2 Supplementary operating profit information.

(i) Reconciliation between operating profit and profit from ordinary activities after income tax

(XLS:) Reconciliation between operating profit and profit from ordinary activities after income tax

 

Notes

2012
£m

20111
£m

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 1. 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.

From continuing operations

 

 

 

Protection and Annuities

(ii)(a)

640

601

Savings

(iii)(a)

133

126

Investment management

(iv)

243

234

US Protection

 

99

97

Group capital and financing

(v)

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

(vi)

(235)

(232)

Profit for the year

 

801

721

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.

(ii) Protection and Annuities

(a) Protection and Annuities operating profit

(XLS:) Protection and Annuities – operating profit

 

Notes

2012
£m

2011
£m

Annuities

 

281

287

Protection

 

289

242

General insurance

(ii)(f)

30

42

Other

 

(3)

(10)

Total UK Housing and Protection operating profit

 

316

274

Total UK Protection and Annuities operating profit

(ii)(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

(XLS:) Protection and Annuities – analysis of UK operating profit

 

Notes

Annuities 2012
£m

Housing and Protection 2012
£m

Total
2012
£m

Annuities 2011
£m

Housing and Protection 2011
£m

Total
2011
£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

(ii)(c)

 

 

14

 

 

22

Changes to valuation assumptions

(ii)(d)

 

 

(2)

 

 

24

Movements in non-cash items

(ii)(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:

(c) Experience variances

(XLS:) Protection and Annuities – experience variances

 

2012
£m

2011
£m

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.

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

(d) Changes to valuation assumptions

(XLS:) Protection and Annuities – changes to valuation assumptions

 

2012
£m

2011
£m

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 (or regulatory pronouncement) to a retail protection product.

Persistency

(8)

(1)

Mortality/morbidity1

(14)

(1)

Expenses2

(2)

28

Other3

22

(2)

 

(2)

24

(e) Movements in non-cash items

(XLS:) Protection and Annuities – movements in non-cash items

 

2012
£m

2011
£m

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.

Deferred tax1

(32)

(77)

Other

(9)

(9)

 

(41)

(86)

(f) General insurance operating profit

(XLS:) Protection and Annuities – general insurance operating profit

 

Net cash generation 2012
£m

Tax
2012
£m

Operating profit
2012
£m

Net cash generation 2011
£m

Tax
2011
£m

Operating profit
2011
£m

Household

22

7

29

27

10

37

Other business

1

1

4

1

5

 

23

7

30

31

11

42

(g) General insurance underwriting result

(XLS:) Protection and Annuities – general insurance underwriting result

 

2012
£m

2011
£m

1.

The 2012 household underwriting result reflects weather experience consistent with our assumptions. The 2011 result reflects the benign weather experienced during the year.

Household1

16

23

Other business

1

4

 

17

27

(h) General insurance combined operating ratio1

(XLS:) Protection and Annuities – general insurance combined operating ratio

 

2012
%

2011
%

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.

Household

95

91

Other business

95

78

 

95

90

(iii) Savings

(a) Savings operating profit

(XLS:) Savings – operating profit

 

Note

2012
£m

2011
£m

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.

Savings investments1

 

16

23

Insured savings2

 

48

34

With-profits3

 

69

69

Total Savings operating profit

(iii)(b)

133

126

(b) Analysis of Savings operating profit

(XLS:) Savings – analysis of Savings operating profit 2012

 

Notes

Insured savings
2012
£m

With-profits 2012
£m

Savings investments 2012
£m

Total
2012
£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

(iii)(c)

 

 

 

(39)

Changes to valuation assumptions

(iii)(d)

 

 

 

20

Movements in non-cash items and other

(iii)(e)

 

 

 

11

Savings investments

 

 

 

 

 

Movements in non-cash items and other

 

 

 

 

(9)

 

 

 

 

 

100

Tax gross up

 

 

 

 

33

Total Savings operating profit

 

 

 

 

133

(XLS:) Savings – analysis of Savings operating profit 2011

 

Notes

Insured
savings
2011
£m

With profits 2011
£m

Savings investments 2011
£m

Total
2011
£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

(iii)(c)

 

 

 

(12)

Changes to valuation assumptions

(iii)(d)

 

 

 

(5)

Movements in non-cash items and other

(iii)(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

(XLS:) Savings – experience variances

 

2012
£m

2011
£m

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).

Persistency

(3)

(1)

Mortality/morbidity

2

Expenses

(1)

1

Project and development costs1

(33)

(12)

Tax

1

(4)

Other

(3)

2

 

(39)

(12)

(d) Changes to valuation assumptions

(XLS:) Savings – changes to valuation assumptions

 

2012
£m

2011
£m

1.

Expense valuation assumptions relate to efficiency improvements in workplace pensions.

Persistency

(2)

Mortality/morbidity

1

Expenses1

17

(2)

Other

3

(2)

 

20

(5)

(e) Movements in non-cash items and other

(XLS:) Savings – movements in non-cash items

 

Note

2012
£m

2011
£m

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.

Deferred tax

 

(6)

(6)

Deferred acquisition costs (DAC)1

(iii)(f)

(9)

(20)

Deferred income liabilities (DIL)1

 

14

27

Other2

 

12

3

 

 

11

4

(f) Deferred acquisition cost movement, net of associated deferred tax

(XLS:) Savings – deferred acquisition cost movement, net of associated deferred tax

 

2012
£m

2011
£m

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.

As at 1 January

592

612

Amortisation through income1

(28)

(74)

Acquisition costs deferred

42

54

As at 31 December

606

592

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:

(XLS:) Savings – expected amortisation profile

 

2012
£m

2011
£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

(iv) Investment management

(XLS:) Investment management – operating profit

 

2012
£m

2011
£m

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.

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

(v) Group capital and financing

(XLS:) Group capital and financing – operating profit

 

2012
£m

2011
£m

1.

Interest expense excludes interest on non recourse financing (see Note 22).

2.

Unallocated corporate expenses includes the operating profit/(loss) attributable to our joint venture operations in Egypt and the Gulf.

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

(vi) Analysis of tax attributable to equity holders

(XLS:) Analysis of tax attributable to equity holders

 

Profit/(loss) before tax
2012
£m

Tax (expense)/
credit
2012
£m

Profit/(loss) before tax
2011
Restated1
£m

Tax (expense)/ credit
2011
Restated1
£m

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 1.

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)

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.