We are addressing the opportunities and challenges presented by
changes in digital customer engagement, investing in digital
innovation to deliver the very significant scale and high levels of
efficiency required to be successful. We have achieved this with
our market leading Retail Protection business, generating over
GBP1bn of premium in 2014, with straight through processing rates
at over 80%. We are now challenging ourselves to replicate this
success elsewhere in our business, for example, we recently
launched a Direct to Consumer (D2C) investment platform and digital
proposition in Workplace for SMEs.
UK Protection delivered a GBP10m reduction in new business
strain, reducing to GBP5m (2013: GBP15m) reflecting increased
levels of efficiency and market leading retail protection premium
of GBP1,056m (2013: GBP990m). Cofunds assets of GBP71.9bn (2013:
GBP64.1bn) included retail assets of GBP37.1bn up 5% (2013:
GBP35.3bn). Our direct general insurance channel has increased
premiums by 29% to GBP88m (2013: GBP68m) this year, benefitting
from enhanced digital capabilities.
OUTLOOK
We are on a multi-year journey to fully position our businesses
for these challenges. Progress has been made but further work is
needed. In 2015, we need to operationally leverage Cofunds and
increase fund flows to LGIM to generate a more meaningful profit
contribution to the Group and offset the managed decline in the
contribution from mature savings products. Our D2C investment
platform is well placed to benefit from increased retail sales and
Workplace's SME proposition is expected to generate further growth
in defined contribution assets, using digital technology to
continue to offer our default auto-enrolment funds at 50bps to
smaller companies.
BANK RETRENCHMENT
Bank retrenchment is creating opportunities for annuity
providers and other investors with long term investment horizons,
such as pension providers and sovereign wealth funds, to invest in
real assets. This provides opportunities for greater returns across
our Capital (LGC), Retirement (LGR) and Investment Management
(LGIM) divisions.
LGC is utilising the Group's capital base to add operational
capabilities, such as the acquisition of Banner Homes within CALA
(our house builder), and a 40% stake in Pemberton Asset Management
(a provider of SME loans across Europe). In addition, we are
developing strategic partnerships, including the GBP370m
co-investment with PGGM, the major Dutch pension fund manager, to
invest across the UK, managed by Legal & General Property
(LGP).
Our approach is providing good access to direct investments and
high quality long duration investments for LGR, supporting growth
in LGIM and generating enhanced risk adjusted yields on our
shareholder capital.
LGC's operating profit increased by 13% to GBP203m (2013:
GBP179m) and its total assets were GBP5.1bn (2013: GBP4.7bn).
Direct Investments across the Group increased to GBP5.7bn (2013:
GBP2.9bn).
OUTLOOK
Our strength in origination and continued development of new
asset classes is allowing us to mitigate the downward pressure on
returns created by the increased demand for 'packaged' direct
investment. In 2015 so far we have consent to build 1,000 new homes
on our landbank and a further GBP200m commitment with joint venture
partner Schroders to regenerate Bracknell town centre.
We see increasing opportunities and growing pipeline through
2015 including a EUR250m investment into European SME loans through
our investment in Pemberton Asset Management and building a further
GBP375m portfolio with PGGM to invest in Central London Commercial
Property, also to be managed by LGP. In addition, LGC has, in 2015,
launched an initial development project in the Private Rented
Sector to establish our presence in this growing asset class.
We have also committed GBP1.5bn to support a GBP25bn UK
regeneration funding vehicle in conjunction with the UK
Government's Regeneration Investment Organisation (RIO), which will
provide LGIM with additional revenue sources as investment manager
of the fund and further access to real assets for LGR.
LEGAL & GENERAL RETIREMENT.
Financial highlights 2014 2013
GBPm
--------------------------------------------- ----- -----
Operational cash generation 292 260
--------------------------------------------- ----- -----
New business surplus 51 33
--------------------------------------------- ----- -----
Net cash generation 343 293
--------------------------------------------- ----- -----
Experience variances, assumption changes,
tax and non-cash movements 85 17
--------------------------------------------- ----- -----
Operating profit 428 310
--------------------------------------------- ----- -----
Bulk annuity sales(GBPbn) 6.0 2.8
--------------------------------------------- ----- -----
Individual annuity sales (GBPbn) 0.6 1.3
--------------------------------------------- ----- -----
Internal transfer from with-profits (GBPbn) 1.9 -
--------------------------------------------- ----- -----
Total annuity transactions (GBPbn) 8.5 4.1
--------------------------------------------- ----- -----
Longevity insurance gross premiums 333 212
--------------------------------------------- ----- -----
Annuity net inflows (GBPbn) 4.4 2.1
--------------------------------------------- ----- -----
Bulk annuity assets (GBPbn) 29.1 21.1
--------------------------------------------- ----- -----
Individual annuity assets (GBPbn) 15.1 13.3
--------------------------------------------- ----- -----
Total annuity assets (GBPbn) 44.2 34.4
--------------------------------------------- ----- -----
RECORD PREMIUMS AND INCREASED CASH
Operational cash generation increased 12% to GBP292m (2013:
GBP260m) reflecting the growth in scale of the business. Net cash
generation increased by 17% to GBP343m (2013: GBP293m), with new
business surplus increasing to GBP51m (2013: GBP33m), reflecting
our continued ability to source attractively priced assets and
effective portfolio strategies to back our new business.
Operating profit increased 38% to GBP428m (2013: GBP310m)
reflecting this growth, with the stock of annuity assets increasing
28% to GBP44.2bn (2013: GBP34.4bn). We continue to benefit from
operating through a wide range of distribution channels and being a
key player in all the main markets for retirement solutions and
pension scheme de-risking.
We continue to see strong demand for our de-risking solutions.
Due to their inherent complexity and size of bulk annuity deals,
the timing of deal flows will be unevenly distributed between
quarterly reporting periods and are susceptible to external market
forces.
NEW BUSINESS MARGINS REMAIN STRONG
We continue to see the annuity market as an attractive place to
deploy capital and have delivered a strong new business surplus, up
55% to GBP51m (2013: GBP33m).
Our numerous competitive advantages built up over nearly three
decades, including specialist expertise across longevity,
investment management and asset transitioning, coupled with our
ability to source new assets to back our annuity business,
delivering enhanced risk adjusted returns, enable us to
competitively price new business and deliver attractive returns to
shareholders.
iNCREASING DEMAND FOR DE-RISKING SOLUTIONS
Bulk Annuity sales more than doubled to GBP5,987m from 54
policies, (2013: GBP2,812m, 94 policies). In addition we completed
the internal transfer of GBP1,953m of annuities from with-profits
to our shareholder fund in July, bringing the total volume of
annuity business that delivers value to our shareholders, to
GBP8,531m (2013: GBP4,089m).
2014 was a landmark year in the UK pension de-risking market. We
completed the two largest bulk annuity transactions in the UK, the
GBP3.0bn buy-in with the ICI Pension Fund and a GBP2.5bn buy-out
with the TRW Pension Scheme. Both demonstrate the strength of our
de-risking proposition, with the TRW specifically highlighting our
strength in transitioning pension schemes from passive investment
strategies to liability driven investments and ultimately to
buyout.
We continue to explore opportunities to use our specialist
experience and robust capital base in the global de-risking market,
particularly in the US.
INDIVIDUAL RETIREMENT - FREEDOM AND CHOICE
Individual Annuity sales were down 54% to GBP591m (2013:
GBP1,277m) following the 2014 Budget changes and in line with our
expectations. We continue to expect the market to remain subdued in
2015, anticipating volumes to be down a further 50% in 2015. We are
focussed on maintaining pricing discipline during this period of
change.
We believe that Individual Annuities remain a good option for
certain consumers, guaranteeing levels of income for life, and will
continue to provide these going forward. We continue to innovate
and have responded to anticipated changes in consumer demand with
new retirement solutions suitable for the post Budget retirement
landscape:
-- Lifetime mortgages will be offered to the increasing numbers
of customers seeking to use the equity in their homes to supplement
their retirement income. In 2014, 21,000 customers across the
industry, purchased equity release products, with a total lending
value of GBP1.4bn. In total, an estimated GBP14bn of equity release
transactions has been completed over the last two decades. Our
recently announced acquisition (subject to regulatory approval) and
funding of Newlife Home Finance Limited fulfils our stated
intention to enter this market.
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