Source - LSE Regulatory
RNS Number : 7165R
Legal & General Group Plc
10 March 2021
 

Legal & General Group Plc

2020 Full Year Results Part 2

 

IFRS Disclosures on performance and Release from operations                                                     Page 37

 

1.01 Operating profit#

For the year ended 31 December 2020

 

 

 

2020

20191

 

 

Notes

£m

£m

 

 

 

 

 

 

 

 

 

 

From continuing operations

 

 

 

 

Legal & General Retirement (LGR)

 

1.03

1,731

1,569

 - LGR Institutional (LGRI)

 

 

1,331

1,216

 - LGR Retail (LGRR)

 

 

400

353

Legal & General Investment Management (LGIM)

 

1.04

404

394

Legal & General Capital (LGC)

 

1.05

275

363

Legal & General Insurance (LGI)

 

1.03

189

314

 - UK and Other

 

 

205

223

 - US (LGIA)

 

 

(16)

91

 

 

 

 

 

 

 

 

 

 

Operating profit from divisions:

 

 

 

 

From continuing operations

 

 

2,599

2,640

From discontinued operations2

 

 

34

11

 

 

 

 

 

 

 

 

 

 

Operating profit from divisions

 

 

2,633

2,651

Group debt costs3

 

 

(233)

(208)

Group investment projects and expenses

 

 

(155)

(157)

Covid-19 costs4

 

 

(27)

-

 

 

 

 

 

 

 

 

 

 

Operating profit

 

 

2,218

2,286

Investment and other variances

 

1.06

(394)

(150)

Losses on non-controlling interests

 

 

(36)

(24)

 

 

 

 

 

Adjusted profit before tax attributable to equity holders

 

 

1,788

2,112

Tax expense attributable to equity holders

 

3.07

(217)

(302)

 

 

 

 

 

 

 

 

 

 

Profit for the year

 

 

1,571

1,810

 

 

 

 

 

 

 

 

 

 

Profit attributable to equity holders

 

 

1,607

1,834

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

Basic (pence per share)5

 

1.07

27.00p

30.92p

Diluted (pence per share)5

 

1.07

25.60p

30.75p

 

 

 

 

 

 

 

 

 

 

1. 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to Legal & General Investment Management (LGIM) within Operating profit from divisions. This has reduced LGIM operating profit by £29m for the year ended 31 December 2019.

2. Discontinued operations include the results of the Mature Savings division, the sale of which completed on 7 September 2020. In 2019, discontinued operations also included the results of the General Insurance division.

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

4. Covid-19 costs reflect incremental operational expenses incurred as a result of Covid-19 and include IT spend on delivering remote working solutions.

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

 

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

 

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

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

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

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

 

Operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Operating profit therefore reflects longer-term economic assumptions for the group's insurance businesses and shareholder funds, except the operating profit for LGC's trading businesses (which reflects the IFRS profit before tax). Variances between actual and long-term expected investment return assumptions are reported below operating profit, which include any differences between investment return on actual assets and the target long-term asset mix. Exceptional income and expenses which arise outside the normal course of business in the year, such as gains/losses from mergers and acquisition, and start-up costs, are also excluded from operating profit.

 

 

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

 

 

IFRS Disclosures on performance and Release from operations                                                     Page 38

 

1.02 Reconciliation of release from operations to operating profit# before tax

 

 

 

 

 

 

Changes in

valuation assump- tions

 

 

Operating profit/ (loss) after tax

 

Operating profit/ (loss) before

tax

 

 

 

New business surplus/ (strain)

Net

release from operations

 

 

 

 

 

 

Release from operations1

Exper- ience variances

Non-cash items

Other

Tax expense/ (credit)

 

 

 

For the year ended

 

31 December 2020

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LGR

655

277

932

116

400

33

-

1,481

250

1,731

 

 - LGRI

492

220

712

81

314

30

-

1,137

194

1,331

 

 - LGRR

163

57

220

35

86

3

-

344

56

400

 

LGIM

357

(15)

342

(17)

-

(1)

-

324

80

404

 

 - LGIM (excluding

 

 

 

 

 

 

 

 

 

 

 

   Workplace Savings)2

327

-

327

-

-

-

-

327

80

407

 

 - Workplace Savings3

30

(15)

15

(17)

-

(1)

-

(3)

-

(3)

 

LGC

224

-

224

-

-

-

-

224

51

275

 

LGI

250

8

258

(41)

58

(5)

(115)

155

34

189

 

 - UK and Other

146

8

154

(41)

58

(5)

-

166

39

205

 

 - US (LGIA)4

104

-

104

-

-

-

(115)

(11)

(5)

(16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

1,486

270

1,756

58

458

27

(115)

2,184

415

2,599

 

From discontinued operations5

28

-

28

-

-

-

-

28

6

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total from divisions

1,514

270

1,784

58

458

27

(115)

2,212

421

2,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group debt costs

(189)

-

(189)

-

-

-

-

(189)

(44)

(233)

 

Group investment projects and expenses

(56)

-

(56)

-

-

-

(61)

(117)

(38)

(155)

 

Covid-19 costs6

-

-

-

-

-

-

(20)

(20)

(7)

(27)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

1,269

270

1,539

58

458

27

(196)

1,886

332

2,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Release from operations within US (LGIA) includes £84m of dividends from the US.

2. LGIM (excluding Workplace Savings) includes profits on fund management services.

3. Workplace Savings represents administration business only.

4. Other includes experience variances, changes in valuation assumptions and non-cash items for LGIA.

5. Discontinued operations include the results of the Mature Savings division, the sale of which completed on 7 September 2020.

6. Covid-19 costs reflect incremental operational expenses incurred as a result of Covid-19 and include IT spend on delivering remote working solutions.

 

Release from operations for LGR, LGIM - Workplace Savings and LGI UK and Other represents the expected IFRS surplus generated in the year from the difference between the prudent assumptions underlying the IFRS liabilities and our best estimate of future experience for in-force non-profit annuities, workplace savings and UK protection businesses. The LGIM release from operations also includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also includes dividends remitted from LGIA. The release from operations within discontinued operations primarily reflects the unwind of expected profits after tax under the risk transfer agreement with ReAssure Limited from the Mature Savings business.

 

 

 

 

 

 

 

 

 

 

 

New business surplus/strain for LGR, LGIM - Workplace Savings and LGI UK and Other represents the initial profit or loss from writing new business. This includes the costs associated with acquiring new business and setting up prudent reserves in respect of new business for UK non-profit annuities, workplace savings and protection, net of tax. The new business surplus and release from operations for LGR, LGIM and LGI excludes any capital held in excess of the prudent reserves from the liability calculation.

 

 

 

 

 

 

 

 

 

 

 

LGR's new business metrics are presented based on a target long-term asset portfolio. At certain period ends, depending upon the quantum and timing of pension risk transfer (PRT) volumes, we may have sourced more or less of the high quality assets targeted to support that business. At year end, the profit impact of the difference between the actual assets held (including alternative surplus assets where suitable) and the long-term asset mix is reflected in investment variance.

 

 

 

 

 

 

 

 

 

 

 

Net release from operations for LGR, LGIM - Workplace Savings, LGI and discontinued operations is defined as release from operations plus new business surplus/(strain).

 

 

 

 

 

 

 

 

 

 

 

Release from operations and net release from operations for LGC and LGIM (excluding workplace savings) represents the operating profit (net of tax).

 

 

 

 

 

 

 

 

 

 

 

See Note 1.03 for more detail on experience variances, changes to valuation assumptions and non-cash items.

 

 

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

 

 

IFRS Disclosures on performance and Release from operations                                                     Page 39

 

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

 

 

 

 

 

 

Changes

 

 

 

 

Operating

 

 

New

Net

 

in

 

 

Operating

 

profit/

 

Release

business

release

Exper-

valuation

 

 

profit/

Tax

(loss)

 

from

surplus/

from

ience

assump-

Non-cash

 

(loss)

expense/

before

For the year ended

operations1

(strain)

operations

variances

tions

items

Other

after tax

(credit)

tax

31 December 2019

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LGR

598

327

925

(53)

390

91

-

1,353

216

1,569

 - LGRI

418

265

683

(40)

313

88

-

1,044

172

1,216

 - LGRR

180

62

242

(13)

77

3

-

309

44

353

LGIM2

348

(20)

328

(6)

-

(4)

-

318

76

394

 - LGIM (excluding Workplace

 

 

 

 

 

 

 

 

 

 

   Savings)3

321

-

321

-

-

-

-

321

77

398

 - Workplace Savings4

27

(20)

7

(6)

-

(4)

-

(3)

(1)

(4)

LGC

295

-

295

-

-

-

-

295

68

363

LGI

259

(7)

252

(11)

44

(12)

4

277

37

314

 - UK and Other

165

(7)

158

(11)

44

(12)

4

183

40

223

 - US (LGIA)5

94

-

94

-

-

-

-

94

(3)

91

 

 

 

 

 

 

 

 

 

 

 

From continuing operations

1,500

300

1,800

(70)

434

75

4

2,243

397

2,640

From discontinued operations6

9

-

9

-

-

-

-

9

2

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total from divisions

1,509

300

1,809

(70)

434

75

4

2,252

399

2,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group debt costs

(168)

-

(168)

-

-

-

-

(168)

(40)

(208)

Group investment projects

 

 

 

 

 

 

 

 

 

 

and expenses2

(44)

-

(44)

-

-

-

(79)

(123)

(34)

(157)

 

 

 

 

 

 

 

 

 

 

 

Total

1,297

300

1,597

(70)

434

75

(75)

1,961

325

2,286

 

 

 

 

 

 

 

 

 

 

 

1. Release from operations within US (LGIA) includes £81m of dividends from the US.

2. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £23m and Workplace Savings operating profit by £6m.

3. LGIM (excluding Workplace Savings) includes profits on fund management services.

4. Workplace Savings represents administration business only.

5. Other includes experience variances, changes in valuation assumptions and non-cash items for LGIA.

6. Discontinued operations include the results of the Mature Savings and General Insurance divisions, the sales of which completed on 7 September 2020 and 31 December 2019 respectively. 

 

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

 

IFRS Disclosures on performance and Release from operations                                            Page 40

 

1.03 Analysis of LGR and LGI operating profit

For the year ended 31 December 2020

 

 

 

 

 

 

 

LGR

LGI

LGR

LGI

 

2020

2020

2019

2019

 

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

Net release from operations

932

258

925

252

 

 

 

 

 

 

 

 

 

 

Experience variances

 

 

 

 

 - Persistency

7

3

(4)

(9)

 - Mortality/morbidity1

104

(46)

6

(5)

 - Expenses

(5)

(5)

(23)

-

 - Project and development costs

(5)

(1)

(12)

-

 - Other

15

8

(20)

3

 

 

 

 

 

 

 

 

 

 

Total experience variances

116

(41)

(53)

(11)

 

 

 

 

 

 

 

 

 

 

Changes to valuation assumptions

 

 

 

 

 - Persistency

-

(1)

-

(16)

 - Mortality/morbidity2

255

54

352

39

 - Expenses

-

2

5

-

 - Other3

145

3

33

21

 

 

 

 

 

 

 

 

 

 

Total changes to valuation assumptions

400

58

390

44

 

 

 

 

 

 

 

 

 

 

Movement in non-cash items

 

 

 

 - Acquisition expense tax relief

-

(3)

-

(2)

 - Other4

33

(2)

91

(10)

 

 

 

 

 

 

 

 

 

 

Total movement in non-cash items

33

(5)

91

(12)

 

 

 

 

 

 

 

 

 

 

Other1

-

(115)

-

4

 

 

 

 

 

 

 

 

 

 

Operating profit after tax

1,481

155

1,353

277

 

 

 

 

 

 

 

 

 

 

Tax gross up

250

34

216

37

 

 

 

 

 

 

 

 

 

 

Operating profit before tax

1,731

189

1,569

314

 

 

 

 

 

 

 

 

 

 

1. Mortality experience variances are driven by increased claims experience due to Covid-19, particularly impacting LGIA (reflected in Other) where we retain the majority of the mortality risk, and include a provision of £110m for future Covid-19 related claims.

2. Mortality assumption changes for LGR include a one off release of £153m (net of tax) from an update in the longevity trend assumption from adjusted CMI 2017 to adjusted CMI 2018. In 2019, the comparable one off release of £134m was from adjusted CMI 2016 to adjusted CMI 2017. Other positive longevity variances are driven by routine updates to our assumptions relating to base mortality rates.

3. The £145m positive Other change to valuation assumptions in LGR reflects both the reduction in the assumed late retirement factors applied to deferred annuities and the impact from updating unit cost and investment expense assumptions.

4. LGR Other movement in non-cash items is driven by the net effect of the capitalisation and unwind of future asset management profits on activity managed by LGIM, and is a function of new business volumes and movements in the main unit cost assumptions.

 

 

IFRS Disclosures on performance and Release from operations                                            Page 41

 

1.04 LGIM operating profit

 

 

 

 

 

 

 

 

 

 

2020

20195

 

 

 

 

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

Asset management revenue (excluding 3rd party market data)1,2

 

929

889

Asset management transactional revenue3

 

27

23

Asset management expenses (excluding 3rd party market data)1,2

 

(549)

(514)

Workplace Savings operating loss4

 

(3)

(4)

 

 

 

 

 

 

Total LGIM operating profit

 

404

394

 

 

 

 

 

 

1. Asset management revenue and expenses exclude income and costs of £27m in relation to the provision of third party market data (2019: £24m).

2. The ETF operating result is included as part of asset management revenue and expenses.

3. Transactional revenue from external clients includes execution fees, asset transition income, trigger fees, arrangement fees on property transactions and performance fees. 

4. Workplace Savings represents administration business.

5. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. For the respective 2019 periods this has increased Asset management expenses (2019: £23m) and reduced the Workplace Savings operating result (2019: £6m).


 

1.05 LGC operating profit

 

 

 

 

 

 

 

 

 

 

2020

2019

 

 

 

 

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

Direct investments1

 

 

112

217

Traded investment portfolio including treasury assets2

 

 

163

146

 

 

 

 

 

 

 

 

 

 

 

 

Total LGC operating profit

 

 

275

363

 

 

 

 

 

 

 

 

 

 

 

 

1. Direct Investments represents LGC's portfolio of assets across future cities (including specialist commercial real estate and clean energy), residential property and SME finance.

2. The traded investment portfolio holds a diversified set of exposures across equities, fixed income, multi-asset funds and cash.


 

1.06 Investment and other variances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

2019

 

 

 

 

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

Investment variance1

 

 

 

(691)

(27)

M&A related and other variances2

 

 

 

297

(123)

 

 

 

 

 

 

 

 

 

 

 

 

Total investment and other variances

 

 

 

(394)

(150)

 

 

 

 

 

 

 

 

 

 

 

 

1. The investment variance for the year ended 31 December 2020 is broadly made up of three significant items: 1) £459m in LGI, reflecting a reduction in the discount rate used to calculate protection liabilities, the rate being linked to UK government bond and US Treasury yields; 2) £299m in LGC, reflecting market movements in our traded and treasury portfolio and write-downs on certain property assets; 3) partially offset by a positive variance of £57m in respect of the defined benefit pension scheme, reflecting the impact of the acquisition of annuity assets from LGR, and the beneficial rate difference between the IAS19 and annuity discount rates.

2. M&A related and other variances includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. 2020 includes a £335m profit on disposal of the Mature Savings division.

 

 

 

 

 

 

Investment variance includes differences between actual and long term expected investment return on traded and real assets, economic assumption changes (e.g. credit default and inflation), the impact of any difference between the actual allocated asset mix and the target long-term asset mix on new pension risk transfer business, and excludes the yield associated with assets held for future new pension risk transfer business from the valuation discount rate.

 

 

 

 

 

 

The long term expected investment return is based on opening economic assumptions applied to the assets under management at the start of the reporting period. The assumptions underlying the calculation of the expected returns for traded equity and commercial property assets are based on long term historic average returns expected to apply through the cycle. The principal assumptions are:

 

 

 

 

 

 

 

 

 

 

2020

2019

 

 

 

 

 

 

 

 

 

 

 

 

Equities

 

 

 

7%

7%

Commercial property

 

 

 

5%

5%

Residential property

 

 

 

RPI + 50bps

RPI + 50bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IFRS Disclosures on performance and Release from operations                                            Page 42

 

1.07 Earnings per share

 

(a) Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After tax

Per share1

After tax

Per share1

 

 

 

 

2020

2020

2019

2019

 

 

 

 

£m

p

£m

p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year attributable to equity holders

1,607

27.10

1,834

30.92

Less: coupon payable in respect of restricted tier 1 convertible notes net of tax relief

 

 

 

(6)

(0.10)

-

-

Total basic earnings

 

 

 

1,601

27.00

1,834

30.92

Less: earnings derived from discontinued operations

 

(290)

(4.89)

(23)

(0.39)

Basic earnings derived from continuing operations

 

 

1,311

22.11

1,811

30.53

 

 

 

 

 

 

 

 

1. Basic earnings per share is calculated by dividing profit after tax by the weighted average number of ordinary shares in issue during the year, excluding employee scheme treasury shares.


 

(b) Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

After tax

Weighted

average

number of

shares

Per share1

 

 

 

 

 

2020

2020

2020

 

 

 

 

 

£m

m

p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year attributable to equity holders

 

1,607

5,930

27.10

Net shares under options allocable for no further consideration

 

-

40

(0.18)

Conversion of restricted tier 1 convertible notes

 

 

-

307

(1.32)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total diluted earnings

 

 

 

 

1,607

6,277

25.60

Less: diluted earnings derived from discontinued operations

 

(290)

-

(4.62)

Diluted earnings derived from continuing operations

 

1,317

6,277

20.98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After tax

Weighted

average

number of

shares

Per share1

 

 

 

 

 

2019

2019

2019

 

 

£m

m

p

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year attributable to equity holders

1,834

5,932

30.92

Net shares under options allocable for no further consideration

-

33

(0.17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total diluted earnings

1,834

5,965

30.75

Less: diluted earnings derived from discontinued operations

 

(23)

-

(0.39)

Diluted earnings derived from continuing operations

 

1,811

5,965

30.36

1. For diluted earnings per share, the weighted average number of ordinary shares in issue, excluding employee scheme treasury shares, is adjusted to assume conversion of all potential ordinary shares, such as share options granted to employees and conversion of restricted tier 1 convertible notes.

 

 

IFRS Disclosures on performance and Release from operations                                            Page 43

 

1.08 Segmental analysis

 

Reportable segments

 

The group has four reportable segments that are continuing operations, comprising LGR, LGIM, LGC and LGI, as set out in Note 1.01. Group central expenses and debt costs are reported separately. Transactions between reportable segments are on normal commercial terms, and are included within the reported segments.

 

Continuing operations exclude the results of the Mature Savings and the General Insurance divisions (General Insurance is in respect of 2019 only), which have been classified as discontinued following the group's announcement to sell these businesses to ReAssure Limited and Allianz respectively. The sale of the Mature Savings business completed on 7 September 2020, whilst that of the General insurance business completed on 31 December 2019.

 

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

 

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

 

(a) Profit/(loss) for the year

 

 

 

 

 

 

 

 

 

 

 

Group

 

 

 

 

 

 

expenses

Total

 

 

 

 

 

and debt

continuing

 

LGR

LGIM

LGC

LGI

costs1

operations

For the year ended 31 December 2020

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit/(loss)#

1,731

404

275

189

(415)

2,184

Investment and other variances

19

(3)

(299)

(459)

24

(718)

Losses attributable to non-controlling interests

-

-

-

-

(36)

(36)

 

 

 

 

 

 

 

Profit/(loss) before tax attributable to equity holders

1,750

401

(24)

(270)

(427)

1,430

Tax (expense)/credit attributable to equity holders

(230)

(63)

(8)

58

94

(149)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) for the year

1,520

338

(32)

(212)

(333)

1,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Group

 

 

 

 

 

 

expenses

Total

 

 

 

 

 

and debt

continuing

 

LGR

LGIM2

LGC

LGI

costs2

operations

For the year ended 31 December 2019

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit/(loss)#

1,569

394

363

314

(365)

2,275

Investment and other variances

43

(9)

91

(234)

(58)

(167)

Losses attributable to non-controlling interests

-

-

-

-

(24)

(24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) before tax attributable to equity holders

1,612

385

454

80

(447)

2,084

Tax (expense)/credit attributable to equity holders

(234)

(75)

(75)

12

75

(297)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) for the year

1,378

310

379

92

(372)

1,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Group expenses and debt costs include £27m of incremental costs incurred as a result of Covid-19.

2. As described in Note 1.01, 2019 has been restated to reflect a reallocation of divisional-related project expenditure from Group investment projects and expenses to LGIM. This has reduced LGIM operating profit by £29m for the year ended 31 December 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                         

 

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

 

 

IFRS Disclosures on performance and Release from operations                                            Page 44

 

1.08 Segmental analysis (continued)

 

(b) Total income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LGC and

Total continuing

 

LGR

LGIM1,2

LGI

other3

operations

For the year ended 31 December 2020

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

Internal income

-

201

-

(201)

-

External income

15,057

20,878

1,799

12,497

50,231

 

 

 

 

 

 

 

 

 

 

 

 

Total income

15,057

21,079

1,799

12,296

50,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LGC and

Total continuing

 

LGR

LGIM1,2

LGI

other3

operations

For the year ended 31 December 2019

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

Internal income

-

188

-

(188)

-

External income

16,385

43,836

1,593

4,972

66,786

 

 

 

 

 

 

 

 

 

 

 

 

Total income

16,385

44,024

1,593

4,784

66,786

 

 

 

 

 

 

 

 

 

 

 

 

1. LGIM internal income relates to investment management services provided to other segments.

2. LGIM external income primarily includes fees from fund management and investment returns on unit linked funds.

 

3. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.

 

 

 

 

 

 

 

 

IFRS Primary Financial Statements                                                                                              Page 45

 

2.01 Consolidated Income Statement

 

 

 

2020

2019

 

For the year ended 31 December 2020

Notes

£m

£m

 

 

 

 

 

 

 

 

 

 

 

Income

 

 

 

 

Gross written premiums

 

12,545

15,203

 

Outward reinsurance premiums

 

(3,187)

(3,452)

 

Net change in provision for unearned premiums

 

12

(66)

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

9,370

11,685

 

Fees from fund management and investment contracts

 

873

834

 

Investment return

 

39,168

53,014

 

Other operational income

 

820

1,253

 

 

 

 

 

 

 

 

 

 

 

Total income

1.08

50,231

66,786

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

Claims and change in insurance contract liabilities

 

17,768

19,005

 

Reinsurance recoveries

 

(3,601)

(3,502)

 

 

 

 

 

 

 

 

 

 

 

Net claims and change in insurance contract liabilities

 

14,167

15,503

 

Change in investment contract liabilities

 

31,410

45,809

 

Acquisition costs

 

617

805

 

Finance costs

 

305

269

 

Other expenses

 

2,233

2,244

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

48,732

64,630

 

 

 

 

 

 

 

 

 

 

 

Profit before tax

 

1,499

2,156

 

Tax expense attributable to policyholder returns

 

(69)

(72)

 

 

 

 

 

 

 

 

 

 

 

Profit before tax attributable to equity holders

 

1,430

2,084

 

 

 

 

 

 

 

 

 

 

 

Total tax expense

 

(218)

(369)

 

Tax expense attributable to policyholder returns

 

69

72

 

 

 

 

 

 

 

 

 

 

 

Tax expense attributable to equity holders

3.07

(149)

(297)

 

 

 

 

 

 

 

 

 

 

 

Profit after tax from continuing operations

1.08

1,281

1,787

 

Profit after tax from discontinued operations

 

290

23

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

 

1,571

1,810

 

 

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

Non-controlling interests

 

(36)

(24)

 

Equity holders

 

1,607

1,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend distributions to equity holders during the year

3.05

1,048

998

 

Dividend distributions to equity holders proposed after the year end

3.05

754

753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

p

p

 

Total basic earnings per share1

1.07

27.00

30.92

 

Total diluted earnings per share1

1.07

25.60

30.75

 

 

 

 

 

 

Basic earnings per share derived from continuing operations1

1.07

22.11

30.53

 

Diluted earnings per share derived from continuing operations1

1.07

20.98

30.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

             

 

 

IFRS Primary Financial Statements                                                                                              Page 46

 

2.02 Consolidated Statement of Comprehensive Income

 

 

2020

2019

For the year ended 31 December 2020

£m

£m

 

 

 

 

 

 

Profit for the year

1,571

1,810

Items that will not be reclassified subsequently to profit or loss

 

 

Actuarial (losses) on defined benefit pension schemes

(168)

(62)

Tax on actuarial (losses) on defined benefit pension schemes

48

11

 

 

 

 

 

 

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

(120)

(51)

 

 

 

 

 

 

Items that may be reclassified subsequently to profit or loss

 

 

Exchange differences on translation of overseas operations

2

(67)

Movement in cross-currency hedge

7

13

Tax on movement in cross-currency hedge

(4)

(1)

Movement in financial investments designated as available-for-sale

2

72

Tax on movement in financial investments designated as available-for-sale

-

(15)

 

 

 

 

 

 

Total items that may be reclassified subsequently to profit or loss

7

2

 

 

 

 

 

 

Other comprehensive (expense) after tax

(113)

(49)

 

 

 

 

 

 

Total comprehensive income for the year

1,458

1,761

 

 

 

 

 

 

Total comprehensive income for the year attributable to:

 

 

Continuing operations

1,168

1,738

Discontinued operations

290

23

 

 

 

Total comprehensive income/(expense) for the year attributable to:

 

 

Non-controlling interests

(36)

(24)

Equity holders

1,494

1,785

 

 

 

 

 

 

 

 

IFRS Primary Financial Statements                                                                                              Page 47

 

2.03 Consolidated Balance Sheet

 

 

 

 

 

 

 

2020

20191

As at 31 December 2020

Notes

£m

£m

 

 

 

 

 

 

 

 

Assets

 

 

 

Goodwill

 

68

64

Purchased interest in long term businesses and other intangible assets

 

329

190

Deferred acquisition costs

 

47

54

Investment in associates and joint ventures accounted for using the equity method

 

288

324

Property, plant and equipment

 

274

298

Investment property

3.06

8,475

7,695

Financial investments

3.06

526,057

498,389

Reinsurers' share of contract liabilities

 

6,939

5,947

Deferred tax assets

3.07

5

8

Current tax assets

 

634

468

Receivables and other assets

 

9,429

8,532

Assets of operations classified as held for sale

 

-

24,844

Cash and cash equivalents

 

18,020

13,923

 

 

 

 

 

 

 

 

Total assets

 

570,565

560,736

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

Share capital

3.08

149

149

Share premium

3.08

1,006

1,000

Employee scheme treasury shares

 

(75)

(65)

Capital redemption and other reserves

 

198

205

Retained earnings

 

8,224

7,749

 

 

 

 

 

 

 

 

Attributable to owners of the parent

 

9,502

9,038

Restricted tier 1 convertible notes

3.09

495

-

Non-controlling interests

3.10

(31)

55

 

 

 

 

 

 

 

 

Total equity

 

9,966

9,093

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

Non-participating insurance contract liabilities

 

89,029

77,881

Non-participating investment contract liabilities

 

343,543

320,594

Core borrowings

3.11

4,558

4,091

Operational borrowings

3.12

1,055

1,020

Provisions

3.16

1,288

1,220

UK deferred tax liabilities

3.07

168

189

Overseas deferred tax liabilities

3.07

39

76

Current tax liabilities

 

61

107

Payables and other financial liabilities

3.13

91,942

84,039

Other liabilities

 

756

804

Net asset value attributable to unit holders

 

28,160

31,507

Liabilities of operations classified as held for sale

 

-

30,115

 

 

 

 

 

 

 

 

Total liabilities

 

560,599

551,643

 

 

 

 

 

 

 

 

Total equity and liabilities

 

570,565

560,736

 

 

 

 

 

 

 

 

1. Following a change in accounting policy for LGIA universal life and annuity reserves, a number of balance sheet items have been restated, notably deferred acquisition costs, financial investments, reinsurers' share of contract liabilities, capital redemption and other reserves, non-participating insurance contract liabilities and overseas deferred tax liabilities. The overall net impact on the group's retained earnings as at 31 December 2019 is a reduction of £284m. Further details on the change in accounting policy are provided in Note 3.01.

 

 

IFRS Primary Financial Statements                                                                                              Page 48

 

2.04 Consolidated Statement of Changes in Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Capital

 

Equity

Restricted

 

 

 

 

 

scheme

redemption

 

 attributable

tier 1

Non-

 

 

Share

Share

treasury

and other

Retained

to owners

convertible

controlling

Total

For the year ended 31 December 2020

capital

premium

shares

reserves1

earnings

of the parent

notes

interests

equity

£m

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at 1 January 2020

149

1,000

(65)

205

7,749

9,038

-

55

9,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

-

-

-

-

1,607

1,607

-

(36)

1,571

Exchange differences on translation of overseas operations

-

-

-

2

-

2

-

-

2

Net movement in cross-currency hedge

-

-

-

3

-

3

-

-

3

Net actuarial losses on defined benefit pension schemes

-

-

-

-

(120)

(120)

-

-

(120)

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

-

-

-

2

-

2

-

-

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the year

-

-

-

7

1,487

1,494

-

(36)

1,458

Options exercised under share option schemes

-

6

-

-

-

6

-

-

6

Shares purchased

-

-

(23)

-

-

(23)

-

-

(23)

Shares vested

-

-

13

(27)

-

(14)

-

-

(14)

Employee scheme treasury shares:

- Value of employee services

-

-

-

43

-

43

-

-

43

Share scheme transfers to retained earnings

-

-

-

-

12

12

-

-

12

Dividends

-

-

-

-

(1,048)

(1,048)

-

-

(1,048)

Restricted tier 1 convertible notes2

-

-

-

-

-

-

495

-

495

Coupon payable in respect of restricted tier 1 convertible notes net of tax relief

-

-

-

-

(6)

(6)

-

-

(6)

Movement in third party interests

-

-

-

-

-

-

-

(50)

(50)

Currency translation differences

-

-

-

(30)

30

-

-

-

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at 31 December 2020

149

1,006

(75)

198

8,224

9,502

495

(31)

9,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Capital redemption and other reserves as at 31 December 2020 include share-based payments £101m, foreign exchange £43m, capital redemption £17m, hedging reserves £35m and available-for-sale reserves £2m.

2. See Note 3.09 for details.

 

 

 

 

 

 

 

 

 

 

 

IFRS Primary Financial Statements                                                                                              Page 49

 

2.04 Consolidated Statement of Changes in Equity (continued)

 

 

 

 

Employee

Capital

 

Equity

 

 

 

 

 

scheme

redemption

 

 attributable

Non-

 

 

Share

Share

treasury

and other

Retained

to owners

controlling

Total

For the year ended 31 December 2019

capital

premium

shares

reserves1

earnings

of the parent

interests

equity

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at 1 January 2019

149

992

(52)

230

7,261

8,580

72

8,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in accounting policy2

-

-

-

9

(330)

(321)

-

(321)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated as at 1 January 2019

149

992

(52)

239

6,931

8,259

72

8,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

-

-

-

-

1,834

1,834

(24)

1,810

Exchange differences on translation of overseas operations

-

-

-

(67)

-

(67)

-

(67)

Net movement in cross-currency hedge

-

-

-

12

-

12

-

12

Net actuarial gains on defined benefit pension schemes

-

-

-

-

(51)

(51)

-

(51)

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

-

-

-

57

-

57

-

57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the year

-

-

-

2

1,783

1,785

(24)

1,761

Options exercised under share option schemes

-

8

-

-

-

8

-

8

Shares purchased

-

-

(20)

-

-

(20)

-

(20)

Shares vested

-

-

7

(35)

-

(28)

-

(28)

Employee scheme treasury shares:

- Value of employee services

-

-

-

39

-

39

-

39

Share scheme transfers to retained earnings

-

-

-

-

1

1

-

1

Dividends

-

-

-

-

(998)

(998)

-

(998)

Movement in third party interests

-

-

-

-

-

-

7

7

Currency translation differences

-

-

-

14

(14)

-

-

-

Change in accounting policy2

-

-

-

(54)

46

(8)

-

(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated as at 31 December 2019

149

1,000

(65)

205

7,749

9,038

55

9,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Capital redemption and other reserves as at 31 December 2019 include share-based payments £85m, foreign exchange £71m, capital redemption £17m and hedging reserves £32m.

2. Change in accounting policy represents the impact on retained earnings of the change in accounting policy related to LGIA universal life and annuity reserves, described in Note 3.01. The change has been applied retrospectively.

 

 

IFRS Primary Financial Statements                                                                                              Page 50

 

2.05 Consolidated Statement of Cash Flows

 

 

 

2020

2019

For the year ended 31 December 2020

Notes

£m

£m

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

Profit for the year

 

1,571

1,810

Adjustments for non cash movements in net profit for the year

 

 

 

Net gains on financial investments and investment property

 

(28,530)

(45,516)

Investment income

 

(9,761)

(10,501)

Interest expense

 

337

322

Tax expense

 

144

598

Other adjustments

 

(12)

117

Net decrease/(increase) in operational assets

 

 

 

Investments held for trading or designated as fair value through profit or loss

 

6,519

(18,031)

Investments designated as available-for-sale

 

1,072

(179)

Other assets

 

(2,445)

(4,660)

Net increase/(decrease) in operational liabilities

 

 

 

Insurance contracts

 

11,607

13,089

Investment contracts

 

20,855

27,514

Other liabilities

 

(5,900)

21,313

Net increase in held for sale net liabilities

 

-

1,206

 

 

 

 

 

 

 

 

Cash utilised in operations

 

(4,543)

(12,918)

Interest paid

 

(301)

(263)

Interest received

 

5,190

5,047

Tax paid1

 

(554)

(540)

Dividends received

 

4,509

5,389

 

 

 

 

 

 

 

 

Net cash flows from/(utilised in) operations

 

4,301

(3,285)

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

Net acquisition of plant, equipment, intangibles and other assets

 

(164)

(89)

Net disposal of operations, net of cash (transferred)/acquired

3.02

(277)

198

Net (investment)/disposal in associates and joint ventures

 

(16)

29

 

 

 

 

 

 

 

 

Net cash flows (utilised)/generated from investing activities

 

(457)

138

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

Dividend distributions to ordinary equity holders during the year

3.05

(1,048)

(998)

Coupon payment in respect of restricted tier 1 convertible notes, gross of tax

 

(7)

-

Options exercised under share option schemes

3.08

6

8

Treasury shares purchased for employee share schemes

 

(23)

(20)

Payment of lease liabilities

 

(37)

(33)

Proceeds from borrowings

 

1,086

1,309

Repayment of borrowings

 

(501)

(958)

Proceeds from issuance of restricted tier 1 convertible notes, net of associated expenses

 

495

-

 

 

 

 

 

 

 

 

Net cash flows utilised in financing activities

 

(29)

(692)

 

 

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

3,815

(3,839)

Exchange losses on cash and cash equivalents

 

(28)

(16)

Cash and cash equivalents at 1 January (before reallocation of held for sale cash)

 

14,233

18,088

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

18,020

14,233

Less: cash and cash equivalents of operations classified as held for sale

3.03

-

(310)

 

 

 

 

 

 

 

 

Cash and cash equivalents at 31 December

 

18,020

13,923

 

 

 

 

 

 

 

 

1. Tax comprises UK corporation tax paid of £417m (2019: £381m), withholding tax of £137m (2019: £166m) and an overseas corporate tax refund of £nil (2019: £7m).

 

 

 

IFRS Disclosure Notes                                                                                                                          Page 51

 

3.01 Basis of preparation

 

The preliminary announcement for the year ended 31 December 2020 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information in this preliminary announcement has been derived from the group financial statements within the group's 2020 Annual Report and Accounts, which will be available on the group's website on 22 March 2021. The group's 2019 Annual Report and Accounts have been filed with the Registrar of Companies, and those for 2020 will be delivered in due course. KPMG have reported on the 2020 and 2019 report and accounts. Both their reports were (i) unqualified, (ii) did not include a reference to any matters to which they drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

 

The group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (EU), and with the requirements of the Companies Act 2006 applicable to companies reporting under IFRS. The group financial statements also comply with interpretations by the IFRS Interpretations Committee as issued by the IASB and as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU. Under the European Union (Withdrawal) Act 2018, enacted in UK law by the European Union (Withdrawal Agreement) Act 2020, an implementation period had been established, which ended on 'IP completion day', defined as 31 December 2020 at 11.00 p.m. UK time. Reporting in the UK continues to be subject to the EU legislative framework until 31 December 2020. From 1 January 2021, the group will prepare financial statements in accordance with UK-adopted international accounting standards. A new UK endorsement mechanism, overseen by the Secretary of State, is being put in place and to this aim a UK Endorsement Board is currently in the process of being established.

 

The group financial statements have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial assets and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

 

The group has selected accounting policies which state fairly its financial position, financial performance and cash flows for a reporting period. The accounting policies have been consistently applied to all years presented, unless otherwise stated.

 

Financial assets and financial liabilities are disclosed gross in the Consolidated Balance Sheet unless a legally enforceable right of offset exists and there is an intention to settle recognised amounts on a net basis. Income and expenses are not offset in the Consolidated Income Statement unless required or permitted by any accounting standard or interpretations by the IFRS Interpretations Committee.

 

Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. The functional currency of the group's foreign operations is the currency of the primary economic environment in which the entity operates. The assets and liabilities of all of the group's foreign operations are translated into sterling, the group's presentation currency, at the closing rate at the date of the balance sheet. The income and expenses for the income statement are translated at average exchange rates. On consolidation, exchange differences arising from the translation of the net investment in foreign entities and of borrowings and other currency instruments designated as hedges of such investments, are taken to a separate component of shareholders' equity.

 

Critical accounting policies and the use of estimates

The preparation of the financial statements includes the use of estimates and assumptions which affect items reported in the Consolidated Balance Sheet and Consolidated Income Statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly. This is particularly relevant for the valuation of insurance and investment contract liabilities, unquoted illiquid assets, investment property, and the determination of defined benefit pension plan assumptions. From a policy application perspective, the major areas of judgement are the assessment of whether a contract transfers significant insurance risk to the group, and whether the group controls underlying entities and should therefore consolidate them. The basis of accounting for these areas, and the significant judgements used in determining them, are outlined in the respective notes to the group's 2020 Annual Report and Accounts.

 

Key technical terms and definitions

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

 

Tax attributable to policyholders and equity holders

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

 

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

 

 

IFRS Disclosure Notes                                                                                                                          Page 52

 

3.01 Basis of preparation (continued)

 

Changes in accounting policy

 

Legal & General Insurance America (LGIA) universal life and annuity liabilities

During the year, the group has changed its accounting policy for universal life and annuity liabilities on business transacted by its US subsidiaries, which was previously based on recognised actuarial methods reflecting US GAAP. From 1 July 2020, the group has calculated such liabilities on the basis of current information using the gross premium valuation method, which is in line with how similar products are accounted for in other parts of the business.

 

The group believes the new policy is preferable as it more closely aligns the accounting for this business with that of business written in the UK, and brings it closer to the principles introduced by the upcoming new accounting standard for insurance contracts, IFRS 17. Following the change, the group no longer has any long-term business accounted for based on actuarial methods reflecting US GAAP therefore resulting in the financial statements providing more reliable and relevant information about the impact of long-term business on the group's financial position, financial performance or cash flows, in line with IFRS requirements. 

 

In addition to the change highlighted above, as at 1 July 2020 the group has reclassified £1,621m of financial investments from designated as available-for-sale and amortised cost to designated as fair value through profit or loss. This represents a further change in accounting policy permitted by IFRS 4, 'Insurance Contracts'.

 

The above represent voluntary changes in accounting policy and have been applied retrospectively, with prior year retained earnings adjusted accordingly.

 

The principal impact of the change on the prior year consolidated financial statements is in the non-participating insurance contract liabilities and in the deferred acquisition costs balance, which has been derecognised, and the associated cash flows now recognised within the insurance contract liability calculation. The carrying value of financial investments has also been affected where the measurement model for such investments has moved from amortised cost to fair value through profit or loss.

 

The impact on each line item of the Consolidated Balance Sheet as at 31 December 2019 is shown in the table below:

 

 

As reported at

31 December 2019

Adjustments

 

As restated at

31 December 2019

 

£m

£m

 

£m

Financial investments

498,376

13

 

498,389

Deferred acquisition costs

75

(21)

 

54

Reinsurers' share of contract liabilities

5,810

137

 

5,947

Non-participating insurance contract liabilities

77,317

564

 

77,881

Overseas deferred tax liability

182

(106)

 

76

Capital redemption and other reserves

250

(45)

 

205

Retained earnings

8,033

(284)

 

7,749

 

 

IFRS Disclosure Notes                                                                                                                          Page 53

 

3.02 Disposals

 

Mature Savings Division

On 6 December 2017 the group announced the sale of its Mature Savings business to ReAssure Limited ("ReAssure") for £650m. While the Part VII transfer became effective on 7 September 2020, the economic effective date of completion and the date on which the assets and liabilities of the Mature Savings business, previously classified as held for sale, were fully derecognised was 31 August 2020. The group recognised a pre-tax gain on disposal of £289m which has been included in profit from discontinued operations in the Consolidated Income Statement for the year ended 31 December 2020¹.

 

 

 

 

 

 

 

 

 

(i) Profit on the sale of the Mature Savings business

 

 

 

 

 

 

 

 

2020

 

 

 

 

 

 

 

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration received

 

 

 

 

650

Less: Unwind of expected underlying profits before disposal2

 

 

 

 

(106)

Less: Final settlement3

 

 

 

 

(55)

Less: Transaction and separation costs

 

 

 

 

(63)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net proceeds from sale

 

 

 

 

426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value of net assets disposed

 

 

 

 

137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit on the sale of the Mature Savings business before tax1

 

 

 

 

289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. The group's total tax expense in the Consolidated Income Statement includes income tax borne by both policyholders and shareholders. This is apportioned between that attributable to policyholders' returns and equity holders' profits.  Under this methodology, the profit on disposal before tax attributable to equity holders' is £335m, as disclosed in Note 3.03.

2. From 1 January 2018 up until the completion of the transaction, the group recognised the unwind of expected profits from the Mature Savings business through the Consolidated Income Statement, totalling £106m since that time. This effectively reduces the amount of consideration attributable to the final profit on sale by an equivalent amount.

3. The final settlement is an amount payable from the group to ReAssure, reflecting the residual net position of assets and liabilities transferred at the date of the Part VII.

 

 

 

 

 

 

 

 

 

(ii) Carrying value of net assets disposed

 

 

 

 

 

 

 

 

2020

 

 

 

 

 

 

 

 

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred acquisition costs

 

 

 

 

438

Investment property

 

 

 

 

926

Financial investments

 

 

 

 

25,092

Reinsurers' share of contract liabilities

 

 

 

 

550

Income tax recoverable

 

 

 

 

101

Cash and cash equivalents

 

 

 

 

248

Other assets

 

 

 

 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

27,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Participating insurance contracts

 

 

 

 

(4,297)

Participating investment contracts

 

 

 

 

(4,352)

Unallocated divisible surplus

 

 

 

 

(655)

Present value of future profits

 

 

 

 

42

Non-participating insurance contacts

 

 

 

 

(837)

Non-participating investment contracts

 

 

 

 

(16,804)

Provisions

 

 

 

 

(1)

Deferred tax liabilities

 

 

 

 

(17)

Payables and other financial liabilities

 

 

 

 

(253)

Other liabilities

 

 

 

 

(161)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

 

 

(27,335)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value of net assets disposed

 

 

 

 

137

 

 

 

 

 

 

 

 

 

 

 

IFRS Disclosure Notes                                                                                                                          Page 54

 

3.03 Discontinued operations

 

The group classifies as discontinued operations components which have been disposed of or are classified as held for sale, and which either represent a separate major line of business or geographical area, are part of a plan to dispose of one, or are a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are shown on the face of the Consolidated Income Statement, separately from the results of the other parts of the group's business.

 

 

 

 

 

The results of the Mature Savings business have been classified as discontinued operations. 2019 also includes the results of the General Insurance business, the sale of which completed on 31 December 2019.

 

 

 

 

 

(i) Financial performance of discontinued operations

 

 

 

 

2020

2019

 

£m

£m

 

 

 

 

 

Revenue1

(855)

4,225

Expenses2

782

(3,973)

Profit on disposal

 

 

289

-

Profit before tax

 

 

216

252

Tax credit/(expense)

74

(229)

Profit after tax from discontinued operations

 

 

290

23

Total comprehensive income from discontinued operations

290

23

1. Revenue includes investment return.

 

 

2. Expenses include change in insurance and investment contract liabilities.

 

 

 

 

 

 

 

 

This is represented as:

 

 

 

2020

2019

 

 

 

£m

£m

Profit before tax

 

 

216

252

Tax expense attributable to policyholder returns

 

 

142

(224)

Profit before tax attributable to equity holders

 

 

358

28

Tax expense attributable to equity holders

 

 

(68)

(5)

Profit after tax from discontinued operations

 

 

290

23

 

 

 

 

 

 

 

 

 

 

Adjusted profit before tax attributable to equity holders reported in Note 1.01 as:

 

 

 

 

 

 

 

2020

2019

 

 

 

£m

£m

Operating profit# from discontinued operations

 

 

34

11

Investment and other variances1

324

17

Adjusted profit before tax attributable to equity holders

 

 

358

28

1. Investment and other variances in 2020 includes the profit on disposal attributable to equity holders of the Mature Savings business of £335m. (2019 includes the profit on disposal of the General Insurance business of £2m).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(ii) Cash flow information of discontinued operations

 

 

 

 

2020

2019

 

£m

£m

 

 

 

 

 

Net cash inflow/(outflow) from operating activities

 

 

9

35

Net cash inflow/(outflow) from investing activities

 

 

-

-

Net cash inflow/(outflow) from financing activities

-

-

Net increase/(decrease) in cash generated by discontinued operations

9

35

 

 

 

 

 

 

 

 

 

 

# Operating profit represents 'Group adjusted operating profit', an alternative performance measure defined in the glossary.

 

 

IFRS Disclosure Notes                                                                                                                          Page 55

 

3.04 Post balance sheet events

 

In the Budget on 3 March 2021, the Chancellor of the Exchequer announced an increase in the headline rate of corporation tax to 25% from 1 April 2023.

 

Deferred tax assets and liabilities are required to be valued using the tax rate which will be in force at the time when the temporary difference is expected to unwind.  In line with the requirements of IAS12, the impact of the change in rate has not been reflected in the deferred tax balances at 31 December 2020 and will be recognised once it has been substantively enacted by the UK Parliament. The estimated impact of the change in tax rate would be an increase in the deferred tax liability of c.£50m.

 

The Solvency II balance sheet and capital position recognise deferred tax assets and liabilities associated with the taxable differences between the IFRS and Solvency II balance sheets.  The estimated impact of the change in tax rate is a small increase in the group's coverage ratio.

 

 

3.05 Dividends and appropriations

 

 

Dividend

Per share1

Dividend

Per share1

 

 

2020

2020

2019

2019

 

 

£m

p

£m

p

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary dividends paid and charged to equity in the year:

 

 

 

 

 - Final 2018 dividend paid in June 2019

 

-

-

704

11.82

 - Interim 2019 dividend paid in September 2019

 

-

-

294

4.93

 - Final 2019 dividend paid in June 2020

 

754

12.64

-

-

 - Interim 2020 dividend paid in September 2020

 

294

4.93

-

-

 

 

 

 

 

 

Total dividends

 

1,048

17.57

998

16.75

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary share dividend proposed2

 

754

12.64

753

12.64

 

 

 

 

 

 

 

 

 

 

 

 

1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.

2. Subsequent to 31 December 2020, the directors declared a final dividend for 2020 of 12.64 pence per ordinary share. This dividend will be paid on 27 May 2021. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2021 and is not included as a liability in the Consolidated Balance Sheet as at 31 December 2020.


 

3.06 Financial investments and investment property

 

 

 

 

 

2020

2019

 

 

 

 

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

Equities1

 

 

 

189,089

200,365

Debt securities2, 5

 

 

 

294,226

287,244

Accrued interest5

 

 

 

1,434

1,648

Derivative assets3

 

 

 

24,631

14,828

Loans4,5

 

 

 

16,677

16,498

 

 

 

 

 

 

 

 

 

 

 

 

Financial investments

 

 

 

526,057

520,583

 

 

 

 

 

 

 

 

 

 

 

 

Investment property

 

 

 

8,475

9,107

 

 

 

 

 

 

 

 

 

 

 

 

Total financial investments and investment property

 

 

 

534,532

529,690

Less: financial investments and investment property of operations classified as held for sale

-

(23,606)

Financial investments and investment property

534,532

506,084

1. Equity securities include investments in unit trusts of £13,215m (31 December 2019: £13,046m).

2. A detailed analysis of debt securities to which shareholders are directly exposed is disclosed in Note 6.03.

3. Derivatives are used for efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management. Derivative assets are shown gross of derivative liabilities of £23,208m (31 December 2019: £13,113m).

4. Loans include £131m (31 December 2019: £121m) of loans valued at amortised cost.

 

 

 

 

 

5. As part of a change in accounting policy for LGIA universal life and annuity reserves, certain financial investments were reclassified from designated as amortised cost to designated as fair value through profit or loss. Accordingly, the 2019 balance for Debt securities, Accrued interest and Loans have been restated to reflect the fair value of those assets. Further details on the change in accounting policy are provided in Note 3.01.

 

 

IFRS Disclosure Notes                                                                                                                          Page 56

 

3.07 Tax

 

(a) Tax charge in the Consolidated Income Statement

 

 

 

 

 

 

 

The tax attributable to equity holders differs from the tax calculated at the standard UK corporation tax rate as follows:

 

 

 

 

 

 

Continuing

 

Continuing

 

 

operations

Total

operations

Total

 

2020

2020

2019

2019

 

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

Profit before tax attributable to equity holders

1,430

1,788

2,084

2,112

Tax calculated at 19.00%

272

340

396

401

 

 

 

 

 

Adjusted for the effects of:

 

 

 

 

Recurring reconciling items:

 

 

 

 

Income not subject to tax

(1)

(1)

(4)

(4)

(Lower)/higher rate of tax on profits taxed overseas1

(111)

(111)

(117)

(117)

Non-deductible expenses

11

11

2

2

Differences between taxable and accounting investment gains

(10)

(10)

(10)

(10)

Property income attributable to minority interests

-

-

4

4

Foreign tax

1

1

6

6

Unrecognised tax losses

14

14

14

14

 

 

 

 

 

Non-recurring reconciling items:

 

 

 

 

Income not subject to tax

-

-

(6)

(6)

Non-deductible expenses

-

-

6

6

Adjustments in respect of prior years2

(42)

(42)

9

9

Impact of the revaluation of deferred tax balances3

16

16

(2)

(2)

Other

(1)

(1)

(1)

(1)

 

 

 

 

 

 

 

 

 

 

Tax attributable to equity holders

149

217

297

302

 

 

 

 

 

 

 

 

 

 

Equity holders' effective tax rate4

10.4%

12.1%

14.3%

14.3%

 

 

 

 

 

1. The lower rate of tax on overseas profits is principally driven by the 0% rate of taxation arising in our Bermudan reinsurance company, which provides the group with regulatory capital flexibility for both our PRT and US term insurance businesses. This line also includes the impact of tax on our US operations which are taxed at 21%.

2. In line with normal practice, adjustments in respect of prior years relate to revisions of earlier estimates.

3. The Finance Act 2020 removed the planned reduction in the headline UK corporation tax rate from 19% to 17%. As a result, UK deferred tax assets and liabilities previously recognised at 17% have been revalued. In the Budget on 3 March 2021, the Chancellor of the Exchequer announced an increase in the headline rate of corporation tax to 25% from 1 April 2023. The impact of this has not been reflected in the tax balances at 31 December 2020. See Note 3.04 for further details.

4. Equity holders' effective tax rate is calculated by dividing the tax attributable to equity holders over profit before tax attributable to equity holders.

 

 

IFRS Disclosure Notes                                                                                                                          Page 57

 

3.07 Tax (continued)

 

(b) Deferred tax

 

 

 

 

 

2020

20191

Deferred tax (liabilities)/assets

 

£m

£m

 

 

 

 

 

 

 

 

Deferred acquisition expenses

85

35

   - UK

 

-

(40)

   - Overseas

 

85

75

Difference between the tax and accounting value of insurance contracts

 

(557)

(524)

   - UK

 

(207)

(198)

   - Overseas

 

(350)

(326)

Unrealised gains on investments

 

(11)

(184)

Excess of depreciation over capital allowances

 

18

15

Excess expenses

 

1

20

Accounting provisions and other

 

(48)

(44)

Trading losses2

 

289

217

Pension fund deficit

 

22

28

Acquired intangibles

 

(1)

(2)

 

 

 

 

Total net deferred tax liabilities

 

(202)

(439)

Less: net deferred tax liabilities of operations classified as held for sale3

 

-

182

 

 

 

 

 

 

 

 

Net deferred tax liabilities

 

(202)

(257)

 

 

 

 

 

Analysed by:

 

 

 

 

 

 

 

 - Deferred tax assets

 

 

 

 

5

8

 - UK deferred tax liabilities

 

(168)

(189)

 - Overseas deferred tax liabilities4

 

(39)

(76)

 

 

 

 

 

 

 

 

Net deferred tax liabilities

 

(202)

(257)

 

 

 

 

 

 

 

 

1. US deferred tax liabilities in respect of deferred acquisition costs and non-participating insurance contracts have been restated following the change in accounting policy for LGIA universal life and annuity reserves. The net impact to overseas deferred tax liabilities is a reduction of £106m at 31 December 2019.

2. Trading losses reflect deferred tax on UK trade and US operating losses of £5m (2019: £4m) and £284m (2019: £213m) respectively.

3. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.

4. Overseas deferred tax liability is wholly comprised of US balances as at 31 December 2020.

 

 

IFRS Disclosure Notes                                                                                                                          Page 58

 

3.08 Share capital and share premium

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

Number of

2020

 

Number of

2019

Authorised share capital

 

shares

£m

 

shares

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 December: ordinary shares of 2.5p each

9,200,000,000

230

9,200,000,000

230

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share

Share

 

 

 

 

 

 

Number of

capital

premium

Issued share capital, fully paid

 

 

 

 

 

shares

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at 1 January 2020

 

 

 

 

5,965,349,607

149

1,000

Options exercised under share option schemes

 

2,009,106

-

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at 31 December 2020

 

 

 

 

5,967,358,713

149

1,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share

Share

 

 

 

 

 

 

Number of

capital

premium

Issued share capital, fully paid

 

 

 

 

 

shares

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at 1 January 2019

 

 

 

 

5,960,768,234

149

992

Options exercised under share option schemes

 

4,581,373

-

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at 31 December 2019

 

 

 

 

5,965,349,607

149

1,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There is one class of ordinary shares of 2.5p each. All shares issued carry equal voting rights.

 

 

 

 

 

 

 

 

 

The holders of the company's ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder meetings of the company.

 

 

3.09 Restricted tier 1 convertible notes

 

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

 

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

 

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

 

 

3.10 Non-controlling interests

 

Non-controlling interests represent third party interests in direct equity investments, including private equity, and property investment vehicles which are consolidated in the group's results.

 

As at 31 December 2020, non-controlling interests primarily represent third party ownership in Thorpe Park Holdings, a mixed residential/commercial retail space in which the group holds 50%.

 

The decrease in non-controlling interests during the year primarily reflects the deconsolidation of property investment vehicles following the sale of the Mature Savings business.

 

No other individual non-controlling interests are considered to be material on the basis of the year end carrying value or share of profit or loss.

 

 

IFRS Disclosure Notes                                                                                                                          Page 59

 

3.11 Core borrowings

 

 

 

Carrying

Coupon

 

Carrying

Coupon

 

 

 

amount

rate

Fair value

amount

rate

Fair value

 

 

2020

2020

2020

2019

2019

2019

 

 

£m

%

£m

£m

%

£m

 

 

 

 

 

 

 

 

Subordinated borrowings

 

 

 

 

 

 

 

10% Sterling subordinated notes 2041 (Tier 2)

313

10.00

329

312

10.00

353

5.5% Sterling subordinated notes 2064 (Tier 2)

589

5.50

813

589

5.50

726

5.375% Sterling subordinated notes 2045 (Tier 2)

604

5.38

714

603

5.38

691

5.25% US Dollar subordinated notes 2047 (Tier 2)

628

5.25

703

648

5.25

704

5.55% US Dollar subordinated notes 2052 (Tier 2)

369

5.55

411

380

5.55

405

5.125% Sterling subordinated notes 2048 (Tier 2)

 

400

5.13

484

399

5.13

459

3.75% Sterling subordinated notes 2049 (Tier 2)

 

598

3.75

662

598

3.75

613

4.5% Sterling subordinated notes 2050  (Tier 2)

499

4.50

587

-

-

-

Client fund holdings of group debt (Tier 2)1

 

(42)

-

(51)

(38)

-

(44)

Total subordinated borrowings

3,958

 

4,652

3,491

 

3,907

 

 

 

 

 

 

 

 

Senior borrowings

 

 

 

 

 

 

 

Sterling medium term notes 2031-2041

609

5.88

926

609

5.88

877

Client fund holdings of group debt1

 

(9)

-

(12)

(9)

-

(13)

Total senior borrowings

 

600

-

914

600

-

864

Total core borrowings

 

4,558

-

5,566

4,091

-

4,771

1. £51m (2019: £47m) of the group's subordinated and senior borrowings are held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total core borrowings in the table above.

The presented fair values of the group's core borrowings reflect quoted prices in active markets and they have been classified as Level 1 in the fair value hierarchy.

 

 

IFRS Disclosure Notes                                                                                                                          Page 60

 

3.11 Core borrowings (continued)

 

Subordinated borrowings

10% Sterling subordinated notes 2041

In 2009, Legal & General Group Plc issued £300m of 10% dated subordinated notes. The notes are callable at par on 23 July 2021 and every five years thereafter. If not called, the coupon from 23 July 2021 will be reset to the prevailing five year benchmark gilt yield plus 9.325% p.a. These notes mature on 23 July 2041.

 

5.5% Sterling subordinated notes 2064

In 2014, Legal & General Group Plc issued £600m of 5.5% dated subordinated notes. The notes are callable at par on 27 June 2044 and every five years thereafter. If not called, the coupon from 27 June 2044 will be reset to the prevailing five year benchmark gilt yield plus 3.17% p.a. These notes mature on 27 June 2064.

 

5.375% Sterling subordinated notes 2045

In 2015, Legal & General Group Plc issued £600m of 5.375% dated subordinated notes. The notes are callable at par on 27 October 2025 and every five years thereafter. If not called, the coupon from 27 October 2025 will be reset to the prevailing five year benchmark gilt yield plus 4.58% p.a. These notes mature on 27 October 2045.

 

5.25% US Dollar subordinated notes 2047

On 21 March 2017, Legal & General Group Plc issued $850m of 5.25% dated subordinated notes. The notes are callable at par on 21 March 2027 and every five years thereafter. If not called, the coupon from 21 March 2027 will be reset to the prevailing US Dollar mid-swap rate plus 3.687% p.a. These notes mature on 21 March 2047.

 

5.55% US Dollar subordinated notes 2052

On 24 April 2017, Legal & General Group Plc issued $500m of 5.55% dated subordinated notes. The notes are callable at par on 24 April 2032 and every five years thereafter. If not called, the coupon from 24 April 2032 will be reset to the prevailing US Dollar mid-swap rate plus 4.19% p.a. These notes mature on 24 April 2052.

 

5.125% Sterling subordinated notes 2048

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

 

3.75% Sterling subordinated notes 2049

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

 

4.5% Sterling subordinated notes 2050

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

 

 

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

 

Senior borrowings

 

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

 

 

IFRS Disclosure Notes                                                                                                                          Page 61

 

3.12 Operational borrowings

 

 

 

 

 

 

 

 

 

Carrying

Interest

 

Carrying

Interest

 

 

amount

rate

Fair value

amount

rate

Fair value

 

2020

2020

2020

2019

2019

2019

 

£m

%

£m

£m

%

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short term operational borrowings

 

 

 

 

 

 

Euro Commercial Paper

50

0.78

50

200

0.93

200

Bank loans and overdrafts

54

-

54

-

-

-

Non recourse borrowings

 

 

 

 

 

 

Consolidated Property Limited Partnerships

-

-

-

58

2.36

58

Later Living portfolio

72

2.77

72

72

3.47

72

CALA revolving credit facility

170

2.95

170

178

3.37

178

Class B Surplus Notes

639

2.45

639

489

4.33

489

Affordable Homes revolving credit facility

60

2.13

60

29

2.66

29

L&G Homes Limited revolving credit facility

-

-

-

16

3.44

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operational borrowings1

1,045

 

1,045

1,042

 

1,042

Less: liabilities of operations classified as held for sale2

-

-

-

(29)

2.36

(29)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operational borrowings

1,045

 

1,045

1,013

 

1,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Unit linked borrowings with a carrying value of £10m (2019: £7m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings including unit linked borrowings are £1,055m (2019: £1,020m).

2. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.

 

 

 

 

 

 

 

Non recourse borrowings

 

 

 

 

 

 

- Consolidated Property Limited Partnerships loans had a charge on the assets of the relevant Property Fund.

 

- Loan facilities to Later Living portfolio have a charge on all assets of each individual SPV company.

 

- CALA Group (Holdings) Limited's revolving credit facility is secured by way of a bond and floating charge, and guarantees and fixed charges granted by CALA Group Limited and its main subsidiaries (CALA 1999 Limited, CALA Limited, and CALA Management Limited). A number of other bonds and floating charges, fixed securities, debentures and share pledges over land and assets have been granted by certain subsidiaries of CALA Group Limited in favour of the lenders.

 

- The Class B Surplus Notes have been issued by a US subsidiary of the group as part of a coinsurance structure for the purpose of US statutory regulations. The notes were issued in exchange for bonds of the same value from an unrelated party, included within financial investments on the group's Consolidated Balance Sheet.

 

- The revolving credit facility to Affordable Homes is subject to agreed covenants, a breach of which could result in a charge on the land and work in progress of L&G Affordable Homes (Development 2) Limited.

 

- The revolving credit facility to L&G Homes Limited was secured by way of a charge on the land assets of L&G Homes Limited.

 

 

 

 

 

 

 

The carrying value of operational borrowings approximates to their fair value. The presented fair values reflect observable market information and have been classified as Level 2 in the fair value hierarchy with the exception of the Later Living portfolio and Affordable Homes revolving credit facility which have been classified as Level 3.

 

 

 

 

 

 

 

 

 

Syndicated Credit Facility

As at 31 December 2020, the group had in place a £1bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in December 2023. No amounts were outstanding at 31 December 2020.

 

 

IFRS Disclosure Notes                                                                                                                          Page 62

 

3.13 Payables and other financial liabilities

 

 

 

 

 

2020

2019

 

 

 

 

£m

£m

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

23,208

13,113

Repurchase agreements1

 

 

53,853

56,884

Other financial liabilities2

 

 

14,881

14,476

 

 

 

 

 

 

Total payables and other financial liabilities

 

 

 

91,942

84,473

Less: payables and other financial liabilities of operations classified as held for sale3

 

 

-

(434)

 

 

 

 

 

 

Payables and other financial liabilities

 

 

 

91,942

84,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due within 12 months4

 

 

65,316

64,689

Due after 12 months4

 

 

26,626

19,784

1. The repurchase agreements are presented gross, however they and their related assets (included within debt securities) are subject to master netting arrangements. The vast majority of the repurchase agreements are unit linked.

2. Other financial liabilities includes trail commission, lease liabilities, FX spots and the value of short positions taken out to cover reverse repurchase agreements. The value of the short positions at 31 December 2020 was £5,147m (2019: £7,673m).

3. Liabilities of operations classified as held for sale relate to the Mature Savings business, the sale of which completed on 7 September 2020.

4. The maturity analysis of the liabilities between less and more than 12 months is based on the Total payables and other financial liabilities.

 

 

 

 

 

 

 

 

 

 

 

 

Fair value hierarchy

 

 

 

 

 

 

 

 

 

 

Amortised

 

Total

Level 1

Level 2

Level 3

cost1

As at 31 December 2020

£m

£m

£m

£m

£m

 

 

 

 

 

 

Derivative liabilities

23,208

300

22,826

82

-

Repurchase agreements

53,853

-

53,853

-

-

Other financial liabilities

14,881

5,222

29

11

9,619

Total payables and other financial liabilities

91,942

5,522

76,708

93

9,619

 

 

 

 

 

 

 

 

 

 

 

Amortised

 

Total

Level 1

Level 2

Level 3

cost1

As at 31 December 2019

£m

£m

£m

£m

£m

 

 

 

 

 

 

Derivative liabilities

13,113

283

12,828

2

-

Repurchase agreements

56,884

-

56,884

-

-

Other financial liabilities

14,476

7,822

9

139

6,506

Total payables and other financial liabilities

84,473

8,105

69,721

141

6,506

1. The carrying value of payables and other financial liabilities at amortised cost approximates its fair value.

 

 

 

 

 

 

Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has therefore been classified as a Level 3 liability. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (2019: £4m).

 

Significant transfers between levels

 

There have been no significant transfers of liabilities between Levels 1, 2 and 3 for the year ended 31 December 2020 (2019: no significant transfers).

 

 

IFRS Disclosure Notes                                                                                                                          Page 63

 

3.14 IFRS sensitivity analysis

 

 

 

 

 

Impact on

 

Impact on

 

 

 

 

 

pre-tax

Impact on

pre-tax

Impact on

 

 

 

 

group profit

group equity

group profit

group equity

 

 

 

 

net of re-

net of re-

net of re-

net of re-

 

 

 

 

insurance

insurance

insurance

insurance

 

 

 

 

2020

2020

2019

2019

 

 

 

 

£m

£m

£m

£m

Economic sensitivity

 

 

 

 

 

 

 

Long-term insurance

 

 

 

 

 

 

 

100bps increase in interest rates

 

 

 

438

350

257

130

50bps decrease in interest rates

 

 

 

(283)

(227)

(188)

(109)

50bps increase in future inflation expectations

(148)

(119)

53

43

 

Credit spreads widen by 100bps with no change in expected defaults

(304)

(246)

(220)

(273)

 

25% rise in equity markets1

 

 

 

482

399

512

446

25% fall in equity markets1

 

 

 

(482)

(399)

(513)

(446)

15% rise in property values1

 

 

 

1,111

903

1,016

838

15% fall in property values1

 

 

 

(1,187)

(964)

(1,075)

(886)

10bps increase in credit default assumptions

(856)

(692)

(717)

(580)

 

10bps decrease in credit default assumptions1

832

672

703

569

 

 

 

 

 

 

 

 

 

Non-economic sensitivity

 

 

 

 

 

 

 

Long-term insurance

 

 

 

 

 

 

 

1% increase in annuitant mortality

209

176

195

221

 

1% decrease in annuitant mortality

(218)

(183)

(201)

(225)

 

5% increase in assurance mortality

(450)

(356)

(385)

(305)

 

10% increase in maintenance expenses

(254)

(205)

(210)

(170)

 

 

 

 

 

 

 

 

 

1. Following improvements to the modelling of market risk sensitivities during the current year, a number of 2019 impacts have been restated to be on a basis consistent with the 2020 results. These restatements do not impact any items reported in the Consolidated Income Statement or Consolidated Balance Sheet.

 

                             

The table above shows the impacts on group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario. The current disclosure reflects management's view of key risks in current economic conditions.

 

In calculating the alternative values, all other assumptions are left unchanged. In practice, items of the group's experience may be correlated.

 

The sensitivity analyses do not take into account management actions that could be taken to reduce the impacts. The group seeks to actively manage its asset and liability position. A change in market conditions may lead to changes in the asset allocation or charging structure which may have a more, or less, significant impact on the value of the liabilities. The analysis also ignores any second order effects of the assumption change, including the potential impact on the group asset and liability position and any second order tax effects.

 

The sensitivity of the profit to changes in assumptions may not be linear. They should not be extrapolated to changes of a much larger order.

 

The change in interest rate test assumes a 100 basis point increase and a 50 basis point decrease in the gross redemption yield on fixed interest securities together with the same change in the real yields on variable securities.  Valuation interest rates are assumed to move in line with market yields, adjusted to allow for prudence calculated in a manner consistent with the base results.

 

The inflation stress adopted is a 0.5% pa increase in inflation, resulting in a 0.5% pa reduction in real yield and no change to the nominal yield. In addition, the expense inflation rate is increased by 0.5% pa.

 

In the sensitivity for credit spreads, corporate bond yields have increased by 100bps, gilt and approved security yields unchanged, and there has been no adjustment to the default assumptions. All lifetime mortgages are excluded, as their primary exposure is to property risk, and therefore captured under the property stress below.

 

The equity stresses are a 25% rise and 25% fall in listed equity market values. 

 

The property stresses adopted are a 15% rise and 15% fall in property market values including lifetime mortgages. Rental income is assumed to be unchanged.  Where property is being used to back liabilities, valuation interest rates move with property yields, and so the value of the liabilities will also move.

 

The credit default assumption is set based on the credit rating of individual bonds and their outstanding term using Moody's global credit default rates. The credit default stress assumes a +/-10bps stress to the current unapproved credit default assumption, which will have an impact on the valuation interest rates used to discount liabilities. Other credit default allowances are unchanged. All lifetime mortgages are excluded, as their primary exposure is to property risk, and therefore captured under the property stress below.

 

The annuitant mortality stresses are a 1% increase and 1% decrease in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates.

 

The assurance mortality stress is a 5% increase in the mortality and morbidity rates with no change to the mortality and morbidity improvement rates.

 

The maintenance expense stress is a 10% increase in all types of maintenance expenses in future years.

 

 

IFRS Disclosure Notes                                                                                                                      Page 64

 

3.15 Foreign exchange rates

 

Principal rates of exchange used for translation are:

 

 

 

 

 

 

 

 

 

 

Year end exchange rates

 

 

 

2020

2019

 

 

 

 

 

 

 

 

 

 

 

 

United States dollar

 

 

 

1.37

1.33

Euro

 

 

 

1.12

1.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average exchange rates

 

 

 

2020

2019

 

 

 

 

 

 

 

 

 

 

 

 

United States dollar

 

 

 

1.28

1.28

Euro

 

 

 

1.13

1.14

 

 

 

 

 

 

 

 

 

 

 

 


 

 

3.16 Provisions

 

(a) Analysis of provisions

 

 

 

 

 

 

 

 

 

 

 

 

2020

2019

 

 

 

 

Note

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefit obligations

 

 

 

3.16 (b)

1,165

1,107

Other provisions

 

 

 

 

123

114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total provisions

 

 

 

1,288

1,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: liabilities of operations classified as held for sale

 

 

 

-

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisions

 

 

 

 

1,288

1,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(b) Retirement benefit obligations

 

 

 

 

 

 

 

 

 

Fund and

CALA Homes

Fund and

CALA Homes

 

 

 

Scheme

and Overseas

Scheme

and Overseas

 

 

 

2020

2020

2019

2019

 

 

 

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross pension obligations included in provisions

 

1,138

27

1,083

24

Annuity obligations insured by LGAS

 

 

(1,051)

-

(944)

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross defined benefit pension deficit

 

 

87

27

139

24

Deferred tax on defined benefit pension deficit

 

 

(17)

(5)

(24)

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net defined benefit pension deficit

 

 

70

22

115

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Legal & General Group UK Pension and Assurance Fund (Fund) and the Legal & General Group UK Senior Pension Scheme (Scheme) account for the majority of the UK and worldwide assets of, and contributions to, such arrangements. The Fund and Scheme were closed to future accrual on 31 December 2015.

 

 

IFRS Disclosure Notes                                                                                                                      Page 65

 

3.17 Contingent liabilities, guarantees and indemnities

 

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

 

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

 

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

 

3.18 Related party transactions

 

 

 

 

 

 

(i) Key management personnel transactions and compensation

 

 

 

 

 

 

 

 

There were no material transactions between key management and the Legal & General group of companies during the year. 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 £137m (2019: £86m) for all employees.

At 31 December 2020 and 31 December 2019 there were no loans outstanding to officers of the company.

 

 

 

The aggregate compensation for key management personnel, including executive and non-executive directors, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

2019

 

 

 

 

 

£m

£m

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

 

 

 

8

12

Share-based incentive awards

 

 

 

 

5

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key management personnel compensation

 

 

13

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(ii) Services provided to and by related parties

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

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

The group has the following material related party transactions:

- Annuity contracts issued by Legal and General Assurance Society Limited for consideration of £50m (2019: £78m) purchased by the group's UK defined benefit pension schemes during the year, priced on an arm's length basis;

- During the year, the Legal & General Group UK Senior Pension Scheme (the Scheme) completed an Assured Payment Policy (APP) transaction with Legal and General Assurance Society Limited (LGAS), a group company. An APP is an investment contract product sold by LGR which, issued to a pension scheme, provides the scheme with a fixed or inflation linked schedule of payments to match the scheme's expected liabilities.

At inception a premium of £397m was paid by the Scheme to LGAS, and LGAS and the Scheme recognised an investment contract liability and an APP plan asset respectively of the same amount. As at 31 December 2020, LGAS recognised a liability related to the APP transaction with the Scheme of £396m which is included in the group's non-participating investment contract liabilities. The Scheme holds a transferable plan asset of the same amount which does not eliminate on consolidation.

- Loans outstanding from related parties at 31 December 2020 of £89m (2019: £83m), with a further commitment of £14m;

- The group has total other commitments of £1,207m to related parties (2019: £1,213m), of which £772m has been drawn at 31 December 2020 (2019: £749m). 

 

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