Operating profit before tax.

OPERATING PROFIT BEFORE TAX Key measure in the remuneration of executives Key performance indicator (KPI)

£1,087m

(2011: £1,053m)

OPERATING PROFIT BEFORE TAX

Operating profit information provides further analysis of the results reported under IFRS and we believe gives shareholders a better understanding of the underlying performance of the business. Operating profit measures the pre-tax result using a smoothed longer-term investment return. Any variance between actual and smoothed investment returns is reported below operating profit.

KPI PURPOSE: OPERATING PROFIT GIVES AN INSIGHT INTO THE GROUP’S ABILITY TO GENERATE CASH FLOWS TO SUPPORT DIVIDENDS.

(XLS:) Operating profit – 2012

 

Net cash1
2012
£m

Experience variances
2012
£m

Changes in valuation assumptions
2012
£m

Non-cash items and other2
2012
£m

IFRS profit/(loss) after tax
2012
£m

Tax expense/ (credit)
2012
£m

IFRS profit/(loss) before tax
2012
£m

1.

Net cash is defined in the Glossary, and further analysis is provided in the Net cash section.

2.

Investment gains and losses, international, and other.

Protection and annuities

491

14

(2)

(22)

481

159

640

Savings

117

(39)

20

2

100

33

133

Investment management

197

197

46

243

US protection

40

22

62

37

99

Group capital and financing

20

(2)

18

4

22

Investment projects

(38)

(38)

(12)

(50)

Operating profit

865

(25)

18

(38)

820

267

1,087

Investment variance and other

(19)

(19)

(32)

(51)

Total

865

(25)

18

(57)

801

235

1,036

(XLS:) Operating profit – 2011

 

Net cash1
2011
£m

Experience variances
2011
£m

Changes in valuation assumptions
2011
£m

Non-cash items and other2
2011
£m

IFRS profit/(loss) after tax
2011
£m

Tax
expense/ (credit)
2011
£m

IFRS profit/(loss) before tax
2011
£m

1.

Net cash is defined in the Glossary, and further analysis is provided in the Net cash section.

2.

Investment gains and losses, international, and other.

Protection and annuities

467

22

24

(74)

439

162

601

Savings

111

(12)

(5)

(2)

92

34

126

Investment management

189

189

45

234

US protection

35

28

63

34

97

Group capital and financing

44

(1)

43

8

51

Investment projects

(41)

(41)

(15)

(56)

Operating profit

846

10

19

(90)

785

268

1,053

Investment variance and other

(64)

(64)

(36)

(100)

Total

846

10

19

(154)

721

232

953

BUSINESS SEGMENT

OPERATING PROFIT BEFORE TAX

PROTECTION AND ANNUITIES

Operating profit for the Protection and Annuities segment represents the profit from the annuities business (individual and bulk purchase Annuities and longevity insurance), profit from the Housing and Protection businesses (general insurance, and retail and group protection business) and profit from our France and Netherlands businesses. 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.

CEO, Protection and Annuities: John Pollock

£640m

(2011: £601m)

Operating profit for Protection and Annuities increased by 6% to £640m (2011: £601m), with particularly strong results in Protection as a result of management of reinsurance and the use of automated underwriting in the Retail Protection business. The Protection and Annuities products also benefit from high quality analysis of risk factors and scale of customer data that enables more accurate pricing of risk at inception.

SAVINGS

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 and the profit from our Savings Investments business. 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.

CEO, Savings: Mark Gregory

£133m

(2011: £126m)

Savings operating profit before tax is up 6% in 2012. This is a result of continuing growth in scale with our Workplace Savings platform growing 58% to £6.0bn (2011: £3.8bn) and our Investment Portfolio Service (IPS) platform for bancassurance growing 26% to £8.6bn (2011: £6.8bn). This growth was achieved whilst investing to maximise the opportunities arising from two significant changes to UK regulation (Auto enrolment and the Retail Distribution Review).

INVESTMENT MANAGEMENT

Operating profit for the Investment Management segment represents the operating profit before tax on our managed and segregated pension business, institutional mandates, private equity, property business and internal funds.

CEO, LGIM: Mark Zinkula

£243m

(2011: £234m)

LGIM’s operating profit before tax grew 4% in 2012 driven by an increase in AUM of 9%, from £371bn at the end of 2011 to £406bn at the end of 2012, and a growth in the proportion of international assets.

US PROTECTION

Operating profit for the US Protection business principally represents profit on our protection and universal life products written by Legal & General America (LGA).

CEO, LGA: Jimmy Atkins

£99m

(2011: £97m)

Operating profit grew by 2% in 2012. The significant driver for the increase in profit was an increase of 10% in gross premium driven by a record sales year.

GROUP CAPITAL AND FINANCING

Operating profit represents the expected return on Group invested assets using longer-term expected investment returns. It also includes interest expense on total Group borrowings (excluding non-recourse financing and other unallocated corporate expenses), and our joint ventures in Egypt and the Gulf. Investment returns and group expenses are before the impact of tax.

Head of Group Treasury & Investments: Paul Stanworth

£22m

(2011: £51m)

The smoothed investment return of £168m (2011: £191m) is calculated asset class by asset class and equates to an annualised average smoothed investment return of 3.9% (2011: 4.7%) on the average balance of invested assets of £4.3bn (2011: £4.0bn). The fall in the average investment return is predominantly due to a reduction in the assumed returns on UK equities to 5.8% (2011: 7.5%).

Interest expense of £127m (2011: £123m) reflects the average cost of debt of 4.9% per annum (2011: 4.8%) on the average debt balance of £2.6bn (2011: £2.6bn).

More details of operating profit can be found in Note 2.