International Financial Reporting Standards                                                                                                                Page 31

 

Supplementary operating profit information

For the year ended 31 December 2012

				2012		2011 1
	Notes			£m		£m
From continuing operations
Protection and Annuities	2.01(a)			640		601
Savings	2.02(a)			133		126
Investment management	2.03			243		234
US Protection				99		97
Group capital and financing	2.04			22		51
Investment projects2				(50)		(56)
Operating profit				1,087		1,053
Investment variances3				(39)		(97)
Losses attributable to non-controlling interests				(12)		(3)
Profit before income tax attributable to equity holders of the Company				1,036		953
Tax expense attributable to equity holders of the Company	2.05			(235)		(232)
Profit for the year				801		721
Attributable to:
Non-controlling interests				(12)		(3)
Equity holders of the Company				813		724
				p		p1
Earnings per share	2.07
Based on operating profit from continuing operations after tax attributable to equity holders
of the Company				14.01		13.47
Based on profit attributable to equity holders of the Company				13.90		12.42
Diluted earnings per share	2.07
Based on operating profit from continuing operations after tax attributable to equity holders
of the Company				13.78		13.25
Based on profit attributable to equity holders of the Company				13.66		12.22
1. Supplementary operating profit has been adjusted to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this adjustment are outlined in Note 2.19. The impact is to reduce US Protection operating profit by £3m for 2011.
2. Investment projects predominantly relate to Solvency II and other strategic investments.
3. Investment variances include £18m of restructuring costs relating to a number of reorganisation initiatives around the Group, including the restructure of the International segment.

 

This supplementary operating profit information (one of the Group's key performance indicators) provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business.

 

During the year, the Group has changed the management lines of the international subsidiaries to reflect the development of our international strategy. This has had the consequence of changing the reportable segments of the Group as outlined below. In accordance with the requirements of IFRS 8, 'Operating Segments', the prior period segmental information has been restated to reflect these changes.

 

Operating profit for the Protection and Annuities segment represents the profit from the annuities business (individual and bulk purchase annuities and longevity insurance) and the profit from the housing and protection businesses (general insurance, and individual and group protection business). It also includes Legal & General France (LGF) and Legal & General Netherlands (LGN). Operating profit reflects the investment returns that the business expects to make on the financial investments that back this business and on shareholder funds retained within our general insurance business. LGN operating profit reflects a longer term expected return on shareholders' funds and index linked policies.

 

Operating profit for the Savings segment represents the profit from the insured savings businesses (non profit investment bonds and non profit pensions (including SIPPs)), the with-profits transfer, the profit of our savings investments business, and our joint venture operation in India. Operating profit for the insured savings business reflects the investment returns that the business expects to make on the financial investments that back this business.

 

Operating profit for the Investment management segment includes a longer term expected investment return on the shareholders' funds within the segment, and operating profit for the US Protection segment comprises the profit before tax from Legal & General America (LGA).

 

Investment return on Group capital incorporates a longer term expected investment return using longer term investment return assumptions applied to the average balance of Group invested assets (including interest bearing intra-group balances) calculated on a monthly basis. Profits or losses arising from actuarial movements on annuities held by the Group's defined benefit pension schemes are excluded from operating profit. Profits or losses arising on the elimination of own debt holdings are also excluded from operating profit. The Group capital and financing segment also includes our joint ventures in Egypt and Gulf.

 

 

International Financial Reporting Standards                                                                                                                Page 32

 

Supplementary operating profit information

2.01 Protection and Annuities

(a) Protection and Annuities operating profit
							2012	2011
		Notes					£m	£m
Annuities							281	287
Protection							289	242
General insurance		2.01(f)					30	42
Other							(3)	(10)
Total UK Housing and Protection operating profit							316	274
Total UK Protection and Annuities operating profit		2.01(b)					597	561
Netherlands							28	20
France							15	20
Total Protection and Annuities operating profit							640	601

 

 

(b) Analysis of UK Protection and Annuities operating profit
				Housing			Housing
				and			and
			Annui-	Protec-		Annui-	Protec-
			ties	tion	Total	ties	tion	Total
			2012	2012	2012	2011	2011	2011
	Notes		£m	£m	£m	£m	£m	£m
UK Protection and Annuities business segment operating profit comprises:
Operational cash generation			243	265	508	227	255	482
New business strain			14	(45)	(31)	35	(66)	(31)
Net cash generation			257	220	477	262	189	451
Experience variances	2.01(c)				14			22
Changes to valuation assumptions	2.01(d)				(2)			24
Movements in non-cash items	2.01(e)				(41)			(86)
Other					2			-
					450			411
Tax gross up					147			150
Total UK Protection and Annuities operating profit					597			561
During the year, Netherlands and France paid £14m (2011: £16m) of sustainable dividends to the Group, which has been included in net cash generation for the Protection and Annuities segment.   The UK protection and annuities (non profit business) operational cash generation represents the expected surplus to be generated in the period from the in-force non profit business which is broadly equivalent to the expected release of profit from the non profit UK protection and annuities business using best estimate assumptions. The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model.   Both new business strain and operational cash generation exclude required solvency margin from the liability calculation.
An analysis of the experience variances, valuation assumption changes and non-cash items, all net of tax, is provided below:

 

 

International Financial Reporting Standards                                                                                                                Page 33

 

Supplementary operating profit information

2.01 Protection and Annuities (continued)

(c) Experience variances
							2012	2011
							£m	£m
Persistency							(4)	(4)
Mortality/morbidity1							3	(32)
Expenses							2	(2)
Bulk purchase annuity data loading							37	42
Project and development costs							(10)	(7)
Tax2							(14)	33
Other							-	(8)
							14	22
1. Mortality/morbidity in 2011 relates to a number of high value claims in group protection. This has trended back to assumptions in 2012.
2. This relates to 2012 unrelieved expenses carried forward for tax purposes. In 2011 there was a net utilisation of brought forward expenses.

 

 

(d) Changes to valuation assumptions
							2012	2011
							£m	£m
Persistency							(8)	(1)
Mortality/morbidity1							(14)	(1)
Expenses2							(2)	28
Other3							22	(2)
							(2)	24
1. This primarily relates to the update of assumptions in the annuities business.
2. Prior year expenses relate to efficiency improvements in Protection and Annuities.
3. Other valuation assumption changes primarily relates to a reduction to the retail protection reserve for reinsurance default and a reduction in reserves applying PS06/14 to a retail protection product.

 

 

(e) Movements in non-cash items
							2012	2011
							£m	£m
Deferred tax1							(32)	(77)
Other							(9)	(9)
							(41)	(86)
1. This amount includes £(72)m (2011: £(80)m) for the utilisation of trading losses within net cash generation. The offsetting items comprise movements in deferred tax from creation of carried forward unrelieved expenses for tax purposes.

 

 

(f) General insurance operating profit
			Net cash		Oper-	Net cash		Oper-
			gener-		ating	gener-		ating
			ation	Tax	profit	ation	Tax	profit
			2012	2012	2012	2011	2011	2011
			£m	£m	£m	£m	£m	£m
Household			22	7	29	27	10	37
Other business			1	-	1	4	1	5
			23	7	30	31	11	42

 

 

 

International Financial Reporting Standards                                                                                                                Page 34

 

Supplementary operating profit information

2.01 Protection and Annuities (continued)

(g) General insurance underwriting result
							2012	2011
							£m	£m
Household1							16	23
Other business							1	4
							17	27
1. The 2012 household underwriting result reflects weather experience consistent with our assumptions. The 2011 result reflects the benign weather experienced during the year.

 

 

(h) General insurance combined operating ratio1
							2012	2011
							%	%
Household							95	91
Other business							95	78
							95	90
1. The calculation of the general insurance combined operating ratio has been amended to incorporate commission and expenses as a percentage of earned premiums, as opposed to premium written. Prior year comparatives have been amended accordingly.

 

 

International Financial Reporting Standards                                                                                                                Page 35

 

Supplementary operating profit information

2.02 Savings

(a) Savings operating profit
							2012	2011
	Note						£m	£m
Savings investments1							16	23
Insured savings2							48	34
With-profits3							69	69
Total Savings operating profit	2.02(b)						133	126
1. Savings investments operating profit includes retail and institutional unit trusts and Suffolk Life.
2. Insured savings includes non profit investment bonds and pensions (including workplace savings and SIPPs), Nationwide Life savings business, International (Ireland) and our joint venture operation in India.
3. With-profits business operating profit is the shareholders' share of total with-profits bonuses.

 

 

(b) Analysis of Savings operating profit
							Savings
					Insured	With-	invest-
					savings	profits	ments	Total
					2012	2012	2012	2012
	Notes				£m	£m	£m	£m
Savings business segment operating profit comprises:
Operational cash generation					108	52	19	179
New business strain					(62)	-	-	(62)
Net cash generation					46	52	19	117
Insured savings
Experience variances	2.02(c)							(39)
Changes to valuation assumptions	2.02(d)							20
Movements in non-cash items and other	2.02(e)							11
Savings investments
Movements in non-cash items and other								(9)
								100
Tax gross up								33
Total Savings operating profit								133

 

 

 

International Financial Reporting Standards                                                                                                                Page 36

 

Supplementary operating profit information

2.02 Savings (continued)

(b) Analysis of Savings operating profit (continued)

							Savings
					Insured	With-	invest-
					savings	profits	ments	Total
					2011	2011	2011	2011
		Notes			£m	£m	£m	£m
Savings business segment operating profit comprises:
Operational cash generation					101	51	22	174
New business strain					(63)	-	-	(63)
Net cash generation					38	51	22	111
Insured savings
Experience variances		2.02(c)						(12)
Changes to valuation assumptions		2.02(d)						(5)
Movements in non-cash items and other		2.02(e)						4
Savings investments
Movements in non-cash items and other								(6)
								92
Tax gross up								34
Total Savings operating profit								126
The insured savings operational cash generation represents the expected surplus generated in the period from the in-force investment bonds and pensions business (non profit savings) which is broadly equivalent to the expected release of profit from non profit savings business using best estimate assumptions and the IFRS profit after tax of the Nationwide Life savings business and International (Ireland). The experience variances are calculated with reference to embedded value assumptions, including the apportionment of investment return and tax in the EEV model.   Both new business strain and operational cash generation exclude required solvency margin from the liability calculation.
An analysis of the experience variances, valuation assumption changes and non-cash items, all net of tax, is provided below:

 

 

(c) Experience variances
							2012	2011
							£m	£m
Persistency							(3)	(1)
Mortality/morbidity							-	2
Expenses							(1)	1
Project and development costs1							(33)	(12)
Tax							1	(4)
Other							(3)	2
							(39)	(12)
1. The 2012 project and development costs are primarily driven by the Retail Distribution Review £18m (2011: £3m) with additional expenditure on our workplace proposition (including auto-enrolment) of £12m (2011: £7m). Other costs are £3m (2011: £2m).

 

 

 

International Financial Reporting Standards                                                                                                                Page 37

 

Supplementary operating profit information

2.02 Savings (continued)

(d) Changes to valuation assumptions
							2012	2011
							£m	£m
Persistency							-	(2)
Mortality/morbidity							-	1
Expenses1							17	(2)
Other							3	(2)
							20	(5)
1. Expense valuation assumptions relate to efficiency improvements in workplace pensions.

 

 

(e) Movements in non-cash items and other
							2012	2011
	Note						£m	£m
Deferred tax							(6)	(6)
Deferred acquisition costs (DAC)1	2.02(f)						(9)	(20)
Deferred income liabilities (DIL)1							14	27
Other2							12	3
							11	4
1. Fluctuations to the DAC and DIL movement are caused by changes to economic assumptions and the associated impact on the trail commission asset within the DAC balance and the trail commission liability in the DIL balance.
2. Other includes the operating profit/(loss) attributable to our joint venture in India.

 

 

(f) Deferred acquisition cost movement, net of associated deferred tax
							2012	2011
							£m	£m
As at 1 January							592	612
Amortisation through income1							(28)	(74)
Acquisition costs deferred							42	54
As at 31 December							606	592
1. The DAC amortisation incorporates a one-off increase of £23m relating to the accounting for Trail Commission DOC where estimation techniques used to determine the amortisation profile has been revised and strengthened.
The Group's balance sheet deferred acquisition costs of £1.9bn (2011: £1.8bn) is presented gross of associated deferred tax. The main contributors to the balance are LGA £0.8bn (2011: £0.7bn), non profit savings of £0.7bn (2011: £0.7bn), retail investments £0.1bn (2011: £0.1bn), savings with-profits £0.1bn (2011: £0.1bn) and other business totalling £0.2bn (2011: £0.2bn).
Expected amortisation profile:
							2012	2011
							£m	£m
Expected to be amortised within one year							76	65
Expected to be amortised between one year and five years							305	271
Expected to be amortised in over five years							225	256
							606	592

 

 

International Financial Reporting Standards                                                                                                                Page 38

 

Supplementary operating profit information

2.03 Investment management

							2012	2011
							£m	£m
Pension funds (managed and segregated)							181	172
Other non-pension1							22	25
Investment management services for internal funds							40	37
Total Investment management operating profit							243	234
1. Other non-pension includes institutional segregated mandates, private equity and property (both in the UK and overseas). Interest income on shareholder funds of £6m (2011: £9m) on an average asset balance of £0.4bn (2011: £0.4bn) has been included within other non-pension operating profit.

 

2.04 Group capital and financing

 

							2012	2011
							£m	£m
Investment return							168	191
Interest expense1							(127)	(123)
Investment expenses							(5)	(5)
Unallocated corporate expenses2							(14)	(12)
Total Group capital and financing operating profit							22	51
1. Interest expense excludes interest on non recourse financing (see Note 2.12).
2. Unallocated corporate expenses includes the operating profit/(loss) attributable to our joint venture operations in Egypt and the Gulf.

 

 

2.05 Analysis of tax attributable to equity holders

					Profit/	Tax		Profit/		Tax
					(loss)	(exp-		(loss)		(exp-
					before	ense)/		before		ense)/
					tax	credit		tax		credit
					2012	2012		2011		2011
								Restated1		Restated1
					£m	£m		£m		£m
Protection and Annuities					640	(159)		601		(162)
Savings					133	(33)		126		(34)
Investment management					243	(46)		234		(45)
US Protection					99	(37)		97		(34)
Group capital and financing					22	(4)		51		(8)
Investment projects					(50)	12		(56)		15
Operating profit/Tax expense					1,087	(267)		1,053		(268)
Investment variances					(39)	39		(97)		42
Impact of change in UK tax rates					-	(7)		-		(6)
Losses attributable to non-controlling interests					(12)	-		(3)		-
Profit for the year/Tax expense for the year					1,036	(235)		953		(232)
1. Operating profit/Tax expense has been restated to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this restatement are outlined in Note 2.19.
The equity holders' effective tax rate for the period is 22.7% (2011: 24.4%). The Group's effective tax rate remains slightly below the UK corporation tax rate due to a number of differences between the measurement of accounting and taxable profits.      International Financial Reporting Standards                                                                                                                Page 39   Consolidated Income Statement For the year ended 31 December 2012
							2012		2011
									Restated1
					Notes		£m		£m
Revenue
Gross written premiums					2.06		5,668		5,719
Outward reinsurance premiums							(718)		(620)
Net change in provision for unearned premiums							(25)		(18)
Net premiums earned							4,925		5,081
Fees from fund management and investment contracts							875		897
Investment return							28,834		12,143
Operational income							342		196
Total revenue							34,976		18,317
Expenses
Claims and change in insurance liabilities							8,588		7,173
Reinsurance recoveries							(779)		(493)
Net claims and change in insurance liabilities							7,809		6,680
Change in provisions for investment contract liabilities							23,656		9,306
Acquisition costs							784		783
Finance costs							165		165
Other expenses							1,194		1,010
Transfers to/(from) unallocated divisible surplus							158		(402)
Total expenses							33,766		17,542
Profit before tax							1,210		775
Tax (expense)/income attributable to policyholder returns							(174)		178
Profit before tax attributable to equity holders of the Company							1,036		953
Total tax expense							(409)		(54)
Tax expense/(income) attributable to policyholder returns							174		(178)
Tax expense attributable to equity holders					2.05		(235)		(232)
Profit for the year							801		721
Attributable to:
Non-controlling interests							(12)		(3)
Equity holders of the Company							813		724
Dividend distributions to equity holders of the Company during the year					2.08		394		298
Dividend distributions to equity holders of the Company proposed after the year end					2.08		336		279
									Restated1
							p		p
Earnings per share
Based on profit attributable to equity holders of the Company					2.07		13.90		12.42
Diluted earnings per share
Based on profit attributable to equity holders of the Company					2.07		13.66		12.22

1. The Consolidated Income Statement has been restated to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this adjustment are outlined in Note 2.19.

 

This financial information was approved by the Board on 5 March 2013.

 

 

International Financial Reporting Standards                                                                                                                Page 40

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2012

 

			2012	2011
				Restated
			£m	£m
Profit for the year			801	721
Other comprehensive income after tax
Exchange differences on translation of overseas operations			(13)	-
Actuarial (losses) on defined benefit pension schemes			(107)	(121)
Actuarial losses on defined benefit pension schemes transferred to unallocated divisible surplus			41	48
Net change in financial investments designated as available-for-sale			32	15
Total comprehensive income for the year			754	663
Total comprehensive income attributable to:
Non-controlling interests			(12)	(3)
Equity holders of the Company			766	666

 

 

International Financial Reporting Standards                                                                                                                Page 41

 

Consolidated Balance Sheet

As at 31 December 2012

 

				2012	2011
					Restated1
		Notes		£m	£m
Assets
Purchased interest in long term businesses and other intangible assets				211	148
Deferred acquisition costs				1,904	1,833
Investment in associates				87	60
Property, plant and equipment				92	78
Investment property				5,143	4,894
Financial investments		2.09		316,748	300,604
Reinsurers' share of contract liabilities				2,499	2,289
Deferred tax asset				316	493
Current tax recoverable				194	94
Other assets				1,564	1,893
Assets of operations classified as held for sale2				891	-
Cash and cash equivalents				16,652	14,113
Total assets				346,301	326,499
Equity
Share capital		2.10		148	147
Share premium		2.10		956	941
Employee scheme treasury shares				(43)	(48)
Capital redemption and other reserves				153	117
Retained earnings				4,227	3,899
Shareholders' equity				5,441	5,056
Non-controlling interests				39	66
Total equity				5,480	5,122
Liabilities
Subordinated borrowings		2.12		1,890	1,921
Participating insurance contracts		2.13		8,116	8,750
Participating investment contracts		2.14		7,403	7,276
Unallocated divisible surplus				1,153	1,038
Value of in-force non-participating contracts				(242)	(242)
Participating contract liabilities				16,430	16,822
Non-participating insurance contracts		2.13		37,728	34,006
Non-participating investment contracts		2.14		264,958	251,345
Non-participating contract liabilities				302,686	285,351
Senior borrowings		2.12		1,475	1,329
Provisions		2.17		983	891
Deferred tax liabilities				382	327
Current tax liabilities				68	1
Payables and other financial liabilities				8,083	7,643
Other liabilities				959	933
Net asset value attributable to unit holders				7,702	6,159
Liabilities of operations classified as held for sale2				163	-
Total liabilities				340,821	321,377
Total equity and liabilities				346,301	326,499

1. The consolidated balance sheet has been restated to reflect the retrospective adoption of ASU 2010-26, issued by the FASB, which specifies the accounting for deferred acquisition costs under US GAAP. Details of this adjustment are outlined in Note 2.19.

2. Assets and liabilities of operations classified as held for sale relate to seed capital the Group has invested into newly established funds. They are classified as held for sale as the Group expects it's ownership to reduce below the level for control within 12 months of classification.

 

 

International Financial Reporting Standards                                                                                                                Page 42

Consolidated Statement of Changes in Equity
			Employee	Capital
			scheme	redemption			Non-
	Share	Share	treasury	and other	Retained		controlling	Total
	capital	premium	shares	reserves	earnings	Total	interests	equity
For the year ended 31 December 2012	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2012	147	941	(48)	117	3,899	5,056	66	5,122
Profit for the year	-	-	-	-	813	813	(12)	801
Exchange differences on translation of
overseas operations	-	-	-	(13)	-	(13)	-	(13)
Actuarial (losses) on defined benefit
pension schemes	-	-	-	-	(107)	(107)	-	(107)
Actuarial losses on defined benefit
pension schemes transferred to
unallocated divisible surplus	-	-	-	-	41	41	-	41
Net change in financial investments
designated as available-for-sale	-	-	-	32	-	32	-	32
Total comprehensive income/(expense)
for the year	-	-	-	19	747	766	(12)	754
Options exercised under
share option schemes:
- Executive share option schemes	-	1	-	-	-	1	-	1
- Savings related share option scheme	1	14	-	-	-	15	-	15
Shares purchased	-	-	(3)	-	-	(3)	-	(3)
Shares vested	-	-	8	(21)	-	(13)	-	(13)
Employee scheme treasury shares:
- Value of employee services	-	-	-	19	-	19	-	19
Share scheme transfers
to retained earnings	-	-	-	-	(6)	(6)	-	(6)
Dividends	-	-	-	-	(394)	(394)	-	(394)
Movement in third party interests	-	-	-	-	-	-	(15)	(15)
Currency translation differences	-	-	-	19	(19)	-	-	-
As at 31 December 2012	148	956	(43)	153	4,227	5,441	39	5,480

 

 

 

International Financial Reporting Standards                                                                                                                Page 43

 

Consolidated Statement of Changes in Equity (continued)

			Employee	Capital
			scheme	redemption			Non-
	Share	Share	treasury	and other	Retained		controlling	Total
For the year ended 31 December 2011	capital	premium	shares	reserves	earnings	Total	interests	equity
(Restated)	£m	£m	£m	£m	£m	£m	£m	£m
As at 1 January 2011	147	938	(41)	91	3,546	4,681	47	4,728
Profit for the year	-	-	-	-	724	724	(3)	721
Exchange differences on translation of
overseas operations	-	-	-	-	-	-	-	-
Actuarial (losses) on defined benefit
pension schemes	-	-	-	-	(121)	(121)	-	(121)
Actuarial losses on defined benefit
pension schemes transferred to
unallocated divisible surplus	-	-	-	-	48	48	-	48
Net change in financial investments
designated as available-for-sale	-	-	-	15	-	15	-	15
Total comprehensive income/(expense)
for the year	-	-	-	15	651	666	(3)	663
Options exercised under
share option schemes:
- Executive share option schemes	-	1	-	-	-	1	-	1
- Savings related share option scheme	-	2	-	-	-	2	-	2
Shares purchased	-	-	(15)	-	-	(15)	-	(15)
Shares vested	-	-	8	(19)	-	(11)	-	(11)
Employee scheme treasury shares:
- Value of employee services	-	-	-	27	-	27	-	27
Share scheme transfers
to retained earnings	-	-	-	-	3	3	-	3
Dividends	-	-	-	-	(298)	(298)	-	(298)
Movement in third party interests	-	-	-	-	-	-	22	22
Currency translation differences	-	-	-	3	(3)	-	-	-
As at 31 December 2011	147	941	(48)	117	3,899	5,056	66	5,122

 

 

International Financial Reporting Standards                                                                                                                Page 44

 

Consolidated Cash Flow Statement

For the year ended 31 December 2012

			2012	2011
				Restated
			£m	£m
Cash flows from operating activities
Profit for the year			801	721
Adjustments for non cash movements in net profit for the year
Realised and unrealised gains on financial investments and investment properties			(18,429)	(3,014)
Investment income			(9,470)	(8,971)
Interest expense			165	165
Tax expense			409	54
Other adjustments			67	68
Net (increase)/decrease in operational assets
Investments held for trading or designated as fair value through profit or loss			(1,118)	3,736
Investments designated as available-for-sale			30	(29)
Other assets			(3,008)	(1,678)
Net increase in operational liabilities
Insurance contracts			3,221	2,075
Transfer from unallocated divisible surplus			115	(431)
Investment contracts			13,795	(2,068)
Value of in-force non-participating contracts			-	135
Other liabilities			7,026	2,258
Cash used in operations			(6,396)	(6,979)
Interest paid			(164)	(164)
Interest received			5,013	5,021
Tax paid1			(193)	(193)
Dividends received			4,539	3,872
Net cash flows from operating activities			2,799	1,557
Cash flows from investing activities
Net acquisition of plant, equipment and intangibles			(59)	(41)
Acquisitions (net of cash acquired)2			(27)	(11)
Capital injection into overseas joint ventures			-	(5)
Net cash flows from investing activities			(86)	(57)
Cash flows from financing activities
Dividend distributions to ordinary equity holders of the Company during the year			(394)	(298)
Proceeds from issue of ordinary share capital			16	3
Purchase of employee scheme shares			(3)	(15)
Proceeds from borrowings			1,318	1,327
Repayment of borrowings			(1,105)	(1,428)
Net cash flows from financing activities			(168)	(411)
Net increase in cash and cash equivalents			2,545	1,089
Exchange (losses) on cash and cash equivalents			(6)	(12)
Cash and cash equivalents at 1 January			14,113	13,036
Cash and cash equivalents at 31 December			16,652	14,113
1. Tax comprises UK corporation tax paid of £60m (2011: £80m), overseas corporate taxes of £8m (2011: £8m) and withholding tax of £125m (2011: £105m).
2. Net cash flows from acquisitions include total net identifiable assets acquired of £33m (2011: £15m) less cash and cash equivalents acquired of £6m (2011: £4m).
The Group's consolidated cash flow statement includes all cash and cash equivalent flows, including those relating to the UK long term fund policyholders.

 

 

International Financial Reporting Standards                                                                                                                Page 45

 

Notes to the Financial Statements

2.06 Gross written premiums on insurance contracts

							2012	2011
							£m	£m
From continuing operations
Protection and Annuities
Non-participating UK business							3,782	3,778
Netherlands (LGN)							172	194
France (LGF)							406	393
General insurance
- Household							327	283
- Other business							22	21
Total Protection and Annuities							4,709	4,669
Savings
Non-participating Savings business							39	40
Participating business							336	488
Total Savings							375	528
US Protection							584	522
Total gross written premiums							5,668	5,719

 

 

2.07 Earnings per share

(a) Earnings per share

	Profit	Tax	Profit	Earnings	Profit	Tax	Profit	Earnings
	before tax	expense	after tax	per share	before tax	expense	after tax	per share
	2012	2012	2012	2012	2011	2011	2011	2011
					Restated	Restated	Restated	Restated
	£m	£m	£m	p	£m	£m	£m	p
Operating profit	1,087	(267)	820	14.01	1,053	(268)	785	13.47
Investment variances	(39)	39	-	0.01	(97)	42	(55)	(0.94)
Impact of change in UK tax rates	-	(7)	(7)	(0.12)	-	(6)	(6)	(0.11)
Earnings per share based on profit
attributable to equity holders	1,048	(235)	813	13.90	956	(232)	724	12.42

 

 

(b) Diluted earnings per share
(i) Based on operating profit after tax

 

 

			Profit	Number	Earnings	Profit	Number	Earnings
			after tax	of shares1	per share	after tax	of shares1	per share
			2012	2012	2012	2011	2011	2011
						Restated		Restated
			£m	m	p	£m	m	p
Operating profit after tax			820	5,851	14.01	785	5,828	13.47
Net shares under options allocable for no further consideration			-	99	(0.23)	-	97	(0.22)
Diluted earnings per share			820	5,950	13.78	785	5,925	13.25

 

 

 

International Financial Reporting Standards                                                                                                                Page 46

 

Notes to the Financial Statements

2.07 Earnings per share (continued)

(b) Diluted earnings per share (continued)

(ii) Based on profit attributable to equity holders

			Profit	Number	Earnings	Profit	Number	Earnings
			after tax	of shares1	per share	after tax	of shares1	per share
			2012	2012	2012	2011	2011	2011
						Restated		Restated
			£m	m	p	£m	m	p
Profit attributable to equity holders of the Company			813	5,851	13.90	724	5,828	12.42
Net shares under options allocable for no further consideration			-	99	(0.24)	-	97	(0.20)
Diluted earnings per share			813	5,950	13.66	724	5,925	12.22
1. Weighted average number of shares.
The number of shares in issue at 31 December 2012 was 5,912,782,826 (31 December 2011: 5,872,166,893).

 

 

2.08 Dividends

					Per		Per
					share	Total	share	Total
					2012	2012	2011	2011
					p	£m	p	£m
Ordinary share dividends paid in the year
- Prior year final dividend					4.74	278	3.42	201
- Current year interim dividend					1.96	116	1.66	97
					6.70	394	5.08	298
Ordinary share dividend proposed1					5.69	336	4.74	279
1. The dividend proposed has not been included as a liability in the balance sheet.

 

 

2.09 Financial investments

 

							2012	2011
							£m	£m
Equities							148,488	134,594
Unit trusts							7,238	7,487
Debt securities1							152,526	149,711
Accrued interest							1,669	1,705
Derivative assets2							6,445	6,756
Loans and receivables							382	351
							316,748	300,604
1. Detailed analysis of debt securities which shareholders are directly exposed to are disclosed in Note 4.02.
2. Derivative exposures arise from efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps, foreign exchange forward contracts for asset and liability management and the matching of Guaranteed Equity Bonds within the Nationwide portfolio. Derivative assets are shown gross of derivative liabilities and include £3,296m (2011: £3,174m) held on behalf of unit linked policyholders.
There have been no significant transfers between levels 1, 2 and 3 of the fair value hierarchy (as prescribed in IFRS 7 'Financial Instruments: Disclosures') for the year ended 31 December 2012. Further details are provided in Note 4.07.

 

 

International Financial Reporting Standards                                                                                                                Page 47

 

Notes to the Financial Statements

2.10 Share capital and share premium

 

				2012			2011
				Number of	2012		Number of	2011
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 2012					5,872,166,893		147	941
Options exercised under share option schemes
- Executive share option scheme						1,626,478	-	1
- Savings related share option scheme					38,989,455		1	14
As at 31 December 2012					5,912,782,826		148	956
							Share	Share
						Number of	capital	premium
Issued share capital, fully paid						shares	£m	£m
As at 1 January 2011					5,866,669,323		147	938
Options exercised under share option schemes
- Executive share option scheme						1,736,890	-	1
- Savings related share option scheme					3,760,680		-	2
As at 31 December 2011					5,872,166,893		147	941
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.

 

 

International Financial Reporting Standards                                                                                                                Page 48

 

Notes to the Financial Statements

2.11 Segmental analysis of shareholders' equity
							2012	2011
								Restated
							£m	£m
Protection and Annuities
General insurance							180	148
Netherlands (LGN)							156	118
France (LGF)							204	196
Other							10	6
Total Protection and Annuities							550	468
Savings
Savings investments							138	136
Other							52	48
Total Savings							190	184
Investment management							360	351
US Protection							919	910
Group capital and financing							3,422	3,143
Shareholders' equity							5,441	5,056
Overseas shareholder equity is presented on a legal entity basis, whereas UK shareholder equity is based on a management assessment of this business.
The Group has five reporting segments comprising Protection and Annuities, Savings, Investment management, US Protection, and Group capital and financing.   The Protection and Annuities segment comprises individual and group protection, individual and bulk purchase annuities, longevity and general insurance, together with estate agencies and the housing related business conducted through our regulated mortgage network. It also includes Legal & General France (LGF) and Legal & General Netherlands (LGN).     The Savings segment comprises non profit investment bonds, non profit pensions (including SIPPs), ISAs, retail unit trusts, retail platform businesses, all with-profits products, and our joint venture operation in India.   The Investment management segment comprises institutional fund management and LGIM America (LGIMA).   The US Protection segment comprises individual protection and universal life contracts written by Legal & General America (LGA).   Shareholders' equity supporting the non profit Protection and Annuities and Savings businesses is held within Legal & General Assurance Society Limited and Legal & General Pensions Limited and is managed on a groupwide basis within Group capital and financing. This also includes capital within the Group's treasury function and unit trust funds and property partnerships, which are managed on behalf of clients but are required to be consolidated under IFRS, which do not constitute a separately reportable segment. The Group capital and financing segment also includes our joint ventures in Egypt and the Gulf.

 

 

International Financial Reporting Standards                                                                                                                Page 49

 

Notes to the Financial Statements

2.12 Borrowings

 

							2012	2011
							£m	£m
Subordinated borrowings
6.385% Sterling perpetual capital securities (Tier 1)							700	721
5.875% Sterling undated subordinated notes (Tier 2)							419	421
4.0% Euro subordinated notes 2025 (Tier 2)							479	483
10% Sterling subordinated notes 2041 (Tier 2)							309	309
Client fund holdings of Group debt1							(17)	(13)
Total subordinated borrowings							1,890	1,921
Senior borrowings
Sterling medium term notes 2031-2041							608	608
Euro Commercial paper							333	246
Bank loans/other							6	8
Client fund holdings of Group debt1							(53)	(51)
Total senior borrowings (excluding non recourse)							894	811
Total borrowings (excluding non recourse)							2,784	2,732
Non recourse
- US Dollar Triple X securitisation 2037							272	286
- Suffolk Life unit linked borrowings							123	136
- LGV 6/LGV 7 Private Equity Fund Limited Partnership							128	96
- Consolidated Property Limited Partnerships							58	-
Total senior borrowings (including non recourse)							1,475	1,329
Total borrowings							3,365	3,250
1. £70m (2011: £64m) of the Group's subordinated and senior debt is currently held by Legal & General customers through unit linked products. These borrowings are shown as a deduction from total borrowings in the table above.

 

 

 

International Financial Reporting Standards                                                                                                                Page 50

 

Notes to the Financial Statements

2.12 Borrowings (continued)

 

Subordinated borrowings

 

6.385% Sterling perpetual capital securities

In 2007, Legal & General Group Plc issued £600m of 6.385% Sterling perpetual capital securities. Simultaneous with the issuance, the fixed coupon was swapped into six month LIBOR plus 0.94% pa. These securities are callable at par on 2 May 2017 and every three months thereafter. If not called, the coupon from 2 May 2017 will be reset to three month LIBOR plus 1.93% pa. For regulatory purposes these securities are treated as innovative tier 1 capital. These securities have been classified as liabilities as the interest payments become mandatory in certain circumstances.

 

5.875% Sterling undated subordinated notes

In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. These notes are callable at par on 1 April 2019 and every five years thereafter. If not called, the coupon from 1 April 2019 will be reset to the prevailing five year benchmark gilt yield plus 2.33% pa. These notes are treated as upper tier 2 capital for regulatory purposes. These securities have been classified as liabilities as the interest payments become mandatory in certain circumstances.

 

4.0% Euro subordinated notes 2025

In 2005, Legal & General Group Plc issued €600m of 4.0% Euro dated subordinated notes. The proceeds were swapped into sterling. The notes are callable at par on 8 June 2015 and each year thereafter. If not called, the coupon from 8 June 2015 will reset to a floating rate of interest based on prevailing three month Euribor plus 1.7% pa. These notes mature on 8 June 2025 and are treated as lower tier 2 capital for regulatory purposes.

 

10% Sterling subordinated notes 2041

On 16 July 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% pa. These notes mature on 23 July 2041 and are treated as lower tier 2 capital for regulatory purposes.

 

Non recourse financing

 

US Dollar Triple X securitisation 2037

In 2006, a subsidiary of LGA issued US$450m of non recourse debt in the US capital markets to meet the Triple X reserve requirements of part of the US term insurance written after 2005 and 2006. It is secured on the cash flows related to that tranche of business.

 

Suffolk Life unit linked borrowings

All of these non recourse borrowings are in relation to commercial properties held within SIPP plans and the borrowings solely relate to client investments.

 

LGV6/LGV7 Private Equity Fund Limited Partnerships

These borrowings are non recourse bank borrowings.

 

Consolidated Property Limited Partnerships

These borrowings are non recourse bank borrowings.

 

Syndicated credit facility

 

As at 31 December 2012, the Group had in place a £1.00bn syndicated committed revolving credit facility provided by a number of its key relationship banks, maturing in October 2017. No drawings were made under this facility during 2012.

 

Holding company short term assets

 

Short term assets available at the holding company level exceeded the amount of non-unit linked short term borrowings of £337m (2011: £254m). They comprise Euro Commercial paper and bank loans.

 

 

International Financial Reporting Standards                                                                                                                Page 51

 

Notes to the Financial Statements

2.13 Insurance contract liabilities

(a) Analysis of insurance contract liabilities

						Re-		Re-
					Gross	insurance	Gross	insurance
					2012	2012	2011	2011
				Notes	£m	£m	£m	£m
Participating insurance contracts				2.13(b)	8,116	(1)	8,750	(1)
Non-participating insurance contracts1				2.13(c)	37,445	(2,277)	33,761	(2,110)
General insurance contracts				2.13(d)	283	(8)	245	(6)
Insurance contract liabilities					45,844	(2,286)	42,756	(2,117)
1. Excluding General insurance contracts.

 

 

(b) Movement in participating insurance contract liabilities

						Re-		Re-
					Gross	insurance	Gross	insurance
					2012	2012	2011	2011
					£m	£m	£m	£m
As at 1 January					8,750	(1)	9,383	(1)
New liabilities in the year					262	-	374	-
Liabilities discharged in the year					(1,413)	-	(1,435)	-
Unwinding of discount rates					78	-	85	-
Effect of change in non-economic assumptions					4	-	(26)	-
Effect of change in economic assumptions					329	-	357	-
Other					106	-	12	-
As at 31 December					8,116	(1)	8,750	(1)

 

 

International Financial Reporting Standards                                                                                                                Page 52

 

Notes to the Financial Statements

2.13 Insurance contract liabilities (continued)

(c) Movement in non-participating insurance contract liabilities

						Re-		Re-
					Gross	insurance	Gross	insurance
					2012	2012	2011	2011
					£m	£m	£m	£m
As at 1 January					33,761	(2,110)	31,064	(2,096)
New liabilities in the year					2,667	(392)	2,687	(309)
Liabilities discharged in the year					(2,271)	213	(2,018)	144
Unwinding of discount rates					1,311	(118)	1,321	(123)
Effect of change in non-economic assumptions					(124)	132	(403)	389
Effect of change in economic assumptions1					2,229	(17)	1,133	(111)
Foreign exchange adjustments					(128)	15	(23)	(4)
As at 31 December					37,445	(2,277)	33,761	(2,110)
1. The economic assumptions changes in 2012 principally reflect the narrowing of credit spreads. Movements in credit spreads also increased the value of the corresponding backing assets.

 

 

(d) Analysis of General insurance contract liabilities

						Re-		Re-
					Gross	insurance	Gross	insurance
					2012	2012	2011	2011
					£m	£m	£m	£m