TIDMLGEN
RNS Number : 7168R
Legal & General Group Plc
10 March 2021
2020 Results: Resilient operating earnings (GBP2.2bn) and a
robust balance sheet deliver 17.3 % ROE; performance provides good
start to new 5 year ambitions
Financial highlights[1]
-- Operating profit[2] broadly flat at GBP2,218m (2019:
GBP2,286m), with 3 of 5 businesses delivering growth
-- Operating profit excluding mortality reserve release down
GBP90m to GBP2,041m (2019: GBP2,131m) , with the reduction driven
by specific COVID-19 estimated impacts of GBP(228)m[3]
-- Profit after tax[4] down 12% to GBP1,607m (2019: GBP1,834m) ,
principally reflecting the formulaic impact of lower interest rates
on LGI and the unrealised impact of market movements, partially
offset by profit on disposal from our Mature Savings business
-- Return on equity of 17.3% (2019: 20.4%), resilient in light of market volatility
-- Despite COVID-19 we delivered financial metrics in line with
our five year ambitions (2020-2024):
-- Full year dividend of 17.57p per share (2019: 17.57p)
-- Net release from operations of GBP1,539m (2019:
GBP1,597m)
-- Solvency II operational surplus generation from continuing
operations of GBP1.5bn (2019: GBP1.5bn)
Business highlights
We remain committed to Inclusive Capitalism as we support our
customers, our people and communities in the face of COVID-19; for
more details of our approach please see page 4.
Our businesses continue to perform resiliently:
-- LGRI global Pension Risk Transfer (PRT) new business premiums
of GBP8,843m , including record US PRT volumes of $1,614m (2019:
GBP11,392m; $1,140m)
-- LGRR annuity premiums of GBP910m (2019: GBP970m), initially
impacted by COVID-19, but recovering to be up 3% during H2 compared
to prior year
-- LGC Direct Investment origination of GBP0.6bn, with AUM
growth of 9% to GBP3.1bn (2019: GBP2.9bn)
-- LGIM external net flows of GBP20.4bn, with AUM up 7% at
GBP1,279bn (2019: GBP86.4bn; GBP1,196bn)
-- LGI new business annual premiums up 10% to GBP372m ,
supporting GBP2,849m gross written premiums (2019: GBP339m;
GBP2,729m)
Our balance sheet is robust:
-- Solvency II coverage ratio[5] of 177% (2019: 184%) and as at
5 March 2021, we estimate the ratio was 192%[6]
-- Our traded credit portfolio (excluding gilts), which is
actively managed, has had no defaults and has seen net downgrades
to sub-investment grade of 0.9 % during 2020; just half of that
experienced by the index. Our GBP3.5bn IFRS Credit Default Reserve
has remained unutilised
-- 99.9% of scheduled cash-flows on our annuity portfolio's
direct investments were paid during the year, reflecting the high
quality of our counterparty exposure
"Legal & General delivered a robust and resilient
performance for all stakeholders, providing stability to our
people, customers and shareholders. Our balance sheet remains
strong, with the Solvency II coverage ratio currently over 190%,
and trading remains consistent with delivering our growth ambitions
which are supported by six long term growth drivers. Our commitment
to Inclusive Capitalism, ESG and investing in climate change means
we intend to play an important role in the post pandemic
recovery."
Nigel Wilson, Group Chief Executive
Financial summary
GBPm 2020 2019 Growth
%
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Analysis of operating profit
Legal & General Retirement (LGR) excl. mortality
reserve release (7) 1,554 1,414 10
- LGR - Institutional (LGRI) 1,229 1,116 10
- LGR - Retail (LGRR) 325 298 9
Legal & General Investment Management (LGIM) (8) 404 394 3
Legal & General Capital (LGC) 275 363 (24)
Legal & General Insurance (LGI) 189 314 (40)
=========================================================== ===== ===== ======
Operating profit from continuing divisions[7] (,[8],[9]) 2,422 2,485 (3)
=========================================================== ===== ===== ======
Mature Savings[10] 34 46 (26)
General Insurance[11] nil (35) n/a
Operating profit from divisions (7) (,) (8) 2,456 2,496 (2)
Group debt costs (233) (208) 12
Group investment projects and expenses (155) (157) (1)
Exceptional COVID-19 related expenses[12] (27) nil n/a
=========================================================== ===== ===== ======
Operating profit excl. mortality reserve release
(7) 2,041 2,131 (4)
=========================================================== ===== ===== ======
LGR mortality reserve release 177 155 n/a
=========================================================== ===== ===== ======
Operating profit 2,218 2,286 (3)
=========================================================== ===== ===== ======
Investment and other variances (incl. minority interests),
excluding LGI 29 60 n/a
LGI investment variance[13] (459) (234) n/a
Profit before tax attributable to equity holders[14] 1,788 2,112 (15)
Profit after tax attributable to equity holders 1,607 1,834 (12)
Of which:
Mortality reserve releases (post-tax) 153 134 n/a
Mature Savings profit on disposal 271
Profit after tax excl. mortality reserve release
and disposals 1,183 1,700 (30)
Reported earnings per share (p) 27.00 30.92 (13)
Of which:
Mortality reserve releases (post-tax) 2.58 2.26 n/a
Mature Savings profit on disposal 4.58 nil n/a
Earnings per share (p) excl. mortality reserve release
and Mature Savings disposal 19.84 28.66 (31)
===== =====
Book value per share (p) 158 150 5
Full year dividend per share (p) 17.57 17.57 nil
Net release from continuing operations (9) 1,511 1,588 (5)
Net release from discontinued operations 28 9 211
=========================================================== ===== ===== ======
2020 Financial performance
Income statement
Legal & General demonstrated the stability of its business
model against a challenging macroeconomic backdrop, delivering
operating profit of GBP2,218m, broadly in line with prior year
(2019: GBP2,286m) . The strength of our diversified business model
meant we were able to weather the volatility of 2020 with three of
our five businesses delivering growth.
Despite the impacts of COVID-19, we delivered financial metrics
consistent with our five year ambitions (2020-2024). Cash
generation of GBP1,539m (2019: GBP1,597m) and capital generation
from continuing operations of GBP1.5bn (2019: GBP1.5bn) were both
consistent with our goals of GBP8bn to GBP9bn over five years. Both
exceeded our full year dividends declared (and paid) of GBP1.0bn
(2019: GBP1.0bn), which is on track for our five year cumulative
dividend ambition of GBP5.6bn to GBP5.9bn. Supporting this robust
financial performance, our new business and balance sheet have
again proven to be resilient against shocks, with LGRI's US
business achieving record PRT volumes and LGI new business annual
premiums up 10% year on year.
LGRI delivered strong operating profit[15] growth, up 10% year
on year to GBP1,229m (2019: GBP1,116m). New business continued to
make a sizeable contribution to profit, with record US PRT volumes
of $1.6bn (2019: $1.1bn) and a steady flow of UK PRT new business
written at attractive Solvency II new business margins of 10.6%
(including LGRR individual annuities) as we were rewarded for
putting capital at risk in volatile times.
LGRR operating profit 15 increased 9% to GBP325m (2019:
GBP298m), supported by the consistent performance of the growing
annuity portfolio. Whilst individual annuity and Lifetime Mortgage
volumes were down year on year, primarily reflecting stalled
demand, the swift use of technological innovation immediately
following the first lockdown meant that our retail annuity business
was able to support customers in their time of need and to win
market share.
LGIM delivered operating profit growth of 3% to GBP404m (2019:
GBP394m) driven by revenue growth of 5% to GBP956m (2019: GBP912m).
This was supported by growth in higher margin areas, partially
offset by LGIM's continued investment in its growth strategy.
Management actions on cost in H1 helped to deliver profit
improvements in H2. Benefitting from a diversified asset base, LGIM
grew its AUM by 7% to GBP1,279bn during 2020.
LGC operating profit decreased 24% to GBP275m (2019: GBP363m),
principally reflecting a pause in traditional house-building and
sales activities during the UK lockdowns and lower profits from our
direct investment portfolio .
LGI operating profit decreased 40% to GBP189m (2019: GBP 314m),
reflecting increased claims experience due to COVID-19,
particularly impacting our US Protection business where we retain
the majority of the mortality risk, and a GBP110m increase in
reserves for potential future COVID-19 related claims in 2021.
Group costs were elevated compared to prior year, largely as a
result of exceptional COVID-19-related costs (GBP27m) primarily
related to the deployment of IT hardware to facilitate remote
working and other operational workplace costs. Higher debt costs
reflected debt raised in H1 2020. The Group will continue to make
measured investments in technology, in order to augment cyber
security and upgrade the IT infrastructure, including preparation
for IFRS 17. This expenditure should reduce towards historical
levels once these projects are delivered.
Profit before tax attributable to equity holders[16] was
GBP1,788m (2019: GBP2,112m), reflecting investment variance of
GBP(430)m (2019: GBP(174)m). The largest contributor to the
investment variance, GBP(459)m, is the formulaic impact of falling
interest rates reducing the discount rate used to calculate LGI
reserves. Investment variance within LGC, where we are long-term
investors, was GBP(299)m, reflecting equity market volatility,
early stage development costs and a prudent approach to asset
valuations within the direct investment portfolio . These were
partly offset by the profit on disposal following the completion of
the sale of our Mature Savings business (GBP335m).
Balance sheet and asset portfolio
The Group's Solvency II operational surplus generation from
continuing operations was up 4% at GBP1.5bn (2019: GBP1.5bn). New
business strain was GBP0.3bn (2019: GBP0.6bn) reflecting UK annuity
new business written at lower strains and good margins (10.6%),
resulting in net surplus generation of GBP1.2bn (2019:
GBP1.0bn).
Our Solvency II coverage ratio on a shareholder basis ([17]) was
177% at 31 December 2020 (2019: 184%). On a proforma calculation
basis ([18]) , our Solvency II coverage ratio was 175% at the end
of December (2019: 179%). As at 5 March 2021, we estimate the ratio
was 192%.[19]
Our IFRS return on equity of 17.3% reflects the impact of
unrealised negative investment variances (2019: 20.4%).[20]
Our balance sheet and asset portfolio performed resiliently
through a turbulent year. The defensive positioning of our
GBP47.7bn actively managed traded credit portfolio (excluding
gilts) has meant that we have outperformed the downgrade experience
of the market, with just 0.9 % of the portfolio downgrading to
sub-investment grade ([21]) and no defaults . The annuity
portfolio's direct investments continue to perform strongly, with
99.9 % of scheduled cash-flows paid year to date, reflecting the
high quality of our counterparty exposure.
COVID-19
COVID-19 is having an unprecedented impact on our customers,
people and society at large. Legal & General Group continues to
support all of our stakeholders through this difficult period,
without relying on direct Government funding. Our priorities remain
to look after our customers, to safeguard the wellbeing of our
people and to support the needs of the wider community more broadly
through Inclusive Capitalism and by investing in the real
economy.
Our purpose is to provide financial stability to our customers
and their dependents in good times and in bad: it is "what we do".
During 2020 we paid GBP1.9bn in gross protection claims and
provided financial stability through regular payments to over 1
million pensioners. To support and protect the residents in LGC's
Later Living communities, we enacted a comprehensive action plan
which kept rates of infection below that of the national average
for over-70s, whilst also focussing on mental wellbeing.
We rapidly facilitated remote working for our people by
distributing an initial block of 1,700 laptops, enabling a remote
contact centre and building a cloud based desktop solution within
just 10 weeks of the initial March 2020 lockdown. Subsequently, we
distributed an additional 2,000 laptops to further enhance our
operational resilience. Additionally, we have supported our
employees' mental and physical wellbeing through a number of
resources including trained Mental Health First Aiders, a
confidential employee assistance helpline and a dedicated COVID-19
intranet hub.
To support the communities around us through the pandemic, we
donated GBP5m to Newcastle City Council to build a prototype care
home which incorporates learnings from COVID-19 on infection
control. We supported the UK's National Health Service (NHS) by
offering key workers free accommodation at our build to rent sites,
offering our Bracknell site for training and storage and 25 of our
other sites for COVID-19 testing, and financial support for NHS
charities.
The human cost of the pandemic has been high. It has impacted
our own customers, including holders of life insurance policies and
annuitants who have lost their lives prematurely. We continue to
pay all valid claims and we have prioritised giving rapid but
sensitive service to bereaved families. Legal & General
experienced GBP76m of COVID-19-related claims in LGI. Since our H1
2020 results, a number of additional COVID-19 variants have emerged
and uncertainty regarding the viruses' trajectory remains,
therefore, we are making a further GBP110m provision for future
COVID-19 claims in LGI, including incurred but not reported (IBNR)
claims. This provision allows us to ensure our year end 2020
reserves adequately reflect the higher expected incidence of 2021
claims compared to our own long term assumptions. Our reinsurance
strategy, which reinsures virtually all LGI's UK retail protection
business, has substantially reduced the impact on LGI of higher
claims, although we retain exposure in the US. During the year, LGR
recognised an GBP85m reserve release in light of 2020 COVID-19
mortality experience. Further operational impacts included pausing
LGC Build to Sell Housing operations for several months, which was
the primary factor in the GBP100m COVID-19 impact to LGC's
operating profit during the year. Additionally, Group operational
costs increased by GBP27m reflecting incremental expenses incurred
as a result of COVID-19, including the provision of IT spend for
remote working. In all, we estimate COVID-19 related events reduced
operating profit by GBP228m.
COVID-19 has increased volatility within asset markets, but the
defensive positioning of LGR's GBP87.0bn asset portfolio has meant
that we have performed well in absolute and relative terms as
described on pages 16 and 17 .
The immediate outlook for the broader economy over the near term
is still highly uncertain and will depend on a number of factors,
including vaccine efficacy and distribution, as well as government
responses to the challenges ahead. We remain highly risk-aware,
alert both to potential challenges and opportunities, while
prudently managing our businesses, including making provisions for
future COVID-19 impacts as described above. With long-term
businesses and a defensive asset portfolio, we believe we are well
positioned to navigate further macroeconomic uncertainty and to
seize future opportunities that may arise.
Group Strategy
Legal & General is primarily a global provider of retirement
solutions to corporates and individuals, with core skills in asset
management and origination, longevity risk and technological
innovation. We operate at scale and are strongly positioned to
capitalise on significant structural growth opportunities across
our chosen markets through our five businesses:
1. Legal & General Retirement - Institutional (LGRI) offers
pension risk transfer (PRT) to institutional clients globally
2. Legal & General Retirement - Retail (LGRR) is a
waterfront provider of UK retail retirement solutions, including
individual annuities and lifetime mortgages (LTMs)
3. Legal & General Investment Management (LGIM) is the
11(th) largest global asset manager by AUM[22], primarily serving
institutional pension clients
4. Legal & General Capital (LGC) invests shareholder capital
and is building an alternative asset pipeline
5. Legal & General Insurance (LGI) sells retail and group
protection in the UK and retail protection in the US
Six growth drivers
Inclusive Capitalism is at the foundation of Legal &
General's strategy. By identifying and addressing long-term secular
trends, we are able to generate attractive, sustainable returns
while delivering products that are economically, socially, and
environmentally useful.
Since 2011 we have delivered total shareholder returns of 366%
[23] while at the same time, providing security in retirement to
more than 3m people. As a retirement solutions provider we invest
pension savings and shareholder assets into GBP29.3bn high quality
direct investments that deliver positive social and environmental
impacts, such as clean energy and affordable housing; this is the
core of our approach to Inclusive Capitalism.
Our strategy is focussed on six global, long-term growth drivers
which are structural rather than cyclical, providing resilience
through periods of macro volatility. 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 are increasingly seeking solutions to their ongoing
pension commitments. At the same time, individuals need to ensure
that their retirement funds and other assets can finance longer
retirements. The opportunity is vast, with global private Defined
Benefit (DB) and Defined Contribution (DC) pension assets nearly
doubling over the last decade to reach $53 trillion.[24]
LGRI and LGRR meet a key 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 $89 trillion and is expected to increase
to around $106 trillion by 2024[25], representing an enormous
opportunity for international asset managers. North America, Europe
and Asia Pacific 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 tripled over the past five years to
GBP388bn , and a driver for LGRI's US expansion, which has written
more than $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) can also struggle to achieve scale without
access to long-term capital. At the same time, the ageing
demographic creates a need for new investable assets for pension
funds.
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 affordable housing and SME growth
equity, as well as create high quality assets for the broader
Group.
4. Welfare reforms
The need to protect people from financial uncertainty has never
been more pertinent. 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, whilst also unlocking opportunities in
adjacent business areas.
Throughout the Legal & General Group , our businesses look
for opportunities to improve customer service and efficiency
through technology. During 2020, our swift technological response
in the immediate wake of the March lockdown meant our businesses
were able to provide continuity to customers and grow market
share.
6. Addressing Climate Change
Scientists, policy-makers, markets and regulators increasingly
agree that we must move to a global warming trajectory below
1.5degC 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.
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 GBP1.4bn of Legal &
General's own assets into renewable energy investments and over the
next five years we intend to develop three business areas aligned
to Addressing Climate Change.
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 global
retirement solutions and insurance markets, benefitting from a
mutually reinforcing business model with 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 GBP87.0bn of assets,
providing long-term, captive AUM to LGIM. This portfolio is
continually being enhanced with direct investments originated by
LGC.
-- LGIM is a leading player in providing UK and US DB de-risking
solutions and is uniquely positioned to support DB clients
journeying to the full range of pension endgame destinations,
including PRT and Insured Self Sufficiency with LGRI; 69% of LGRI's
PRT transactions over the past three years were from existing LGIM
clients.[26] Furthermore, as DB clients de-risk assets and
liabilities through PRT with LGRI, LGIM then manages the associated
assets for decades to come. LGIM is also the market leader in UK DC
pension scheme clients - a market with significant growth
potential. Total UK DC assets are expected to more than double by
2028 to GBP955bn.[27]
-- LGC invests society's capital for society's benefit. As a
core component of our retirement solutions business, LGC creates
assets to back pensions (notably in LGRI and LGRR) and invests our
shareholder funds to achieve more attractive risk adjusted returns.
LGC is building an alternative asset creation platform, benefitting
LGIM clients, and leveraging third party capital to invest client
funds directly and via acquired boutiques.
-- 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.
Delivering Inclusive Capitalism and ESG
Our business strategy is focused on Inclusive Capitalism, and,
accordingly, our Environmental, Social, and
Governance (ESG) impact[28], particularly in terms of:
1. How our businesses operate. Our commitment to ESG is evident
from our ambition to operate our offices and business travel with
net zero emissions from 2030, to build 3,000 affordable homes by
2023 and for all of our new homes to be net zero operational carbon
from 2030. During 2020 we ran an Addressing Climate Change
Accelerator Programme, incubating a number of cross-functional
projects aimed at increasing our involvement in funding the
transition to net zero, especially in the built environment.
2. How we invest our GBP 95.1bn of proprietary assets[29] . We
consider ESG factors in new investment decisions and in 2020 we
reduced the carbon intensity of the Group balance sheet by 2%.
Please see pages 16 to 17 for more information and our Task Force
on Climate-related Financial Disclosures to be published on 22
March 2021.
3. How we influence as one of the world's largest asset managers
with GBP 1.3 trillion AUM . We have GBP206.8bn AUM in ESG
strategies and during 2020 we cast 139,000 stewardship votes as we
continued to pressure investee companies to behave responsibly.[30]
Please see page 20 for more information.
Our alignment to six long-term growth drivers and our commitment
to Inclusive Capitalism have led us to develop a sustainable
business model which generates positive outcomes for shareholders,
customers, wider society and the environment.
Outlook
Medium term growth ambitions unchanged
Our strategy has delivered strong returns for our shareholders
over time and has demonstrated resilience in the current
environment. We are confident our focus on our 6 growth drivers
will continue to deliver profitable growth into the future as we
execute on our strategy based on Inclusive Capitalism .
In November we set out our five year ambitions. Cumulatively,
over the period 2020-2024, our financial ambitions are for[31]
:
1. Cash and capital generation to significantly exceed dividends
(we intend to generate GBP8.0bn - GBP9.0bn of both cash and
capital, and to pay dividends of GBP5.6bn - GBP5.9bn)[32]
2. Earnings per Share to grow faster than dividends, with the
dividend growing at low to mid-single digits from 2021
3. Net capital surplus generation (i.e. including new business strain) to exceed dividends
We expect to deliver long-term, diversified growth across the
Group . LGRI and LGRR provide highly predictable, stable cash flows
from their growing back-books and we expect the annuity portfolio
to be fully self-financing in the next three to five years. Our
asset management and origination businesses, LGIM and LGC, operate
in attractive and profitable markets, and maintain a strong
commitment to ESG-aligned investing. LGI is applying technology
best practices to sustain its UK leadership, to grow in the US and
to continue to expand into adjacent markets.
We remain confident in our strategy and in our ability to
deliver resilient, organic growth through periods of
macro-volatility, supported by strong competitive positioning in
attractive and growing markets. Our confidence and our dividend
paying capacity are underpinned by the Group's strong balance sheet
with GBP7.4bn in surplus regulatory capital, a GBP3.5bn IFRS credit
default reserve, and significant buffers to absorb a market
downturn. We have a proven operating model which is reinforced by
robust risk management practices.
2021 Group outlook consistent with medium term ambitions
We have made a good start to our five year cumulative financial
ambitions and we remain confident of making further progress in
2021. Global PRT markets have remained buoyant in Q1 2021, while
LGIM has benefited from continued asset market recoveries. LGC has
seen a continuation of the rebound in the UK residential property
market, which has also increased demand for UK retail protection
from LGI. H2 2020 momentum in LGRR has continued into 2021, as
customers look to buy annuities and lifetime mortgages. Although
macro-economic uncertainty remains, we are pleased with the
progress we have made year to date.
Whilst recognising the significant near-term challenges that
remain over 2021, we intend to be a leader in the post-pandemic
economic recovery. Our strategy and experience are strongly aligned
to the UK Government's three flagship policies of "Build back
Better", "Levelling Up" and Climate. We will continue to support
our shareholders and customers while delivering Inclusive
Capitalism through investments in infrastructure, clean energy,
affordable housing, and providing products to support individuals'
financial resilience.
Business segment outlook
LGR Institutional (LGRI)
LGRI participates in the rapidly growing global PRT market,
focussing on corporate defined DB pension plans in the UK, the US,
the Netherlands, Ireland, and Canada, which together have nearly
GBP7 trillion of pension liabilities due to ageing demographics.
([33])
We are the only global player in PRT, writing direct business in
the UK and US, and are market leaders in the UK. We are supported
by LGIM's long-standing client relationships and LGC's asset
manufacturing capabilities, as well as wide-ranging skills across
the Group which enhance our asset strategy and product innovation.
During 2020, 75% of our UK transactions were with LGIM clients,
demonstrating the strength of our client relationships and the
resilience provided by our unique position as the only firm
operating across the full pension de-risking journey.
The UK is our primary market and it is the most mature PRT
market globally with GBP2.2 trillion of UK DB pension liabilities,
of which only c.11% have been transferred to insurance companies to
date.[34] This leaves a sizeable opportunity for future growth in
this market. Demand from companies and pension plans for insurance
remains robust. Market commentators expect that the total UK PRT
market was more than GBP30bn in 2020[35], and they anticipate as
much as GBP240bn of PRT demand potentially arising in the UK during
the next five years.[36] Our ambition is to write GBP40bn to
GBP50bn of new UK PRT over the next five years, as we remain
disciplined in our pricing and deployment of capital.
The US represents a further, significant market opportunity,
with $3.5 (GBP2.8) trillion of DB liabilities, of which only c.6%
have transacted to date.[37] Since our market entry in 2015, our US
business has written more than $5bn of PRT with 67 clients. We are
the only insurer providing PRT directly to pension plans globally
and during 2020 we undertook our first international PRT
transactions, securing pension benefits for the UK and US pension
plans of two multinational companies. This is anticipated by market
commentators to be "one of the key levers that sponsors with UK and
US obligations look to utilise going forwards".[38] Our ambition is
to write more than $10bn of international PRT over the next five
years.
Whilst new PRT business requires solvency capital on day one,
this capital commitment pays back quickly, generating an attractive
and long-term stream of operating surplus, which provides stability
to the division's operating performance and means that LGRI is not
dependent on new business to deliver stable profits. Our annuity
portfolio (including LGRR individual annuities) is expected to be
self-sustaining within 3-5 years as it reaches GBP90bn-GBP110bn AUM
(2020: GBP87.0bn). At this point, it will be able to fund new
business, while both (a) paying its share of a progressive Group
dividend and (b) contributing to an increase in the Group solvency
coverage ratio over time.
LGR Retail (LGRR)
LGRR is a growth engine of the firm and we expect its target
market to continue to expand, driven by ageing demographics and
welfare reforms . LGRR is a waterfront provider of UK retail
retirement solutions offering annuities, income drawdown, pot
consolidation, lifetime mortgages, and advice. LGRR works closely
with LGIM to deliver and develop a broad range of retirement
solutions for customers.
The retirement market continues to be a key area of growth for
Legal & General and we are uniquely placed to capitalise on
this opportunity, leveraging our brand, customer relationships,
capabilities and people. LGRR is building out offerings in
retirement income, lifetime mortgages and care. Additionally, in
early 2021, the Workplace Savings business and its four million
customers was transferred from LGIM to LGRR, further building out
LGRR's retail retirement proposition. Associated in-house assets
will continue to be managed by LGIM. Our ambition is to be the UK's
leading retirement brand, enabling all our customers to have a
secure retirement whilst generating lasting profit for the Group
and, over time, to expand internationally.
Our primary market is the UK, where currently, each year, there
are GBP40bn of personal pension assets coming to maturity and this
is expected to grow to GBP50bn by 2024.[39] Within this, the
individual annuity market accounts for just GBP4.2bn of total
maturing assets, i.e. a little over 10%.[40] LGRR is building on
its strong market position in annuities, having grown its market
share to 20.3% in the first nine months of 2020 (40) , while
expanding its addressable market through product innovation, such
as drawdown and Retirement Interest Only mortgages.
The UK Lifetime Mortgages (LTM) market continues to represent a
sizeable opportunity for LGRR, with UK housing equity in over 55s
at GBP1.7 trillion across approximately 5.5m houses.[41] At present
only GBP4bn per year is being released through the LTM market.
While we maintain our focus on the traditional market (those with
houses of average value of GBP400k, which accounts for around a
third of over 55's housing equity, or c.GBP680bn) a further
GBP600bn of housing equity is with people who still owe money on
their house when they reach retirement age. We are starting to
serve this market better through our Retirement Interest Only
mortgages. GBP420bn of housing equity is represented by owners of
houses worth GBP1m or more. This "wealth" sector has been
under-served, but we expect to see lending to this segment
increasing year-on-year from 2021 onwards. Additionally, we are
looking at overseas opportunities, particularly in Australia, where
we acquired a 20% stake in Household Capital in early 2020.
The global disruption following the outbreak of coronavirus
caused a temporary dip in demand for retail retirement products,
but we do not expect this to alter the long-term growth trajectory.
Despite lower rates, many individuals place greater value on the
certainty of an annuity in these uncertain times, while other
people may choose to access home equity through a lifetime mortgage
to weather reductions in the value of other assets. We are actively
seeking solutions to address the needs of the 1.5m UK workers aged
over 50 who report that they intend to significantly delay their
retirement as a direct result of the pandemic.
Legal & General Investment Management (LGIM)
LGIM benefits from a combination of scale businesses and a
diversified asset base, underpinned by structural demand for our
products and investment capabilities. Our purpose is to create a
better future through responsible investing, and we are recognised
as a global market leader in ESG. Our five year growth ambition is
driven by the three pillars of our strategy to modernise, diversify
and internationalise the business. We seek (i) to grow cumulative
profits at least in line with the Group's dividend growth rate of
3% to 6%, absent of market shocks, (ii) to increase AUM in
international and higher margin areas, and (iii) to diversify AUM
by client, channel and geography. We expect to maintain a cost
income ratio in the high 50 percent range over the next two to
three years as we invest for growth , after which we expect it to
trend downwards.
LGIM plays a critical role in Legal & General Group's
position as a leading, global pension solutions provider. As such,
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 and broadening its reach.
Modernise: LGIM continues to invest in the business to achieve
the resilience and global scalability critical to our future
success. We are laying the foundations for continued global growth
by investing in our people, operating platform, and refining our
organisational structure . In the past year we have significantly
strengthened our senior leadership team, with the addition of
experienced new hires in the positions of Chief Risk Officer, Chief
Compliance Officer, Global Chief Operating Officer, Global Head of
Human Resources, Chief Technology Officer and Chief Data Officer.
We continue to invest in our front office systems capabilities,
driving efficiencies in the investment process.
Diversify: We continue to cement our leadership in ESG
investing, and plan to expand our product ranges globally, as well
as driving further integration of ESG into our mainstream
investment portfolios. We will expand our investment offering, with
particular focus on higher margin areas such as Real Assets, Multi
Asset and Solutions. We see a sizeable opportunity in Real Assets -
we are well known for our UK Real Estate Equity expertise, and will
increasingly also provide investors with access to our leading
private credit capabilities. As UK and US DB schemes come closer to
funding maturity, we have an opportunity to extend our strong
market position by enhancing our 'endgame' Solutions offering,
thereby helping many clients to either self-sufficiency or to buy
out with LGRI.
Internationalise: LGIM will be a disruptor in regions and
countries where our strengths align to client needs. Over the last
five years LGIM's international AUM has more than tripled to reach
GBP 388 bn - 30 % of LGIM's total AUM. Our ambition is to continue
growing International AUM profitably and at pace, with a focus on
the US, Europe and Asia. In the US, we will deepen our strong
client relationships through innovation in DC and leadership in
ESG. In Europe, we will build on our successes in Germany and
Italy, to lay the foundation for expansion into other European
markets, aiming to be a leading asset manager in Europe by 2025. In
Asia, our strategy is to retain and increase our share of wallet
with existing clients and deepen our footprint in existing markets
- Japan, China, Hong Kong, Taiwan and Korea - by showcasing
investment solutions that address key market trends.
LGIM's strategy strongly positions us to achieve our five-year
ambitions and to grow cumulative profits at least in line with the
Group's dividend growth rate of 3% to 6%, absent of market
shocks.
Legal & General Capital (LGC)
LGC, the Group's alternative asset platform, makes substantial
contributions to shareholder value creation and is positioned to
drive further meaningful growth in the future.
LGC's alternative asset capabilities have grown out of a
strategic desire to create assets to back LGRI and LGRR annuities,
and to invest our shareholder funds to achieve more attractive risk
adjusted returns. LGC's success in creating and scaling alternative
asset capabilities has resulted in a pipeline of opportunities that
exceeds the demands of Legal & General's balance sheet. As a
result, as we continue to expand our balance sheet assets, we will
increasingly create alternative assets for third party investors.
By scaling up our asset distribution platform, we can accelerate
the speed with which we recycle capital and deliver returns. This
strategic expansion is additive to shareholder value and supports
LGIM's diversification plans. Over the next five years we expect to
build our diversified direct investment AUM towards c.GBP5bn (2020:
GBP3.1bn) with a target blended portfolio return of 8% to 10%.
Additionally, we plan to increase third party capital to over
GBP14bn (2020: GBP5.2bn) through (i) capital raised by our
part-owned boutique fund managers, (ii) co-investment in new and
existing LGC assets, (iii) real assets manufactured for LGRI and
LGRR, and (iv) LGC-originated real assets distributed by LGIM.
LGC continues to build its capabilities in a range of sectors,
which are all supported by long-term structural growth drivers,
meeting a financing gap and responding to a scarcity of supply that
is underpinned by enduring societal needs. With c.GBP1bn invested
in the real economy, supporting the Group's focus on climate and
inclusive capitalism, our investments create jobs, change lives and
contribute towards a net zero carbon future.
-- Our specialist commercial real estate portfolio, which
includes data centres, urban development, and science and
technology-focussed real estate, has c.GBP0.7bn currently invested
across sixteen UK towns and cities, creating jobs, driving economic
growth and boosting local communities as the UK looks to build back
better.
-- In the clean energy sector, more than $130 trillion of
investment is needed globally by 2050 to address climate change.
LGC has invested GBP0.2bn in clean energy to date, including in the
Kensa Group, a ground source heat pump technology firm, and a stake
in Pod Point, one of the UK's largest electric vehicle charge point
operators. We are committed to scaling-up investments in the clean
energy sector to accelerate progress towards a low-cost and
low-carbon economy .
-- LGC's residential property platform is diversified across
build to rent, build to sell, later living, and affordable housing,
providing some insulation from cyclical shocks. The long term need
for UK housing is well established: each year delivery of new homes
falls short of demand, leading to increased levels of overcrowding,
affordability issues, impaired labour mobility and increased levels
of homelessness. Supporting our climate ambitions, we have
committed that our homes will all be operationally carbon
emission-free from 2030.
We are well positioned to achieve our long-term targets of
delivering:
o Over 3,000 traditional build to sell homes per annum
o 5,500 build to rent homes in our pipeline
o 3,000 affordable homes per year by 2023 to help meet the needs
of the more than 1.4m households on waiting lists for UK social
housing
o Over 3,000 Later Living homes in our pipeline to help address
the housing requirements of last time buyers seeking to downsize,
estimated at over 3.4m by 2021
-- In SME Finance, we are continuing to support UK innovation,
investing in the real economy by creating a diverse portolio of
assets. We expect to continue to deploy our capital and focus to
support the venture ecosystem to help create and grow the
businesses of tomorrow.
Legal & General Insurance (LGI)
We anticipate continued premium growth across our UK and US
businesses as technological innovation makes our products more
accessible to customers and supports further product and pricing
enhancements.
In the UK, our market leading retail protection business is
supported by the strength of our distribution relationships,
investment in our systems and platforms, and product enhancements;
these strengths led to a strong performance in H2 2020 which is
continuing into 2021. Our group protection business has gained
market share in 2020, however, 2021 new business volumes may not
reach the record levels from 2020 as, typically, fewer large
schemes are tendered in odd years than in even years. In line with
our five year ambition, we are targeting mid-single digit growth in
revenues across our UK protection businesses.
In the US, we anticipate our on-going technology investments and
new partnerships will position us for premium growth as the market
recovers from the distribution and underwriting disruptions caused
by COVID-19. We plan to use technology to improve customer
experience while reducing cost and becoming the partner of choice
for a wide range of distribution partners. We are already the
largest provider of term life assurance in the brokerage channel by
policy count, and our digital first approach is aiming to achieve
double digit growth in new business sales over the next five
years.
As we look to transform adjacent markets, we are also
accelerating growth in our digital platforms such as Salary
Finance, where the loan book has quadrupled since 2018.
LGI expects to emerge stronger from the current crisis. In
responding to the challenges presented by COVID-19 we have
accelerated our use of data analytics in the UK and US, allowing us
to enhance our products, optimise our profits, and take proactive
risk management actions.
People
At Legal & General our greatest strength is our people, and
that includes ensuring we have the right leaders across our
business. To capitalise on the opportunities ahead of us and the
expertise of our leaders, we are making a number of leadership
changes in 2021.
Simon Gadd will step down as Group Chief Risk Officer in 2021
after a 34 year career with the Group, and move into an advisory
role for the firm. We would like to thank Simon for his leadership
and his enormous technical ability demonstrated during his time
with us.
Chris Knight will take over the role of Group Chief Risk Officer
from March, subject to PRA approval, having led LGRR through a
strong period of growth during his three years as CEO of the
division. During Chris's twelve years at Legal & General he has
held a number of Group and Divisional leadership roles throughout
the firm. He has also served as the Group's Customer Champion,
representing retail customers' interests across the whole product
range: a perspective he will bring to his CRO role.
Chris is succeeded as CEO of LGRR by Andrew Kail who was
previously the Head of PwC's Financial Services practice and was
Legal & General's Group engagement audit partner for five
years. Andrew spent thirty years with PwC and, as a long-standing
senior auditor and advisor, brings significant financial services
experience as well as expertise in regulation, risk and technology.
He is well placed to lead LGRR into the next stage of its mission
to bring the best retirement products and services to UK
consumers.
To facilitate our internationalisation objectives, Kerrigan
Procter (currently CEO of LGC) has been appointed President of
Asia, Legal & General Group, based in Hong Kong. The dynamism
of the Asia-Pacific markets provides significant opportunities for
not only LGIM, which is already established in the region with
ambition to grow, but also across the Group. Kerrigan's remit will
involve working hand in hand with our divisions to develop their
strategies for growth in Asia and then implementing them in the
region.
Laura Mason, who is currently serving as the CEO of LGRI, has
been named as Kerrigan's successor as CEO of LGC. This move sees
Laura return to LGC where she was part of the original leadership
team involved in setting up the division. Laura is already heavily
involved in LGC's work to invest in the real economy, with board
positions overseeing our Oxford and Pemberton investments.
We will announce Laura's successor as CEO of LGRI in due
course.
Dividend
Our businesses and balance sheet have shown resilience during
the COVID-19 pandemic. As a long-term company, we act prudently and
take into consideration all of our stakeholders. As indicated at
the Capital Markets event in November, the Board has declared a
final dividend of 17.57p per share, flat against the prior
year.
Over the longer term, Legal & General expects to maintain
its progressive dividend policy reflecting the Group's expected
underlying business growth, including net release from operations
and operating earnings.
LGR - Institutional
FINANCIAL HIGHLIGHTS GBPm 2020 2019
================================================== ===== =======
Operating profit excluding mortality reserve
release 1,229 1,116
Mortality reserve release 102 100
================================================== ===== =======
Operating Profit 1,331 1,216
================================================== ===== =======
Release from operations 492 418
New business surplus 220 265
================================================== ===== =======
Net release from operations 712 683
================================================== ===== =======
UK PRT 7,196 10,075
International PRT 1,250 1,067
Other PRT (longevity insurance, Assured Payment
Policy, Insured Self-Sufficiency) 397 250
Total new business 8,843 11,392
================================================== ===== =======
Operating profit up 10% to GBP1,229m ([42])
LGRI continues to deliver consistent operating profit growth,
with a 10% increase in operating profit over 2020 t o GBP1,229m
(42) (2019: GBP1,116m (42) ). Growth was underpinned by the
performance of our growing annuity portfolio and by resilient
pension risk transfer (PRT) new business volumes, which saw
particularly robust growth in our US business. As mentioned on page
4, the devastating loss of life from COVID-19 has had impacts
across the Group, including LGR.
In H2 2020 we reviewed our future longevity improvement
assumptions and have conservatively adopted an adjusted version of
the CMI 2018 mortality tables for LGRI's annuity book, resulting in
a GBP 102 m reserve release. Including the reserve release,
operating profit increased 9 % to GBP 1,331 m (2019:
GBP1,216m).
Release from operations increased 18% to GBP492m (2019:
GBP418m), reflecting the scale of the business as prudential
margins unwind from LGR's growing GBP 87.0 bn annuity fund (2019:
GBP75.9bn).
Net release from operations was GBP712m (2019: GBP683m) with new
business surplus of GBP220m (2019: GBP265m). Higher release from
operations was offset by lower new business surplus due to lower
volumes in 2020, although at higher margins, compared with record
bulk annuity new business volumes in 2019.
During 2020 we wrote GBP7,196m of UK bulk annuities, which
combined with the Other PRT of GBP397m and GBP910m of individual
annuities written in LGRR, delivered a 10.6% Solvency II new
business margin (2019: 7.9%) with UK PRT capital strain of less
than 4%. PRT business written during 2020 was especially capital
efficient due to markets, reducing strain.
Gross longevity exposure was GBP88.9bn across LGRI and LGRR's
annuity and longevity insurance businesses. We have reinsured
GBP37.1bn of longevity risk with fourteen reinsurance
counterparties, leaving a net exposure of GBP51.8bn. The
reinsurance market is growing and innovating, and we expect it to
continue to offer sufficient capacity to meet the demand from
insurers.
57% increase in number of UK PRT transactions
During 2020 LGRI underwrote GBP8,843m of PRT across 61 deals
globally (2019: GBP11,392m; 42 deals) .
Legal & General maintained its position as a leader in the
UK PRT market, having written GBP 7,593m of premiums across 44
transactions (2019: GBP10,325m; 28 deals). The UK PRT market was
robust during 2020, with new business volumes the second highest on
record and surpassed only by 2019 volumes. [43] Whilst there was a
surge of mega-deals in 2019 driving higher market volumes in that
year, 2020 saw more transactions as a whole, but concentrated on
smaller and mid-sized pension schemes. As the only whole-of-market
provider in the UK we see nearly all deals coming to market and are
well positioned to preserve market share.
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 large UK PRT market. Long term
client relationships, typically fostered by LGIM, have allowed us
to help many pension plans achieve their de-risking goals. In 2020
we demonstrated our market leadership and solutions capabilities by
writing a series of innovative transactions, including:
-- Small scheme solutions, with over 65 % of our transactions
smaller than GBP100m as we leveraged technological innovation to
serve smaller pension plans more efficiently.
-- GBP1.1bn bulk annuity with Maersk Retirement Benefit Scheme
which secures the pension benefits of around 1,900 deferred members
and 3,000 retirees.
-- A GBP397m Assured Payment Policy, our capital-light PRT
product, for Legal & General Group UK Senior 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.
-- A ninth bulk annuity for ICI, one of our largest PRT clients.
Record new business as US PRT volumes increased 42%
Our US PRT new business premiums increased 42% to $1,614m (2020:
GBP1,250m; 2019: $1,140m; GBP893m) , as we grew market share from
4% in 2019 to 6% in 2020.[44] Since entering the market in 2015, we
have underwritten more
than $5bn of premium with 67 clients. [45] During 2020, the business broke new ground, writing:
-- Our largest ever US PRT transaction independent of reinsurance, at more than $350m;
-- Our first global PRT transaction, with LGRI simultaneously
insuring IHS Markit's UK and US pension plans for $144m (GBP122m).
As the only insurer providing PRT to pension plans globally, Legal
& General is uniquely positioned to offer holistic, global
pension de-risking solutions; and
-- The largest global PRT transaction for Evonik Industries,
insuring both their US and UK pensions plans for $826m (GBP617m)
during H2 2020.
LGR - Retail
FINANCIAL HIGHLIGHTS GBPm 2020 2019
=============================================== ===== ======
Operating profit excluding mortality reserve
release 325 298
Mortality reserve release 75 55
=============================================== ===== ======
Operating Profit 400 353
=============================================== ===== ======
Release from operations 163 180
New business surplus 57 62
=============================================== ===== ======
Net release from operations 220 242
=============================================== ===== ======
Individual single premium annuities 910 970
Lifetime & Retirement Interest Only mortgage
advances 791 965
Total new business 1,701 1,935
=============================================== ===== ======
Operating profit up 9% to GBP325m ([46])
LGRR operating profit growth excluding mortality reserve release
increased 9% t o GBP325m during 2020 (46) (2019: GBP298m (46) ).
Experience variances, primarily related to the tragic human cost of
COVID-19[47], offset the reduction in net release from
operations.
In H2 2020 we reviewed our future longevity improvement
assumptions and have conservatively adopted an adjusted version of
the CMI 2018 mortality tables for LGRR's annuity book, resulting in
a GBP 75 m reserve release. Including the reserve release,
operating profit was up 13 % to GBP 400 m (2019: GBP353m).
Release from operations was GBP163m (2019: GBP180m), a decrease
of 9 %, reflecting reduced lifetime mortgage lending in 2020 .
Net release from operations was GBP220m (2019: GBP242m) with new
business surplus of GBP57m (2019: GBP62m). New business surplus
fell reflecting a reduction in annuity sales due to the market-wide
slow down following the UK March 2020 lockdown.
Lower new business volumes in 2020, but both businesses have
bounced back from early pandemic disruptions
LGRR has helped customers weather the economic uncertainty
following COVID-19, delivering solutions to retirees through
individual annuities and Lifetime Mortgages (LTMs).
Individual annuity sales were down 6% to GBP 910 m in 2020
(2019: GBP970m), reflecting COVID impacts on new business volumes,
particularly the desire of potential customers to postpone formal
retirement in the immediate aftermath of the UK lockdown. Sales
recovered over H2 2020, up 3% compared to H2 2019, as demand
rebounded and technological innovation helped operational
adaptation to the current environment. Our relative performance
remained strong: our swift operational response, product innovation
and increased intermediary presence allowed us to grow market share
to 20.9%. ([48])
Lifetime mortgage advances, including Retirement Interest Only
mortgages, were down 18 % to GBP 791 m (2019: GBP965m), again
reflecting COVID impacts on new business volumes, and the
particular challenges which affected the working of the end-to-end
housing market. Throughout this period, we have maintained pricing
and underwriting discipline while building customer-focused
innovation, such as virtual valuations and electronic signatures.
At the end of 2020, LTMs were 7% of our total annuity assets and
our LTM new business portfolio had an average customer age of 71
and a weighted average loan-to-value of c.28% at point of sale.
Product innovation as a foundation for future growth
In addition to further growing its market leading annuity and
lifetime mortgage business, LGRR seeks to achieve its five year
ambitions by expanding its addressable market through product
innovation.
As an example, during Q2 2020, we launched our non-advised
drawdown to compete in the GBP28bn UK income drawdown market and in
Q4 we launched our market-leading pension pot tracing and
consolidation service.
Additionally, from 1 January 2021, the Workplace Savings
business and its four million customers was transferred from LGIM
to LGRR, building out LGRR's retail retirement proposition.
Associated in-house assets will continue to be managed by LGIM.
We are expanding our product range to create a holistic
decumulation proposition, and developing a digitally-led customer
journey, offering flexible and guaranteed income options as well as
pensions tracing and consolidation. As we develop our retail
retirement proposition to expand our addressable market, we expect
incremental growth to be increasingly capital light.
Legal & General Retirement - Total Annuity Asset
Portfolio
FINANCIAL HIGHLIGHTS GBPm 2020 2019
=========================================== ===== ======
Operating Profit 1,731 1,569
Investment and other variances 19 43
=========================================== ===== ======
Profit before tax 1,750 1,612
=========================================== ===== ======
Total annuity assets (GBPbn) 87.0 75.9
Of which: Direct investments (GBPbn) 24.7 21.6
=========================================== ===== ======
Legal & General Retirement's (LGR) GBP 87.0 bn 'A minus'
rated asset portfolio backing the IFRS annuity liabilities in LGRI
and LGRR is well diversified by sector and geography (2019:
GBP75.9bn).[49] Our ambition is to continue to strengthen our asset
sourcing capabilities (a core competitive advantage), including
both self-manufactured and public assets with a strong ESG
focus.
During 2020 LGR published its asset portfolio ESG strategy[50].
This includes:
Environmental - Portfolio decarbonisation (reducing portfolio
carbon emission intensity by 18.5% by 2025) and influencing the
transition to a low-carbon economy
We are decarbonising our portfolio through three primary
mechanisms:
1. Investing new business premiums at a lower carbon intensity than our current portfolio
2. Increasing portfolio allocation towards companies that are
themselves aligned to the Paris carbon emissions trajectory
3. Trading out of issuers (companies) within our current
portfolio which are decarbonising too slowly
Social impact - Creating new investments for the future
economy
When allocating capital towards investments, our primary aim is
to ensure the safety of our policyholders' benefits, but we also
look to invest to generate positive societal impacts, to drive
local and global economic growth, and to contribute to reliable
dividends for our shareholders.
Governance - Measuring and managing financial related risks
including ESG to make society more resilient with our financial
solutions
LGR and LGIM aim to develop and analyse ESG data in an efficient
way to identify, measure and manage the most salient risk factors
for our investments, and integrate these assessments into the
investment process. We measure and mitigate ESG risks in our
portfolio at both individual security and portfolio levels.
Credit portfolio management
Approximately two-thirds of LGR's fixed income portfolio is
rated A or better, 33 % rated BBB and 2 % sub-investment grade.
The key objective of our annuity-focused, fixed income fund
managers in LGIM is to manage the portfolio to match liabilities
while minimising credit downgrades and avoiding 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 we hold a GBP
3.5 bn IFRS credit default reserve .
We have kept lower-rated, cyclical exposures to a minimum and
only 13% of our BBB assets are BBB-. We actively manage our asset
portfolio and continue to take opportunities to improve credit
quality at attractive pricing levels. Market dynamics during the
early stages of COVID-19 allowed us to take significant positive
action and we remain vigilant as the economic impact of the
pandemic continues to develop.
This two-pronged approach, defensive positioning and active
management, has helped us mitigate downgrade and default risk. We
have outperformed the downgrade experience of the market, with just
0.9% of our traded credit assets downgraded to sub-investment grade
compared to 1.8% of the index. We have had no defaults.
Direct Investment
LGR originated GBP 2.6 bn of new, high quality direct
investments during 2020 which, along with market movements, brought
the direct investment portfolio total to GBP 24.7 bn[51] (2019:
GBP21.6bn) , including GBP 6.0 bn in LTMs. Consistent with the
broader bond portfolio, approximately two-thirds of the direct
investment bond portfolio was rated 'A' or above using robust and
independent rating processes which take account of long-term stress
events on the strong counterparties and the underlying
collateral.
The portfolio has been resilient, with 99.9% of scheduled
cash-flows paid during the year, reflecting the high quality of our
counterparty exposure. During 2020, just four direct investments,
representing 2.6% of our UK direct investment portfolio (excluding
lifetime mortgages), were downgraded to sub-investment grade. Two
of the affected assets were under construction and delays have
meant that the construction phase has been extended slightly,
resulting in a downgrade under our independent rating methodology.
One of these assets has already been upgraded back to investment
grade in 2021.
Across the Legal & General Group, our businesses help to
meet the societal needs arising from welfare reforms by harnessing
the power of pensions to deliver Inclusive Capitalism. We aim to
invest in sectors where long term funding is needed, for example,
in assets providing housing and clean energy across our UK towns
and cities. Our ability to self-manufacture attractive, long-term
assets to back annuities, such as build to rent or affordable
housing, 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 2020 2019
=============================================== ===== ======
Management fee revenue 929 889
Transactional revenue 27 23
================================================= ===== ======
Total revenue 956 912
Total costs (549) (514)
================================================= ===== ======
Asset management operating profit(2) 407 398
Workplace Saving operating profit / (loss) (3) (4)
================================================= ===== ======
Operating profit 404 394
Investment and other variances (3) (9)
================================================= ===== ======
Profit before tax 401 385
================================================= ===== ======
Net release from operations 342 328
================================================= ===== ======
Asset Management cost:income ratio(2) (%) 57 56
================================================= ===== ======
NET FLOWS AND ASSETS GBPbn
=============================================== ===== ======
External net flows 20.4 86.4
Internal net flows 2.1 2.8
================================================= ===== ======
Total net flows 22.5 89.2
- Of which international(3) (4.0) 59.2
Cash management flows 2.4 (0.6)
Persistency (%) 85 89
================================================= ===== ======
Average assets under management 1,222 1,132
Assets under management as 31 December 1,279 1,196
Of which:
- International assets under management(4) 388 370
- UK DC assets under management 113 94
================================================= ===== ======
1. Please see disclosure 1.01 for further details. 2019 LGIM
operating profit restated to include LGIM-related project
expenditure formerly reflected in Group expenses.
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.
Operating profit growth of 3% to GBP404m
LGIM's AUM and profit were resilient through the significant
market volatility associated with COVID-19. Assets under management
increased to GBP1,278.9bn (2019: GBP1,196.2bn), benefitting from
the diversified asset base. The business delivered positive
external net flows of GBP20.4bn (2019: GBP86.4bn), driven by strong
structural demand for our products against a prior year comparator
which included a GBP37bn mandate with the Japan Government Pension
Investment Fund. Revenues increased 5% to GBP956m (2019: GBP912m),
supported by growth in higher margin areas like factor based and
thematic ETFs and Multi-Asset. LGIM continues to be a strong
enabler and beneficiary of growth in LGRI and LGRR, and in 2020
revenue from these divisions totalled GBP148m (2019: GBP131m).
During 2020 our position as a leader in ESG was acknowledged both
through our #1 ranking globally among asset managers by independent
NGO ShareAction for our work on climate change, and through our
selection into the 'Leaders Group' by the UN Principles for
Responsible Investment.
Operating profit increased by 3% to GBP404m (2019: GBP394m),
reflecting increased revenues from flows and asset values, which
were partially offset by LGIM's continued investment in its growth
strategy. As outlined in the November 2020 Capital Markets Event,
LGIM is continuing to invest across all three strategic areas of
focus in order to modernise, diversify and internationalise the
business. Key areas of investment are: data analytics, digital
customer experience, investment platform optimisation and
international expansion, particularly for scaling up our European
operations. The cost income ratio (57%) reflects our continued
investment in the business. However, we are balancing our
investments with a focus on cost, taking decisive actions as
necessary. Expense management in H1 2020 benefited our full year
result.
Falling interest rates have increased the value of fixed income
assets, which account for over one-third of LGIM's AUM. Despite the
low rates environment, pension schemes have continued programmes of
de-risking which have positively impacted flows from UK DB pension
plans and thanks to our deep relationships with plan trustees LGIM
has been able to support our clients during these uncertain
times.
Workplace Savings assets increased by 2 6 % to GBP5 0.8 bn
(2019: GBP40. 3 bn) driven by continued client wins and increased
contributions. We are focused on improving efficiency as the
business grows. The 2020 operating result was GBP(3)m (2019:
GBP(4)m). This relates to the administration business only, as the
profits on the fund management services provided are included in
LGIM's asset management operating profit. From 1 January 2021, the
Workplace Savings administration business has transferred to LGRR,
where it complements their retirement solutions offering and retail
customer focus; LGIM continues to manage the assets and earn the
asset management profit from this business.
Strong flows into UK DC and UK DB benefitting from increased
hedging activity
LGIM's UK Institutional business delivered resilient external
net flows of GBP21.3bn (2019: GBP22.8bn).
This was led by a robust performance from the Defined Benefit
(DB) business, with external net flows of GBP10.2bn, driven
primarily by strong inflows of GBP22.7bn into DB LDI Solutions. The
market volatility and low rates environment have made DB pension
plans increasingly aware of their asset risks and, as such, many
have sought to hedge these risks. LGIM is both an enabler and a
beneficiary of LGRI's PRT business. As a leading Solutions
provider, LGIM can support clients at all stages of their funding
journey, eventually helping them transition into a PRT relationship
with LGRI. At this point, these assets are given to LGIM as captive
AUM to manage for the long term. This means that even as the UK DB
market gradually de-risks and declines in size, LGIM will continue
to meaningfully participate, benefitting from a truly virtuous
circle with LGRI. Adding to our suite of DB investment solutions,
this year we launched the Secure Income Assets Fund (SIAF),
offering DB clients the chance to invest in infrastructure debt,
real estate debt and private corporate debt.
The Defined Contribution (DC) business continues to attract
flows, with robust external net flows of GBP11.1bn. Total UK DC AUM
is up 20% over prior year driven by net inflows, with total AUM of
GBP112.7bn (2019 GBP94.3bn). This success was made possible by
LGIM's strong customer focus, as shown by our 2020 Global Investor
Award and a 93% persistency rate among our DC customers.
LGIM has experienced a 14% increase in customers on its
Workplace pension platform in 2020, with the number of members now
at four million. LGIM also has one of the largest and
fastest-growing UK Master Trusts, which recently reached GBP12.5bn
AUM at its ninth anniversary, reflecting the increasing appeal of
the structure for DC plans wishing to outsource their governance,
investment and administration.
International AUM increased 5% despite slightly negative net
flows
LGIM experienced international external net flows of GBP(4.0)bn,
which is down against the exceptional prior year performance (2019:
GBP59.2bn), which reflected a GBP37bn mandate with the Japan
Government Pension Investment Fund.
The low rate environment resulted in rising asset values but saw
US external net flows of GBP(7.2)bn as some US pension plans
rebalanced their portfolios away from fixed income towards other
asset classes based on pre-set asset allocation thresholds. We
expect US growth to resume as clients, particularly DB pensions,
continue to focus on long term de-risking objectives. Asia ex-Japan
net flows were encouraging, at GBP11.5bn (2019: GBP2.6bn).
International AUM of GBP388bn is up 5% from 2019 (GBP370bn) with
fixed income asset values benefitting from lower rates.
Notwithstanding short-term market volatility, we continue to focus
on international growth. Our deep relationships with a number of
leading international clients underpin our strong belief in our
ability to grow international AUM and earnings over the next five
years.
Strong growth and product innovation in our retail business
The retail business delivered net flows of GBP1.6bn, through a
period of significant market volatility . Retail AUM increased by
7% to GBP41.6bn (2019: GBP38.8bn) as we continue to develop our
product range and client-service proposition in the UK and broaden
our distribution strategy in Europe. LGIM was ranked top 4 in gross
UK retail sales in 2020. ([52]) In October, LGIM sold a c.GBP5.8bn
back-book of retail investment products within the Personal
Investing business to Fidelity International Ltd. Customers will
remain invested in LGIM funds upon transfer (expected in H2 2021)
and LGIM will continue to earn an investment management fee on
these assets.
Product innovation within our ETF business has helped bolster
our retail distribution strategy with GBP1.5bn of net flows in
2020, and AUM increasing by 74% to GBP5.4bn (2019: GBP3.1bn).
Currently 79% of our ETF offering by AUM/market type has
experienced net inflows in 2020 and we rank in the top 10 for
pan-European mutual funds and ETF net flows. ([53]) During 2020 we
launched a range of ESG aligned ETF's, including a new thematic
Clean Energy ETF. Additionally, LGIM launched its Core Fixed Income
ETF range with ESG and liquidity considerations integrated into the
investment design. The range excludes the bottom quintile of
issuers based on their ESG scores, as well as certain industries
such as controversial weapons manufacturers, thermal coal miners,
tobacco companies, oil sands and violators of the UN Global
Compact.
Leading in responsible investing
LGIM continues to build on its credentials as a responsible
investor and remains committed to leading the asset management
industry in addressing the environmental and social challenges
arising from a rapidly changing world. As at 31 December 2020, LGIM
managed GBP206.8bn in responsible investment strategies explicitly
linked to ESG criteria for a broad range of clients.
LGIM has a strong, unified sense of purpose: to create a better
future through responsible investing. To that end, we work to raise
ESG standards on important global issues, leveraging our position
as one of the 15 largest global asset managers. Examples of our
achievements in 2020 include:
-- Integration of ESG factors : Building on two of our
structural growth drivers, using technological innovation to
address climate change, LGIM and Baringa Partners co-developed a
bespoke climate risk framework, Destination@Risk. It has initially
been used to analyse around 2,000 companies globally, concluding
that most companies are not aligned with the Paris objectives. A
climate risk dashboard is now available to portfolio managers and
analysts within LGIM, enabling LGIM to embed climate risk and
alignment in a consistent way throughout the entire global
investment function. Destination@Risk was first used to evaluate
the climate risk and alignment of Legal & General Group's own
balance sheet assets, as detailed in the firm's 2019 Task Force on
Climate-related Financial Disclosures (TCFD) report.
-- Product innovation : LGIM is committed to meeting clients'
demands for ESG-focused investment products. During 2020 we built
on our strong heritage in index and ESG investing to develop
innovative new products:
1. ESG fossil-fuel free Emerging Market Equity Index Fund, which
allocates capital based on transparent ESG scores, incorporates
energy and tobacco sector exclusions, while leveraging LGIM's
stewardship capabilities
2. Climate transition index equity fund, based on the Transition
Pathway Initiative (TPI) analysis of how the world's largest and
most carbon intensive public companies are managing the climate
transition
3. Social Housing investments: LGIM Real Assets has made a
number of affordable housing investments during 2020, including its
first investment in an Irish scheme. Across the Group Legal &
General has invested to date more than GBP1.5bn in affordable
housing in the UK.
4. In 2020 our launch of the L&G US Equity (Responsible
Exclusions) UCITS ETF was recognised as the most successful
sustainable fund launch in the market, raising over GBP1bn AUM in
the 12 months after launch.
-- Stewardship with impact : LGIM's stewardship team engaged
with 65 companies and voted on 139,000 resolutions in 2020.
Additionally, during 2020 we engaged with regulators and
policymakers around the world on more than 30 topics , in an effort
to raise market standards globally. Recognising the crucial role of
international leadership and collaboration to the decarbonisation
initiative; Legal & General is at the heart of the COP26
programme in 2021, with LGIM CEO, Michelle Scrimgeour, co-chairing
COP26 Business Leaders alongside the Secretary of State for
Business, Energy and Industrial Strategy, Rt Hon Alok Sharma
MP.
Breadth of investment management solutions
Asset movements (1) Active Real Total
(GBPbn) Index Strategies Multi Asset Solutions assets AUM
============================ ====== =========== =========== ========= ======= =======
At 1 January 2020 403.6 177.2 58.0 526.6 30.8 1,196.2
============================ ====== =========== =========== ========= ======= =======
External inflows 76.6 17.7 8.5 27.0 1.0 130.8
External outflows (84.7) (17.8) (5.3) (36.6) (1.4) (145.8)
Overlay net flows - - - 33.9 - 33.9
ETF net flows 1.5 - - - - 1.5
============================ ====== =========== =========== ========= ======= =======
External net flows (6.6) (0.1) 3.2 24.3 (0.4) 20.4
Internal net flows (0.2) 2.6 (0.4) (0.3) 0.4 2.1
============================ ====== =========== =========== ========= ======= =======
Total net flows (6.8) 2.5 2.8 24.0 - 22.5
Cash management movements - 2.4 - - - 2.4
Market and other
movements 33.1 11.5 2.6 8.9 1.7 57.8
============================ ====== =========== =========== ========= ======= =======
At 31 December 2020 429.9 193.6 63.4 559.5 32.5 1,278.9
============================ ====== =========== =========== ========= ======= =======
1. Please see disclosure 4.01 for further details.
In Solutions and Index, clients rely on us to deliver their
target returns against defined benchmarks. For actively managed
portfolios, investment outperformance versus either benchmarks or
peer groups is an important driver of current and future client
flows, and in 2020 LGIM's active teams delivered strong performance
across multiple asset classes. Using our regulated UCITS and US
Composites as a proxy for the performance returns(2) of our
mainstream investment strategies, our active teams have delivered
1, 3 and 5 year performance numbers to 31 December 2020 as
follows:
Strategies 1 year % outperformance 3 year % outperformance 5 year %
outperformance
Multi asset (LGIM) 76% 81% 88%
============================= ======================= ======================= ================
Active Fixed Income (LGIM) 94% 93% 85%
============================= ======================= ======================= ================
Active Fixed Income (LGIMA) 86% 73% 83%
============================= ======================= ======================= ================
Active Equities (LGIM) 50% 36% 44%
============================= ======================= ======================= ================
2. Net fund performance data versus key comparators (benchmark
or generic peer groups for bonds and equities as per the relevant
prospectuses and benchmark per the relevant prospectus or custom
peer group for Multi Asset) sourced for the LGIM UCITS from Lipper
and calculated internally for the U.S. composites, in both cases as
at 31 December 2020.
LDI Solutions continued to deliver positive external net flows
of GBP24.3bn (2019: GBP38.1bn) driven by strong demand from UK DB
clients as they continue to de-risk. We manufacture Solutions
products in both publicly and privately traded asset classes and
combine these together in integrated portfolios for UK DB clients.
We are well positioned to capitalise on this continuing trend; and
together with our fiduciary business offering, and close alignment
to LGR's PRT business, we are able to tailor solutions to UK DB
schemes at all stages of their funding journey.
Index reported net flows of GBP(6.6)bn (2019: GBP37.7bn)
reflecting the structural trend of DB schemes de-risking resulting
in a shift from index to LDI strategies, offset by positive flows
in Europe and Asia.
Active Strategies (formerly Global Fixed Income and Active
Equities) delivered net flows of GBP(0.1)bn (2019: GBP2.8bn) . The
flows performance in 2020 reflects positive net inflows from UK DB
clients, offset by rates driven outflows in the US reflecting
rising asset values and clients rebalancing their portfolios.
Multi-asset strategies continue to be in high demand from DC
schemes and retail customers . External net flows into multi-asset
funds were GBP3.2bn (2019: GBP7.7bn).
Real Assets saw external net flows of GBP(0.4)bn (2019:
GBP0.1bn) reflecting market and regulatory sentiment impacted by
COVID-19 . The future growth of external flows will be supported by
our Build to Rent business, which now has a pipeline of c.5,500
homes across the country, and Private Credit, which offers clients
diversification of secure income and value protection
solutions.
Legal & General Capital
FINANCIAL HIGHLIGHTS GBPm 2020 2019
================================================== ===== ======
Operating profit 275 363
- Direct investment 112 217
- Traded investment portfolio 161 135
- Treasury assets 2 11
Investment and other variances (299) 91
================================================== ===== ======
Profit / (loss) before tax attributable to equity
holders (24) 454
================================================== ===== ======
Net release from operations 224 295
================================================== ===== ======
DIRECT INVESTMENT PORTFOLIO GBPm
================================================== ===== ======
Specialist commercial real estate 694 760
1
Clean energy 182 170
Residential property
Homes 1,738 1,483
SME Finance 525 464
3,139 2,877
TRADED ASSET PORTFOLIO GBPm
================================================== ===== ======
Equities 1,749 1,797
Fixed income 446 499
Multi-asset 209 238
Cash(1) 1,522 2,024
================================================== ===== ======
3,926 4,558
LGC investment portfolio 7,065 7,435
Treasury assets at holding company 1,982 1,555
================================================== ===== ======
Total 9,047 8,990
================================================== ===== ======
1. Includes short term liquid holdings.
Total operating profit of GBP275m reflecting pause in
housebuilding in March lockdown
LGC operating profit decreased 24% to GBP275m (2019: GBP363m),
principally reflecting lower profits from our direct investment
portfolio (2020: GBP112m; 2019: GBP217m) as a result of a pause in
traditional housebuilding activities during the UK lockdown. O
perating profit from the traded and treasury portfolios increased
to GBP163m (2019: GBP146m), primarily driven by the larger opening
traded equity portfolio value at the start of 2020.
Profit before tax of GBP(24)m includes the impact of equity
market volatility, early stage development costs and investment
variance from asset valuation markdowns, particularly in respect of
our two retail assets (The Lexicon Bracknell and Thorpe Park in
Leeds), and a prudent approach to valuations of realisable yields
on some of our housing businesses. These markdowns relate to the
current value of the portfolio and are not realised losses.
The combination of a slowdown in build to sell housing and
measured retail-related asset write-downs, resulted in a direct
investment net portfolio return of (4.0)% (2019: 5.2%), which we
expect to recover to 8% to 10% over the medium term.
Direct investment portfolio grew 9% over 2020 to GBP3.1bn
LGC has continued to build its capabilities in a range of
alternative assets, delivering depth of resource, track record and
intellectual property, while sourcing new opportunities that are
underpinned by our structural growth drivers. Taking a prudent
approach to investment over the period, our direct investment
portfolio increased to GBP3,139m (2019: GBP2,877m) as we added
GBP0.6bn of new diversified investments and made further new
undrawn commitments of GBP0.2bn, continuing to deploy cash to
support the growth of our existing businesses and access new
opportunities. As we are maturing, we have also divested GBP0.2bn
in assets.
Our portfolio continues to be well diversified across our
business models, with:
-- 55% invested in wholly owned operating businesses, including
our investments in Affordable housing and CALA;
-- 28% in joint ventures or partnerships with other investors,
such as the SciTech partnership with Bruntwood and our Oxford
University Development partnership; and
-- 17% in externally managed funds, including our investments in
Pemberton funds and NTR, where we are a significant
shareholder.
Further diversification of our specialist commercial real estate
across science and innovation
Addressing a shortage of investment in specialist commercial
real estate, we are involved in some of the UK's largest urban
transformation schemes and are funding the next generation of
science and innovation centres, which have proven crucial in
response to COVID-19. Creating jobs, boosting local communities and
helping the UK to build back better, these investments generate
returns for shareholders, create attractive Matching Adjustment
eligible assets for LGRI and LGRR and supply desirable alternative
assets to LGIM clients.
During 2020 our portfolio reduced marginally to GBP694m (2019:
GBP760m) as COVID-19 related valuation impacts (particularly
affecting our two retail assets) were largely offset by continued
investment in new and existing projects. As a part of our GBP4bn
Oxford University partnership, we facilitated LGR's GBP200m funding
for a new Life and Mind sciences building. We have also worked with
LGIM, LGRI and LGRR to finance and develop a state-of-the-art TV
and film studio for Sky in Elstree, creating around 2,000 jobs and
generating GBP3bn of production investment.
Through Bruntwood Scitech, we have developed world-class
diagnostics infrastructure, such as the Lighthouse Lab at Alderley
Park, which has put us at the forefront of the fight against
COVID-19. Continuing to support our leadership in UK SciTech
innovation districts, we have made further progress in Manchester
and have partnered with Birmingham University to deliver the
Birmingham Health Innovation Campus, an ambitious 10-year project
to establish a new 657,000 sq ft life sciences hub.
Our Clean Energy portfolio expanded to GBP182m, in line with
climate ambitions (2019: GBP170m)
As we transition to a net zero carbon world, we are investing in
SME scale-ups that can deliver the game-changing innovation,
renewable technology and momentum needed to meet public targets and
decarbonise our economy. During 2020 LGC expanded its clean energy
portfolio, which includes renewable infrastructure and clean
technology, across low-carbon heat, transport, and power
generation.
In February, we increased our stake in Pod Point to c.22%,
forming a partnership with EDF. Its growth has been significant,
driven by increasing consumer interest in electrical vehicles and
it has developed an extensive public netwok across the UK,
including the roll-out of charging bays at Tesco and Lidl
stores.
In April, we took a 36% stake in The Kensa Group, a leader in
the UK ground source heat pump technology sector. During 2020,
Kensa announced it is involved in a GBP41m low carbon transport,
power and heat energy superhub being created in a deprived area of
Oxford, which is supported by the UK Government's Industrial
Strategy Challenge Fund and includes retrofitting ground source
heat pumps in over 300 domestic properties.
Additionally, through our boutique fund manager, NTR, we are
continuing to source, build and operate new renewable energy assets
to create attractive returns for investors over the medium to long
term by generating zero carbon electricity, scaling our platform
and impact. At the end of 2020, NTR closed its second fund, NTR
Renewable Energy Income Fund II, with more than EUR300m to invest
in onshore wind, solar and battery projects in Europe, around 50%
of which has already been successfully deployed.
Strengthening our UK residential platform as assets increase to
GBP1,738m (2019: GBP1,483m)
LGC continues to scale up its ambitions across all housing
tenures. Diversified across affordability and life stage, LGC's
investments meet the UK's long term social and economic need for
quality housing for all demographics.
Now in its second year, LGC's profitable Affordable Homes
business has established itself as one of the UK's leading
institutional developers and managers of affordable housing, and is
generating investment opportunities for LGR. In the wake of the
COVID-19 crisis, the business remains highly resilient, in terms of
both valuations and income. Working in collaboration with
Government and leveraging the countercyclical nature of affordable
housing, it is delivering much needed homes to meet increasing
demand, growing its development pipeline to over 4,400 homes across
92 sites. Delivering a mix of social rent, affordable rent and
shared ownership homes, the business had a total of 670 homes in
operation (2019: 117) and has completed 183 shared ownership sales
(2019: 8). Customer service standards are an important strength and
the business received a Net Promoter Score of 49, compared to a
Housing Association sector average of 6.
Having launched an urban Build to Rent business in 2015, across
the Group we now have a GBP1.8bn portfolio of c.5,500 homes with 15
schemes in operation or development across the UK's major towns and
cities. Creating a pipeline of attractive, high quality assets for
LGRI, LGRR and LGIM clients, our urban Build to Rent portfolio has
continued to deliver a stable return throughout the crisis. Showing
its resilience and relatively countercyclical nature, rent
collection has remained robust at over 97% (as at end of 2020) and
occupancy and demand have remained high. In November 2020, LGC
launched its Suburban Build to Rent business, which builds on our
Group-wide expertise in UK urban build to rent. The Suburban Build
to Rent sector has lacked the concentration of institutional
investment, with less than 1% of the market having been
'institutionalised' compared to around 6% in the urban sector.
Our Build to Sell business, CALA, was the most operationally
impacted of our residential businesses by COVID-19, with a material
reduction in revenues and construction progress seen in the first
lockdown. To counteract these financial impacts, we carefully
managed costs through the period. Performing in line with or ahead
of the wider housing maket, we saw strong sales activity during H2,
demonstrating the enduring underlying demand for new homes.
Underlying sales demand has been supplemented by the Government's
stamp duty holiday in England and Land and Buildings Transaction
Tax (LBTT) threshold increases in Scotland, in addition to pent up
demand from the spring lockdown, when many reassessed their housing
needs in light of home working and the need for outdoor space.
Our Modular Housing business has continued to grow, now
employing over 300 team members and securing planning approval for
nearly 350 homes since May, as it moves towards delivering 3,000
homes a year at maturity. In December planning consent was achieved
to deliver 185 homes in Bristol. Developed with Bristol City
Council, 50% of the scheme is affordable housing and will form part
of the council's affordable housing stock.
Our Later Living platform is transforming what the elderly can
expect from later life, with a key role to play in combatting
loneliness and promoting good health. COVID-19 has heightened
public awareness of later living and our villages have played a
vital role in providing a protective shield to our residents, with
an infection rate lower than that seen in over 70s across the UK.
Despite four months of lockdown, completions were broadly flat on
the previous year. Good planning progress was made by the business,
with consent for nearly 800 homes added to our pipeline in the
first lockdown.
SME Finance increased to GBP525m (2019: GBP464m)
Investing in the real economy through our Alternative Finance
and SME Growth Equity platforms, we are continuing to support
growth businesses, delivering enhanced returns while boosting job
creation, innovation, and science and technology advancements.
In the Alternative Finance sector, we support UK and European
mid-market lending via our fund investments with Pemberton, in
which we own a 40% stake. Notwithstanding the challenges that have
been presented by COVID-19, Pemberton has continued to show
resilience and make excellent progress, with committed Funds Under
Management reaching EUR9.3bn (2019: EUR6.1bn) across 4 strategies
and EUR8.3bn deployed since inception. This represents 20x growth
in committed AUM since our investment five years ago. As a
signatory of the Principles for Responsible Investment, Pemberton
is committed to financing sustainable companies and seeking to
support its borrower clients in building long-term value through
sustainable growth.
Our SME Growth Equity business backs over 300 start-up
businesses across the UK and Europe through fund investments with
eleven Venture Capital managers. We have increased our investments
during the year with the addition of two new funds from leading
European managers, as we continue to diversify across stage,
vintage and sector, bringing our total Venture Capital commitments
to GBP116m. The portfolio is performing well, with earlier vintages
now beginning to generate strong returns. Investments in the
underlying portfolio include accuRx, a healthcare communication
company with a SMS patient messaging service used by 99% of UK GPs
(over 7,000 practices) including supporting vaccine bookings and
which has facilitated over 1m video consultations since the start
of COVID-19. Looking to share the benefits of the Innovation
Economy with retirement savers in the UK, we are working with LGIM
to develop a viable solution for Defined Contribution clients which
democratises access to the venture capital sector.
Legal & General Insurance
FINANCIAL HIGHLIGHTS GBPm 2020 2019
Operating profit 189 314
* UK 205 223
* US (LGIA) (16) 91
Investment and other variances(1) (459) (234)
======================================== ===== ======
Profit / (loss) before tax attributable
to equity holders (270) 80
======================================== ===== ======
Release from operations 250 259
New business surplus / (strain) 8 (7)
======================================== ===== ======
Net release from operations 258 252
======================================== ===== ======
Solvency II New Business Value 254 216
======================================== ===== ======
LGI new business annual premiums 372 339
UK Retail Protection gross premiums 1,374 1,327
UK Group Protection gross premiums 382 345
US Protection (LGIA) gross premiums 1,093 1,057
Total gross premiums 2,849 2,729
======================================== ===== ======
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.
Operating profit of GBP189m impacted by COVID-19 mortality; new
business value growth of 18%
Honouring our promises and responding quickly and
compassionately to our customers' needs is core to our values at
Legal & General. At this difficult time, LGI is especially
aware of the importance of our commitments to our customers; we
paid GBP1 ,942m of protection claims in 2020.
During 2020 LGI operating profit decreased 40% to GBP189m (2019:
GBP 314m), reflecting adverse COVID-related impacts of GBP186m,
particularly impacting our US Protection and UK Group Protection
businesses where we retain the majority of the mortality risk. We
have provisioned for GBP110m of future COVID-19 related claims,
having realised GBP76m of COVID-19-related claims during 2020. For
more information please refer to the "COVID-19" section on page
4.
Solvency II New Business Value increased 18% to GBP254m (2019:
GBP216m) due to strong sales in Group Protection, increased focus
on cost optimisation across our retail businesses and favourable
business mix in the US, which together delivered improved UK and US
Solvency II New Business margins. The protection business continues
to generate Solvency II surplus immediately when written and
provides diversification benefits to the Group, particularly
LGR.
LGI UK operating profit fell by 8% to GBP205m (2019: GBP223m)
due to adverse mortality experience in Group Protection, partially
offset by assumption changes. The retail protection business was
largely insulated from the impact of COVID-19 claims because of the
high proportion of the business which is reinsured. The UK
Protection Solvency II new business value increased 31% to GBP160m
(2019: GBP122m).
LGIA operating profit decreased to $(21)m (2019: $116m) due to
adverse mortality experience from COVID-19, consistent with
experience across the broader US life sector. The annual dividend
paid by LGIA to the Group in March 2020, shown in the accounts
within LGIA net release from operations, increased to $109m (2019:
$107m). Despite competition in the term market as well as business
disruption and lower new business premium caused by COVID-19, US
protection sales delivered higher new business margins resulting in
Solvency II new business value of $120m (2019: $120m).
Profit before tax was predominantly impacted by the formulaic
change in LGI's discount rates. LGI's negative investment variance
of GBP459m was driven primarily by falls in UK and US government
bond yields which have resulted in a reduction in the discount rate
used to calculate the reserves. This result reverses as rates rise.
The UK 10 year gilts rate fell from 0.82% at the start of 2020 to
0.20% on 31 December 2020. Likewise, US 10 year Treasury yields
fell from 1.92% to 0.93% by the end of 2020 .
Gross written premium up 4% led by strong new business growth of
10%
UK Retail Protection gross premium income increased to GBP1,374m
(2019: GBP1,327m) with new business annual premiums of GBP175m
(2019: GBP174m), up on prior year despite the interruption from
COVID-19 for a number of our distribution partners, particularly
those that depend on the mortgage market or in-person advice. We
increased our market share to 27% in Q3 2020 (up from 21% a year
earlier) and remain the leading provider of retail protection in
the UK, delivering a point of sale decision for more than 80% of
our customers. Our market share growth was supported by our
innovation over the period, for instance, further enhancements to
our Income Protection Benefit attracted new customers in 2020.
These factors added resilience to our sales during the turbulence
following the emergence of COVID-19 and positioned us to be
beneficiaries as the retail protection market recovered in the
second half of the year.
UK Group Protection grew new business annual premiums by 54% to
GBP117m (2019: GBP76m) with gross written premiums increasing 11%
to GBP382m (2019: GBP345m). With improved service and more refined
pricing we are attracting a wider range of scheme sizes and
actively dealing with more advisers in the group protection market,
enabling us to gain market share and grow new business premiums. We
anticipate that 2021 new business volumes may not reach the record
levels of 2020 as typically fewer large schemes are tendered in odd
years than in even years.
US Protection (LGIA) gross written premiums increased 4% (up 3%
on a sterling basis) to $1,403m (2019: $1,349m). New business
annual premiums reduced to $103m (2019: $113m) as obtaining medical
evidence in the pandemic became harder. Through the brokerage
channel, LGIA continues to be the largest provider of US term life
assurance by number of policies, and second largest by new business
APE. We have continued to develop our new business platform to
deliver a faster and better customer experience that will lead to
further sales growth while reducing unit costs in coming years.
Legal & General Mortgage Club facilitated GBP77bn of
mortgages, down 1% (2019: GBP78bn), with the result impacted by
lower residential housing sales during COVID-related lockdowns in
the UK. We are well placed for growth as the market recovers, being
the largest participant in the UK intermediated mortgage market and
involved in over one in five of all UK mortgage transactions. Our
Surveying Services were also impacted, facilitating only 440k
surveys and valuations, compared to 550k surveys and valuations in
2019. Since buying a new house is often a catalyst for purchasing
life insurance, the Legal & General Mortgage Club is a helpful
component of our overall offering to customers.
Fintech: Using technological innovation to respond to the
changing environment
LGI has continued to grow its expertise in the Fintech sector
focusing on innovating in markets adjacent to our life insurance
business by building customer-focused solutions and making targeted
investments in start-up and scale-up opportunities.
In March 2020, Salary Finance, our employee benefits platform
business, in which we own a 41% stake, completed the acquisition of
Neyber's new business platform and contracts, thereby doubling its
reach. By the end of 2020 the Salary Finance platform was available
to over 3.5m employees in the UK and almost 200,000 in the US.
Additionally, in December, Legal & General, alongside Experian,
completed a joint GBP20m capital injection into the business,
cementing Salary Finance as one of the UK's fastest growing Fintech
platforms.
We are making buying and financing a home easier and quicker for
our customers and advisors through our technology investments. For
example, Legal & General Mortgage Club launched SmartrFit, a
digital tool for mortgage advisors, combining our mortgage search
criteria tool with an affordability calculator. Responding to the
changing environment, Legal & General Surveying Services have
continued to use technological innovation to make the process of
buying a home easier. We have extended our Digital Valuation
solution to new lenders this year and processed 43k digital
valuations in 2020, compared with 27k in 2019.
Disposed operations
The Group announced the sale of the Mature Savings business to
ReAssure on 6 December 2017 for GBP650m. The proceeds were received
by the Group at the start of January 2018. In 2020 we recognised
GBP34m operating profit from the business, resulting from the
unwind of the expected underlying profits . The Part VII transfer
completed in September 2020 and generated an IFRS pre-tax gain of
GBP335m, which is in addition to profits recognised in 2018, 2019
and 2020 (GBP148m total). The completion of the Part VII transfer
was broadly neutral to the Group's Solvency II coverage ratio.
Legal & General Group sold the General Insurance business to
Allianz Holdings Plc in 2019.
Subsidiary dividends to Group
GBPm 2020 2019
Subsidiary dividends remitted(1) :
LGAS 935 766
LGIM 215 269
LGA 80 84
Other(2) 181 124
======================================= ===== =====
Total 1,411 1,243
======================================= ===== =====
Total excluding mortality release(3) 1,261 1,093
======================================= ===== =====
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, and Legal & General Partnership Services
Limited.
3. GBP150m dividend paid from Legal & General Assurance
Society (LGAS) to Group (2019: GBP150m) due to mortality reserve
releases in recent years.
The level of subsidiary dividends ensures coverage of external
dividends (2020: GBP1,048m; 2019: GBP1,048m), 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 GBP4.6bn at 31
December 2020 (2019: GBP4.1bn). There is also a further GBP1.0bn
(2019: GBP1.0bn) of operational borrowings including GBP0.9bn
(2019: GBP0.8bn) of non-recourse borrowings.
On 1 May 2020 the Group issued GBP500m of Tier 2 subordinated
debt with a coupon of 4.500% to capitalise on new business
opportunities given favourable debt market conditions.
Group debt costs of GBP233m (2019: GBP208m) reflect an average
cost of debt of 5.0% per annum (2019: 5.0% per annum) on an average
nominal value of debt balances of GBP4.7bn (2019: GBP4.1bn).
Restricted Tier 1 Notes
On 24 June 2020 the Group issued GBP500m of perpetual Restricted
Tier 1 Contingent Convertible notes with a coupon of 5.625% as we
capitalised on favourable bond market conditions to provide a
further measure of prudence as the longer-term economic impact of
COVID-19 remains uncertain. This issuance further positions us
strongly for the post-pandemic recovery.
The notes have no fixed maturity date. Optional cancellation of
coupon payments is at the discretion of the issuer and mandatory
cancellation is upon the occurrence of certain conditions.
Therefore, the notes are treated as equity under IFRS and coupon
payments are recognised directly in equity when paid.
Taxation
Equity holders' Effective Tax Rate (%) 2020 2019
Equity holders' total Effective Tax Rate[54] 12.1 14.3
Annualised rate of UK corporation tax 19.0 19.0
=============================================== ===== =====
The effective tax rate reflects the impact of losses arising in
the period and the different rates of taxation that apply to Legal
& General's overseas operations. The decrease in the effective
tax rate compared to 2019 is a result of losses made in our UK and
US businesses reflected in investment variance, as well as one-off
adjustments reflecting the finalisation of tax charges relating to
prior years. Without these the effective tax rate on operating
profits for 2020 is 15.0% (2019: 15.1%).
Solvency II
As at 31 December 2020, the Group had an estimated Solvency II
surplus of GBP7.4bn over its Solvency Capital Requirement,
corresponding to a Solvency II coverage ratio of 177% on a
shareholder basis. As at 5 March 2021, we estimate the ratio was
192%.[55]
Capital(1) (GBPbn) 2020 2019
Own Funds 17.1 16.1
Solvency Capital Requirement (SCR) (9.7) (8.8)
=================================== ===== ======
Solvency II surplus 7.4 7.3
SCR coverage ratio (%) 177 184
=================================== ===== ======
1. Solvency II position on a shareholder basis is adjusted for
the Own Funds and SCR of the With-profits fund (2019 only) and the
Group final salary pension schemes, and is before the accrual of
the relevant dividend. Please see disclosure 5.01 (a) for further
details.
Analysis of movement from 1 January 2020 to 31 December Solvency
2020(1) (GBPbn) II surplus
Surplus arising from back-book (including release of
SCR) 1.3
Release of Risk Margin 0.6
Amortisation of TMTP (0.4)
=========================================================== ============
Operational surplus generation - continuing operations 1.5
Operational surplus generation - discontinued operations -
Operational surplus generation 1.5
New business strain (0.3)
=========================================================== ============
Net surplus generation 1.2
Operating variances 0.4
Mergers, acquisitions and disposals (0.1)
Market movements (1.4)
Restricted Tier 1 convertible notes 0.5
Subordinated liabilities 0.5
Dividends paid (1.0)
=========================================================== ============
Total surplus movement (after dividends paid in the
period) 0.1
=========================================================== ============
1. Please see disclosure 5.01 (d) for further details.
Operational surplus generation from continuing operations was
GBP1.5bn (2019: GBP1.5bn) , after allowing for amortisation of the
opening Transitional Measures on Technical Provisions (TMTP) and
release of Risk Margin.
New business strain was GBP(0.3)bn, primarily reflecting UK PRT
volumes written at a capital strain of less than 4%. This resulted
in net surplus generation of GBP1.2bn (2019: GBP1.0bn), which, in
line with our five year ambitions, was in excess of the GBP1.0bn of
dividends announced (and paid) during the year.
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 GBP0.4 bn,
benefitting primarily from the LGR mortality reserve release .
Market movements of GBP(1.4)bn reflect the impact of lower rates on
the valuation of our balance sheet and spread dispersion, i.e.
credit spreads on lower rated assets widen more than spreads on
higher rated assets, thereby increasing the modelled cost of
trading those assets after projecting downgrades in a range of
scenarios , as well as a number of other, smaller variances.
The movements shown above include the impact of recalculating
the TMTP as at 31 December 2020.
When stated on a proforma basis, including the SCR attributable
to the Group final salary pension schemes in both the Group's Own
Funds and the SCR, the Group's coverage ratio was 175 % (2019[56]:
179%).
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 2020:
GBPbn
IFRS Release from operations 1.3
Expected release of IFRS prudential margins (0.5)
Release of IFRS specific reserves (0.2)
Solvency II investment margin 0.3
Release of Solvency II Capital Requirement and Risk
Margin less TMTP amortisation 0.6
Solvency II Operational Surplus Generation 1.5
The table below gives a reconciliation of the Group's IFRS New
business surplus to Solvency II New business strain in 2020:
GBPbn
IFRS New business surplus 0.3
Removal of requirement to set up prudential margins
above best estimate on new business 0.3
Set up of Solvency II Capital Requirement on new business (0.7)
Set up of Risk Margin on new business (0.2)
Solvency II New business strain (0.3)
========================================================== ======
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
2020 2020
GBPbn %
======================================================= =========== =============
Credit spreads widen by 100bps assuming an escalating
addition to ratings 0.5 11
Credit spreads narrow by 100bps assuming an escalating
addition to ratings (0.7) (12)
Credit spreads widen by 100bps assuming a level
addition to ratings 0.7 13
Credit spreads of sub-investment grade assets widen
by 100bps assuming a level addition to ratings (0.4) (5)
Credit migration (1.2) (13)
25% fall in equity markets (0.5) (4)
15% fall in property markets (0.6) (6)
100bps increase in risk free rates 1.0 20
50bps decrease in risk free rates (0.7) (11)
Substantially reduced Risk Margin 0.5 5
======================================================= =========== =============
1. Please see disclosure 5.01 (g) for further details.
The above analysis does not reflect all possible management
actions which could be taken to reduce the impact 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 movements 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 2020 are shown below(1)
:
PVNBP Contribution Margin
from %
new business
================================= ===== ============= ======
LGR - UK annuity business (GBPm) 8,503 901 10.6
UK Protection Total (GBPm) 1,887 160 8.5
- Retail protection 1,359 123 9.1
- Group protection 528 37 7.0
US Protection (GBPm) 829 94 11.2
================================= ===== ============= ======
The key economic assumptions as at 31 December 2020 are as
follows:
%
=========================================== ===
Margin for risk 3.9
Risk free rate
- UK 0.5
- US 0.9
Risk discount rate (net of tax)
- UK 4.4
- US 4.8
Long term rate of return on assets backing
non-profit annuities in LGR 2.1
============================================= ===
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, outlook and mitigation
============================== ========================================================
Reserves and our We are monitoring the impacts of COVID-19
assessment of capital on the lives we insure and the impacts for
requirements may longevity and other insurance assumptions.
require revision To date COVID-19 mortality is lower than
as a result of changes our 1-in-200 pandemic modelling scenario,
in experience, regulation and we have seen an offsetting effect in
or legislation our annuities portfolio; however, uncertainty
The pricing of long-term remains. While the availability of vaccines
insurance business and treatments for COVID-19 are increasing,
requires the setting understanding of virus mutations and the
of assumptions for efficacy of vaccines is still evolving.
long-term trends
in factors such as The deferral of non-COVID-19 medical treatments
mortality, lapse may also impact future rates of mortality,
rates, valuation and it is too early to assess the effects
interest rates, expenses of 'long COVID' on morbidity.
and credit defaults
as well as the availability We remain inherently exposed to longevity
of assets with appropriate risk in our pensions risk transfer businesses
returns. Actual experience and a dramatic advance in medical science
may require recalibration beyond that anticipated remains a risk factor.
of these assumptions, For our protection businesses, risk factors
increasing the level include new diseases, changes in immunology
of reserves and impacting and, for our US term policies variances
profitability. in the rate of policy renewal compared to
our assumptions.
Management estimates
are also required We undertake significant analysis of the
in the derivation variables associated with writing long-term
of Solvency II capital insurance business to ensure that a suitable
metrics. These include premium is charged for the risks we take
modelling simplifications on, and that reserves continue to remain
to reflect that it appropriate for factors including mortality,
is not possible to lapse rates, valuation interest rates, and
perfectly model the expenses, as well as credit default in the
external environment, assets backing our insurance liabilities.
with adjustment necessitated We also seek to pre-fund and warehouse appropriate
where new data emerges. investment assets to support the pricing
Forced changes in of long-term business.
reserves can also
arise from regulatory In seeking a comprehensive understanding
or legislative intervention of longevity we are evaluating how COVID-19
impacting capital will impact wider trends in life expectancy.
requirements and In our protection business, as part of our
profitability. continuous evolution of our underwriting
capabilities, we are seeking to ensure we
fairly assess COVID-19 as a risk factor
and that our reserves remain appropriate.
However, we cannot remove the risk that
adjustment to reserves may be required,
although the selective use of reinsurance
acts to reduce the impacts of significant
variations in life expectancy and mortality.
============================== ========================================================
Investment market The immediate outlook for the global economy
performance and conditions is highly uncertain, and whilst the rollout
in the broader economy of COVID-19 vaccines and the expectations
may adversely impact of renewed US government spending has seen
earnings, profitability a resurgence in investment markets, they
or surplus capital remain highly susceptible to shocks and
The performance and the reappraisal of asset values, particularly
liquidity of investment from actions to control COVID-19. Associated
markets, interest valuation uncertainty is likely to persist
rate movements and in commercial property markets for the foreseeable
inflation impact future and interest rates look set to continue
the value of investments at ultra-low or negative levels.
we hold in shareholders'
funds and to meet In addition, whilst the UK has agreed post
the obligations from Brexit trade terms, the impacts for certain
insurance business; sectors of the UK economy are still to fully
the movement in certain emerge. Similarly, although the US presidential
investments directly elections are likely to result in a more
impacts profitability. positive stance on global trade, in the
Interest rate movements wake of COVID-19 there is potential for
and inflation can protectionist behaviours and a reduction
also change the value on dependency on extended global supply
of our obligations. chains.
Losses can still
arise from adverse We cannot eliminate the downside impacts
markets although on our earnings, profitability or surplus
we seek to match capital from these or other investment market
assets and liabilities. and economic risk factors, although we seek
to position our investment portfolio and
Falls in the risk wider business plans for a range of plausible
free yield curve economic scenarios and investment market
can also create a conditions to ensure their resilience across
greater degree of a range of outcomes. This includes the economic
inherent volatility and asset prices stresses that could arise
to be managed in from extreme measures being taken to control
the Solvency II balance the spread of COVID-19.
sheet, potentially
impacting capital Our ORSA is integral to this process, evaluating
requirements and capital sufficiency for the risks to which
surplus capital. we may be exposed to in our business plans,
Falls in investment and supporting analysis of those exposures
values can reduce relative to our risk appetite. Where appropriate
our investment management we may also take management actions to take
fee income. advantage of markets conditions, for example
by raising debt at attractive rates during
2020.
============================== ========================================================
In dealing with issuers The significant deterioration in the global
of debt and other economic outlook in 2020 saw a widening
types of counterparty of credit spreads and rating downgrades,
the Group is exposed particularly in industries directly impacted
to the risk of financial by global lockdowns including the leisure,
loss transport, travel and retail consumer cyclical
Systemic corporate sectors, with the UK Sovereign rating also
sector failures, seeing downgrade in response to greatly
or a major sovereign increased levels of government debt.
debt event, could,
in extreme scenarios, Whilst emerging COVID-19 vaccines and treatments
trigger defaults are expected to support a gradual economic
impacting the value recovery, as economies emerge from the downturn
of our bond portfolios. there remains risk of further downgrade
Under Solvency II, rating actions and debt defaults as governments
a widespread widening withdraw current economic support measures.
of credit spreads The effect of COVID-19 on reinsurance counterparties,
and downgrades can both from mortality payments and unanticipated
also result in a business interruption claims, also has potential
reduction in our to impact the ratings of weaker reinsurers,
Solvency II balance although default generally remains a more
sheet surplus, despite remote risk.
already setting aside
significant capital We actively manage our exposure to downgrade
for credit risk. and default risks within our bond portfolios,
setting selection criteria and exposure
We are also exposed limits, and using LGIM's global credit team's
to default risks capabilities to ensure risks are effectively
in dealing with banking, controlled. We entered the crisis with a
money market and well-diversified credit portfolio, and while
reinsurance counterparties, we have experienced no credit defaults we
as well as settlement, remain vigilant to downgrade and default
custody and other risks, and if appropriate trading out to
bespoke business improve credit quality, particularly in
services. A default those sectors most affected by global lockdowns.
by a counterparty
could expose us to In our property lending businesses, our
both financial loss loan criteria take account of borrower default
and operational disruption and movements in the value of security.
of business processes. We manage our reinsurer exposures dealing
Default risk also only with those with a minimum A- rating
arises where we undertake at outset, setting exposure limits, and
property lending, where appropriate taking collateral. Whilst
with exposure to we manage risks to our Solvency II balance
loss if an accrued sheet, we can never eliminate downgrade
debt exceeds the or default risks, although we seek to hold
value of security a strong balance sheet that we believe to
taken. be prudent for a range of adverse scenarios.
============================== ========================================================
Changes in regulation Regulatory driven change remains a significant
or legislation may risk factor across our businesses. In the
have a detrimental UK, with the end of the Brexit transition
effect on our strategy period, responsibility for the future evolution
Legislation and government of prudential regulations is now vested
fiscal policy influence in UK regulators, and HMT Treasury have
our product design, initiated consultation on Solvency II. UK
the period of retention conduct regulation continues to focus on
of products and required consumer protection, market integrity and
reserves for future the promotion of competition, and we are
liabilities. Regulation preparing for the FCA's transition in 2021
defines the overall from LIBOR to SONIA.
framework for the
design, marketing, Regulatory focus also continues on the financial
taxation and distribution risks presented from climate change and
of our products, the readiness of firms to prepare for the
and the prudential transition to a low-carbon economy. Alongside
capital that we hold. regulatory risk, we are also monitoring
Significant changes potential for changes in UK fiscal policy
in legislation or arising from the need to fund government
regulation may increase borrowing in response to COVID-19.
our cost base, reduce
our future revenues We are supportive of regulation in the markets
and impact profitability in which we operate where it ensures trust
or require us to and confidence and can be a positive force
hold more capital. on business. We seek to actively participate
with government and regulatory bodies to
The prominence of assist in the evaluation of change so as
the risk increases to develop outcomes that meet the needs
where change is implemented of all stakeholders. Internally, we evaluate
without prior engagement change as part of our formal risk assessment
with the sector. processes, with material matters being considered
The nature of long-term at the Group Risk Committee and the Group
business can also Board. Our activities in readiness for the
result in some changes transition to SONIA are well advanced, and
in regulation, and we continue to make good progress in aligning
the re-interpretation our approach to the management of climate
of regulation over risk with the expectations of our regulators.
time, having a retrospective
effect on in-force Our internal control framework seeks to
books of business, ensure on-going compliance with relevant
impacting future legislation and regulation. Residual risk
cash generation. remains, however, that controls may fail
or that historic financial services industry
accepted practices may be reappraised by
regulators, resulting in sanctions against
the Group.
============================== ========================================================
New entrants, or The need to adjust to living with COVID-19
legislative change, has seen the acceleration of a number of
may disrupt the markets trends, including greater consumer engagement
in which we operate in digital business models and on-line servicing
There is already tools. It has also seen businesses like
strong competition ours transform working practices, and we
in our markets, and expect to continue to invest in automation,
although we have using robotics to improve business efficiency.
had considerable Evolving governmental initiatives including
past success at building defined benefit 'superfund' consolidation
scale to offer low schemes, pension dashboards and 'collective'
cost products, we pension scheme arrangements also present
recognise that markets opportunities.
remain attractive
to new entrants. We continuously monitor the factors that
It is possible that may impact the markets in which we operate
alternative digitally and are maintaining our focus on developing
enabled financial our digital platforms. In our pensions risk
services providers transfer business, our capabilities to assess
emerge with lower risk and offer bespoke solutions enable
cost business models us to differentiate our offer from competitors,
or innovative service and we believe that our investment management
propositions and and Institutional retirement businesses
capital structures, are well positioned for the evolution of
and disrupt the current the pensions market.
competitive landscape,
and that changes
in legislation or
regulation impact
operating models.
============================== ========================================================
A material failure Although COVID-19 lockdowns have had some
in our business processes impact on our business operations, we have
or IT security may been able to continue the majority of our
result in unanticipated business services without material disruption.
financial loss or We remain, however, alert to the operational
reputation damage risks in the current environment including
We have constructed the increased risk of cyber threats and
our framework of the potential for on-going disruption from
internal controls lockdowns. We continue to invest in our
to minimise the risk system capabilities, including those for
of unanticipated the management of cyber risks, to ensure
financial loss or that our business processes are resilient,
damage to our reputation. and that appropriate recovery plans are
However, no system in place. We also seek to closely manage
of internal control our property construction and safety risks
can completely eliminate through robust internal control systems,
the risk of error, including training, monitoring and independent
financial loss, fraudulent assessments.
actions or reputational
damage. We are also Our risk governance model seeks to ensure
inherently exposed that business management are actively engaged
to the risk that in maintaining an appropriate control environment,
third parties may supported by risk functions led by the Group
seek to steal customer Chief Risk Officer, with independent assurance
data or perpetrate from Group Internal Audit.
acts of fraud using
digital media, and As part of our move to a remote working
there is strong stakeholder model, our risk and internal audit functions
expectation that have undertaken reviews across our business
our core business to ensure that our core control processes
services are resilient remain effective and that key operational
to operational disruption. risks are being managed. Whilst we seek
to maintain a control environment commensurate
with our risk profile we recognise that
residual risk will always remain across
the spectrum of our business operations
and we aim to develop response plans so
that when adverse events occur, appropriate
actions are deployed.
============================== ========================================================
We fail to respond The science underpinning climate change
to the emerging threats is clear and the effects can already be
from climate change seen across the world. We believe, however,
for our investment that climate change has still to be fully
portfolios and wider priced in by financial markets. The urgent
businesses global response to COVID-19 has illustrated
As a significant the potential scale of shock that could
investor in financial arise from delays in responding to climate
markets, commercial risk with sudden late policy action leading
real estate and housing, to potentially large and unanticipated shifts
we are exposed to in asset valuations for impacted industries
climate related transition and sectors. But alongside the risks, there
risks, particularly is an opportunity for investment in new
should abrupt shifts technologies that offer good returns whilst
in the political meeting global goals for net zero carbon
and technological emissions, including energy efficient property,
landscape impact renewables and new science to support de-carbonisation.
the value of those
investment assets We recognise that our scale brings a responsibility
associated with higher to act decisively in positioning our balance
levels of greenhouse sheet to the threats from climate change
gas emissions. and, as one of the largest global institutional
investors, also encouraging others to follow
suit. We continue to embed the assessment
of climate risks in our investment process
and are developing our risk metrics and
framework for oversight and taking opportunities.
As set out in our TCFD report, we continue
to measure the carbon intensity targets
of our investment portfolios, and along
with specific investment exclusions we have
set reduction targets aligned with a 1.5
degree Celsius interpretation of the Paris
commitment.
============================== ========================================================
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 virtual presentation to analysts and fund managers will be
available shortly after 7:00am UK time today at
www.legalandgeneralgroup.com/investors/preliminary-results-2020
.
A teleconference for analyst questions will take place at 9:30am
UK time today. Details of the teleconference below:
Participant dial-in numbers
============================= ===============================================================
Location where you are Number you should dial
dialling in from
============================= ===============================================================
United Kingdom +44 20 3936 2999
============================= ===============================================================
United States (toll free) +1 855 9796 654
============================= ===============================================================
All other locations www.legalandgeneralgroup.com/investors/teleconference-details/
============================= ===============================================================
Please enter access code 766500 to gain access to the
conference.
To ask a question press *1; to remove a question press *2.
Financial Calendar Date
======================================== ===============
Ex-dividend date (2020 final dividend) 15 April 2021
Record date 16 April 2021
Annual General Meeting 20 May 2021
Dividend payment date 27 May 2021
2021 interim results announcement 4 August 2021
Ex-dividend date (2021 interim dividend) 12 August 2021
Record date 13 August 2021
Dividend payment date 20 September
2021
Definitions
Definitions are included in the Glossary on pages 94 to 97 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
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 IFRS Primary Financial
Statements and Disclosure Notes of the Full year report 2020.
Principal risks and uncertainties are detailed on pages 31 to
33.
The Directors have made an assessment of the Group's going
concern, considering both the Group's current performance and the
Group's outlook for a period of at least, but not limited to, 12
months from the date of approval of these consolidated financial
statements, which takes account of the current and future impact of
the COVID-19 pandemic, using the information available up to the
date of issue of the Full year report 2020.
The Group manages and monitors its capital and liquidity, and
various stresses are applied to those positions to understand
potential impacts from market downturns. Our key sensitivities and
the impacts on our capital position from a range of stresses is
disclosed on table 5.01 of the Capital section of the Full year
report 2020. These stresses, including the additional
considerations and stresses applied in response to COVID-19, do not
give rise to any material uncertainties over the ability of the
Group to continue as a going concern. Based upon the available
information, the directors consider that the Group has the plans
and resources to manage its business risks successfully and that it
remains financially strong and well diversified.
Having reassessed the principal risks and uncertainties (both
financial and operational) in light of COVID-19 and the current
economic climate, as detailed on pages 31 to 33, the directors are
confident that the Group and Company will have sufficient funds to
continue to meet its liabilities as they fall due for a period of,
but not limited to, 12 months from the date of approval of the
financial statements and therefore have considered it appropriate
to adopt the going concern basis of accounting when preparing the
financial statements.
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
principal 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
9 March 2021 9 March 2021
Enquiries
Investors
+44 7585 905 799
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 054
Nimalan Ilankovan, Investor Relations
investor.relations@group.landg.com
legalandgeneralgroup.com
Media
+44 203 1242 090
John Godfrey, Group Corporate Affairs Director
legalandgeneralgroup.com
+44 207 3534 200
Graeme Wilson, Tulchan Communications
+44 207 3534 200
Sheebani Chothani, Tulchan Communications
[1] The Alternative Performance Measures within the Group's
financial highlights are defined in the glossary, on pages 93 to 97
of this report.
[2] Including mortality reserve releases (2020: GBP177m, 2019:
GBP155m). 2020 mortality release of GBP177m from LGR's GBP51.8bn of
net longevity exposure relates to changes in longevity improvement
assumptions to align to CMI 2018 tables, adjusted to reflect our
annuitant portfolio.
[3] Specific COVID-19 impacts of LGRI and LGRR (+GBP85m
combined); LGC (-GBP100m); LGI (-GBP186m, which includes -GBP110m
reserve increases for potential future COVID-19 claims); and Group
Costs (-GBP27m). Please see page 4 for more information.
[4] Profit after tax attributable to equity holders.
[5] Solvency II coverage ratio on a shareholder basis, which is
adjusted for the Own Funds and SCR of the With-profits fund (2019
only) and the Group final salary pension plans. Incorporates the
impact of recalculating the Transitional Measures for Technical
Provisions (TMTP) as at 31 December 2020
[6] Coverage ratio before payment of the 2020 final dividend.
[7] Excludes mortality reserve releases (2020: GBP177m, 2019:
GBP155m). 2020 mortality release of GBP177m from LGR's GBP51.8bn of
net longevity exposure relates to changes in longevity improvement
assumptions to align to CMI 2018 tables, adjusted to reflect our
annuitant portfolio.
[8] 2019 LGIM operating profit restated to include LGIM-related
project expenditure (GBP29m) formerly reflected in Group
expenses.
[9] Excludes Mature Savings and General Insurance.
[10] Mature Savings sale to ReAssure for GBP650m was announced
on 6 December 2017, completed in September 2020, and the 2019 and
2020 results reflect the Reinsurance Transfer Agreement.
[11] General Insurance sale to Allianz completed on 31 December 2019.
[12] COVID-19 costs reflect incremental operational expenses
incurred as a result of COVID-19 and include the provision of IT
spend on remote working solutions. Please see page 4 for more
information.
[13] LGI investment variance is the formulaic impact of falling
interest rates reducing the discount rate (both UK and US) used to
calculate LGI reserves.
[14] Profit before tax attributable to equity holders is an
alternative performance measure and represents Adjusted profit
before tax attributable to equity holders as defined on page
93.
[15] Excludes aggregate LGRI and LGRR mortality reserve releases
(2020: GBP177m, 2019: GBP155m). 2020 mortality release of GBP177m
from LGRI and LGRR's GBP51.8bn of net longevity exposure relates to
changes in longevity improvement assumptions to align to CMI 2018
tables, adjusted to reflect our annuitant portfolio.
[16] Profit before tax attributable to equity holders is an
alternative performance measure, and represents Adjusted profit
before tax attributable to equity holders as defined on page
93.
[17] Solvency II coverage ratio on a "shareholder view".
Incorporates the impact of recalculating the Transitional Measures
for Technical Provisions (TMTP) as at 31 December 2020.
[18] Solvency II coverage ratio on a proforma basis includes the
SCR attributable to our With-profits fund (2019 only) 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
2020.
[19] Coverage ratio before payment of the 2020 final dividend.
[20] Calculated using annualised profit for the year and average
equity attributable to the owners of the parent of GBP9,270m.
[21] We have realised less than GBP475m of downgrades to
sub-investment grade within our actively managed traded credit
portfolio; this represents just half of the downgrades to
sub-investment grade implied by index experience (1.8%).
[22] WTW, The world's largest 500 asset managers
[23] Bloomberg Total Shareholder Return 4 January 2011; please
see "Outlook" section for more information.
[24] WTW, Global Pension Assets Study 2021.
[25] Industry data from Boston Consulting Group, "Global Asset
Management 2020".
[26] Three year average measured by UK PRT new business volumes.
Three year average measured by UK PRT deal count from LGIM clients
is 67%.
[27] Broadridge, UK Defined Contribution and Retirement Income
report 2019. 2019 UK DC Assets: GBP438bn.
[28] For more information please refer to
www.legalandgeneralgroup.com/investors/esg-investors/
[29] Proprietary assets relate to Investments to which
shareholders are directly exposed (excluding client, policyholder
assets, derivatives, cash, cash equivalents and loans), as
disclosed in Note 6.01.
[30] State Street R-Factor Research, January 2020.
[31] The ambition is based on the aggregate performance over a
five-year period. Performance may vary from year to year and
individual statements may not be met in
each year on a standalone basis. Dividend decisions are subject
to final Board approval.
[32] Cash generation is IFRS net release from operations,
capital generation is Solvency II operational surplus generation.
Dividends on a declared basis. On the basis of a flat final 2020
dividend, and 3-6% annual growth thereafter.
[33] Legal & General 2020 Capital Markets Event, slide
26
[34] Pension Purple Book 2020, PPF; Hymans Robertson, 2019 Risk
Transfer Report; 2021 de-risking report, Willis Towers Watson
[35]
www.ipe.com/news/aon-adds-to-outlooks-for-active-2021-pension-risk-transfer-market/10049888.article
[36] Pensions Policy Institute, October 2019; Aon
[37] LIMRA, March 2020
[38] Professional Pensions, "L&G announces bulk annuities
with UK and US schemes", 13 May 2020
[39] FCA Retirement Income Data Oct 2017 - March 2019,
Broadridge DC Report 2019
[40] ABI
[41] ABI, FCA Retirement Income Data Oct 2017 - March 2019,
Broadridge DC Report 2019
[42] Excluding mortality release (2020: GBP102m, 2019:
GBP100m).
[43]
www.ipe.com/news/aon-adds-to-outlooks-for-active-2021-pension-risk-transfer-market/10049888.article
[44] Legal & General 2020 Capital Markets Event
[45] 2015: $445m, 1; 2016: $448m, 6; 2017: $713m, 15; 2018:
$844m, 21; 2019: $1,140m, 10; 2020: $1,614m, 17 (of which 14 are
new clients)
[46] Excluding mortality release (2020: GBP75m, 2019:
GBP55m).
[47] Please see page 4 for more information.
[48] ABI Q3 2020 Report; Q4 2019: 18.6%; Q3 2020: 20.9%
[49] See note 4.05. LGR's total annuity asset portfolio is with
respect to our UK and US annuities businesses, and excludes
derivative liabilities (GBP20.8bn) and loans and other receivables
(GBP3.2bn) from the total LGR investments (GBP111bn) shown in note
6.01.
[50] For more information, please visit
www.legalandgeneral.com/institutional/pension-risk-transfer/who-we-are/esg/
[51] Includes LGR direct investment bonds (GBP 20,306m), direct
investment property (GBP4,319m), direct investments equity
(GBP19m), and other assets (GBP88m). Please see note 6.02b for more
information.
[52] Pridham Report, 2021.
[53] Broadridge Pan-European mutual fund and ETF flows Q1
2020.
[54] The equity holders' total Effective Tax Rate excluding
discontinued operations is 10.4% (2019: 14.3%).
[55] Coverage ratio before payment of the 2020 final
dividend.
[56] 2019 comparator includes the SCR attributable to the
With-profits fund, whose sale completed in September 2020.
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