TIDMLGEN
RNS Number : 9172E
Legal & General Group Plc
04 March 2020
2019 results: EPS(1) up 16% to 28.7p, ROE 20.4%, record Pension
Risk Transfer sales of GBP11.4bn and LGIM external net flows of
GBP86bn
Financial highlights(2)
-- Operating profit from continuing divisions(3,4) up 17% to GBP2,514m (2018: GBP2,152m)
-- Operating profit(3) of GBP2,131m, up 12% (2018: GBP1,902m)
-- Earnings per share(1) of 28.66p, up 16% (2018: 24.74p)
-- Return on equity at 20.4% (2018: 22.7%)
-- Full year dividend up 7% to 17.57p per share (2018: 16.42p)
-- Profit after tax up 16% to GBP1,700m (2018: GBP1,468m)
excluding mortality reserve release, including mortality reserve
release profit after tax(5) was GBP1,834m (2018: GBP1,827m)
-- Net release from continuing operations up 15% to GBP1,606m (2018: GBP1,396m)
-- Solvency II operational surplus generation up by 9% to GBP1.6bn (2018: GBP1.4bn)
-- Solvency II coverage ratio(6) of 184% (2018: 188%)
Business highlights
-- Pension Risk Transfer sales(7) of GBP11.4bn (2018: GBP9.1bn),
including $1.1bn of US PRT (2018: $0.8bn)
-- Individual annuity sales up 22% to GBP970m (2018: GBP795m)
-- Group-wide Direct Investment up 34% at GBP25.7bn (2018: GBP19.2bn)
-- LGIM AUM up 18% at GBP1,196bn (2018: GBP1,015bn)
-- LGIM external net flows of GBP86.4bn (2018: GBP42.6bn)
-- Insurance GWP up 6% to GBP2,729m (2018: GBP2,580m)
" Legal & General's strategy of Inclusive Capitalism, underpinned
by structural growth drivers, has enabled us to achieve our
five year EPS growth ambition in four years, growing 58%
since 2015.
Our five growing, profitable and increasingly international
businesses compete in attractive, growing markets and work
together to deliver economically and socially useful customer
solutions. Society's increasing focus on net zero carbon,
ESG investing and levelling up through investment in all
regions plays to our strengths, creating future growth opportunities.
Having delivered EPS growth of 16% to 28.7p, dividends up
7% to 17.57p, and a 20% plus ROE, we are well-positioned
for the future and we remain ambitious. "
---------------------------------------------------------------------------
Nigel Wilson, Group Chief Executive
Financial summary
GBPm 2019 2018 Growth %
=================================================== ====== ===== ========
Analysis of operating profit
Legal & General Retirement (LGR) excl. mortality
reserve release(8) 1,414 1,115 27
- LGR Institutional (LGRI) 1,116 832 34
- LGR Retail (LGRR) 298 283 5
Legal & General Investment Management (LGIM) 423 407 4
Legal & General Capital (LGC) 363 322 13
Legal & General Insurance (LGI) 314 308 2
---------------------------------------------------- ------ ----- --------
Operating profit from continuing divisions(8,9) 2,514 2,152 17
---------------------------------------------------- ------ ----- --------
Mature Savings(10) 46 79 (42)
General Insurance(11) (35) 0 n/a
Operating profit from divisions(8) 2,525 2,231 13
Group debt costs (208) (203) 2
Group investment projects and expenses (186) (126) 48
Operating profit(8) 2,131 1,902 12
---------------------------------------------------- ------ ----- --------
Legal & General Retirement (LGR) mortality reserve
release 155 433 (64)
---------------------------------------------------- ------ ----- --------
Operating profit incl. mortality reserve release 2,286 2,335 (2)
---------------------------------------------------- ------ ----- --------
Investment and other variances (incl. minority
interests) (174) (207) n/a
Profit before tax attributable to equity holders 2,112 2,128 (1)
Profit after tax attributable to equity holders 1,834 1,827 0
Of which:
- Mortality reserve releases (post-tax) 134 359 n/a
Profit after tax excl. mortality reserve release 1,700 1,468 16
------ -----
Reported earnings per share (p) 30.92 30.79 0
Of which:
* Mortality reserve releases (post-tax) 2.26 6.05 n/a
---------------------------------------------------- ------ ----- --------
Earnings per share(12) (p) 28.66 24.74 16
---------------------------------------------------- ------ ----- --------
Return on equity (%) 20.4 22.7 n/a
Book value per share (p) 156 143 9
Full year dividend per share (p) 17.57 16.42 7
Net release from continuing operations(9) 1,606 1,396 15
Net release from discontinued operations 9 44 (80)
2019 Financial performance
Income statement
Operating profit from continuing divisions [13] increased 17% to
GBP2,514m (2018: GBP2,152m) , with all businesses delivering growth
over prior year.
LGR delivered operating profit(13) of GBP1,414m (2018:
GBP1,115m), driven by strong new business volumes and the
consistent performance of the growing annuity portfolio. In H2 2019
we reviewed our future longevity improvement assumptions and have
conservatively adopted an adjusted version of the CMI 2017
mortality tables for LGR's annuity book, resulting in a reserve
release of GBP155m. Including this mortality reserve release,
operating profit was GBP1,569m (2018: GBP1,548m).
LGIM operating profit increased by 4% to GBP423m (2018:
GBP407m). Strong external net flows of GBP86.4bn (2018: GBP42.6bn),
together with positive market valuations over the year, resulted in
an 18% increase in total AUM to GBP1,196bn (2018: GBP1,015bn).
Total revenues increased by 8% to GBP912m (2018: GBP847m), lower
than AUM growth due to new business mix, which had a significant
contribution from a GBP37bn passive mandate in H1. LGIM has
continued to invest in the business to achieve the resilience and
scalability fundamental to its future success, which is reflected
in a cost income ratio of 54% (2018: 52%).
LGC operating profit grew 13% to GBP363m (2018: GBP322m), led by
direct investment operating profit, which was up 15% over the year
(2019: GBP217m, 2018: GBP188m). CALA delivered revenue of GBP1bn,
growing 6% since 2018. The LGC direct investment portfolio
increased to GBP2.9bn (2018: GBP2.4bn), progressing in line with
LGC's stated ambition of increasing its direct investment AUM to
c.GBP5bn over the next three to five years.
LGI operating profit increased 2% to GBP314m (2018: GBP308m),
reflecting stable profit delivery in highly competitive UK markets,
while the US Term Protection business transitioned towards a more
digital operating model.
Disposed operations contributed GBP11m to operating profit
(2018: GBP79m). This included GBP46m from Mature Savings,
reflecting the unwind of expected underlying profits, partly offset
by a GBP35m operating loss from the General Insurance business due
to higher claims inflation. The General Insurance sale completed in
2019 and the Mature Savings sale is expected to complete in H1
2020.
As previously indicated, we have continued to make measured
investments in technology to enhance customer experience, drive
cost efficiencies, gain access to growth areas and to comply with
the evolving regulatory framework, resulting in an increase in
Group investment projects and expenses of GBP60m (2019: GBP(186)m;
2018: GBP(126)m). The additional expenditure over the near term
primarily relates to augmenting cyber security and upgrading the IT
infrastructure, including preparation for IFRS 17, and should
reduce towards historic levels once these projects are
delivered.
Balance sheet
The Group's Solvency II operational surplus generation increased
9 % to GBP 1.6 bn (2018: GBP1.4bn). New business strain was GBP 0.6
bn (2018: GBP0.5bn) reflecting record UK Pension Risk Transfer
(PRT) volumes written at a capital strain of less than 4%, which
typically has a payback period of five years. This resulted in net
surplus generation of GBP 1.0 bn (2018: GBP0.9bn) and supported a
Solvency II coverage ratio [14] of 184% at the end of 2019 (H1
2019: 171%, FY 2018: 188%). As at 28 February 2020, we estimate the
ratio was 174%. [15]
On a proforma calculation basis ([16]) , our Solvency II
coverage ratio was 179 % at the end of 2019 (FY 2018: 181%).
We continue to deliver a strong IFRS return on equity of 20.4% (
2018: 22.7%). [17]
Group strategy
Five businesses
Over the past several years, Legal & General has
successfully transitioned into high growth / high return businesses
from lower growth / lower return businesses. We have a focused
business model which targets two types of markets, (i) large
markets, where we have a relatively small market share and we can
outpace market growth, and (ii) growth markets where we already
have a leading market share and where we can grow by retaining
market leadership. We have sold businesses that were either
sub-scale or in geographies where we were unlikely to achieve
financial success, generating GBP1.5bn of disposal proceeds. These
proceeds have been reinvested to fund future profitable growth for
shareholders.
We have achieved a clean structure comprised of five
businesses:
1. Legal & General Retirement Institutional (LGRI) offers
pension risk transfer (PRT) to institutional clients globally
2. Legal & General Retirement Retail (LGRR) provides
individual annuities and lifetime mortgages (LTMs) in the UK
3. Legal & General Investment Management (LGIM) is the
14(th) largest global asset manager by AUM [18]
4. Legal & General Capital (LGC) invests shareholder capital
and builds an alternative asset pipeline for LGRI, LGRR and
LGIM
5. Legal & General Insurance (LGI) sells retail and group
protection in the UK and retail protection in the US
These businesses are aligned to six long term growth drivers,
which are the core of Legal & General's strategy.
Six growth drivers
Inclusive Capitalism is the foundation of Legal & General's
strategy. By identifying and addressing systemic market
dislocations, we are able to generate attractive, sustainable
returns while delivering products or investments that are
economically, socially, and environmentally useful.
Since 2011 we have delivered total shareholder returns of 387%
and grown EPS by 11% per year. [19] At the same time, we provide
security in retirement to more than 3 million people as we have
invested their pensions into GBP26bn high quality direct
investments that deliver positive social and environmental impacts,
such as clean energy and affordable housing.
We have been adept at identifying the right opportunities,
focussing on six global, long-term growth drivers which are
structural rather than cyclical. Responding to these drivers
creates sustainable profits and positive social and environmental
outcomes as we harness the power of pensions.
1. Ageing demographics
As populations live longer their pensions need to last longer
too. Companies increasingly need to find solutions to their ongoing
pension commitments which can apply pressure on their financial
resources. At the same time, individuals need to ensure that their
retirement funds and other assets can finance longer
retirements.
LGRI and LGRR meet the customer need arising from ageing
demographics, providing financial security in retirement.
2. Globalisation of asset markets
Asset markets are increasingly globalised and growing -
worldwide AUM is currently $74 trillion and is expected to increase
to around $101 trillion by 2023, representing an enormous
opportunity for international asset managers. North America, Asia
Pacific and Europe are all attractive markets which continue to
expand.
Legal & General looks for selective opportunities to build
and expand its successful UK business model abroad into markets
where we believe we can thrive. The globalisation of asset markets
has been a cornerstone of LGIM's growth strategy, where
international AUM has more than doubled over the past three years
to GBP370bn , and a driver for LGRI's US expansion, which has
written more than $3.5bn of premium since the business started in
2015.
3. Investing in the Real Economy
Throughout the UK and beyond, there has been a long-term trend
of underinvestment in major towns and cities, and we continue to
experience a serious housing shortage, while Small and Medium
Enterprises (SMEs) also struggle to achieve scale without access to
long-term capital.
Across the Legal & General Group we harness the power of
pensions by investing pension assets into the Real Economy,
delivering financial security for pensioners and fostering growth
in cities and towns across the UK. Furthermore, in LGC we invest in
alternative assets such as Build-to-Rent and affordable housing, as
well as Venture Capital and SME financing through Pemberton.
4. Welfare reforms
The need to protect people from financial uncertainty continues.
This includes helping people take personal responsibility for
saving for their retirements and safeguarding their financial
wellbeing and resilience.
LGI offers life insurance, income protection and critical
illness cover, and, through our stake in Salary Finance, salary
savings and lending services, providing financial stability to
customers' families and dependents. As fewer companies offer DB
pensions and a greater burden is placed on social security
programmes, LGIM helps individuals save for the future while LGRR
provides financial security in retirement.
5. Technological innovation
Consumers, clients and businesses look to digital platforms to
help organise their finances and working lives. Technological
solutions can increase security and improve the way we work and how
we access information. This can mean the difference between success
and failure in business.
Throughout the Legal & General Group , our businesses look
for opportunities to improve customer service and efficiency
through technology.
6. Addressing Climate Change
Scientists, policy-makers, markets and regulators increasingly
agree that we must move to a global warming trajectory below 2degC
to avoid potentially catastrophic physical risks which will impact
global economies, markets, companies and people. This implies
massive transition to a lower-carbon economy, which in turn creates
risk management challenges but also substantial new growth
opportunities, including in renewables and innovative
technologies.
Whilst Addressing Climate Change is formally a new addition to
our growth drivers in 2019, it is not new to our approach. Across
the Legal & General Group we seek ways to address Climate
Change by building scalable, profitable businesses to reduce carbon
emissions. LGIM continues to build on its strong heritage in
Environmental, Social and Governance (ESG) investing for its
clients and, increasingly, we see opportunities in LGC, LGRI, and
LGRR to make investment decisions informed by Climate Change. To
date, we have invested more than GBP1.3bn of Legal & General's
own assets into renewable energy investments, predominantly solar
and offshore wind, as well as taken a stake in PodPoint, one of the
UK's largest electrical vehicle charging operators.
Together these drivers have led us to participate in material,
high growth markets where we are leaders or where we can leverage
our expertise to increase our market share.
A unique, synergistic business model
Our strategy has positioned us to be a leader in the pension
asset management and insurance markets, benefitting from a mutually
reinforcing business model and unique synergies in pension
de-risking and asset manufacturing and management:
-- LGRI , a market leader in UK PRT, and LGRR, a leading
provider of UK individual annuities, have GBP76bn of assets,
providing long-term, captive AUM to LGIM. This portfolio is
continually being enhanced with direct investments originated by
LGC.
-- LGIM is the market leader in providing investment management
to UK DB pension scheme clients, specifically through index, fixed
income and LDI strategies. This provides LGRI with a strong
pipeline: 51% of our pension risk transfer (PRT) transactions over
the past three years were from existing LGIM clients. [20] LGIM has
leveraged its UK DB capabilities to become a leading asset manager
for UK defined contribution (DC) pension scheme clients, and is
also successfully growing overseas.
-- LGC uses shareholder capital to achieve two clear goals:
1. To deliver attractive financial returns for our shareholders
by creating real alternative assets and operating businesses and
leveraging Legal & General's existing businesses, network of
relationships, brand, and expertise
2. To self-manufacture attractive, Matching Adjustment-eligible
direct investments to back LGRI and LGRR's growing annuity
liabilities and to create assets for LGIM's clients
-- LGI is a market leader in UK protection and US brokerage term
life insurance, and provides significant Solvency II benefits to
the Group by partially offsetting new business strain in LGRI and
LGRR. Additionally, LGI's US business facilitates LGRI's US PRT
transactions, which are written onto the existing US balance
sheet.
The synergies within our businesses drive profits and fuel
future growth, allowing the Group to regularly deliver an ROE of
c.20%.
Outlook
Our strategy and growth drivers have yielded reliably strong
returns, both dividend and ROE, for our shareholders and we are
confident they will continue to deliver growth into the future as
we execute on our strategy based on inclusive capitalism .
Our focused and consistent strategy has delivered 11% EPS CAGR
since 2011 . [21] We have achieved our five year ambition of 10%
EPS CAGR (58% growth over the period) in just four years, reporting
underlying EPS of 28.66p in 2019, 12% annual growth since 2015 . As
previously reported, Legal & General is well placed to continue
to grow organically, supported by ongoing judicious and considered
investment in technology across the Group, and strong competitive
positioning in attractive and growing markets. We remain confident
in our strategy and our ability to deliver future growth and,
having successfully delivered on our previous stated ambitions, we
plan to update these at a Capital Markets Event on 12 November
2020.
Our confidence in future growth and dividend paying capacity is
underpinned by the Group's strong balance sheet with GBP7.3bn in
surplus regulatory capital and significant buffers to absorb a
market downturn. We have a proven operating model which is
reinforced by robust risk management practices.
LGR's Institutional (LGRI) business participates in the rapidly
growing global pension risk transfer (PRT) market , focussing on
corporate defined benefit (DB) pension plans in the UK, the US, the
Netherlands, Ireland, and Canada, which together have more than
GBP5 trillion of pension liabilities due to ageing demographics.
[22]
The UK is currently our primary market, where we are an
established leader and the only PRT provider to operate
continuously for more than thirty years. Although the UK is the
most mature PRT market globally, it still represents an enormous
opportunity as only c.11% of the GBP2.1 trillion of UK DB pension
liabilities have transferred to insurance companies to date.
[23]
We estimate more than GBP40bn of UK PRT was underwritten in
2019, nearly double the 2018 level, which includes six of the ten
largest UK PRT transactions. Demand from companies and pension
plans for insurance remains robust, with more than GBP770bn of PRT
demand potentially arising in the UK over the next decade. [24] In
order to better address demand from pension plans, we have
bolstered our structuring expertise in order to develop
capital-light solutions, such as our new Assured Payment Policy.
Whilst new PRT business requires solvency capital on day one, this
capital commitment pays back quickly, and generates an attractive
and long-term flow of operating surplus for the business. Our
intention is to write GBP40bn to GBP50bn of new UK PRT over the
next five years to help fuel future growth.
The US represents a significant market opportunity, with $3.5
trillion of DB liabilities, of which only c.6% have transacted to
date. [25] 2019 was our first year to write more than $1bn of
premiums in a single year, including our first fully retained
transaction for more than $200m, heralding a new phase of growth
for our US business. Since our market entry in 2015, our US
business has written more than $3.5bn of PRT with 53 clients,
including twelve transactions in 2019.
As always, we remain disciplined in the deployment of our
capital, and we select opportunities that allow us to invest at
high credit quality and meet our return targets.
LGR Retail's (LGRR) target market continues to expand, both in
terms of the numbers of retirees and the levels of wealth they
hold, driven by ageing demographics and welfare reforms . LGRR
works closely with LGIM to deliver and develop a broad range of
retirement solutions to customers.
There are GBP40bn of personal pension assets coming to maturity
each year in the UK, with the individual annuity market accounting
for only GBP4.5bn of the total maturing assets. [26] LGRR seeks to
expand its addressable market through product innovation and has
already succeeded in improving its enhanced annuity offering over
2018 and 2019. We continue to focus on customer service innovation
and building distribution relationships. We have introducer
agreements with AEGON, ReAssure, and Sun Life Financial of Canada
and in November 2019 we added an introducer arrangement with
Prudential, which is expected to increase LGRR's total annuity
sales in 2020 by 15%. [27]
Despite competition within the LTM market we achieved a 25%
market share in 2019. This is slightly lower than that seen in
previous years, as we focussed on maintaining our pricing and
underwriting discipline. With GBP1.8 trillion of housing equity
owned by UK individuals over the age of 55, we believe that the
slowdown seen in the overall LTM market is temporary and that there
is room for further growth in this developing market as individuals
access their housing wealth to provide themselves a secure
retirement. [28]
LGRR leads the servicing initiative for our Retirement customers
and works with individuals to better understand their needs and
objectives. During 2019 we made further strides to enhance customer
experience leveraging on technological innovation within the Group.
For example, we have made purchasing an annuity easier through our
development of Annuity Ready, a whole-of-market retail annuity
comparison service. Annuity Ready has been developed and run by
theidol.com, part of LGI's Fintech area. In response to customer
feedback, we acquired MyFutureNow, a platform which will allow
customers to trace their lost or forgotten pension pots and
provides a single dashboard view of an individual's pension savings
portfolio. Beyond products, we provide a range of support to
vulnerable customers, including through our partnership with the
Royal Voluntary Service. Our mission is to support individuals all
the way along the retirement journey, providing them the tools and
products they need to make sound, informed financial decisions in
order to have as full and colourful life in retirement as possible
for them.
As in previous years, LGR will review its longevity trend
assumptions against updated experience data and intends to make any
amendments, as necessary, in H2 2020 to reflect its analysis of the
next set of mortality tables (CMI 2018) and LGR's specific
data.
Investment Management (LGIM) continues to benefit from global
trends in retirement saving and structural shifts in product
demand. This is driving an increase in customer appetite for our
diverse range of products and investment capabilities spanning
Index, Active, Multi-asset, and Alternatives, underpinned by a
thoughtful and pro-active approach to ESG. On average LGIM has
delivered net flows, expressed as a proportion of opening AUM, of
5.4% per annum over the last five years. LGIM's AUM now stands at
GBP1.2tn.
Over the last three years LGIM's international AUM has doubled
to reach GBP 370 bn - 31 % of LGIM's total AUM. LGIM plans to
continue growing International AUM at pace, with a particular focus
on the US, Asia and European retail/wholesale markets. As such, we
were pleased to secure a GBP 37bn passive mandate with the Japan
Government Pension Investment Fund in the first half of 2019.
LGIM intends to maintain its strong position in the UK, which
has been the bedrock of the firm's success to date, while
diversifying its capabilities. LGIM is a leading player in
providing UK DB de-risking solutions and is the market leader in UK
DC - a market with significant growth potential - with total assets
of GBP 94.3 bn (2018: GBP70.8bn). The DC market represents an
enormous opportunity with total UK DC assets expected to more than
double by 2028 to GBP955bn. [29] In addition to diversifying our
client-base, we also look to diversify and build our product
offering, particularly focussing on Real Assets and ESG as we
leverage the skills developed within LGC, LGRI and LGRR in managing
our GBP76bn annuity portfolio.
LGIM continues to invest in the business to achieve the
resilience and scalability critical to its future success. To this
end, we are automating and simplifying our business through
investment in data analytics, providing a digital experience for
our customers, and optimising our investment platforms.
Furthermore, a portion of LGIM-related project expenditure,
currently reflected in Group expenses, will be allocated to the
LGIM segmented results from 2020.
LGIM is well positioned to continue to drive net flows, and to
deliver meaningful earnings growth, as it continues to leverage its
core strengths, and to expand internationally.
Legal & General Capital (LGC) will continue to seek
opportunities to deploy its long-term capital in alternative assets
where we see an enduring need for private long-term capital to
support future cities, housing, and innovative funding for SMEs and
early stage enterprises. Over the next three to five years we
expect to increase our diversified direct investment portfolio to
c.GBP5bn (2019: GBP2.9bn) with a target blended portfolio return of
8% to 10%.
Our Future Cities portfolio has invested almost GBP1bn into the
Real Economy across fourteen UK towns and cities and we expect to
invest further in these locations and others. Utilising
capabilities in infrastructure, clean energy, commercial real
estate and residential property, Legal & General Group is well
placed to bring together on-balance sheet (LGR and LGC) or third
party private capital (LGIM) with the development capability to
make a difference to UK cities, deploying the power of pensions to
deliver inclusive capitalism and address Climate Change. For
example, in 2019 our Future Cities business announced that Legal
& General has committed up to GBP4bn of funding to Oxford
University over the next ten years from LGC, LGR and LGIM-managed
funds, and committed GBP100m to Sunderland City Council's
regeneration scheme, backed by LGR.
LGC's housing platform continues to grow its diversified housing
creation business across build-to-rent, build-to-sell, later
living, and affordable housing. The affordable market remains in
need of significant investment, with more than 1.4m households on
UK waiting lists for homes . We have already secured a pipeline of
c.3,500 new affordable homes, comprising a Gross Asset Value of
around GBP750m and are generating investment opportunities for LGR.
Our ambition is to deliver 3,000 affordable homes annually by 2023
. We plan for ambitious growth across the other components of our
diversified housing platform, particularly in our Later Living
business where we have sold more than 500 homes to date and plan to
deliver a further 3,000 new retirement homes over the next five
years, providing attractive options for the 3.1m people in the UK
actively seeking to downsize. In the first full year of L&G's
100% ownership of CALA, the business has grown again in terms of
units and profits, with nearly 2,500 new homes completed.
We are developing and growing our alternative asset
capabilities, creating a diverse and profitable portolio of assets
which complement LGIM's portfolio and support LGR's growth both
today and into the future. In SME Finance, we expect to continue to
deploy our capital and focus to support the UK venture ecosystem to
help create the businesses of tomorrow, whilst continuing our
support of Pemberton in the provision of private credit to the
European mid-market.
In Insurance (LGI) , we anticipate continued premium growth
across our UK and US businesses.
In the UK, we expect our market leading retail protection
business to grow new business premiums and to generate good profits
in 2020, supported by the strength of our distribution
relationships, investment in our systems and platforms, and product
enhancements. We have completed the successful turnaround of our
group protection business as reflected by the strong performance in
2019, and we are well positioned to increase market share in
2020.
In the US, we anticipate our on-going investment in
technological innovation and new partnerships to position us for
new business growth while maintaining healthy profits. We plan to
use technology to increase our share of the emerging direct life
insurance market, adding to our successful US offering, where we
are already the largest provider of term life assurance in the
brokerage channel by policy count.
In LGI Fintech, we expect continued growth from Salary Finance
both in the UK and the US as the business gains access to more
employees and diversifies the products and services offered. We
also expect our investments and developments in the UK mortgage
market to deliver growth as we make the journey to buy and finance
a house easier and more efficient for everyone involved.
Full year dividend up 7%
Legal & General has a progressive dividend policy reflecting
the Group's expected medium term underlying business growth,
including net release from operations and operating earnings. There
is no change to our dividend policy.
Taking into account sustainability across a wide range of
economic scenarios and the Group's anticipated financial
performance, the Board has recommended a final dividend of 12.64p
(2018: 11.82p) giving a full year dividend of 17.57p (2018:
16.42p), 7% higher than 2018.
Legal & General Retirement
FINANCIAL HIGHLIGHTS GBPm 2019 2018
============================================= ====== =======
Operating profit excluding mortality reserve
release 1,414 1,115
- LGR Institutional (LGRI) 1,116 832
- LGR Retail (LGRR) 298 283
Mortality reserve release 155 433
Operating profit 1,569 1,548
=============================================== ====== =======
Investment and other variances 43 95
=============================================== ====== =======
Profit before tax 1,612 1,643
=============================================== ====== =======
Release from operations 598 551
New business surplus 327 217
=============================================== ====== =======
Net release from operations 925 768
=============================================== ====== =======
UK PRT 10,325 8,351
International PRT 1,067 789
Individual annuity single premiums 970 795
Lifetime mortgage advances 965 1,197
Longevity insurance 0 287
Total new business 13,327 11,419
Total annuity assets (GBPbn) 75.9 63.0
=============================================== ====== =======
Operating profit up 27% to GBP1,414m ([30])
Operating profit increased to GBP1,414m (30) (2018: GBP1,115m
(30) ), driven by record UK PRT new business volumes for a second
year running, 22% growth in retail annuity sales, and consistently
strong profits emerging from Legal & General Retirement (LGR)'s
growing annuity portfolio, further bolstered by routine assumption
updates.
In H2 2019 we reviewed our future longevity improvement
assumptions and have conservatively adopted an adjusted version of
the CMI 2017 mortality tables for LGR's annuity book resulting in a
GBP155m reserve release. Including the reserve release, operating
profit was up 1% at GBP1,569m (2018: GBP1,548m).
We constantly evaluate the appropriateness of our longevity
trend assumptions and we are currently reviewing the CMI 2018
mortality data which we expect to complete by the end of 2020. We
are prudent in our assessment of longevity trends and will only
recognise releases after full analysis of the most recent data.
Release from operations was GBP598m (2018: GBP551m), an increase
of 9%, reflecting the scale of the business as prudential margins
unwind from our growing GBP75.9bn annuity fund (2018:
GBP63.0bn).
Net release from operations increased 20% to GBP925m (2018:
GBP768m) with new business surplus of GBP327m (2018: GBP217m),
reflecting record annuity new business volumes.
During 2019 we wrote GBP11,295m of UK annuities delivering a 7.9
% Solvency II new business margin, including UK PRT new business
volumes of GBP 10,325 m with capital strain of less than 4%. This
strong performance demonstrates LGR's constant pricing discipline
and the supply and demand dynamics in the PRT market.
Gross longevity exposure was GBP80.4bn across LGR's annuity and
longevity insurance business. We have reinsured GBP31.3bn of
longevity risk with thirteen reinsurance counterparties, leaving a
net exposure of GBP49.1bn. We continue to see significant supply
and competition in the reinsurance market.
LGR Institutional - Global Pension Risk Transfer
In 2019 LGR Institutional (LGRI) completed GBP11,392m (2018:
GBP9,140m) of bulk annuities across 42 deals globally , including
our first transaction in Canada and record years for both our UK
and US businesses.
For the second year running, UK PRT volumes reached all-time
highs, with the market breaking GBP40bn in bulk annuity sales for
the first time. Legal & General maintained its position as a
market leader and wrote GBP10,325m across 28 deals as we served
pension plans of all sizes and issued bulk annuities ranging from
GBP2m to more than GBP4.6bn in 2019.
LGRI's brand, scale and asset origination capabilities through
synergies with, and expertise within, LGIM and LGC are critical to
our market leadership in the rapidly growing UK PRT market. In 2019
we have demonstrated our market leadership and innovation by
writing a series of transactions that demonstrated our solutions
capabilities, including:
-- A GBP4.6bn pension buyout for the Rolls-Royce UK Pension
Fund, the largest UK bulk annuity underwritten at the time,
building on LGIM's longstanding relationship as investment manager
for the c.GBP14bn pension plan since 1989.
-- A third and final bulk annuity for Hitachi Data Systems
Retirement Benefits Plan, the culmination of a seven year
de-risking journey to provide all plan members with a Legal &
General annuity.
-- A GBP1.6bn bulk annuity with National Grid UK Pension Scheme, a GBP20bn DB pension plan.
-- One of the first transfers from fiduciary management to
pension buyout, leveraging Legal & General's unique position as
the only UK pensions fiduciary manager (LGIM) with a leading PRT
provider (LGRI).
-- A GBP250m Assured Payment Policy, a new capital-light PRT
product, for AIB Group UK Pension Scheme. The policy provides asset
yield, interest rate and inflation risk protection to the pension
plan, paving a more secure path to buyout over a planned
timeframe.
Additionally we have used technological innovation to serve
smaller pension plans more efficiently; over 2019 our technology
investments have increased the speed of pricing by 66% for this
market segment.
Our business model has been very successful for us in the UK and
we are continuing its expansion abroad into similar pensions
markets.
International PRT premiums were GBP1,067m (2018: GBP789m). LGRI
continued its international expansion into Canada where we wrote
our first transaction for more than CAD $200m through our strategic
Canadian partnership with Brookfield Annuity Company.
Our US PRT premiums surpassed $1bn for the first time, an
increase of 35% (2019: $1,140m, GBP893m; 2018: $844m, GBP646m). We
have now underwritten more than $3.5bn of US PRT transactions with
53 clients [31] through nine different intermediaries since
entering the market in 2015. During 2019 our US business entered
its next phase of growth by writing its first transaction of over
USD $200m, and more than 40% of our 2019 US annuity transactions
were for more than $100m (2018: 5%).
LGR Retail - Individual Retirement Solutions
Individual annuity sales were up 22 % to GBP 970 m in 2019
(2018: GBP795m), benefiting from our improved enhanced annuity
proposition and increased intermediary presence. Our introducer
arrangement with Prudential, which began in November 2019, is
expected to increase LGRR's total annuity sales in 2020 by 15%.
[32] LGRR also has similar arrangements with AEGON, ReAssure and
Sun Life Financial of Canada. We are one of the leading players in
the UK individual annuity market and have more than doubled our
market share since 2016, with a current market share of 17.2 %
([33]) . Our strong heritage in individual annuities means that
they account for approximately one quarter of the Group's total
annuity assets.
Lifetime mortgage advances were down 19% to GBP965m (2018:
GBP1,197m), as we maintained pricing and underwriting discipline.
Despite competition within the market, LGRR was able to achieve a
market share of 25% [34] , driven by our wide range of products and
strong customer-focused brand . We have continued our
customer-focused innovation, unveiling our Retirement Interest-Only
Mortgage in late 2019 to address the growing number of individuals
reaching retirement with interest-only mortgages. At the end of
2019, LTMs were 6% of our total annuity assets and our LTM
portfolio had an average customer age of 70 and a weighted average
loan-to-value of c.28% at the transaction date.
On-going credit and asset management
LGR's GBP75.9bn 'A minus' rated asset portfolio backing the IFRS
annuity liabilities is well diversified by sector and geography.
[35]
Credit portfolio management
LGR's GBP70.1bn fixed income portfolio is comprised of GBP52.4bn
of listed bonds and GBP17.7bn of direct investments. Approximately
two-thirds of this portfolio was rated A or better, 33% rated BBB
and 1% sub-investment grade. Just 22% of the bond asset portfolio
was invested in UK-listed corporate credit, many of these being
multinationals. We have avoided sectors which we believe are at
risk of significant disruption, for instance traditional retail and
automotive, which together constitute less than 2% of our
portfolio.
Additionally, we are reviewing and managing our portfolio to
better integrate and manage climate change risks; when making new
investment decisions we have put constraints on companies involved
in coal extraction and coal-based electricity production and have
set carbon intensity targets to monitor alignment with the Paris
Agreement objective. In 2019 we have reduced the carbon emissions
of the Group's asset portfolio by 6%, which is dominated by LGR's
annuity asset portfolio.
The principal objective of our annuity-focused, fixed income
fund managers in LGIM is to manage the portfolio to avoid credit
downgrades and defaults. We constantly review our asset portfolio,
including sector allocations and asset classes, in order to manage
portfolio credit quality and to mitigate risks. We have vigorously
stress tested our portfolio to build resilience against a range of
scenarios and hold a GBP3.2bn IFRS credit default reserve.
Direct Investment
LGR originated GBP4.3bn of new, high quality direct investments
during the year which, along with market movements, brought the
portfolio total to GBP21.6bn [36] (FY 2018: GBP15.7bn).
Within the direct investment portfolio, fixed income assets
accounted for GBP17.7bn of AUM, including GBP4.7bn in LTMs.
Consistent with the broader bond portfolio, two-thirds of the
direct investment bond portfolio was rated 'A' or above based on
strong counterparties and collateral, using robust and independent
rating processes which take account of long term stress events. We
invest in sectors where long term funding is needed, such as
government infrastructure. For example, we completed funding of a
further GBP510m in long term leases on Her Majesty's Revenue &
Customs buildings across the UK during 2019.
The Group's long term illiquid liabilities and large balance
sheet size enable it to invest in assets of size and term that
differentiate it from many other institutional investors. Direct
investments are one of the key components of our investment
strategy supporting bulk annuity pricing, and we regularly assess
the relative value of our different direct investment asset classes
against each other as well as against the risk-reward
characteristics of global traded bonds.
We see particular opportunity in the build-to-rent and
affordable housing asset classes, building on the strong
capabilities within LGC Homes and LGIM Real Assets. During 2019 LGR
funded its first build-to-rent investment in London for GBP250m and
added several affordable housing assets to its portfolio, including
a GBP45m financing of public housing in Croydon, a suburb of
London. Under the arrangement, LGR takes credit risk to the local
government, secured by the properties. [37] We have a growing
pipeline of investment opportunities in build-to-rent and
affordable housing. Across the Legal & General Group, our
businesses help meet the societal needs arising from welfare
reforms, harnessing the power of pensions to deliver inclusive
capitalism.
Our ability to self-manufacture attractive, long-term assets to
back annuities, working with LGIM, LGC, or through LTMs, is a
differentiating feature of LGR's business and remains a key
competitive advantage.
Legal & General Investment Management
FINANCIAL HIGHLIGHTS(1) GBPm 2019 2018
=============================================== ======= ========
Management fee revenue 889 820
Transactional revenue 23 27
================================================= ======= ========
Total revenue 912 847
Total costs (491) (443)
================================================= ======= ========
Asset management operating profit(2) 421 404
Workplace Saving operating result 2 3
================================================= ======= ========
Operating profit 423 407
Investment and other variances (9) (4)
================================================= ======= ========
Profit before tax 414 403
================================================= ======= ========
Net release from operations 346 329
================================================= ======= ========
Asset Management cost:income ratio(2) (%) 54 52
================================================= ======= ========
NET FLOWS AND ASSETS GBPbn
=============================================== ======= ========
Canvas Acquisition - 2.4
External net flows 86.4 42.6
Internal net flows 2.8 2.6
================================================= ======= ========
Total net flows 89.2 45.2
- Of which international(3) 59.2 19.6
Cash management flows (0.6) (0.5)
Persistency (%) 90 89
================================================= ======= ========
Average assets under management 1,132.1 990.7
Assets under management as at 31 December 1,196.2 1,015.5
Of which:
- International assets under management(4) 370.0 257.6
- UK DC assets under management 94.3 70.8
================================================= ======= ========
1. Please see disclosure 1.04 for further details.
2. Excludes revenue and costs from the Workplace Savings business.
3. International asset net flows are shown on the basis of client domicile.
4. International AUM includes assets from internationally
domiciled clients plus assets managed internationally on behalf of
UK clients.
External net flows of GBP86.4bn, operating profit up 4% to
GBP423m
LGIM has continued to expand and diversify its business across
channels, regions and investment capabilities. This contributed to
18% growth in assets under management (AUM) to GBP1,196bn (2018:
GBP1,015bn). External net flows were GBP86.4bn (2018: GBP42.6bn),
9.4% of opening external AUM, driven by a GBP37bn passive mandate
and strong demand from a broad range of European customers.
Revenues were up 8% to GBP912m (2018: GBP847m), supported by good
growth in both external and internal business. Management fees
increased by 8% to GBP889m (2018: GBP820m).
Operating profit increased by 4% to GBP423m (2018: GBP407m),
reflecting increased revenues from flows and asset values which
were partially offset by LGIM's continued investment in its growth
strategy. LGIM is automating and simplifying the business through
investment in data analytics, providing a digital experience for
customers and optimising investment platforms. The cost income
ratio (54%) reflects this continued investment in the business.
Furthermore, a portion of LGIM-related project expenditure,
currently reflected in Group expenses, will be allocated to the
LGIM segmented results from 2020.
Workplace Savings assets increased by 34% to GBP40.3bn (2018:
GBP30.0bn) driven by continued client wins and increased
contributions. We are focused on improving efficiency as the
business grows. We delivered 2019 operating profit of GBP2m. This
profit relates to the administration business only, as the profits
on the fund management services provided are included in LGIM's
operating profit.
International net flows tripled to GBP59.2bn (2018:
GBP19.6bn)
LGIM's international assets increased GBP112bn to GBP370bn . The
performance was driven by a GBP37bn mandate with the Japan
Government Pension Investment Fund, which provides a long term
foundation for future growth in Japan and the broader region. Total
flows from Asia including Japan were GBP39.7bn (2018: GBP3.0bn)
over the period. Our European (excluding UK) business performed
well with net flows of GBP11.6bn (2018: -GBP1.2bn), reflecting the
continued focus we have placed on the region. The US business
delivered net flows of GBP8.0bn (USD $10.0bn; 2018: GBP11.0bn, USD
$15.2bn) and has a strong pipeline for 2020. US net flows were
reduced relative to prior year due to higher outflows caused by DB
clients insuring their plans with other PRT providers.
GBP7.3bn net flows from DC business
The defined contribution (DC) business continued to grow rapidly
with total net inflows of GBP7.3bn (2018: GBP8.4bn), driven by the
Workplace Savings business which provides administration and
investment services to DC pension plans. Total UK DC AUM increased
by 33% to GBP94.3bn (2018: GBP70.8bn). LGIM has experienced a 14%
increase in customers on its Workplace pension platform, with the
number of members now at 3.5m. LGIM also has one of the largest and
fastest-growing UK Master Trusts, which recently reached GBP8.9bn
in assets under management, reflecting the continued appeal of the
structure for DC plans wishing to outsource their governance,
investment and administration. We have used technological
innovation to better serve our DC customers, including launching a
financial wellbeing platform to provide practical tools and
information to help members feel financially confident about their
retirement planning.
Accelerating growth in our retail business
The retail business experienced strong net flows of GBP4.0bn
(2018: GBP2.8bn) despite challenging market conditions. There was
strong demand for multi-asset and index products in 2019. Retail
AUM, including Personal Investing, increased to GBP38.8bn (2018:
GBP30.6bn) as we continued to develop our product range and
client-service proposition in the UK and broaden our distribution
strategy in Europe. LGIM was ranked second in both gross and net UK
retail sales in 2019. ([38])
The ETF business has further supported our European retail
distribution plans with additional launches in core equities and
thematic ETFs. Currently 70% of our ETF offering has experienced
net inflows in 2019 and we rank in the top 10 for pan-European
mutual funds and ETFs net flows. ([39]) We have continued to expand
our range of funds and distribution capabilities in line with
client demand, leading to strong H2 2019 net flows and growing ETF
AUM by 35% to GBP3.1bn (2018: GBP2.3bn).
Leading in responsible investing
LGIM is building on its credentials as a responsible investor to
lead the asset management industry in addressing the environmental
and social challenges arising from a rapidly changing world. As at
31 December 2019, LGIM managed GBP150.5bn in responsible investment
strategies explicitly linked to ESG criteria.
Embedded within our processes and decisions, LGIM is providing
clients:
-- Stewardship with impact : LGIM's stewardship team engaged
with 493 companies and voted on 50,900 resolutions
-- Active corporate engagement : LGIM established a Global
Research and Engagement Platform last year, bringing together the
best sector expertise across its investment management business
-- Integration of ESG factors : To meet growing demand for
responsible investment products, LGIM extended its industry-leading
Future World fund range in 2019, while utilising its proprietary
ESG scores across a broad range of strategies
LGIM is also demonstrating leadership by taking, and pushing
for, decisive action on era-defining issues, such as addressing
climate change. For example, LGIM is developing the modelling
technology required to assess climate risk in asset portfolios.
LGIM aims to offer its clients (including internal clients, like
LGR) end-to-end climate solutions, including measuring and managing
carbon exposure, identifying underlying climate risks and seeking
temperature alignment.
Breadth of investment management solutions
Asset movements (1) Active Real Total
(GBPbn) Index Strategies Multi Asset Solutions assets AUM
============================ ====== =========== =========== ========= ======= =======
At 1 January 2019 307.1 160.4 43.6 477.9 26.5 1,015.5
============================ ====== =========== =========== ========= ======= =======
External inflows 97.2 13.9 11.2 25.5 1.8 149.6
External outflows (59.9) (11.1) (3.5) (26.2) (1.7) (102.4)
Overlay net flows - - - 38.8 - 38.8
ETF net flows 0.4 - - - - 0.4
============================ ====== =========== =========== ========= ======= =======
External net flows 37.7 2.8 7.7 38.1 0.1 86.4
Internal net flows (0.3) (0.4) (0.9) 1.9 2.5 2.8
============================ ====== =========== =========== ========= ======= =======
Total net flows 37.4 2.4 6.8 40.0 2.6 89.2
Cash management movements - (0.6) - - - (0.6)
Market and other
movements 59.1 15.0 7.6 8.7 1.7 92.1
============================ ====== =========== =========== ========= ======= =======
At 31 December 2019 403.6 177.2 58.0 526.6 30.8 1,196.2
============================ ====== =========== =========== ========= ======= =======
1. Please see disclosure 4.01 for further details.
Total AUM increased 18% to GBP1,196.2bn (2018: GBP1,015.5bn),
with external net flows of GBP86.4bn (2018: GBP42.6bn) and rising
asset values driving GBP181bn of AUM growth. Net flows were
broad-based with the international business contributing GBP59.2bn
and positive flows from all established UK channels. Flows were
positive across most asset classes as customers benefitted from our
diverse product range and broad investment capabilities.
We anticipate that LGIM will continue to benefit from global
trends in retirement saving and structural shifts in demand in the
asset management industry, including ESG strategies. The Legal
& General Master Trust launched the Future World Multi-Asset
Fund as a default option for members making it the first Master
Trust to launch a multi-asset ESG fund as a default option.
Index external net flows were GBP37.7bn (2018: -GBP14.8bn net
flows), as we secured a GBP37bn passive mandate and experienced
strong demand from a broad range of European customers. We saw and
expect a continuation of the structural trend of DB schemes
de-risking resulting in a shift from index to LDI strategies. We
are well positioned to capitalise on this continuing trend.
Active Strategies, formerly Global Fixed Income and Active
Equities, delivered external net flows of GBP2.8bn (2018:
GBP9.9bn). The flows performance in 2019 reflects outflows from US
clients seeking pension risk transfers solutions. This effect was
offset by new mandates in the Gulf and Japan.
Solutions external net flows were GBP38.1bn (2018: GBP40.2bn),
driven by DB pension schemes implementing a broad range of
liability driven investment (LDI) strategies as customers manage
their risk positions more proactively.
Multi-asset strategies are in high demand from DC schemes and
retail customers . External net flows into multi-asset funds were
GBP7.7bn (2018: GBP7.4bn) of which GBP1.4bn relates to funds
switching from Index as part of a review of the default investment
offering for some Workplace Savings plans.
The Real Assets business has continued to expand, growing its
AUM to GBP30.8bn (2018: GBP26.5bn). External flows have been
affected by market sentiment and political uncertainty. The future
growth of external flows will be supported by our build-to-rent
business, which now has a pipeline of c.5,000 homes across the
country, and our Private Credit business, which offers clients
diversification of secure income and value protection solutions.
The long term nature of the strategic relationships developed with
LGR and LGC continue to be a positive source of funds.
Legal & General Capital
FINANCIAL HIGHLIGHTS GBPm 2019 2018
================================================= ===== ======
Operating profit 363 322
- Direct investment 217 188
- Traded investment portfolio 135 124
- Treasury assets 11 10
Investment and other variances 91 (273)
================================================= ===== ======
Profit before tax attributable to equity holders 454 49
================================================= ===== ======
Net release from operations 295 261
================================================= ===== ======
DIRECT INVESTMENT PORTFOLIO GBPm
================================================= ===== ======
Future Cities 930 787
Homes 1,483 1,158
SME Finance 464 414
2,877 2,359
TRADED PORTFOLIO GBPm
================================================= ===== ======
Equities 1,797 1,451
Fixed income 499 176
Multi-asset 238 218
Cash(1) 2,024 2,480
================================================= ===== ======
4,558 4,325
LGC investment portfolio 7,435 6,684
Treasury assets at holding company 1,555 1,958
================================================= ===== ======
Total 8,990 8,642
================================================= ===== ======
1. Includes short term liquid holdings.
Total operating profit up 13% to GBP363m
LGC operating profit was GBP363m , a 13% increase from the
previous year (2018: GBP322m), driven by our diversified investment
strategy and continued growth in the underlying direct investments
portfolio. Overall the direct investment operating profit increased
by 15% (2019: GBP217m, 2018: GBP188m). O perating profit from the
traded investment and treasury portfolios increased by 9% to
GBP146m (2018: GBP134m) with the equity portfolio growing to
GBP1,797m (2018: GBP1,451m).
Profit before tax saw a significant increase to GBP454m (2018:
GBP49m), reflecting strong improvements in equity markets in 2019
relative to 2018 , slightly offset due to a reduction in the
valuation of retail rental income from our Bracknell regeneration
project.
Overall, the direct investment net portfolio return was down
slightly to 5.2% (2018: 7.4%), reflecting continued new investment
and a greater proportion of AUM in early stage development
assets.
Direct investment portfolio grew 22% to GBP2.9bn
LGC's direct investment portfolio grew to GBP2,877m, an increase
of 22% (2018: GBP2,359m). During the year we have added GBP0.5bn of
diversified investments and a further GBP0.4bn of new commitments
across Housing, Future Cities and SME Finance.
Strengthening and capitalising on our presence in the UK Housing
sector, the Affordable Housing business performed exceptionally
well, reaching profitability in its first year of operation, ahead
of schedule and in the first full year of our 100% ownership of
CALA, the CALA business has grown again in terms of homes delivered
and profitability. Our Future Cities strategy continued to develop
across its existing, maturing portfolio, and four new major
council- or university-backed partnerships were announced during
the year.
Our portfolio is well diversified across our business models,
with:
-- 48% invested in wholly-owned Legal & General operating
businesses (2018: 47%), principally our investment in CALA;
-- 33% in joint ventures or partnerships with other investors
(2018: 31%), such as the MediaCityUK partnership with The Peel
Group; and
-- 19% in externally-managed funds (2018: 22%), including for
example, our investments in Pemberton funds, where we are a
significant shareholder.
Investing GBP930m in the future of UK cities (2018: GBP787m)
The challenges for UK urban areas are increasing. With the
majority of the population now living in towns and cities and
following decades of underinvestment, pressure has been placed on
existing real estate, energy, transportation and social
infrastructure. LGC's Future Cities business is addressing a
shortage of investment and innovation in urban regeneration, clean
energy and digital infrastructure. Together, these building blocks
can have a multiplier effect to create the resilient urban centres
of the future. Through these investments and our partnerships with
universities, local governments, authorities and businesses, Legal
& General is supporting the UK to develop great places to live
and quality, world-class science and technology employment.
Our Future Cities' investments create real assets and support
clean energy technologies which generate returns for shareholders,
create attractive Matching Adjustment eligible assets for LGR, and
supply desirable assets to LGIM clients. During 2019 our LGC Future
Cities portfolio increased 18% to GBP930m (2018: GBP787m) through
investment across all our target sectors.
In June LGC became a funding and development partner for Oxford
University to develop homes for University staff and students,
along with science and innovation districts in and around Oxford.
This demonstrates LGC's ability to create assets for the wider
Legal & General Group, which will provide funding of up to
GBP4bn over the next ten years from its shareholder, annuity and
LGIM-managed funds.
In November LGC committed GBP100m of funding for the Sunderland
City Council's regeneration of the city and the construction of a
new core business district. The project addresses twenty years of
significant underinvestment, seeking to deliver three new
commercial buildings, including the new city hall, and supporting
the creation of up to 3,000 new jobs, while generating asset
creation opportunities for LGR.
The Cardiff Central Square investment continues to mature. LGC
provided the early-stage investment for the project in 2015 and as
the project has matured LGC has created real assets for LGR and
LGIM. As such, Legal & General's ownership of Cardiff Central
Square is divided between the three divisions, with LGC owning 12%,
LGR owning 64% and LGIM clients owning 24%. Additionally, in July
2019, LGC announced its investment in one of the final stages of
its GBP400m Cardiff Central Square: a 500,000 sq ft project
comprising the bus interchange, 100,000 sq ft of Grade A office
space and 318 build-to-rent apartments for LGC's Housing
business.
Sizeable investments were also made in digital infrastructure,
through our investment in The Kao Data Campus, a state-of-the-art
GBP230m data centre development servicing the London to Cambridge
corridor, and clean energy, through our 23% stake in Pod Point, one
of the UK's largest electric vehicle charge point operators.
Strengthening our UK Housing platform as assets increase to
GBP1,483m (2018: GBP1,158m)
LGC has continued to expand its housing sector investments and
capabilities, which are diversified across affordability, tenure
and life-stage, meeting the UK's long term need for more homes
across all demographics. During 2019 LGC's housing businesses sold
or rented over 2,800 homes (2018: c.2,500).
LGC's Affordable Homes business was profitable in its first year
of operation, ahead of schedule. During the year it delivered its
first homes and is now generating investment opportunities for LGR.
Partnering with fourteen established housing associations and
providers to support its housing operations across the UK, it
announced that it had secured a development pipeline of nearly
3,500 homes , representing a Gross Asset Value of around GBP750m,
which it will deliver over the next two to three years. This is a
strong start to LGC's target of delivering 3,000 affordable homes
per year within its first four full years of operation in order to
meet the UK's overwhelming need for more affordable homes.
LGC has extended its Later Living platform, adding a new rental
offering to its suburban later living business, Inspired Villages
Group, and establishing Guild Living, a developer and operator of
urban later living communities. With an estimated 3.1m UK
individuals aged over 55 actively seeking to downsize and only
7,000 retirement homes delivered per annum, there is a deep
societal and economic need for investment in later living
accommodation. Later Living aims to transform what the elderly can
expect from later life by providing vibrant communities
specifically built to activate retirement living - socially,
physically, intellectually, and financially. 2019 was a successful
year for the business, for example, Inspired Villages' combined
sales and rental completions saw annual growth of 27% across its
six operational sites during the period.
In our Build-to-Sell business, CALA increased revenues by 6% to
GBP1.0bn, delivering nearly 2,500 homes across 91 active sites
during the year, despite a challenging start to the year in the UK
market. We believe our diversified housing platform makes us more
resilient to temporary market slowdowns and we are well positioned
to achieve our long -- term target of building over 3,000
build-to-sell units per annum as we continue to focus on further
margin improvement within CALA.
In Legal & General's Build-to-Rent business, LGC has
supported further developments across England, Scotland and Wales
and completed its project in Bath. Across the Group, the
build-to-rent business creates a pipeline of attractive, high
quality assets for LGR and LGIM clients, with approximately 5,000
homes completed, in planning or under development, across fifteen
schemes.
In our Modular Housing business, we are working with the Selby
District Council and Bristol City Council to deliver over 180 new
homes, with a focus on affordable homes.
SME Finance increased to GBP464m (2018: GBP414m)
We are developing and growing our alternative asset capabilities
in order to enhance returns and create a portolio of assets which
complement LGIM's portfolio and support LGR's growth both now and
over the longer term. As part of this, we continue to support UK
and European mid-market lending via fund investments with
Pemberton. We also invest in start-up businesses across the UK and
Europe through fund investments with Venture Capital managers and
direct stakes in innovation and growth companies strategically
aligned with our business.
In European SME financing, our 40% owned private credit manager
Pemberton has accelerated the deployment of capital across all
funds, with EUR3bn deployed across 30 deals in 2019. During the
year Pemberton's total Funds Under Management grew to c.EUR6.1bn
(2018: c.EUR4bn).
We continued to strengthen and diversify our well-performing
Venture Capital fund portfolio through the addition of five new
funds from leading European managers in 2019, bringing our total
commitment to c.GBP140m across fifteen funds. In addition, we are
also working with other industry participants on a solution that
will democratise access to this exciting asset class for LGIM's
Defined Contribution customers.
Legal & General Insurance
FINANCIAL HIGHLIGHTS GBPm 2019 2018
=================================== ===== ======
Operating profit 314 308
* UK 223 246
* US (LGIA) 91 62
Investment and other variances(1) (234) (1)
===================================== ===== ======
Profit before tax attributable
to equity holders 80 307
===================================== ===== ======
Release from operations 259 258
New business surplus / (strain) (7) (22)
===================================== ===== ======
Net release from operations 252 236
===================================== ===== ======
LGI new business annual premiums 339 343
UK Retail Protection gross
premiums 1,327 1,279
UK Group Protection gross premiums 345 329
US Protection (LGIA) gross
premiums 1,057 972
Total gross premiums 2,729 2,580
===================================== ===== ======
1. Investment variance is driven by a fall in UK government bond
yields and US Treasury yields which has resulted in a reduction in
the discount rate used to calculate the reserves for both our UK
and US protection liabilities.
Total operating profit of GBP314m
LGI operating profit increased 2% to GBP314m (2018: 308m),
reflecting stable profit delivery in highly competitive UK markets,
while the US Term protection business transitioned towards a more
digital operating model.
LGI UK delivered operating profit of GBP223m (2018: GBP246m),
reflecting changes in intra-group reinsurance resulting in c.GBP13m
of profits shifting from the UK into the US. Historically we have
reinsured part of our US protection risk to the UK, however we plan
to continue to gradually reduce the intra-group reinsurance of LGIA
into the UK in the coming years. Additionally, the 2018 results
benefited from model changes. As in prior years, we reflected
recent experience in our review of actuarial assumptions.
Net release from operations for LGI UK was broadly flat at
GBP158m (2018: GBP159m), and included improved new business strain
of GBP(7)m (2018: GBP(22)m) as a result of improving margins across
the business. This was offset by a reduction in release from
operations as a result of the recapture of intra-group reinsurance
and prior year model and assumption changes, as well as an increase
in Fintech's contribution.
UK Protection Solvency II new business margin increased to 7.6%
(2018: 7.1%), reflecting product mix changes and continuous
improvement in new business value despite competitive markets,
particularly in H2. The protection business continues to generate
Solvency II surplus immediately when written and provides
diversification benefits to the Group, particularly LGR.
LGIA operating profit increased by $33m to $116m (2018: $83m).
This includes reserve releases following assumption and model
changes and the impact of the amendment to the reinsurance
arrangement with the UK business, partially offset by adverse
mortality, which was consistent with experience across the broader
US life sector.
The annual dividend paid by LGIA to the Group in March 2019,
shown in the accounts within LGIA net release from operations,
increased by 2% (up 5% on a sterling basis) to $107m (2018:
$105m).
Despite significant competition in the term market, US
protection sales delivered a strong Solvency II new business margin
of 11.1% (2018: 11.2%).
Profit before tax was impacted by a fall in government yields.
LGI's negative investment variance of GBP234m was primarily driven
by falls in UK and US government bond yields which have resulted in
a reduction in the discount rate used to calculate the reserves.
Our UK protection discount rate fell by 52 bps [40] and US 10 year
Treasury yields fell by 74 bps [41] .
Gross written premium up 6% in competitive markets
UK Retail Protection gross premium income increased 4% to
GBP1,327m (2018: GBP1,279m) with new business annual premiums of
GBP174m (2018: GBP175m). We remain the leading provider of retail
protection in the UK, delivering straight through processing for
more than 80% of our customers. In H2 we continued to see strong
sales performance despite operating in a heavily competitive
environment. Distribution through our bank partners benefited from
our investments in these partnerships. We continued to innovate in
the intermediary market with the launch of our rental protection
proposition.
UK Group Protection gross premium income increased 5% to GBP345m
(2018: GBP329m) with new business annual premiums of GBP76m (2018:
GBP83m). The turnaround in Group Protection has now completed with
the strong performance in 2019 reflecting improvements in service
to our customers.
US Protection (LGIA) gross premium income increased 4% (up 9% on
a sterling basis) to $1,349m (2018: $1,299m) with new business
annual premiums of $113m (2018: $114m). Through the brokerage
channel, LGIA is the largest provider of US term life assurance by
number of policies, and second largest by new business APE.
Legal & General Mortgage Club had a record year facilitating
GBP78bn of mortgages, up 7% (2018: GBP73bn), through strong
partnerships with top lenders and an expanded service offering to
more mortgage brokers following a period of digital investment. As
the largest participant in the intermediated mortgage market in the
UK, we are involved in nearly one in five of all UK mortgage
transactions. Legal & General Surveying Services also delivered
a strong performance, facilitating 550k surveys and valuations.
Fintech: Salary Finance expansion and mortgage market
disruption
LGI has continued to grow its expertise in the Fintech sector
focusing on disrupting markets adjacent to our life insurance
business by building customer focused solutions and making targeted
investments in start-up and scale-up opportunities.
Salary Finance continued its rapid expansion. In the UK, the
financial wellbeing platform achieved a reach of 1.3m employees and
its loan book doubled compared to the end of 2018. In the US, the
platform has reached more than 130,000 employees within the first
year of operation. The company is in a strong position to continue
to grow its UK and US loan books through new, customer focused
products launching in 2020.
We are making buying and financing a home easier and quicker for
our customers and advisors through our technology investments, as
detailed below.
Legal & General Mortgage Club brings together mortgage
advisers and lenders. Through SmartrCriteria, the Mortgage Club's
digital user-friendly criteria search system, we are helping 6,000
advisers select the best mortgage out of a universe of over 400,000
mortgage outcomes from over 80 lenders.
Legal & General Surveying Services performed over 27,000
digital valuations in 2019 compared to fewer than 4,000 in 2018 and
has secured two new valuation deals with HSBC & Barclays. We
launched a next-generation, digital home buyers survey and continue
to invest in technology to innovate in the lender valuations
market.
Disposed operations
In May 2019, Legal & General Group announced the sale of the
General Insurance business to Allianz Holdings Plc. The transaction
completed in December 2019, improving the Group's Solvency II
coverage ratio by c.1%.
The Group announced the sale of the Mature Savings business to
Swiss Re on 6 December 2017 for GBP650m. The proceeds were received
by the Group at the start of January 2018. In 2019 we recognised
GBP46m operating profit from the business, resulting from the
unwind of the expected underlying profits . We expect to complete
the associated Part VII transfer in H1 2020, upon which it is
anticipated that an IFRS gain of circa GBP350m will be generated,
which includes the unwind of the 2020 expected underlying profits
and is in addition to profits recognised in 2018 and 2019,
including the one-off provision release in 2018 (GBP125m total).
The completion of the Part VII transfer is expected to be broadly
neutral to the Group's Solvency II coverage ratio.
Subsidiary dividends to Group
GBPm 2019 2018
Subsidiary dividends(1) :
LGAS 766 852
LGIM 269 251
LGA 84 75
Other(2) 124 108
============================ ===== =====
Total 1,243 1,286
============================ ===== =====
1. Represents cash that will be remitted from subsidiaries to
Group in respect of the year's financial performance.
2. Other includes Legal & General Home Financing, Legal
& General Capital Investments Limited, Legal & General
Reinsurance, Investment Discounts On-Line Limited, Legal &
General Partnership Services Limited and Legal & General
Surveying Services.
The level of subsidiary dividends are scheduled to cover
external dividends (2019: GBP1,047m; 2018: GBP978m), Group related
costs, and investment in our businesses, with excess liquidity
being held within our regulated subsidiaries.
Borrowings
The Group's outstanding core borrowings totalled GBP4.1bn at 31
December 2019 (2018: GBP3.9bn). There is also a further GBP1.0bn
(2018: GBP1.0bn) of operational borrowings including GBP0.8bn
(2018: GBP0.6bn) of non-recourse borrowings.
In November 2019 the Group issued GBP600m of Tier 2 subordinated
debt with a coupon of 3.75%.
Group debt costs of GBP208m (2018: GBP203m) reflect an average
cost of debt of 5.0% per annum (2018: 5.1% per annum) on an average
nominal value of debt balances of GBP4.1bn (2018: GBP4.0bn).
Taxation
Equity holders' Effective Tax Rate (%) 2019 2018
Equity holders' total Effective Tax Rate [42] 14.3 15.0
Annualised rate of UK corporation tax 19.0 19.0
================================================ ===== =====
The effective tax rate reflects changes to the structuring of
our internal reinsurance arrangements for capital management
reasons and the interplay with our global reinsurance hub.
Solvency II
As at 31 December 2019, the Group had an estimated Solvency II
surplus of GBP7.3bn over its Solvency Capital Requirement,
corresponding to a Solvency II coverage ratio of 184% on a
shareholder basis. As at 28 February 2020, we estimate the ratio
was 174%. [43]
Capital (GBPbn) 2019(1) 2018(1)
Own Funds 16.1 14.8
Solvency Capital Requirement (SCR) (8.8) (7.9)
=================================== ======= ========
Solvency II surplus 7.3 6.9
SCR coverage ratio (%) 184 188
=================================== ======= ========
1. Solvency II position on a shareholder basis is adjusted for
the Own Funds and SCR of the With-profits fund and the Group final
salary pension schemes, and is before the accrual of the relevant
dividend.
Solvency
Analysis of movement from 1 January 2019 to II
31 December 2019(1) (GBPbn) surplus
Surplus arising from back-book (including
release of SCR) 1.5
Release of Risk Margin 0.4
Amortisation of TMTP (0.3)
=========================================================== ==========
Operational surplus generation 1.6
New business strain (0.6)
=========================================================== ==========
Net surplus generation 1.0
Operating variances 0.3
Mergers, acquisitions and disposals 0.1
Market movements (0.2)
Subordinated debt 0.2
Dividends paid (1.0)
=========================================================== ==========
Total surplus movement (after dividends paid
in the period) 0.4
1. Please see disclosure 5.01 (d) for further details.
Operational surplus generation was up 9% [44] to GBP1.6bn (2018:
GBP1.4bn) , after allowing for amortisation of the opening
Transitional Measures on Technical Provisions (TMTP) and release of
Risk Margin.
New business strain was GBP0.6bn, reflecting significant UK PRT
volumes written at a capital strain of less than 4%. This resulted
in net surplus generation of GBP1.0bn (2018: GBP0.9bn).
Operating variances include the impact of experience variances,
changes to model calibrations, and management actions. The net
impact of operating variances over the period was GBP0.3 bn .
Market movements of GBP(0.2)bn reflect the impact of lower rates on
the valuation of our balance sheet, partially offset by higher
asset markets, predominantly in equities, as well as a number of
other, smaller variances.
The movements shown above incorporate changes to the Internal
Model and Matching Adjustment during 2019 and the impacts of a
recalculation of the TMTP as at end December 2019. The recalculated
TMTP of GBP5.7bn (31 December 2018: GBP5.2bn) is net of
amortisation to 31 December 2019.
When stated on a proforma basis, including the SCR attributable
to our With-profits fund and the Group final salary pension schemes
in both the Group's Own Funds and the SCR, the Group's coverage
ratio was 179% (2018: 181%).
Reconciliation of IFRS net release from operations to Solvency
II net surplus generation(1)
The table below gives a reconciliation of the Group's IFRS
Release from operations and Solvency II Operational surplus
generation in 2019:
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 0.7
Solvency II Operational surplus generation 1.6
The table below gives a reconciliation of the Group's IFRS New
business surplus to Solvency II New business strain in 2019:
GBPbn
IFRS New business surplus 0.3
Removal of requirement to set up prudential margins above
best estimate on new business 0.2
Set up of Solvency II Capital Requirement on new business (0.9)
Set up of Risk Margin on new business (0.2)
Solvency II New business strain (0.6)
1. Please see disclosure 5.01 (e) for further details.
Sensitivity analysis(1)
Impact Impact
on net on net
of tax of tax
Solvency Solvency
II capital II coverage
surplus ratio
2019 2019
GBPbn %
======================================================= =========== =============
Credit spreads widen by 100bps assuming an escalating
addition to ratings 0.3 8
Credit spreads narrow by 100bps assuming an escalating
addition to ratings (0.4) (9)
Credit migration (0.8) (9)
25% rise in equity markets 0.5 4
25% fall in equity markets (0.5) (5)
15% rise in property markets 0.6 6
15% fall in property markets (0.7) (6)
100bps increase in risk free rates 1.0 22
50bps decrease in risk free rates (0.6) (11)
Substantially reduced Risk Margin 0.6 6
======================================================= =========== =============
1. Please see disclosure 5.01 (g) for further details .
The above sensitivity analysis does not reflect all possible
management actions which could be taken to reduce the impacts of
each sensitivity due to the complex nature of the modelling. In
practice, the Group actively manages its asset and liability
positions to respond to market movements. Other than in the
interest rate stresses, we have not allowed for the recalculation
of TMTP. 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.
The impacts of credit spread and risk free rate sensitivities
are primarily non-economic arising from movement in balance sheet
items that result from changes in the discount rates used to
calculate the value of assets and liabilities. The credit migration
stress, in the absence of defaults, delays the emergence of
operating surplus generation, but does not reduce the actual
quantum of future releases. Similarly equity and property stresses
only result in losses if assets are sold at depressed values.
Solvency II new business contribution
Management estimates of the present value of new business
(PVNBP) and the margin as at 31 December 2019 are shown below(1)
:
PVNBP Contribution Margin
from %
new business
================================= ====== ============= ======
LGR - UK annuity business (GBPm) 11,295 890 7.9
UK Protection Total (GBPm) 1,604 122 7.6
- Retail protection 1,284 98 7.6
- Group protection 320 24 7.5
US Protection (GBPm) 850 94 11.1
================================= ====== ============= ======
The key economic assumptions as at 31 December 2019 are as
follows:
%
================================================= ===
Margin for risk 3.5
Risk free rate
- UK 1.1
- US 1.9
Risk discount rate (net of tax)
- UK 4.6
- US 5.4
Long term rate of return on non-profit annuities
in LGR 2.8
=================================================== ===
1. Please see disclosure 5.02 for further details.
The future earnings are discounted using duration-based discount
rates, which is the sum of a duration-based risk free rate and a
flat Margin for Risk. The risk free rates have been based on a swap
curve net of the EIOPA-specified Credit Risk Adjustment. The risk
free rate shown above is a weighted average based on the projected
cash flows.
Other than updating for recent experience, all other economic
and non-economic assumptions and methodologies that would have a
material impact on the margin for these contracts are unchanged
from those previously used by the group for its European Embedded
Value reporting, other than the cost of currency hedging which has
been updated to reflect current market conditions and hedging
activity in light of Solvency II.
Principal risks and uncertainties
Legal & General runs a portfolio of risk taking businesses;
we accept risk in the normal course of business and aim to deliver
sustainable returns on risk based capital to our investors in
excess of our cost of capital. We manage the portfolio of risk that
we accept to build a sustainable franchise for the interests of all
our stakeholders; we do not aim to eliminate that risk. We have an
appetite for risks that we understand deeply and are rewarded for,
and which are consistent with delivery of our strategic objectives.
Risk management is embedded within the business. The Group's
Principal Risks and Uncertainties summarise key matters that may
impact the delivery of Group's strategy earnings or
profitability.
Risks and uncertainties Trend and outlook Mitigation
================================= ============================= =============================
Reserves and our assessment We regularly appraise We undertake significant
of capital requirements the assumptions analysis of the
may require revision underpinning the variables associated
as a result of changes business we write. with writing long-term
in experience, regulation We remain, however, insurance business
or legislation inherently exposed to ensure that a
The pricing of long-term to certain extreme suitable premium
insurance business events that could is charged for the
requires the setting require us to adjust risks we take on,
of assumptions for our reserves. For and that reserves
long-term trends in example, in our continue to remain
factors such as mortality, pensions risk transfer appropriate for
lapse rates, valuation and annuities business, factors including
interest rates, expenses a dramatic advance mortality, lapse
and credit defaults in medical science rates, valuation
as well as the availability beyond that anticipated interest rates,
of assets with appropriate may lead to an unexpected expenses and credit
returns. Actual experience change in life expectancy, defaults. We also
may require recalibration requiring adjustment seek to pre-fund
of these assumptions, to reserves. In and warehouse appropriate
impacting profitability. our protection businesses investment assets
Management estimates an extreme event to support the pricing
are also required leading to a widespread of long-term business.
in the derivation increase in mortality In seeking a comprehensive
of Solvency II capital or morbidity, for understanding of
metrics. These include example the emergence longevity science
modelling simplifications of new diseases we aim to anticipate
to reflect that it or reductions in long -- term trends
is not possible to immunology, may in mortality, and
perfectly model the also require re-evaluation continue to evolve
external environment, of reserves although and develop our
with adjustment necessitated these may be mitigated underwriting capabilities
where new data emerges. by reinsurance and for our protection
Forced changes in the offsetting effects business. The selective
reserves can also with our annuities use of reinsurance
arise from regulatory business. We are acts to reduce the
or legislative intervention also exposed to impacts of significant
impacting capital lapse risks if our variations in life
requirements and profitability. US term policies expectancy and mortality.
are not continued
in line with our
renewal assumptions.
================================= ============================= =============================
Investment market The outlook for We cannot eliminate
performance and conditions the global economy the downside impacts
in the broader economy whilst showing tentative from these and other
may adversely impact signs of improvement, risk factors on
earnings, profitability continues to be our earnings, profitability
or surplus capital that of relatively or surplus capital,
The performance and low growth. Interest however, as part
liquidity of investment rates also look of our strategic
markets, interest set to continue planning activity
rate movements and at their historic we seek to model
inflation impact the lows. In the UK our business plans
value of investments following the agreement across plausible
we hold in shareholders' of withdrawal terms economic scenarios
funds and those to from the EU the to ensure resilience
meet the obligations immediate risks across a range of
from insurance business, associated with outcomes. Our ORSA
with the movement a no trade deal process plays an
in certain investments outcome have receded integral part in
directly impacting and there is also ensuring a clear
profitability. Interest more certainty in link between capital
rate movements and the broader political sufficiency and
inflation can also landscape. There the nature of risks
change the value of are, however, a to which we may
our obligations. We range of factors be exposed, and
use a range of techniques that could lead confirming that
to manage mismatches to a deterioration exposures are within
between assets and in this outlook our risk appetite.
liabilities, however, and a reappraisal We have sought to
losses can still arise of asset values. ensure focus upon
from adverse markets. These include rising those market segments
Interest rate expectations geopolitical tensions that we expect to
leading to falls in within the Middle be resilient in
the risk free yield East leading to projected conditions.
curve can also create the disruption of
a greater degree of global oil supplies;
inherent volatility the truce in the
to be managed in the US - China trade
Solvency II balance war proving temporary
sheet than the underlying or the trade tensions
economic position extending to the
would dictate, potentially EU; and the UK failing
impacting capital to achieve a satisfactory
requirements and surplus future trading relationship
capital. In addition, with the EU. The
significant falls emergence of COVID-19
in investment values in China also has
can reduce fee income potential to temporarily
to our investment impact global growth
management business. rates through the
disruption of supply
chains, as well
as the value of
investment assets
that may be perceived
as being adversely
impacted from a
slowdown. While
concerns about COVID-19
have had minimal
effect on our business
to date, they have
driven a return
to more volatile
markets in the current
quarter.
================================= ============================= =============================
In dealing with issuers An event leading We actively manage
of debt and other to widespread default our exposure to
types of counterparty among the issuers default risks within
the group is exposed of investment grade our bond portfolios,
to the risk of financial debt is considered setting selection
loss to be a more remote criteria and exposure
Systemic corporate risk; however, we limits, and using
sector failures, or closely monitor the capabilities
a major sovereign a range of factors of LGIM's global
debt event, could, that may lead to credit team to ensure
in extreme scenarios, a widening of credit the risks are effectively
trigger defaults impacting spreads, including controlled, and
the value of our bond those relating to if appropriate trade
portfolios. Under the economic outlook, out to improve credit
Solvency II, a widespread trends in global quality. Within
widening of credit interest rates and our property lending
spreads and downgrades emerging markets. businesses, our
can also result in Whilst considered loan criteria take
a reduction in our to be more extreme account of both
Solvency II balance risk scenarios in the default risk
sheet surplus, despite the current environment, of the borrower
already setting aside factors that could and the potential
significant capital increase the level for adverse movements
for credit risk. We of default risk, in the value of
are also exposed to if they were to security. In placing
default risks in dealing occur, include a reinsurance we set
with banking, money material deterioration counterparty specific
market and reinsurance in global economic exposure limits,
counterparties, as conditions; and where appropriate
well as settlement, a renewed banking taking collateral.
custody and other crisis. We manage risks
bespoke business services. to our Solvency
A default by a counterparty II balance sheet
could expose us to through monitoring
both financial loss factors that could
and operational disruption give rise to a heightened
of business processes. level of default
Default risk also risk. However, we
arises where we undertake can never eliminate
property lending, default risks or
with exposure to loss their impacts to
if an accrued debt our Solvency II
exceeds the value balance sheet, although
of security taken. we seek to hold
a strong balance
sheet that we believe
to be prudent for
a range of adverse
scenarios.
================================= ============================= =============================
Changes in regulation The regulatory regimes We are supportive
or legislation may under which the of regulation in
have a detrimental group operates continue the markets in which
effect on our strategy to evolve. The operation we operate where
Legislation and government of the EU derived it ensures trust
fiscal policy influence Solvency II capital and confidence and
our product design, regime, which has can be a positive
the period of retention been in place since force on business.
of products and required 2016, is currently We seek to actively
reserves for future subject to review participate with
liabilities. Regulation by EU regulators, government and regulatory
defines the overall and although the bodies in the UK
framework for the UK has left the and Europe to assist
design, marketing, EU changes may be in the evaluation
taxation and distribution required to be adopted of change so as
of our products, and in a transition to develop outcomes
the prudential capital period. The UK prudential that meet the needs
that we hold. Significant regulator also continues of all stakeholders.
changes in legislation to refine Solvency Internally, we evaluate
or regulation may II rules for areas change as part of
increase our cost such as the capital our formal risk
base, reduce our future treatment of lifetime assessment processes,
revenues and impact mortgages and other with material matters
profitability or require illiquid assets, being considered
us to hold more capital. and the matching at the Group Risk
The prominence of adjustment for long-term Committee and the
the risk increases business. Other Group Board. Our
where change is implemented areas of significant internal control
without prior engagement regulatory change framework seeks
with the sector. The include the transition to ensure ongoing
nature of long-term from LIBOR to SONIA compliance with
business can also in 2021, for which relevant legislation
result in some changes our planning is and regulation.
in regulation, and already well advanced. Residulal risk remains,
the re-interpretation Focus areas of the however, that controls
of regulation over FCA, the UK's conduct may fail or that
time, having a retrospective regulator, include historic financial
effect on in-force the fair treatment services industry
books of business, of vulnerable customers accepted practices
impacting future cash and the provision may be reappraised
generation. of financial advice. by regulators, resulting
Focus also continues in sanctions against
on ensuring firms the group.
prepare for the
transition to a
low-carbon economy
================================= ============================= =============================
New entrants, or legislative We closely monitor As set out in our
change, may disrupt the factors that business review,
the markets in which may impact the markets we continue to introduce
we operate in which we operate, new digital platforms
There is already strong including governmental to grow our businesses
competition in our initiatives, developing including Annuity
markets, and although industry practices Ready, SmartrCriteria
we have had considerable and competitor activity. and SmartrSurvey,
past success at building Alongside digital and we are investing
scale to offer low enabled changes in automation using
cost products, we to business operating robotics to improve
recognise that markets models that enhance the efficiency of
remain attractive the customer experience, our business processes.
to new entrants. It technology is being In our pensions
is possible that alternative widely applied to risk transfer business,
digitally enabled achieve cost savings our capabilities
financial services and efficiencies to assess risk and
providers emerge with for market participants. offer bespoke solutions
lower cost business Defined benefit enable us to differentiate
models or innovative "superfund" consolidation, our offer from competitors,
service propositions pension dashboards and we believe that
and capital structures, and "collective" our investment management
and disrupt the current pension scheme arrangements and retirement businesses
competitive landscape, also have potential are well positioned
and that changes in to transform the for the evolution
legislation or regulation operating environment of the pensions
impact operating models. for our asset management market.
and pension businesses.
================================= ============================= =============================
A material failure Our plans for growth Our risk governance
in our business processes and the digitalisation model seeks to ensure
or IT security may of our businesses, that business management
result in unanticipated together with the are actively engaged
financial loss or regulatory change in maintaining an
reputation damage agenda, inherently appropriate control
We have constructed increase the profile environment, supported
our framework of internal of operational risks by risk functions
controls to minimise and the need for led by the Group
the risk of unanticipated resilience across Chief Risk Officer,
financial loss or our businesses. with independent
damage to our reputation. We are also exposed assurance from Group
However, no system to construction Internal Audit.
of internal control and safety risks We recognise, however,
can completely eliminate within our commercial that residual risk
the risk of error, real estate and will always remain
financial loss, fraudulent housing businesses, and have designed
actions or reputational and wider safety our risk governance
damage. We are also risks in the operation framework to ensure
inherently exposed of retirement villages that when adverse
to the risk that third and affordable homes. events occur we
parties may seek to We continue to invest can deploy appropriate
steal customer data in our system capabilities responses.
or perpetrate acts and business processes
of fraud using digital to ensure that we
media, and there is meet the expectations
strong stakeholder of our customers;
expectation that our comply with regulatory,
core business services legal and financial
are resilient to operational reporting requirements;
disruption. and mitigate the
risks of loss or
reputational damage
from risk events.
================================= ============================= =============================
We fail to respond The science underpinning We recognise that
to the emerging threats climate change is our scale brings
from climate change clear and the effects a responsibility
for our investment can already be seen to act decisively
portfolios and wider across the world. in positioning our
businesses We believe, however, balance sheet to
As a significant investor that climate change the threats from
in financial markets, has not yet been climate change,
commercial real estate fully priced in and encouraging
and housing, we are by financial markets, others to follow
exposed to climate and as such it is suit, as one of
related transition an area of both the largest global
risks, particularly additional risk institutional investors.
should abrupt shifts as well as an opportunity We are embedding
in the political and for investment in the assessment of
technological landscape new technologies. climate risks in
impact the value of While national governments our investment process
those investment assets are setting goals and are developing
associated with higher to support a smooth our risk metrics
levels of green house transition to low and framework for
gas emissions. carbon economies, oversight and taking
delays in making opportunities. We
the necessary changes are engaging with
increases the risk regulators, and
of sudden late policy the companies in
action, in turn which we invest,
leading to potentially in support of increased
large and unanticipated climate action.
shifts in asset We have already
valuations for those set carbon intensity
industries and sectors targets for our
that will need to investment portfolios,
take action. and along with specific
investment exclusions
for thermal coal
we have implemented
controls around
the acquisition
of high carbon investments.
We are also actively
investing in energy
efficient property,
renewables and new
science to support
de-carbonisation.
================================= ============================= =============================
Notes
A copy of this announcement can be found in "Results, Reports
and Presentations", under the "Investors" section of our
shareholder we bsite at
www.legalandgeneralgroup.com/investors/results-reports-and-presentations/
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
www.legalandgeneralgroup.com/investors/preliminary-results-2019 . A
replay will be available on this website later today.
2020 Financial Calendar Date
Ex-dividend date (2019 final dividend) 23 April 2020
Record date 24 April 2020
Annual General Meeting 21 May 2020
Payment date of 2019 final dividend 4 June 2020
2020 interim results announcement 5 August 2020
Capital markets event 12 November
2020
Definitions
Definitions are included in the Glossary on pages 85 to 89 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
acquisitions or combinations within relevant industries. As a
result, Legal & General's actual future condition, performance
and results may differ materially from the plans, goals and
expectations set out in these forward-looking statements and
persons reading this announcement should not place reliance on
forward-looking statements. These forward-looking statements are
made only as at the date on which such statements are made and
Legal & General Group Plc does not undertake to update
forward-looking statements contained in this announcement or any
other forward-looking statement it may make.
Going concern statement
The Group's business activities, together with the factors
likely to affect its future development, performance and position
in the current economic climate are set out in this Preliminary
Management Report. The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in
the Group Results. Principal risks and uncertainties are detailed
on pages 24 to 26 . In addition, the financial statements include,
amongst other things, notes on the Group's objectives, policies and
process for managing its capital, its financial risk management
objectives, details of its financial instruments and hedging
activities, and its exposures to credit and liquidity risk.
The Group manages and monitors its capital with various stresses
built in order to understand the expected impact of market
downturns. These stresses do not give rise to any material
uncertainties over the ability of the Group to continue as a going
concern and therefore, based upon the available information, the
directors consider that the Group has the plans and resources to
manage its business risks successfully as it has a diverse range of
business and remains financially strong.
Having reassessed the principal risks, the directors considered
it appropriate to adopt the going concern basis of accounting in
preparing the preliminary financial information.
Directors' responsibility statement
We confirm to the best of our knowledge that:
i. The group financial statements within the full Annual Report
and Accounts, from which the financial information within this
preliminary announcement has been extracted, and which have been
prepared in accordance with IFRSs as adopted by the EU, give a true
and fair view of the assets, liabilities, financial position and
profit of the group;
ii. The preliminary announcement includes a fair review of the
development, performance and position of the group, as well as the
principle risks and uncertainties faced by the group; and
iii. The directors of Legal & General Group Plc are listed
in the Legal & General Group Plc website:
www.legalandgeneralgroup.com/about-us/our-management/group-board/
.
By order of the Board
Nigel Wilson Stuart Jeffrey Davies
Group Chief Executive Group Chief Financial Officer
4 March 2020 4 March 2020
Enquiries
Investors
+44 203 1242 091
Edward Houghton, Head of Investor Relations
investor.relations@group.landg.com
legalandgeneralgroup.com
+1 312 964 3034
Sujee Rajah, Investor Relations Director
investor.relations@group.landg.com
legalandgeneralgroup.com
+44 203 1242 047
Alyssa Manning, Investor Relations Director
investor.relations@group.landg.com
legalandgeneralgroup.com
Media
+44 203 1242 090
John Godfrey, Group Corporate Affairs Director
legalandgeneralgroup.com
+44 207 3534 200
Simon Pilkington, Tulchan Communications
+44 207 3534 200
Sheebani Chothani, Tulchan Communications
Notes
(1) Excludes post-tax mortality release of GBP134m (2018:
GBP359m). Including these impacts, EPS was roughly flat at 30.92p
(2018: 30.79p).
(2) The Alternative Performance Measures within the Group's
financial highlights are defined in the glossary, on pages 85 to 89
of this report.
(3) Excludes mortality release of GBP155m (2018: GBP433m) from
LGR's GBP49.1bn net longevity exposure. 2019 mortality release
relates to changes in longevity improvement assumptions to align to
CMI 2017 tables, adjusted to reflect our annuitant portfolio.
Including the reserve release, operating profit was down 2% to
GBP2,286m (2018: GBP2,335m).
(4) Excludes Mature Savings and General Insurance.
(5) Profit after tax attributable to equity holders.
(6) Solvency II coverage ratio on a shareholder basis, which is
adjusted for the Own Funds and SCR of the With-profits fund and the
Group final salary pension plans.
(7) Excludes Longevity Insurance transactions (2019: GBPnil,
2018: GBP287m).
(8) Excludes mortality reserve releases (2019: GBP155m, 2018:
GBP433m). 2019 mortality release of GBP155m from LGR's GBP49.1bn of
net longevity exposure relates to changes in longevity improvement
assumptions to align to CMI 2017 tables, adjusted to reflect our
annuitant portfolio.
(9) Excludes Mature Savings and General Insurance.
(10) Mature Savings sale to Swiss Re for GBP650m was announced
on 6 December 2017 and the 2018 and 2019 results reflect the
Reinsurance Transfer Agreement.
(11) General Insurance sale to Allianz for a final consideration
of GBP255m was announced on 31 May 2019 and completed during the
year.
(12) Excludes post-tax mortality release of GBP134m (2018:
GBP359m). Including these impacts, EPS was roughly flat at 30.92p
(2018: 30.79p).
[13] Excludes mortality release of GBP155m (2018: GBP433m) from
LGR's GBP49.1bn net longevity exposure. 2018 mortality release r
elates to changes in longevity improvement assumptions to align to
CMI 2017 tables , adjusted to reflect our annuitant portfolio .
Including the reserve release, Group operating profit was down 2%
to GBP2,286m (2018: GBP2,335m).
[14] Solvency II coverage ratio on a "shareholder view".
Incorporates the impact of recalculating the Transitional Measures
for Technical Provisions (TMTP) as at 31 December 2019.
[15] Coverage ratio before payment of the 2019 final
dividend.
[16] Solvency II coverage ratio on a proforma basis includes the
SCR attributable to our With-profits fund and the Group final
salary pension plans in both the Group's Own Funds and the SCR.
Incorporates the impact of recalculating the Transitional Measures
for Technical Provisions (TMTP) as at 31 December 2019.
[17] Calculated using profit for the year of GBP1,8 34m (2018:
GBP1,827m) and average equity attributable to the owners of the
parent of GBP8,974m (2018: GBP8,048m).
[18] WTW, The world's largest 500 asset managers
[19] Source: Bloomberg Total Shareholder Return 4 January
2011
[20] Three year average measured by UK PRT deal count. Three
year average measured by UK PRT new business volumes from LGIM
clients is 64%.
[21] 2011 EPS: 12.42p; 2015 EPS: 18.16p; 2019 Underlying EPS:
28.66p
[22] Source: Pension Purple Book 2019, PPF; LIMRA, March 2019;
https://www.ipe.com/countries/ireland/irish-pension-liabilities-hit-167-of-gdp/10024291.article
; "The Coming
Pensions Crisis", Citi Research
[23] Source: Pension Purple Book 2019, PPF; Hymans Robertson,
2019 Risk Transfer Report
[24] Pensions Policy Institute, "DB Endgame Report", October
2019
[25] LIMRA, March 2020
[26] Retirement income market data 2018/19, FCA, 2019, based on
2019 data
[27]
https://www.legalandgeneralgroup.com/media-centre/press-releases/legal-general-agrees-individual-annuity-deal-with-prudential/
[28] Equity Release Council, "Equity Release Rebooted", April 2017
[29] Broadridge, UK Defined Contribution And Retirement Income
report 2019. 2019 UK DC Assets: GBP438bn
[30] Excluding mortality release (2019: GBP155m, 2018:
GBP433m).
[31] 2015: 1; 2016: 6; 2017: 15; 2018: 21; 2019: 10
[32]
https://www.legalandgeneralgroup.com/media-centre/press-releases/legal-general-agrees-individual-annuity-deal-with-prudential/
[33] Q1 2016: 6.5%; Q3 2019: 17.2%
[34] UK Equity Release Market (ERM) Monitor, Q4 2019
[35] LGR's total annuity asset portfolio is with respect to our
UK and US annuities businesses, and excludes Derivative assets
(GBP11.4bn). See note 6.01.
[36] Includes LGR direct investment bonds (GBP 17,711m), direct
investment property (GBP3,798m), direct investments equity (GBP9m),
and other assets (GBP90m). Please see note 6.02b for more
information.
[37]
https://www.legalandgeneralgroup.com/media-centre/press-releases/legal-general-invests-750m-into-developing-new-affordable-housing/
[38] Pridham Report, 2019
[39] Broadridge Pan-European mutual fund and ETF flows Q4
2019
[40] UK protection discount rate from 2.00% on 31 December 2018
to 1.48% on 31 December 2019
[41] US 10 year treasury rate reduced from 2.66% on 31 December 2018 to 1.92% on 31 December 2019
[42] The equity holders' total Effective Tax Rate excluding
discontinued operations is 14.3% (2018: 15.0%).
[43] Coverage ratio before payment of the 2019 final
dividend.
[44] Using unrounded operational surplus generation values.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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