Notes to the Financial Information (IFRS basis)
20. Basis of preparation
The Group's financial information for the period ended 30 June 2006 has been prepared in accordance with the Listing Rules of the Financial Services Authority (FSA). The Group's financial information has been prepared in accordance with the accounting policies that the Group expects to adopt for the 2006 year end which are consistent with the principal accounting policies which were set out in the Group's 2005 consolidated financial statements. The principal accounting policies adopted by the Group for the 2005 year end, as set out in the Group's 2005 consolidated financial statements, were consistent with IFRSs issued by the IASB as adopted by the European Commission (EC) for use in the European Union (EU). The Group has chosen not to adopt IAS 34 'Interim Financial Reporting' in preparing its 2006 interim accounts since adoption of this standard is not mandatory until the EU Transparency Directive is implemented through the FSA's Listing Rules.
The preparation of the financial information includes the use of estimates and assumptions that affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the date of the financial information. Although these estimates are based on management's knowledge and understanding of current circumstances and future events and actions, actual results may differ from those estimates, possibly significantly.
The accounting policies have been consistently applied to all periods presented.
21. Restatement of prior year comparatives
After the 2005 Interim Results were presented under IFRS, the interpretation of provisions within IAS 32, 'Financial Instruments: Disclosure and Presentation', required the £400m 5.875% undated subordinated notes to be classified as equity, rather than as a liability. The change in classification resulted in an increase in reported profit after tax for the six months to 30 June 2005 of £8m, due to the corresponding reclassification of interest payments as distributions and an increase in total equity of £398m. On 13 March 2006, the terms were modified to remove the discretionary nature of the interest and it is now classified as debt. The debt has been recognised at the prevailing fair value on the date of the variation.
22. Dividends
|
30.06.06 p |
30.06.06 £m |
30.06.05 p |
30.06.05 £m |
Full year 2005 p |
Full year 2005 £m |
|
|---|---|---|---|---|---|---|
| Ordinary share dividend paid in the period | 3.63 | 236 | 3.45 | 224 | 5.10 | 331 |
| Ordinary share dividend proposed1 | 1.74 | 113 | 1.65 | 107 | 3.63 | 236 |
1. The dividend proposed has not been included as a liability in the balance sheet.
23. Segmental analysis
The Group is organised into three main business segments:
– Long term business
– General insurance
– Investment management
Other operations comprise Shareholders’ assets, Regulated mortgage network, Estate agencies and Corporate expenses, none of which constitute a separately reportable segment.
| Six months ended 30 June 2006 |
Long term business £m |
Investment management £m |
General insurance £m |
Other operations £m |
Elimination of inter segment amounts £m |
Total £m |
|---|---|---|---|---|---|---|
| Total revenue from continuing operations | 2,469 | 2,067 | 154 | 225 | (110) | 4,805 |
| Total expenses from continuing operations | 2,245 | 1,984 | 158 | 135 | (110) | 4,412 |
| Profit from continuing operations after income tax | 151 | 45 | (3) | 84 | – | 277 |
| Profit from discontinued operations | - | - | - | - | - | - |
| Inter segment revenue | – | (34) | – | (76) | 110 | – |
| Six months ended 30 June 2005 (Restated) |
Long term business £m |
Investment management £m |
General insurance £m |
Other operations £m |
Elimination of inter segment amounts £m |
Total £m |
|---|---|---|---|---|---|---|
| Total revenue from continuing operations | 5,091 | 6,704 | 160 | 205 | (111) | 12,049 |
| Total expenses from continuing operations | 4,717 | 6,625 | 154 | 88 | (111) | 11,473 |
| Profit from continuing operations after income tax | 227 | 34 | 3 | 100 | – | 364 |
| Profit from discontinued operations | - | - | 13 | - | - | 13 |
| Inter segment revenue | – | (28) | (1) | (82) | 111 | – |
| Full year ended 31 December 2005 |
Long term business £m |
Investment management £m |
General insurance £m |
Other operations £m |
Elimination of inter segment amounts £m |
Total £m |
|---|---|---|---|---|---|---|
| Total revenue from continuing operations | 11,512 | 18,833 | 328 | 559 | (243) | 30,989 |
| Total expenses from continuing operations | 10,373 | 18,724 | 311 | 235 | (243) | 29,400 |
| Profit from continuing operations after income tax | 650 | 71 | 13 | 278 | – | 1,012 |
| Profit from discontinued operations | - | - | 13 | - | - | 13 |
| Inter segment revenue | – | (59) | (2) | (182) | 243 | – |
24. Profit from discontinued operations
Gresham Insurance Company Limited
On 31 March 2005, the Group sold its 90% stake in its subsidiary Gresham to Barclays Bank Plc for a consideration of £85m, of which £4m was paid in dividends by Gresham and the remainder in cash by Barclays. The transaction resulted in an exceptional profit before tax of £15m (£15m after tax).
|
30.06.06 £m |
30.06.05 £m |
Full year 2005 £m |
|
|---|---|---|---|
| Post tax result from discontinued operations to 31 March 2005 | – | (2) | (2) |
| Gain on disposal | – | 15 | 15 |
| Profit for the period from discontinued operations after income tax | – | 13 | 13 |
25. Earnings per share
|
30.06.06 Basic |
30.06.06 Diluted |
30.05.06 Basic |
30.05.06 Diluted |
Full year 2005 Basic |
Full year 2005 Diluted |
|
|---|---|---|---|---|---|---|
| Based on profit from continuing operations after income tax | 3.95 | 3.93 | 5.33 | 5.19 | 14.13 | 13.76 |
| Based on profit from discontinued operations after income tax | – | – | 0.20 | 0.19 | 0.20 | 0.19 |
| Based on profit attributable to ordinary equity holders | 3.95 | 3.93 | 5.53 | 5.38 | 14.33 | 13.95 |
26. Movement in equity
|
30.06.06 £m |
30.06.05 Restated £m |
Full year 2005 £m |
|
|---|---|---|---|
| At beginning of period | 4,936 | 4,283 | 4,283 |
| Total recognised income and expense | 272 | 367 | 1,002 |
| Issue of ordinary share capital | 12 | – | 1 |
| Net movements in employee share schemes and treasury shares | (4) | (2) | 7 |
| Dividend distributions to ordinary equity holders of the Company during the period | (236) | (224) | (331) |
| Distributions during the period on subordinated borrowings designated as equity | – | (8) | (16) |
| Movements in minority interests including disposals | 12 | (10) | (10) |
| Reclassification of subordinated borrowings from equity to debt | (394) | – | – |
| Fair value loss after tax on reclassification of subordinated borrowings as debt | (28) | – | – |
| At end of period | 4,570 | 4,406 | 4,936 |
27. Analysis of borrowings
|
At 30.06.06 £m |
At 30.06.05 Restated £m |
At 31.12.05 £m |
|
|---|---|---|---|
| Subordinated borrowings designated as equity | |||
| 5.875% Sterling undated subordinated notes | – | 394 | 394 |
| Subordinated borrowings | |||
| 5.875% Sterling undated subordinated notes | 429 | – | – |
| 4.0% Euro subordinated notes 2025 | 384 | 407 | 415 |
| Total subordinated borrowings | 813 | 801 | 809 |
| Senior borrowings | |||
| 2.75% Sterling convertible bond 2006 | 518 | 501 | 509 |
| Sterling medium term notes 2031-2041 | 602 | 602 | 608 |
| Euro commercial paper 2006 | 111 | 71 | 110 |
| Bank loans 2006 | 25 | 4 | 6 |
| Non-recourse financing | |||
| – US Dollar Triple X securitisation 2025 | 286 | 295 | 308 |
| – Sterling property partnership loans 2011 | 140 | 93 | 93 |
| Total senior borrowings | 1,682 | 1,566 | 1,634 |
| Total borrowings | 2,495 | 2,367 | 2,443 |
| Total borrowings (excluding non-recourse financing) | 2,069 | 1,979 | 2,042 |
The convertible bond matures in December 2006 and is convertible into ordinary shares of Legal & General Group Plc at 184p per share. If converted, this bond would give rise to the issue of 285.3m new ordinary shares which would represent approximately 4.4% of the current issued share capital.
Legal & General Group Plc has in issue €600m of 4% dated subordinated notes. The proceeds were swapped into sterling and will be used to repay part of the convertible bond which matures in December 2006. The notes are callable 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.
Legal & General Group Plc also has in issue £400m of 5.875% undated subordinated notes. These notes are callable 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.
Coupon payments on both subordinated issues may be deferred if no dividend is paid on the Group’s ordinary shares.
The undated subordinated notes were classified as equity in 2005 because their perpetual nature meant that in certain circumstances, interest could be deferred indefinitely. On 13 March 2006 the Group entered into a supplementary trust deed to remove the discretionary nature of the interest in respect of the undated subordinated notes which had the effect of reclassifying the notes from equity to liability and coupon payments from distributions to interest. Upon reclassification the new debt component was recognised at fair value.
The Euro dated subordinated notes are treated as lower tier II capital for regulatory purposes and the sterling undated subordinated notes as upper tier II capital.
A subsidiary of Legal & General America has in issue US$550m of non-recourse debt in the US domestic capital markets to meet the Triple X reserve requirements on the US term insurance business. It is secured on the cash flows related to this business.
The property partnership loans are secured on specific properties.
Of the total borrowings £602m (1H05:£602m; FY05: £602m) is attributed to the SRC.
28. Minorty interests
Minority interests represent third party interests in property investment vehicles which are consolidated in the Group’s results.
29. Foreign exchange rates
| Period end exhange rates | At 30.06.06 | At 30.06.05 | At 31.12.05 |
|---|---|---|---|
| United States Dollar | 1.85 | 1.79 | 1.72 |
| Euro | 1.45 | 1.48 | 1.46 |
| Average exchange rates | 01.01.06 - 30.06.06 | 01.01.05 - 30.06.05 | 01.07.05 - 31.12.05 |
|---|---|---|---|
| United States Dollar | 1.79 | 1.87 | 1.77 |
| Euro | 1.46 | 1.46 | 1.47 |
30. Contingent liabilities, guarantees and indemnities
Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance of actual experience from that assumed may result in such liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating to the interpretation of such contracts, or the circumstances in which policyholders have entered into them (together in this paragraph ‘liabilities’). The extent of such liabilities is influenced by a number of factors including the actions and requirements of the FSA, by ombudsman rulings, by industry compensation schemes and by court judgements. The continuing general profile and emphasis being given by the FSA and other bodies to the suitability of the past sales of endowment policies in the context of some mortgage transactions has led to the continuing receipt of claims from holders of endowment policies.
Provision for liabilities continues to be made and is regularly reviewed. However, it is not possible to predict, with certainty, the extent and the timing of the financial impact to which these liabilities may give rise. The relevant members of the Group nevertheless consider that each makes prudent provision for such liabilities, as and when circumstances calling for such provision become clear, and that each has adequate capital and reserves to meet all reasonably foreseeable eventualities.
In 1975 the Society was required by the Institute of London Underwriters (ILU) to execute the ILU form of guarantee in respect of policies issued through the ILU’s Policy Signing Office on behalf of NRG Victory Reinsurance Company Limited (Victory), a company which was then a subsidiary of the Society. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to the Society against any liability the Society may have as a result of the ILU’s requirement, and the ILU agreed that its requirement of the Society would not apply to policies written or renewed after the acquisition. Whether Society has any liability as a result of the ILU’s requirement and, if so, the amount of its potential liability is uncertain. Society has made no payment or provision in respect of this matter.
Group companies have given indemnities and guarantees, including interest rate guarantees, as a normal part of their operating activities or in relation to capital market transactions.