Disciplined investment of capital

GROUP METRICS

IFRS profit before tax
£1,238m
(2013: £1,144m)

Key measure in the remuneration of executivesThis is a key performance indicator

IFRS profit before tax (PBT)

PBT measures profit attributable to shareholders incorporating actual investment returns and other variances experienced during the year.

KPI purpose: PBT measures the actual distributable earnings of the group, reflecting actual returns on investments, net of investment in future groupwide capabilities and new business ventures.

Profit before tax is up 8% on 2013 due to strong operating profits including favourable new business surplus arising in our retirement business. This has more than offset the impact of equity market falls and narrowing spreads in government bonds in the group’s investment portfolio in December.

Return on equity
16.9%
(2013: 16.1%)

Key measure in the remuneration of executivesThis is a key performance indicator

Return on equity (ROE)

ROE measures the return earned by shareholders on shareholder capital retained within the business. ROE is calculated as IFRS profit after tax divided by average IFRS shareholders’ funds.

KPI purpose: ROE provides a link between performance and balance sheet management and ensures an appropriate balance is maintained between the two.

The group continues to demonstrate careful use of capital across all divisions, generating a strong 16.9% return on equity, up 0.8 percentage points on 2013, reflecting a 9% rise in profit after tax in 2014.

Earnings per share
16.70p
(2013: 15.20p)

Key measure in the remuneration of executivesThis is a key performance indicator

Earnings per share (EPS)

EPS is a common financial metric, which can be used to measure the profitability and strength of a company over time. It is the total shareholder profit after tax divided by the number of shares outstanding. EPS uses a weighted average of shares outstanding in the year.

KPI purpose: EPS demonstrates the link between performance and shareholder return.

We’ve delivered another year of EPS growth, driven by a 9% increase in the group profit after tax (up from £906 million in 2013 to £992 million in 2014). This has resulted in a 10% (1.50p) increase in EPS.

Full year dividend
11.25p
(2013: 9.30p)

This is a key performance indicator

Full year dividend

The full year dividend is the total dividend per share declared for the year (including interim dividend but excluding, where appropriate, any special dividend).

KPI purpose: Full year dividend demonstrates the level of distribution to shareholders.

Consistent with our dividend guidance to reduce our net cash coverage of dividend towards 1.5 times, the Board has recommended an increase of 21% in the full year dividend to 11.25p (2013: 9.30p). The cost of the full year dividend is £668 million (2013: £550 million) and is covered 1.65 times by the net cash generated.

Please refer to the Group chief financial officer Q&A section of this report for further details on our dividend guidance.

Total shareholder return
184%
(2013: 171%)

This is a key performance indicator

Total shareholder return (TSR)

TSR is a measure used to compare the performance of different companies’ stocks and shares over time. It combines the share price appreciation and dividends paid to show the total return to shareholders.

KPI purpose: TSR measures total return to shareholders, including dividends and share price movements over time.

Based on TSR performance, we are in the FTSE 100 top quartile (top 15 position as at 31 December 2014) after giving investors a 184% return over a three year period. We were also one of the world’s top performing life insurance companies in the FTSE Global Index during this period.

Economic capital surplus and coverage
£7.0bn
229%
(2013: £6.9bn/251%)

Key measure in the remuneration of executives

Economic capital surplus and coverage

Economic capital is the amount of capital that the Board believes the group needs to hold, over and above its liabilities, in order to meet the group’s strategic objectives. These numbers do not represent our view of the Solvency II outcome for the group. Solvency II has elements which L&G considers to be inconsistent with the group’s definition of economic capital, so there will be differences between the two balance sheets.

Purpose: Economic capital surplus and coverage are group defined capital measures used for measuring and reporting market and operational risks across the group.

The group is in a strong capital position with a £7 billion economic capital surplus and a 229% coverage ratio. The surplus has increased since year end 2013, primarily reflecting the operating experience over the course of the year and the issuance of £600 million of Tier 2 capital in June 2014. These figures are pre-accrual of final dividends.

Guide to symbols

This is a key performance indicatorKey performance indicator (KPI)

Key measure in the remuneration of executivesKey measure in the remuneration of executives