2 LGAS and LGR embedded value reconciliation

 

Shareholder net worth

 

 

For the year ended 31 December 2014

Free surplus
£m

Required capital
£m

Total
£m

Value of in-force
£m

Total embed­ded value
£m

1.

The UK free surplus reduction of £340m to finance new business primarily reflects £343m additional required capital in relation to new business.

2.

The increase in UK free surplus of £901m from the expected transfer from the in-force non profit business includes £688m of operational cash generation and a £213m reduction in required capital. The £764m operational cash generation from LGAS and LGR per Note 2 of the IFRS section also includes £29m dividend from LGN, £2m dividend from LGF and £44m primarily reflecting profit from non-covered business.

3.

Reflects the impact of the change in treatment in deferred tax to align with IFRS by removing the effect of discounting.

4.

Intra-group distributions primarily reflect £675m dividend paid from LGAS to group and dividend of €35m from LGN and £5m from Nationwide to LGAS.

5.

The transfer to non-covered business represents the IFRS profits arising in the year from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.

6.

The other reserve movements reflect the pension deficit movement, the effect of reinsurance arrangement transactions between UK and US covered business, and intra-group capital contribution.

At 1 January 2014

1,174

 

2,390

 

3,564

 

4,890

 

8,454

Exchange movement

(1)

 

(16)

 

(17)

 

(13)

 

(30)

Operating profit/(loss) after tax – UK business:

 

 

 

 

 

 

 

 

 

Contribution from new risks after cost of capital

 

 

 

 

 

 

 

 

 

– New business contribution1

(340)

 

343

 

3

 

607

 

610

– Intragroup transfer from With-Profit to Non Profit Fund

 

 

 

80

 

80

– Expected return on VIF

 

 

 

317

 

317

– Expected transfer from VIF to SNW2

901

 

(213)

 

688

 

(688)

 

– Expected return on SNW

55

 

116

 

171

 

 

171

Generation of embedded value

616

 

246

 

862

 

316

 

1,178

– Experience variances

175

 

(83)

 

92

 

(6)

 

86

– Operating assumption changes

171

 

(109)

 

62

 

(36)

 

26

– Development costs

(26)

 

 

(26)

 

 

(26)

Variances

320

 

(192)

 

128

 

(42)

 

86

Operating profit after tax – LGAS overseas

4

 

3

 

7

 

24

 

31

Operating profit after tax – LGAS and LGR

940

 

57

 

997

 

298

 

1,295

Non-operating profit/(loss) after tax – UK business:

 

 

 

 

 

 

 

 

 

– Economic variances

(359)

 

219

 

(140)

 

851

 

711

– Other taxation impacts3

(12)

 

 

(12)

 

10

 

(2)

Non-operating profit/(loss) after tax – LGAS overseas

57

 

(7)

 

50

 

(61)

 

(11)

Non-operating profit/(loss) after tax – LGAS and LGR

(314)

 

212

 

(102)

 

800

 

698

Profit for the year – LGAS and LGR

626

 

269

 

895

 

1,098

 

1,993

Intra-group distributions4

(671)

 

 

(671)

 

 

(671)

Transfer to non-covered business5

(26)

 

 

(26)

 

 

(26)

Other reserve movements including pension deficit6

(125)

 

224

 

99

 

290

 

389

Embedded value at 31 December 2014

977

 

2,867

 

3,844

 

6,265

 

10,109

The value of in-force business of £6,265m is comprised of £5,925m of non profit business and £340m of with-profits business.

 

Shareholder net worth

 

 

For the year ended 31 December 2013

Free surplus
£m

Required capital
£m

Total
£m

Value of in-force
£m

Total embedded value
£m

1.

The UK free surplus reduction of £324m to finance new business includes £40m new business strain and £284m additional required capital.

2.

The increase in UK free surplus of £869m from the expected transfer from the in-force covered business includes £688m of operational cash generation and a £181m reduction in required capital. The £734m operational cash from LGAS and LGR per Note 2 of the IFRS section also includes £2m and £14m remitted from LGF and LGN respectively, and £30m primarily reflecting IFRS profit from non covered business.

3.

Reflects the implementation of the UK planned future reductions in corporation tax to 20% on 1 April 2015.

4.

UK intra-group dividends reflect a £625m dividend paid from LGAS to group and dividends of £10m paid to LGAS from subsidiaries (primarily Nationwide Life). Dividends of €16m from LGN were also paid to LGAS.

5.

The transfer to non-covered business represents the IFRS profits arising in the year from the provisions of investment management services by LGIM to the UK covered business, which have been included in the operating profit of the covered business on the look through basis.

6.

The other reserve movements reflects the pension deficit movement, the movement of investment project costs from covered to non-covered business and the effect of reinsurance arrangement transactions between UK and US covered business.

At 1 January 2013

1,259

 

2,215

 

3,474

 

4,548

 

8,022

Exchange movement

3

 

3

 

6

 

3

 

9

Operating profit/(loss) after tax – UK business:

 

 

 

 

 

 

 

 

 

Contribution from new risks after cost of capital

 

 

 

 

 

 

 

 

 

– New business contribution1

(324)

 

284

 

(40)

 

484

 

444

– Intragroup transfer from With-Profit to Non-Profit Fund

 

 

 

 

– Expected return on VIF

 

 

 

266

 

266

– Expected transfer from VIF to SNW2

869

 

(181)

 

688

 

(688)

 

– Expected return on SNW

40

 

76

 

116

 

 

116

Generation of embedded value

585

 

179

 

764

 

62

 

826

– Experience variances

5

 

(9)

 

(4)

 

14

 

10

– Operating assumption changes

(24)

 

2

 

(22)

 

21

 

(1)

– Development costs

(31)

 

 

(31)

 

 

(31)

Variances

(50)

 

(7)

 

(57)

 

35

 

(22)

Operating profit after tax – LGAS overseas

7

 

1

 

8

 

8

 

16

Operating profit after tax – LGAS and LGR

542

 

173

 

715

 

105

 

820

Non-operating profit/(loss) after tax – UK business:

 

 

 

 

 

 

 

 

 

– Economic variances

109

 

(8)

 

101

 

80

 

181

– Effect of tax rate changes and other taxation impacts3

 

 

 

41

 

41

Non-operating profit after tax – LGAS overseas

20

 

 

20

 

40

 

60

Non-operating profit/(loss) after tax – LGAS and LGR

129

 

(8)

 

121

 

161

 

282

Profit for the year – LGAS and LGR

671

 

165

 

836

 

266

 

1,102

Intra-group distributions4

(617)

 

 

(617)

 

 

(617)

Transfer to non-covered business5

(27)

 

 

(27)

 

 

(27)

Other reserve movements including pension deficit6

(115)

 

7

 

(108)

 

73

 

(35)

Embedded value at 31 December 2013

1,174

 

2,390

 

3,564

 

4,890

 

8,454

The value of in-force business of £4,890m is comprised of £4,454m of non profit business and £436m of with-profits business.