Legal & General Group Plc. Results for the year ended 31 December Operating profit before tax 413m 368m up 12% (from continuing operations)

Transcription

1 Stock Exchange Release - Part 1 29 February 2000 Legal & General Group Plc Results for the year ended 31 December 1999 Modified Statutory Solvency basis - Operating profit before tax 413m 368m up 12% (from continuing operations) Earnings per share p 5.26p up 24% Dividend per share 4.13p 3.62p up 14% Achieved Profits basis - Operating profit before tax 647m 522m up 24% (from continuing operations ) Profit before tax 1,294m 631m up 105% Contribution from worldwide new business 2 178m 135m up 32% Shareholders funds 5,250m 4,465m up 18% 1 based on operating profit from continuing operations after tax. 2 contribution before tax from long term business. Group Chief Executive, David Prosser said: These excellent results show that Legal & General continues to be a growth company in a growth market. We have again shown that in our core UK businesses we have the scale and ability to compete effectively and profitably. During the past year we have e-enabled our business to support both our partners and agents. As well as making further investment in business to business capabilities, we are also developing significant business to consumer applications which will be rolled-out later this year. We are well positioned for the Stakeholder Pensions revolution which, we believe, will establish the framework for the whole pensions market. We expect to be a leader in this important market, which will be structured around worksite marketing and internet based customer self-servicing. It will be a springboard for us to develop both significant new business and wider customer relationships Overview of results The Group has continued to enjoy strong growth in new business. Worldwide Equivalent Premium Income (EPI 1 ) grew by 27% to 628 million. UK new business exceeded 500 million EPI for the first time and sales have almost trebled since a compound growth rate of 29% per annum. New business EPI in the USA grew by 77%, reflecting our success as a major writer of term assurance in that market.

2 The Group s operating profit before tax from continuing operations grew by 12% and the related earnings per share by 24%. This was driven by a 10% growth in profits from the Group s life and pensions businesses and a 34% increase in the contribution from investment management. A lower tax charge as a result of favourable prior year adjustment and a US tax credit, resulted in a sharply higher earnings per share. The contribution from worldwide new business on the achieved profits basis amounted to 178 million pre tax, an increase of 32% over 1998, with strong growth from UK life and pensions, UK pension fund management business and the USA. Our investment management business has seen continued success, performing exceptionally well in 1999 by winning 13.1 billion of new fund management business, which exceeded the outstanding result of 11.3 billion achieved in This reinforces our market leading position in the UK as a provider of pooled index funds. Funds under management have grown by 30% during 1999 to reach 108 billion. The scale of our investment business, together with the index tracking skills and the reputation which we have built, is a critical competitive advantage for Legal & General in the rapidly evolving financial services market. Legal & General enjoyed a strong final PEP season and, although investors initial reaction to ISAs was one of caution, they have become increasingly accepted. Single payment unit trust, PEP and ISA sales were a record 877 million (1998: 755 million). Total unit trust, PEP and ISA assets under management now amount to 3.5 billion. During 1999, shareholders funds on the Achieved Profit basis, grew from 4.47 billion to 5.25 billion, an increase of 22% before the dividend. The operating and financial strength of the Group provides a secure base for the Board to continue its progressive dividend policy and to declare a 14% increase in the dividend for the fourth successive year. Modified statutory solvency (MSS) basis Operating profit before tax 2 413m 368m +12% Profit before tax 676m 406m Profit after tax 587m 407m New business Worldwide EPI 628m 494m +27% - UK total EPI 541m 437m +24% - UK individual EPI 442m 369m +20% - UK corporate EPI 99m 68m +46% - International EPI 87m 58m +50% New UK pension fund management 13.1bn 11.3bn +16% Funds under management 108bn 83bn +30% 1 EPI - equivalent premium income for continuing operations. EPI is total annual premiums + 10% of single premiums and includes unit trust, PEP and ISA sales. 2 based on operating profit from continuing operations before tax. Achieved Profits results The Achieved Profits results show a profit before tax of 1,294 million (1998: 543 million) before exceptional items, benefiting from the increased contribution from new business and from strong investment markets. The 1998 results included the profit on the sale of the Australian business of 180 million, offset by the 92 million premium paid on the repurchase of the Euroconvertible bonds. The operating profit before tax from continuing operations for 1999 grew 24% to 647 million (1998: 522 million). The 1999 result reflected a record worldwide new business contribution of 178 million (1998: 135million) with strong growth experienced in all our major businesses. The contribution from in-force business grew from 172 million to 289 million as a result of the good growth in the business portfolio and positive experience variances. The contribution from

3 shareholders net worth, declined to 128 million (1998: 176 million), reflecting a lower opening net worth because of the investment in the business portfolio during The profit before tax includes the effect of investment variances and economic assumption changes. There was a favourable investment variance of 670 million in 1999 (1998: 103 million), reflecting strong equity and property returns. Shareholders funds increased by 18% from 4.47 billion to 5.25 billion, after the 1999 dividend of 212 million. The Achieved Profits results are set out in Part 3 of this release. Dividend The Board has declared a final dividend of 2.83p, bringing the total for the year to 4.13p, an increase of 14%, reflecting the Group s financial and operating strengths and our confidence in the future success of the business. The dividend has now increased by 14% per annum each year since Business review e-enablement 1999 was a year in which we not only grew rapidly, but we also made important investment in the capabilities, which we believe will provide substantial competitive advantages in the years ahead. Our achievements in building modern IT systems, in establishing efficient intermediary extranet capabilities, in running large call centres and in managing efficient index tracking funds, mean that Legal & General is in the front rank of companies ready to operate in the new financial services world. Having first invested in business to business applications to maximise cost savings potential, we are now delivering increasing business to consumer functionality. Customers can already apply for ISAs, mortgages and pensions over the internet. They can manage their mortgages and track the value of their pensions, unit trusts, PEPs and ISAs held with us. Our current priority is to increase the range of products consumers can purchase and then self-service over the internet. Life protection, savings and general insurance products head the list of products scheduled to be delivered over the internet this year. UK life and pensions Our UK life and pensions business continues to grow strongly. The IFA sector remains a significant source of new business, delivering substantial growth for the fourth consecutive year. Our award winning internet capabilities, together with our firmly established telesales channel, enable us to meet the increasing and changing needs of our customers and their advisers. At the same time we have been securing and developing important new business partnerships which provide the low cost distribution essential to our future growth. They include a wide range of businesses and affiliations ranging from small entrepreneurs to large retail businesses. These relationships will be of growing importance in the future. Legal & General s strategy has consistently delivered strong growth in new business. We have benefited from our multi-channel distribution and wide product range, which has enabled us to take advantage of developing market trends. Multi-channel distribution is a key component in Legal & General s growth strategy. This maintains the greatest access to potential customers and embraces our business partners, IFAs and direct sales to customers through our call centre, the internet and off the page. Each of these channels is making increasing use of e-commerce opportunities to drive down costs and to enhance customer service. All of our channels have achieved volume growth, with strongest growth in the IFA channel where individual new business grew by 31% over the prior year. The main features in 1999 were: Single premium bond sales remained strong throughout 1999, growing by 42% to 634 million (1998: 446 million), sales were supported by the launch of our new With-Profits Bond in August Our continued success in the group personal pensions market has largely offset the uncertainties created in the individual personal pensions market, where sales have slowed ahead of the launch of Stakeholder Pensions. New individual pension and annuity business, including group personal

4 pensions, increased to 142 million EPI (1998: 138 million). We believe Legal & General is well positioned for the introduction of Stakeholder Pensions in April The housing market, in which Legal & General s distribution is strongly represented, has seen good growth in Our capabilities in this area have helped to push individual annual premium life sales up by 37% to 126 million (1998: 92 million). Legal & General enjoyed a strong final PEP season and, although investors initial reaction to ISAs was one of caution, they have become increasingly accepted. Single payment ISA and PEP transfer sales in the second half of 1999 exceeded PEP sales over the equivalent period of 1998 by 18%. This - together with increased institutional unit trust sales - produced a 16% increase in single payment sales over the full year to 877 million (1998: 755 million). Total unit trust, PEP and ISA assets under management now amount to 3.5 billion. UK corporate life and pensions new business in 1999 grew by 46% to 99 million EPI (1998: 68 million). Good growth in bulk purchase annuity business in the first and final quarters of the year pushed single premiums up by 85% to 643 million (1998: 348 million). The group risk business achieved record sales levels, with new annual premiums increasing by 20% to 24 million (1998: 20 million). The UK life and pensions operating profit before tax rose by 9% to 285 million (1998: 261 million), reflecting a 10% growth in the net transfer from the UK long term fund and a lower grossing up rate. International life and pensions The profits from the Group s international businesses grew by 16% to 36 million (1998: 31 million). USA Sales grew strongly throughout the year to give record new business and profits. New business, which is predominantly annual premium, grew 77% to $101million EPI (1998: $57 million). Legal & General America is a major writer of term assurance for high net worth individuals and markets its products through a national brokerage distribution. Its success has been built upon significant medical underwriting capabilities, good value products and good service developed within the framework of a low cost, business to business, internet operating environment. Profit before tax of $48 million (1998: $40 million) was up 20%. Netherlands In the Netherlands, sales grew by 17% to 14 million EPI (1998: 12 million). Annual premiums grew particularly strongly - up 33% to 8 million, of which 3 million (38%) represented sales of the new flexible universal life product launched in April. Operating profit before tax grew by 50% to 9 million (1998: 6 million) reflecting the strong growth in the business in recent years. France In France, there was a 14% increase in new business over the year to 25 million EPI (1998: 22 million). New annual premiums - including group protection business - increased 14% to 8 million. Life single premiums grew 22% to 115 million, with a particularly strong performance in the final quarter, which benefited from the launch of a new unit linked fund. The profit of 2 million was down on the 1998 result of 4 million profit because of increased local reserving requirements and lower realised gains. Investment management Our investment management business provides fund management expertise to trustees of pension schemes, other institutional clients and to the Group s corporate and retail businesses. Total funds under management were 108 billion at the year-end, of which over 60% are held for external clients. The success and scale of our investment management business is a key competitive advantage for Legal & General. The profits from the management of external client funds increased by 34% to 43 million (1998: 32 million), reflecting the very strong growth in external funds under management in recent years.

5 New funds under management business rose 16% to 13.1 billion, exceeding the then record 11.3 billion of new business achieved in Pension fund assets exceeded 60 billion at end 1999, underlining Legal & General s position as a major UK investment house and a leading provider of index tracking services. General insurance The operating profit from the general insurance business increased to 20 million (1998: 14 million), after a transfer of 5 million to equalisation provision (1998: 5 million). The household account remains the major component of the Group s general insurance business and includes the joint venture with Woolwich plc. The household underwriting result improved but lower investment returns led to a reduced operating profit of 2 million (1998: 4 million). Further investment in the development of the healthcare business resulted in an operating loss of 3 million (1998: 4 million loss). Domestic mortgage indemnity business produced an insurance profit of 20 million (1998: 18 million). This comprises 14 million profit from post-1992 business and a 6 million profit from pre business (1998: 14 million and 4 million respectively). Other income Shareholders other income Shareholders other income from investments held outside the UK long-term fund declined from 43 million to 41 million, reflecting a lower level of investment gains than in 1998, in a portfolio largely invested in bonds. Banking New mortgage advances grew by 83% to 271 million, driven by our Flexible Reserve product. Mortgage loans now total 868m. The launch of Legal & General s Easy Access LIBOR tracker deposit account in November has generated a strong response from savers. By the year-end, Legal & General Bank (LGB) deposits were 1.03 billion (1998: 0.94 billion) on behalf of some 66,000 customers - an increase of 20,000 customers over the year. LGB s loss of 3 million (1998: 2 million loss) reflected its continuing investment in growth. Estate Agency The strength of the housing market and the restructuring of the estate agency operation produced a break-even result (1998: 8 million loss). This result excludes the contribution from products distributed through this channel. The 1998 result included a charge of 4 million primarily arising from the reassessment of provisions for vacant properties. Change in shareholders retained capital (SRC) The value of the SRC is but one component of the embedded value of the UK long term fund, which grew to 3.82 billion net of tax (1998: 3.24 billion) after the annual distribution to shareholders. Accounting standards require that the change in the amount of the SRC is included in the profit and loss account. For 1999, the change in the SRC, grossed-up to a pre tax amount, was an increase of 260 million (1998: a decrease of 195 million) and comprised: - the investment return on the SRC, which amounted to 288 million (1998: 224 million) - plus the release of capital and profits from business written in previous years, which has been partly offset by the investment of SRC in new business not written in the with-profits fund. In aggregate these items amounted to an increase of 126 million. The equivalent figure in 1998 was a decrease of 284 million, as a result of an increase in actuarial provisions following a rapid fall in interest rates; and allowances for trends in annuitant mortality. - less the accrued transfer from SRC of 154 million (1998: 135 million), already included in the life and pensions operating profit. FSA Reviews We continue to make good progress with the Phase 2 of the PIA Pensions Review. 51,000 requests for review have been received and our target is to complete the review by June The estimated cost of compensation, which has been fully provided, has been borne by the working capital provided by shareholders over many years and retained in the with-profits part of the UK long-term fund.

6 The FSA has called for a review of endowment policies. Legal & General fully supports the FSA s statement that, on average, consumers have done well from having endowment policies. As part of the action plan agreed by the ABI, we have written to all endowment mortgage policyholders outlining the review process. Outlook The financial services marketplace is rapidly changing. As well as traditional methods of product delivery and customer servicing, the market is adopting internet technologies as a step towards full interactivity. Legal & General is committed to being a major force in that marketplace. Our many capabilities and the investments we have made and are making, position us well for that world. We have a growing business to business internet capability and are now rolling out our business to customer functionality. The scale of our investment management business and our expertise in index tracking are major competitive advantages for the Group. We are ready for the new Stakeholder Pensions market. The model of low cost Stakeholder Pensions, delivered through worksite marketing and self-serviced over the internet, will provide significant opportunities for us to develop both extensive new business and valuable customer relationships. The qualities of good value and trustworthiness associated with our brand will be of growing importance in this changing world. Legal & General is looking forward to these opportunities and to continuing as a growth company in a growth market. Notes: - The Annual General Meeting will be held on Wednesday 12 April The Annual Report for 1999 will be sent to shareholders on Monday 13 March The final dividend will be paid on Tuesday 2 May 2000 to shareholders registered at the close of business on Friday 14 April The shares go ex-dividend on Monday 10 April. Enquiries to: Investors: Anthony Hobson, Group Director (Finance) tony.hobson@group.landg.com Peter Horsman, Investor Relations Manager peter.horsman@group.landg.com Media: Graham Rimmer, Chief Press Officer Anthony Carlisle, Citigate Dewe Rogerson

7 Part 2 Legal & General Group Plc Summary of audited results for the year ended 31 December 1999 CONTENTS P1 P2 P3 P3 P4 P5 P6 P7 P7 P8 P8 P9 P10 P10 P11 P11 P12 Consolidated profit and loss account Consolidated balance sheet New business from continuing operations Half yearly analysis of operating profit Half yearly analysis of new UK business Life and pensions premiums and operating profit UK general insurance Investment return Other income Change in shareholders' retained capital (SRC) in the UK long term fund Tax Funds under management Shareholders' funds Segmental analysis of shareholders' funds Borrowings UK long term fund Consolidated cash flow statement

8 Consolidated Profit and Loss Account P1 Notes Profit from continuing operations m m Life and pensions Investment management General insurance Other income Profit from discontinued operations Australian business - 7 Operating profit Variation from longer term general insurance investment return Change in shareholders' retained capital (SRC) (195) Profit on sale of Australian business Premium on repurchase of Euroconvertible bonds - (92) Profit from ordinary activities before tax Tax on profit on ordinary activities 8 (89) 1 Profit for the financial period Dividends (212) (185) Retained profit Earnings per share p p Based on operating profit from continuing operations after tax Based on profit for the financial period Diluted earnings per share Based on operating profit from continuing operations after tax Based on profit for the financial period Dividend per share Statement of Total Recognised Gains and Losses m m Profit for the financial period Exchange gains 3 0 Total recognised gains and losses The following financial statements, which constitute non-statutory accounts within the meaning of Section 240 of the Companies Act 1985, are extracted from the Company's financial statements for the year ended 31 December The financial statements include the auditors' unqualified report and do not contain a statement under either sections 237(2) or 237(3) of the Companies Act These financial statements were approved by the Board on 28 February 2000 and have been prepared using the modified statutory solvency basis for long term business. The 1999 Report and Accounts will be posted to shareholders on 13 March 2000 and delivered to the Registrar of Companies after the Annual General Meeting on 12 April 2000.

9 Consolidated Balance Sheet As at 31 December 1999 P2 Notes Assets m m Investments 9 34,143 31,526 Assets held to cover linked liabilities 65,928 45,253 Other assets 2,135 1, ,206 78,588 Liabilities Shareholders' funds (i) 10 3,085 2,700 Fund for future appropriations (ii) 5,814 4,240 Technical provisions Technical provisions for linked liabilities 65,742 45,196 Other long term business provisions 24,538 23,319 General insurance provisions ,645 68,916 Borrowings Borrowings for financing operations Mortgage related borrowings Bank customer deposits 1, Other creditors 1,205 1, ,206 78,588 (i) Shareholders' funds include profits retained as shareholders' retained capital in the UK long term fund. These amounts, net of allowance for tax, form part of the embedded value of the UK long term fund which is reported in the supplementary financial statements prepared on the Achieved Profits basis. (ii) The fund for future appropriations comprises funds which have not been allocated between policyholders and shareholders at the end of the financial period and consists primarily of unrealised investment appreciation within the withprofits part of the UK long term fund. As at As at

10 New business from continuing operations P3 Life and pensions Annual Single Annual Single m m m m Life Pensions 84 1, UK 234 1, ,402 USA Netherlands France Insurance total 307 2, ,511 Retail investment business UK France Total new business 330 2, ,302 Equivalent premium income (EPI) is calculated for total new business, including unit trusts, PEPs and ISAs (excluding cash ISAs), and comprises the new annual premiums together with 10% of single premiums. EPI from continuing insurance business has increased from 396m in 1998 to 514m in EPI from total new business in the same period has increased from 494m in 1998 to 628m in New overseas insurance premiums expressed at 31 December 1999 exchange rates Annual Single Annual Single m m m m USA Netherlands France Half year analysis of Operating profit Second half First half Second half First half m m m m Life and pensions Investment management General insurance Other income Profit from discontinued Australian business

11 New UK business P4 New UK annual premiums Full Second First Full Second First year half half year half half m m m m m m Life: Mortgage related Savings Protection Group risk Pensions: Individual pensions Group pensions Investments: PEPs/ISAs (excluding cash ISAs) Total New UK Annual Business New UK single premiums Bonds: With-profits Other Pensions: Individual pensions Annuities - individual Annuities - bulk purchase Other group business DSS rebates Investments: Unit trusts PEPs/ISAs (excluding cash ISAs) Total New UK Single Business 2,838 1,283 1,555 2, ,268 New UK EPI Total individual life and pensions EPI Total investments EPI Total individual EPI Total group EPI Total EPI Pension fund management* 13,098 7,094 6,004 11,322 6,233 5,089 * Pension fund management new business comprises new monies from external clients for both pooled and segregated funds.

12 Notes to Financial Statements P5 1. Life and pensions premiums and operating profit from continuing operations Gross Operating Gross Operating premiums profit premiums profit m m m m With-profits business - Life 1, , Individual pensions Group pensions , , Non-profit business 1, UK 3, , USA Netherlands France , , UK life and pensions profit is included in operating profit as the accrued statutory transfer, grossed up at the corporate tax rate. USA profits are included on the basis of US GAAP. Overseas life and pensions premium income and results expressed at 31 December 1999 exchange rates are: Gross Operating Gross Operating premiums profit premiums profit m m m m USA Netherlands France Principal sterling exchange rates used United States dollar Euro

13 Notes to Financial Statements P6 3. UK general insurance Net premiums Underwriting Equalisation Investment Operating written result provision return profit/(loss) 1999 m m m m m Household 168 (4) (5) 11 2 Healthcare 9 (3) - 0 (3) Motor and other Mortgage indemnity Total (5) Household 163 (6) (5) 15 4 Healthcare 3 (4) - 0 (4) Motor and other 30 (6) 0 2 (4) Mortgage indemnity Total 200 (5) (5) Investment return is reported on a basis which reflects longer term rates of investment return. The rates used are consistent with those used for Achieved Profits reporting. Capital supporting the business to which the longer term rates are applied is based on the solvency margin appropriate for the business. For both 1999 and 1998, the investment return has been calculated by applying these longer term rates of return to the investment funds at the start of each quarter. The total investment return continues to be reported in Profit on ordinary activities before tax. The longer term rates of return applied in the allocation of investment return to general insurance operating profit are: % % UK equities 7.1 p.a. 8.8 p.a. UK gilts 4.5 p.a. 6.4 p.a. For these purposes, UK dividend income no longer includes attributable tax credits, following the adoption of FRS16.

14 Notes to Financial Statements P7 4. Investment return (net of interest expense and charges) m m Investment income Interest expense and charges (7) (8) Realised investment (losses)/gains (1) 14 Unrealised investment appreciation reported as: Allocated to general insurance operating profit Variation from longer term general insurance investment return (see note 3) 3 10 Shareholders' other income The investment return shown represents the return on the shareholders' and worldwide GI funds excluding that in respect of SRC and non-insurance operations (primarily Legal & General Bank). 5. Other income m m Shareholders' other income Investment return on shareholders' funds (excluding SRC) Interest expense on core debt (6) (6) Other operations Banking (3) (2) Estate agency 0 (8) Fairmount 1 2 (2) (8) Unallocated corporate expenses Corporate fees (3) 0 Other expenses (7) (5) (10) (5) 29 30

15 Notes to Financial Statements P8 6. Change in Shareholders' Retained Capital (SRC) in the UK Long Term Fund m m Investment income Interest expense and charges (1) (1) Realised investment gains Unrealised investment appreciation Investment return on SRC Net capital released from/(invested in) non-profit business 126 (284) Accrued transfer to shareholders in respect of non-profit business included in operating profit (154) (135) Change in SRC before tax 260 (195) 7. Sale of Legal and General Australia Legal & General Australia was sold to Colonial Limited on 1 July 1998, resulting in an exceptional pre-tax profit of 308m ( 293m after tax). Gross premiums written for the six months to totalled 76m while the contribution to pre-tax operating profit was 7m. 8. Tax Profit Tax Profit/(loss) Tax before (charge)/ before (charge)/ tax credit tax credit m m m m Profit from continuing operations Life and pensions 321 (79) 292 (87) Investment management 43 (12) 32 (11) General insurance Other income (3) 413 (81) 368 (101) Profit from discontinued Australian business (3) Operating profit 413 (81) 375 (104) Variation from longer term general insurance investment return 3 (1) 10 (3) Change in shareholders' retained capital (SRC) 260 (7) (195) 95 Profit on sale of Australian business (15) Premium on repurchase of Euroconvertible bonds - - (92) 28 Tax (charge)/credit on ordinary activities 676 (89) The bases adopted in determining tax include the following: (a) Tax on UK and Australia life and pensions business - by grossing up the statutory transfers at corporate tax rates. (b) Tax on the change in SRC, excluding investment return (see note 6) - by grossing up net of tax amounts by the UK corporate tax rate of 30.25% (1998: 31.0%).

16 Notes to Financial Statements P9 9. Funds under management Long term Other Long term Other business business business business m m m m Land and buildings 3, , Shares, variable yield securities and unit trusts 14,337 1,448 12,243 1,555 Debt and other fixed income securities 12,055 1,019 12, Loans secured by mortgages 13 1, Other loans and investments Deposits with credit institutions Total investments 30,143 4,000 27,437 4,089 Held within the UK long term fund 2,718 2,759 Held outside the UK long term fund 1,282 1,330 4,000 4,089 m m Total investments 34,143 31,526 Assets held to cover linked liabilities 65,928 45,253 Funds included in the consolidated balance sheet 100,071 76,779 Segregated pension funds 4,027 3,489 Unit trusts, PEPs and ISAs (excluding cash ISAs) 3,450 2,280 Total funds under management 107,548 82,548 representing: Managed in the UK - Active 35,414 31,927 - Index tracking 67,817 46,192 - for overseas subsidiaries 964 1, ,195 79,141 Mortgages and other 1,636 1, ,831 80,750 Managed overseas 1,717 1, ,548 82,548 Total Total (i) Assets managed for external pension fund clients totalled 61,297m (1998: 41,753m). (ii) The reported asset mix shown above does not reflect the use of derivatives. The effect of outstanding futures contracts is to change the mix as if, for long term business, the value as reported for shares, variable yield securities and unit trusts decreased by 383m (1998: 371m) and there was no effect on debt and other fixed income securities (1998: 18m increase) and for shareholders' and general insurance funds, the value as reported for shares, variable yield securities and unit trusts decreased by 94m (1998: 101m). In both cases, cash and deposits would be changed by corresponding amounts. The effect of other derivatives was not considered significant enough to be separately reported.

17 Notes to Financial Statements P Shareholders' funds m m At 1 January 2,700 2,438 Total recognised gains and losses Dividends (212) (185) Increase in share capital/premium - conversion of bonds exercise of share options 6 7 Increase in share capital 7 40 At end of period 3,085 2,700 Comprising: Share capital Share premium Profit and loss account -SRC 1,981 1,697 -Other ,825 2,447 3,085 2,700 The number of fully paid ordinary shares of 2.5p in issue was 5,129 million (1998: 5,112 million), including 13 million (1998: 18 million) shares held within the Employee Share Ownership Trust. 11. Segmental analysis of shareholders' funds m m Life and Pensions - UK (Shareholders' retained capital (SRC))* 1,818 1,581 - USA Netherlands France ,250 1,925 Investment management General insurance Banking Corporate funds ,085 2,700 * Excluding SRC funds of 163m (1998: 116m) in respect of the net assets of subsidiaries.

18 Notes to Financial Statements P Borrowings Long term Other Long term Other business business business business m m m m Core debt Mortgage related borrowings Total borrowings % Euroconvertible subordinated bonds due 2008 At the year end 3.3m (1998: 4.4m) nominal of these bonds were outstanding. On 1 December 1999 the Group gave bondholders notice that the bonds outstanding would be redeemed at par on 31 January 2000, if not converted prior to that date. Under the terms of the Trust Deed, the trustee has ensured that all bonds which were outstanding on 31 January 2000 were converted. Conversion of the 3.3m outstanding bonds, resulted in the issue of 6 million shares based on the conversion price of 55 pence per share. 13. UK Long Term Fund As at As at bn bn With-profits business Non-profit business Sub-fund * Shareholders' retained capital (SRC) Market value of assets * The sub-fund, together with the SRC, represents the amount of accumulated profits retained in the long term fund from non-profit business. Earnings on the sub-fund may, at the discretion of directors, be used to support withprofits business.

19 Consolidated cash flow statement (excluding long term business and SRC) P12 m m Net cash inflow from operating activities Interest paid on operational borrowings (6) (6) Tax received/(paid) 36 (20) Disposal of Australian business Dividends paid (193) (169) Financing - Issue of share capital Increase/(decrease) in core debt 30 (10) (11) 263 Cash flows (not including long term business) were invested as follows: (Decrease)/increase in cash holdings 0 (8) Land and buildings 0 (9) Shares, variable yield securities and unit trusts 2 (7) Debt and other fixed income securities Deposits with credit institutions (79) 15 Other loans and investments (217) 203 Net portfolio investment (11) 271 Net investment (11) 263 Reconciliation of profit before tax to operating cash flow Profit on ordinary activities before tax Profits relating to long term business and SRC (617) (116) - Cash received from long term business Profit on sale of Australian business - (308) - Other items (124) (31) Net cash inflow from operating activities

20 Part 3 P1 Supplementary financial statements on the Achieved Profits basis For the year to 31 December 1999 The Group's current external reporting for long term business described in Parts 1 and 2 of the Stock Exchange announcement is based upon statutory requirements designed to demonstrate solvency. It defers the recognition of profit and does not recognise the shareholders' interest in our portfolio of in-force long term business. The Association of British Insurers (ABI) is continuing to develop the Achieved Profits reporting basis as a more realistic method of accounting for long term business. The Achieved Profits basis reflects the development of the embedded value of long term business. A description of Achieved Profits methodology is given in the Report and Accounts. A discussion of the Achieved Profits results for long term business for the year to 31 December 1999 is provided below. Other businesses, including general insurance, which are not affected by the use of Achieved Profits, are discussed in Part 1 of the Stock Exchange announcement. These supplementary financial statements have been reviewed and reported on by the auditors Results The Group's operating profit from continuing operations was 647 million compared with 522 million in 1998, with the contribution from worldwide new business up 32% to 178 million. Profit on ordinary activities before tax, which includes investment returns in excess of assumptions, was 1,294 million (1998: 543 million before exceptional items). Shareholders' funds grew to 5,250 million (1998: 4,465 million), an increase of 22% before the dividend. UK life and pensions Operating profit was 412 million, compared with 352 million for The contribution before tax from new business was up 38% to 99 million. In an increasingly competitive market, we have again written new business which delivers significant value for our shareholders. As a proportion of EPI, the contribution increased from 21% to 23%, reflecting a favourable mix of new business and control of acquisition expenses. The contribution from new business reflects the degree to which its anticipated profitability exceeds the target rate of return. Further contributions to operating profit will arise from the management of this business in future years. The contribution from the in-force business was 194 million (1998: 113 million). This benefited from strong growth in the business portfolio in recent years and positive experience variances, which more than offset the impact of the lower risk discount rate used for This result is after the cost of the investment in strategic systems of 50 million (1998: 55 million). The 1998 contribution was depressed by the effect of anticipating lighter annuitant mortality. The contribution from shareholders' net worth of 119 million (1998: 167 million) reflects both the reduced expected rate of return and a lower opening net worth, following the allocation of significant additional capital to the business portfolio during Profit before tax includes the effect of variances in investment return from those assumed at the end of the previous year, together with economic assumption changes. The investment variance was 663 million (1998: 78 million); in 1999 the excess investment return on the equity and property portfolio over the assumption for the period was 15.9% (1998: 4.5%). The effect of economic assumption changes was a small reduction of 26 million, compared to a reduction of 103 million in 1998, when interest rates fell sharply.

21 Investment management The long term UK Managed Funds business generated an operating profit of 96 million (1998: 70 million), of which new business contributed 50 million (1998: 43 million). This reflects the continuing strong growth in new business and funds under management in recent years. Together with the results of the Ventures operation and the unit trust and PEP/ISA business, which are not included on an Achieved Profits basis, this gave a total investment management operating profit of 99 million (1998: 65 million). P2 International life and pensions Operating profit from continuing international business grew from 61 million to 87 million in 1999, including a strong new business contribution of 29 million (1998: 20 million). USA The highly successful US business is the largest component of international profits and provided a contribution from new business up 77% at 23 million which, as a percentage of EPI, was 36% (1998: 37%). In force business contributed 31 million (1998: 21 million), reflecting strong growth in the business in recent years, to give an operating profit of 58 million (1998: 38 million). Profit before tax was 47 million (1998: 47 million), after an increase in the risk discount rate following the rise in bond rates, resulted in an 11 million charge. Europe The Dutch business had an operating profit of 14 million (1998: 9 million), with a contribution from new business of 4 million (1998: 4 million); whilst the French operation had an operating profit of 15 million (1998: 14 million), with a contribution from new business of 2 million (1998: 3 million). Embedded values During 1999, the embedded value of the UK life and pensions business grew by 24% from 3,237 million (excluding operational investments), to 4,022 million, before the transfer from the UK long term fund of 198 million. This growth reflects new business growth, good operating performance and strong investment markets. The embedded value of the UK Managed Funds, as a subsidiary activity of the Society LTF, is the value of the in-force business in excess of the net assets included in the MSS accounts. This value grew very strongly from 77 million at the end of 1998 to 158 million at the end of 1999, before the distribution of 28 million which is included in the profit reported on the MSS basis. A corresponding embedded value for the unit trust and PEP/ISA operations is not included. The embedded value of the international businesses grew from 376 million to 461 million, including capital injections of 45 million. The changes in the embedded values of these long term businesses underlay a post tax return on shareholders' funds of 18% to 5,250 million, after a dividend to shareholders of 212 million.

22 P3 Consolidated Profit & Loss Account - Achieved Profits basis Notes Profit from continuing operations m m - UK Life and Pensions USA Netherlands France Investment management General insurance Other income Profit from discontinued operations Australian business - 13 Operating profit Variation from longer term investment return Effect of economic assumption changes (23) (95) 1, Profit on sale of Australian business Premium on repurchase of Euroconvertible bonds - (92) Profit on ordinary activities before tax 1, Tax on profit on ordinary activities (295) (127) Profit for the financial period Accrued transfer from UK long term fund (net) Dividends payable Earnings per share - based on operating profit from continuing operations after tax 9.51p 7.47p - based on profit for the financial period 19.57p 9.94p Diluted earnings per share - based on operating profit from continuing operations after tax 9.46p 7.42p - based on profit for the financial period 19.47p 9.88p Dividend per share 4.13p 3.62p

23 P4 Consolidated Balance Sheet - Achieved Profits basis As at 31 December 1999 Notes m m Assets Investments 34,143 31,526 Assets held to cover linked liabilities 65,928 45,253 Long term in-force business 2,216 1,806 Other assets 2,084 1, ,371 80,353 Liabilities Shareholders' funds 5 5,250 4,465 Fund for future appropriations 5,814 4,240 Technical provisions Technical provisions for linked liabilities 65,742 45,196 Other long term business provisions 24,538 23,319 General insurance provisions ,645 68,916 Borrowings Borrowings for financing operations Mortgage related borrowings Bank customer deposits 1, Other creditors 1,205 1, ,371 80,353

24 P5 Notes to Financial Statements - Achieved Profits basis 1. Contribution from continuing long term business UK UK UK UK Life and Managed Life and Managed Pensions Funds + Pensions Funds m m m m Contribution from new business Contribution from in-force business * Contribution from shareholders' net worth Operating profit Variation from longer term investment return** Effect of economic assumption changes (26) 3 (103) 2 Profit before tax 1, Tax (243) (35) (77) (24) Profit after tax International Total International Total m m m m Contribution from new business Contribution from in-force business * Contribution from shareholders' net worth Operating profit Variation from longer term investment return** (13) Effect of economic assumption changes 0 (23) 6 (95) Profit before tax 74 1, Tax (26) (304) (29) (130) Profit after tax Included in the Investment management result. * The UK life and pensions contribution from in-force business reflects a charge of 50m (1998: 55m), relating, primarily, to the cost of investment in strategic systems. ** The variation from longer term investment return represents the effect of the investment performance in respect of shareholders' net worth and in-force business, compared with embedded value assumptions at the beginning of the period.

25 P6 Notes to Financial Statements - Achieved Profits basis 2. Embedded value from continuing operations As at As at UK UK UK UK Life and Managed Life and Managed Pensions Funds Pensions Funds m m m m Shareholders' net worth 1,457-1,287 - Value of in-force business 2, , Embedded value 3, , International Total International Total m m m m Shareholders' net worth 135 1, ,415 Value of in-force business 326 2, ,275 Embedded value 461 4, ,690 For the UK life and pensions business, shareholdersõ net worth comprises the ShareholdersÕ Retained Capital on the MSS basis, adjusted for deferred acquisition costs, and the sub-fund, both net of allowance for tax; but excludes net assets of 163m (1998: 116m) of long term fund operational subsidiaries. For other life and pensions operations, the shareholders' net worth comprises the shareholders' capital associated with the long term business. This is adjusted, where applicable, for an amount locked in to satisfy solvency requirements. 3. Movement in embedded value UK UK UK UK Life and Managed Life and Managed Pensions Funds Pensions Funds m m m m At 1 January 3, , Profit after tax Capital movements (21) - (23) - Distributions (198) (28) (180) (25) At 31 December 3, , International Total International Total m m m m At 1 January 376 3, ,566 Exchange rate movement (4) (4) , ,571 Profit after tax Capital movements (23) Distributions (4) (230) (4) (209) At 31 December 461 4, , Sale of Legal & General Australia Legal & General Australia was sold to Colonial Limited on 1 July 1998, resulting in an exceptional pre-tax profit of 180m ( 165m after tax).

26 P7 Notes to Financial Statements - Achieved Profits basis 5. Segmental analysis of shareholders' funds Embedded value of life and pension businesses: m m - UK 3,824 3,237 - USA Netherlands France ,285 3,613 Investment management* General insurance Banking Corporate funds ,250 4,465 * Including 130m (1998: 77m) embedded value of UK Managed Funds business. All Investment management subsidiaries are included at net asset value, except for the UK Managed Funds business of Legal & General Assurance (Pensions Management) Ltd, a long term insurance company, which is included on the Achieved Profits basis. The net assets of these UK long term fund subsidiaries and the value of the in-force UK Managed Funds business, are attributed to the investment management business. The net assets of the other UK long term fund operating subsidiaries are included in Banking and Corporate funds.

27 P8 Notes to Financial Statements - Achieved Profits basis 6. Assumptions UK i) The assumed future pre-tax return on fixed interest securities is set by reference to redemption yields available in the market at the end of the reporting period. The corresponding return on equities and property is set by reference to the gilt assumption As at As at Investment return % p.a. % p.a. Gilts and RPI-linked Other fixed interest Equities and property Risk discount rate Inflation Expenses/earnings Indexation The assumed return on other fixed interest securities is net of an allowance for default risk of 0.05% p.a. (1998, 0.1% p.a.). ii) The methodology requires an attribution of assets identified as backing the long term contracts and the residual assets. Assets have in particular been attributed to the with-profits fund. The residual assets represent the balance of the long term fund, excluding the with-profits fund and the assets backing the statutory long term business provisions for contracts not written in the with-profits fund. iii) The risk discount rate has been set by reference to the assumed future investment returns and is net of tax. Potential transfers are discounted from the time at which they are assumed to become available for distribution to shareholders. Thus, residual assets retained in the long term fund to support the business are assumed not to be immediately available for distributions; and their value is the discounted value of future assumed distributions. iv) The value of the in-force business has been calculated after allowing for the additional cost, if any, of holding solvency capital. No such additional cost exists for business written within the with-profits fund whilst the solvency capital for that business is met by that fund; nor is there any additional cost to shareholders in respect of non profit business whilst the solvency capital is provided by the residual assets. v) Assets are valued at their market value. For the projection of investment returns, asset values are adjusted in the case of fixed interest and RPI linked investments to reflect the assumed interest and inflation rates. vi) The value of the subfund is the discounted value of projected investment return for a period of 20 years (1998: 20 years). vii) The contribution from new business has been calculated using actual acquisition costs. It reflects the profit arising at the time of sale and the profit arising from differences between actual and expected experience on these policies during the year accumulated to the year end.