Legal & General Regulatory News (LGEN)

2016

2015

Notes

£m

£m

From continuing operations

Legal & General Retirement (LGR)

2.02

811

641

Legal & General Investment Management (LGIM)

2.03

366

355

Legal & General Capital (LGC)

2.05

257

233

Legal & General Insurance (LGI)

2.02

317

315

 - UK and Other

232

232

 - US

85

83

Savings

2.02

99

107

General Insurance

2.04

52

51

Operating profit from divisions

1,902

1,702

Group debt costs1

(172)

(153)

Group investment projects and expenses2

2.06

(102)

(86)

Adjusted operating profit

1,628

1,463

Kingswood office closure costs

(66)

(8)

Operating profit

1,562

1,455

Investment and other variances

2.07

13

(119)

Gains on non-controlling interests

7

19

Profit before tax attributable to equity holders

1,582

1,355

Tax expense attributable to equity holders of the company

2.15

(317)

(261)

Profit for the year

1,265

1,094

Profit attributable to equity holders of the company

1,258

1,075

p

p

Earnings per share3

2.10

21.22

18.16

Diluted earnings per share3

2.10

21.13

18.04

1. Group debt costs exclude interest on non recourse financing.

2. Group investment projects and expenses in 2016 include restructuring costs of £54m (2015: £42m).

3. All earnings per share calculations are based on profit attributable to equity holders of the company.

The table below provides an analysis of the release from operations by each of the group's business segments, together with a reconciliation to operating profit before tax.

Changes

Operating

New

Net

in

Operating

profit/

Release

business

release

Exper-

valuation

Non-cash

Inter-

profit/

Tax

(loss)

from

surplus/

from

ience

assump-

items and

national

(loss)

expense/

before

For the year ended

operations1

(strain)

operations

variances

tions

other

and other2

after tax

(credit)

tax

31 December 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

LGR

433

159

592

34

40

6

-

672

139

811

LGIM

308

(22)

286

(1)

-

-

-

285

81

366

 - LGIM excluding Workplace

Savings (admin only)

290

-

290

-

-

-

-

290

82

372

 - Workplace Savings (admin

only)3

18

(22)

(4)

(1)

-

-

-

(5)

(1)

(6)

LGC

214

-

214

-

-

-

-

214

43

257

LGI

317

23

340

(11)

5

(29)

(79)

226

91

317

 - UK and Other

254

23

277

(11)

5

(29)

(57)

185

47

232

 - US

63

-

63

-

-

-

(22)

41

44

85

Savings

104

(5)

99

4

8

(32)

-

79

20

99

General Insurance

42

-

42

-

-

-

-

42

10

52

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)

Adjusted total

1,256

155

1,411

26

53

(55)

(138)

1,297

331

1,628

Kingswood office closure costs4

-

-

-

-

-

-

(53)

(53)

(13)

(66)

Total

1,256

155

1,411

26

53

(55)

(191)

1,244

318

1,562

1. Release from operations includes dividends remitted from LGN of £70m (2015: £28m) within the LGI UK and Other line and US of £63m (2015: £54m).

2. International and other includes £43m (2015: £34m) of restructuring costs (£54m before tax) (2015: £42m 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.

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 LGA 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 remaining 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).

During 2016, changes have been made to the organisational structure. The advised sales and India businesses have been transferred to LGI from Savings, and the IDOL business has been transferred to LGR from LGI. Comparatives have been amended accordingly.

See Note 2.02 for more detail on experience variances, changes to valuation assumptions and non-cash items.

Changes

Operating

New

Net

in

Operating

profit/

Release

business

release

Exper-

valuation

Non-cash

Inter-

profit/

Tax

(loss)

from

surplus/

from

ience

assump-

items and

national

(loss)

expense/

before

For the year ended

operations1

(strain)

operations

variances

tions

other

and other2

after tax

(credit)

tax

31 December 2015

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

LGR4

374

45

419

13

114

(20)

-

526

115

641

LGIM

303

(22)

281

(1)

1

(2)

-

279

76

355

 - LGIM excluding Workplace

Savings (admin only)

282

-

282

-

-

-

-

282

77

359

 - Workplace Savings (admin3

only)

21

(22)

(1)

(1)

1

(2)

-

(3)

(1)

(4)

LGC

187

-

187

-

-

-

-

187

46

233

LGI4

328

25

353

(14)

(45)

(46)

(28)

220

95

315

 - UK and Other

274

25

299

(14)

(45)

(46)

(11)

183

49

232

 - US

54

-

54

-

-

-

(17)

37

46

83

Savings4

125

(9)

116

(9)

-

(23)

2

86

21

107

General Insurance

41

-

41

-

-

-

-

41

10

51

Total from divisions

1,358

39

1,397

(11)

70

(91)

(26)

1,339

363

1,702

Group debt costs

(122)

-

(122)

-

-

-

-

(122)

(31)

(153)

Group investment projects

and expenses

(19)

-

(19)

-

-

-

(50)

(69)

(17)

(86)

Adjusted total

1,217

39

1,256

(11)

70

(91)

(76)

1,148

315

1,463

Kingswood office closure costs

-

-

-

-

-

-

(6)

(6)

(2)

(8)

Total

1,217

39

1,256

(11)

70

(91)

(82)

1,142

313

1,455

1. Release from operations includes dividends remitted from LGF of £1m and LGN of £28m within the LGI UK and Other line and US of £54m.

2. International and other includes £34m of restructuring costs (£42m before tax) within the Group investment projects and expenses line.

3. This represents Workplace Savings admin only and excludes fund management profits.

4. LGR includes the IDOL business which was previously reported in LGI, and LGI includes the advised sales and India businesses which were previously reflected in Savings. The impact of this reclassification has been to increase LGR 2015 release from operations by £2m, increase Savings 2015 release from operations by £6m and reduce LGI 2015 release from operations by £8m.

LGR

LGI

Savings

LGR

LGI

Savings

2016

2016

2016

2015

2015

2015

£m

£m

£m

£m

£m

£m

Net release from operations

592

340

99

419

353

116

Experience variances

Persistency

2

(2)

-

4

5

(2)

Mortality/morbidity1

47

(34)

-

18

(16)

-

Expenses

(9)

4

7

-

2

3

Project and development costs

(21)

2

(4)

(20)

(2)

(2)

Other

15

19

1

11

(3)

(8)

Total experience variances

34

(11)

4

13

(14)

(9)

Changes to valuation assumptions

Persistency2

-

(52)

5

-

48

-

Mortality/morbidity3

40

4

-

97

(20)

-

Expenses4

-

53

-

17

27

(2)

Reinsurance modelling5

-

-

-

-

(93)

-

Other

-

-

3

-

(7)

2

Total valuation assumption changes

40

5

8

114

(45)

-

Movement in non-cash items

Deferred tax

-

-

1

-

-

2

Utilisation of brought forward trading losses

-

-

-

(25)

(6)

-

Acquisition expense tax relief 6

-

(27)

(3)

-

(30)

(4)

Deferred Acquisition Costs (DAC)7

-

-

(28)

-

-

(54)

Deferred Income Liabilities (DIL)7

-

-

9

-

-

39

Other

6

(2)

(11)

5

(10)

(6)

Total non-cash movement items

6

(29)

(32)

(20)

(46)

(23)

International and other8

-

(79)

-

-

(28)

2

Operating profit after tax

672

226

79

526

220

86

Tax gross up

139

91

20

115

95

21

Operating profit before tax

811

317

99

641

315

107

1. The LGR mortality/morbidity experience variance reflects higher than expected annuitant deaths experience over 2016. LGI mortality/morbidity experience variance in 2016 primarily reflects adverse claims experience on the group protection book of business.

2. The LGI persistency valuation assumption change in 2016 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. The 2015 LGR mortality/morbidity change to valuation assumptions primarily reflected a change in mortality reserving assumptions in relation to unreported deaths of deferred annuitants.

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. The reinsurance modelling for our UK protection business was enhanced in 2015. Recent reinsurance contracts have been written on a risk premium basis (as opposed to level premium) and the model change ensured that for these treaties, sufficient prudence was being held in later years. The one-off impact reduced operating profit by £93m in 2015. This also deferred a higher proportion of release from operations into the later years of these reinsurance contracts.

6. 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.

7. 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.

8. LGI Other in 2016 reflects the difference between the dividend (release from operations) remitted from LGN and LGA of £70m and £63m respectively (2015: dividends remitted from LGN of £28m, LGF of £1m and LGA of £54m) and the LGN, LGA and India operating profit after tax (2015: LGN, LGF, LGA and India operating profit after tax).

2016

2015

£m

£m

Investment management revenue

744

694

Investment management expenses

(372)

(335)

Workplace Savings (admin only) operating loss1

(6)

(4)

Total LGIM operating profit

366

355

1. This represents Workplace Savings admin only and excludes fund management profits.

2016

2015

£m

£m

General Insurance operating profit1

52

51

General Insurance combined operating ratio (%)2

89

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.

2016

2015

£m

£m

Direct investments

121

69

Traded portfolio including treasury operations

136

164

Total LGC operating profit

257

233

2016

2015

£m

£m

Group investment projects and central expenses

(48)

(44)

Restructuring costs1

(54)

(42)

Total Group investment projects and expenses

(102)

(86)

1. Restructuring costs exclude the Kingswood office closure costs which have been presented separately.

2016

2015

£m

£m

Investment variance1

147

(57)

M&A related2

(102)

(57)

Other3

(32)

(5)

Total Investment and other variances

13

(119)

1. 2016 investment variance is positive, primarily driven by foreign exchange gains on US dollar assets, the outperformance of equity markets to expectations and a lack of defaults on the group's bond portfolios, partially offset by the negative impact of interest rate changes during the period. The defined benefit pension scheme variance of £29m contained within this line (2015: £(15)m) reflects the actuarial gains and losses, and valuation differences arising on annuity assets held by defined benefit pension schemes that have been purchased from Legal & General Assurance Society Limited. 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. 2016 includes the £60m net loss resulting from the classification of Cofunds Plc as held for sale (£64m loss) and the disposal of Suffolk Life (£4m gain).(2015: includes the £25m net loss resulting from the disposal of subsidiary and joint venture investments during the year).

3. Other includes new business start-up costs and other non-investment related variance items.

2016

2015

Notes

£m

£m

Income

Gross written premiums

10,325

6,321

Outward reinsurance premiums

(1,573)

(1,603)

Net change in provision for unearned premiums

4

21

Net premiums earned

8,756

4,739

Fees from fund management and investment contracts

1,068

1,139

Investment return

67,824

5,947

Operational income

321

876

Total income

2.09

77,969

12,701

Expenses

Claims and change in insurance liabilities

17,896

5,080

Reinsurance recoveries

(2,745)

(2,466)

Net claims and change in insurance liabilities

15,151

2,614

Change in provisions for investment contract liabilities

58,578

5,615

Acquisition costs

793

838

Finance costs

198

186

Other expenses

1,569

1,893

Transfers (from)/to unallocated divisible surplus

(187)

141

Total expenses

76,102

11,287

Profit before tax

1,867

1,414

Tax expense attributable to policyholder returns

(285)

(59)

Profit before tax attributable to equity holders

1,582

1,355

Total tax expense

(602)

(320)

Tax expense attributable to policyholder returns

285

59

Tax expense attributable to equity holders

2.15

(317)

(261)

Profit for the year

1,265

1,094

Attributable to:

Non-controlling interests

2.24

7

19

Equity holders of the company

1,258

1,075

Dividend distributions to equity holders of the company during the year

2.17

830

701

Dividend distributions to equity holders of the company proposed after the year end

2.17

616

592

p

p

Earnings per share1

2.10

21.22

18.16

Diluted earnings per share1

2.10

21.13

18.04

1. All earnings per share calculations are based on profit attributable to equity holders of the company.

2016

2015

£m

£m

Profit for the year

1,265

1,094

Items that will not be reclassified subsequently to profit or loss

Actuarial (losses)/gains on defined benefit pension schemes

(138)

47

Tax on actuarial (losses)/gains on defined benefit pension schemes

17

(11)

Actuarial gains/(losses) on defined benefit pension schemes transferred to unallocated divisible surplus

51

(17)

Tax on actuarial gains/(losses) on defined benefit pension schemes transferred to unallocated divisible surplus

(6)

4

Total items that will not be reclassified to profit or loss subsequently

(76)

23

Items that may be reclassified subsequently to profit or loss

Exchange differences on translation of overseas operations

190

25

Net change in financial investments designated as available-for-sale

(4)

(64)

Tax on net change in financial investments designated as available-for-sale

1

22

Total items that may be reclassified to profit or loss subsequently

187

(17)

Other comprehensive income after tax

111

6

Total comprehensive income for the year

1,376

1,100

Total comprehensive income attributable to:

Non-controlling interests

7

19

Equity holders of the company

1,369

1,081

2016

2015

Notes

£m

£m

Assets

Goodwill

11

83

Purchased interest in long term businesses and other intangible assets

155

292

Deferred acquisition costs

2,105

1,887

Investment in associates and joint ventures

283

220

Property, plant and equipment

76

92

Investment property

2.14/3.04

8,150

8,082

Financial investments

2.14/3.04

418,175

354,063

Reinsurers' share of contract liabilities

5,593

4,120

UK deferred tax asset

2.15

5

20

Current tax recoverable

297

236

Other assets

5,022

3,618

Assets of operations classified as held for sale

2.12

2,265

3,409

Cash and cash equivalents

25,717

20,677

Total assets

467,854

396,799

Equity

Share capital

2.18

149

149

Share premium

2.18

981

976

Employee scheme treasury shares

(30)

(30)

Capital redemption and other reserves

212

89

Retained earnings

5,633

5,220