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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Legal & General Group Plc | LSE:LGEN | London | Ordinary Share | GB0005603997 | ORD 2 1/2P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
-1.10 | -0.43% | 254.40 | 254.60 | 254.70 | 255.50 | 253.10 | 254.60 | 16,374,581 | 16:35:07 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
Ins Agents,brokers & Service | 36.48B | 457M | 0.0764 | 33.32 | 15.22B |
TIDMLGEN
RNS Number : 4600N
Legal & General Group Plc
09 August 2017
Legal & General Group Plc
Half-year Results 2017 Part 2
IFRS and Release from Operations Page 25
Operating profit
For the six months ended 30 June 2017
Full year 30.06.17 30.06.16 31.12.16 Notes GBPm GBPm GBPm From continuing operations Legal & General Retirement (LGR) 2.02 566 405 809 Legal & General Investment Management (LGIM) 2.03 194 171 366 Legal & General Capital (LGC) 2.05 142 135 257 Legal & General Insurance (LGI) 2.02 151 151 319 -------- -------- --------- - UK and Other 94 108 234 - US 57 43 85 -------- -------- --------- General Insurance 2.04 15 31 52 Savings 2.02 52 49 99 Operating profit from divisions 1,120 942 1,902 Group debt costs(1) (92) (86) (172) Group investment projects and expenses(2) 2.06 (40) (34) (102) Kingswood office closure costs - (45) (66) Operating profit 988 777 1,562 Investment and other variances 2.07 169 50 13 Gains/(losses) on non-controlling interests 6 (1) 7 Profit before tax attributable to equity holders 1,163 826 1,582 Tax expense attributable to equity holders of the company 2.14 (211) (159) (317) Profit for the period 952 667 1,265 Profit attributable to equity holders of the company 946 668 1,258 p p p Earnings per share(3) 2.10 15.94 11.27 21.22 Diluted earnings per share(3) 2.10 15.88 11.23 21.13 1. Group debt costs exclude interest on non recourse financing. 2. Group investment projects and expenses in H1 17 include restructuring costs of GBP12m (H1 16: GBP16m; FY 16: GBP54m). 3. All earnings per share calculations are based on profit attributable to equity holders of the company.
This supplementary operating profit information (one of the group's key performance indicators) provides further analysis of the results reported under IFRS and the group believes it provides shareholders with a better understanding of the underlying performance of the business in the year.
LGR represents worldwide pension risk transfer business (including longevity insurance), individual retirement and lifetime mortgages.
The LGIM segment represents institutional and retail investment management and workplace savings businesses.
LGC represents shareholder assets invested in direct investments, and traded and treasury assets.
LGI represents business in retail protection, group protection, networks, Legal & General Netherlands (LGN) (which was sold during April 2017) and protection business written in the USA (LGI US).
Savings represents business in platforms, SIPPs and mature savings including with-profits.
The General Insurance segment comprises short-term protection.
Operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Operating profit therefore reflects longer-term economic assumptions for the group's insurance businesses and shareholder funds, except for LGC's trading businesses (which reflects IFRS profit before tax) and LGI US (which excludes unrealised investment returns to align with the liability measurement under US GAAP). Variances between actual and smoothed investment return assumptions are reported below operating profit. Exceptional income and expenses which arise outside the normal course of business in the year, such as merger and acquisition, and start-up costs, are also excluded from operating profit.
During 2017, changes have been made to the organisational structure. Investment Discounts On Line Limited (the IDOL) has been transferred to LGI from LGR. Comparatives have been amended accordingly. The impact of this reclassification has been to reduce LGR H1 16 operating profit by GBP1m (FY 16: reduce by GBP2m), and increase LGI (UK and Other) H1 16 operating profit by GBP1m (FY 16: increase by GBP2m).
During 2016, the Insurance (excluding General Insurance) and LGA segments were combined to create the new Legal & General Insurance (LGI) segment. General Insurance is now presented as a separate segment.
IFRS and Release from Operations Page 26
2.01 Reconciliation of release from operations to operating profit before tax
The table below provides an analysis of the release from operations by each of the group's business segments, together with a reconciliation to operating profit before tax. Changes Operating New Net in Operating profit/ Release business release Exper- valuation Non-cash Inter- profit/ Tax (loss) from surplus/ from ience assump- items national (loss) expense/ before and For the six operations(1) (strain) operations variances tions other and after (credit) tax months other(2) tax ended 30 June 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm LGR(3) 256 51 307 59 104 (3) - 467 99 566 LGIM 165 (11) 154 - (2) 1 - 153 41 194 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- - LGIM excluding Workplace Savings (admin only) 153 - 153 - - - - 153 41 194 - Workplace Savings (admin only)(4) 12 (11) 1 - (2) 1 - - - - ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- LGC 119 - 119 - - - - 119 23 142 LGI 166 3 169 (28) 23 (13) (43) 108 43 151 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- - UK and Other(3) 86 3 89 (28) 23 (13) 4 75 19 94 - US 80 - 80 - - - (47) 33 24 57 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- General Insurance 12 - 12 - - - - 12 3 15 Savings 53 (2) 51 - 2 (11) - 42 10 52 Total from divisions 771 41 812 31 127 (26) (43) 901 219 1,120 Group debt costs (74) - (74) - - - - (74) (18) (92) Group investment projects and expenses (14) - (14) - - - (18) (32) (8) (40) Total 683 41 724 31 127 (26) (61) 795 193 988 Attributable to: Retained business 683 41 724 31 127 (26) (64) 792 192 984 Disposed operations - - - - - - 3 3 1 4 1. Release from operations includes dividends remitted from LGN of GBPnil (H1 16: GBP48m; FY 16: GBP70m) within the LGI (UK and Other) line and US dividends of GBP80m (H1 16: GBP61m; FY 16: GBP63m) within the LGI (US) line. 2. International and other includes GBP10m (H1 16: GBP13m; FY 16: GBP43m) of restructuring costs (GBP12m before tax) (H1 16: GBP16m before tax; FY 16: GBP54m before tax) within the Group investment projects and expenses line.
3. During 2017, changes have been made to the organisational structure. The IDOL business has been transferred to LGI from LGR. Comparatives have been amended accordingly. The impact of this reclassification has been to reduce LGR H1 16 release from operations by GBP1m (FY 16: reduce by GBP1m) and increase LGI (UK and Other) H1 16 release from operations by GBP1m (FY 16: increase by GBP1m). 4. This represents Workplace Savings admin only and excludes fund management profits. Release from operations for LGR, LGIM, LGI and Savings represents the expected IFRS surplus generated in the year from the in-force non profit annuities, workplace savings, protection and savings businesses using best estimate assumptions. The LGIM release from operations also includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from LGN and LGI US and operating profit after tax from the remaining LGI businesses. The Savings release from operations includes the shareholders' share of bonuses on with-profits business and operating profit after tax from the other Savings businesses. New business surplus/strain for LGR, LGIM, LGI and Savings represents the cost of acquiring new business and setting up prudent reserves in respect of the new business for UK non profit annuities, workplace savings, protection and savings, net of tax. The new business surplus and release from operations for LGR, LGIM, LGI and Savings exclude any capital held in excess of the prudent reserves from the liability calculation. Net release from operations for LGR, LGIM, LGI and Savings is defined as release from operations less new business strain. Release from operations and net release from operations for LGC and General Insurance represents the operating profit (net of tax). See Note 2.02 for more detail on experience variances, changes to valuation assumptions and non-cash items.
IFRS and Release from Operations Page 27
2.01 Reconciliation of release from operations to operating profit before tax (continued)
Changes Operating New Net in Operating profit/ Release business release Exper- valuation Non-cash Inter- profit/ Tax (loss) from surplus/ from ience assump- items national (loss) expense/ before and For the six operations(1) (strain) operations variances tions other and after (credit) tax months other(2) tax ended 30 June 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm LGR(3) 204 79 283 (11) 48 13 - 333 72 405 LGIM 145 (11) 134 1 - (1) - 134 37 171 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- - LGIM excluding Workplace Savings (admin only) 136 - 136 - - - - 136 38 174 - Workplace Savings (admin only)(4) 9 (11) (2) 1 - (1) - (2) (1) (3) ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- LGC 113 - 113 - - - - 113 22 135 LGI 196 7 203 (16) 17 (13) (87) 104 47 151 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- - UK and Other(3) 135 7 142 (16) 17 (13) (44) 86 22 108 - US 61 - 61 - - - (43) 18 25 43 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- General Insurance 25 - 25 - - - - 25 6 31 Savings 51 (3) 48 - 5 (14) - 39 10 49 Total from divisions 734 72 806 (26) 70 (15) (87) 748 194 942 Group debt costs (69) - (69) - - - - (69) (17) (86) Group investment projects and expenses (10) - (10) - - - (17) (27) (7) (34) Kingswood office closure costs(5) - - - - - - (36) (36) (9) (45) Total 655 72 727 (26) 70 (15) (140) 616 161 777 Attributable to: Retained business 609 72 681 (26) 70 (12) (96) 617 161 778 Disposed operations 46 - 46 - - (3) (44) (1) - (1) 1. Operational cash generation includes dividends remitted from LGN of GBP48m within the LGI (UK and Other) line and LGI (US) of GBP61m. 2. International and other includes GBP13m of restructuring costs (GBP16m before tax) within the group investment projects and expenses line. 3. LGI (UK and Other) includes the IDOL business which was previously reported in LGR. Comparatives have been restated accordingly. 4. This represents Workplace Savings admin only and excludes fund management profits. 5. The Kingswood office closure costs reflect expenditure in relation to rent and rates, as well as the write-off of previously capitalised expenditure.
IFRS and Release from Operations Page 28
2.01 Reconciliation of release from operations to operating profit before tax (continued)
Changes Operating New Net in Operating profit/ Release business release Exper- valuation Non-cash Inter- profit/ Tax (loss) from surplus/ from ience assump- items national (loss) expense/ before and For the year operations(1) (strain) operations variances tions other and after (credit) tax ended other(2) tax 31 December GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm 2016 LGR 432 159 591 34 40 6 - 671 138 809 LGIM 308 (22) 286 (1) - - - 285 81 366 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- - LGIM excluding Workplace Savings (admin only) 290 - 290 - - - - 290 82 372 - Workplace Savings (admin(3) only) 18 (22) (4) (1) - - - (5) (1) (6) ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- LGC 214 - 214 - - - - 214 43 257 LGI 318 23 341 (11) 5 (29) (79) 227 92 319 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- - UK and Other 255 23 278 (11) 5 (29) (57) 186 48 234 - US 63 - 63 - - - (22) 41 44 85 ------------- -------- ---------- --------- --------- -------- -------- --------- -------- --------- General Insurance 42 - 42 - - - - 42 10 52 Savings 104 (5) 99 4 8 (32) - 79 20 99 Total from divisions 1,418 155 1,573 26 53 (55) (79) 1,518 384 1,902 Group debt costs (138) - (138) - - - - (138) (34) (172) Group investment projects
and expenses (24) - (24) - - - (59) (83) (19) (102) Kingswood office closure costs(4) - - - - - - (53) (53) (13) (66) Total 1,256 155 1,411 26 53 (55) (191) 1,244 318 1,562 Attributable to: Retained business 1,186 155 1,341 26 53 (50) (133) 1,237 315 1,552 Disposed operations 70 - 70 - - (5) (58) 7 3 10 1. Release from operations includes dividends remitted from LGN of GBP70m within the LGI (UK and Other) line and LGI (US) of GBP63m. 2. International and other includes GBP43m of restructuring costs (GBP54m before tax) within the Group investment projects and expenses line. 3. This represents Workplace Savings admin only and excludes fund management profits. 4. The Kingswood office closure costs reflect expenditure in relation to rent and rates, as well as the write-off of previously capitalised expenditure.
IFRS and Release from Operations Page 29
2.02 Analysis of LGR, LGI and Savings operating profit
LGR LGI Savings LGR LGI Savings 30.06.17 30.06.17 30.06.17 30.06.16 30.06.16 30.06.16 GBPm GBPm GBPm GBPm GBPm GBPm Net release from operations 307 169 51 283 203 48 Experience variances Persistency(1) - (13) - - 1 - Mortality/morbidity(2) 3 (16) - 2 (15) - Expenses (6) 2 1 (7) 3 2 Project and development costs (2) (1) (2) (1) (1) - Other(3) 64 - 1 (5) (4) (2) Total experience variances 59 (28) - (11) (16) - Changes to valuation assumptions Persistency - - - - - 5 Mortality/morbidity(4) 104 25 - 48 2 - Expenses - - - - 25 - Other - (2) 2 - (10) - Total changes in valuation assumptions 104 23 2 48 17 5 Movement in non-cash items Deferred tax - - - - 1 - Acquisition expense tax relief (5) - (9) (1) - (13) (2) Deferred Acquisition Costs (DAC)(6) - - (15) - - (15) Deferred Income Liabilities (DIL)(6) - - 5 - - 6 Other (3) (4) - 13 (1) (3) Total non-cash movement items and other (3) (13) (11) 13 (13) (14) International and other(7) - (43) - - (87) - Operating profit after tax 467 108 42 333 104 39 Tax gross up 99 43 10 72 47 10 Operating profit before tax 566 151 52 405 151 49 1. The H1 17 LGI persistency experience variance primarily reflects a higher number of group protection scheme renewals than anticipated, coupled with retail protection negative lapse experience and cancellations. 2. LGI mortality/morbidity experience variance in H1 17 primarily reflects adverse claims experience on the group protection book of business. 3. The H1 17 positive LGR other experience variance is primarily due to the GBP60m release of reserves from moving to finalised PRT scheme data, and a GBP16m model change to improve consistency between deferred and immediate annuity liability valuation models. This is partially offset by a GBP12m negative impact from prudent mortality experience assumptions during the period where full death data is not yet available. 4. The H1 17 LGR mortality/morbidity valuation assumption changes primarily reflect an update of the portfolio base mortality assumptions following the review of mortality rates seen over the last few years. The LGI mortality/morbidity valuation assumption changes reflects an improvement in individual protection mortality reserving basis modelling. The H1 16 mortality/morbidity valuation assumption change in LGR primarily reflects a change in the treatment to historic longevity insurance deals where future fees in excess of prudent estimates of longevity and expense experience are now included as an offset to IFRS reserves. 5. Net release from operations for LGI and Savings recognises tax relief from prior year acquisition expenses, which are spread evenly over seven years under relevant 'I-E' tax legislation in the period the cash flows actually occur. In contrast, operating profit typically recognises the value of these future cash flows in the same period as the underlying expense as deferred tax amounts. The reconciling amounts arising from these items are included in the table above. Following the removal of new retail protection business from the 'I-E' tax regime, and the removal of commission from new insured savings business under the Retail Distribution Review at the end of 2012, no material amount of deferred tax assets arise on new acquisition expenses and the value of these future cash flows for post-2013 acquisition expenses have been reflected within net release from operations. The residual prior year acquisition expenses will run off predictably to 2018. 6. The DAC in Savings represents the amortisation charges offset by new acquisition costs deferred in the year. The DIL reflects initial fees on insured savings business which relate to the future provision of services and are deferred and amortised over the anticipated period in which these services are provided. 7. LGI Other in H1 17 reflects the difference between the dividend (release from operations) remitted from LGA of GBP80m (H1 2016: dividends remitted from LGN of GBP48m and LGA of GBP61m) and the LGA and India operating profit after tax (H1 16: LGN, LGA and India operating profit after tax).
IFRS and Release from Operations Page 30
2.02 Analysis of LGR, LGI and Savings operating profit (continued)
LGR LGI Savings Full year Full year Full year 31.12.16 31.12.16 31.12.16 GBPm GBPm GBPm Net release from operations 591 341 99 Experience variances Persistency 2 (2) - Mortality/morbidity(1) 47 (34) - Expenses (9) 4 7 Project and development costs (21) 2 (4) Other 15 19 1 Total experience variances 34 (11) 4 Changes to valuation assumptions Persistency(2) - (52) 5 Mortality/morbidity(3) 40 4 - Expenses(4) - 53 - Other - - 3 Total valuation assumption changes 40 5 8 Movement in non-cash items Deferred tax - - 1 Acquisition expense tax relief (5) - (27) (3) Deferred Acquisition Costs (DAC)(6) - - (28) Deferred Income Liabilities (DIL)(6) - - 9 Other 6 (2) (11) Total non-cash movement items 6 (29) (32) International and other(7) - (79) - Operating profit after tax 671 227 79 Tax gross up 138 92 20
Operating profit before tax 809 319 99 1. The LGR mortality/morbidity experience variance reflects higher than expected annuitant deaths experience over FY 16. LGI mortality/morbidity experience variance in FY 16 primarily reflects adverse claims experience on the group protection book of business. 2. The LGI persistency valuation assumption change in FY 16 is the result of a review of prudence within the lapse assumption for level and decreasing term assurance products. 3. The mortality/morbidity valuation assumption change in LGR primarily reflects a change in the treatment to historic longevity insurance deals where future fees in excess of prudent estimates of longevity and expense experience are now included as an offset to IFRS reserves. 4. The LGI expense valuation assumption change is the result of the reduction in unit costs following recent expense savings actions, together with a review of the prudence within renewal expenses on our protection products. 5. Net release from operations for LGI and Savings recognises tax relief from prior year acquisition expenses, which are spread evenly over seven years under relevant 'I-E' tax legislation in the period the cash flows actually occur. In contrast, operating profit typically recognises the value of these future cash flows in the same period as the underlying expense as deferred tax amounts. The reconciling amounts arising from these items are included in the table above. Following the removal of new retail protection business from the 'I-E' tax regime, and the removal of commission from new insured savings business under the Retail Distribution Review at the end of 2012, no material amount of deferred tax assets arise on new acquisition expenses and the value of these future cash flows for post-2013 acquisition expenses have been reflected within net release from operations. The residual prior year acquisition expenses will run off predictably to 2018. 6. The DAC in Savings represents the amortisation charges offset by new acquisition costs deferred in the year. The DIL reflects initial fees on insured savings business which relate to the future provision of services and are deferred and amortised over the anticipated period in which these services are provided. 7. LGI Other in FY 16 reflects the difference between the dividend (release from operations) remitted from LGN and LGI (US) of GBP70m and GBP63m respectively and the LGN, LGI (US) and India operating profit after tax.
IFRS and Release from Operations Page 31
2.03 LGIM operating profit
Full year 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Investment management revenue (excluding 3rd party market data)(1) 382 332 700 Investment management transactional revenue(2) 12 16 30 Investment management expenses (excluding 3rd party market data)(1) (200) (174) (358) Workplace Savings (admin only) operating loss(3) - (3) (6) Total LGIM operating profit 194 171 366 1. Investment management revenue and expenses excludes income and costs of GBP8m in relation to provision of 3rd party market data (H1 16: GBP5m each; FY 16: GBP14m each). 2. Transactional revenue includes execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees for property funds. 3. This represents Workplace Savings admin only and excludes fund management profits.
2.04 General Insurance operating profit and combined operating ratio
Full year 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm General Insurance operating profit(1) 15 31 52 General Insurance combined operating ratio (%)(2) 95 85 89 1. The General Insurance operating profit includes the underwriting result and smoothed investment return. 2. The calculation of the General Insurance combined operating ratio incorporates claims, commission and expenses as a percentage of net earned premiums.
2.05 LGC operating profit
Full year 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Direct investments 69 68 121 Traded portfolio including treasury operations 73 67 136 Total LGC operating profit 142 135 257
2.06 Group investment projects and central expenses
Full year 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Group investment projects and central expenses (28) (18) (48) Restructuring costs(1) (12) (16) (54) Total group investment projects and expenses (40) (34) (102) 1. Restructuring costs exclude the Kingswood office closure costs which have been presented separately.
IFRS and Release from Operations Page 32
2.07 Investment and other variances
Full year 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Investment variance(1) 198 58 147 M&A related(2) 6 (4) (102) Other(3) (35) (4) (32) Total investment and other variances 169 50 13 1. H1 17 investment variance is positive, primarily driven by the outperformance of UK equity markets to expectations. The defined benefit pension scheme variance of GBP111m contained within this line (H1 16: GBP31m; FY 16: GBP29m) primarily reflects the impact of the acquisition of annuities as an asset of the scheme from LGR, and the interest rate difference between the IAS 19 and annuity discount rates. A segmental analysis of Investment and other variances can be found in note 2.09 (a). 2. M&A related includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. H1 17 includes the GBP17m net gain resulting from the disposal of Legal & General Netherlands. (H1 16: includes the GBP4m net gain resulting from the disposal of subsidiaries during the period; FY 16: includes the GBP60m net loss resulting from the classification of Cofunds as held for sale (GBP64m loss) and the disposal of Suffolk Life (GBP4m gain)). 3. Other includes new business start-up costs and other non-investment related variance items.
IFRS and Release from Operations Page 33
Consolidated Income Statement
For the six months ended 30 June 2017
Full year 30.06.17 30.06.16 31.12.16 Notes GBPm GBPm GBPm Income Gross written premiums 4.02 3,716 5,492 10,325 Outward reinsurance premiums (866) (719) (1,573) Net change in provision for unearned premiums (11) 6 4 Net premiums earned 2,839 4,779 8,756 Fees from fund management and investment contracts 481 523 1,068 Investment return 15,457 36,978 67,824 Operational income 141 243 321 Total income 2.09 18,918 42,523 77,969 Expenses Claims and change in insurance liabilities 3,449 11,377 17,896 Reinsurance recoveries (494) (1,454) (2,745) Net claims and change in insurance liabilities 2,955 9,923 15,151 Change in provisions for investment contract liabilities 13,618 30,569 58,578 Acquisition costs 377 375 793 Finance costs 106 98 198 Other expenses 468 748 1,569 Transfers to/(from) unallocated divisible surplus 84 (174) (187) Total expenses 17,608 41,539 76,102
Profit before tax 1,310 984 1,867 Tax expense attributable to policyholder returns (147) (158) (285) Profit before tax attributable to equity holders 1,163 826 1,582 Total tax expense (358) (317) (602) Tax expense attributable to policyholder returns 147 158 285 Tax expense attributable to equity holders 2.14 (211) (159) (317) Profit for the period 2.09 952 667 1,265 Attributable to: Non-controlling interests 2.20 6 (1) 7 Equity holders of the company 946 668 1,258 Dividend distributions to equity holders of the company during the period 2.16 616 592 830 Dividend distributions to equity holders of the company proposed after the period end 2.16 256 238 616 p p p Earnings per share(1) 2.10 15.94 11.27 21.22 Diluted earnings per share(1) 2.10 15.88 11.23 21.13 1. All earnings per share calculations are based on profit attributable to equity holders of the company.
IFRS and Release from Operations Page 34
Consolidated Statement of Comprehensive Income
For the six months ended 30 June 2017
30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Profit for the period 952 667 1,265 Items that will not be reclassified subsequently to profit or loss Actuarial losses on defined benefit pension schemes (89) (62) (138) Tax on actuarial losses on defined benefit pension schemes 16 12 17 Actuarial gains on defined benefit pension schemes transferred to unallocated divisible surplus 33 23 51 Tax on actuarial gains on defined benefit pension schemes transferred to unallocated divisible surplus (6) (4) (6) Total items that will not be reclassified to profit or loss subsequently (46) (31) (76) Items that may be reclassified subsequently to profit or loss Exchange differences on translation of overseas operations (44) 116 190 Movement in cross-currency hedge 20 - - Net change in financial investments designated as available-for-sale 28 66 (4) Tax on net change in financial investments designated as available-for-sale (10) (23) 1 Total items that may be reclassified to profit or loss subsequently (6) 159 187 Other comprehensive (expense)/income after tax (52) 128 111 Total comprehensive income for the period 900 795 1,376 Total comprehensive income attributable to: Non-controlling interests 6 (1) 7 Equity holders of the company 894 796 1,369
IFRS and Release from Operations Page 35
Consolidated Balance Sheet
As at 30 June 2017
30.06.17 30.06.16(1) 31.12.16(1) Notes GBPm GBPm GBPm Assets Goodwill 11 79 11 Purchased interest in long term businesses and other intangible assets 133 251 155 Deferred acquisition costs 2,032 2,007 2,105 Investment in associates and joint ventures 305 237 283 Property, plant and equipment 69 97 76 Investment property 2.13/3.04 8,714 8,227 8,150 Financial investments 2.13/3.04 435,861 403,237 428,544 Reinsurers' share of contract liabilities 5,300 4,955 5,593 Deferred tax asset 2.14 5 5 5 Current tax recoverable 358 271 297 Other assets 11,262 10,900 5,022 Assets of operations classified as held for sale 2.12 - - 2,265 Cash and cash equivalents 15,805 12,842 15,348 Total assets 479,855 443,108 467,854 Equity Share capital 2.17 149 149 149 Share premium 985 978 981 Employee scheme treasury shares (40) (32) (30) Capital redemption and other reserves 211 211 212 Retained earnings 5,910 5,285 5,633 Attributable to owners of the parent 7,215 6,591 6,945 Non-controlling interests 2.20 350 292 338 Total equity 7,565 6,883 7,283 Liabilities Participating insurance contracts 5,579 5,864 5,794 Participating investment contracts 5,180 5,260 5,271 Unallocated divisible surplus 719 693 661 Value of in-force non-participating contracts (145) (135) (206) Participating contract liabilities 11,333 11,682 11,520 Non-participating insurance contracts 61,097 58,437 60,779 Non-participating investment contracts 325,059 300,605 321,177 Non-participating contract liabilities 386,156 359,042 381,956 Core borrowings 2.18 3,499 3,064 3,071 Operational borrowings 2.19 553 411 430 Provisions 1,358 1,205 1,328 Deferred tax liabilities 2.14 840 729 813 Current tax liabilities 171 120 117 Payables and other financial liabilities 2.15 43,709 36,756 37,347 Other liabilities 509 617 594 Net asset value attributable to unit holders 24,162 22,599 21,573 Liabilities of operations classified as held for sale 2.12 - - 1,822 Total liabilities 472,290 436,225 460,571 Total equity and liabilities 479,855 443,108 467,854 1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
IFRS and Release from Operations Page 36
Condensed Consolidated Statement of Changes in Equity
Employee Capital Equity scheme redemption attributable Non- Share Share treasury and other Retained to owners controlling Total of the capital premium shares reserves(1) earnings parent interests equity For the six GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm months ended 30 June 2017 As at 1 January 2017 149 981 (30) 212 5,633 6,945 338 7,283 Total comprehensive (expense)/income for the period - - - (6) 900 894 6 900 Options exercised under share option schemes - 4 - - - 4 - 4 Net movement in employee scheme treasury shares - - (10) (3) 1 (12) - (12)
Dividends - - - - (616) (616) - (616) Movement in third party interests - - - - - - 6 6 Currency translation differences - - - 8 (8) - - - As at 30 June 2017 149 985 (40) 211 5,910 7,215 350 7,565 1. Capital redemption and other reserves include Share-based payments GBP57m (H1 16: GBP64m; FY 16: GBP60m), Foreign exchange GBP99m (H1 16: GBP81m; FY 16: GBP135m), Capital redemption GBP17m (H1 16: GBP17m; FY 16: GBP17m), Available-for-sale reserves GBP17m (H1 16: GBP48m; FY 16: GBP(1)m) and Hedging reserves GBP21m (H1 16: GBP1m; FY 16: GBP1m). Employee Capital Equity scheme redemption attributable Non- Share Share treasury and other Retained to owners controlling Total of the capital premium shares reserves earnings parent interests equity For the six GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm months ended 30 June 2016 As at 1 January 2016 149 976 (30) 89 5,220 6,404 289 6,693 Total comprehensive income/(expense) for the period - - - 159 637 796 (1) 795 Options exercised under share option schemes - 2 - - - 2 - 2 Net movement in employee scheme treasury shares - - (2) (5) (12) (19) - (19) Dividends - - - - (592) (592) - (592) Movement in third party interests - - - - - - 4 4 Currency translation differences - - - (32) 32 - - - As at 30 June 2016 149 978 (32) 211 5,285 6,591 292 6,883 Employee Capital Equity scheme redemption attributable Non- Share Share treasury and other Retained to owners controlling Total of the capital premium shares reserves earnings parent interests equity For the year GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ended 31 December 2016 As at 1 January 2016 149 976 (30) 89 5,220 6,404 289 6,693 Total comprehensive income for the year - - - 187 1,182 1,369 7 1,376 Options exercised under share option scheme - 5 - -(-) - 5 - 5 Net movement in employee scheme treasury shares - - - (9)(-) 6 (3) - (3) Dividends - - - - (830) (830) - (830) Movement in third party interests - - - - - - 42 42 Currency translation differences - - - (55) 55 - - - As at 31 December 2016 149 981 (30) 212(-) 5,633 6,945 338 7,283
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Consolidated Cash Flow Statement
For the six months ended 30 June 2017
Full year 30.06.17 30.06.16(1) 31.12.16(1) Notes GBPm GBPm GBPm Cash flows from operating activities Profit for the period 952 667 1,265 Adjustments for non cash movements in net profit for the period Realised and unrealised (gains) on financial investments and investment properties (9,588) (31,213) (53,262) Investment income (5,396) (5,164) (9,390) Interest expense 106 98 198 Tax expense 358 317 602 Other adjustments 33 (7) (45) Net (increase)/decrease in operational assets Investments held for trading or designated as fair value through profit or loss 418 485 (11,210) Investments designated as available-for-sale (4) 327 246 Other assets (6,116) (7,947) (2,658) Net increase/(decrease) in operational liabilities Insurance contracts 259 8,921 12,910 Transfer to unallocated divisible surplus 57 (200) (232) Investment contracts 3,790 19,164 39,747 Value of in-force non-participating contracts 62 49 (22) Other liabilities 10,517 10,674 17,023 Cash used in operations (4,552) (3,829) (4,828) Interest paid (104) (75) (198) Interest received 2,353 2,740 4,863 Tax paid(2) (298) (217) (424) Dividends received 2,851 2,622 4,676 Net cash flows from operating activities 250 1,241 4,089 Cash flows from investing activities Net acquisition of plant, equipment and intangibles (30) (29) (45) Disposal of subsidiaries(3) 2.11 286 (340) (272) Investment in joint ventures - (17) (63) Net cash flows from/(used in) investing activities 256 (386) (380) Cash flows from financing activities Dividend distributions to ordinary equity holders of the company during the period 2.16 (616) (589) (830) Proceeds from issue of ordinary share capital 3 3 5 Purchase of employee scheme shares (net) 9 2 - Proceeds from borrowings 1,211 253 219 Repayment of borrowings (619) (315) (342) Net cash flows used in financing activities (12) (646) (948) Net increase in cash and cash equivalents 494 209 2,761 Exchange (losses)/gains on cash and cash equivalents (37) 89 182 Cash and cash equivalents at 1 January (before reallocation of held for sale cash) 15,348 12,544 12,544 Cash and cash equivalents (before reallocation of held for sale cash) 15,805 12,842 15,487 Cash and cash equivalents classified as held for sale 2.12 - - (139) Cash and cash equivalents at 30 June/31 December 15,805 12,842 15,348 1. Following a review of certain short dated instruments held by the group, certain assets have been reclassified from Cash and Cash Equivalents to Financial Instruments as their tenure is greater than 3 months. These amounts totalled GBP6,114m at H1 16 and GBP10,369m at FY 16. There is a net nil impact on the Consolidated Income Statement. The reclassification has resulted in an adjustment to the Investments held for trading or designated as fair value through profit or loss in the Consolidated Cash Flow Statement of GBP2,408m at H1 16 and (GBP1,847m) at FY 16. 2. Tax comprises UK corporation tax paid of GBP151m (H1 16: GBP108m; FY 16: GBP249m), overseas corporate taxes of GBP8m (H1 16: GBP5m; FY 16: GBP16m), and withholding tax of GBP139m (H1 16: GBP104m; FY 16: GBP159m). 3. Net cash flows from disposals includes cash received of GBP286m (H1 16: GBP74m; FY 16: GBP144m) less cash and cash equivalents disposed of GBPnil (H1 16: GBP414m; FY 16: GBP416m). The group's Consolidated Cash Flow Statement includes all cash and cash equivalent flows. The closing cash position includes GBP679m (H1 16: GBP601m; FY 16: GBP731m) relating to the with-profit fund policyholders
and GBP12,687m (H1 16: GBP10,201m; FY 16: GBP11,764m) relating to unit-linked policyholders.
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2.08 Basis of preparation
The group's financial information for the six months ended 30 June 2017 has been prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority and with IAS 34, 'Interim Financial Reporting'. The group's financial information has also been prepared in line with the accounting policies and methods of computation which the group expects to adopt for the 2017 year end. These policies are consistent with the principal accounting policies which were set out in the group's 2016 consolidated financial statements which were consistent with IFRSs issued by the International Accounting Standards Board as adopted by the European Commission for use in the European Union.
The preparation of the interim management report includes the use of estimates and assumptions which affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial statements. The economic and non-economic actuarial assumptions used to establish the liabilities in relation to insurance and investment contracts are significant. For half-year financial reporting, economic assumptions have been updated to reflect market conditions. Non-economic assumptions are consistent with those used in the 31 December 2016 financial statements except for the changes outlined in Note 2.02.
The results for the six months ended 30 June 2017 are unaudited but have been reviewed by PricewaterhouseCoopers LLP. The interim results do not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The results from the full year 2016 have been taken from the group's 2016 Annual Report and Accounts, restated as described in footnote 1 of the Consolidated Cash Flow Statement. Therefore, these interim accounts should be read in conjunction with the 2016 Annual Report and Accounts that have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and adopted by the European Commission for use in the European Union. PricewaterhouseCoopers LLP reported on the 2016 financial statements, and their report was unqualified and did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The group's 2016 Annual Report and Accounts has been filed with the Registrar of Companies.
Key technical terms and definitions
The interim management report refers to various key performance indicators, accounting standards and other technical terms. A comprehensive list of these definitions is contained within the glossary section of these interim financial statements.
Alternative performance measures
The group uses a number of alternative performance measures (APMs), including release from operations, net release from operations and operating profit, in the discussion of its business performance and financial position as the group believes that they provide a better indication of performance. Definitions of key APMs can be found in the glossary.
Future accounting developments
Revenue from Contracts with Customers
IFRS 15, 'Revenue from Contracts with Customers', issued in May 2014, is effective, for annual periods beginning on or after 1 January 2018. This standard provides clear guidance over when and how much revenue should be recognised. It provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for obligations as they are satisfied. An assessment is currently on-going to determine the impact upon the group, focussing in particular on our investment management business including the assessment of performance fees. The standard does not apply to business classified as insurance contracts. The group does not intend to early adopt this standard.
Insurance Contracts
IFRS 17, 'Insurance Contracts' was issued in May 2017 and is effective for annual periods beginning on or after 1 January 2021 (subject to EU endorsement). The standard provides a comprehensive approach for accounting for insurance contracts including their valuation, income statement presentation and disclosure. The group has mobilised a project to assess the financial and operational implications of the standard.
Financial Instruments
In July 2014, the IASB issued IFRS 9, 'Financial Instruments' which is effective for annual periods beginning on or after 1 January 2018. The ISAB subsequently issued 'Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts' which allows entities which meet certain requirements to defer their implementation of IFRS 9 (subject to EU endorsement) until adoption of IFRS 17 or 1 January 2021, whichever is the earlier. As disclosed in the 31 December 2016 financial statements, the group will qualify, and expects to apply this deferral of IFRS 9.
The impact of IFRS 9 on the group's nancial statements will depend on the interaction of the asset classi cation and measurement with the insurance contract measurement at the date of transition, particularly for liabilities which are measured using locked in discount rates.
Leases
In January 2016, the IASB issued IFRS 16, 'Leases', effective for annual periods beginning on or after 1 January 2019, subject to EU endorsement. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a 'right-of-use asset' for virtually all lease contracts, bringing commitments in relation to operating leases (as currently defined in IAS 17, 'Leases') onto the balance sheet. The impact of the standard on lessor accounting is significantly smaller with the provisions remaining closely aligned to those in IAS 17 although the IASB have issued updated guidance on the definition of a lease. An assessment of the impacts of the standard on the group's financial statements will be completed in due course. The group does not intend to early adopt this standard.
Tax attributable to policyholders and equity holders
The total tax expense shown in the group's Consolidated Income Statement includes income tax borne by both policyholders and shareholders. This has been apportioned between that attributable to policyholders' returns and equity holders' profits. This represents the fact that the group's long-term business in the UK pays tax on policyholder investment return, in addition to the corporation tax charge charged on shareholder profit. The separate presentation is intended to provide more relevant information about the tax that the group pays on the profits that it makes.
For this apportionment, the equity holders' tax on long-term business is estimated by applying the statutory tax rate to profits attributed to equity holders. This is considered to approximate the corporation tax attributable to shareholders as calculated under UK tax rules. The balance of income tax associated with UK long-term business is attributed to income tax attributable to policyholders' returns and approximates the corporation tax attributable to policyholders as calculated under UK tax rules.
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2.09 Segmental analysis
Reportable segments
The group has six reportable segments comprising LGR, LGIM, LGC, LGI, Savings and General Insurance. Central group expenses and debt costs are reported separately.
LGR represents worldwide pension risk transfer business (including longevity insurance), individual retirement and lifetime mortgages.
The LGIM segment represents institutional and retail investment management and workplace savings businesses.
LGC represents shareholder assets in direct investments, and traded and treasury assets.
LGI represents UK retail protection, group protection and network business, Legal & General Netherlands (LGN) (which was sold during April 2017) and protection business written in the USA (LGI US).
Savings represents business in platforms, SIPPs, mature savings and with-profits.
The General Insurance segment comprises short-term protection.
During 2017, changes have been made to the organisational structure. The IDOL business has been transferred to LGI from LGR. Comparatives have been amended accordingly. The impact of this reclassification has been to reduce LGR H1 16 release from operations by GBP1m (FY 16: reduce by GBP1m) and increase LGI (UK and Other) H1 16 release from operations by GBP1m (FY 16: increase by GBP1m).
During 2016, the Insurance (excluding General Insurance) and LGA segments were combined to create the new Legal & General Insurance (LGI) segment. General Insurance is now presented as a separate segment.
Transactions between reportable segments are on normal commercial terms, and are included within the reported segments.
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2.09 Segmental analysis (continued)
(a) Profit/(loss) for the period
Group expenses General and debt LGR LGIM LGC LGI(1) Insurance Savings costs Total For the six months GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ended 30 June 2017 Operating profit/(loss) 566 194 142 151 15 52 (132) 988 Investment and other variances(1) 38 (4) 52 7 6 (7) 77 169 Gains attributable to non-controlling interests - - - - - - 6 6 Profit/(loss) before tax attributable to equity holders 604 190 194 158 21 45 (49) 1,163 Tax (expense)/credit attributable to equity holders of the company (108) (40) (25) (41) (4) (9) 16 (211) Profit/(loss) for the period 496 150 169 117 17 36 (33) 952 Group expenses General and debt LGR(2) LGIM LGC LGI(2) Insurance Savings(1) costs Total For the six months GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ended 30 June 2016 Operating profit/(loss) 405 171 135 151 31 49 (165) 777 Investment and other variances(1) 63 (8) 60 (100) 10 4 21 50 Loss attributable to non-controlling interests - - - - - - (1) (1) Profit/(loss) before tax attributable to equity holders 468 163 195 51 41 53 (145) 826 Tax (expense)/credit attributable to equity holders of the company (82) (35) (24) (30) (6) (10) 28 (159) Profit/(loss) for the period 386 128 171 21 35 43 (117) 667 =========================== ====== ==== ==== ====== ========= ========== ======== ===== Group expenses General and debt LGR(2) LGIM LGC LGI(2) Insurance Savings(1) costs Total For the year ended GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm 31 December 2016 Operating profit/(loss) 809 366 257 319 52 99 (340) 1,562 Investment and other variances(1) 37 (32) 162 (124) 16 (51) 5 13 Gains attributable to non-controlling interests - - - - - - 7 7 Profit/(loss) before tax attributable to equity holders 846 334 419 195 68 48 (328) 1,582 Tax (expense)/credit attributable to equity holders of the company (148) (68) (52) (72) (13) (22) 58 (317) Profit/(loss) for the period 698 266 367 123 55 26 (270) 1,265 1. H1 17 Investment and other variances - LGI includes the GBP17m net gain resulting from the disposal of subsidiaries during the period (H1 16: Savings includes the GBP4m net gain resulting from the disposal of subsidiaries during the period; FY 16: Savings includes the GBP60m net loss resulting from the disposal of subsidiaries during the year). 2. During 2017, changes have been made to the organisational structure. The IDOL business has been transferred to LGI from LGR. Comparatives have been restated accordingly. The impact of this reclassification has been to reduce LGR H1 16 operating profit by GBP1m and profit before tax by GBP1m (FY 16: reduce LGR operating profit by GBP2m and profit before tax by GBP1m). LGI operating profit and profit before tax are showing corresponding increases.
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2.09 Segmental analysis (continued)
(b) Income
LGC General and LGR LGIM(1) LGI Insurance Savings other(2) Total For the six months ended GBPm GBPm GBPm GBPm GBPm GBPm GBPm 30 June 2017 Internal income - 78 - - - (78) - External income 2,810 12,988 896 167 1,436 621 18,918 Total income 2,810 13,066 896 167 1,436 543 18,918 LGC General and LGR(3) LGIM(1,4) LGI Insurance Savings(4) other(2,4) Total For the six months ended GBPm GBPm GBPm GBPm GBPm GBPm GBPm 30 June 2016 Internal income - 66 - - - (66) - External income 9,075 24,129 1,182 159 2,368 5,610 42,523 Total income 9,075 24,195 1,182 159 2,368 5,544 42,523 LGC General and LGR(3) LGIM(1,4) LGI Insurance Savings(4) other(2,4) Total For the year ended 31 December GBPm GBPm GBPm GBPm GBPm GBPm GBPm 2016 Internal income - 139 - - - (139) - External income 13,831 49,812 2,257 326 4,406 7,337 77,969 Total income 13,831 49,951 2,257 326 4,406 7,198 77,969 1. LGIM internal revenue relates to investment management services provided to other segments. 2. LGC and other includes LGC, inter-segmental eliminations and group consolidation adjustments. 3. During 2017, changes have been made to the organisational structure. The IDOL business has been transferred to LGI from LGR. Comparatives have been amended accordingly. The impact of this reclassification has been to reduce LGR H1 16 external income by GBP8m (FY 16: reduce by GBP20m) with corresponding increases in LGI external income. 4. An internal transaction (H1 16: GBP79m; FY 16: GBP175m) has been reclassified between LGIM, Savings and LGC and other internal and external income.
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2.10 Earnings per share
(a) Earning per share
Adjusted Adjusted Adjusted Adjusted Profit Earnings profit earnings Profit Earnings profit earnings after per share(1) after per share(1,2) after per share(1) after per share(1,2) tax tax tax tax 30.06.17 30.06.17 30.06.17 30.06.17 30.06.16 30.06.16 30.06.16 30.06.16 GBPm p GBPm p GBPm p GBPm p Operating profit after tax 795 13.40 795 13.40 616 10.39 616 10.39 Investment and other variances 151 2.54 134 2.26 52 0.88 48 0.81 Earnings per share based on profit attributable to equity holders 946 15.94 929 15.66 668 11.27 664 11.20 Adjusted Adjusted Profit Earnings profit earnings after per share(1) after per share(1,2) tax tax Full year Full year Full year Full year 31.12.16 31.12.16 31.12.16 31.12.16 GBPm p GBPm p Operating profit after tax 1,244 20.98 1,244 20.98 Investment and other
variances 14 0.24 72 1.22 Earnings per share based on profit attributable to equity holders 1,258 21.22 1,316 22.20 1. Earnings per share is calculated by dividing profit after tax derived from continuing operations by the weighted average number of ordinary shares in issue during the period, excluding employee scheme treasury shares. 2. Adjusted earnings per share has been calculated after excluding the net current year profit after tax of GBP17m, resulting from the disposal of L&G Netherlands. (H1 16: excluding the net gain of GBP4m, resulting from the disposal of Suffolk Life; FY 16: excluding the net loss after tax of GBP58m, resulting from the disposal of Suffolk Life and the classification of Cofunds as held for sale).
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2.10 Earnings per share (continued)
(b) Diluted earnings per share
Adjusted Adjusted Number Profit Earnings profit earnings of shares after per share(1) after per share(1,2) tax tax 30.06.17 30.06.17 30.06.17 30.06.17 30.06.17 m GBPm p GBPm p Profit attributable to equity holders of the company 5,933 946 15.94 929 15.66 Net shares under options allocable for no further consideration 25 - (0.06) - (0.06) Diluted earnings per share 5,958 946 15.88 929 15.60 Adjusted Adjusted Number Profit Earnings profit earnings of shares after per share(1) after per share(1,2) tax tax 30.06.16 30.06.16 30.06.16 30.06.16 30.06.16 m GBPm p GBPm p Profit attributable to equity holders of the company 5,927 668 11.27 664 11.20 Net shares under options allocable for no further consideration 22 - (0.04) - (0.04) Diluted earnings per share 5,949 668 11.23 664 11.16 Adjusted Adjusted Number Profit Earnings profit earnings of shares after per share(1) after per share(1,2) tax tax Full year Full year Full year Full year Full year 31.12.16 31.12.16 31.12.16 31.12.16 31.12.16 m GBPm p GBPm p Profit attributable to equity holders of the company 5,929 1,258 21.22 1,316 22.20 Net shares under options allocable for no further consideration 24 - (0.09) - (0.09) Diluted earnings per share 5,953 1,258 21.13 1,316 22.11 1. For diluted earnings per share, the weighted average number of ordinary shares in issue, excluding employee scheme treasury shares, is adjusted to assume conversion of all potential ordinary shares, such as share options granted to employees. 2. Adjusted earnings per share has been calculated after excluding the net current year profit after tax of GBP17m, resulting from the disposal of Netherlands (H1 16: excluding the net GBP4m gain resulting from the disposal of Suffolk Life; FY 16: excluding the net loss after tax of GBP58m, resulting from the disposal of Suffolk Life and the classification of Cofunds as held for sale).
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2.11 Disposals
During H1 17, the group made the following disposals:
-On 1 January 2017, the group completed the disposal of Cofunds Limited (Cofunds) to Aegon for GBP141m, net of transaction costs. The sale included the Investor Portfolio Service (IPS) platform as well as Cofunds' retail and institutional business. The group carrying value of the investment was GBP141m resulting in a net nil impact to the group.
-On 6 April 2017, the group completed the sale of Legal & General Netherland Levensvervekering Maatschappij N.V. (LGN) to Chesnara plc (Chesnara) for EUR161.0m (GBP137m). The group carrying value of the investment was GBP118m, resulting in a current year profit GBP17m, net of transaction costs GBP2m. A further GBP3m of transaction costs were incurred in the prior year.
2.12 Held for sale
In H1 17 no assets or liabilities have been classified as held for sale. The FY 16 balances related to planned disposals of Investment property, LGN and Cofunds, which were disposed of in 2017 (detailed in note 2.11). 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Assets classified as held for sale Purchased interest in long term business and other intangible assets - - 85 DAC - - 12 Property, plant and equipment - - 11 Investment property - - 95 Financial investments - - 1,861 Reinsurers' share of contract liabilities - - 1 Cash and cash equivalents - - 139 Other assets(1) - - 62 Total assets of the disposal groups - - 2,266 Liabilities classified as held for sale Insurance contract liabilities - - 1,709 Tax liabilities - - 26 Payables and other financial liabilities - - 28 Other liabilities(1) - - 147 Total liabilities of the disposal groups - - 1,910 Total net assets of the disposal groups - - 356 1. Included in the FY 16 other assets is GBP1m, and in other liabilities, GBP88m, which are both balances with other group entities that are eliminated on the Consolidated Balance Sheet.
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2.13 Financial investments and investment property
30.06.17 30.06.16(1) 31.12.16(1) GBPm GBPm GBPm Equities 194,754 176,194 191,025 Unit trusts 7,584 6,594 6,969 Debt securities(2) 219,989 203,114 215,331 Accrued interest 1,449 1,403 1,536 Derivative assets(3) 11,513 15,424 13,121 Loans and receivables 572 508 562 Financial investments 435,861 403,237 428,544 Investment property(4) 8,714 8,227 8,150 Total financial investments and investment property 444,575 411,464 436,694 1. H1 16 and FY 16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement. 2. A detailed analysis of debt securities, which shareholders are directly exposed to, is disclosed in note 4.06.
3. Derivatives are used to ensure efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management. Derivative assets are shown gross of derivative liabilities and include GBP7,597m (H1 16: GBP9,543m; FY 16: GBP8,294m) held on behalf of unit linked policyholders. 4. A detailed analysis of investment property, which shareholders are directly exposed to, is disclosed in note 4.07. (a) Fair value hierarchy Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the group's view of market assumptions in the absence of observable market information. The group utilises techniques that maximise the use of observable inputs and minimise the use of unobservable inputs. The levels of fair value measurement bases are defined as follows: Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: fair values measured using valuation techniques for all inputs significant to the measurement other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: fair values measured using valuation techniques for any input for the asset or liability significant to the measurement that is not based on observable market data (unobservable inputs). All of the group's level 2 assets have been valued using standard market pricing sources, such as iBoxx, IDC and Bloomberg, which use mathematical modelling and multiple source validation in order to determine "consensus" prices, except for bespoke CDO and swaps holdings (see below). In normal market conditions, we would consider these market prices to be observable market prices. Following consultation with our pricing providers and a number of their contributing brokers, we have considered that these prices are not from a suitably active market and have classified them as level 2. CDOs are valued using an external valuation based on observable market inputs, which include CDX and iTraxx index tranches and CDS spreads on underlying reference entities. This valuation is then validated against the internal valuation. Accordingly, these assets have also been classified in level 2. There have been no significant transfers between level 1 and level 2 for the period 30 June 2017 (30 June 2016: GBPnil; 31 December 2016: GBPnil). The table on the following page presents the group's assets by IFRS 13 hierarchy levels.
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2.13 Financial investments and investment property (continued)
(a) Fair value hierarchy (continued)
Total Level Level Level 1 2 3 For the six months ended 30 June 2017 GBPm GBPm GBPm GBPm Shareholder Equity securities 2,352 1,718 2 632 Debt securities 4,533 1,030 3,105 398 Accrued interest 24 6 15 3 Derivative assets 50 25 25 - Investment property 200 - - 200 Non profit non-unit linked Equity securities 268 264 4 - Debt securities 51,067 8,127 35,781 7,159 Accrued interest 469 40 417 12 Derivative assets 3,773 74 3,694 5 Investment property 2,687 - - 2,687 With-profits Equity securities 3,241 3,014 18 209 Debt securities 6,741 2,888 3,848 5 Accrued interest 56 18 38 - Derivative assets 93 40 53 - Investment property 740 - - 740 Unit linked Equity securities 196,477 192,628 3,370 479 Debt securities 157,648 105,951 51,690 7 Accrued interest 900 349 551 - Derivative assets 7,597 607 6,990 - Investment property 5,087 - - 5,087 Total financial investments and investment property at fair value(1) 444,003 316,779 109,601 17,623 1. This table excludes loans and receivables of GBP572m, which are held at amortised cost.
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2.13 Financial investments and investment property (continued)
(a) Fair value hierarchy (continued)
Total(1) Level Level Level 1(1) 2(1) 3 For the six months ended 30 June 2016 GBPm GBPm GBPm GBPm Shareholder Equity securities 2,331 2,025 - 306 Debt securities 5,255 2,317 2,581 357 Accrued interest 34 16 15 3 Derivative assets 62 6 56 - Investment property 200 - - 200 Non profit non-unit linked Equity securities 56 52 4 - Debt securities 47,675 7,124 37,108 3,443 Accrued interest 496 38 453 5 Derivative assets 5,661 325 5,326 10 Investment property 2,257 - - 2,257 With-profits Equity securities 3,607 3,382 1 224 Debt securities 7,122 3,696 3,416 10 Accrued interest 69 29 40 - Derivative assets 158 40 118 - Investment property 920 - - 920 Unit linked Equity securities 176,794 173,351 3,062 381 Debt securities 143,063 98,817 44,246 - Accrued interest 803 295 508 - Derivative assets 9,543 225 9,318 - Investment property 4,850 - - 4,850 Total financial investments and investment property at fair value(2) 410,956 291,738 106,252 12,966 1. H1 16 and FY 16 Cash Equivalents and Financial Investment values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement. 2. This table excludes loans and receivables of GBP508m, which are held at amortised cost.
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2.13 Financial investments and investment property (continued)
(a) Fair value hierarchy (continued)
Total(1) Level Level Level 1(1) 2(1) 3 For the year ended 31 December 2016 GBPm GBPm GBPm GBPm Shareholder Equity securities 1,928 1,478 1 449 Debt securities 4,945 1,513 3,046 386 Accrued interest 31 7 21 3 Derivative assets 82 59 23 - Investment property 162 - - 162 Non profit non-unit linked Equity securities 393 389 4 - Debt securities 49,380 8,351 37,067 3,962 Accrued interest 496 42 448 6 Derivative assets 4,611 115 4,474 22 Investment property 2,442 - - 2,442 With-profits Equity securities 3,432 3,216 9 207 Debt securities 6,827 3,467 3,349 11 Accrued interest 63 22 41 - Derivative assets 134 31 103 - Investment property 738 - - 738 Unit linked Equity securities 192,242 188,769 3,028 445
Debt securities 154,178 106,224 47,954 - Accrued interest 946 333 613 - Derivative assets 8,294 332 7,962 - Investment property 4,808 - - 4,808 Total financial investments and investment property at fair value(2) 436,132 314,348 108,143 13,641 1. H1 16 and FY 16 Cash Equivalents and Financial Investment values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement. 2. This table excludes loans and receivables of GBP562m, which are held at amortised cost.
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2.13 Financial investments and investment property (continued)
(b) Assets measured at fair value based on level 3
Level 3 assets where internal models are used, represent a small proportion of assets to which shareholders are exposed. These comprise property, unquoted equities, untraded debt securities and securities where the broker methodology is unknown. Unquoted equities include suspended securities and investments in private equity and property vehicles. Untraded debt securities include private placements, commercial real estate loans, income strips and lifetime mortgages.
In many situations, inputs used to measure the fair value of an asset or liability may fall into different levels of the fair value hierarchy. In these situations, the group determines the level in which the fair value falls based upon the lowest level input that is significant to the determination of the fair value. As a result, both observable and unobservable inputs may be used in the determination of fair values that the group has classified within level 3.
The group determines the fair values of certain financial assets and liabilities based on quoted market prices, where available. The group also determines fair value based on estimated future cash flows discounted at the appropriate current market rate. As appropriate, fair values reflect adjustments for counterparty credit quality, the group's credit standing, liquidity and risk margins on unobservable inputs.
Where quoted market prices are not available, fair value estimates are made at a point in time, based on relevant market data, as well as the best information about the individual financial instrument. Illiquid market conditions have resulted in inactive markets for certain of the group's financial instruments. As a result, there is generally no or limited observable market data for these assets and liabilities. Fair value estimates for financial instruments deemed to be in an illiquid market are based on judgments regarding current economic conditions, liquidity discounts, currency, credit and interest rate risks, loss experience and other factors. These fair values are estimates and involve considerable uncertainty and variability as a result of the inputs selected and may differ significantly from the values that would have been used had a ready market existed, and the differences could be material. As a result, such calculated fair value estimates may not be realisable in an immediate sale or settlement of the instrument. In addition, changes in the underlying assumptions used in the fair value measurement technique could significantly affect these fair value estimates.
Fair values are subject to a control framework designed to ensure that input variables and outputs are assessed independent of the risk taker. These inputs and outputs are reviewed and approved by a valuation committee and validated independently as appropriate.
The group's policy is to re-assess the categorisation of financial assets at the end of each reporting period and to recognise transfers between levels at that point in time.
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2.13 Financial investments and investment property (continued)
(b) Assets measured at fair value based on level 3 (continued)
Other Other financial financial Equity invest- Investment Equity invest- Investment securities ments(1) property Total securities ments(1) property Total 30.06.17 30.06.17 30.06.17 30.06.17 30.06.16 30.06.16 30.06.16 30.06.16 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm As at 1 January 1,101 4,390 8,150 13,641 863 1,456 8,082 10,401 Total gains / (losses) for the period recognised in profit: - in other comprehensive income - 7 - 7 - 15 - 15 - realised and unrealised (losses) / gains(2) (23) 234 217 428 9 269 (51) 227 Purchases / Additions 156 1,283 402 1,841 260 586 283 1,129 Sales / Disposals (34) (39) (166) (239) (244) (112) (87) (443) Transfers into level 3(3) 118 1,714 101 1,933 26 1,670 - 1,696 Transfers out of level 3(3) - (5) - (5) (3) (56) - (59) Other 2 5 10 17 - - - - As at 30 June 1,320 7,589 8,714 17,623 911 3,828(-) 8,227 12,966 1. Other financial investments comprise debt securities, lifetime mortgages and derivative assets. 2. The realised and unrealised gains and losses have been recognised in investment return in the Consolidated Income Statement. 3. The group holds regular discussions with its pricing providers to determine whether transfers between levels of the fair value hierarchy have occurred. The above transfers occurred as a result of this process. In H1 17, transfers into level 3 include GBP874m of private placement and GBP795m of income strips, which were previously classified as level 2. In H1 16, transfers into level 3 included GBP1.6bn of commercial real estate loans, which were previously classified as level 2. Other financial Equity invest- Investment securities ments(1) property Total Full year Full year Full year Full year 31.12.16 31.12.16 31.12.16 31.12.16 GBPm GBPm GBPm GBPm As at 1 January 863 1,456 8,082 10,401 Total gains / (losses) for the year recognised in profit: - in other comprehensive income - 5 - 5 - realised and unrealised gains / (losses)(2) 40 350 (78) 312 Purchases / Additions 473 1,161 692 2,326 Sales / Disposals (302) (139) (494) (935) Transfers into level 3(3) 22 1,590 - 1,612 Transfers out of level 3(3) - (33) - (33) Transfers to held for sale - - (53) (53) Other 5 - 1 6 ========================== ========== ========= ========== ======== ========== ========= ========== ========= As at 31 December 1,101 4,390 8,150 13,641 1. Other financial investments comprise debt securities, lifetime mortgages and derivative assets. 2. The realised and unrealised gains and losses have been recognised in investment return in the Consolidated Income Statement. 3. The group holds regular discussion with its pricing providers to determine whether transfers between levels of the fair value hierarchy have occurred. The above transfers occurred as result of this process. In 2016, transfers into level 3 included GBP1.6bn of commercial real estate loans, which were previously classified as level 2.
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2.13 Financial investments and investment property (continued)
(c) Effect of changes in significant unobservable inputs to reasonably possible alternative assumptions on level 3 assets
Fair values of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data. The following table shows the level 3 financial instruments carried at fair value as at the balance sheet date, the valuation basis, main assumptions used in the valuation of these instruments and reasonably possible increases or decreases in fair value based on reasonably possible alternative assumptions. Reasonably possible alternative assumptions =========================== Current Increase Decrease fair in fair in fair For the six months ended Main value value value 30 June 2017 Financial instruments and investment assumptions GBPm GBPm GBPm property Assets Shareholder - Unquoted investments in property vehicles(1) Property yield 565 15 (15) Cash flows; expected - Untraded and other debt securities(2) defaults 401 4 (4) Cash flows; expected - Unquoted and other securities(2) defaults 67 3 (3) - Investment property(1) Property yield 200 23 (23) Non profit non-linked - Lifetime mortgage loans Market spreads; LTVs 1,433 77 (83) Cash flows; expected - Untraded and other debt securities(2) defaults 3,602 102 (100) - Commercial real Cash flows; expected estate loans defaults 2,136 43 (43) Cash flows; property - Investment property(1) yield 2,687 138 (138) - Other Cash flows 5 - - With-profits - Unquoted investments in property vehicles(1) Property yield 209 13 (13) Cash flows; expected - Untraded and other debt securities(2) defaults 5 - - Cash flows; Property - Investment property(1) yield 740 38 (38) Unit linked - Unquoted investments in property Cash flows; Property vehicles(1) yield 92 6 (6) Estimated recoverable - Suspended securities amount 26 - - Cash flows; expected - Untraded and other debt securities(3) defaults 7 - - Cash flows; expected - Unquoted and other securities(2) defaults 361 18 (18) Cash flows; Property - Investment property(1) yield 5,087 256 (256) Total 17,623 736 (740) 1. Unquoted investments in property vehicles and direct holdings in investment property are valued using valuations provided by independent valuers on the basis of open market value as defined in the appraisal and valuation manual of the Royal Institute of Chartered Surveyors. Reasonably possible alternative valuations have been determined using alternative yields. 2. No reasonably possible increases or decreases in fair values have been given for securities where the broker valuation methodology is unknown. 3. Private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines. Reasonably possible alternative valuations have been determined using alternative price earnings multiples.
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2.13 Financial investments and investment property (continued)
(c) Effect of changes in significant unobservable inputs to reasonably possible alternative assumptions on level 3 assets (continued)
Reasonably possible alternative assumptions =========================== Current Increase Decrease fair in fair in fair For the six months ended 30 June Main value value value 2016 Financial instruments and assumptions GBPm GBPm GBPm investment property Assets Shareholder - Private equity investment vehicles(1) Price earnings multiple 16 1 (1) - Unquoted investments in property vehicles(2) Property yield 283 1 (2) Cash flows; expected - Asset backed securities defaults 2 - - Cash flows; expected - Untraded and other debt securities(3) defaults 358 2 (2) Cash flows; expected - Unquoted and other securities(3) defaults 7 - - - Investment property(2) Property yield 200 10 (20) Non profit non-linked Market Spreads; - Lifetime Mortgage loans LTV's 440 8 (7) Cash flows; expected - Untraded and other debt securities(3) defaults 1,197 - - Cash flows; expected - Commercial real estate loans defaults 1,811 32 (32) Cash flows; Property - Investment property(2) yield 2,257 56 (113) - Other Cash flows 10 - - With-profits - Private equity investment vehicles(1) Price earnings multiple 17 - - - Unquoted investments in property vehicles(2) Property yield 207 13 (25) Cash flows; expected - Unquoted and other securities(3) defaults 10 - - - Investment property(2) Property yield 920 47 (92) Unit linked - Unquoted investments in property vehicles(2) Property yield 369 19 (38) - Private equity investment vehicles(1) Price earnings multiple 1 - - Cash flows; expected - Suspended securities defaults 11 - - - Investment property(2) Property yield 4,850 247 (485) Total 12,966 436 (817) 1. Private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines. Reasonably possible alternative valuations have been determined using alternative price earnings multiples. 2. Unquoted investments in property vehicles and direct holdings in investment property are valued using valuations provided by independent valuers on the basis of open market value as defined in the appraisal and valuation manual of the Royal Institute of Chartered Surveyors. Reasonably possible alternative valuations have been determined using alternative yields. 3. No reasonably possible increases or decreases in fair values have been given for securities where the broker valuation methodology is unknown.
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2.13 Financial investments and investment property (continued)
(c) Effect of changes in significant unobservable inputs to reasonably possible alternative assumptions on level 3 assets (continued)
Reasonably possible alternative assumptions =========================== Current Increase Decrease fair in fair in fair For the year ended 31 December Main value value value 2016 Financial instruments and assumptions GBPm GBPm GBPm investment property Assets Shareholder Unquoted investments in property vehicles(1) Property yield 292 19 (19) Cash flows; expected Untraded and other debt securities(2) defaults 474 12 (12) Cash flows; expected Unquoted and other securities(2) defaults 72 2 (3) Investment property(1) Property yield 162 8 (9) Non profit non-linked Lifetime mortgage loans Market spreads; LTVs 852 10 (18) Cash flows; expected Untraded and other debt securities(2) defaults 1,270 2 (2) Commercial real estate Cash flows; expected loans defaults 1,776 11 (16) Investment property(1) Property yield 2,442 127 (127) Other Cash flows 92 - - With-profits Private equity investment vehicles Price earnings multiple 8 - - Unquoted investments in property vehicles(1) Property yield 200 12 (12) Cash flows; expected Untraded and other debt securities(2) defaults 10 - - Investment property(1) Property yield 738 38 (38) Unit linked Unquoted investments in property vehicles(1) Property yield 87 5 (5) Cash flows; expected Untraded and other debt securities(2) defaults 23 - - Cash flows; expected Unquoted and other securities(2) defaults 335 17 (17) Investment property(1) Property yield 4,808 235 (235) Total 13,641 498 (513) 1. Unquoted investments in property vehicles and direct holdings in investment property are valued using valuations provided by independent valuers on the basis of open market value as defined in the appraisal and valuation manual of the Royal Institute of Chartered Surveyors. Reasonably possible alternative valuations have been determined using alternative yields. 2. No reasonably possible increases or decreases in fair values have been given for securities where the broker valuation methodology is unknown.
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2.14 Tax
(a) Tax charge in the Consolidated Income Statement
The tax attributable to equity holders differs from the tax calculated at the standard UK corporation tax rate as follows: Full year 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Profit before tax attributable to equity holders 1,163 826 1,582 Tax calculated at 19.25% (H1 16: 20.00%; FY 16: 20.00%) 224 165 316 Adjusted for the effects of: Recurring reconciling items: Income not subject to tax (6) (4) (12) Higher/(lower) rate of tax on profits taxed overseas 3 4 7 Non-deductible expenses - 2 4 Differences between taxable and accounting investment gains (4) (2) (11) Non-recurring reconciling items: Income not subject to tax(1) (4) (1) (1) Non-deductible expenses 1 - 17 Differences between taxable and accounting investment gains - (3) (14) Adjustments in respect of prior years (3) - 13 Impact of reduction in UK corporate tax rate to 17% from 2020 on deferred tax balances - (2) (2) Tax attributable to equity holders 211 159 317 Equity holders' effective tax rate(2) 18.1% 19.2% 20.0% 1. Includes gains relating to M&A activity which are non taxable. 2. Equity holders' effective tax rate is calculated by dividing the tax attributable to equity holders over profit before tax attributable to equity holders. Refer to note 2.08 for detail on the methodology of the split of policyholder and equity holders' tax.
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2.14 Tax (continued)
(b) Deferred tax
30.06.17 30.06.16 31.12.16 Deferred tax (liabilities)/assets GBPm GBPm GBPm Deferred acquisition expenses (414) (392) (429) -------- -------- -------- - UK (43) (48) (45) - Overseas (371) (344) (384) -------- -------- -------- Difference between the tax and accounting value of insurance contracts (288) (305) (286) -------- -------- -------- - UK (134) (125) (123) - Overseas (154) (180) (163) -------- -------- -------- Realised and unrealised gains on investments (275) (210) (255) Excess of depreciation over capital allowances 16 16 15 Excess expenses(1) 40 62 49 Accounting provisions and other (51) (29) (51) Trading losses(2) 63 88 80 Pension fund deficit 77 71 82 Purchased interest in long-term business (3) (25) (13) ====================================================== ======== ======== ======== Net deferred tax liabilities (835) (724) (808) Analysed by: - UK deferred tax asset 2 5 5 - Overseas deferred tax asset 3 - - - UK deferred tax liability (316) (206) (291) - Overseas deferred tax liability (524) (523) (522) Net deferred tax liabilities(3) (835) (724) (808) 1. The reduction in the UK deferred tax asset on excess expenses reflects the unwind of the spread acquisition expenses. 2. Trading losses include UK trade and US operating losses of GBP8m (H1 16: GBP7m; FY 16: GBP5m) and GBP55m (H1 16: GBP81m; FY 16: GBP75m) respectively. The reduction in the deferred tax asset primarily reflects utilisation of brought forward US operating losses against US profits. 3. On the Consolidated Balance Sheet, the net deferred tax liability has been split between an asset of GBP5m and a liability of GBP840m where the relevant items cannot be offset.
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2.15 Payables and other financial liabilities
Full year 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Derivative liabilities 7,376 15,473 9,014 Repurchase agreements(1) 28,076 17,295 23,163 Other 8,257 3,988 5,170 Payables and other financial liabilities 43,709 36,756 37,347 1. The repurchase agreements are presented gross, however they and their related assets are subject to master netting arrangements. Fair value hierarchy Amortised Total Level Level Level cost 1 2 3 As at 30 June 2017 GBPm GBPm GBPm GBPm GBPm Derivative liabilities 7,376 482 6,894 - - Repurchase agreements 28,076 - - - 28,076 Other 8,257 2,550 15 179 5,513 Payables and other financial liabilities 43,709 3,032 6,909 179 33,589 Amortised Total Level Level Level cost 1 2 3 As at 30 June 2016 GBPm GBPm GBPm GBPm GBPm Derivative liabilities 15,473 5,519 9,954 - - Repurchase agreements 17,295 - - - 17,295 Other 3,988 522 14 174 3,278 Payables and other financial liabilities 36,756 6,041 9,968 174 20,573 Amortised Total Level Level Level cost 1 2 3 As at 31 December 2016 GBPm GBPm GBPm GBPm GBPm Derivative liabilities 9,014 884 8,130 - - Repurchase agreements 23,163 - - - 23,163 Other 5,170 806 8 177 4,179 Payables and other financial liabilities 37,347 1,690 8,138 177 27,342 Future commission costs are modelled using expected cash flows, incorporating expected future persistency. They have therefore been classified as level 3 liabilities. The entire movement in the balance has been reflected in the Consolidated Income Statement during the year. A reasonably possible alternative persistency assumption would have the effect of increasing the liability by GBP5m (H1 16: GBP4m; FY 16: GBP5m). Significant transfers between levels There have been no significant transfers between levels 1, 2 and 3 for the period ended 30 June 2017 (30 June 2016 and 31 December 2016: no significant transfers between levels 1, 2 and 3).
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2.16 Dividends
Full year Per(1) Per(1) Full year Per(1) Dividend share Dividend share Dividend share 30.06.17 30.06.17 30.06.16 30.06.16 31.12.16 31.12.16 GBPm p GBPm p GBPm p Ordinary share dividends paid in the period: - Prior year final dividend 616 10.35 592 9.95 592 9.95 - Current year interim dividend - - - - 238 4.00 616 10.35 592 9.95 830 13.95 Ordinary share dividend proposed(2) 256 4.30 238 4.00 616 10.35 1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date. 2. The dividend proposed is not included as a liability in the Consolidated Balance Sheet.
2.17 Share capital
Number of Number of Number of shares shares shares Full year 30.06.17 30.06.16 31.12.16 As at 1 January 5,954,656,466 5,948,788,480 5,948,788,480 Options exercised under share option schemes: - Savings related share option scheme 2,061,874 3,465,839 5,867,986 As at 30 June / 31 December 5,956,718,340 5,952,254,319 5,954,656,466 There is one class of ordinary shares of 2.5p each. All shares issued carry equal voting rights. The holders of the company's ordinary shares are entitled to receive dividends which are authorised and are no longer at the discretion of the company.
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2.18 Core Borrowings
Carrying Fair Carrying Fair Carrying Fair amount value amount value amount value 30.06.17 30.06.17 30.06.16 30.06.16 31.12.16 31.12.16 GBPm GBPm GBPm GBPm GBPm GBPm Subordinated borrowings 6.385% Sterling perpetual capital securities (Tier 1) - - 626 615 615 609 5.875% Sterling undated subordinated notes (Tier 2) 410 432 412 412 411 418 5.25% US Dollar subordinated notes 2047 (Tier 2) 658 700 - - - - 5.55% US Dollar subordinated notes 2052 (Tier 2) 387 399 - - - - 10% Sterling subordinated notes 2041 (Tier 2) 311 406 310 392 310 403 5.5% Sterling subordinated notes 2064 (Tier 2) 589 651 589 534 589 603 5.375% Sterling subordinated notes 2045 (Tier 2) 602 670 602 607 602 627 Client fund holdings of group debt(1) (33) (33) (33) (32) (31) (31) Total subordinated borrowings 2,924 3,225 2,506 2,528 2,496 2,629 Senior borrowings Sterling medium term notes 2031-2041 602 848 602 801 609 845 Client fund holdings of group debt(1) (27) (27) (44) (58) (34) (34) Total senior borrowings 575 821 558 743 575 811 Total core borrowings 3,499 4,046 3,064 3,271 3,071 3,440 1. GBP60m (H1 16: GBP77m; FY 16: GBP65m) of the group's subordinated and senior borrowings are currently held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total core borrowings in the table above. All of the group's core borrowings are measured using amortised cost. The presented fair values of the group's core borrowings reflect quoted prices in active markets and they are classified as level 1 in the fair value hierarchy.
Subordinated borrowings
6.385% Sterling perpetual capital securities
In 2007, Legal & General Group Plc issued GBP600m of 6.385% Sterling perpetual capital securities. These securities were called at par on 2 May 2017.
5.875% Sterling undated subordinated notes
In 2004, Legal & General Group Plc issued GBP400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% pa. These notes are treated as tier 2 own funds for Solvency II purposes.
5.25% US Dollar subordinated notes 2047
On 21 March 2017, Legal & General Group Plc issued $850m of 5.25% dated subordinated notes. The notes are callable at par on 21 March 2027 and every five years thereafter. If not called, the coupon from 21 March 2027 will be reset to the prevailing USD mid-swap rate plus 3.687% pa. These notes mature on 21 March 2047. They are treated as tier 2 own funds for Solvency II purposes.
5.55% US Dollar subordinated notes 2052
On 24 April 2017, Legal & General Group Plc issued $500m of 5.55% dated subordinated notes. The notes are callable at par on 24 April 2032 and every five years thereafter. If not called, the coupon from 24 April 2032 will be reset to the prevailing USD mid-swap rate plus 4.19% pa. These notes mature on 24 April 2052. They are treated as tier 2 own funds for Solvency II purposes.
10% Sterling subordinated notes 2041
In 2009, Legal & General Group Plc issued GBP300m of 10% dated subordinated notes. The notes are callable at par on 23 July 2021 and every five years thereafter. If not called, the coupon from 23 July 2021 will be reset to the prevailing five year benchmark gilt yield plus 9.325% pa. These notes mature on 23 July 2041. They are treated as tier 2 own funds for Solvency II purposes.
5.5% Sterling subordinated notes 2064
In 2014, Legal & General Group Plc issued GBP600m of 5.5% dated subordinated notes. The notes are callable at par on 27 June 2044 and every five years thereafter. If not called, the coupon from 27 June 2044 will be reset to the prevailing five year benchmark gilt yield plus 3.17% pa. These notes mature on 27 June 2064. They are treated as tier 2 own funds for Solvency II purposes.
5.375% Sterling subordinated notes 2045
In 2015, Legal & General Group Plc issued GBP600m of 5.375% dated subordinated notes. The notes are callable at par on 27 October 2025 and every five years thereafter. If not called, the coupon from 27 October 2025 will be reset to the prevailing five year benchmark gilt yield plus 4.58% pa. These notes mature on 27 October 2045. They are treated as tier 2 own funds for Solvency II purposes.
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2.19 Operational borrowings
Carrying Fair Carrying Fair Carrying Fair amount value amount value amount value 30.06.17 30.06.17 30.06.16 30.06.16 31.12.16 31.12.16 GBPm GBPm GBPm GBPm GBPm GBPm Short term operational borrowings Euro Commercial paper 322 322 103 103 216 216 Bank loans and overdrafts 20 20 69 69 6 6 Total short term operational borrowings 342 342 172 172 222 222 Non recourse borrowings LGV 6/LGV 7 Private Equity Fund Limited Partnership - - 42 42 - - Consolidated Property Limited Partnerships 211 211 197 197 208 208 Total non recourse borrowings 211 211 239 239 208 208 Total operational borrowings 553 553 411 411 430 430
The presented fair values of the group's operational borrowings reflect observable market information and have been classified as level 2 in the fair value hierarchy.
Short term operational borrowings
Short term assets available at the holding company level exceeded the amount of short term operational borrowings of GBP342m (H1 16: GBP172m; FY 16: GBP222m.). Short term operational borrowings comprise Euro Commercial paper, bank loans and overdrafts.
Non recourse borrowings
LGV 6/LGV 7 Private Equity Fund Limited Partnerships
These borrowings were non recourse bank borrowings.
Consolidated Property Limited Partnerships
These borrowings are non recourse bank borrowings.
Syndicated credit facility
As at 30 June 2017, the group had in place a GBP1.00bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2021.
2.20 Non-controlling interests
Non-controlling interests represent third party interests in direct equity investments as well as investments in private equity and property investment vehicles which are consolidated in the group's results. The majority of the non-controlling interests in 2017 are in relation to investments in the Leisure Fund Unit Trust, the Performance Retail Unit Trust, the Legal & General UK Property Ungeared Fund Limited Partnership, and Thorpe Park Developments Limited.
2.21 Foreign exchange rates
Principal rates of exchange used for translation are: Period end exchange At 31.12.16 rates At 30.06.17 At 30.06.16 United States Dollar 1.30 1.34 1.24 Euro 1.14 1.20 1.17 01.01.17 01.01.16 01.01.16 - - - Average exchange rates 30.06.17 30.06.16 31.12.16 United States Dollar 1.26 1.43 1.36 Euro 1.16 1.28 1.22
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2.22 Related party transactions
There were no material transactions between key management and the Legal & General group of companies during the period. All transactions between the group and its key management are on commercial terms which are no more favourable than those available to employees in general. Contributions to the post-employment defined benefit plans were GBP36m (H1 16: GBP34m; FY 16: GBP75m) for all employees. At 30 June 2017, 30 June 2016 and 31 December 2016 there were no loans outstanding to officers of the company. Key management personnel compensation The aggregate compensation for key management personnel, including executive and non-executive directors, is as follows: 30.06.17 30.06.16 31.12.16 GBPm GBPm GBPm Salaries 2 2 9 Social security costs 1 1 2 Post-employment benefits - - - Share-based incentive awards 2 2 5 Key management personnel compensation 5 5 16 Number of key management personnel 16 16 15 The group has the following related party transactions: - Annuity contracts issued by Society for consideration of GBP161m (H1 16: GBP4m; FY 16: GBP3m) purchased by the group's UK defined benefit pension schemes during the period, priced on an arm's length basis; - Investments in venture capital, property and financial investments held via collective investment vehicles. All transactions between the group and these collective investment vehicles are on commercial terms which are no more favourable than those available to companies in general. The net investments into associate investment vehicles totalled GBP10m during the period (H1 16: 27m; FY 16: GBP47m). The group received investment management fees of GBP1m during the period (H1 16: GBP1m; FY 16: GBP2m). Distributions from these investment vehicles to the group totalled GBP15m (H1 16: GBP6m; FY 16: GBP20m); - Loans outstanding from CALA at 30 June 2017 total GBP68m (30 June 2016: GBP63m; 31 December 2016: GBP65m); - The equity investment in Pemberton is now fully drawn at GBP18m. A commitment of GBP220m was previously made to Pemberton's inaugural European Mid-Market Debt Fund, of which GBP125m was drawn as at 30 June 2017. In addition, a GBP50m commitment was made to the Pemberton U.K. Mid-Market Direct Lending Fund, of which GBP25m has been drawn down to date; - Loans outstanding from MediaCity at 30 June 2017 total GBP55m (H1 2016: GBP55m; FY 2016: GBP55m); - Preference shares outstanding from Thorpe Park at 30 June 2017 total GBP30m (H1 16: GBP12m; FY 16: GBP18m); - A 50/50 joint venture in Access Development Partnership, developing build to rent properties. LGC has a total commitment of GBP150m, of which GBP28m has been drawn down to date; - A 46% investment in Accelerated Digital Ventures, a venture investment company, for a total commitment of GBP34m, of which GBP17m has been drawn to date; - Further contingent capital commitments of GBP2m for NTR Asset Management Europe DAC, with a total commitment of GBP5m. A commitment of GBP103m to the NTR Wind 1 Limited fund, of which GBP80m has been drawn to date;
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2.23 Pension costs
The Legal & General Group UK Pension and Assurance Fund and the Legal & General Group UK Senior Pension Scheme are defined benefit pension arrangements and account for all UK and the majority of worldwide assets of, and contributions to, such arrangements. The schemes were closed to future accrual on 31 December 2015. At 30 June 2017, the combined after tax deficit arising from these arrangements (net of annuity obligations insured by Society) has been estimated at GBP347m (30 June 2016: GBP306m; 31 December 2016: GBP374m). These amounts have been recognised in the financial statements with GBP219m charged against shareholder equity (30 June 2016: GBP193m; 31 December 2016: GBP236m) and GBP128m against the unallocated divisible surplus (30 June 2016: GBP113m; 31 December 2016: GBP138m).
2.24 Contingent liabilities, guarantees and indemnities
Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance between actual experience from that assumed may result in those liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of policyholder contracts, or the circumstances in which policyholders have entered into them. The extent of these liabilities is influenced by a number of factors including the actions and requirements of the PRA, FCA, ombudsman rulings, industry compensation schemes and court judgments.
Various group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. The relevant members of the group ensure that they make prudent provision as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet reasonably foreseeable eventualities. The provisions made are regularly reviewed. It is not possible to predict, with certainty, the extent and the timing of the financial impact of these claims, litigation or issues.
In 1975, Legal & General Assurance Society Limited (the Society) was required by the Institute of London Underwriters (ILU) to execute the ILU form of guarantee in respect of policies issued through the ILU's Policy Signing Office on behalf of NRG Victory Reinsurance Company Ltd (Victory), a company which was then a subsidiary of the Society. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to the Society against any liability the Society may have as a result of the ILU's requirement, and the ILU agreed that its requirement of the Society would not apply to policies written or renewed after the acquisition. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary of Berkshire Hathaway Inc. Whether the Society has any liability as a result of the ILU's requirement and, if so, the amount of its potential liability is uncertain. The Society has made no payment or provision in respect of this matter.
Group companies have given warranties, indemnities and guarantees as a normal part of their business and operating activities or in relation to capital market transactions or corporate disposals. Legal & General Group Plc has provided indemnities and guarantees in respect of the liabilities of group companies in support of their business activities including Pension Protection Fund compliant guarantees in respect of certain group companies' liabilities under the group pension fund and scheme. The Society has provided indemnities, a liquidity and expense risk agreement, a deed of support and a cash and securities liquidity facility in respect of the liabilities of group companies to facilitate the group's matching adjustment reorganisation pursuant to Solvency II.
IFRS and Release from Operations Page 62
2.25 Independent review report to Legal & General Group Plc - IFRS
Report on the consolidated interim financial statements
Our conclusion
We have reviewed Legal & General Group Plc's consolidated interim financial statements (the "interim financial statements") in the Interim Management Statement of Legal & General Group Plc for the 6 month period ended 30 June 2017. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the Consolidated Balance Sheet as at 30 June 2017;
-- the Consolidated Income Statement and Consolidated Statement of Comprehensive Income for the period then ended;
-- the Consolidated Cash Flow Statement for the period then ended; -- the Condensed Consolidated Statement of Changes in Equity for the period then ended; and -- the explanatory notes to the interim financial statements (pages 25 to 61).
The interim financial statements included in the Interim Management Statement have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2.08 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The Interim Management Statement, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Interim Management Statement in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the Interim Management Statement based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
IFRS and Release from Operations Page 63
2.25 Independent review report to Legal & General Group Plc - IFRS (continued)
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Interim Management Statement and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
8 August 2017
a) The maintenance and integrity of the Legal & General Group Plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim financial statements since they were initially presented on the website.
b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
IFRS and Release from Operations Page 64
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