TIDMLGEN
RNS Number : 4599N
Legal & General Group Plc
09 August 2017
Legal & General Group Plc
Half year results 2017 Part 1
Stock Exchange Release
09 August 2017
Strong financial performance in h1 2017: profit before tax(1) up
41% to GBP1.2bn
financial highlights(2) :
-- OPERATING PROFIT up 27% to GBP988M (H1 2016: GBP777m)
-- Profit after tax UP 43% to GBP952m (H1 2016: GBP667m)
-- Earnings per share up 41% to 15.94P (H1 2016: 11.27p)
-- Interim dividend(3) of 4.30p per share (H1 2016: 4.00p)
-- Net release From operations for Retained business(4) up 6% to GBP724m (H1 2016:
GBP681m)
-- return on equity(5) of 26.7% (H1 2016: 20.6%)
-- SOLVENCY II SURPLUS(6) INCREASED BY GBP1.0BN TO GBP6.7BN (FY 2016: GBP5.7BN)
-- SOLVENCY II COVERAGE RATIO(6) OF 186% (FY 2016: 171%)
-- H1 2017 Results include base mortality release(7) of GBP126m
business highlights:
-- lgr PRT(8) new annuity business of GBP1.6bn (H1 2016: GBP0.7bn)
-- lgr retail(9) total sales UP 98% to GBP769m (H1 2016: GBP389m)
-- LGIM AUM UP 13% AT GBP951.1BN (H1 2016: GBP841.5BN)
-- LGIM EXTERNAL Net inflows of GBP21.7bn (H1 2016: GBP9.6bn)
-- GROUP-WIDE DIRECT INVESTMENT UP 48% AT GBP11.8BN (H1 2016: GBP8.0bn)
-- LGI GROSS PREMIUMS UP 6% TO GBP1,338M (H1 2016: GBP1,260M)
Nigel Wilson, Group Chief Executive, said:
"L&G delivered 41% growth in EPS to 15.9p, 41% growth in
profit before tax to GBP1.2 billion and a 26.7% Return on Equity.
This includes a base mortality release of GBP126m as part of our
review of longevity assumptions. Our consistently improving
financial performance is due to: investing for the long term in our
market leading businesses, excellent execution by my colleagues and
delivering value for customers.
Our strategy, based around six long term macro and demographic
growth drivers, not only allows us to grow L&G's business, but
also the scale of our long term capital enables us to support
inclusive growth across the UK. We are replicating our successful
UK model with measured expansion in the US, where we are
experiencing increasing customer acceptance and an ever improving
financial performance.
Our business model has proven to be resilient to political,
economic and regulatory uncertainties. We are not being complacent
as we recognise that there are currently some structural weaknesses
in the UK economy. Notwithstanding this we have tremendous momentum
across our business, a strong AA- rated balance sheet and
increasing access to global growth opportunities, therefore we
remain confident in our ability to deliver growth."
1. Represents profit before tax attributable to equity holders.
2. The metrics within the Group's financial highlights are
defined in the glossary, which includes Alternative Performance
Measures, on pages 101 to 105 in this report.
3. A formulaic approach is used to set the interim dividend,
being 30% of the prior year full year dividend.
4. Excludes businesses disposed of comprising Legal &
General Netherlands, Suffolk Life, Cofunds and IPS.
5. Return on equity is calculated by dividing annualised profit
after tax attributable to equity holders of the Company (twice the
half-year number), by the average of shareholders' equity during
the period.
6. Solvency II surplus and coverage ratio on a shareholder basis
is adjusted for the Own Funds and SCR of the With-profits fund and
the final salary pension schemes.
7. IFRS impact from base mortality release in LGR's GBP45.5bn of net longevity exposure.
8. PRT (Pension Risk Transfer) represents bulk annuities bought
by entities that run final salary pension schemes to reduce their
responsibilities by passing the assets and obligations to insurance
providers. Figures disclosed exclude back-book transactions.
9. LGR Retail comprises the division's individual annuities and
lifetime mortgage businesses (Legal & General Home
Finance).
FINANCIAL SUMMARY
GBPm H1 2017 H1 2016 Growth %
============================================== ======= ============== ========
Analysis of operating profit
Legal & General Retirement (LGR) 566 405 40
Legal & General Investment Management (LGIM) 194 171 13
Legal & General Capital (LGC) 142 135 5
Legal & General Insurance (LGI) 151 151 -
General Insurance 15 31 (52)
Savings 52 49 6
Operating profit from divisions 1,120 942 19
Group debt costs (92) (86) (7)
Group investment projects and expenses(1) (40) (34) (18)
Kingswood office closure provision - (45) n/a
Operating profit 988 777 27
Investment and other variances (inc. minority
interests)(2) 175 49 n/a
Profit before tax attributable to equity
holders 1,163 826 41
Profit after tax 952 667 43
IFRS earnings per share (p) 15.94 11.27 41
Return on equity (%)(3) 26.7 20.6 n/a
Interim dividend per share (p) 4.30 4.00 n/a
Release from operations 683 655 4
New business surplus 41 72 (43)
Net release from operations 724 727 -
* Retained business 724 681 6
- 46 n/a
* Disposed operations(4)
Additional dividend from subsidiary in
respect of base mortality release(5) 100 - n/a
=============================================== ======= ============== ========
Total release 824 727 13
1. In H1 2017, we invested GBP12m (H1 2016: GBP16m) to deliver a
reduction in operating costs and management expenses, to increase
efficiencies and develop strategic initiatives.
2. Includes net profit on disposals in H1 2017 of GBP17m in
relation to the disposal of Legal & General Netherlands (H1
2016: GBP4m profit in relation to the disposal of Suffolk Life).
Cofunds and IPS disposal completed on 1 January 2017, however these
businesses were classed as held for sale at 2016 year end with a
GBP64m impairment loss recognised in the 2016 full year
results.
3. Return on equity is calculated by dividing annualised profit
after tax attributable to equity holders of the Company (twice the
half-year number), by the average of shareholders' equity during
the period.
4. Disposed operations comprise Legal & General Netherlands,
Suffolk Life, Cofunds and IPS.
5. Represents subsidiary dividend from LGAS to Group, in
addition to normal LGAS dividend, arising due to base mortality
release in H1 2017.
commentary on H1 2017 financial performance
Income statement
Operating profit increased 27% to GBP988m (H1 2016: GBP777m),
demonstrating the continued successful execution of our
strategy.
LGR delivered a 40% increase in operating profit to GBP566m (H1
2016: GBP405m) driven by strong performance from our front and back
books in LGR's Corporate and Retail divisions. This was supported
by continuing greater than expected mortality experience and we
have chosen to reflect that in our base mortality, contributing to
a release of GBP126m. Excluding the base mortality release, growth
in operating profit remained strong at 9%.
LGIM operating profit increased by 13% to GBP194m (H1 2016:
GBP171m). Management fee revenues were up 15% to GBP382m (H1 2016:
GBP332m) driven by strong external net inflows of GBP21.7bn (H1
2016: GBP9.6bn), and higher asset values throughout H1 2017. This
was partially offset by planned investment to grow the business in
our target international markets.
LGC operating profit increased by 5% to GBP142m (H1 2016:
GBP135m) driven by growth in the overall equity portfolio size
within the division's GBP3.9bn traded assets, and continued strong
performance in the GBP1.3bn direct investment portfolio. Direct
investments delivered GBP69m (H1 2016: GBP68m) operating
profit.
LGI operating profit was flat year-on-year at GBP151m (H1 2016:
GBP151m). US Protection operating profit increased 33% to GBP57m
(H1 2016: GBP43m) driven by business growth and favourable
mortality experience. This was offset by UK Protection operating
profit decreasing by 13% to GBP90m (H1 2016: GBP103m) driven by
adverse experience of GBP26m in our group protection business,
which we previously highlighted in our full year 2016 results. UK
retail protection continued to generate good profits through
consistent performance.
General Insurance operating profit decreased 52% to GBP15m (H1
2016: GBP31m), primarily due to higher than expected costs from
non-weather related claims in Q1, predominantly escape of water, in
line with wider market experience.
Mature Savings operating profit remained robust at GBP52m (H1
2016: GBP55m) as we focus on managing costs whilst maintaining
customer service levels.
Profit before tax attributable to equity holders increased 41%
to GBP1,163m (H1 2016: GBP826m).
Profit before tax increased on the back of the 27% increase in
operating profit. In addition, positive investment and other
variances contributed GBP175m (H1 2016: GBP49m), demonstrating
diversification benefits across the Group. This included GBP52m (H1
2016: GBP60m) primarily from the traded assets portfolio in LGC
through outperformance of long term economic assumptions, as well
as profit on disposals realised in the direct investments
portfolio. Additionally, consistent with prior years, there was an
accounting gain driven by the Group's defined benefit pension
scheme reflecting accounting valuation differences arising on
annuity assets held by the scheme. These gains were partially
offset by a number of smaller variances in other divisions in the
Group.
In H1 2017, the Group had a net profit on disposal of GBP17m (H1
2016: GBP4m) following the sale of Legal & General Netherlands
in April.
Net release from operations for retained business(1) increased
6% to GBP724m (H1 2016: GBP681m), comprising GBP683m (H1 2016:
GBP609m) release from operations and GBP41m (H1 2016: GBP72m) new
business surplus. The prior year new business surplus, in H1 2016,
benefitted in particular from the GBP2.9bn Aegon back-book
transaction in LGR.
The base mortality release in H1 2017 resulted in an additional
GBP100m subsidiary dividend to be remitted to the Group,
contributing to a total release of GBP824m (H1 2016: GBP727m).
balance sheet
The Group's Solvency II surplus increased by GBP1.0bn to
GBP6.7bn (FY 2016: GBP5.7bn) in the six months from the 2016 year
end.
Our Solvency II coverage ratio(2) increased to 186% at H1 2017
(FY 2016: 171%), with net surplus generation contributing 6.0%. On
a proforma calculation basis(2) , our Solvency II coverage ratio
increased from 165% at the end of 2016 to 180% at H1 2017. The
surplus is the same on both bases. The Group remains focused on
delivering appropriate returns on capital. In H1 2017, our Solvency
II new business strain was GBP0.1bn.
The above incorporates management's estimate of the impact of
recalculating the Transitional Measures for Technical Provisions
(TMTP) as at 30(th) June 2017 as we believe this provides the most
up to date and meaningful view of our Solvency II position. In line
with PRA guidance, a formal recalculation of the Group's TMTP will
take place no later than 1(st) January 2018.
1. Excludes businesses disposed of comprising Legal &
General Netherlands, Suffolk Life, Cofunds and IPS.
2. Solvency II coverage ratio on a shareholder basis excludes
the SCR of the With-profits fund and the final salary pension
schemes from both the Own Funds and SCR. The proforma calculation
basis includes these items.
outlook
The Group's strategy is aligned to our six established long term
growth drivers of: ageing demographics; globalisation of asset
markets; creating new real productive assets; reform of the welfare
state; technological innovation; and providing "today's capital".
Our focus on attractive high growth markets, where we can leverage
our expertise, and the clear synergies between our core divisions
is expected to deliver further profit growth in the future. Our
financial ambition is to achieve a similar performance in 2016-2020
as that achieved in 2011-2015; where EPS grew by 10% per annum and
net release from operations by 10% per annum. We made a good start
in 2016 with EPS rising by 17% and net release from operations by
12%. This has continued with a strong performance in H1 2017.
Although no business model can be fully immunised to market
volatility, we believe the opportunities available to the Group,
primarily in the UK and US, remain largely unchanged. Despite a
number of potentially destabilising events in H1 2017 including a
snap UK general election and the start of Brexit negotiations with
the EU, our successful performance continues to demonstrate the
resilience of our operating model and our focus on the excellent
execution of our strategy.
In LGR, demand for pension de-risking strategies remains strong.
We are currently quoting on c.GBP12bn of buy-in and buy-out deals
in the UK, and in our US Pension Risk Transfer (PRT) franchise we
continue to build on recent successes. The individual annuity
market is growing post "Pension Freedoms" driven by demographic and
regulatory trends. Our Aegon distribution agreement signed in
October 2016 has delivered good levels of new business in H1 2017
in addition to our existing arrangements, and we expect to see
continued positive growth in individual annuity sales in H2 2017.
We have a 30% market share in lifetime mortgages with market
volumes expected to grow to GBP3.0bn in 2017. With regard to
reserving, as part of our normal processes, we will review the
appropriateness of our longevity improvement assumptions at the
year end. Based on our current view of the data and level of
certainty, if recent mortality improvement experience continues, we
would expect to fully reflect this in our assumptions over several
years as the credibility of the data increases.
LGIM expects to maintain growth across the business. We are well
placed to continue being a market leader in supporting Defined
Benefit (DB) pension schemes as they de-risk. LGIM is gaining
market share in the UK Defined Contribution (DC) and Retail
markets. We expect the US business to continue its rapid growth and
we are successfully expanding in other target regions. We will also
continue to invest in technology and overseas distribution. LGIM
has established a resilient business model that is well positioned
to deal with the challenges facing the industry such as the FCA
Asset Management Market Study, MiFID II and Brexit
negotiations.
LGC is broadening its business and so far this year has
committed over GBP200m in investment across all its chosen sectors.
In Housing, CALA's growth outlook remains strong, and to complement
this we are also expanding into Later Living and are reviewing
opportunities in Affordable Housing. In Infrastructure, we are
continuing to progress our strategic urban regeneration
developments. In SME finance, Pemberton will be launching further
new funding initiatives in H2 2017. We are also on track to meet
our sales proceeds target of c.GBP250m from asset disposals, and
our year-to-date sales have been achieved at or above our target
IRR's. LGC's GBP3.9bn traded asset portfolio outperformed our long
term assumptions in H1 2017.
In LGI, we expect to maintain good growth from US new business
sales with H1 2017 17% higher than H1 2016. During H1 2017 our US
business, in collaboration with colleagues from LGI UK, launched a
direct to consumer sales channel including online apply, and work
is ongoing to deliver digital transformation. In the UK we will
continue to focus on the turnaround of our UK group protection
business and growing our market leading retail protection business.
We expect these management actions to become evident in H2 2017. We
are confident the division will deliver growth in profits and gross
premiums in H2 2017.
In General Insurance, we are growing the business, having won a
number of new distribution agreements, and remain on track to
deliver a c.10% increase in gross premiums in 2017. We are also
developing new digital solutions for our customers. The actions
taken on escape of water are expected to deliver improved
profitability in future periods.
Our Mature Savings operation is largely closed to new business.
We will continue to focus on customer service whilst actively
managing costs on our GBP30bn assets under administration.
DIVID
Legal & General has a progressive dividend policy reflecting
the Group's expected medium term underlying business growth,
including net release from operations and operating earnings. There
is no change to this dividend policy.
In line with Group's policy of using a formulaic approach to
setting the interim dividend, being 30% of the prior year full year
dividend, the Board has declared an interim dividend of 4.30p per
share.
LEGAL & GENERAL RETIREMENT
FINANCIAL HIGHLIGHTS GBPm H1 2017 H1 2016
Release from operations 256 204
New business surplus 51 79
Net release from operations 307 283
Experience variances, assumption changes, tax
and non-cash movements 259 122
Operating profit 566 405
Investment and other variances 38 63
=================================================== ======== ========
Profit before tax attributable to equity holders 604 468
=================================================== ======== ========
Back book acquisitions - 2,945
UK PRT 1,504 640
International PRT 115 45
Individual annuity single premiums 345 158
Lifetime mortgage advances 424 231
Longevity insurance(1) 800 -
Total LGR new business 3,188 4,019
Annuity net inflows (GBPbn) 0.4 2.6
Total annuity assets (GBPbn) 55.6 51.0
=================================================== ======== ========
1. The GBP800m quoted represents the notional size of the
transaction and is based on the present value of the fixed leg
cashflows discounted at the LIBOR curve.
operating profit up 40% to GBP566m
LGR had a strong H1 2017 achieving further growth in profits and
total new business volumes of GBP3.2bn (H1 2016: GBP4.0bn).
Release from operations increased 25% to GBP256m (H1 2016:
GBP204m), reflecting the expected release of prudential margins
from our growing GBP55.6bn annuity fund.
Net release from operations increased 8% to GBP307m (H1 2016:
GBP283m) with new business surplus of GBP51m (H1 2016: GBP79m). New
business surplus benefitted from securing attractive spreads on
direct investments including lifetime mortgages, while H1 2016
benefitted in particular from the GBP2.9bn Aegon back-book
transaction.
We achieved Solvency II new business strain of less than 4%
against GBP1,964m new annuity business in H1 2017, within our
target low to mid single digit range. UK annuity sales delivered a
8.9% new business margin on Solvency II capital.
Operating profit increased to GBP566m (H1 2016: GBP405m) driven
by strong performance in the front and back books of LGR's
Institutional and Retail divisions. Additionally, mortality
experience for LGR's annuity book has been greater than expected
for a number of years and we have chosen to reflect that in our
base mortality, with a release of GBP126m of prudence within our
reserves.
LGR's gross longevity exposure is GBP61.4bn across annuity and
longevity insurance business. We have reinsured GBP15.9bn of
longevity risk with 11 reinsurance counterparties, leaving a net
exposure of GBP45.5bn.
LGR, in line with the industry, has two principal assumptions in
relation to longevity: the level of mortality currently being
experienced by pensioners (often referred to as "base" mortality),
and the rate at which mortality will change in the future (the
"improvement" or "trend" assumption). In preparing the half year
results, we have not adjusted our assumptions for the rate of
future longevity improvement; they remain consistent with those
disclosed last year. As part of our normal processes we will review
the appropriateness of longevity improvement assumptions at the
year end. There is increasing evidence that the higher than
expected level of recent mortality is in part due to medium or
long-term influences rather than short-term events. In performing
this review, consideration will be given as to whether, and over
what period, to move to newer versions of the CMI model. We would
expect to continue to apply caution in our assessment of the
sustainability of any reduction in mortality improvements, with any
release being recognised over several years as greater certainty
emerges on the continuation of positive experience.
increasing demand for de-risking strategies
The need for products and services as a consequence of ageing
populations is increasing, and our strategy is to be at the
forefront of providing those products and services. Our core
business themes of Global PRT for our institutional customers and
Individual Retirement Choices for our retail customers are there to
meet these substantial and growing needs.
LGR Institutional - Global PRT
In H1 2017, LGR Institutional completed GBP1,619m (H1 2016:
GBP685m) of bulk annuity transactions and a longevity insurance
transaction of GBP800m.
The UK pension de-risking market has made a steady start in 2017
with increased activity anticipated in H2. LGR closed a number of
significant buy-ins and buy-outs in H1 2017, with UK PRT bulk
annuity sales up GBP0.9bn to GBP1.5bn (H1 2016: GBP0.6bn). Of this,
just under GBP1bn of assets transferred from liability driven
investment (LDI) and fixed income customers in LGIM, further
demonstrating the strength of L&G's de-risking proposition. In
the US we completed three bulk deals in H1 2017 totalling $141m
premiums. We also completed an GBP800m longevity insurance
transaction in June 2017 which we have fully reinsured. We operate
a capital efficient model, reinsuring approximately 80% of
longevity risk on new UK PRT business to our panel of
reinsurers.
We are currently quoting on c.GBP12bn of UK buy-in and buy-out
deals. Whilst lower real yields increase the average pension fund
deficit, the impact on pension funds depends on the amount of LDI
hedging they have done, the extent to which equities have been
switched to bonds, and the extent to which equities have been
diversified globally, with or without currency hedging. We estimate
that c.50% of the interest rate and inflation risk has been removed
from the UK private sector defined benefit sector.
Legal & General is unique in being able to offer all
possible pension risk transfer and DB pension de-risking solutions.
We are recreating this disciplined approach in the US, with our US
PRT business making further progress in 2017.
LGR Retail - Individual Retirement Choices
LGR's Retail business is playing an important role in our
customers' retirement planning. In volatile times, the certainty of
income and access to housing wealth we provide for those
approaching or already in retirement is vital.
Individual annuity sales were up 118% at GBP345m (H1 2016:
GBP158m) and LGR Retail now manages over GBP21bn in assets for its
550,000 individual annuity customers. In October 2016 we agreed to
be Aegon's preferred supplier of annuity business and together with
improved sales performance in the wider individual annuity sector,
we remain on track to achieve further growth in H2 2017.
The combination of Freedom & Choice in Pensions and Solvency
II has resulted in consolidation among individual annuity
providers. We expect there to be further back-book consolidation
opportunities over time and we will consider these as and when they
arise.
Legal & General Home Finance has had a strong H1, writing
GBP424m of lifetime mortgage advances in H1 2017 (H1 2016: GBP231m)
representing a 30% market share, and now has approximately 16,000
customers in our market leading business. Our portfolio has an
average customer age of 70 and the weighted average loan-to-value
is c.28%. With an estimated GBP1.5 trillion of housing equity
currently owned by the over 55s in the UK, the long-term growth
characteristics of this market are strong, and we expect the market
volume to reach GBP3bn in 2017, up from GBP2.2bn in 2016. We are
also delivering solutions for customers with maturing interest-only
mortgages.
ONGOING credit and ASSET management
Credit portfolio management
LGR's GBP55.6bn asset portfolio backing its IFRS liabilities is
well diversified. Within the GBP51.5bn bond portfolio, just over
2/3rds of the portfolio is A-rated or better, 30% BBB-rated and 1%
sub-investment grade. The bond portfolio has 14% in gilts, 4% in
Banks, and 4% in Energy, Oil & Gas. It is an objective of our
fixed income fund managers in LGIM to manage the portfolio such
that credit downgrades and defaults are avoided. We hold GBP2.7bn
of IFRS credit default reserves against these assets.
Direct Investment
Our direct investment portfolio is secured through directly
negotiated covenants and security or collateral. In H1 2017, LGR
invested over GBP1.4bn in direct investments, including
infrastructure, housing and lifetime mortgages. This portfolio is
now GBP9.8bn (H1 2016: GBP6.6bn) including GBP1,433m in lifetime
mortgages, and makes up c.15% of the assets within the annuity
portfolio. The PRA has reviewed and approved the use of internal
ratings within our Matching Adjustment (MA) process and c.59% of
the direct investment portfolio is rated A and above.
With the Group's balance sheet size and the long term nature of
LGR's liabilities, LGR is able to invest in assets of size and term
that differentiates it from many other investors. The ability to
self-manufacture attractive assets to back the annuities book,
working with LGIM, LGC, or through lifetime mortgages, is an
important feature of LGR's business.
LEGAL & GENERAL investment management
FINANCIAL HIGHLIGHTS GBPm H1 2017 H1 2016
Management fee revenue(1) 382 332
Transactional revenue 12 16
=================================================== ======= ========
Total revenue 394 348
Total costs(1) (200) (174)
Asset management operating profit 194 174
Workplace Savings operating result(2) - (3)
=================================================== ======= ========
Operating profit 194 171
Investment and other variances (4) (8)
=================================================== ======= ========
Profit before tax attributable to equity holders 190 163
Net release from operations 154 134
Cost:income ratio(3) (%) 51 50
External net flows (GBPbn) 21.7 9.6
Internal net flows (GBPbn) (1.1) 0.3
Disposal of LGN(4) (GBPbn) (0.8) -
Total net flows (GBPbn) 19.8 9.9
Of which international (GBPbn) 17.9 6.7
Persistency (%) 90 91
GBPbn H1 2017 H1 2016
Assets under management(5) 951.1 841.5
Of which:
- International assets under management(5) 198.3 151.9
Assets under administration - Workplace Savings 24.9 17.3
================================================== ======== ========
1. Management fee revenue and total costs exclude income and
costs of GBP8m in relation to provision of 3rd party market data
(H1 2016: GBP5m each; FY 2016: GBP14m each).
2. Represents Workplace Savings admin only and excludes fund management profits.
3. Excluding Workplace Savings.
4. Legal & General Netherlands disposal completed on 6 April 2017.
5. Assets under management include overlay assets, which
represent the notional value of derivative instruments on which
LGIM earns fees. Fees are charged on notional values and as such
are not subject to positive or negative market movements.
operating profit up 13% to GBP194m
LGIM continues to expand its business across channels, regions
and product lines. External net flows were strong at GBP21.7bn (H1
2016: GBP9.6bn), contributing to 13% growth in assets under
management (AUM) to GBP951.1bn (H1 2016: GBP841.5bn). Revenues from
management fees were up 15% to GBP382m (H1 2016: GBP332m), while
transactional revenues were lower at GBP12m (H1 2016: GBP16m).
Operating profit increased by 13% to GBP194m (H1 2016: GBP171m),
reflecting AUM growth from flows and asset values, partially offset
by planned investment to grow the business.
Workplace savings achieved a break-even operating result in H1
2017 (H1 2016: GBP(3)m), demonstrating increasing efficiencies as
the platform continues to grow. This result is for the
administration business only and the profits on the fund management
services provided are included in the LGIM result.
The International business experienced strong net inflows of
GBP17.9bn (H1 2016: GBP6.7bn) with all regions producing positive
net flows. The DC business continued to expand, with total net
inflows of GBP1.7bn (H1 2016: GBP0.8bn) driven by our bundled
business, which offers investment and administration services to DC
schemes. We are now the largest manager of DC assets in the UK. The
retail business experienced net inflows of GBP1.7bn (H1 2016:
GBP0.7bn) and was ranked first in UK net sales in Q2 2017 (Source:
Pridham).
breadth of investment management solutions
Active
Asset movements Index fixed Solu- Real Active Total
GBPbn funds income tions assets equities AUM
At 1 January 2017 319.8 134.8 411.9 19.6 8.1 894.2
External inflows 25.4 8.3 16.0 0.8 0.1 50.6
--------
External outflows (29.7) (3.0) (9.0) (0.5) (0.1) (42.3)
Overlay / advisory net
flows - - 13.4 - - 13.4
External net flows (4.3) 5.3 20.4 0.3 - 21.7
Internal net flows (0.3) (0.4) 0.4 0.5 (1.3) (1.1)
Disposal of LGN(1) (0.3) (0.5) - - - (0.8)
Total net flows (4.9) 4.4 20.8 0.8 (1.3) 19.8
Cash management movements - 4.1 - - - 4.1
Market and other movements 16.6 1.7 13.4 0.8 0.5 33.0
At 30 June 2017 331.5 145.0 446.1 21.2 7.3 951.1
1. Legal & General Netherlands disposal completed on 6 April
2017.
Total AUM increased 13% to GBP951.1bn (H1 2016: GBP841.5bn).
Total external net inflows of GBP21.7bn (H1 2016: GBP9.6bn)
represent c.2.4% of opening AUM. Positive flows across all
channels, regions and most product lines demonstrate the breadth of
LGIM's business model. LGIM delivered consistent strong performance
for its active clients, with the majority of our funds
outperforming their respective benchmarks over the past one, three
and five years.
Solutions external net inflows were GBP20.4bn (H1 2016:
GBP9.4bn), driven by DB pension schemes implementing a broader
range of Liability Driven Investment (LDI) strategies, and DC
schemes and retail customers seeking a range of Multi-Asset
strategies. The de-risking of DB schemes presents the business with
considerable opportunities, taking clients from traditional Index
strategies, through LDI capabilities, to Solutions that combine
LDI, Credit, Multi-Asset and Real Asset strategies, as well as PRT
transactions in LGR.
Index external net outflows were GBP4.3bn (H1 2016: GBP2.4bn
outflow). Net outflows were once again largely from UK DB clients
switching to other products, primarily Solutions. However, there
were strong net inflows from international and Retail clients as
the Index business continues to expand in other channels and
regions.
Net external inflows into Active Fixed Income of GBP5.3bn (H1
2016: GBP2.6bn) were driven primarily by institutional clients in
the UK and US, and demand continues to grow from clients in other
regions.
The Real Assets business has continued to expand, with
especially strong growth in private credit. LGIM originated over
GBP1bn of investments across real estate, infrastructure and
corporate debt. LGIM continues to see success with its Build to
Rent fund, with c.GBP1bn of capital raised. Real Assets AUM has
grown to GBP21.2bn (H1 2016: GBP18.4bn).
The Retail business has performed well as the AUM increased to
GBP26.8bn (H1 2016: GBP21.4bn) and the business has gained market
share.
largest uk dc asset manager - GBP63bn aUM
LGIM has experienced a 20% increase in customers on its
Workplace platform, with the number of members now 2.4m (H1 2016:
2.0m). Our Master Trust is the second largest and fastest growing
in the UK. Net inflows into our workplace platform were GBP2.8bn
(H1 2016: GBP1.8bn) and assets are now GBP24.9bn (H1 2016:
GBP17.3bn). The number of pension schemes supported by the DC
business has grown to 12,234 (H1 2016: 6,844). Total UK DC AUM
increased by 26% to GBP62.8bn (H1 2016: GBP49.8bn).
INTERNATIONAL assets up 31% to GBP198bn
LGIM's international businesses experienced record net inflows
of GBP17.9bn (H1 2016: GBP6.7bn). Once again positive net flows
took place in all regions. Net inflows in the US business were
GBP8.6bn (H1 2016: GBP3.1bn) across Solutions, Active Fixed Income
and Index funds. Net inflows were GBP6.6bn in Europe (H1 2016:
GBP1.5bn), GBP2.5bn in the Gulf (H1 2016: GBP1.6bn) and GBP0.3bn in
Asia (H1 2016: GBP0.5bn). Total International AUM was GBP198.3bn, a
31% increase (H1 2016: GBP151.9bn).
Additionally, we have established a regional office in Tokyo and
trading and fund management capabilities in Hong Kong.
LEGAL & GENERAL CAPITAL
FINANCIAL HIGHLIGHTS GBPm H1 2017 H1 2016
Net release from operations 119 113
Operating profit from:
Direct investment 69 68
Traded investment portfolio 73 59
Treasury assets - 8
Total operating profit 142 135
Investment and other variances 52 60
=================================================== ======== ========
Profit before tax attributable to equity holders 194 195
DIRECT INVESTMENT PORTFOLIO(1) GBPm H1 2017 H1 2016
UK Housing 416 377
Infrastructure 731 506
SME Finance 201 181
1,348 1,064
TRADED PORTFOLIO GBPm
Equities 2,047 1,630
Fixed income 308 499
Multi-asset 140 472
Cash 1,443 1,232
3,938 3,833
LGC investment portfolio 5,286 4,897
Treasury assets at holding company 1,504 1,021
=================================================== ======= ========
Total 6,790 5,918
1. Direct Investment portfolio includes two LGC assets valued at
GBP98m which are classified as debtors as contracts have been
exchanged as at 30 June 2017, and for which the proceeds were
received shortly following that date. In addition it excludes
GBP25m of Group shareholder investment property.
direct investment portfolio up 27% to GBP1.3bn
The Direct Investments portfolio increased by 27% to GBP1,348m
(H1 2016: GBP1,064m). The portfolio delivered operating profit of
GBP69m (H1 2016: GBP68m) and profit before tax of GBP53m (H1 2016:
GBP51m), representing an annualised net portfolio return of 8.6%
(H1 2016: 10.2%).
LGC's Direct Investment portfolio delivered a solid performance
in H1 2017. In particular, Infrastructure performed strongly driven
by a 44% increase in the portfolio. Profit before tax increased to
GBP53m (H1 2016: GBP51m) driven by the maturing profile of the
portfolio which has delivered positive variances from asset
disposals.
So far this year LGC has committed over GBP200m in investments
across all the target sectors. In our Infrastructure portfolio we
have invested GBP72m, funding the further development of our
existing investments, and in our SME portfolio we have deployed
GBP25m in Pemberton's new UK Sterling Loan Fund and have committed
GBP22m across three new early-stage venture capital funds.
Additionally, in Housing we invested GBP39m in August into the
Later Living sector.
portfolio delivers reALISED profits FROM DISPOSALs
In H1 2017, LGC completed, or exchanged contracts for, disposals
which will generate proceeds of GBP164m, and remain on target to
achieve the full year target of GBP250m of disposals, representing
a significant increase from 2016. Disposals have been achieved at
or above our target IRRs, demonstrating our ability to generate
liquidity and profits for our shareholders.
Infrastructure assets increased to GBP731m (H1 2016:
GBP506m)
During H1 2017, the urban regeneration business continued to
grow. Our portfolio is maturing, with profits being realised on
disposals and valuations increasing as projects are developed and
letting of units is achieved.
In our GBP400m development in Cardiff, we are now funding the
development of the second office building and have completed the
disposal of One Central Square which is adjacent to BBC Wales' new
HQ (acquired by LGR in 2015), delivering our target IRR's. The
GBP240m Bracknell Town Centre development (The Lexicon) is
progressing well towards the planned opening in September 2017 with
over 90% of the retail space now let.
MediaCityUK (Salford) is trading well, delivering a strong
valuation uplift with the completion of further leasing of the
estate. The Newcastle Science Central project has submitted a
planning application for the first of its grade A office buildings.
The 100,000 sq ft office building will create modern workspace for
over 1,200 people.
In Clean Energy, NTR(1) completed the construction of a further
3 UK onshore wind sites, taking the number of operational assets to
5 out of 11 assets. The EUR246m fund is 77% deployed and remains on
target to be fully deployed by December 2017. We are working with
NTR on the development of its second fund, expected to target
EUR500m of equity investment in clean energy assets in H2 2017.
Housing assets increased to GBP416m (H1 2016: GBP377m)
CALA Homes(2) delivered another strong financial performance. In
the twelve months to the end of June, CALA delivered revenue in
excess of GBP700m representing an almost three fold increase since
we acquired our shareholding in 2013.
The Build-to-Rent joint venture invested in new sites in Bath
and Leeds and now has over 1,400 homes under development since
inception in early 2016. Additionally, residents are now occupying
the first scheme in Salford ahead of plan.
Legal & General Homes is launching the prime development in
Crowthorne, Berkshire. The site has Outline Planning Permission for
1,000 new homes and building is expected to start in September once
the on-site infrastructure has been delivered. Legal & General
Homes Modular has produced its first units, and we have appointed a
new CEO to optimise the production phase now the factory
development is complete. There continues to be strong interest from
prospective buyers.
SME Finance assets increased to GBP201m (H1 2016: GBP181m)
Pemberton(3) continues to grow and is targeting c.EUR3bn of AUM
growth in 2017. This year three new funds are being launched: a
second Euro Fund a follow-on fund to the successful first Euro Fund
with a target size of EUR2bn; a new Trade Receivables fund; and a
Strategic Opportunities fund.
LGC also committed GBP22m to three funds investing in early
stage start-ups in the UK and Europe in a range of sectors
including Fin Tech to establish an institutional presence in the VC
market.
TRADED PORTFOLIO
LGC's traded investment portfolio, including treasury assets,
delivered operating profit of GBP73m (H1 2016: GBP67m) and profit
before tax of GBP141m (H1 2016: GBP144m).
The traded portfolio holds a diversified set of exposures across
equities, fixed income, multi-asset funds and cash. The portfolio
has performed above assumed returns over the first half of the
year, benefiting from positive global equity market
performance.
1. LGC owned a 25.0% share in the NTR fund management business
and 47.0% in the NTR fund as at 30 June 2017.
2. LGC owned a 47.9% share in CALA Homes as at 30 June 2017.
3. LGC owned a 40.0% share in Pemberton as at 30 June 2017.
LEGAL & GENERaL INSURANCE
FINANCIAL HIGHLIGHTS GBPm H1 2017 H1 2016
Release from operations 166 196
New business surplus 3 7
Net release from operations 169 203
* Retained business 169 155
- Disposed operations(1) - 48
Operating profit 151 151
* UK 90 103
* US 57 43
* Netherlands(1) 4 5
Investment and other variances(2,3) 7 (100)
=================================================== ======= ========
Profit before tax attributable to equity holders 158 51
=================================================== ======= ========
LGI new business annual premiums 153 148
Retail Protection gross premiums 609 582
Group Protection gross premiums 224 233
US Protection gross premiums 491 420
Netherlands gross premiums 14 25
Total gross premiums 1,338 1,260
1.Legal & General Netherlands disposal completed on 6 April
2017.
2.Prior year investment variance of GBP(100)m) driven by a
reduction in UK government bond yields of c.100bps which impacted
the discount rate used to calculate the reserves for our UK
protection liabilities.
3. H1 2017 includes a GBP17m gain resulting from the disposal of
Legal and General Netherlands.
6% increase in Gross premiums to GBP1.3bn
Retail Protection gross premium income increased 5% to GBP609m
(H1 2016: GBP582m) with new business annual premiums of GBP86m (H1
2016: GBP82m). We remain a leading provider of Retail Protection in
the UK and benefit from a highly efficient automated underwriting
model, delivering straight through processing for more than 80% of
our customers, and a broad distribution reach. Our direct
distribution channel continues to perform strongly and delivered
Retail Protection new business APE of GBP16m (H1 2016: GBP16m)
accounting for c.19% of new business APE. Group Protection gross
premium income was GBP224m (H1 2016: GBP233m) with new business of
GBP28m (H1 2016: GBP36m).
LGI US gross premium income increased 3% (17% on a sterling
basis) to $618m (H1 2016: $601m) driven by new annual premiums
increasing 17% to $48m (H1 2016: $41m). LGI US is the second
largest provider of US term life assurance through the brokerage
channel(4) and has 1.2m policies in force (H1 2016: 1.2m).
Legal & General Mortgage Club facilitated GBP29bn of
mortgages in H1 2017 (H1 2016: GBP26bn) through strong partnerships
with top lenders and over 10,000 mortgage brokers. As the largest
participant in the intermediated mortgage market in the UK, we are
involved in one in five of all UK mortgage transactions. Legal
& General Surveying Services continues to deliver a strong
performance, completing over 262k surveys (H1 2016: 250k).
4. By annual premium equivalent as at 31 March 2017.
SUSTAINED divisional operating profit and strong us growth
LGI US operating profit increased 16% (up 33% on a sterling
basis) to $72m (H1 2016: $62m), due to business growth and
favourable mortality experience. LGI US delivered a strong Solvency
II new business margin of 12.8%.
LGI UK operating profit decreased 13% to GBP90m (H1 2016:
GBP103m), as consistent performance from our UK retail protection
business was offset by the previously anticipated adverse
experience of GBP26m in group protection, where our use of
reinsurance is significantly lower than on our retail protection
book leading to greater volatility in claims results.
The adverse experience arose primarily in a relatively small
number of income protection schemes. A range of actions have been
taken to address the issues arising, including pricing action at
scheme renewals. The impact of these actions will take time to be
fully reflected in our experience, so we expect some adverse
experience to continue emerging but at a reduced level in the
second half of 2017.
Retail protection continued to generate good profits reflecting
the consistent performance of this business and its leading market
position in 2016. We continue to develop our Retail Protection
proposition and enhance our underwriting approaches to place us in
a strong position to win additional distribution deals in order to
support our market share and profitability levels.
UK protection sales delivered a 9.1% new business margin on
Solvency II capital reflecting competitive pressures in both UK
markets.
Net release from retained business in LGI increased by 9% to
GBP169m (H1 2016: GBP155m). LGI US net release from operations
increased by 14% (31% on a sterling basis) to $100m (H1 2016:
$88m). This represents the annual dividend paid by LGI US to the
Group in February 2017.
Digital innovation
Our UK retail protection business benefits from high levels of
automation and self-service capabilities which we have continued to
enhance during 2017 with further functionality delivered to our
advisers. We are also increasingly using predictive analytics and
improved underwriting approaches to reduce the time it takes for
advisers and their customers to apply for policies. The digital
transformation of our US Protection business is just beginning but
will catch up fast, fully using the wealth of experience and
capabilities we have from digitising our UK business. Our focus in
2017 is developing online applications including automated
underwriting to deliver a better customer experience, scalability,
reduced unit costs and enhanced risk management.
Our use of innovative digital marketing approaches has been
helping us engage more effectively with customers, contributing to
a 56% increase in direct business over the last 3 years. Further
significant focus on this area, in both UK and US, will take place
in H2 2017 and subsequent years as we use the latest technology and
techniques to improve customer engagement. LGI recently launched an
easy and engaging way to obtain a life insurance quote in the US.
SelfieQuote.com provides a life insurance estimate by determining
an individual's age, and body mass index (BMI) using a selfie
photo. We are the first in the life insurance industry to roll out
this approach, which is an example of how technology can improve
the application process for consumers.
We see increasing opportunities for technology innovation to
help customers engage with financial services. To pursue these
growth opportunities we have recently established a Fintech
business area within LGI that will include our existing fintech
business, Investment Discounts Online (IDOL), and other fintech
start-up businesses that we will fund and collaborate with.
General Insurance
FINANCIAL HIGHLIGHTS GBPm H1 2017 H1 2016
Net release from operations 12 25
Experience variances, assumption changes, tax
and non-cash movements 3 6
Operating profit 15 31
Investment and other variances 6 10
=================================================== ======= ========
Profit before tax attributable to equity holders 21 41
=================================================== ======= ========
General Insurance gross premiums 173 156
Combined operating ratio (%) 95 85
=================================================== ======= ========
11% growth in gross premiums to GBP173m
Gross premiums increased 11% to GBP173m (H1 2016: GBP156m)
despite the pressures of a competitive market. Our direct business
delivered gross premiums of GBP63m in H1 2017, representing 17%
growth on H1 2016 and now accounts for 36% of gross premiums (H1
2016: GBP54m, 35% of gross premiums).The General Insurance business
has won five distribution agreements in the last two years with UK
financial institutions. We are on track to increase gross premiums
by over 10% by the end of 2017.
Operating profit decreased to GBP15m (H1 2016: GBP31m) with a
combined operating ratio of 95% (H1 2016: 85%). This was primarily
due to increased costs from non-weather related claims in Q1,
predominantly escape of water, in line with wider market
experience. We have taken action across pricing, underwriting and
claims management to address this and have seen improved claims
experience in Q2. We will continue to monitor this closely and will
take further action if required. In contrast, the H1 2016
comparator benefitted from better than expected claims experience
during that period.
savings
FINANCIAL HIGHLIGHTS GBPm H1 2017 H1 2016
Release from operations 53 51
New business strain (2) (3)
Net release from operations 51 48
Experience variances, assumption changes, tax
and non-cash movements 1 1
Operating profit 52 49
* Mature Savings 52 55
* Disposed operations(1) - (6)
Investment and other variances(2) (7) 4
Profit before tax attributable to equity holders 45 53
=================================================== ======= ========
1. Disposed operations comprises Suffolk Life which was sold on
25 May 2016, and Cofunds and IPS which was sold on 3 January
2017.
2. H1 2016 includes a GBP4m gain resulting from the disposal of
Suffolk Life.
robust operating profit
Net release from operations was higher reflecting market
conditions, with lower new business strain as the book
declines.
Operating profit in Mature Savings remains robust at GBP52m (H1
2016: GBP55m). Reducing unit costs, whilst maintaining customer
service levels, has been achieved through the introduction of
robotics, and further automation.
Mature Savings had outflows of GBP(1.5)bn (H1 2016: GBP(1.3)bn),
with assets under administration of GBP30.2bn in H1 2017 (H1 2016:
GBP29.4bn).
Mature Savings outflows increased year on year due to our
products' maturity profile. Since the introduction of the Pensions
Reform legislation we have seen an increase in the proportion of
customers wishing to take their pension pots as cash withdrawals,
with c.80% electing to take cash payments. Our average payment size
is GBP14k.
Disposals
On 6(th) April 2017, the Group completed the sale of Legal &
General Nederland Levensverzekering Maatschappij N.V. to Chesnara
plc for total consideration of EUR161m resulting in a GBP17m profit
on disposal.
On 1(st) January 2017, the Group completed the sale of Cofunds
and IPS to Aegon for total consideration of GBP147.5m. The Cofunds
business was acquired in stages between 2005 and 2013, for a total
cash consideration of GBP153m. Investment in Cofunds subsequent to
the acquisition as well as our IPS platform, including capitalised
costs in respect of the Retail Distribution Review, resulted in an
impairment loss of GBP64m recognised in 2016.
The impact of these disposals improved the Group's H1 2017
Solvency II coverage ratio by 2.5%.
borrowings
Legal & General continues to have a strong liquidity
position including amounts required for working capital and
derivative collateral purposes. The Group's outstanding core
borrowings total GBP3.5bn (H1 2016: GBP3.1bn). There is also a
further GBP0.6bn (H1 2016: GBP0.4bn) of operational borrowings
including GBP0.2bn (H1 2016: GBP0.2bn) of non-recourse
borrowings.
The Group accessed the US dollar market in March 2017 for the
first time and issued $850m of Tier 2 subordinated debt with a
coupon of 5.25%. The proceeds were utilised to refinance the
Group's GBP600m Tier 1 notes with a coupon of 6.385% which were
called in May 2017. This inaugural issue has given the Group access
to an alternative source of debt financing away from the Group's
traditional European institutional investor base. In April 2017 the
Group accessed the US dollar market again when it issued $500m of
Tier 2 subordinated debt in private placement format with a coupon
of 5.55%, reflecting the longer duration compared to the March 2017
issue.
Group debt costs of GBP92m (H1 2016: GBP86m) reflect an average
cost of debt of 5.0% per annum (H1 2016: 5.4% per annum) on average
nominal value of debt balances of GBP3.7bn (H1 2016: GBP3.2bn).
taxation - effective tax rate of 18.1%
Equity holders' Effective Tax Rate (%) H1 2017 H1 2016
Equity holders' total Effective Tax Rate 18.1 19.2
Annualised rate of UK corporation tax 19.25 20.00
In H1 2017, the Group's effective tax rate was lower than the UK
corporation tax rate. This reflects the overall positive impact
from differences between the measurement of accounting and taxable
profits.
SOLVENCY II
As at 30(th) June 2017, the Group had an estimated Solvency II
surplus of GBP6.7bn over its Solvency Capital Requirement,
corresponding to a Solvency II coverage ratio of 186% on a
shareholder basis.
Capital (GBPbn) H1 2017(1) FY 2016(1)
Own Funds 14.5 13.6
Solvency Capital Requirement (SCR) (7.8) (7.9)
Solvency II surplus 6.7 5.7
SCR coverage ratio (%) 186 171
1. Solvency II position on a shareholder basis and before the
accrual of the 2017 interim dividend (H1 2017) and 2016 final
dividend (FY 2016).
Analysis of movement from 1 January to 30 June Solvency
2017 (GBPbn) II surplus
Surplus arising from back-book (including release
of SCR) 0.6
Release of Risk Margin(2) 0.2
Amortisation of TMTP(3) (0.2)
========================================================================== =============
Operational surplus generation 0.6
New business strain (0.1)
========================================================================== =============
Net surplus generation 0.5
Dividends paid - 2016 final dividend (0.6)
Operating variances 0.5
Market movements 0.1
Subordinated debt 0.5
========================================================================== =============
Total surplus movement (after dividends paid
in the period) 1.0
2. Based on the risk margin in force at 31 December 2016 and does not
include the release of any risk margin added by new business written
in 2017.
3. TMTP amortisation based on a linear run down of the end-2016 TMTP
of GBP5.9bn (net of tax, GBP7bn before tax) which was management's
estimate of the TMTP on end-2016 market conditions.
The increase in surplus reflects the surplus generated over the
first six months of 2017 net of dividends paid of GBP0.6bn and
interest payments on the Group's debt of GBP0.1bn. The net surplus
generation was GBP0.5bn, after allowing for six months'
amortisation of the opening Transitional Measures on Technical
Provisions (TMTP). New business strain was GBP0.1bn. The total
surplus generation includes a positive investment variance of
GBP0.1bn reflecting market movements over 2017, in particular an
increase in risk free rates and narrowing of credit spreads.
Operating variances include the impact of experience variances,
changes to valuation and capital calibration assumptions, and other
management actions including changes in asset mix, matching
adjustment optimisation, hedging strategies, M&A activities
(sale of Cofunds and Legal & General Netherlands contributed
GBP0.1bn surplus), and update to the longevity assumptions.
The above incorporates management's estimate of the impact of
recalculating the Transitional Measures for Technical Provisions
(TMTP) as at 30(th) June 2017 as we believe this provides the most
up to date and meaningful view of our Solvency II position. In line
with PRA guidance, a formal recalculation of the Group's TMTP will
take place no later than 1(st) January 2018.
When stated on a proforma basis, including the SCR attributable
to our With-profits fund of GBP0.5bn and the final salary pension
schemes of GBP0.2bn in both the Group's Own Funds and the SCR, the
Group's coverage ratio was 180% (FY 2016: 165%).
reconcilation of ifrs net release from operations to solvency ii
net surplus generation
The table below gives a reconciliation of the Group's IFRS
Release from operations and Solvency II Operational surplus
generation in H1 2017:
GBPbn
IFRS Release from operations 0.7
Expected release of IFRS prudential margins (0.3)
Release of IFRS specific reserves -
Solvency II investment margin 0.1
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation 0.2
Other Solvency II items and presentational differences (0.1)
Solvency II Operational surplus generation 0.6
The table below gives a reconciliation of the Group's IFRS New
business surplus to Solvency II New business strain in H1 2017:
GBPbn
IFRS New business surplus -
Removal of requirement to set up prudential margins above
best estimate on new business 0.2
Set up of Solvency II Capital Requirement on new business (0.2)
Set up of Risk Margin on new business (0.1)
Solvency II New business strain (0.1)
Sensitivity analysis
Impact on net Impact on
of tax Solvency net of tax
II capital surplus Solvency
H1 2017 II coverage
GBPbn ratio H1
2017
%
Credit spreads widen by 100bps assuming an escalating
addition to ratings 0.3 8
Credit migration(1) (0.6) (8)
15% fall in property markets (0.3) (3)
100bps increase in risk free rates 1.0 24
50bps fall in risk free rates (0.5) (11)
1. Credit migration stress covers the cost of an immediate big letter
downgrade on c.20% of annuity portfolio bonds, or 3 times level expected
in the next 12 months.
The above sensitivity analysis does not reflect all of the
management actions which could be taken to reduce the impacts. In
practice, the Group actively manages its asset and liability
positions to respond to market movements. These results all allow
(on an approximate basis) for the recalculation of estimated TMTP
as at 30(th) June 2017 where the impact of the stress would cause
this to change materially. The impacts of these stresses are not
linear therefore these results should not be used to interpolate or
extrapolate the impact of a smaller or larger stress. The results
of these tests are indicative of the market conditions prevailing
at the balance sheet date. The results would be different if
performed at an alternative reporting date.
Solvency II new business contribution
Management estimates of the value of new business and the margin
as at 30(th) June 2017 are shown below:
Contribution
from
PVNBP new business Margin %
LGR(1) (GBPm) 1,859 166 8.9
UK Protection Total (GBPm) 754 69 9.1
- Retail protection 632 61 9.6
- Group protection 122 8 6.5
US Protection (GBPm) 376 48 12.8
1. UK annuity business.
Key assumptions in calculating the Solvency II new business
contribution are shown below:
Risk margin 3.1%
Risk free rate
- UK 1.7%
- US 2.1%
Risk discount rate (net of tax)
- UK 4.8%
- US 5.2%
Long term rate of return on non-profit annuities
in LGR 3.1%
All assumptions and methodologies that would have a material
impact on the margin for these contracts are unchanged from end
2016 other than the cost of currency hedging which has been updated
to reflect current market conditions and hedging activity in light
of Solvency II.
principal risks and UNCERTAINTIES
Legal & General runs a portfolio of risk taking businesses;
we accept risk in the normal course of business and aim to deliver
sustainable returns on risk based capital to our investors in
excess of our cost of capital. We manage the portfolio of risk that
we accept to build a sustainable franchise for the interests of all
our stakeholders; we do not aim to eliminate that risk. We have an
appetite for risks that we understand deeply and are rewarded for,
and which are consistent with delivery of our strategic objectives.
Risk management is embedded within the business. The Group's
Principal Risks and Uncertainties summarise key matters that may
impact the delivery of the Group's strategy, earnings or
profitability.
RISKS AND UNCERTAINTIES TR, OUTLOOK AND MITIGATION
Reserves and our assessment of We undertake significant analysis of
capital requirements may require the variables associated with writing
revision as a result of changes long-term insurance business to ensure
in experience, regulation or legislation. that a suitable premium is charged
The writing of long-term insurance for the risks we take on, and that
business requires the setting of reserves continue to remain appropriate
assumptions for long term trends for factors including mortality, lapse
in factors such as mortality, lapse rates, valuation interest rates, expenses
rates, valuation interest rates, and credit defaults. We remain, however,
expenses and credit defaults. Actual inherently exposed to certain extreme
experience may require recalibration events which could require us to adjust
of these assumptions impacting our reserves. For example, in our annuities
profitability. Management estimates business, while recent trend data continues
are also required in the derivation to suggest the rate of longevity improvement
of Solvency II capital metrics. may be slowing, we're inherently exposed
These include modelling simplifications to the risk that a dramatic advance
to reflect that it is not possible in medical science beyond that anticipated
to perfectly model the external leads to an unexpected change in life
environment, with adjustment necessitated expectancy. This could require adjustment
where new data emerges. Forced to reserves as improvements in mortality
changes in reserves can also arise emerge. In our protection businesses,
from regulatory or legislative the emergence of new factors with potential
intervention impacting capital to cause widespread mortality/morbidity
requirements and profitability. or significant policy lapse rates may
similarly require us to re-evaluate
reserves. To mitigate these risks we
remain focused on developing a comprehensive
understanding of longevity science
and continue to evolve and develop
our underwriting capabilities for protection
business. Our continued selective use
of reinsurance also acts to reduce
the impacts of these risk factors.
Investment market performance and Whilst the global economic outlook
conditions in the broader economy generally remains positive, we continue
may adversely impact earnings, to monitor a range of risk factors
profitability or surplus capital. that could trigger a reappraisal of
The performance and liquidity of asset values or influence a change
investment markets, interest rate in broader central bank monetary policies.
movements and inflation impact In the US, financial markets have responded
the value of investments we hold favourably to a pro-growth pro-business
in shareholders' funds and those agenda, nevertheless, political and
to meet the obligations from insurance policy uncertainties remain; in China,
business, with the movement in private debt levels leading to a disorderly
certain investments directly impacting default and a contraction in global
profitability. Interest rate movements growth remains a credible, if more
and inflation can also change the remote risk; and in the UK, a lengthy
value of our obligations. We use period of negotiation and an uncertain
a range of techniques to manage "Brexit" outcome has potential to create
mismatches between assets and liabilities. on-going volatility for financial markets
However, loss can still arise from and the broader UK economy in which
adverse markets. Interest rate we operate. Although we cannot fully
expectations leading to falls in eliminate the downside impacts from
the risk free yield curve can also these and other risk factors on our
create a greater degree of inherent earnings, profitability or surplus
volatility to be managed in the capital, as part of our on-going business
Solvency II balance sheet, than planning activity we continue to model
the underlying economic position a broad range of economic and financial
would dictate, potentially impacting market scenarios so as to try to ensure
capital requirements and surplus our strategies will remain resilient
capital. In addition, significant in projected conditions.
falls in investment values can
reduce fee income to our investment
management business.
In dealing with issuers of debt We continue to actively manage our
and other types of counterparty exposure to default risks within our
the group is exposed to the risk bond portfolios, setting selection
of financial loss. criteria and exposure limits, and using
A systemic default event within the capabilities of LGIM's global credit
the corporate sector, or a major team to ensure the risks are effectively
sovereign debt event, could result controlled, and if appropriate, trade
in dislocation of bond markets, out to improve credit quality. We also
significantly widening credit spreads seek to closely manage risks to our
and in extreme scenarios trigger Solvency II balance sheet through monitoring
defaults impacting the value of factors that could give rise to a heightened
bond portfolios. We are also exposed level of default risk. However, we
to banking, money market and reinsurance can never completely eliminate default
counterparties, and settlement, risks or their impacts, although we
custody and other bespoke business seek to hold a strong balance sheet
services, a failure of which could that we believe to be prudent for a
expose us to both financial loss range of adverse scenarios. Current
and operational disruption of our factors that could lead to an increase
business processes. Under Solvency in the level of default risk if they
II, a widespread widening of credit were to occur include a material deterioration
spreads and downgrades can also in economic conditions; a renewed banking
result in a reduction in our Solvency crisis within the Euro zone area; and
II balance sheet surplus, despite default on debt linked to emerging
already setting aside significant markets.
capital for credit risk.
Changes in regulation or legislation The financial services sector continues
may have a detrimental effect on to see significant regulatory driven
our strategy. change, both from the EU and from within
Legislation and government fiscal the UK. Our internal control framework
policy influence our product design, seeks to ensure on-going compliance
the period of retention of products with relevant legislation and regulation
and required reserves for future and we are progressing our responses
liabilities. Regulation defines to EU driven financial services regulation
the overall framework for the design, including UCITS V, MiFID II and PRIIPS.
marketing, taxation and distribution We have also established a programme
of our products; and the prudential of action to meet the requirements
capital that we hold. Significant of the EU General Data Protection Directive
changes in legislation or regulation (GDPR) which comes into force in May
may increase our cost base, reduce 2018. As a predominantly UK and US
our future revenues and impact focused business, a potential loss
profitability or require us to by the UK financial services sector
hold more capital. The prominence of EU regulatory pass-porting rights
of the risk increases where change has limited direct impact, however,
is implemented without prior engagement we are monitoring potential implications
with the sector. The nature of on market infrastructure and ensuring
long-term business can also result appropriate contingency plans are established.
in some changes in regulation, Within the UK the FCA published its
and the re-interpretation of regulation final report on the Asset Management
over time, having a retrospective Market Study in June 2017 and continues
effect on our in-force books of with its thematic review activities
business, impacting the future across the sector to ensure the fair
cash generation. treatment of customers. We remain supportive
of such regulation where it ensures
trust and confidence and is a positive
force on business, and whilst we believe
we have appropriate frameworks in place
to develop outcomes that meet the needs
of all stakeholders, we are exposed
to the inherent risk that thematic
reviews of historic industry practices
lead to unanticipated additional costs
and we cannot completely eliminate
the risk that controls may fail, resulting
in sanction against the group.
New entrants may disrupt the landscape There is already strong competition
of the markets in which we operate. in all our markets, and although we
As has been seen in other business have had considerable past success
sectors, it is possible that alternative at building scale to offer low cost
digitally enabled providers of products, we recognise that markets
financial service products emerge remain attractive to new entrants.
with lower cost business models We are also cognisant of the potential
or innovative service propositions for entry by scale overseas competitors
and capital structures disrupting who may have lower return on capital
the current competitive landscape. requirements and be unconstrained by
Solvency II. We continue to execute
a strategy that has digital technologies
at its heart, with digital platforms
an integral part of our protection,
auto-enrolled pensions and individual
retirement businesses, ensuring focus
on customer engagement and the digital
experience.
============================================ ===============================================
A material failure in our business Our plans for growth and the digitalisation
processes or IT security may result of our businesses, together with the
in unanticipated financial loss regulatory change agenda, inherently
or reputation damage. increase the profile of operational
We have constructed our framework risks across our businesses. We continue
of internal controls to minimise to invest in our system capabilities
the risk of unanticipated financial and business processes to ensure that
loss or damage to our reputation. we meet the expectations of our customers;
However, no system of internal comply with regulatory, legal and financial
control can completely eliminate reporting requirements; and mitigate
the risk of error, financial loss, the risks of loss or reputational damage
fraudulent actions or reputational from operational risk events and external
damage. We are also inherently cyber threats.
exposed to the risk that third
parties may seek to disrupt our
online business operations, steal
customer data or perpetrate acts
of fraud using digital media.
ENQUIRIES
Investors:
Laura Doyle Head of Investor Relations 020 3124 2088
Sujee Rajah Investor Relations Manager 020 3124 2047
Media:
Graeme Wilson Tulchan Communications 020 7353 4200
Sheebani Chothani Tulchan Communications 020 7353 4200
Notes
A copy of this announcement can be found in "Results", under the
"Financial information" section of our shareholder website at
http://www.legalandgeneralgroup.com/investors/results2017.html.
A presentation to analysts and fund managers will take place at
9.30am UK time today at One Coleman Street, London, EC2R 5AA. There
will be a live webcast of the presentation which can be accessed at
http://www.legalandgeneralgroup.com/investors/video.html A replay
will be available on this website later today.
There will be a live, listen only, teleconference link to the
presentation. Details below:
PARTICIPANT DIAL-IN NUMBERS
LOCATION YOU ARE DIALLING IN FROM NUMBER YOU SHOULD DIAL
UNITED KINGDOM 020 3059 8125
=================================== ======================
UNITED STATES (TOLL FREE) 1 855 287 9927
ALL OTHER LOCATIONS +44 20 3059 8125
2017 Financial Calendar Date
Ex-dividend date (interim dividend) 17(th) August
2017
Record date 18(th) August
2017
Last day for DRIP elections 1(st) September
2017
Payment date of 2017 interim dividend 21(st) September
2017
DEFINITIONS
Definitions are included in the Glossary on pages 101 to 105 of
this release.
FORWARD LOOKING STATEMENTS
This announcement may contain certain forward-looking statements
relating to Legal & General, its plans and its current goals
and expectations relating to future financial condition,
performance and results. By their nature, forward-looking
statements involve uncertainty because they relate to future events
and circumstances which are beyond Legal & General's control,
including, among others, UK domestic and global economic and
business conditions, market related risks such as fluctuations in
interest rates and exchange rates, the policies and actions of
regulatory and Governmental authorities, the impact of competition,
the timing impact of these events and other uncertainties of future
acquisition or combinations within relevant industries. As a
result, Legal & General's actual future condition, performance
and results may differ materially from the plans, goals and
expectations set out in these forward-looking statements and
persons reading this announcement should not place reliance on
forward-looking statements. These forward-looking statements are
made only as at the date on which such statements are made and
Legal & General Group Plc does not undertake to update
forward-looking statements contained in this announcement or any
other forward-looking statement it may make.
GOING CONCERN STATEMENT
The Group's business activities, together with the factors
likely to affect its future development, performance and position
in the current economic climate are set out in this Interim
Management Report. The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in
the Group Results. Principal risks and uncertainties are detailed
on pages 18 to 20. In addition, the financial statements include,
amongst other things, notes on the Group's objectives, policies and
process for managing its capital, its financial risk management
objectives, details of its financial instruments and hedging
activities, and its exposures to credit and liquidity risk.
The Group manages and monitors its capital with various stresses
built in in order to understand the expected impact of market
downturns. These stresses do not give rise to any material
uncertainties over the ability of the Group to continue as a going
concern and therefore, based upon the available information, the
directors consider that the Group has the plans and resources to
manage its business risks successfully as it has a diverse range of
business and remains financially strong.
Having reassessed the principal risks, the directors considered
it appropriate to adopt the going concern basis of accounting in
preparing the interim financial information.
Director's responsibility statement
We confirm to the best of our knowledge that:
i. The consolidated interim financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting as
adopted by the European Union;
ii. The interim management report includes a fair review of the
information required by DTR 4.2.7, namely an indication of
important events that have occurred during the first six months of
the financial year and their impact on the consolidated interim
financial statements, as well as a description of the principal
risks and uncertainties faced by the company and the undertakings
included in the consolidation taken as a whole for the remaining
six months of the financial year;
iii. The interim management report includes, as required by DTR
4.2.8, a fair review of material related party transactions that
have taken place in the first six months of the financial year and
any material changes in the related party transactions described in
the last Annual Report and Accounts; and
iv. The directors of Legal & General Group Plc are listed in
the Legal & General Group Plc Annual Report and Accounts for 31
December 2016, with the exception of Mark Gregory who resigned as
Chief Financial Officer on 9 March 2017 and Richard Meddings and
Rudy Markham who both resigned as non-executive directors on 25 May
2017. Stuart Jeffrey Davies joined the Board as Chief Financial
Officer on 9 March 2017, Kerrigan Procter joined the Board as Chief
Executive Officer, Legal & General Retirement on 9 March 2017
and Toby Strauss joined the Board as non-executive director on 1
January 2017. A list of current directors is maintained on the
Legal & General Group Plc website:
legalandgeneralgroup.com.
By order of the Board
Nigel Wilson Stuart Jeffrey Davies
Group Chief Executive Group Chief Financial Officer
8 August 2017 8 August 2017
NOTES
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR UWSWRBVAWRAR
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