Legal & General Group Plc is the ultimate holding company for a group of insurance, investment management and financial services companies. The Company’s principal operating subsidiaries are set out in Note 47.
Business Review
Information on the Group’s principal activities together with a review of the development and performance of the Group, including financial performance in accordance with Section 234ZZB Companies Act 1985 is set out within the Operating and Financial Review.
The Key Performance Indicators (KPIs) are defined in the table below. The KPIs for the Group in 2006 are shown in the following table:
| 2006 | 2005 | |
|---|---|---|
| EEV operating profit | £1,233m | £1,092m |
| IFRS operating profit | £752m | £647m |
| Return on embedded value | 12.5% | 12.6% |
| IGD surplus* | £2.1bn | £2.4bn |
| Three year total shareholder return | 80% | 50% |
- *
- Figures extracted from draft regulatory returns
See the Principal Risks and Uncertainties facing the Group.
KPI Definitions
- EEV Operating Profit
-
Definition: Legal & General provides supplementary financial statements prepared on the European Embedded Value (EEV) basis for long term insurance contracts (see Supplementary Financial Statements) The EEV figures provide an assessment of the value which has been generated by the business during a period.
Calculation: Operating profit on the EEV basis reports the change in embedded value in a period, but excludes fluctuations from assumed longer term investment return.
Purpose: In the Board’s opinion, EEV operating profit provides shareholders with a better understanding of the Group’s performance than IFRS, as it provides information about the value which is being created on the Group’s long term insurance contracts.
- IFRS Operating Profit
-
Definition: The Group’s primary financial statements (see Financial Statements) are prepared on the International Financial Reporting Standards (IFRS) basis which all EU listed companies are required to follow.
Calculation: IFRS operating profit measures the pre-tax result using an assumed longer term investment return. Any variance between actual and assumed investment return is reported below operating profit. For UK life and pensions, the maximum operating profit is based on a formula agreed with the FSA which is set out in Note 3 (iv) of the Financial Statements.
Purpose: IFRS operating profit gives an insight into the Group’s ability to generate cash flows to support dividends during a period.
- Return on Embedded Value (ROEV)
-
Definition: ROEV measures the return earned by shareholders on shareholder capital retained within the business.
Calculation: ROEV is calculated as EEV operating profit after tax divided by opening EEV shareholders’ funds.
Purpose: ROEV provides a link between performance and balance sheet management and ensures that an optimal balance is maintained.
- IGD Surplus
Definition: The IGD surplus is an FSA regulatory measure which calculates surplus capital within the Group.
Calculation: IGD surplus is defined as Group regulatory capital employed less the Group regulatory capital requirement. Surplus capital held within our Society Long Term Fund cannot be included in the IGD definition of capital employed.
Purpose: IGD surplus is the dominant regulatory surplus capital measure for the Group.
- Total Shareholder Return (TSR)
Definition: TSR is a measure used to compare the performance of different companies’ stocks and shares over time. It combines the share price appreciation and dividends paid to show the total return to the shareholder.
Calculation: TSR is the change in share price over a three year performance period, plus the value of reinvested dividends, relative to the performance of all the other companies in the FTSE 100.
Purpose: TSR measures total return to shareholders over the medium term.
Result for the Year
The IFRS profit attributable to equity holders of the Company for the financial year was £1,564m (2005: £944m profit) and the earnings per share were 24.12p (2005: 14.33p). The consolidated balance sheet and the consolidated income statement show the affairs of the Group as at, and for the year ended, 31 December 2006. An analysis of worldwide gross written premiums is shown on Note 4(iv).
Dividend
The directors recommend the payment of a final dividend of 3.81p per share. With the interim dividend of 1.74p per share paid on 2 October 2006, this brings the total dividend recommended for 2006 to 5.55p per share (2005: 5.28p), an increase of 5.1%. The final dividend will be paid on 21 May 2007 to members registered at the close of business on 20 April 2007. The cost of the dividend paid for the year is £349m. The retained profit was £1,215m.
Directors
A list of the current directors of the Company, together with biographical notes, is shown on Board of Directors. All current directors remained in office throughout 2006 with the exception of Rudy Markham, who was appointed on 1 October 2006. Barrie Morgans retired from the Board at the conclusion of the Annual General Meeting (AGM) on 18 May 2006.
The following changes are proposed in 2007:
Beverley Hodson will retire from the Board at the conclusion of the AGM on 16 May 2007.
The directors retiring by rotation at the AGM are, Kate Avery, John Pollock, Dr Ronaldo Schmitz and James Strachan who, being eligible, offer themselves for re-election.
Rudy Markham has been appointed since the last AGM and, being eligible, offers himself for election.
Kate Avery and John Pollock have service contracts which are terminable by them or the Company on receipt of no less than six months’ written notice. On termination, they would become entitled to six months’ salary and benefits.
The terms and conditions of Rudy Markham, James Strachan and Dr Ronaldo Schmitz’s appointment are available for inspection at the Company’s registered office and at the AGM.
The Directors’ Report on Remuneration provides details of the current incentive schemes, the interests of directors in the share capital of the Company and details of their share options and other long term incentives.
The changes in directors’ share interests between 31 December 2006 and 13 March 2007 are outlined in the tables below.
The executive directors’ share purchases were made pursuant to their participation in the Employee Share Plan:
|
2 January 2007 |
1
February 2007 |
1
March 2007 |
|
|---|---|---|---|
| Tim Breedon | 90 | 92 | 92 |
| Kate Avery | 90 | 92 | 92 |
| Andrew Palmer | 91 | 91 | 92 |
| Robin Phipps | 90 | 92 | 91 |
| John Pollock | 90 | 92 | 92 |
The non-executive directors acquired shares pursuant to the regular monthly purchase of shares as part of their remuneration.
| 2 January 2007 |
1
February 2007 |
1 March 2007 |
|
|---|---|---|---|
| Sir Rob Margetts | 4,260 | 4,998 | 5,177 |
| Frances Heaton | 916 | 915 | 947 |
| Beverley Hodson | 916 | 915 | 947 |
| Rudy Markham1 | nil | nil | nil |
| Ronaldo Schmitz | 916 | 915 | 947 |
| Henry Staunton | 1,225 | 1,223 | 1,267 |
| James Strachan | 916 | 915 | 947 |
| Sir David Walker | 1,225 | 1,223 | 1,267 |
- 1.
- See Remuneration Report for explanation of Rudy Markham’s fee arrangements.
United Kingdom Employees
It is the Group’s policy to treat its employees without discrimination and to operate equal opportunity employment practices designed to achieve this end.
Furthermore, it is the Group’s policy to give full and fair consideration to applications for employment made by disabled persons; to continue, wherever possible, the employment of staff who become disabled and to provide equal opportunities for the training and career development of disabled employees.
The Group seeks to achieve an awareness among staff of corporate objectives and performance, financial and economic factors affecting the business and other matters of concern to them as employees. During the year, staff were provided with information through briefings by managers, training courses, email bulletins, staff newspapers and circulars.
The Company operates a savings related share option scheme (SAYE), a Company Share Option Plan and an Employee Share Plan, all of which are approved by Her Majesty’s Revenue & Customs (HMRC).
Details of employee share schemes and long term incentives are included in the The Directors’ Report on Remuneration .
Purchase of Own Shares
The directors propose to seek shareholders’ approval to increase from 5%-10% the authority for the Company to purchase its own shares up to a total of 653,252,004 ordinary shares of 2.5p each, having an aggregate nominal value of £16,331,300, being 10% of the issued nominal ordinary share capital as at 13 March 2007 (being the last practicable date prior to publication of the AGM Notice). A Special Resolution seeking shareholders’ authority is set out in the notice of the AGM in the accompanying Circular to Shareholders.
Share Capital
As at 13 March 2007, the Company had received notifications from Aviva and its subsidiary companies, Swiss Reinsurance Company group of companies and Barclays Plc of holdings of the Company’s share capital with voting rights amounting to 3.14%, 3.14% and 4.01%, respectively.
Resolution 11, set out in the notice of the AGM, will authorise the directors to allot up to an aggregate nominal amount of £8,165,650, being 5% of the total issued capital as at 13 March 2007 (being the last practicable date prior to publication of the AGM Notice).
Resolution 12, set out in the notice of the AGM, will authorise the directors to issue further shares up to the equivalent of 5% of the Company’s issued share capital as at 13 March 2007 (being the last practicable date prior to publication of the AGM Notice) for cash without offering the shares first to existing shareholders by way of rights. It is not intended, without prior consultation with the Investment Committee of the Association of British Insurers, to issue in this way more than 7.5% of the unissued share capital in any rolling three year period. The resolution will also authorise the directors to allot shares in connection with a rights issue otherwise than strictly pro rata where practical considerations, such as fractions and foreign securities laws, make this desirable.
Details of the number, the consideration and the reason for the issue of shares by the Company during the year are set out in Note 28.
Other than the above, the directors have no current intention of issuing further share capital and no issue will be made which would effectively alter control of the Company without prior approval of the members in general meeting.
Directors’ Indemnities
On 3 January 2006, the Company agreed in writing to indemnify each of the directors against any liability incurred by the director in respect of acts or omissions arising in the course of their office. The indemnity only applies to the extent permitted by law. Copies of the Deeds of Indemnity are available for inspection at the Registered Office and at the AGM.
Risk Management and Control
Details of the Company’s risk management and control policies are disclosed in Note 51 to the Financial Statements.
Insurance
Legal & General maintains an appropriate level of Directors’ and Officers’ liability insurance which is reviewed annually.
Environment
Details of the Group’s commitment to environmental issues, as part of its Corporate Social Responsibility programme.
United Kingdom Donations
During 2006, charitable donations totalling £2.3m (2005: £1.3m) were made. In 2005 purely charitable donations were disclosed. In 2006 both charitable donations and charitable sponsorship have been disclosed. No political donations were made during the year (2005: none).
Payments to Suppliers
The Group agrees terms and conditions for its business transactions with suppliers. Payment is made in accordance with these terms provided the supplier meets its obligations.
The Company has no trade creditors. As at 31 December 2006, the average number of days of payments outstanding for the Legal & General Group of companies was 31 (2005: 33).
Auditors
A resolution to re-appoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the AGM.
Disclosure of Information to Auditors
Each of the directors at the date of approval of this report confirms that:
1. so far as the director is aware, there is no relevant information of which the Company’s auditors are unaware; and
2. the director has taken all the steps that he/she ought to have taken as a director to make himself/herself aware of any relevant information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 234ZA of the Companies Act 1985.
On behalf of the Board
Claire Davies
Group Secretary
13 March 2007