TIDMLGEN
RNS Number : 7988Y
Legal & General Group Plc
08 March 2017
Stock Exchange Release
08 March 2017
EPS(1) UP 19% to 22.2p, Profit Before Tax(2) up 17% to
GBP1.6bn
financial highlights(3) :
-- Net release from operations (net cash)(4) up 12% to GBP1,411m (2015: GBP1,256m)
-- adjusted OPERATING PROFIT(5) up 11% to GBP1,628M (2015: GBP1,463m)
-- Profit after tax UP 16% to GBP1,265m (2015: GBP1,094m)
-- Earnings per share up 17% to 21.22P (2015: 18.16p)
-- adjusted Earnings per share(1) UP 19% to 22.20P (2015: 18.58p)
-- Full year dividend up 7% to 14.35p per share (2015: 13.40p)
-- Adjusted return on equity(6) 19.6% (2015: 17.7%)
-- SOLVENCY II SURPLUS OF GBP5.7BN (2015: GBP5.5BN)
-- SOLVENCY II COVERAGE RATIO OF 171% (2015: 176%), shareholder BASIS(7)
business highlights:
-- lgr new business of GBP8.5bn (2015: GBP2.9bn)
-- lgr ANNUITY ASSETS UP 25% AT GBP54.4BN (2015: GBP43.4BN)
-- GROUP-WIDE DIRECT INVESTMENT UP 39% AT GBP10.0BN (2015: GBP7.2bn)
-- LGIM AUM UP 20% AT GBP894.2BN (2015: GBP746.1BN)
Nigel Wilson, Group Chief Executive, said:
"Our long term approach to strategy and investment coupled with
outstanding execution has again delivered terrific financial
performance in 2016. Profit before tax up 17% to GBP1.6 billion,
net release from operations up 12% to GBP1.4 billion, EPS up 19% at
22.2p and a return on equity of nearly 20%.
We believe the UK remains a great place for us to help fill the
huge funding gaps and under-provision of key financial products. We
are playing our part to regenerate the UK's cities, delivering
economic growth and jobs, capitalise on its world-leading
universities and improve commercialisation of its scientific
discoveries. Additionally, we are accelerating the evolution of our
US businesses.
We look forward to the future with confidence as our core
markets are growing, our market share is increasing, our balance
sheet is strong and we have positive cash and earnings momentum.
Through a combination of selective hiring and internal promotions
we have significantly strengthened our management team and
technology capability".
Sir John Kingman, Chairman, said:
"Legal & General has a strong management team and formidable
further potential. Against that backdrop, the Board has considered
the best trajectory of dividend growth, taking into account
sustainability across a wide range of economic scenarios and the
Group's anticipated financial performance. Accordingly, the Board
has recommended an increase in the full year 2016 dividend of
7%".
1. Adjusted earnings per share is calculated by dividing profit
after tax attributable to equity holders of the Company, by the
weighted average number of ordinary shares in issue during the
period. This excludes a GBP60m net loss on disposals being a GBP64m
impairment loss in relation to the disposal of Cofunds and a GBP4m
profit in relation to the disposal of Suffolk Life (2015: GBP25m
net loss in relation to the disposals of Legal & General
France, Legal & General Gulf, Legal & General Egypt and
Legal & General International (Ireland)).
2. Represents profit before tax attributable to equity holders.
3. The metrics within the Group's financial highlights are
defined in the glossary, which includes Alternative Performance
Measures, on pages 89 to 92 to this report.
4. Net release from operations has replaced the term Net cash
generation. There is no change in how it is determined.
5. Adjusted operating profit is calculated as operating profit
of GBP1,562m (2015: GBP1,455m) before taking account of the
provision in respect of the closure of our Kingswood office of
GBP66m (2015: GBP8m).
6. Adjusted return on equity is calculated by taking profit
after tax attributable to equity holders of the Company, excluding
the GBP60m net loss on disposals (2015: GBP25m net loss) described
in note 1, divided by the average shareholders' equity during the
period.
7. Solvency II 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.
FINANCIAL SUMMARY
GBPm 2016 2015 Growth
%
========================================== ===== ===== ======
Analysis of operating profit
Legal & General Retirement 811 641 27
Legal & General Investment Management 366 355 3
Legal & General Capital 257 233 10
Legal & General Insurance 317 315 1
General Insurance 52 51 2
Savings 99 107 (7)
Operating profit from divisions 1,902 1,702 12
Group debt costs (172) (153) (12)
Group investment projects and expenses(1) (102) (86) (19)
Adjusted operating profit 1,628 1,463 11
Kingswood office closure provision(2) (66) (8) n/a
Operating profit 1,562 1,455 7
Investment and other variances (inc.
minority interests) 80 (75) n/a
Adjusted profit before tax attributable
to equity holders 1,642 1,380 19
Net loss on disposals(3) (60) (25) n/a
Profit before tax attributable to
equity holders 1,582 1,355 17
Profit after tax 1,265 1,094 16
Adjusted earnings per share (p)(4) 22.20 18.58 19
IFRS earnings per share (p) 21.22 18.16 17
Adjusted return on equity (%)(5) 19.6 17.7 n/a
Full year dividend per share (p) 14.35 13.40 7
* Final dividend per share (p) 10.35 9.95 4
* Interim dividend per share (p) 4.00 3.45 16
Release from operations(6) 1,256 1,217 3
New business surplus 155 39 297
Net release from operations(6) 1,411 1,256 12
1. In 2016, we invested GBP40m (2015: GBP50m) to deliver a
reduction in operating costs and management expenses.
2. The Group recorded a GBP66m (2015: GBP8m) provision in
respect of the closure of our Kingswood office. No further related
costs are expected in the future.
3. Net loss on disposals in 2016 of GBP60m includes a GBP64m
impairment loss in relation to the disposal of Cofunds and a GBP4m
profit on disposal of Suffolk Life (2015: GBP25m net loss in
relation to the disposals of Legal & General France, Legal
& General Gulf, Legal & General Egypt and Legal &
General International (Ireland)).
4. Adjusted earnings per share is calculated by dividing profit
after tax attributable to equity holders of the Company, excluding
the GBP60m net loss on disposals (2015: GBP25m net loss) described
in note 3, by the weighted average number of ordinary shares in
issue during the period.
5. Adjusted return on equity is calculated by taking profit
after tax attributable to equity holders of the Company, excluding
the GBP60m net loss on disposals (2015: GBP25m net loss) described
in note 3, divided by the average shareholders' equity during the
period.
6. Release from operations and Net release from operations have
replaced the terms Operational cash generation and Net cash
generation respectively. There is no change in how they are
determined.
commentary on 2016 financial performance
Income statement
Net release from operations increased 12% to GBP1,411m (2015:
GBP1,256m)
The Group delivered GBP1,411m net release from operations
comprising GBP1,256m (2015: GBP1,217m) release from operations and
GBP155m (2015: GBP39m) new business surplus. The increase in
release from operations was consistent with the guidance we issued
in August 2016. The GBP116m year-on-year increase in new business
surplus was primarily a result of significantly higher new business
volumes in LGR, with new annuity sales up 155% at GBP7.0bn.
Adjusted operating profit increased 11% to GBP1,628m (2015:
GBP1,463m)
The Group achieved double digit percentage growth in adjusted
operating profit for the third consecutive year, demonstrating the
successful execution of our strategy.
LGR achieved record operating profits of GBP811m driven by
strong performance from our front and back books, as well as
benefitting from higher levels of longevity reinsurance on new
business. Longevity experience in the year was once again positive
compared to our assumptions. Despite this outcome, we have not
materially adjusted our forward-looking longevity reserves.
LGIM operating profit increased by 3%. The combined contribution
from positive net flows of GBP31.2bn (2015: GBP33.3bn) and higher
asset values in the second half, was partially offset by planned
investment to grow the business, as well as the impact of ongoing
industry fee pressure.
LGC operating profit increased by 10% due to strong performance
in the division's GBP1.1bn (2015: GBP0.9bn) direct investment
portfolio which delivered GBP121m (2015: GBP69m) operating profit,
of which 44% (2015: 28%) came from earnings in LGC's operating
businesses, including CALA Homes.
LGI operating profit was flat year-on-year, in part as a
consequence of a GBP39m lower expected release from the UK retail
protection back book, and adverse claims experience of GBP43m,
primarily in group protection. The 2015 comparator for LGI was
impacted by one-off reserve strengthening primarily relating to the
modelling of reinsurance contracts in retail protection.
Profit before tax attributable to equity holders increased 17%
to GBP1,582m (2015: GBP1,355m)
In 2016 profit before tax has increased by GBP227m on the back
of the 11% increase in adjusted operating profit. In addition,
positive investment and other variances contributed GBP80m (2015:
GBP(75)m), demonstrating diversification benefits across the Group.
This included GBP162m (2015: GBP(116)m) in LGC, primarily due to
the traded assets portfolio outperforming our long term economic
assumptions, and GBP36m (2015: GBP78m) in LGR. This was partially
offset by GBP(123)m (2015: GBP(44)m) in LGI driven by a reduction
in UK government bond yields of c.85bps which impacted the discount
rate used to calculate the reserves for our UK protection
liabilities.
The Group had a net loss on disposal in 2016 of GBP60m (2015:
GBP25m) following the sale of Cofunds, IPS and Suffolk Life.
Additionally, the Group booked a GBP66m (2015: GBP8m) provision
in respect of the closure of our Kingswood office. No further
related costs are expected in the future.
balance sheet
The Group's Solvency II surplus increased by GBP0.4bn since the
half year, from GBP5.3bn to GBP5.7bn at the year end.
This incorporates management's estimate of the impact of
recalculating the Transitional Measures for Technical Provisions
(TMTP) as at the end of 2016 as we believe this provides the most
up to date and meaningful view of our Solvency II position. The
conditions set out by the PRA to allow a formal recalculation of
the Group's TMTP were not met as at end 2016 but, in line with PRA
guidance, a formal recalculation will take place no later than
1(st) January 2018.
As we stated at our Capital Markets Event on 5(th) December
2016, to assist with peer comparability, going forwards we will
lead with coverage ratio defined on a shareholder basis which
progressed from 163% at the half year to 171% at the year end. On a
proforma basis of calculation, our Solvency II coverage ratio
increased from 158% at the half year to 165% at the year end. The
surplus is the same on both bases.
The Group remains focused on delivering appropriate returns on
capital. In 2016, our Solvency II new business strain was less than
GBP100m in a year when we wrote a record GBP7bn of new annuity
business as we continued to deliver our capital efficient
strategy.
outlook
We remain confident in outlook for the Group as our strategy is
aligned to, what we believe to be, 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, coupled with increasing
expertise, is expected to deliver further profit growth, built on
our resilient IFRS and Solvency II balance sheets. With further
political and economic uncertainty anticipated in 2017 and beyond,
we expect further market volatility. The risk of slowing global
economic activity remains and no business model can be fully
immunised. However, we believe the opportunities available to the
Group, primarily in the UK and US, remain attractive.
Our operating model is built on clear synergies between our core
divisions. LGIM is the UK market leader in providing LDI solutions
to defined benefit (DB) pension scheme clients, which can be a
precursor to pension risk transfer (PRT) transactions in LGR, such
as the GBP1.1bn Vickers Group Pension Scheme buy-out in 2016. LGR,
the market leader in UK PRT, has over GBP54bn of assets actively
managed by LGIM and potential for matching adjustment compliant
direct investments being developed by LGC. LGI provides significant
Solvency II diversification benefits contributing to sustainable
levels of new business surplus in the Group.
In LGR, demand for pension de-risking strategies remains strong.
We are currently quoting on c.GBP13bn of buy-in and buy-out deals
in the UK. We will remain disciplined in the deployment of our
capital, and will only select PRT and longevity opportunities that
meet our return on capital hurdle rates. In October 2016, we
commenced a distribution agreement with Aegon to offer our
individual annuities to their pension customers with sales of
c.GBP190m expected in the first 12 months. The lifetime mortgage
market is expected to grow to GBP2.8bn in 2017 and we anticipate
writing c.GBP0.8bn of new business in the year.
LGIM is targeting further outperformance of market net fund
flows. The business will maintain a client focused, low cost fee
model, however, we anticipate further fee pressure in the asset
management industry. We will continue our investment in technology,
client propositions and overseas distribution to maintain momentum
in net flows. Our market leading Solutions business is well placed
to support DB pension schemes as they de-risk. In the defined
contribution (DC) market, LGIM continues to gain market share and
we expect the number of members of our workplace schemes to
increase to around 2.5m in 2017. We expect our US business to
expand its asset base in Index, Active Fixed Income and Solutions
as we seek to establish ourselves as a leading US pension solutions
provider.
LGC is planning to invest over GBP0.5bn of shareholder capital
in direct investments in 2017. In Housing, we plan to expand our
build to sell and build to rent businesses into affordable and
senior living, which will incorporate modern factory construction
methods. For the Infrastructure sector, we will build on our
successful Urban Regeneration model, increasing the number of
cities we invest in. We will also expand our SME funding
initiatives across equity and new debt products. We expect our
operating profit and profit before tax from LGC's direct
investments to grow further in 2017 and beyond. We are also
targeting proceeds of c.GBP250m from asset disposals, representing
an uplift to our carrying values at the year-end 2016. LGC's
GBP3.8bn traded asset portfolio significantly outperformed our long
term assumptions in 2016, however, we do not anticipate a similar
outperformance in 2017.
In LGI, we expect operating profit to grow in 2017 as we have
started the process of addressing areas of poor performance in our
UK group protection business. Although operating in a mature
sector, our UK leading retail protection business is targeting
further operating profit growth in 2017, and will continue to
provide good customer outcomes and attractive returns for our
shareholders. We will also focus on accelerating the digital
transformation of our US protection business including diversifying
distribution and products, building on our proven expertise in the
UK.
In General Insurance, we see the potential to grow the business
through distribution agreements and increased growth in the direct
channel. Recently signed distribution agreements in aggregate are
expected to increase gross premiums by c.10% in 2017. Despite
recent poor weather in the UK, General Insurance has had a strong
start to 2017, however, exceptional weather events can impact
future profitability.
Our Mature Savings operation is largely closed to new business.
We will continue to focus on customer service whilst actively
managing costs.
FULL year DIVID UP 7%
In March 2016, Legal & General adopted 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 our policy, the Board has considered the best
trajectory of dividend growth, taking into account sustainability
across a wide range of economic scenarios and the Group's
anticipated financial performance. Accordingly, the Board has
recommended a final dividend of 10.35p (2015: 9.95p) giving a full
year dividend of 14.35p (2015: 13.40p), 7% higher than 2015.
LEGAL & GENERAL RETIREMENT
FINANCIAL HIGHLIGHTS GBPm 2016 2015
Release from operations 433 374
New business surplus 159 45
Net release from operations 592 419
Experience variances, assumption
changes, tax and non-cash movements 219 222
Operating profit 811 641
Investment and other variances 36 78
======================================= ===== ======
Profit before tax 847 719
======================================= ===== ======
Back book acquisitions 2,945 -
UK PRT 3,338 1,977
International PRT 347 440
Individual annuity single premiums 378 327
Lifetime mortgage advances 620 201
Longevity insurance(1) 900 -
Total LGR new business 8,528 2,945
Annuity net inflows (GBPbn) 4.3 0.4
Total annuity assets (GBPbn) 54.4 43.4
======================================= ===== ======
1. Represents a reinsured longevity insurance deal transacted in
December 2016. The GBP900m 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.
increased scale and profitability
LGR had another strong financial performance in 2016 achieving
record profits. Total new business was up 190% at GBP8.5bn (2015:
GBP2.9bn).
Release from operations increased 16% to GBP433m (2015:
GBP374m), reflecting the growth in the scale of the business over
the last few years and the release of prudential margins associated
with that larger annuity fund. This also includes a contribution
from our Legal & General Home Finance business.
Net release from operations increased 41% to GBP592m (2015:
GBP419m) with new business surplus of GBP159m (2015: GBP45m)
reflecting higher levels of new business and greater use of
longevity reinsurance. UK annuity sales delivered a 10.4% new
business margin on SII capital.
Operating profit increased to GBP811m (2015: GBP641m) which
included increased favourable mortality experience compared to our
best estimate assumptions. However, we have not made any material
adjustments to our forward-looking longevity assumptions despite
the recurrence of further positive in-year longevity
experience.
STrong demand for de-risking strategies
The need for products and services to manage the consequences 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 Pension Risk Transfer for our corporate
customers and Individual Retirement Choices for our retail
customers are there to meet these substantial and growing
needs.
Global Pension Risk Transfer
In 2016, LGR completed GBP3,685m (2015: GBP2,417m) of buy-in and
buy-out transactions and a longevity insurance transaction of
GBP900m.
2016 was a good year for the UK pension de-risking market. LGR
achieved the largest pension buy-out of the year with GBP1.1bn
Vickers Group Pension Scheme, part of the Rolls-Royce Group,
covering over 11,000 members. This transaction further demonstrates
the strength of our de-risking proposition as we transitioned
Vickers from a liability driven investment (LDI) customer in 2007
to a full buyout in 2016. In addition, we completed GBP1.5bn of
buy-ins with the ICI Pension Fund, including GBP750m in the
fortnight after the EU referendum vote. In the US we completed six
bulk deals in 2016 totalling $448m premiums. We also transacted a
GBP900m longevity insurance deal in December 2016 which we expect
to fully reinsure.
The UK private sector defined benefit market is estimated to
have GBP2.1 trillion liabilities, with only c.5% transacted to
date. Two thirds of large pension plans expect to use pension risk
transfer by 2020, and consequently our UK market pipeline for
pension risk transfer remains strong. We are currently quoting on
c.GBP13bn of UK buy-in and buy-out deals and a variety of longevity
insurance opportunities. 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 nearly 50% of the interest rate and
inflation risk has been removed from the UK private sector defined
benefit system.
Pension funds are increasingly looking to de-risk in steps that
can include tranches of pensioner buy-ins, top-slicing, or
longevity insurance as a first step. Pension funds do not need to
be fully funded or fully hedged to make progress. Legal &
General is well placed for this incremental approach as a
financially sound partner, committed to the pension risk transfer
market. We are unique in being able to offer all possible pension
risk transfer and DB pension de-risking steps.
Our aim is to recreate this disciplined approach in the US, with
our US PRT business making progress in 2016. Our reinsurance hub,
L&G Re, A 'plus' rated, in a Solvency II equivalent regime, and
with registered reinsurer status in the Netherlands, allows us to
participate as a reinsurer in the Dutch pension risk transfer
market.
Individual Retirement Choices
Sales of individual annuities and lifetime mortgages reached
GBP1bn in LGR's Retail Customer business in 2016. This business
area now manages almost GBP20bn in assets for its 500,000
individual annuity customers. Chris Knight was appointed Managing
Director of this business in January 2017.
Individual annuity sales were up 16% on 2015 at GBP378m (2015:
GBP327m) and are set to grow further in 2017. In July, we agreed an
arrangement with Aegon where Legal & General would be Aegon's
preferred supplier of annuity business from October 2016. We expect
this arrangement to increase LGR's individual annuity volumes by
approximately 50%.
Legal & General Home Finance has made an exceptionally
strong entry into the Lifetime Mortgage market since April 2015,
writing GBP620m in 2016 (2015: GBP201m), and now has over 10,000
customers. The market is expected to grow substantially from
GBP2.2bn of annual lending in 2016. This fact coupled with an
estimated GBP1.5 trillion of housing equity currently owned by the
over 55s in the UK, makes the long-term growth characteristics of
this market strong. Additionally, we are helping to solve the
problem of interest-only mortgages for those who have high levels
of equity in their house.
In 2016 we signed distribution agreements with Santander and
continue to broaden our distribution to offer lifetime mortgages.
We anticipate that this will result in up to an additional GBP100m
of lifetime mortgages per annum. We secured Solvency II matching
adjustment treatment from the PRA for our lifetime mortgages in Q4
2016.
Industry consolidation
The combination of Freedom & Choice in Pensions and the
introduction of the EU's Solvency II regime has already led to
consolidation among individual annuity providers. We participated
in this consolidation in May 2016 with the acquisition of a
GBP2.9bn back book of individual annuities from Aegon. We expect
there to be further consolidation opportunities over time but we
will only pursue these if they have sufficiently attractive return
characteristics.
ONGOING credit and ASSET management
Credit portfolio management
LGR's GBP54.4bn asset portfolio backing its IFRS liabilities is
well diversified. We hold GBP2.7bn of IFRS credit default reserves
(2015: GBP2.2bn) against these assets and have experienced less
than GBP10m in defaults in the last 5 years, with no defaults in
2016. Within the GBP49.5bn bond portfolio, just over 2/3rds of the
portfolio is A-rated or better, 29% BBB-rated and 2% sub-investment
grade. The bond portfolio has 14% in gilts, 5% in Banks, 4% in
Energy, Oil & Gas, and 5% in bonds in the property sector,
illustrating the high degree of diversification in the
portfolio.
Direct Investment
Our direct investment portfolio is secured through directly
negotiated covenants and security or collateral. This portfolio is
now GBP8.1bn, (2015: GBP5.7bn) including GBP852m in lifetime
mortgages, and makes up c.15% of the assets within the annuity
portfolio. 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 annuities,
working with LGIM, LGC, or through lifetime mortgages, is an
important feature of LGR's business as the hunt for yield continues
with lower for longer interest rates.
In 2016 LGR has invested over GBP2bn in direct investments,
including infrastructure, housing and lifetime mortgages, over
double last year's investment. Notable investments in 2016 include
the funding of the new Amazon distribution centre in Tilbury, and
the third berth at the London Gateway port.
LEGAL & GENERAL investment management
FINANCIAL HIGHLIGHTS GBPm 2016 2015
Management fee revenue 714 651
Transactional revenue 30 43
============================================= ===== ======
Total revenue 744 694
Total costs (372) (335)
Asset management operating profit 372 359
Workplace Savings (admin only) operating
loss(1) (6) (4)
============================================= ===== ======
Operating profit 366 355
Investment and other variances (32) (20)
============================================= ===== ======
Profit before tax 334 335
Net release from operations 286 281
Cost:income ratio(2) (%) 49 48
External net flows (GBPbn) 29.2 37.7
Internal net flows (GBPbn) 2.0 (2.1)
Disposal of LGF assets (GBPbn) - (2.3)
Total net flows (GBPbn) 31.2 33.3
Of which international (GBPbn) 14.5 9.5
Persistency (%) 91 92
GBPbn 2016 2015
Assets under management, including
overlay assets(3) 894.2 746.1
Advisory assets 7.8 10.5
Total assets 902.0 756.6
Of which:
- International assets under management,
including overlay assets(3) 177.4 122.4
- Advisory assets 7.8 10.5
=============================================== ===== ======
- Total international assets 185.2 132.9
Assets under administration - Workplace
Savings 20.8 14.7
1. Represents Workplace Savings admin only and excludes fund
management profits.
2. Excluding Workplace Savings and recoverable market data costs
which are treated as a cost of sale.
3. 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.
strong performance in uncertain environment
LGIM continues to expand its business across channels, regions
and product lines. External net flows were GBP29.2bn (2015:
GBP37.7bn), contributing to 20% growth in assets under management
(AUM) to GBP894.2bn (2015: GBP746.1bn). Revenues from management
fees were up 10% to GBP714m (2015: GBP651m), while transactional
revenues were lower at GBP30m (2015: GBP43m) due to the decision to
discontinue box profits (2015: GBP11m). Operating profit increased
by 3% to GBP366m (2015: GBP355m), reflecting higher AUM growth
occurring later in the year, partially offset by planned investment
to grow the business, and ongoing industry fee pressure.
The International business experienced net inflows of GBP14.5bn
(2015: GBP9.5bn), with a particularly strong performance in the US
business and higher flows in Europe, the Gulf and Asia. The DC
business continued to expand, with net inflows of GBP2.0bn (2015:
GBP2.9bn) driven by our bundled business, which offers investment
and administration services to DC schemes. The retail business
experienced net inflows of GBP1.4bn (2015: GBP1.2bn) and was ranked
third in UK net sales in 2016 (Source: Pridham), despite
challenging retail market conditions.
breadth of investment management solutions
Active
Asset movements Index fixed Solu- Real Active Total Advisory Total
GBPbn funds income tions assets equities AUM assets assets
At 1(st) January
2016 274.3 106.8 338.2 18.3 8.5 746.1 10.5 756.6
External inflows 35.2 10.8 19.9 1.4 - 67.3 67.3
-------- --------
External outflows (45.0) (6.5) (12.4) (1.2) (0.2) (65.3) (65.3)
--------
Overlay / advisory
net flows - - 27.2 - - 27.2 (5.4) 21.8
--------
External net
flows (9.8) 4.3 34.7 0.2 (0.2) 29.2 (5.4) 23.8
Internal net
flows (0.3) 1.5 - 0.7 0.1 2.0 - 2.0
Total net flows (10.1) 5.8 34.7 0.9 (0.1) 31.2 (5.4) 25.8
Cash management
movements - (0.7) - - - (0.7) - (0.7)
Market and other
movements 55.6 22.9 39.0 0.4 (0.3) 117.6 2.7 120.3
At 31(st) December
2016 319.8 134.8 411.9 19.6 8.1 894.2 7.8 902.0
Total AUM increased 20% to GBP894.2bn (2015: GBP746.1bn). Total
external net inflows were GBP29.2bn (2015: GBP37.7bn) despite
political and economic uncertainty and represent c.4% of opening
AUM. Positive flows across our main product lines, client channels
and regions demonstrate the breadth of LGIM's business model. In a
challenging year for active managers in which the majority
underperformed, 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 net inflows were strong at GBP34.7bn (2015:
GBP34.7bn), as DB pension schemes implement LDI strategies and DC
schemes seek a range of multi-asset and drawdown strategies.
Index external net outflows were GBP9.8bn in 2016 (2015:
GBP5.4bn). Net outflows were largely from UK DB clients switching
into other products, primarily Solutions. There were net inflows
from international and retail clients as the Index business
diversifies. We are well positioned for the continued de-risking of
DB schemes, taking clients from traditional index strategies,
through LDI and multi-asset capabilities, to solutions that combine
LDI and credit.
Net external inflows into Active Fixed Income of GBP4.3bn (2015:
GBP7.7bn) were driven primarily by institutional clients in the UK
and US with growing demand from clients in other regions.
The Retail business has performed well despite net industry
sales falling to their lowest level since 1995 (Source: Pridham
report). Against this backdrop, the business has gained market
share and AUM increased to GBP24.1bn (2015: GBP19.9bn).
Real Assets was adversely impacted by fewer transactions in the
property market in 2016. All of LGIM's unitised property funds
remained open post the EU Referendum vote, and net inflows resumed
in Q4 contributing to overall AUM of GBP19.6bn (2015: GBP18.3bn).
We continued to develop innovative direct investment solutions to
meet our clients' needs, such as the recently launched Build to
Rent fund.
WORKPLACE PENSIONS benefit from SME market
LGIM is well positioned to benefit from the rapid growth of the
UK DC market, experiencing a 23% increase in customers on our
Workplace platform to more than 2.2m (2015: 1.8m). Net flows were
GBP2.0bn (2015: GBP2.9bn) and contributed to GBP20.8bn of assets on
our Workplace platform. In 2016, LGIM acquired a 16.5% stake in
Smart Pension, an online auto-enrolment platform, which has
enhanced our presence in the SME market. The number of pension
schemes supported by the DC business has grown to over 9,400 (2015:
4,376). Total LGIM DC AUM increased by 24% to GBP57.1bn (2015:
GBP46.1bn).
INTERNATIONAL expansion continues
LGIM delivered strong net inflows of GBP14.5bn (2015: GBP9.5bn)
in its international businesses. Total International AUM was
GBP177.4bn, a 45% increase (2015: GBP122.4bn). Along with positive
flows and rallying equity markets, the devaluation of sterling
during the year had a significant impact on the increase in
AUM.
Net inflows in the US business were GBP9.4bn (2015: GBP6.3bn),
with significant growth in Index and continued strength in
Solutions and Fixed Income. In November 2016, Aaron Meder was
appointed Chief Executive Officer of LGIM America.
European net inflows were GBP2.6bn (2015: GBP2.0bn), driven by
growing interest in our index and multi-asset products and
supported by the launch of additional products. In the Gulf, net
inflows were GBP1.6bn (2015: GBP0.6bn). Asian net inflows for the
period were GBP0.8bn (2015: GBP0.8bn). In Japan, we signed a second
co-operation agreement, are establishing a regional office in
Tokyo, and in Hong Kong we are developing our trading and fund
management capabilities.
LEGAL & GENERAL CAPITAL
FINANCIAL HIGHLIGHTS GBPm 2016 2015
Net release from operations 214 187
Operating profit from:
UK Housing 61 31
Infrastructure 51 33
SME finance 10 5
Direct investment operating profit 121 69
Traded investment portfolio 122 154
Treasury assets 14 10
Total operating profit 257 233
Investment and other variances 162 (116)
====================================== ===== ========
Profit before tax 419 117
DIRECT INVESTMENT PORTFOLIO(1) GBPm 2016 2015
UK Housing 392 345
Infrastructure 591 428
SME Finance 154 94
1,137 867
TRADED PORTFOLIO(2) GBPm
Equities 1,714 1,552
Fixed income 492 480
Multi-asset 150 133
Cash 1,418 1,048
3,774 3,213
LGC investment portfolio 4,911 4,080
Treasury assets at holding company
GBPm 1,282 1,585
====================================== ===== ======
Total 6,193 5,665
1. Direct Investment portfolio excludes two LGC assets valued at
GBP91m at 31 December 2016 which have entered advanced disposal
negotiations and are classified as "assets held for sale" and
reported separately.
2. Traded portfolio in 2015 restated to show reclassification of
assets held within underlying fund structures.
DIRECT INVESTMENT STRATEGY delivers record profits
The direct investment portfolio delivered operating profit of
GBP121m (2015: GBP69m) and profit before tax of GBP94m (2015:
GBP73m), representing a net portfolio return of 9.0% (2015: 9.2%).
Direct investments increased 31% to GBP1,137m (2015: GBP867m).
Since it was established in 2013, LGC has trebled its total
direct investments to over GBP1bn, with investments in all its key
sectors of UK Housing, Infrastructure and SME finance. Driven by
long term social and economic trends, LGC invests in enterprises
where funding gaps exist which we expect to be met through future
long term direct investors. We target attractive risk-adjusted
returns for shareholders by building successful platforms and
generating returns by delivering the direct investment pipeline. We
work alongside trusted partners with proven experience in several
joint ventures in a disciplined way. Innovative direct investing
attracts long term co-investors which further underpins improved UK
growth. We also create investment opportunities for our LGR
business. Throughout, we ensure we meet our Group liquidity
requirements and maintain the Group's capital strength. We are
planning to invest over GBP0.5bn of shareholder capital in direct
investments in 2017.
We are also targeting proceeds of c.GBP250m from asset disposals
which will deliver additional funding for re-investment. We are
already in discussions with external parties to dispose of several
developed property assets in our portfolio, including One Central
Square in Cardiff, thus demonstrating the liquidity of our direct
investment strategy.
Operating profit for direct investments is calculated as a share
of the investments' own trading profits less costs or a smoothed
IRR basis. Direct investment trading profits from our operating
businesses, such as CALA Homes, are recognised as our share of
their profit before tax, and delivered GBP53m, representing 44% of
direct investment operating profit (2015: GBP19m, 28%). For
projects, profit before tax is based on an independently verified
valuation plus any net revenue from these assets.
Housing operating profit increased 97% to GBP61m in 2016 (2015:
GBP31m), assets increased to GBP392m (2015: GBP345m)
CALA Homes(1) had a very strong year to 31(st) December 2016,
delivering a record number of homes sold of 1,476, and revenues of
GBP718m, 62% and 43% increases respectively from the previous year.
This delivered profit before tax for LGC, net of expenses, of
GBP31m (2015: GBP16m). In the second half of 2016, CALA Homes
secured planning consent on 15 sites, which is expected to deliver
1,533 new homes with a gross development value (GDV) of
GBP648m.
LGC launched a build-to-rent JV with PGGM in early 2016 which,
including the newly created L&G managed build to rent fund, now
has GBP940m of committed funds and over 900 homes under development
in Walthamstow, Bristol and Salford. Work has also started to build
1000 new homes at our 250-acre site at Crowthorne with a GDV of
approximately GBP450m. We also launched a modular homes business
which will modernise home building with innovative precision built
modular housing. Strong interest is being seen from prospective
buyers.
Infrastructure operating profit increased 55% to GBP51m in 2016
(2015: GBP33m), assets increased to GBP591m (2015: GBP428m)
During 2016, the urban regeneration business continued to grow.
In Cardiff, our investment in One Central Square at the site
adjacent to BBC Wales' new HQ (acquired by LGR in 2015), has been
100% let, with development commencing on a third asset in 2017. The
GBP240m Bracknell Town Centre development (The Lexicon) is
progressing well towards the planned opening in September 2017.
MediaCityUK (Salford) is trading well and we have agreed plans to
double the size of the estate over 10 years, with a GDV of over
GBP1bn, with LGC retaining options over the pipeline of assets.
LGC also agreed a new partnership with Newcastle City Council
and University to develop the GBP350m Science Central 24-acre
science and technology hub. This is set to create over 4,000 jobs,
500,000 sq ft of office space and 450 new homes plus asset
opportunities for LGR.
In clean energy, NTR onshore wind construction fund reached
final close in 2016, at EUR246m, with over 66% deployed, and a
EUR500m NTR Fund II is targeted for launch in 2017.
In addition to the opportunities available through existing
partners, we will continue to work with the UK Department of
International Trade to identify investment opportunities across the
UK.
SME Finance operating profit increased 100% to GBP10m in 2016
(2015: GBP5m), assets increased to GBP154m (2015: GBP94m)
Pemberton announced the final close of its first mid-market loan
fund at the beginning of November at EUR1.2bn with 53% now
deployed. The fund has secured commitments from 27 insurance and
pension investors across Europe, the US and Asia. New strategies
for 2017 include a UK Sterling loan fund and Trade Receivables
fund, in total targeting EUR3bn AUM by the end of the year.
LGC also invested keystone funds in Accelerated Digital Ventures
which is set to provide capital to the emerging UK SME sector,
supported by a co-investment from the British Business Bank and
Woodford Investment Management.
TRADED PORTFOLIO
LGC's traded investment portfolio delivered operating profit of
GBP122m (2015: GBP154m). Treasury assets contributed a further
GBP14m (2015: GBP10m) to operating profit. The investment variance
on the traded investment portfolio and treasury assets was GBP189m
(2015: GBP(120)m), resulting in a combined profit before tax of
GBP325m (2015: GBP44m).
The traded portfolio holds a diversified set of exposures across
equities, fixed income, multi-asset funds and cash. Overall,
operating profit has decreased by 21% in the year following a
re-positioning of the portfolio, reducing risk through holding more
cash and increased hedging activity, leading to a reduced return
expectation. The portfolio performed above assumed returns over the
year, benefiting from positive equity market performance in
particular UK and Emerging Market exposures. The portfolio also
benefited from a currency translation effect on foreign holdings,
notably on USD denominated assets, from the devaluation of GBP
following the market reaction to the outcome of the EU
Referendum.
LGC holds cash for a variety of reasons including working
capital, collateral to cover derivative trades and cash awaiting
longer term investment. In addition, Group Treasury holds cash and
near cash investments to cover a range of uses including working
capital, upcoming interest and dividend payments, derivative
collateral requirements and contingency funding for the Group. The
treasury liquid assets also include working capital balances from
various business units.
1. LGC owned a 47.9% share in CALA Homes as at 31(st) December
2016. Performance metrics are based on CALA Homes calendar year,
with data sourced from the company's unaudited management accounts
as its financial year-end is 30(th) June.
LEGAL & GENERaL INSURANCE
FINANCIAL HIGHLIGHTS(1) GBPm 2016 2015
Release from operations 317 328
New business surplus 23 25
Net release from operations 340 353
Experience variances, assumption changes,
tax, international and non-cash movements (23) (38)
Operating profit 317 315
* UK 216 204
* US 85 83
* Netherlands 16 16
* France(2) - 12
Investment and other variances (123) (44)
============================================= ===== ======
Profit before tax 194 271
============================================= ===== ======
UK Protection new business annual premiums 228 231
Retail Protection gross premiums 1,179 1,112
Group Protection gross premiums 333 330
US Protection gross premiums 897 773
Total UK and US gross premiums 2,409 2,215
1. Reported consolidated numbers reflect the new Insurance
divisional structure announced in 2016.
2. Legal & General France disposal completed on 31(st) December 2015.
In November 2016, the Group announced the formation of Legal
& General Insurance (LGI) which combined our UK and US
Protection businesses, with Bernie Hickman appointed Chief
Executive Officer. The new Insurance division provides life
insurance, critical illness cover, and income protection to over 7
million individuals and company employees in the UK and US.
LGI UK
continued growth in premium income
Retail Protection gross premium income increased 6% to GBP1,179m
(2015: GBP1,112m) with new business annual premiums of GBP170m
(2015: GBP162m). We remain the leading provider of Retail
Protection in the UK and benefit from a highly efficient automated
underwriting model and broad distribution reach. Our direct
distribution channel delivered Retail Protection new business APE
of GBP31m, representing 7% growth on 2015 and accounts for 18% of
new business APE (2015: GBP29m, 18% of new business APE). Group
Protection gross premium income was GBP333m (2015: GBP330m) with
new business of GBP58m (2015: GBP69m).
Legal & General Mortgage Club facilitated GBP53bn of
mortgages in 2016 (2015: GBP46bn) 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
now involved in one in five of all UK mortgage transactions. Legal
& General Surveying Services continues to deliver a strong
performance, completing over 523,000 surveys (2015: 482,000).
SUSTAINED operating profit
Release from operations from our UK business was lower at
GBP185m (2015: GBP244m) following the change to the modelling of
reinsurance contracts in retail protection in 2015, to ensure
sufficient prudence is being held in later years. New business
surplus was GBP23m (2015: GBP25m) driven primarily by the
competitive market environment and refinement of our models.
LGI UK operating profit increased 6% to GBP216m (2015: GBP204m),
with the one-off reserve strengthening impacting the 2015
comparator, partially offset by the lower net release from
operations and GBP43m adverse claims experience, primarily in group
protection where we reinsure significantly less risk than on our
retail protection book.
We expect 2016 to be the LGI UK operating profit base level from
which the business will grow in 2017 and onwards, with continued
growth in retail protection supported by an improved group
protection performance as we address specific areas of poor
performance.
Profit before tax impacted by interest rates
LGI UK's profit before tax reduced to GBP84m (2015: GBP226m), as
a result of a negative investment variance of GBP(132)m (2015:
GBP22m) following a reduction in UK government bond yields of
c.85bps which impacted the discount rate used to calculate the
reserves for our UK protection liabilities.
LGI US
FINANCIAL HIGHLIGHTS $m 2016 2015
Net release from operations 91 83
Operating profit 115 125
Gross premium income 1,220 1,183
INCREASED CONTRIBUTION TO CASH and profits
Net release from operations increased by 10% (17% on a sterling
basis) to $91m (2015: $83m). This represents the dividends paid by
Legal & General America to the Group.
Operating profit decreased 8% (up 2% on a sterling basis) to
$115m (2015: $125m), primarily due to higher mortality experience
with profit before tax of $119m, up 13% (27% on a sterling
basis).
Gross premium revenue increased 3% (16% on a sterling basis) to
$1,220m (2015: $1,183m) due to continued strong persistency of our
core term product. LGI US is the tenth largest provider of term
life assurance by annual premium equivalent in the US and is the
fourth largest provider through the brokerage channel. LGI US has
1.2m policies in force (2015: 1.2m).
In 2015, LGI US adjusted its protection new business pricing to
be better positioned in the market. These changes allowed for the
pricing of risk at a more granular level which has raised prices at
lower margin price points and reduced prices elsewhere. The impact
of this has been improved new business margins and reduced new
business volumes. LGI US maintained this disciplined approach in
2016, resulting in a strong Solvency II new business margin of
12.4%. New annual premiums decreased 21% to $84m (2015: $106m).
Legal & General America paid its 2017 dividend in February
of this year, up 10% to $100m (2015: $91m).
General Insurance
FINANCIAL HIGHLIGHTS GBPm 2016 2015
Net release from operations 42 41
Experience variances, assumption
changes, tax and non-cash movements 10 10
Operating profit 52 51
Investment and other variances 16 (8)
======================================= ==== =====
Profit before tax 68 43
======================================= ==== =====
General Insurance gross premiums 326 337
Combined operating ratio (%) 89 89
======================================= ==== =====
increase in profits and direct premium income
Operating profit increased to GBP52m (2015: GBP51m) with a
combined operating ratio of 89% (2015: 89%). This was despite the
introduction of the annual Flood Re levy of GBP9m which added 3% to
the combined operating ratio.
General Insurance gross premiums were down 3% at GBP326m (2015:
GBP337m) as we maintained pricing discipline in a competitive
market. Our direct business delivered GWP of GBP121m in 2016,
representing 20% growth on 2015 and now accounts for 37% of gross
premiums (2015: GBP101m, 30% of gross premiums).
In December 2016, Cheryl Agius was appointed Chief Executive
Officer of General Insurance. The division has 1.3m policyholders
(2015: 1.4m) covering household, travel and pet insurance products.
Additionally, General Insurance signed distribution agreements with
several leading UK financial institutions which in aggregate are
expected to increase 2017 gross premiums by around 10%.
savings
FINANCIAL HIGHLIGHTS GBPm 2016 2015
Release from operations 104 125
New business strain (5) (9)
Net release from operations 99 116
Experience variances, assumption
changes, tax and non-cash movements - (9)
Operating profit 99 107
- Mature Savings 105 106
- Digital Savings (6) 1
Investment and other variances 9 3
Net profit / (loss) on disposals (60) -
===================================== ==== =====
Profit before tax 48 110
======================================= ==== =====
lower contribution from mature savings
Release from operations reduced to GBP104m (2015: GBP125m) as we
continue to manage the reducing contribution from our declining
Mature Savings business. Net release from operations was GBP17m
lower at GBP99m (2015: GBP116m), with new business strain of GBP5m
(2015: GBP9m) as we actively manage the cost base.
Operating profit in Mature Savings remains strong at GBP99m
(2015: GBP107m). The introduction of robotics has increased
automation and allowed us to reduce unit costs. Favourable market
movements contributed GBP9m (2015: GBP3m) to profit before tax.
The Group completed the sale of Cofunds and IPS to Aegon on
1(st) January 2017 for a total consideration of GBP147.5m,
resulting in a GBP64m impairment loss in 2016. On 25(th) May 2016,
the Group announced the completion of the sale of Suffolk Life to
Curtis Banks Group for GBP45m, resulting in a GBP4m profit on
disposal.
The Digital Savings operating loss in 2016 was GBP6m (2015:
GBP1m operating profit).
Mature Retail Savings business outflows of GBP(3.0)bn (2015:
GBP(5.8)bn), and assets under administration of GBP30.7bn (2015:
GBP29.6bn).
Mature Savings outflows reduced year on year due to the reducing
maturity profile of some products, particularly Endowments. 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% or 13,000 customers,
electing to take cash payments. Our average payment size is GBP14k.
This compares to c.60% of customers taking cash before the reform
legislation was announced.
Disposals
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. This was offset by a GBP4m profit on
disposal of Suffolk Life, resulting in total net loss on disposals
of GBP60m in 2016.
In November 2016, Legal & General reached an agreement in
principle with Chesnara plc to sell Legal & General Nederland
Levensverzekering Maatschappij N.V. for EUR160m. The sale is
expected to complete in H1 2017. During the year, Legal &
General Netherlands contributed GBP70m (2015: GBP29m) of dividends
to LGI due to a favourable surplus capital position.
The sale of Legal & General France to APICIL Prévoyance
completed on 31(st) December 2015.
Net release from operations BACKED BY dividends TO GROUP
The 2016 full year dividend of GBP854m reflects net release from
operations coverage of 1.65 times (2015: 1.58 times).
2016 2015
Net Subsidiaries' Net Subsidiaries' Dividend
release dividends Dividend release from dividends % of Net
from operations to Group % of Net operations to Group release
GBPm release from from
operations operations
Total 1,411 1,085 77 1,256 1,003 80
=================== ================ ============= ============= ============= ============= ===============
External dividend 854 797
Dividend coverage 1.65 1.58
=================== ================ ============= ============= ============= ============= ===============
borrowings
Legal & General continues to have a strong liquidity
position reflecting its requirements for working capital and
derivative collateral. The Group's outstanding core borrowings
total GBP3.1bn (2015: GBP3.1bn). There is also a further GBP0.4bn
(2015: GBP0.5bn) of operational borrowings including GBP0.2bn
(2015: GBP0.6bn) of non-recourse borrowings.
Group debt costs of GBP172m (2015: GBP153m) reflect an average
cost of debt of 5.4% per annum (2015: 5.3% per annum) on average
nominal value of debt balances of GBP3.2bn (2015: GBP2.9bn).
taxation - effective tax rate of 20.0%
Equity holders' Effective Tax Rate 2016 2015
(%)
Equity holders' total Effective
Tax Rate 20.0 19.3
Annualised rate of UK corporation
tax 20.00 20.25
In 2016, the Group's effective tax rate was in line with the UK
corporation tax rate. This reflects the overall positive impact
from differences between the measurement of accounting and taxable
profits, offset by the average higher rates of taxes applied on
overseas profits.
SOLVENCY II
As at 31(st) December 2016, the Group had an estimated Solvency
II surplus of GBP5.7bn over its Solvency Capital Requirement,
corresponding to a Solvency II coverage ratio of 171% on a
shareholder basis. The Cofunds disposal, which completed on 1(st)
January 2017, will provide a c.1.5% coverage ratio benefit in
2017.
Capital (GBPbn)(1) 2016 2015
Own Funds 13.6 12.8
Solvency Capital Requirement (SCR) (7.9) (7.3)
Solvency II surplus 5.7 5.5
SCR coverage ratio (%) 171% 176%
1. Solvency II position on a shareholder basis as at 31(st)
December and before the accrual of the final dividend.
Analysis of movement from 1(st) Solvency
January to 31(st) December 2016 II
(GBPbn) surplus
Operational surplus generation 1.2
New business strain (0.1)
=========================================== =========
Net surplus generation 1.1
Dividends paid (0.8)
Operating variances 0.2
Market movements (0.3)
=========================================== =========
Total surplus movement (after dividends
paid in the year) 0.2
The increase in surplus reflects the surplus generated over 2016
net of dividends paid of GBP0.8bn and interest payments on the
Group's debt of GBP0.2bn. The net surplus generation was GBP1.1bn,
after allowing for the amortisation of 1/16th of the opening
Transitional Measures on Technical Provisions (TMTP). New business
strain was GBP0.1bn. The total surplus generation includes a
negative investment variance of GBP0.3bn reflecting market
movements over 2016, in particular falls in risk free rates.
Operating variances include the impact of experience variances,
changes to valuation and capital calibration assumptions, changes
to planned volumes of new business, tax rate changes, PRA approval
of changes to the Internal Model and Matching Adjustment, (in
particular the inclusion of Lifetime Mortgages as assets eligible
for Matching Adjustment), and other management actions including
changes in asset mix and hedging strategies.
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 165% (2015: 169%).
The analysis incorporates management's estimate of a
recalculation of the TMTP as at the end of 2016. The conditions set
out by the the PRA to allow a formal recalculation of the Group's
TMTP were not met as at end 2016 but, in line with PRA guidance, a
formal recalculation will take place no later than 1(st) January
2018. Therefore, the disclosed Solvency II position on a
shareholder basis and proforma basis do not reflect the regulatory
capital position as at 31(st) December 2016. This will be made
public in May 2017.
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 2016:
GBPbn
IFRS Release from operations 1.3
Expected release of IFRS prudential margins (0.5)
Release of IFRS specific reserves (0.1)
Solvency II investment margin 0.2
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation 0.4
Other Solvency II items and presentational differences (0.1)
Solvency II Operational surplus generation 1.2
The table below gives a reconciliation of the Group's IFRS New
business surplus to Solvency II New business strain in 2016:
GBPbn
IFRS New business surplus 0.2
Removal of requirement to set up prudential
margins above best estimate on new business 0.5
Set up of Solvency II Capital Requirement
on new business (0.7)
Set up of Risk Margin on new business (0.1)
Solvency II New business strain (0.1)
Sensitivity analysis
Impact on net Impact
of tax Solvency on net
II capital surplus of tax
2016 Solvency
GBPbn II coverage
ratio 2016
%
Credit spreads widen by 100bps assuming
a level addition to all ratings 0.4 10
Credit spreads widen by 100bps assuming
an escalating addition to ratings 0.2 7
Credit spreads narrow by 100bps assuming
a level addition to all ratings (0.4) (9)
Credit spreads narrow by 100bps assuming
an escalating addition to ratings (0.2) (7)
Credit migration (0.6) (8)
20% fall in equity markets (0.4) (5)
40% fall in equity markets (0.8) (9)
20% rise in equity markets 0.5 5
15% fall in property markets (0.2) (3)
15% rise in property markets 0.2 3
100bps increase in risk free rates 1.0 22
50bps fall in risk free rates (0.5) (10)
Future inflation expectation increase
by 50bps (0.1) (3)
1% reduction in annuitant base mortality (0.2) (2)
1% increase in annuitant base mortality 0.2 2
Substantially reduced Risk Margin 0.1 1
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 31(st) December 2016 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 31(st) December 2016 are shown below:
Contribution
from
PVNBP new business Margin
%
LGR(1) (GBPm) 6,661 693 10.4
UK Protection Total (GBPm) 1,466 153 10.4
- Individual protection 1,255 139 11.1
- Workplace health and protection 211 14 6.6
US Protection (GBPm) 631 78 12.4
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%
Demographic assumptions and reserving methodologies have been
updated in line with our Solvency II and Economic Capital balance
sheets. Other assumptions and methodologies that would have a
material impact on the margin for these contracts are unchanged
from end 2015 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 is
exposed to a number of key risk categories.
RISKS AND UNCERTAINTIES TR, OUTLOOK AND MITIGATION
Reserves and our assessment We regularly appraise the
of capital requirements assumptions underpinning the
may require revision as business that we write. Certain
a result of changes in extreme events, however, could
experience, regulation require us to adjust our reserves.
or legislation. For example in our annuities
The writing of long-term business, while recent trend
insurance business requires data suggests the rate of
the setting of assumptions longevity improvement may
for long term trends in be slowing, we're inherently
factors such as mortality, exposed to the risk that a
lapse rates, valuation dramatic advance in medical
interest rates, expenses science beyond that anticipated
and credit defaults. Actual leads to an unexpected change
experience may require in life expectancy. This could
recalibration of these require adjustment to reserves
assumptions impacting profitability. as improvements in mortality
Management estimates are emerged. In our protection
also required in the derivation businesses, the emergence
of Solvency II capital of new factors with potential
metrics. These include to cause widespread mortality/morbidity
modelling simplifications or significant policy lapse
to reflect that it is not rates may similarly require
possible to perfectly model us to re-evaluate reserves.
the external environment,
with adjustment necessitated We undertake significant analysis
where new data emerges. of the variables associated
Forced changes in reserves with writing long-term insurance
can also arise from regulatory business to ensure that a
or legislative intervention suitable premium is charged
impacting capital requirements for the risks we take on,
and profitability. and that reserves continue
to remain appropriate for
factors including mortality,
lapse rates, valuation interest
rates, expenses and credit
defaults. We remain focused
on developing a comprehensive
understanding of longevity
science and continue to evolve
and develop our underwriting
capabilities for our protection
business. Our use of reinsurance
also acts to reduce the impacts
of significant variations
in life expectancy and mortality.
Investment market performance 2016 has seen volatility in
and conditions in the broader financial markets as they
economy may adversely impact have responded to uncertainties
earnings, profitability in the global economy and
or surplus capital. political events, such as
The performance and liquidity the UK referendum on membership
of investment markets, of the EU. For Legal & General
interest rate movements the vote to leave has little
and inflation impact the direct impact on trading,
value of investments we as our customer base is located
hold in shareholders' funds very largely in the UK, the
and those to meet the obligations US and Asia. It is, however,
from insurance business, probable that a potentially
with the movement in certain lengthy period of negotiation
investments directly impacting and an uncertain outcome will
profitability. Interest create ongoing uncertainty
rate movements and inflation for financial markets and
can also change the value the broader UK economy in
of our obligations. We which we operate; with potential
use a range of techniques for asset price shifts should
to manage mismatches between uncertainty lead markets to
assets and liabilities. reappraise their value. Potential
However, loss can still also exists for renewed financial
arise from adverse markets. stress in Europe driven by
Interest rate expectations political events and residual
leading to falls in the weaknesses in the Euro currency
risk free yield curve can banking systems. Broader geo-political
also create a greater degree events also have potential
of inherent volatility to cause shocks to financial
to be managed in the Solvency markets, with stressed conditions
II balance sheet, than having potential to create
the underlying economic illiquidity in bond markets
position would dictate, exaggerating the impacts of
potentially impacting capital any significant market correction.
requirements and surplus
capital. In addition, significant We model our business plans
falls in investment values across a broad range of economic
can reduce fee income to scenarios and take account
our investment management of alternative economic outlooks
business. within our overall business
strategy. Our ORSA process
plays an
integral part in our business
planning ensuring a clear
link between capital sufficiency
and the nature of risks to
which we may be exposed. We
have sought to ensure focus
upon those market segments
that we expect to be resilient
in projected conditions. For
example, investing in real
assets provides both enhanced
returns to our 'slow money'
and reduces exposure to the
volatilities of traded investments.
In dealing with issuers A material deterioration in
of debt and other types economic conditions inherently
of counterparty the group increases potential for a
is exposed to the risk widening in credit spreads
of financial loss. as financial markets price
A systemic default event for increased uncertainty,
within the corporate sector, which in turn may impact our
or a major sovereign debt Solvency II balance sheet
event, could result in surplus. Current factors that
dislocation of bond markets, may trigger a reassessment
significantly widening include the changing global
credit spreads and in extreme economic outlook with uncertainties
scenarios trigger defaults following the UK referendum
impacting the value of on EU membership and other
bond portfolios. We are political events potentially
also exposed to banking, exacerbating down side risks;
money market and reinsurance a renewed banking crisis within
counterparties, and settlement, the Euro zone area; and default
custody and other bespoke on debt linked to emerging
business services, a failure markets.
of which could expose us
to both financial loss We actively manage our exposure
and operational disruption to default risks within our
of our business processes. bond portfolios, setting selection
Under Solvency II, a widespread criteria and exposure limits,
widening of credit spreads and using the capabilities
and downgrades can also of LGIM's global credit team
result in a reduction in to ensure the risks are effectively
our Solvency II balance controlled, and if appropriate
sheet surplus, despite trade out to improve credit
already setting aside significant quality. We also seek to closely
capital for credit risk. manage risks to our Solvency
II balance sheet through monitoring
factors that could give rise
to a heightened level of default
risk. However, we can never
completely eliminate default
risks or their impacts to
our Solvency II balance sheet,
although we seek to hold a
strong balance sheet that
we believe to be prudent for
a range of adverse scenarios.
Changes in regulation or There remains a significant
legislation may have a regulatory change agenda,
detrimental effect on our both from the EU and from
strategy. within the UK. Current changes
Legislation and government in EU driven regulation include
fiscal policy influence GDPR, UCITS V, MIFID II and
our product design, the PRIIPS. While over the longer
period of retention of term, the UK exit from the
products and required reserves EU will potentially lead to
for future liabilities. a re-writing of some legislation,
Regulation defines the until the UK formally leaves
overall framework for the and the UK Government legislates
design, marketing, taxation otherwise, EU derived legislation
and distribution of our will remain in force. There
products; and the prudential is also the risk that EU exit
capital that we hold. Significant negotiation proposals have
changes in legislation unintended consequences for
or regulation may increase the operation of the UK financial
our cost base, reduce our services sector. There also
future revenues and impact continues to be significant
profitability or require change in the tax environment
us to hold more capital. including the global implementation
The prominence of the risk of OECD BEPS recommendations
increases where change and the prospect of significant
is implemented without US tax reform. With regard
prior engagement with the to UK regulation, alongside
sector. The nature of long-term the PRA ensuring the effective
business can also result operation of Solvency II,
in some changes in regulation, the FCA continues to focus
and the re-interpretation on its approach to consumer
of regulation over time, regulation, with the inherent
having a retrospective risk that thematic reviews
effect on our in-force of historic industry practices
books of business, impacting lead to unanticipated additional
the future cash generation. costs.
We are supportive of regulation
in the markets in which we
operate where it ensures trust
and confidence and can be
a positive force on business.
We seek to actively participate
with government and regulatory
bodies in the UK and Europe
to assist in the evaluation
of change so as to develop
outcomes that meet the needs
of all stakeholders. Internally,
we evaluate change as part
of our formal risk assessment
processes, with material matters
being considered at the Group
Risk Committee and the Group
Board. Our internal control
framework seeks to ensure
ongoing compliance with relevant
legislation and regulation.
We cannot, however, completely
eliminate the risks that controls
may fail or that historic
accepted practices may be
reappraised by regulators,
resulting in sanction against
the group.
New entrants may disrupt There is already strong competition
the landscape of the markets in all our markets, and although
in which we operate. we have had considerable past
As has been seen in other success at building scale
business sectors, it is to offer low cost products,
possible that alternative we recognise that markets
digitally enabled providers remain attractive to new entrants.
of financial service products We are also cognisant of the
emerge with lower cost potential for entry by scale
business models or innovative overseas competitors who may
service propositions and have lower return on capital
capital structures disrupting requirements and be unconstrained
the current competitive by Solvency II.
landscape.
We are executing a digital
strategy, using platforms
that allow for growth and
high scale. Alongside our
direct insurance business
that enable customers to purchase
our protection products on-line,
we continue to enhance our
online capabilities for auto-enrolment,
investment platforms and individual
retirement products ensuring
focus on customer engagement
and the digital experience.
=================================== ========================================
A material failure in our Our plans for growth and the
business processes or IT digitalisation of our businesses,
security may result in together with the regulatory
unanticipated financial change agenda, inherently
loss or reputation damage. increase the profile of operational
We have constructed our risks across our businesses.
framework of internal controls We continue to invest in our
to minimise the risk of system capabilities and business
unanticipated financial processes to ensure that we
loss or damage to our reputation. meet the expectations of our
However, no system of internal customers; comply with regulatory,
control can completely legal and financial reporting
eliminate the risk of error, requirements; and mitigate
financial loss, fraudulent the risks of loss or reputational
actions or reputational damage from operational risk
damage. We are also inherently events and external cyber
exposed to the risk that threats.
third parties may seek
to disrupt our online business Our risk governance model
operations, steal customer seeks to ensure that business
data or perpetrate acts management are actively engaged
of fraud using digital in maintaining an appropriate
media. control environment, supported
by risk functions led by the
group chief risk officer,
with independent assurance
from Group Internal Audit.
We recognise however, that
residual risk will always
remain and have designed our
risk governance framework
to ensure that when adverse
events occur we can deploy
appropriate responses.
ENQUIRIES
Investors:
Laura Doyle Head of Investor Relations 020 3124 2088
Sujee Rajah Investor Relations Manager 020 3124 2047
Media:
Richard King Head of Group Corporate Communications
020 3124 2095
Doug Campbell 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 NUMBER YOU SHOULD DIAL
IN FROM
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 (final dividend) 27(th) April
2017
Record date 28(th) April
2017
Last day for DRIP elections 19(th) May
2017
Annual general meeting 25(th) May
2017
Payment date of 2016 final dividend 8(th) June
2017
Half-year results 2017 9(th) August
2017
DEFINITIONS
Definitions are included in the Glossary on pages 89 to 92 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.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR OKODDFBKDONK
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