivity of the fair value of Level 3 asset valuations as at 30 June 2020 to changes in unobservable inputs to a reasonable alternative. In light of COVID-19, we have reviewed and reflected changes in those sensitivities, and further disclosure in how these sensitivities have been applied can be found in note 4.04 (b).

 

						Sensitivities
		Fair value 30 June 2020 £m		Most significant unobservable input		Positive Impact £m	Negative Impact £m
Lifetime mortgages		5,478		Illiquidity premium		493	(493)
Private credit loans		11,661		Credit spreads		758	(758)
Investment property		9,334		Equivalent yields		720	(821)
Other investments		5,627		Various		412	(455)
Total Level 3 assets		32,100				2,383	(2,527)
The above table demonstrates that the effect of a change in one or more unobservable inputs to reasonable alternative assumptions would result in a change in the fair value of Level 3 assets of +7/- 8% (30 June 2019: +/-6%; 31 December 2019: +/-6%). While the table demonstrates the effect of these changes in isolation, there may in reality be a correlation between the unobservable inputs and other factors. It should also be noted that some of these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 59

 

4.05 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	6 months	6 months	6 months	Full year	Full year
	2020	2020	2019	2019	2019	2019
	£m	£m	£m	£m	£m	£m
Profit before tax attributable to equity holders	261	285	1,020	1,053	2,084	2,112
Tax calculated at 19.00%	50	54	194	200	396	401
Adjusted for the effects of:
Recurring reconciling items:
Income not subject to tax	-	-	(1)	(1)	(4)	(4)
(Lower)/higher rate of tax on profits taxed overseas1	(49)	(49)	(11)	(11)	(117)	(117)
Non-deductible expenses	6	6	1	1	2	2
Differences between taxable and accounting investment gains	(2)	(2)	-	-	(10)	(10)
Adjustments for non-controlling interests	3	3	-	-	4	4
Foreign tax	2	2	-	-	6	6
Unrecognised tax losses	1	1	2	2	14	14
Non-recurring reconciling items:
Income not subject to tax	-	-	(2)	(2)	(6)	(6)
Non-deductible expenses	2	2	-	-	6	6
Adjustments in respect of prior years2	(14)	(14)	(2)	(2)	9	9
Impact of the revaluation of deferred tax balances3	7	7	1	1	(2)	(2)
Other	1	2	-	-	(1)	(1)
					-	-
Tax attributable to equity holders	7	12	182	188	297	302
Equity holders' effective tax rate4	2.7%	4.2%	17.8%	17.9%	14.3%	14.3%
1. The lower rate of tax on overseas profits is principally driven by the 0% rate of taxation arising in our Bermudan reinsurance company, which provides our business with regulatory capital flexibility for both our PRT business and our US term insurance business. This is partially offset by the tax rate of 21% that applies to our US operations.
2. Adjustments in respect of prior years relate to revisions of earlier estimates.
3. The Finance Act 2020 removed the planned reduction in the headline UK corporation tax rate from 19% to 17%. As a result, UK deferred tax assets and liabilities previously recognised at 17% have been revalued.
4. Equity holders' effective tax rate is calculated by dividing the tax attributable to equity holders over profit before tax attributable to equity holders.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 60

 

4.05 Tax (continued)

 

(b) Deferred tax
		30 Jun 2020	30 Jun 2019	31 Dec 2019
Deferred tax (liabilities)/assets		£m	£m	£m
Deferred acquisition expenses		50	29	35
- UK		(40)	(40)	(40)
- Overseas		90	69	75
Difference between the tax and accounting value of insurance contracts		(690)	(635)	(630)
- UK		(232)	(228)	(198)
- Overseas		(458)	(407)	(432)
Unrealised gains on investments		(57)	(175)	(184)
Excess of depreciation over capital allowances		18	12	15
Excess expenses		19	20	20
Accounting provisions and other		(59)	(32)	(44)
Trading losses1		257	179	217
Pension fund deficit		34	35	28
Acquired intangibles		(2)	(2)	(2)
Total net deferred tax liabilities		(430)	(569)	(545)
Less: net deferred tax liabilities of operations classified as held for sale		70	186	182
Net deferred tax liabilities		(360)	(383)	(363)
Analysed by:
- UK deferred tax assets
		5	2	3
- UK deferred tax liabilities		(186)	(193)	(189)
- Overseas deferred tax assets		5	5	5
- Overseas deferred tax liabilities2		(184)	(197)	(182)
Net deferred tax liabilities		(360)	(383)	(363)
1. Trading losses include UK trade and US operating losses of £5m (H1 19: £3m; FY 19: £4m) and £252m (H1 19: £176m; FY 19: £213m) respectively.
2. Overseas deferred tax liability is wholly comprised of US balances as at 30 June 2020.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 61

 

4.06 Share capital and share premium

 

							Number of
Authorised share capital							shares	£m
At 30 June 2020, 30 June 2019 and 31 December 2019: 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 2020					5,965,349,607		149	1,000
Options exercised under share option schemes					1,225,772		-	3
As at 30 June 2020					5,966,575,379		149	1,003
							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
Options exercised under share option schemes						1,084,188	-	2
As at 31 December 2019					5,965,349,607		149	1,000
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.

 

4.07 Restricted tier 1 convertible notes

 

On 24 June 2020, Legal & General Group Plc issued £500m of 5.625% perpetual restricted Tier 1 contingent convertible notes. The notes are callable at par between 24 March 2031 and 24 September 2031 (the First Reset Date) inclusive and every 5 years after the First Reset Date. If not called, the coupon from 24 September 2031 will be reset to the prevailing five year benchmark gilt yield plus 5.378%.

 

The notes have no fixed maturity date. Optional cancellation of coupon payments is at the discretion of the issuer and mandatory cancellation is upon the occurrence of certain conditions. The Tier 1 notes are therefore treated as equity and coupon payments are recognised directly in equity when paid. The notes rank junior to all other liabilities and senior to equity attributable to owners of the parent.  On the occurrence of certain conversion trigger events the notes are convertible into ordinary shares of the Issuer at the prevailing conversion price.

 

The notes are treated as restricted Tier 1 own funds for Solvency II purposes.

 

4.08 Non-controlling interests

 

Non-controlling interests represent third party interests in direct equity investments, including 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.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

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
		2020	2020	2019	2019	2019	2019
		£m	£m	£m	£m	£m	£m
Subordinated borrowings
10% Sterling subordinated notes 2041 (Tier 2)		312	339	312	364	312	353
5.5% Sterling subordinated notes 2064 (Tier 2)		589	688	589	684	589	726
5.375% Sterling subordinated notes 2045 (Tier 2)		603	672	602	673	603	691
5.25% US Dollar subordinated notes 2047 (Tier 2)		693	733	661	706	648	704
5.55% US Dollar subordinated notes 2052 (Tier 2)		407	435	388	419	380	405
5.125% Sterling subordinated notes 2048 (Tier 2)		399	442	399	445	399	459
3.75% Sterling subordinated notes 2049 (Tier 2)		598	595	-	-	598	613
4.5% Sterling subordinated notes 2050  (Tier 2)		499	521	-	-	-	-
Client fund holdings of group debt (Tier 2)1		(43)	(47)	(31)	(34)	(38)	(44)
Total subordinated borrowings		4,057	4,378	2,920	3,257	3,491	3,907
Senior borrowings
Sterling medium term notes 2031-2041		603	896	603	868	609	877
Client fund holdings of group debt1		(9)	(13)	(9)	(13)	(9)	(13)
Total senior borrowings		594	883	594	855	600	864
Total core borrowings		4,651	5,261	3,514	4,112	4,091	4,771
1. £52m (30 June 2019: £40m; 31 December 2019: £47m) of the group's subordinated and senior borrowings are 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.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 63

 

4.09 Core borrowings (continued)

 

Subordinated borrowings

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.

 

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.

 

3.75% Sterling subordinated notes 2049

On 26 November 2019, Legal & General Group Plc issued £600m of 3.75% dated subordinated notes. The notes are callable at par on 26 November 2029 and every five years thereafter. If not called, the coupon from 26 November 2029 will be reset to the prevailing five year benchmark gilt yield plus 4.05% p.a. These notes mature on 26 November 2049.

 

4.5% Sterling subordinated notes 2050

On 1 May 2020, Legal & General Group Plc issued £500m of 4.5% dated subordinated notes. The notes are callable at par on 1 November 2030 and every five years thereafter. If not called, the coupon from 1 November 2030 will be reset to the prevailing five year benchmark gilt yield plus 5.25% pa. These notes mature on 1 November 2050.

 

 

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

 

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.

 

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 64

 

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
	2020	2020	2019	2019	2019	2019
	£m	£m	£m	£m	£m	£m
Euro Commercial Paper	100	100	354	354	200	200
Non recourse borrowings	1,000	1,000	657	657	842	842
Bank loans and overdrafts	104	104	58	58	-	-
Total operational borrowings1	1,204	1,204	1,069	1,069	1,042	1,042
Less: liabilities of operations classified as held for sale	(30)	(30)	(29)	(29)	(29)	(29)
Operational borrowings	1,174	1,174	1,040	1,040	1,013	1,013
1. Unit linked borrowings with a carrying value of £21m (30 June 2019: £11m; 31 December: £7m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,195m (30 June 2019: £1,051m; 31 December 2019: £1,020m).

 

Syndicated Credit Facility
As at 30 June 2020, the group had in place a £1bn 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 2020.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 65

 

4.11 Payables and other financial liabilities

 

					30 Jun 2020	30 Jun 2019	31 Dec 2019
					£m	£m	£m
Derivative liabilities					27,550	11,778	13,113
Repurchase agreements1					55,309	46,994	56,884
Other financial liabilities2					19,544	17,353	14,476
Total payables and other financial liabilities					102,403	76,125	84,473
Less: Payables and other liabilities of operations classified as held for sale					(738)	(598)	(434)
Payables and other financial liabilities					101,665	75,527	84,039
1. The 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, lease liabilities, reinsurance payables and collateral repayable on short position reverse repurchase agreements. The value of collateral repayable on short position reverse repurchase agreements was £5,882m (30 June 2019: £6,114m; 31 December 2019: £7,673m).
Fair value hierarchy
							Amortised
			Total	Level 1	Level 2	Level 3	cost
As at 30 June 2020			£m	£m	£m	£m	£m
Derivative liabilities			27,550	232	27,301	17	-
Repurchase agreements			55,309	-	55,309	-	-
Other financial liabilities			19,544	6,552	61	138	12,793
Total payables and other financial liabilities			102,403	6,784	82,671	155	12,793
							Amortised
			Total	Level 1	Level 2	Level 3	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 31 December 2019			£m	£m	£m	£m	£m
Derivative liabilities			13,113	283	12,828	2	-
Repurchase agreements			56,884	-	56,884	-	-
Other financial liabilities			14,476	7,822	9	139	6,506
Total payables and other financial liabilities			84,473	8,105	69,721	141	6,506
Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as Level 3 liabilities. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (30 June 2019 and 31 December 2019: Increase of £4m).
Significant transfers between levels   There have been no significant transfers of liabilities between Levels 1, 2 and 3 for the period ended 30 June 2020 (30 June 2019 and 31 December 2019: no significant transfers).

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 66

 

4.12 Foreign exchange rates

 

 

Principal rates of exchange used for translation are:
Period end exchange rates				30 Jun 2020	30 Jun 2019	31 Dec 2019
United States dollar				1.24	1.27	1.33
Euro				1.10	1.12	1.18
				6 months	6 months	Full year
Average exchange rates				2020	2019	2019
United States dollar				1.26	1.29	1.28
Euro				1.14	1.15	1.14

 

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 2020, the combined obligation arising from these arrangements has been estimated at £1,199m (30 June 2019: £1,139m; 31 December 2019: £1,083m). The retirement benefit obligations are 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 £122m (30 June 2019: £161m; 31 December 2019: £115m).

 

 

 

Legal & General Group Plc

Half Year Report 2020 Part 2

 

IFRS Disclosure Notes                                                                                                  Page 67

 

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.

 

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.

 

4.15 Related party transactions
(i) 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 £47m (30 June 2019: £40m; 31 December 2019: £86m) for all employees.
At 30 June 2020, 30 June 2019 and 31 December 2019 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
					2020	2019	2019
					£m	£m	£m
Salaries					3	3	12
Share-based incentive awards					4	3	7
Key management personnel compensation					7	6	19

 

(ii) Services provided to and by related parties

All transactions between the group and associates, joint ventures and other related parties during the period are on commercial terms which are no more favourable than those available to companies in general.

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 £50m (30 June 2019: £78m; 31 December 2019: £78m) 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 at 30 June 2020 of £86m (30 June 2019: £81m; 31 December 2019: £83m), with a further commitment of £15m;

- The group has total other commitments of £1,253m to related parties (30 June 2019: £1,178m; 31 December 2019: £1,213m), of which £820m has been drawn at 30 June 2020 (30 June 2019: £821m; 31 December 2019: £749m).