The Board has confidence in the strength and growth prospects
for the business. This underpins the Board's recommendation of a
final dividend of 8.35p (2013: 6.90p) giving a full year dividend
of 11.25p (2013: 9.30p), 21% higher than 2013. This reflects a net
cash cover of 1.65 times. We expect to reduce our net cash coverage
of dividend towards 1.5 times in 2015 should our Solvency II
surplus be no lower than Solvency I. We will provide updated
dividend guidance when Solvency II clarity has fully emerged.
PROGRESSING THE STRATEGY - 2015 AND BEYOND
The Group continues to execute on its clear and focused strategy
based on five key macro trends: ageing populations; globalisation
of asset markets; welfare reform; digital lifestyles and
retrenching banks, through both organic growth and selective
bolt-on acquisitions.
Our responses to these trends and the diversification within our
business model have enabled us to deliver sustained growth in our
cash and earnings. We believe that aligning our strategy to the
five macro trends creates a high degree of resilience in our
business model, although we do recognise that many external
uncertainties remain unresolved. Against this background, we remain
selective in our risk appetite, with established capabilities in
managing and minimising risk.
Effective and sustainable management of costs remains a key
feature of our strategy. We are targetting a cGBP80m reduction in
management expenses and operating costs in 2015 as we continue to
drive greater efficiencies through our businesses, as well as
responding to the reduced contribution from our mature savings
products. We anticipate incurring restructuring costs of cGBP40m in
2015 to achieve this.
Ageing Populations
The world is getting older and people are living for longer.
Individuals generally have not saved enough during their working
lives, under-estimating their outgoings in retirement, life
expectancy and the cost of care. Pensioners will need to rely
increasingly on alternative sources of finance to fund this
'savings gap'. The over 60s in the UK are estimated to have some
GBP1.3 trillion of housing equity and we expect increasing numbers
of retirees to use this equity to supplement their retirement
income.
Ageing populations at the same time expose corporate balance
sheets to earnings volatility caused by predominantly legacy
defined benefit pension schemes and the associated financial
obligations placed on the sponsoring employer. Globally, the
Defined Benefit pension market is in the very early stages of
de-risking. It has been estimated that something of the order of
$10 trillion worth of liabilities will be de-risked over the next
couple of decades.
We have positioned our Investment Management (LGIM) and
Retirement (LGR) businesses to respond to the growing demand. LGIM
leads the market in liability driven investment (LDI) solutions in
the UK, with an estimated market share of over 40% and is
delivering good growth in this market in the US. LGR similarly is
the market leader in bulk annuity solutions. The bulk annuity
market requires a strong and sustained track record, a robust
capital base and integrated asset and liability management bringing
together different parts of our organisation. Legal & General
has all these competitive advantages, built up over 27 years.
In 2014 total LDI assets increased by 26% to GBP293.3bn (2013:
GBP232.5bn), including net flows of GBP21.1bn. LGR increased bulk
annuity sales to GBP5,987m (2013: GBP2,812m). In addition we
completed the internal transfer of GBP1,953m of annuities from
with-profits to our shareholder fund in July, which together with
individual annuity sales, brings the total volume of annuity
business that delivers value to our shareholders, to GBP8,531m
(2013: GBP4,089m).
OUTLOOK
In LGIM, the clear intention of the majority of companies to
de-risk their defined benefit pension schemes is expected to result
in strong LDI new business volumes in the UK and US in 2015. This
growth is expected, in part, to offset outflows in our UK passive
funds which results from this de-risking trend and pension schemes
using funds to pay annuitants.
In LGR, demand for de-risking strategies, including annuity
transactions, remains high. Our research indicates that almost two
thirds of large defined benefit pension schemes are looking to
de-risk. Actual transaction flows of buy-out and buy-in annuity
transactions are however dependent on their affordability, which
will remain determined on underlying scheme funding levels and
prevailing market conditions. Additionally our appetite for bulk
annuity transactions and the risks we choose to retain is dependent
on the application of Solvency II in the UK.
Our recently announced acquisition of Newlife Home Finance
Limited (subject to regulatory
approval), a provider of UK lifetime mortgages, gives us access
to this potentially sizeable market. We expect to write over
GBP100m of lifetime mortgages in 2015 and increasing amounts
thereafter.
The changes introduced in the March Budget have introduced
greater flexibility for individuals in retirement. We expect
consumers to demand simple, tax efficient products that allow them
to 'cash-out' their pensions and we have tailored our new products
accordingly. We expect 2015 sales of Individual Annuities to be
around 50% of 2014 new business volumes.
GLOBALISATION OF ASSET MARKETS
Increasingly global asset markets create attractive
opportunities to grow and internationalise successful investment
management capabilities. LGIM is a trusted, long-standing and
increasingly international brand. Following the success of
liability driven investment in the UK we are concentrating on
expanding our presence in the US market. We recently launched our
Index proposition in the US and will seek to capitalise on the
efficiency that comes from managing GBP275bn of index assets
globally.
International net inflows were GBP8.5bn (2013: GBP15.8bn) as
LGIM continued to expand overseas, with sustained growth in LGIM
America's LDI and Active Fixed Income products. As a result, total
international assets are GBP128.8bn (2013: GBP61.2bn), which
includes the transfer of c$60.0bn of US business to LGIM's Chicago
office and $23.3bn of advisory assets resulting from the
acquisition of Global Index Advisors (GIA), both in 2014.
OUTLOOK
Our international business continues to gather momentum,
particularly in the US, where we are expanding our distribution
capabilities and widening our product offering across LDI, active
fixed income and, most recently, index products, with passive funds
opening to third party investment in 2015. In the Gulf, we continue
to broaden our client relationships and are working to expand our
range of mandates. We are also making good progress in Asia, where
we are winning mandates in the region and look set to capitalise on
these early successes in 2015. Longer term we are creating a global
operating model across our London, Chicago and Hong Kong
manufacturing hubs to provide enhanced trading and operational
capabilities to our increasingly international client base.
WELFARE REFORM
Pressure on public finances is moving the provision of welfare
from the state to individuals and employers. This process is
already well underway, for example with the introduction of
auto-enrolment, which is expected to result in a tripling of DC
savings in the UK over the next 10 years. Statutory minimum
contribution rates will increase from 2% today to 5% in 2017 and up
to 8% in 2018. Longer term, we expect defined contribution savings
to be significantly greater than the existing DB assets that we
manage. Coupled with this we expect that, as state funding shrinks,
the private provision of protection products, both directly with
consumers and potentially using the infrastructure of
auto-enrolment to employers, will become increasingly
important.
Our Workplace business is building the scale to capitalise on
this trend, successfully winning c20% of all new members coming to
market. The integration of Workplace into LGIM will further
strengthen our already strong position, enabling us to continue
delivering market-leading capabilities to all our clients.
Our Protection proposition is highly efficient, relying on our
digital capabilities that underwrite over 80% of applications at
point of sale. We continue to be the market leader of Retail
Protection products to both Independent Financial Advisers (IFAs)
and in the market in total.
Workplace savings assets increased 28% in the year to GBP11.1bn
(2013: GBP8.7bn) including net flows of GBP2.2bn (2013: GBP1.5bn).
Retail Protection wrote over GBP1bn of premium, driving growth in
total UK Protection premiums, up 6% to GBP1,407m (2013: GBP1,326m).
Group Protection premium increased 4% to GBP351m (2013: GBP336m).
In the US, our protection business delivered a 9% increase in gross
premium, up to $1,117m (2013: $1,024m).
OUTLOOK
In Workplace Savings we anticipate further growth in scale
resulting from increased contribution from existing members, new
scheme wins as pension schemes reassess their auto-enrolment
providers and resulting from our recently launched digital SME
offering. Over one million SMEs will need to auto-enrol their
employees by October 2018. In 2014 we halved the losses of GBP29m
made in 2013 and the target is for our Workplace business to
break-even by the end of 2015.
We expect our UK Retail Protection business to continue to
leverage its market leading position although growth is anticipated
to be moderate due to the mature nature of this market.
In the US we have introduced price changes which we expect to
result in c15% lower new business volumes in 2015 than in 2014. We
will take further management action in 2015 if the adverse
mortality experience of 2014 is repeated. LGA remains focused on
net cash generation.
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