- 1. Accounting policies
- 2. Impact of significant events and changes in 2006
- 3. Operating Profit Information
- 4. Segmental Analysis
- 5. New business (Gross of Reinsurance)
- 6. Investment return
- 7. Net claims and change in insurance liabilities
- 8. Other expenses
- 9. Auditors' remuneration
- 10. Employee information
Back to Notes to the Financial Statements
2. Impact of significant events and changes in 2006
Corporate restructure
On 31 December 2006, the non-linked non profit pensions and annuity business of Society was ceded to a new, wholly owned, reinsurance company, Legal & General Pensions Limited (LGP).
LGP has been capitalised using £1.3bn of Society shareholder capital, £400m of this is represented by subordinated debt (£200m upper tier II, £200m lower tier II) and £900m by equity. The reinsurance was effected on arm’s length terms resulting in an initial regulatory loss in LGP. Further funds of £571m have been injected from Society’s LTF into LGP’s LTF by means of a contingent loan to cover this loss.
Prior to the capitalisation of LGP, the intra-group subordinated debt capital of £602m attributed to SRC was repaid to Group Plc and an equivalent amount was lent to Society shareholder capital on a subordinated basis (£301m upper tier II, £301m lower tier II).
The corporate restructuring has had no impact on the IFRS profit before tax for the year. The movement in liabilities and assets between Society and LGP is eliminated in the Group consolidation in accordance with the Group accounting policies. However, there is a £171m deferred tax benefit for 2006, which increases the IFRS profit after tax (see Note 13). This is the result of an initial tax loss in LGP.
The corporate restructuring has reduced Society’s regulatory surplus capital by £0.5bn (2006 total surplus: £4.9bn) and the Insurance Groups Directive (IGD) regulatory surplus by £0.5bn (2006 total surplus: £2.1bn), primarily due to the requirement to hold solvency margins in both Society and LGP for the reinsured business. These amounts are extracted from draft regulatory returns.
Implementation of changes to FSA reporting and capital rules (Policy Statement 06/14)
In 2006, the FSA introduced a more realistic reserving framework for certain non profit business. As a result, the Group changed its insurance assumptions as detailed in Note 37. This lead to a reduction in the non-participating insurance contract liabilities and regulatory reserves required for term assurance business of £641m, and an elimination of the deferred acquisition cost asset relating to term assurance business amounting £145m (see Note 24(ii)), resulting in an increase to IFRS profit after tax of £496m.
The change to the reserving framework has also resulted in a consequent small reduction in the long term insurance capital requirement. The associated financial reinsurance previously in place to finance these reserves was terminated and no credit has been taken for implicit items in the regulatory balance sheet, of which approximately £240m related term assurance. The net impact on Society’s regulatory capital surplus of the changes to reserving has been an increase of approximately £125m.
In addition, the FSA removed the requirement for Society to calculate a resilience capital requirement and changed the calculation of the With‑Profits Insurance Capital Component which has resulted in a decrease in Society’s capital resources requirement of £432m.
Review of annuity investment policy
During 2006, Society undertook a review of its asset liability matching policy for annuity business. Property assets backing annuity liabilities were replaced with corporate bonds and Society entered into inflation swaps to mitigate negative inflation risk (see Note 21). As a result, a closer match between assets and liabilities was achieved. Additionally, the margin within the reserves to cover an interest rate mismatch was reviewed and reduced. These actions reduced the regulatory reserves for Society, and increased the IFRS profit after tax, by £422m.
Tax effects
In accordance with the Group’s policy for attributing tax to equity holders and policyholders, the IFRS profit before equity holder tax from the net capital released from UK non profit business is determined by grossing up after tax amounts at the standard rate of UK corporation tax (30%). In 2006, there was no current or deferred tax charge on these profits.