2 Supplementary operating profit information.

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

2013
£m

20121
£m

1.

Investment and other variances have been adjusted to reflect the adoption by the Group of amendments to IAS 19, ‘Employee Benefits’. The impact is to reduce profit for the year by £3m for 2012, offset by a corresponding change in the Consolidated Statement of Comprehensive Income.

2.

Group debt costs exclude interest on non recourse financing.

3.

Group investment projects and expenses include investment project costs of £25m (2012: £50m) that predominantly relate to the Economic Capital programme and other strategic projects.

From continuing operations

 

 

 

Legal & General Assurance Society (LGAS)

(iii)

444

462

Legal & General Retirement (LGR)

(iii)

310

281

Legal & General Investment Management (LGIM)

(v)

304

272

Legal & General Capital (LGC)

(vi)

179

163

Legal & General America (LGA)

 

92

99

Operating profit from divisions

 

1,329

1,277

Group debt costs2

 

(127)

(127)

Group investment projects and expenses3

 

(44)

(63)

Operating profit

 

1,158

1,087

Investment and other variances

(vii)

(27)

(42)

Gains/(losses) on non-controlling interests

 

3

(12)

Profit before tax

 

1,134

1,033

Tax expense attributable to equity holders of the Company

(viii)

(238)

(235)

Profit for the year

 

896

798

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.

Operating profit measures the pre-tax result reflecting longer-term economic assumptions for our insurance businesses and shareholder funds, except for LGA which excludes unrealised investment returns to align with the liability measurement under US GAAP. Variances between actual and smoothed assumptions are reported below operating profit. Income and expenses arising outside the normal course of business, such as merger and acquisition and restructuring costs, are excluded from operating profit, as are profits and losses arising on the elimination of own debt holdings.

During the year, the Group has made changes to the organisational structure, effective from 1 July 2013. The prior period segmental information has been represented to reflect these changes.

LGAS represents Protection business (retail protection, group protection and general insurance) and Savings business (platforms, workplace, SIPPs, mature savings and with-profits). The LGAS segment also includes Legal & General France (LGF), Legal & General Netherlands (LGN) and emerging markets.

LGR represents Annuities (both individual and bulk purchase) and longevity insurance.

The LGIM segment represents institutional and retail investment management businesses.

LGC represents the long term investment return (less investment expenses) on Group invested assets, using assumptions applied to the average balance of Group invested assets (including interest bearing intra-group balances) calculated on a monthly basis.

The LGA segment comprises protection business written in the USA.

(ii) Operational cash generation

The table below provides an analysis of the operational cash generation by each of the Group’s business segments, together with a reconciliation to operating profit before tax.

(XLS:) Operational cash generation 2013

For the year ended 31 December 2013

Oper­ational cash gener­ation1
£m

New busi­ness strain
£m

Net cash gener­ation
£m

Expe­rience var­iances
£m

Changes in valuation assump­tions
£m

Non-
cash items and other
£m

Intern­ational and other2
£m

Operating profit/ (loss) after tax
£m

Tax expense/ (credit)
£m

Operating profit/ (loss) before tax
£m

1.

Operational cash generation includes dividends remitted from LGF of £2m (2012: £2m), LGN of £14m (2012: £12m) and LGA of £44m (2012: £40m).

2.

International and other includes the operating profits not remitted as dividends from LGF of £4m (2012: £8m), LGN of £6m (2012: £9m) within the Protection line and LGA of £14m (2012: £22m).

LGAS

474

(73)

401

(34)

31

(69)

10

339

105

444

– Protection

310

(15)

295

(7)

20

(47)

10

271

84

355

– Savings

164

(58)

106

(27)

11

(22)

68

21

89

LGR

260

33

293

9

(13)

(48)

241

69

310

LGIM

239

239

239

65

304

LGC

137

137

137

42

179

LGA

44

44

14

58

34

92

Total from divisions

1,154

(40)

1,114

(25)

18

(117)

24

1,014

315

1,329

Group debt costs

(97)

(97)

(97)

(30)

(127)

Group investment projects and expenses

(15)

(15)

(19)

(34)

(10)

(44)

Total

1,042

(40)

1,002

(25)

18

(117)

5

883

275

1,158

Operational cash generation for LGAS and LGR represents the expected surplus generated in the period from the UK in-force non profit Protection, Savings and Annuities businesses using best estimate assumptions. The LGAS operational cash generation also includes the shareholders’ share of bonuses on with-profits business, dividends remitted from LGF and LGN and operating profit after tax from remaining Savings businesses.

New business strain for LGAS and LGR represents the cost of acquiring new business and setting up regulatory reserves in respect of the new business for UK non profit Protection, Savings and Annuities, net of tax. The new business strain and operational cash generation for both LGAS and LGR exclude required solvency margin from the liability calculation.

Net cash generation for LGAS and LGR is defined as operational cash generation less new business strain.

Operational cash generation and net cash for LGIM represents the operating profit (net of tax).

Operational cash generation for LGC represents the long term expected investment returns (net of tax) on Group invested assets.

The operational cash generation for LGA represents the dividends received.

See Note 2(iii) for more detail on variances, assumption changes and non-cash items.

(XLS:) Operational cash generation 2012

For the year ended 31 December 2012

Oper­ational cash gener­ation1
£m

New busi­ness strain
£m

Net cash gener­ation
£m

Expe­rience var­iances
£m

Changes in valuation assump­tions
£m

Non-
cash items and other
£m

Intern­ational and other2
£m

Operating profit/ (loss) after tax
£m

Tax expense/ (credit)
£m

Operating profit/ (loss) before tax
£m

1.

Operational cash generation includes dividends remitted from LGF of £2m, LGN of £12m and LGA of £40m.

2.

International and other includes the operating profits not remitted as dividends from LGF of £8m, LGN of £9m within the Protection line and LGA of £22m.

LGAS

436

(107)

329

(47)

45

4

15

346

116

462

– Protection

279

(45)

234

(8)

25

1

17

269

90

359

– Savings

157

(62)

95

(39)

20

3

(2)

77

26

103

LGR

243

14

257

43

(24)

(64)

212

69

281

LGIM

219

219

219

53

272

LGC

123

123

123

40

163

LGA

40

40

22

62

37

99

Total from divisions

1,061

(93)

968

(4)

21

(60)

37

962

315

1,277

Group debt costs

(96)

(96)

(96)

(31)

(127)

Group investment projects and expenses

(7)

(7)

(40)

(47)

(16)

(63)

Total

958

(93)

865

(4)

21

(60)

(3)

819

268

1,087

(iii) Analysis of LGAS and LGR operating profit

(XLS:) Analysis of LGAS and LGR operating profit

 

LGAS
2013
£m

LGR
2013
£m

LGAS
2012
£m

LGR
2012
£m

1.

The project and development costs in LGAS primarily relate to expenditure on workplace savings and the Retail Distribution Review. For LGR, it is primarily related to expenditure on our enhanced annuity platform proposition.

2.

LGR adverse Mortality/Morbidity assumption changes primarily relate to the strengthening of the prudence margin for base mortality.

3.

Other valuation assumption changes for LGAS in 2012 primarily relate to a reduction in the best estimate reserves within retail protection for reinsurer default and applying PS06/14 to a retail protection product.

4.

Net cash for LGAS Protection and insured savings recognises tax relief from prior year acquisition expenses, which are spread evenly over seven years under relevant ‘I-E’ tax legislation in the period the cash flows actually occur. In contrast, operating profit typically recognises the value of these future cash flows in the same period as the underlying expense as deferred tax amounts. The reconciling amounts arising from these items are included in the table above. Following the removal of new retail protection business from the I-E tax regime, and the removal of commission from new insured savings business under the Retail Distribution Review at the end of 2012, no material amount of deferred tax assets arise on new acquisition expenses. From 2013, as the deferred tax asset on prior period acquisition expenses unwinds, no replacement asset is created resulting in a higher level of Net Cash in 2013, which will then reduce over the following 6 years.

5.

The DAC in LGAS represents the amortisation charges offset by new acquisitions costs deferred in the year. The decrease in deferred costs reflects the removal of commission payable on savings and investment business following the implementation of the requirements of the Retail Distribution Review on 1 January 2013.

6.

The DIL in LGAS reflects initial fees on insured savings business which relate to the future provision of services and are deferred and amortised over the anticipated period in which these services are provided. The significant movement in the year is driven by the implementation of the requirements of the Retail Distribution Review on 1 January 2013.

7.

The £22m in other non-cash items in LGR primarily relates to movement in valuation differences between IFRS and regulatory bases.

8.

Other in LGAS includes the operating profits not remitted back as dividends from LGF £4m (2012: £8m) and LGN £6m (2012: £9m).

Net cash generation

401

293

329

257

Experience variances

 

 

 

 

Persistency

5

1

(3)

(2)

Mortality/Morbidity

14

(1)

5

Expenses

(3)

5

BPA Loading

4

37

Project and development costs1

(23)

(11)

(38)

(5)

Other

(13)

1

(10)

8

Total experience variances

(34)

9

(47)

43

Changes to valuation assumptions

 

 

 

 

Persistency

7

(10)

Mortality/Morbidity2

9

(13)

9

(23)

Expenses

8

18

Other3

7

28

(1)

Total valuation assumption changes

31

(13)

45

(24)

Movement in non-cash items

 

 

 

 

Deferred tax

(4)

(3)

(1)

Utilisation of brought forward trading losses

(4)

(70)

(2)

(70)

Acquisition expense tax relief4

(51)

14

Deferred acquisition costs (DAC)5

(54)

(9)

Deferred income liabilities (DIL)6

47

14

Other7

(3)

22

(10)

7

Total non-cash movement items

(69)

(48)

4

(64)

Other8

10

15

Operating profit after tax

339

241

346

212

Tax gross up

105

69

116

69

Operating profit before tax

444

310

462

281

(iv) General insurance combined operating ratio1

(XLS:) General insurance combined operating ratio

 

2013
%

2012
%

1.

The calculation of the general insurance combined operating ratio incorporates commission and expenses as a percentage of earned premiums.

2.

The reduced combined operating ratio reflects the continued pricing and underwriting discipline, improvements in the claims management processes during 2013 and benign weather experienced in the first 11 months of the year.

General insurance combined operating ratio2

84

95

(v) LGIM

(XLS:) LGIM operating profit

 

2013
£m

2012
£m

1.

Total LGIM operating profit includes £37m (2012: £29m) from retail investment management.

Revenues

594

533

Expenses

(290)

(261)

Total LGIM operating profit1

304

272

(vi) LGC

(XLS:) LGC operating profit

 

2013
£m

2012
£m

Investment return

185

168

Investment expenses

(6)

(5)

Total LGC operating profit

179

163

(vii) Investment and other variances

(XLS:) Investment and other variances

 

2013
£m

2012
£m

1.

Investment variance is positive due to strong equity returns from shareholder funds and a positive impact from the increase in exposure to Direct Investments. This has been partly offset by the defined pension benefit scheme variance of £(30)m (2012: £40m), that reflects the actuarial gains and losses and valuation difference arising on annuity assets held by defined benefit pension schemes that have been purchased from Legal & General Assurance Society Limited. All other actuarial gains and losses on the defined benefit scheme assets and liabilities are presented in the Other Comprehensive Income.

2.

M&A related includes gains, expenses and intangible amortisation relating to acquisitions.

3.

Other includes new business start up costs, restructuring costs, and other non-investment related variance items.

Investment variance1

29

(23)

M&A related2

(16)

Other3

(40)

(19)

Total

(27)

(42)

(viii) Analysis of tax attributable to equity holders

(XLS:) Analysis of tax attributable to equity holders

 

Profit/(loss) before tax
2013
£m

Tax
(expense)/
credit
2013
£m

Profit/(loss) before tax
20121
£m

Tax
(expense)/
credit
2012
£m

1.

Profit for the year has been restated to reflect the adoption by the Group of amendments to IAS 19, ‘Employee Benefits’. Further details are contained in Note 1. The impact is to reduce profit for the year by £3m for 2012.

LGAS

444

(105)

462

(123)

LGR

310

(69)

281

(69)

LGIM

304

(65)

272

(46)

LGC

179

(42)

163

(40)

LGA

92

(34)

99

(37)

Operating profit from divisions/Tax expense on divisions

1,329

(315)

1,277

(315)

Group debt costs

(127)

30

(127)

31

Group Investment projects and expenses

(44)

10

(63)

16

Operating profit/Tax expense

1,158

(275)

1,087

(268)

Investment variances

(27)

40

(42)

40

Impact of change in UK tax rates

(3)

(7)

Gains/(Losses) on non-controlling interests

3

(12)

Profit for the year/Tax expense for the year

1,134

(238)

1,033

(235)

The equity holders’ effective tax rate for the year is 21.0% (2012: 22.6%). The Group’s effective tax rate remains slightly below the UK corporation tax rate due to differences between the measurement of accounting and taxable profits.

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