2 Supplementary operating profit information

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

 

Notes

2014
£m

20131
£m

1.

Gains on non-controlling interests have been restated to reflect the adoption by the group of IFRS 10, ‘Consolidated Financial Statements’. The impact is to increase gains on non-controlling interests and profit for the year by £10m for 2013. The profit attributable to equity holders remains unaffected. Further details are contained in Note 1.

2.

Group debt costs exclude interest on non recourse financing.

3.

Group Investment projects and expenses in 2014 include restructuring costs of £31m.

From continuing operations

 

 

 

Legal & General Assurance Society (LGAS)

2(iii)

460

444

Legal & General Retirement (LGR)

2(iii)

428

310

Legal & General Investment Management (LGIM)

2(v)

336

304

Legal & General Capital (LGC)

2(vi)

203

179

Legal & General America (LGA)

 

56

92

Operating profit from divisions

 

1,483

1,329

Group debt costs2

 

(142)

(127)

Group investment projects and expenses3

2(vii)

(66)

(44)

Operating profit

 

1,275

1,158

Investment and other variances

2(viii)

(44)

(27)

Gains on non-controlling interests

 

7

13

Profit before tax attributable to equity holders

 

1,238

1,144

Tax expense attributable to equity holders of the Company

36(i)

(246)

(238)

Profit for the year

 

992

906

This supplementary operating profit information (one of the group’s key performance indicators) provides further analysis of the results reported under IFRS and the group believes gives shareholders a better understanding of the underlying performance of the business in the year.

During the year the group redefined its operating profit definition, and applied this prospectively. Under the new definition, restructuring costs, while varying from year to year, are considered to be part of ongoing business activities and as such, are included within operating profit.

Operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. Operating profit therefore reflects longer-term economic assumptions for the group’s 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. Exceptional income and expenses which arise outside the normal course of business in the year, such as merger and acquisition, start-up and closure costs, are excluded from operating profit.

LGAS represents Insurance 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 medium term investment return (less 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) Reconciliation of operational cash to operating profit before tax

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.

For the year ended 31 December 2014

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 (2013: £2m) and LGN of £29m (2013: £14m) within the Insurance line and LGA of £46m (2013: £44m).

2.

International and other includes £25m of restructuring costs (£31m before tax) (2013: £nil) within the group investment projects and expenses line.

LGAS

472

(48)

424

(18)

32

(70)

(7)

361

99

460

– Insurance

332

(5)

327

(8)

24

(50)

(6)

287

83

370

– Savings

140

(43)

97

(10)

8

(20)

(1)

74

16

90

LGR

292

51

343

(13)

48

(32)

346

82

428

LGIM

262

262

262

74

336

LGC

162

162

162

41

203

LGA

46

46

(14)

32

24

56

Total from divisions

1,234

3

1,237

(31)

80

(102)

(21)

1,163

320

1,483

Group debt costs

(112)

(112)

(112)

(30)

(142)

Group investment projects and expenses

(21)

(21)

(32)

(53)

(13)

(66)

Total

1,101

3

1,104

(31)

80

(102)

(53)

998

277

1,275

Operational cash generation for LGAS and LGR represents the expected surplus generated in the year from the in-force non profit Insurance, 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 General Insurance and the 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 Insurance, 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 and LGC represents the operating profit (net of tax).

The operational cash generation for LGA represents the dividends received.

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

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 other
£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 and LGN of £14m within the Insurance line and LGA of £44m.

LGAS

474

(73)

401

(34)

31

(69)

10

339

105

444

– Insurance

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

(iii) Analysis of LGAS and LGR operating profit

 

LGAS
2014
£m

LGR
2014
£m

LGAS
2013
£m

LGR
2013
£m

1.

The mortality/morbidity experience variances in LGAS in 2014 primarily relates to adverse morbidity on one of our group protection products.

2.

The persistency valuation assumption change in LGAS primarily relates to an improvement in the experience and modelling for persistency on some of our long term products.

3.

The mortality/morbidity valuation assumption change in LGAS primarily relates to an improvement in the modelling for certain morbidity features on our retail protection products. The LGR mortality valuation assumption change primarily relates to the adoption of the recent CMI projection table (CMI2013) with an allowance for anticipated changes that have been incorporated into the CMI2014 model.

4.

The other valuation assumption change in LGAS primarily relates to a refinement in the modelling for reinsurance on certain long term policies.

5.

The DAC in LGAS represents the amortisation charges offset by new acquisition costs deferred in the year. The DIL 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.

6.

The other non-cash items in LGR primarily relates to the elimination of intra-group future profits arising from the provision of investment management services at market referenced rates.

Net cash generation

424

343

401

293

Experience variances

 

 

 

 

Persistency

(3)

5

1

Mortality/Morbidity1

(5)

13

14

Expenses

(4)

(3)

(3)

BPA Loading

6

4

Project and development costs

(12)

(19)

(23)

(11)

Other

3

(7)

(13)

1

Total experience variances

(18)

(13)

(34)

9

Changes to valuation assumptions

 

 

 

 

Persistency2

42

7

Mortality/Morbidity3

37

61

9

(13)

Expenses

15

(5)

8

Other4

(62)

(8)

7

Total valuation assumption changes

32

48

31

(13)

Movement in non-cash items

 

 

 

 

Deferred tax

6

(11)

5

Utilisation of brought forward trading losses

(9)

(62)

(4)

(70)

Acquisition expense tax relief

(42)

(51)

Deferred Acquisition Costs (DAC)5

(71)

(63)

Deferred Income Liabilities (DIL)5

46

47

Other6

41

(3)

22

Total non-cash movement items

(70)

(32)

(69)

(48)

Other

(7)

10

Operating profit after tax

361

346

339

241

Tax gross up

99

82

105

69

Operating profit before tax

460

428

444

310

(iv) General insurance operating profit and combined operating ratio

 

2014
£m

2013
£m

1.

The General insurance operating profit includes the underwriting result and investment return.

2.

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

General insurance operating profit1

59

69

General insurance combined operating ratio (%)2

87

84

(v) LGIM

 

2014
£m

2013
£m

Revenue

645

594

Expenses

(309)

(290)

Total LGIM operating profit

336

304

(vi) LGC

 

2014
£m

2013
£m

1.

LGC expenses in 2014 include £10m of management expenses previously borne by the group and allocated as group expenses.

Investment return

219

185

Expenses1

(16)

(6)

Total LGC operating profit

203

179

(vii) Group investment projects and expenses

 

2014
£m

2013
£m

Group investment projects and central expenses

(35)

(44)

Restructuring costs

(31)

Total group investment projects and expenses

(66)

(44)

(viii) Investment and other variances

 

2014
£m

2013
£m

1.

Investment variance is negative, primarily due to lower equity returns from shareholder funds. This has been partially offset by an increase in exposure to Direct Investments in LGR, which has enhanced the risk adjusted return, and favourable default experience.

2.

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

3.

Other includes new business start-up costs, closure costs and other non-investment related variance items. In 2013 Other included £17m of restructuring costs.

Investment variance1

(8)

29

M&A related2

(21)

(16)

Other3

(15)

(40)

Total Investment and other variances

(44)

(27)

(ix) Analysis of tax attributable to equity holders

 

Profit/(loss) before tax1
2014
£m

Tax (expense)/credit
2014
£m

Profit/(loss) before tax1
20132
£m

Tax (expense)/credit
2013
£m

1.

The Profit/(loss) before tax reflects profit/(loss) before tax attributable to equity holders.

2.

The Analysis of tax attributable to equity holders has been restated to reflect the adoption by the group of IFRS 10, ‘Consolidated Financial Statements’. Further details are contained in Note 1. The impact is to increase the profit for the period by £10m for 2013.

LGAS

460

(99)

444

(105)

LGR

428

(82)

310

(69)

LGIM

336

(74)

304

(65)

LGC

203

(41)

179

(42)

LGA

56

(24)

92

(34)

Operating profit from divisions/Tax expense on divisions

1,483

(320)

1,329

(315)

Group debt costs

(142)

30

(127)

30

Group Investment projects and expenses

(66)

13

(44)

10

Operating profit/Tax expense

1,275

(277)

1,158

(275)

Investment variances

(44)

31

(27)

40

Impact of change in UK tax rates

(3)

Gains on non-controlling interests

7

13

Profit for the year/Tax expense for the year

1,238

(246)

1,144

(238)

The equity holders’ effective tax rate for the year is 19.9% (2013: 20.8%). 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.