Legal & General Group Plc L&G FY 2014 results -8-
04 März 2015 - 8:02AM
UK Regulatory
2.19 IFRS sensitivity analysis
Impact
on
pre-tax Impact
on
Group Group
profit equity
net of net of
re- re-
insurance insurance
2014 2014
GBPm GBPm
Economic sensitivity
Long-term insurance
1% increase in interest
rates 120 54
1% decrease in interest
rates (245) (146)
1% increase in long term inflation
expectations (193) (152)
Credit spread widens by 100bps with no change in expected
defaults (177) (212)
10% decrease in listed
equities (155) (126)
10% fall in property
values (130) (102)
10bps increase in credit
default assumption (370) (290)
10bps decrease in credit
default assumption 344 270
Non-economic sensitivity
Long-term insurance
1% decrease in annuitant
mortality (170) (133)
5% increase in assurance
mortality (56) (44)
Default of largest
external reinsurer (657) (516)
General Insurance
Single storm event with 1
in 200 year probability (74) (59)
Subsidence event - worst
claims ratio in last 30 years (54) (43)
5% decrease in overall
claims ratio 8 6
5% surplus over claims
liabilities 5 4
The table shows the impacts on Group pre-tax profit and equity,
net of reinsurance, under each sensitivity scenario for the Group.
The participating funds have been excluded in the above sensitivity
analysis as the impact of the sensitivities on IFRS profit and
equity is offset by the movement in the unallocated divisible
surplus (UDS). The shareholders' share of with-profit bonus
declared in the year is relatively insensitive to market movements
due to the smoothing policies applied.
The above sensitivity analyses do not reflect management actions
which could be taken to reduce the impacts. The Group seeks to
actively manage its asset and liability position. A change in
market conditions may lead to changes in the asset allocation or
charging structure which may have a more, or less, significant
impact on the value of the liabilities. The analyses also ignore
any second order effects of the assumption change, including the
potential impact on the Group asset and liability position and any
second order tax effects. In calculating the alternative values,
all other assumptions are left unchanged, though in practice, items
of the Group's experience may be correlated. The sensitivity of the
profit and equity to changes in assumptions may not be linear.
These results should not be extrapolated to changes of a much
larger order.
The interest rate sensitivity assumes a 100 basis point change
in the gross redemption yield on fixed interest securities together
with a 100 basis point change in the real yields on variable
securities. For the UK long term funds, valuation interest rates
are assumed to move in line with market yields adjusted to allow
for the impact of PRA regulations. The interest rate sensitivities
reflect the impact of the regulatory restrictions on the
reinvestment rate used to value the liabilities of the long term
business. Modelling improvements have been made in the year which
more accurately isolate the impacts of discrete assumptions
changes. This, coupled with the increase in the Group's annuity
liabilities have led to an increase in the reported 2014
sensitivities for interest rates and inflation. No yield floors
have been applied in the estimation of the stresses, despite the
current low interest rate environment.
Interest rate and inflation expectation have historically shown
positive correlation and have therefore been presented next to each
other.
The inflation stress adopted is a 1% pa increase in inflation
resulting in a 1% pa reduction in real yield and no change to the
nominal yield. In addition the expense inflation rate is increased
by 1% pa.
In the sensitivity for credit spreads, corporate bond yields
have increased by 100bps, gilt and approved security yields are
unchanged, and there has been no adjustment to the default
assumptions.
The equity stress is a 10% fall in listed equity market values.
The property stress adopted is a 10% fall in property market value.
Rental income is assumed to be unchanged; however the vacant
possession value is stressed down by 10% in line with the market
value stress. Where property is being used to back liabilities, the
valuation interest rate used to place a value on the liabilities
moves with the implied change in property yields.
The annuitant mortality stress is a 1% reduction in the
mortality rates for immediate and deferred annuitants with no
change to the mortality improvement rates. The assurance mortality
stress represents an increase in mortality/morbidity rates for
assurance contracts by 5%.
The credit default stress assumes a +/-10bps stress to the
current credit default assumption for unapproved corporate bonds
which will have an impact on the valuation interest rates used to
discount liabilities. The credit default assumption is set based on
the credit rating of the individual bonds in the asset portfolio
and their outstanding term using Moody's global credit default
rates.
For the sensitivity to the default of the Group's largest
external reinsurer, the reinsurer stress shown is equal to the
technical provisions ceded to the external reinsurer and represents
the impact of the default of largest external reinsurer at an
entity level.
IFRS and Cash 50
2.20 Foreign exchange rates
Principal rates of exchange
used for translation are:
Year end exchange rates At 31.12.14 At 31.12.13
United States Dollar 1.56 1.66
Euro 1.29 1.20
01.01.14 01.01.13
- -
Average exchange rates 31.12.14 31.12.13
United States Dollar 1.65 1.57
Euro 1.24 1.18
2.21 Provisions
(a) Analysis of provisions
2014 2013
GBPm GBPm
Retirement benefit
obligations 1,217 1,113
Other provisions 30 15
1,247 1,128
(b) Retirement benefit obligations
Fund and Fund and
Scheme Overseas Scheme Overseas
2014 2014 2013 2013
GBPm GBPm GBPm GBPm
Gross pension obligations included in provisions (1,215) (2) (1,113) -
Annuity obligations insured by Society 723 - 646 -
Gross defined benefit pension deficit (492) (2) (467) -
Deferred tax on defined benefit pension deficit 98 - 93 -
Net defined benefit pension deficit (394) (2) (374) -
The Legal & General Group UK Pension and Assurance Fund and the Legal
& General Group UK Senior Pension Scheme are defined benefit pension arrangements
and account for all UK and the majority of worldwide assets of, and contributions
to, such arrangements. At 31 December 2014, the combined after tax deficit
arising from these arrangements (net of annuity obligations insured by
Society) has been estimated at GBP394m (2013: GBP374m). These amounts
have been recognised in the financial statements with GBP248m charged
against shareholder equity (2013: GBP236m) and GBP146m against the unallocated
divisible surplus (2013: GBP138m).
IFRS and Cash 51
2.22 Tax
(a) Tax charge in the Consolidated Income Statement
The tax attributable to equity holders differs from the tax calculated
at the standard UK corporation tax rate as follows:
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