TIDMLGEN
RNS Number : 7166R
Legal & General Group Plc
10 March 2021
Legal & General Group Plc
2020 Full Year Results Part 3
Asset and premium flows Page 66
4.01 LGIM total assets under management(1)
Active Multi Real Total
Index strategies Asset Solutions(2) assets AUM
For the year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2020
As 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(3) (6.6) (0.1) 3.2 24.3 (0.4) 20.4
Internal net flows(5) (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(4) - 2.4 - - - 2.4
Market and other movements(3) 33.1 11.5 2.6 8.9 1.7 57.8
As at 31 December 2020 429.9 193.6 63.4 559.5 32.5 1,278.9
Assets attributable to:
External 1,162.6
Internal 116.3
1. Assets under management (AUM) includes assets on our Investment
Only Platform that are managed by third parties, on which fees
are earned.
2. Solutions include liability driven investments and GBP340.1bn
(31 December 2019: GBP335.7bn) of derivative notionals associated
with the Solutions business.
3. External net flows exclude movements in short-term Solutions
assets, as their maturity dates are determined by client agreements
and are subject to a higher degree of variability. The total value
of these assets at 31 December 2020 was GBP45.8bn (31 December
2019: GBP67.1bn) and the movement in these assets is included in
market and other movements for Solutions assets.
4. Cash management movements include external holdings in money
market funds and other cash mandates held for client liquidity
management purposes.
5. Internal net flows include flows in legacy assets from the unit-linked
and with-profits savings business sold to ReAssure in 2020.
Active Multi Real Total
Index strategies asset Solutions(2) assets AUM
For the year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2019
As at 1 January 2019 307.1 160.4 43.6 477.9 26.5 1,015.5
External inflows 96.2 14.0 11.2 25.5 1.8 148.7
External outflows (58.9) (11.2) (3.5) (26.2) (1.7) (101.5)
Overlay net flows - - - 38.8 - 38.8
ETF net flows 0.4 - - - - 0.4
External net flows(3) 37.7 2.8 7.7 38.1 0.1 86.4
Internal net flows (0.3) (0.4) (0.9) 1.9 2.5 2.8
Total net flows 37.4 2.4 6.8 40.0 2.6 89.2
Cash management movements(4) - (0.6) - - - (0.6)
Market and other movements(3) 59.1 15.0 7.6 8.7 1.7 92.1
As at 31 December 2019 403.6 177.2 58.0 526.6 30.8 1,196.2
Assets attributable to:
External 1,092.2
Internal 104.0
1. Assets under management (AUM) includes assets on our Investment
Only Platform, that are managed by third parties, on which fees
are earned.
2. Solutions include liability driven investments and GBP335.7bn
of derivative notionals associated with the Solutions business.
3. External net flows exclude movements in short-term Solutions
assets, as their maturity dates are determined by client agreements
and are subject to a
higher degree of variability. The total value of these assets at
31 December 2019 was GBP67.1bn and the movement in these assets
is included in market and
other movements for Solutions assets.
4. Cash management movements include external holdings in money
market funds and other cash mandates held for client liquidity management
purposes.
Asset and premium flows Page 67
4.02 LGIM total assets under management(1) half-yearly
progression
Active Multi Real Total
Index strategies Asset Solutions(2) assets AUM
For the year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2020
As at 1 January 2020 403.6 177.2 58.0 526.6 30.8 1,196.2
External inflows 27.7 9.5 4.3 10.9 0.6 53.0
External outflows (32.3) (9.0) (2.7) (22.7) (0.4) (67.1)
Overlay net flows - - - 20.1 - 20.1
ETF Net Flows 0.2 - - - - 0.2
External net flows(3) (4.4) 0.5 1.6 8.3 0.2 6.2
Internal net flows - (0.2) (0.7) (0.1) 0.4 (0.6)
Total net flows (4.4) 0.3 0.9 8.2 0.6 5.6
Cash management movements(4) - 2.8 - - - 2.8
Market and other movements(3) (4.1) 9.2 (1.8) 32.0 0.7 36.0
As at 30 June 2020 395.1 189.5 57.1 566.8 32.1 1,240.6
External inflows 48.9 8.2 4.2 16.1 0.4 77.8
External outflows (52.4) (8.8) (2.6) (13.9) (1.0) (78.7)
Overlay net flows - - - 13.8 - 13.8
ETF Net Flows 1.3 - - - - 1.3
External net flows(3) (2.2) (0.6) 1.6 16.0 (0.6) 14.2
Internal net flows(5) (0.2) 2.8 0.3 (0.2) - 2.7
Total net flows (2.4) 2.2 1.9 15.8 (0.6) 16.9
Cash management movements(4) - (0.4) - - - (0.4)
Market and other movements(3) 37.2 2.3 4.4 (23.1) 1.0 21.8
As at 31 December 2020 429.9 193.6 63.4 559.5 32.5 1,278.9
1. AUM includes assets on our Investment Only Platform, that are managed
by third parties, on which fees are earned.
2. Solutions include liability driven investments and GBP340.1bn (30
June 2020: GBP348.3bn; 31 December 2019: GBP335.7bn) of derivative
notionals associated with the Solutions business.
3. External net flows exclude movements in short-term Solutions assets,
as their maturity dates are determined by client agreements and are
subject to a higher degree of variability. The total value of these
assets at 31 December 2020 was GBP45.8bn (30 June 2020: GBP62.3bn;
31 December 2019: GBP67.1bn) and the movement in these assets is included
in market and other movements for Solutions assets.
4. Cash management movements include external holdings in money market
funds and other cash mandates held for client liquidity management
purposes.
5. Internal net flows include legacy assets from unit-linked and with-profits
savings business sold to ReAssure in 2020.
Asset and premium flows Page 68
4.02 LGIM total assets under management(1) half-yearly
progression (continued)
Active Multi Real Total
Index Strategies asset Solutions(2) assets AUM
For the year ended 31 December GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
2019
As at 1 January 2019 307.1 160.4 43.6 477.9 26.5 1,015.5
Canvas Acquisition(3)
External inflows 60.8 5.7 6.5 8.8 0.8 82.6
External outflows (26.1) (4.8) (1.4) (11.0) (0.8) (44.1)
Overlay net flows - - - 22.0 - 22.0
ETF net flows (0.2) - - - - (0.2)
External net flows(3) 34.5 0.9 5.1 19.8 - 60.3
Internal net flows (0.1) (2.0) (0.3) 3.6 1.2 2.4
Total net flows 34.4 (1.1) 4.8 23.4 1.2 62.7
Cash management movements(4) - 0.5 - - - 0.5
Market and other movements(3) 43.9 12.4 6.0 (7.7) 1.2 55.8
As at 30 June 2019 385.4 172.2 54.4 493.6 28.9 1,134.5
External inflows 35.4 8.3 4.7 16.7 1.0 66.1
External outflows (32.8) (6.4) (2.1) (15.2) (0.9) (57.4)
Overlay net flows - - - 16.8 - 16.8
ETF net flows 0.6 - - - - 0.6
External net flows(3) 3.2 1.9 2.6 18.3 0.1 26.1
Internal net flows (0.2) 1.6 (0.6) (1.7) 1.3 0.4
Total net flows 3.0 3.5 2.0 16.6 1.4 26.5
Cash management movements(4) - (1.1) - - - (1.1)
Market and other movements(3) 15.2 2.6 1.6 16.4 0.5 36.3
As at 31 December 2019 403.6 177.2 58.0 526.6 30.8 1,196.2
1. Assets under management (AUM) includes assets on our Investment
Only Platform that are managed by third parties, on which fees are
earned.
2. Solutions include liability driven investments and GBP335.7bn of
derivative notionals associated with the Solutions business.
3. External net flows exclude movements in short-term Solutions
assets, as their maturity dates are determined by client agreements
and are subject to a higher degree of variability. The total
value of these assets as at 31 December 2019 was GBP67.1bn and
the movement in these assets is included in market and other
movements for Solutions assets.
4. Cash management movements include external holdings in money market
funds and other cash mandates held for client liquidity management
purposes.
Asset and premium flows Page 69
4.03 LGIM total external assets under management and net
flows
Assets under management Net flows for the period
at ended(2)
31 December 30 June 31 December 30 June 31 December 30 June 31 December 30 June
2020 2020 2019 2019 2020 2020 2019 2019
GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn GBPbn
International(1) 303.5 289.5 276.7 248.6 (1.0) (3.0) 14.6 44.6
UK Institutional
- Defined contribution 112.7 96.7 94.3 86.4 5.6 5.5 3.7 3.6
- Defined benefit 699.4 706.7 679.3 659.7 7.7 2.5 4.8 10.7
Retail
- Retail intermediary 36 33.3 33.1 30.0 0.6 1.0 2.5 1.7
- Personal investing(3) 5.6 5.2 5.7 5.6 - - (0.1) (0.1)
ETF 5.4 3.5 3.1 2.4 1.3 0.2 0.6 (0.2)
Total external 1,162.6 1,134.9 1,092.2 1,032.7 14.2 6.2 26.1 60.3
-------
1. International asset are shown on the basis of client domicile.
Total International AUM, including assets managed internationally
on behalf of UK clients, amounted to GBP388bn as at 31 December
2020 (2019: GBP370bn).
2. External net flows exclude movements in short-term solutions
assets, as their maturity dates are determined by client agreements
and are subject to a higher degree of variability.
3. Personal investing includes GBP1.4bn (2019: GBP1.6bn) of AUM
relating to legacy Banks and Building Society customers, which drove
net outflows in 2019.
4.04 Reconciliation of assets under management to Consolidated Balance
Sheet financial investments, investment property and cash and cash
equivalents
2020 2019
GBPbn GBPbn
------------------------------------------------------------ ------ -----
Assets under management 1,279 1,196
Derivative notionals (1) (340) (336)
Third party assets (2) (419) (379)
Other (3) 33 63
Total financial investments, investment property and
cash and cash equivalents 553 544
Less: assets of operations classified as held for
sale - (24)
------------------------------------------------------------ ------ -----
Financial investments, investment property and cash
and cash equivalents 553 520
------------------------------------------------------------ ------ -----
1. Derivative notionals are included in the assets under management
measure but are not for IFRS reporting and are thus removed.
2. Third party assets are those that LGIM manage on behalf of others
which are not included on the group's Consolidated Balance Sheet.
3. Other includes assets that are managed by third parties on behalf
of the group, other assets and liabilities related to financial
investments, derivative assets and pooled funds.
Asset and premium flows Page 70
4.05 Assets under administration
Workplace(1) Annuities(2) Workplace Annuities
2020 2020 2019 2019
GBPbn GBPbn GBPbn GBPbn
As at 1 January 40.3 75.9 30.0 63.0
Gross inflows 10.0 10.1 7.3 12.4
Gross outflows (2.2) - (2.0) -
Payments to pensioners - (4.3) - (4.1)
Net flows 7.8 5.8 5.3 8.3
Market and other movements 2.7 5.3 5.0 4.6
As at 31 December 50.8 87.0 40.3 75.9
1. Workplace assets under administration as at 31 December 2020 includes
GBP50.7bn (2019: GBP40.2bn) of assets under management included in
Note 4.01.
2. Annuities assets under administration as at 31 December 2020 includes
GBP79.4bn (2019: GBP70.1bn) of assets under management included in
Note 4.01.
4.06 Assets under administration half-yearly progression
Workplace Annuities Workplace Annuities
2020 2020 2019 2019
For the year ended 31 December 2020 GBPbn GBPbn GBPbn GBPbn
As at 1 January 2020 40.3 75.9 30.0 63.0
Gross inflows 3.3 3.8 3.5 7.2
Gross outflows (0.9) - (0.9) -
Payments to pensioners - (2.1) - (2.0)
Net flows 2.4 1.7 2.6 5.2
Market and other movements (1.2) 3.1 3.5 3.9
As at 30 June 2020 41.5 80.7 36.1 72.1
Gross inflows 6.6 6.3 3.8 5.2
Gross outflows (1.3) - (1.1) -
Payments to pensioners - (2.2) - (2.1)
==================================== ========= ========= ========= =========
Net flows 5.3 4.1 2.7 3.1
Market and other movements 3.9 2.2 1.5 0.7
As at 31 December 2020 50.8 87.0 40.3 75.9
Asset and premium flows Page 71
4.07 LGR new business
6 months 6 months 6 months 6 months
Total 31 December 30 June Total 31 December 30 June
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Pension risk transfer
- UK 7,593 4,417 3,176 10,325 4,009 6,316
- US 1,250 1,002 248 893 670 223
- Bermuda - - - 174 36 138
Individual annuities 910 489 421 970 473 497
Lifetime & retirement interest
only mortgage advances 791 429 362 965 476 489
Total LGR new business 10,544 6,337 4,207 13,327 5,664 7,663
4.08 LGI new business
6 months 6 months 6 months 6 months
Total 31 December 30 June Total 31 December 30 June
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
UK Retail protection 175 92 83 174 83 91
UK Group protection 117 52 65 76 32 44
US protection(1) 80 36 44 89 46 43
Total LGI new business 372 180 192 339 161 178
1. In local currency, US protection reflects new business of $103m
for 2020 (H2: $47; H1: $56) (H2 19: $58m; H1 19: $55m).
4.09 Gross written premiums on insurance business
6 months 6 months 6 months 6 months
Total 31 December 30 June Total 31 December 30 June
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
UK Retail protection 1,374 694 680 1,327 669 658
UK Group protection 382 137 245 345 112 233
US Protection(1) 1,093 543 550 1,057 539 518
Longevity insurance 327 168 159 376 186 190
Total gross written premiums on
insurance business 3,176 1,542 1,634 3,105 1,506 1,599
1. In local currency, US protection reflects gross written premiums
of $1,403m for 2020 (H2: $710; H1: $693) (H2 19: $679m; H1 19: $670m).
Capital Page 72
5.01 Group regulatory capital - Solvency II
The group complies with the requirements established by the
Solvency II Framework Directive, as adopted by the Prudential
Regulation Authority (PRA) in the UK and measures and monitors its
capital resources on this basis.
The Solvency II results are estimated and unaudited. Further
explanation of the underlying methodology and assumptions are set
out in the sections below.
The group calculates its Solvency II capital requirements using
a Partial Internal Model. The vast majority of the risk to which
the group is exposed is assessed on the Partial Internal Model
basis approved by the PRA. Capital requirements for a few smaller
entities are assessed using the Standard Formula basis on
materiality grounds. The group's US insurance businesses are valued
on a local statutory basis following the PRA's approval to use the
Deduction and Aggregation method of including these businesses in
the group solvency calculation.
The table below shows the "shareholder view" of the group Own
Funds, Solvency Capital Requirement (SCR) and Surplus Own Funds,
based on the Partial Internal Model, Matching Adjustment and
Transitional Measures on Technical Provisions (TMTP) (recalculated
as at 31 December 2020 as agreed with the PRA). The TMTP
incorporates estimated impacts of end December 2020 economic
conditions and changes during 2020 to the Internal Model and
Matching Adjustment. This is in line with group's management of the
capital position on a dynamic TMTP basis.
(a) Capital position
As at 31 December 2020, and on the above basis, the group had a
surplus of GBP7.4bn (2019: GBP7.3bn) over its Solvency Capital Requirement,
corresponding to a Solvency II capital coverage ratio on a "shareholder
view" basis of 177% (2019: 184%). The shareholder view of the Solvency
II capital position is as follows:
2020 2019
GBPbn GBPbn
Unrestricted Tier 1 Own Funds 12.3 12.4
Restricted Tier 1 Own Funds(1) 0.5 -
Tier 2 Subordinated liabilities(2) 4.5 3.9
Eligibility restrictions (0.2) (0.2)
===================================================================================== ====== =====
Solvency II Own Funds (3) 17.1 16.1
Solvency Capital Requirement (9.7) (8.8)
Solvency II surplus 7.4 7.3
-
------------------------------------------------------------------------------- --- ------ -----
SCR Coverage ratio(4) 177% 184%
1. Restricted Tier 1 Own Funds represent Perpetual Restricted Tier
1 Contingent Convertible Notes issued during the year. See Note
3.09 for details.
2. Tier 2 subordinated liabilities include new debt issue of GBP0.5bn
during the year.
3. Solvency II Own Funds allow for a Risk Margin of GBP6.1bn (2019:
GBP5.9bn) and TMTP of GBP5.6bn (2019: GBP5.7bn).
4. SCR Coverage ratio is based on unrounded inputs.
The "shareholder view" basis excludes the contribution that the
final salary pension schemes would normally make to the group
position. This is reflected by reducing the group's Own Funds and
the group's SCR by the amount of the SCR for the final salary
pension schemes.
On a "proforma basis", which includes the contribution of the
With-profits fund (2019 only) and the final salary pension schemes,
the coverage ratio at 31 December 2020 is 175% (31 December 2019:
179%).
On 6 December 2017, the group announced the sale of its Mature
Savings business to ReAssure Limited. ReAssure Limited assumed the
economic exposure of the business from 1 January 2018 via a risk
transfer agreement. The formal transfer of the business completed
on 7 September 2020. The transfer was effected by way of a Part VII
transfer under the Financial Services and Markets Act 2000.
Capital Page 73
5.01 Group regulatory capital - Solvency II (continued)
(b) Methodology
Own Funds comprise the excess of the value of assets over the
liabilities, as valued on a Solvency II basis. Subordinated debt
issued by the group is considered to be part of available capital,
rather than a liability, as it is subordinate to policyholder
claims. Own Funds include deductions in relation to fungibility and
transferability restrictions, where the surplus Own Funds of a
specific group entity cannot be freely transferred around the group
due to local legal or regulatory constraints.
Assets are valued at IFRS fair value with adjustments to remove
intangibles and deferred acquisition costs, and to value
reassurers' share of technical provisions on a basis consistent
with the liabilities on the Solvency II balance sheet.
Liabilities are valued on a best estimate market consistent
basis, with the application of a Solvency II Matching Adjustment
for valuing annuity liabilities. Own Funds incorporate changes to
the Internal Model and Matching Adjustment during 2020 and the
impacts of a recalculation of the TMTP as at end December 2020 as
approved by the PRA. The recalculated TMTP of GBP5.6bn (31 December
2019: GBP5.7bn) is net of amortisation to 31 December 2020.
The liabilities include a Risk Margin of GBP6.1bn (31 December
2019: GBP5.9bn) which represents an allowance for the cost of
capital for a purchasing insurer to take on the portfolio of
liabilities and residual risks that are deemed to be not hedgeable
under Solvency II. This is calculated using a cost of capital of 6%
as prescribed by the European Insurance and Occupational Pensions
Authority (EIOPA).
The Solvency Capital Requirement is the amount of capital
required to cover the 1-in-200 worst projected future outcome in
the year following the valuation, allowing for realistic management
and policyholder actions and the impact of the stress on the tax
position of the group. This allows for diversification between the
different firms within the group and between the risks to which
they are exposed.
All material EEA insurance firms, including Legal and General
Assurance Society Limited (LGAS) and Legal and General Assurance
(Pensions Management) Limited, are incorporated into the group's
Solvency II Internal Model assessment of required capital, assuming
diversification of the risks between and within those firms. These
firms, as well as the non-EEA insurance firm (Legal & General
Reinsurance Company Limited (LGRe) based in Bermuda) contribute
over 93% of the group's SCR.
Insurance firms for which the capital requirements are less
material are valued on a Solvency II Standard Formula basis. Firms
which are not regulated but which carry material risks to the
group's solvency are modelled in the Internal Model on the basis of
applying an appropriate stress to their net asset value.
Legal & General America's Banner Life and its subsidiaries
(LGA) are incorporated into the calculation of group solvency using
a Deduction and Aggregation basis. All risk exposure in these firms
is valued on a local statutory basis, with capital requirements set
to a multiple of local statutory Risk Based Capital (RBC) and
further restrictions on the surplus contribution to the group. The
US regulatory regime is considered to be equivalent to Solvency II
by the European Commission. The contribution to group SCR is 150%
of the local Company Action Level RBC (CAL RBC). The contribution
to group's Own Funds is the SCR together with any surplus capital
in excess of 250% of CAL RBC.
All non-insurance regulated firms are included using their
regulatory surplus on 31 December 2020.
Allowance is made within the Solvency II balance sheet for the
group's defined benefit pension schemes using results on an IFRS
basis. Within the SCR, an allowance is made by stressing the IFRS
position using the same Internal Model basis as for the insurance
firms.
Capital Page 74
5.01 Group regulatory capital - Solvency II (continued)
(c) Assumptions
The calculation of the Solvency II balance sheet and associated
capital requirements requires a number of assumptions,
including:
(i) assumptions required to derive the present value of best
estimate liability cash flows. Non-market assumptions are
consistent with those underlying the group's IFRS disclosures, but
with the removal of any prudence margins. Future investment returns
and discount rates are those defined by EIOPA, which means that the
risk-free rates used to discount liabilities are market swap rates,
with an 11 basis point (2019: 11 basis points) deduction to allow
for a credit risk adjustment for sterling denominated liabilities.
For annuities that are eligible, the liability discount rate
includes a Matching Adjustment. This Matching Adjustment varies
between LGAS and LGRe and by the currency of the relevant
liabilities.
At 31 December 2020 the Matching Adjustment for the UK GBP
portfolio was 103 basis points (31 December 2019: 110 basis points)
after deducting an allowance for the EIOPA fundamental spread
equivalent to 55 basis points (31 December 2019: 53 basis
points).
(ii) assumptions regarding management actions and policyholder
behaviour across the full range of scenarios. The only management
actions allowed for are those that have been approved by the Board
and are in place at the balance sheet date;
(iii) assumptions regarding the volatility of the risks to which
the group is exposed. Assumptions have been set using a combination
of historic market, demographic and operating experience data. In
areas where data is not considered robust, expert judgement has
been used; and
(iv) assumptions on the dependencies between risks, which are
calibrated using a combination of historic data and expert
judgement.
(d) Analysis of change
The table below shows the movement (net of tax) during the year
ended 31 December 2020 in the group's Solvency II surplus.
2020 2019
GBPbn GBPbn
Surplus arising from back-book (including release
of SCR) 1.3 1.5
Release of Risk Margin(1) 0.6 0.4
Amortisation of TMTP(2) (0.4) (0.3)
------------------------------------------------------------------ ------ -----
Total operational surplus generation (3) 1.5 1.6
------------------------------------------------------------------ ------ -----
Operational surplus generation - continuing operations 1.5 1.5
Operational surplus generation - discontinued operations - 0.1
------------------------------------------------------------------ ------ -----
Total operational surplus generation (3) 1.5 1.6
------------------------------------------------------------------ ------ -----
New business strain - continuing operations (0.3) (0.5)
New business strain - discontinued operations - (0.1)
------------------------------------------------------------------ ------ -----
New business strain (0.3) (0.6)
------------------------------------------------------------------ ------ -----
Net surplus generation 1.2 1.0
Operating variances(4) 0.4 0.3
Mergers, acquisitions and disposals(5) (0.1) 0.1
Market movements(6) (1.4) (0.2)
Restricted Tier 1 convertible notes(7) 0.5 -
Subordinated liabilities(8) 0.5 0.2
Dividends paid(9) (1.0) (1.0)
Total surplus movement (after dividends paid in the
year) 0.1 0.4
------------------------------------------------------------------ ------ -----
1. Based on the Risk Margin in force at 31 December 2019 and does
not include the release of any Risk Margin added by new business
written in 2020.
2. TMTP amortisation based on a linear run down of the 31 December
2019 TMTP.
3. Release of surplus generated by in-force business and includes
management actions which at the start of the year could have been
reasonably expected to take place. For 2020 these are primarily
related to the optimisation of structures used to make assets Matching
Adjustment eligible and the planned reinsurance of back-book liabilities.
4. Operating variances include the impact of experience variances,
changes to valuation and capital calibration assumptions, other
management actions including changes in asset mix, hedging strategies,
and Matching Adjustment optimisation.
5. Mergers, acquisitions and disposals include the impacts of the
sale of the Mature Savings business, which completed in H2 20.
6. Market movements represent the impact of changes in investment
market conditions over the year and changes to future economic assumptions.
Market movements in 2020 include an increase in the Risk Margin
of GBP0.7bn (net of tax) and an increase to TMTP of GBP0.7bn (net
of tax).
7. Restricted Tier 1 convertible notes represent an issuance of
GBP0.5bn in the year (2019: nil).
8. Subordinated liabilities includes an issuance of GBP0.5bn in
the year (2019: redemption of GBP0.4bn and an issuance of GBP0.6bn).
9. Dividends paid are the amounts from the 2019 final and 2020 interim
dividend declarations (2019: 2018 final and 2019 interim dividend
declarations).
Capital Page 75
5.01 Group regulatory capital - Solvency II (continued)
(d) Analysis of change (continued)
Operational surplus generation is the expected surplus generated
from the assets and liabilities in-force at the start of the year.
It is based on assumed real world returns and best estimate
non-market assumptions. It includes the impact of management
actions to the extent that, at the start of the year, these were
reasonably expected to be implemented over the year.
New Business Strain is the cost of acquiring and setting up
Technical Provisions and SCR (net of any premium income) on actual
new business written over the year. It is based on economic
conditions at the point of sale.
(e) Reconciliation of IFRS Release from operations to Solvency II
Operational surplus generation
(i) The table below provides a reconciliation of the group's IFRS
Release from operations to Solvency II Operational surplus generation.
2020 2019
GBPbn GBPbn
IFRS Release from operations 1.3 1.3
Expected release of IFRS prudential margins (0.5) (0.5)
Releases of IFRS specific reserves(1) (0.2) (0.1)
Solvency II investment margin(2,3) 0.3 0.2
Release of Solvency II Capital Requirement and Risk
Margin less TMTP amortisation 0.6 0.7
Solvency II Operational surplus generation (4) 1.5 1.6
------------------------------------------------------------------ ------ ------
1. Release of prudence from IFRS specific reserves which are not
included in Solvency II (e.g. long term longevity and expense margins).
2. Release of prudence related to differences between the EIOPA-defined
Fundamental Spread and Legal & General's best estimate default assumption.
3. Expected market returns earned on LGR's free assets in excess
of risk-free rates over 2020.
4. Solvency II Operational Surplus Generation includes management
actions which at the start of 2020 were reasonably expected to be
implemented over the year.
(ii) The table below provides a reconciliation of the group's IFRS
New business surplus to Solvency II New business strain.
2020 2019
GBPbn GBPbn
IFRS New business surplus 0.3 0.3
Removal of requirement to set up prudential margins
above best estimate on new business 0.3 0.2
Set up of SCR on new business (0.7) (0.9)
Set up of Risk Margin on new business (0.2) (0.2)
Solvency II New business strain (1) (0.3) (0.6)
1. UK PRT new business volume during 2020 was GBP7.6bn, compared
to GBP10.3bn over 2019.
(f) Reconciliation of IFRS equity to Solvency II Own Funds
A reconciliation of the group's IFRS equity to Solvency II Own Funds
is given below:
2020 2019(4)
GBPbn GBPbn
----------------------------------------------------------- ----- -------
IFRS equity 10.0 9.1
Remove DAC, goodwill and other intangible assets and
associated liabilities (0.4) (0.5)
Add IFRS carrying value of subordinated borrowings(1) 4.0 3.5
Insurance contract valuation differences(2) 4.5 5.6
Difference in value of net deferred tax liabilities (0.6) (0.6)
SCR for with-profits fund and final salary pension schemes (0.2) (0.8)
Eligibility restrictions(3) (0.2) (0.2)
Solvency II Own Funds 17.1 16.1
------------------------------------------------------------- ----- -------
1. Treated as available capital on the Solvency II balance sheet
as the liabilities are subordinate to policyholder claims.
2. Differences in the measurement of technical provisions between
IFRS and Solvency II.
3. Relating to the Own Funds of non-insurance regulated entities
that are subject to local regulatory rules.
4. Following the change in accounting policy for LGIA universal
life and annuity IFRS reserves, the 2019 reconciliation has been
restated. Further details on the change in accounting policy are
provided in Note 3.01.
Capital Page 76
5.01 Group regulatory capital - Solvency II (continued)
(g) Sensitivity analysis
The following sensitivities are provided to give an indication of
how the group's Solvency II surplus as at 31 December 2020 would
have changed in a variety of adverse events. These are all independent
stresses to a single risk. In practice, the balance sheet is impacted
by combinations of stresses and the combined impact can be larger
than adding together the impacts of the same stresses in isolation.
It is expected that, particularly for market risks, adverse stresses
will happen together.
Impact Impact Impact Impact
on on on on
net of net of net of net of
tax tax tax tax
Solvency Solvency Solvency Solvency
II II II II
capital coverage capital coverage
surplus(1) ratio(1) surplus(1) ratio(1)
2020 2020 2019 2019
GBPbn % GBPbn %
Credit spreads widen by 100bps assuming
an escalating addition to ratings(2,3) 0.5 11 0.3 8
Credit spreads narrow by 100bps assuming
an escalating addition to ratings(2,3) (0.7) (12) (0.4) (9)
Credit spreads widen by 100bps assuming
a level addition to ratings(2) 0.7 13 0.5 11
Credit spreads of sub investment grade assets
widen by 100bps assuming a level addition
to ratings(2,4) (0.4) (5) (0.3) (6)
Credit migration(5) (1.2) (13) (0.8) (9)
25% fall in equity markets(6) (0.5) (4) (0.5) (5)
15% fall in property markets(7) (0.6) (6) (0.7) (6)
100bps increase in risk-free rates(8) 1.0 20 1.0 22
50bps decrease in risk-free rates(8,9) (0.7) (11) (0.6) (11)
10% increase in maintenance expenses(10) (0.3) (3) (0.2) (3)
Substantially reduced Risk Margin(11) 0.5 5 0.6 6
1. Both the 2020 and 2019 sensitivities exclude the impact from
the Mature Savings business (including the With-Profits fund) as
the risks were transferred to ReAssure Limited from 1 January 2018.
2. The spread sensitivity applies to the group's corporate bond
(and similar) holdings, with no change in long-term default expectations.
Restructured lifetime mortgages are excluded as the underlying exposure
is mostly to property.
3. The stress for AA bonds is twice that for AAA bonds, for A bonds
it is three times, for BBB four times and so on, such that the weighted
average spread stress for the portfolio is 100 basis points. To
give a 100bps increase on the total portfolio, the spread stress
increases in steps of 32bps, i.e. 32bps for AAA, 64bps for AA etc.
4. No stress for bonds rated BBB and above. For bonds rated BB and
below the stress is 100bps. The spread widening on the total portfolio
is 2bps as the group holds only 2% in bonds rated BB and below.
The impact is primarily an increase in SCR arising from the modelled
cost of trading downgraded bonds back to a higher rating in the
stress scenarios in the SCR calculation.
5. Credit migration stress covers the cost of an immediate big letter
downgrade on 20% of all assets where the capital treatment depends
on a credit rating (including corporate bonds, and sale and leaseback
rental strips; lifetime mortgage senior notes are excluded). Downgraded
assets are assumed to be traded to their original credit rating,
so the impact is primarily a reduction in Own Funds from the loss
of value on downgrade. The impact of the sensitivity will depend
upon the market levels of spreads at the balance sheet date.
6. This relates primarily to equity exposure in LGC but will also
include equity-based mutual funds and other investments that receive
an equity stress (for example, certain investments in subsidiaries).
Some assets have factors that increase or decrease the stress relative
to general equity levels via a beta factor.
7. Assets stressed include residual values from sale and leaseback,
the full amount of lifetime mortgages and direct investments treated
as property.
8. Assuming a recalculation of the Transitional Measure on Technical
Provisions that partially offsets the impact on Risk Margin.
9. In the interest rate down stress negative rates are allowed,
i.e. there is no floor at zero rates.
10. A 10% increase in the assumed unit costs and future costs of
investment management across all long term insurance business lines.
11. Assuming a 2/3 reduction in the Risk Margin, allowing for offset
from an equivalent reduction in the Transitional Measure on Technical
Provisions.
The above sensitivity analysis does not reflect all management actions
which could be taken to reduce the impacts. In practice, the group
actively manages its asset and liability positions to respond to
market movements. 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.
Capital Page 77
5.01 Group regulatory capital - Solvency II (continued)
(h) Analysis of Group Solvency Capital Requirement
The table below shows a breakdown of the group's SCR by risk type.
The split is shown before the effects of diversification and tax.
2020 2019
% %
Interest rate 2 1
Equity 6 6
Property 9 9
Credit(1) 29 27
Currency 3 4
Inflation 7 6
Total Market risk (2) 56 53
Counterparty risk 1 2
Life mortality 3 3
Life longevity(3) 22 22
Life mass lapse 2 2
Life non-mass lapse 2 2
Life catastrophe 4 5
Expense 3 3
Total Insurance risk 36 37
Non-life underwriting 1 1
Operational risk 4 5
Miscellaneous(4) 2 2
Total SCR 100 100
-------------------------------------------------------- ---------- -----
1. Credit risk is one of the group's most significant exposures,
arising predominantly from the portfolio of bonds and bond-like
assets backing the group's annuity business.
2. In addition to credit risk the group also has significant exposure
to other market risks, primarily due to the investment holdings
within the shareholder funds but also the risk to fee income from
assets backing unit-linked business.
3. Longevity risk is the group's most significant insurance risk
exposure, arising from the annuity book on which the majority of
the longevity risk on the back-book is retained. However, we expect
this to reduce over time as we continue to reinsure the majority
of the exposure on the new business written post the implementation
of Solvency II.
4. Miscellaneous includes LGA on a Deduction and Aggregation basis
and the sectoral capital requirements for non-insurance regulated
firms.
Capital Page 78
5.02 Estimated Solvency II new business contribution
(a) New business by product
(1)
Management estimates of the present value of new business premium
(PVNBP) and the margin for selected lines of business are provided
below:
Contribution Contribution
from new from
new
PVNBP business(2) Margin(3) PVNBP business(2) Margin(3)
Full Year Full Year Full Year Full year Full Full year
year
2020 2020 2020 2019 2019 2019
GBPm GBPm % GBPm GBPm %
LGR - UK annuity business 8,503 901 10.6 11,295 890 7.9
UK Protection Total 1,887 160 8.5 1,604 122 7.6
- Retail Protection 1,359 123 9.1 1,284 98 7.6
- Group Protection 528 37 7.0 320 24 7.5
US Protection(4) 829 94 11.2 850 94 11.1
1. Selected lines of business only.
2. The contribution from new business is defined as the present
value at the point of sale of expected future Solvency II surplus
emerging from new business written in the year using the risk discount
rate applicable at the end of the year.
3. Margin is based on unrounded inputs.
4. In local currency, US Protection reflects PVNBP of $1,064m (31
December 2019: $1,085m) and a contribution from new business of
$120m (31 December 2019: $120m).
The increase in LGR margin was driven by the longer average duration
for the schemes written in 2020, compared to the schemes written
in prior year.
For UK Protection new business the increase in profitability was
driven by a shift in the product mix combined with continued price
optimisation. The margin was further increased by the fall in interest
rates during 2020.
Capital Page 79
5.02 Estimated Solvency II new business contribution
(continued)
(b) Assumptions
The key economic assumptions are as follows:
2020 2019
% %
Margin for Risk 3.9 3.5
Risk-free rate
- UK 0.5 1.1
- US 0.9 1.9
Risk discount rate (net of tax)
- UK 4.4 4.6
- US 4.8 5.4
Long-term rate of return on non-profit annuities in
LGR 2.1 2.8
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. In particular:
-- The assumed future pre-tax returns on fixed interest and
RPI-linked securities are set by reference to the portfolio yield
on the relevant backing assets held at market value at the end of
the reporting period. The calculated return takes account of
derivatives and other credit instruments in the investment
portfolio. The returns on fixed and index-linked assets are
calculated net of an allowance for default risk which takes account
of the credit rating and the outstanding term of the assets. The
allowance for corporate and other unapproved credit asset defaults
within the new business contribution is calculated explicitly for
each bulk annuity scheme written, and the weighted average
deduction for business written in 2020 equates to a level rate
deduction from the expected returns for the overall annuities
portfolio of 15 basis points.
-- Non-economic assumptions have been set at levels commensurate
with recent operating experience, including those for mortality,
morbidity, persistency and maintenance expenses (excluding
development costs). An allowance is made for future mortality
improvement. For new business, mortality assumptions may be
modified to take certain scheme-specific features into account.
Tax
The projections take into account all tax which is expected to
be paid, based on best estimate assumptions, applying current
legislation and practice together with substantively enacted future
changes.
The profits on the new business are calculated on an after tax
basis and are grossed up by the notional attributed tax rate. For
the UK, the after tax basis assumes the annualised current rate of
19%. The tax rate used for grossing up is the long-term corporate
tax rate in the territory concerned, which for the UK is 19%.
US covered business profits are grossed up using the long-term
corporate tax rate of 21%.
Capital Page 80
5.02 Estimated Solvency II new business contribution
(continued)
(c) Methodology
Basis of preparation
Solvency II new business contribution reflects the portion of
Solvency II value added by new business written in the period. It
has been calculated in a manner consistent with principles and
methodologies as set out in the group's 2020 Annual Report and
Accounts and Full Year Results.
Solvency II new business contribution has been calculated for
the group's most material insurance-related businesses, namely,
LGR, LGI and LGA.
Description of methodology
The objective of the Solvency II new business contribution is to
provide shareholders with information on the long-term contribution
of new business written in 2020.
The Solvency II new business contribution has been calculated as
the present value of future shareholder profits arising from
business written in 2020. Cash flow projections are determined
using best estimate assumptions for each component of cash flow and
for each policy group. Best estimate assumptions including
mortality, morbidity, persistency and expenses reflect recent
operating experience and are set in accordance with the CFO Forum
EEV Principles, dated April 2016.
The PVNBP is equivalent to total single premiums plus the
discounted value of annual premiums expected to be received over
the term of the contracts using the same economic and operating
assumptions used for the calculation of the new business
contribution for the financial period.
The new business margin is defined as new business contribution
divided by the PVNBP. The premium volumes used to calculate the
PVNBP are the same as those used to calculate new business
contribution.
LGA is consolidated into the group solvency balance sheet on a
US Statutory solvency basis. Intra-group reinsurance arrangements
are in place between US, UK and Bermudan businesses and it is
expected that these arrangements will be periodically extended to
cover future new business. The LGA new business margin looks
through the intra-group arrangements.
Projection assumptions
Cash flow projections are determined using best estimate
assumptions for each component of cash flow for each line of
business. Future economic and investment return assumptions are
based on conditions at the end of the financial period.
Detailed projection assumptions including mortality, morbidity,
persistency and expenses reflect recent operating experience and
are normally reviewed annually. Allowance is made for future
improvements in annuitant mortality based on experience and
externally published data. Favourable changes in operating
experience are not anticipated until the improvement in experience
has been observed.
All costs relating to new business, even if incurred elsewhere
in the group, are allocated to the new business. The expense
assumptions used for the cash flow projections therefore include
the full cost of servicing this business.
Tax
The projections take into account all tax which is expected to
be paid, based on best estimate assumptions, applying current
legislation and practice together with substantively enacted future
changes.
Risk discount rate
The risk discount rate (RDR) is duration-based and is a
combination of the risk-free curve 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 of 11 basis points for GBP
and 16 basis points for USD (31 December 2019: 11 basis points for
GBP and 13 basis points for USD).
The Margin for Risk has been determined based on an assessment
of the group's Weighted Average Cost of Capital (WACC). This
assessment incorporates a beta for the group, which measures the
correlation of movements in the group's share price to movements in
a relevant index. Beta values therefore allow for the market's
assessment of the risks inherent in the business relative to other
companies in the chosen index.
Capital Page 81
5.02 Estimated Solvency II new business contribution
(continued)
(c) Methodology (continued)
The WACC is derived from the group's cost of equity, cost of
debt, and the proportion of equity to debt in the group's capital
structure measured using market values. Each of these three
parameters is forward looking, although informed by historic
information and appropriate judgements where necessary. The cost of
equity is calculated as the risk-free rate plus the equity risk
premium for the chosen index multiplied by the company's beta.
The cost of debt used in the WACC calculations takes account of
the actual locked-in rates for our senior and subordinated
long-term debt. All debt interest attracts tax relief at a time
adjusted rate of 19% (31 December 2019: 17.17%).
Whilst the WACC approach is a relatively simple and transparent
calculation to apply, subjectivity remains within a number of the
assumptions. Management believes that the chosen margin, together
with the levels of required capital and the inherent strength of
the group's regulatory reserves, is appropriate to reflect the
risks within the covered business.
(d) Reconciliation of PVNBP to gross written
premium
A reconciliation of PVNBP and gross written
premium is given below:
2020 2019
Notes GBPbn GBPbn
5.02
PVNBP (a) 11.2 13.7
Effect of capitalisation factor (2.3) (1.9)
New business premiums from selected lines 8.9 11.8
Other(1) 2.0 1.9
Total LGR and LGI new business 4.07,4.08 10.9 13.7
Annualisation impact of regular premium long-term
business (0.2) (0.2)
IFRS gross written premiums from existing
long-term insurance business 3.0 2.9
Deposit accounting for investment products (1.2) (1.2)
Total gross written premiums(2) 2.01 12.5 15.2
1. Other principally includes annuity sales in the US and lifetime
and retirement interest only mortgage advances.
2. Total gross written premiums exclude gross written premiums
from discontinued operations, but include GBP114m of gross written
premiums relating to a residual reinsurance treaty following
the disposal of the General Insurance business
Investments Page 82
6.01 Investment portfolio
Market Market
value value
2020 2019
GBPm GBPm
Worldwide total assets under management(1,2) 1,285,489 1,202,438
Client and policyholder assets (1,161,631) (1,092,626)
Non-unit linked with-profits assets - (10,190)
Investments to which shareholders are directly
exposed 123,858 99,622
1. Worldwide total assets under management include LGIM AUM and other
group assets not managed by LGIM.
2. As part of a change in accounting policy for LGIA universal life
and annuity reserves, certain financial investments were reclassified
from designated as amortised cost to designated as fair value through
profit or loss. Accordingly, the 2019 balance for Worldwide total
assets under management has been restated to reflect the fair value
of those assets. Further details on the change in accounting policy
are provided in Note 3.01.
Analysed by investment class:
Other
non profit Other
LGR insurance LGC shareholder
investments investments investments investments Total Total
2020 2020 2020 2020 2020 2019
Notes GBPm GBPm GBPm GBPm GBPm GBPm
Equities (3) 68 27 2,943 286 3,324 3,131
Bonds (4) 6.03 80,438 2,434 2,343 287 85,502 75,471
Derivative assets (5) 20,868 - 68 - 20,936 11,556
Property 6.04 4,319 - 163 - 4,482 3,957
Cash, cash equivalents
and loans (4,6) 5,192 450 1,822 354 7,818 3,959
Financial investments 110,885 2,911 7,339 927 122,062 98,074
Other assets (7) 88 - 1,708 - 1,796 1,548
Total investments 110,973 2,911 9,047 927 123,858 99,622
3. Equity investments include a total of GBP288m (31 December 2019:
GBP324m) in respect of associates and joint ventures.
4. As part of a change in accounting policy for LGIA universal life
and annuity reserves, certain financial investments were reclassified
from designated as amortised cost to designated as fair value through
profit or loss. Accordingly, the 2019 balances for Bonds and Cash,
cash equivalents and loans have been restated to reflect the fair
value of those assets. Further details on the change in accounting
policy are provided in Note 3.01.
5. Derivative assets are shown gross of derivative liabilities of
GBP21.2bn (31 December 2019: GBP11.5bn). Exposures arise from use
of derivatives for efficient portfolio management, especially the
use of interest rate swaps, inflation swaps, credit default swaps
and foreign exchange forward contracts for assets and liability
management.
6. Loans include reverse repurchase agreements of GBP4,117m (31
December 2019: GBP1,262m).
7. Other assets include finance leases of GBP88m (31 December 2019:
GBP90m) and the consolidated net asset value of the group's investments
in CALA Home and other housing businesses.
Investments Page 83
6.02 Direct investments
(a) Analysed by asset class
Direct(1) Traded(2) Direct(1) Traded(2)
investments securities Total Investments securities Total
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Equities 1,338 1,986 3,324 1,282 1,849 3,131
Bonds (3,5) 21,555 63,947 85,502 18,882 56,589 75,471
Derivative assets - 20,936 20,936 - 11,556 11,556
Property (4) 4,482 - 4,482 3,957 - 3,957
Loans and other receivables
(5) 99 7,719 7,818 93 3,866 3,959
Financial investments 27,474 94,588 122,062 24,214 73,860 98,074
Other assets 1,796 - 1,796 1,548 - 1,548
Total investments 29,270 94,588 123,858 25,762 73,860 99,622
------------------------------------- ------------ ---------- --------- ------------ ----------- ------
1. Direct investments, which generally constitute an agreement
with another party, represent an exposure to untraded and often
less volatile asset classes. Direct Investments also include physical
assets, bilateral loans and private equity, but excluded hedge
funds.
2. Traded securities are defined by exclusion. If an instrument
is not a Direct investment, then it is classed as a traded security.
3. Bonds include lifetime mortgages of GBP6,036m (31 December
2019: GBP4,733m).
4. A further breakdown of property is provided in Note 6.04.
5. As part of a change in accounting policy for LGIA universal
life and annuity and reserves, certain financial investments were
reclassified from designated as amortised cost to designated as
fair value through profit or loss. Accordingly, the 2019 balances
for Bonds and Loans and other receivables have been restated to
reflect the fair value of those assets. Further details on the
change in accounting policy are provided in Note 3.01.
(b) Analysed by segment
LGR LGC (1) LGI Total
2020 2020 2020 2020
GBPm GBPm GBPm GBPm
-
------------------------------- --- ----------- --------------------- ------------ ----------- ------
Equities 19 1,213 106 1,338
Bonds(2) 20,306 3 1,246 21,555
Property 4,319 163 - 4,482
Loans and other receivables - 99 - 99
-------------------------------------- ----------- --------------------- ------------ ----------- ------
Financial investments 24,644 1,478 1,352 27,474
------------------------------------- ----------- --------------------- ------------ ----------- ------
Other assets 88 1,708 - 1,796
-------------------------------------- ----------- --------------------- ------------ ----------- ------
Total direct investments 24,732 3,186 1,352 29,270
------------------------------------- ----------- --------------------- ------------ ----------- ------
1. LGC includes GBP47m of equities that belong to other
shareholder funds.
2. Bonds include lifetime mortgages of GBP6,036m.
LGR LGC(1) LGI Total
2019 2019 2019 2019
GBPm GBPm GBPm GBPm
Equities 9 1,211 62 1,282
Bonds (2,3) 17,711 4 1,167 18,882
Property 3,798 159 - 3,957
Loans and other receivables
(3) - 93 - 93
----------------------------------------- --------- -------- ------ --------
Financial investments 21,518 1,467 1,229 24,214
------------------------------------------ --------- -------- ------ --------
Other assets 90 1,458 - 1,548
------------------------------------------ --------- -------- ------ --------
Total direct investments 21,608 2,925 1,229 25,762
------------------------------------------ --------- -------- ------ --------
1. LGC includes GBP48m of equities that belong to other shareholder
funds.
2. Bonds include lifetime mortgages of GBP4,733m.
3. As part of a change in accounting policy for LGIA universal
life and annuity reserves, certain financial investments were
reclassified from designated as amortised cost to designated
as fair value through profit or loss. Accordingly, the 2019 balances
for Bonds and Loans and other receivables have been restated
to reflect the fair value of those assets. Further details on
the change in accounting policy are provided in Note 3.01.
Investments Page 84
6.03 Bond portfolio summary
(a) Sectors analysed by credit rating
BB or
AAA AA A BBB below Other Total(2) Total(2)
As at 31 December 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
Sovereigns, Supras and
Sub-Sovereigns 2,747 12,187 903 398 9 - 16,244 19
Banks:
- Tier 2 and other subordinated - - 61 43 3 - 107 -
- Senior - 1,182 3,314 678 1 - 5,175 6
- Covered 158 - - - - - 158 -
Financial Services:
- Tier 2 and other subordinated - 120 71 10 - 3 204 -
- Senior 55 488 202 323 9 - 1,077 1
Insurance:
- Tier 2 and other subordinated 65 161 8 59 - - 293 -
- Senior - 273 492 401 - - 1,166 1
Consumer Services and
Goods:
- Cyclical - 24 1,158 1,771 288 - 3,241 4
- Non-cyclical 366 1,153 2,849 4,057 324 - 8,749 10
- Health Care - 437 886 669 5 - 1,997 2
Infrastructure:
- Social 217 766 4,579 814 79 - 6,455 8
- Economic 328 61 784 4,006 290 - 5,469 7
Technology and Telecoms 193 229 1,633 3,080 31 1 5,167 6
Industrials - 16 709 759 26 - 1,510 2
Utilities - 207 6,034 5,526 27 - 11,794 14
Energy - - 429 784 19 - 1,232 1
Commodities - - 351 919 7 - 1,277 2
Oil and Gas - 773 958 467 276 - 2,474 3
Real estate - 8 1,622 1,675 93 - 3,398 4
Structured finance ABS
/ RMBS / CMBS / Other 429 772 400 578 27 1 2,207 3
Lifetime mortgage loans
(1) 3,611 1,533 494 385 - 13 6,036 7
CDOs - 58 - 14 - - 72 -
Total GBPm 8,169 20,448 27,937 27,416 1,514 18 85,502 100
Total % 9 24 33 32 2 - 100
1. The credit ratings attributed to lifetime mortgages are allocated
in accordance with the internal Matching Adjustment structuring.
2. The group's bond portfolio is dominated by LGR investments. These
account for GBP80,438m, representing 94% of the total group portfolio.
Investments Page 85
6.03 Bond portfolio summary (continued)
(a) Sectors analysed by credit rating
(continued)
BB or
AAA AA A BBB below Other Total(2) Total(2)
As at 31 December 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm %
Sovereigns, Supras and
Sub-Sovereigns 2,188 9,543 535 390 27 - 12,683 17
Banks:
- Tier 1 - - - 1 - 1 2 -
- Tier 2 and other subordinated - - 73 24 3 - 100 -
- Senior 6 1,893 2,794 758 1 - 5,452 7
- Covered 165 - 2 - - - 167 -
Financial Services:
- Tier 2 and other subordinated - 196 91 10 - 4 301 -
- Senior 4 381 231 322 9 - 947 1
Insurance:
- Tier 2 and other subordinated 49 131 6 56 - - 242 -
- Senior - 232 549 207 - - 988 1
Consumer Services and
Goods:
- Cyclical - 425 963 1,985 134 2 3,509 5
- Non-cyclical 260 868 2,185 3,827 217 1 7,358 10
- Health care - 309 728 425 7 - 1,469 2
Infrastructure:
- Social 121 772 4,044 781 80 - 5,798 8
- Economic 338 27 1,436 3,148 102 - 5,051 7
Technology and Telecoms 202 173 1,196 2,805 42 - 4,418 6
Industrials - 11 817 588 27 - 1,443 2
Utilities - 190 5,885 4,669 2 32 10,778 14
Energy - - 340 814 12 - 1,166 2
Commodities - - 244 654 14 - 912 1
Oil and Gas - 593 799 702 108 1 2,203 3
Real estate 3 8 1,787 1,629 125 - 3,552 5
Structured finance ABS
/ RMBS / CMBS / Other 406 881 325 469 36 1 2,117 3
Lifetime mortgage loans(1) 2,798 1,253 362 309 - 11 4,733 6
CDOs - - 68 14 - - 82 -
Total GBPm 6,540 17,886 25,460 24,587 946 53 75,471 100
Total % 9 23 34 33 1 - 100
1. The credit ratings attributed to lifetime mortgages are allocated
in accordance with the internal Matching Adjustment structuring.
2. The group's bond portfolio is dominated by LGR investments. These
account for GBP70,061m, representing 93% of the total group portfolio.
3. As part of a change in accounting policy for LGIA universal life
and annuity reserves, certain financial investments were reclassified
from designated as amortised cost to designated as fair value through
profit or loss. Accordingly, the 2019 balances for Structured finance
ABS / RMBS / CMBS / Other have been restated to reflect the fair
value of those assets. Further details on the change in accounting
policy are provided in Note 3.01.
Investments Page 86
6.03 Bond portfolio summary (continued)
(b) Sectors analysed by domicile
EU
excluding Rest of
UK US UK the World Total
As at 31 December 2020 GBPm GBPm GBPm GBPm GBPm
Sovereigns, Supras and Sub-Sovereigns 11,797 2,425 1,176 846 16,244
Banks 1,687 1,907 1,463 383 5,440
Financial Services 391 298 525 67 1,281
Insurance 109 1,049 181 120 1,459
Consumer Services and Goods:
- Cyclical 543 2,201 360 137 3,241
- Non-cyclical 1,789 6,403 389 168 8,749
- Health care 209 1,694 94 - 1,997
Infrastructure:
- Social 5,809 487 112 47 6,455
- Economic 4,071 853 231 314 5,469
Technology and Telecoms 485 3,098 754 830 5,167
Industrials 191 927 330 62 1,510
Utilities 6,886 2,236 2,097 575 11,794
Energy 244 758 105 125 1,232
Commodities 3 596 165 513 1,277
Oil and Gas 232 642 832 768 2,474
Real estate 2,168 384 634 212 3,398
Structured Finance ABS / RMBS /
CMBS / Other 944 1,207 11 45 2,207
Lifetime mortgages 6,036 - - - 6,036
CDOs - - - 72 72
Total 43,594 27,165 9,459 5,284 85,502
Investments Page 87
6.03 Bond portfolio summary (continued)
(b) Sectors analysed by domicile (continued)
EU
excluding Rest of
UK US UK the World Total
As at 31 December 2019 GBPm GBPm GBPm GBPm GBPm
Sovereigns, Supras and Sub-Sovereigns 9,764 1,995 645 279 12,683
Banks 2,002 1,328 1,669 722 5,721
Financial Services 501 95 639 13 1,248
Insurance 103 858 186 83 1,230
Consumer Services and Goods
- Cyclical 637 2,325 341 206 3,509
- Non-cyclical 1,716 5,123 479 40 7,358
- Health care 182 1,233 54 - 1,469
Infrastructure
- Social 5,357 290 106 45 5,798
- Economic 3,823 705 174 349 5,051
Technology and Telecoms 685 2,321 673 739 4,418
Industrials 76 1,036 273 58 1,443
Utilities 6,259 1,927 2,108 484 10,778
Energy 265 768 11 122 1,166
Commodities 5 305 137 465 912
Oil and Gas 288 665 583 667 2,203
Real estate 2,290 377 489 396 3,552
Structured finance ABS / RMBS / CMBS
/ Other (1) 979 1,095 21 22 2,117
Lifetime mortgage loans 4,733 - - - 4,733
CDOs - - - 82 82
Total 39,665 22,446 8,588 4,772 75,471
1. As part of a change in accounting policy for LGIA universal life
and annuity reserves, certain financial investments were reclassified
from designated as amortised cost to designated as fair value through
profit or loss. Accordingly, the 2019 balances for Structured finance
ABS / RMBS / CMBS / Other have been restated to reflect the fair
value of those assets. Further details on the change in accounting
policy are provided in Note 3.01.
Investments Page 88
6.03 Bond portfolio summary (continued)
(c) Bond portfolio analysed by credit rating
Externally Internally
rated rated(1) Total
As at 31 December 2020 GBPm GBPm GBPm
AAA 4,101 4,068 8,169
AA 17,101 3,347 20,448
A 21,235 6,702 27,937
BBB 21,307 6,109 27,416
BB or below 1,049 465 1,514
Other 4 14 18
Total 64,797 20,705 85,502
Externally Internally
rated rated(1) Total
As at 31 December 2019 GBPm GBPm GBPm
AAA 3,364 3,176 6,540
AA 14,568 3,318 17,886
A 19,320 6,140 25,460
BBB 18,990 5,597 24,587
BB or below 655 291 946
Other 12 41 53
Total 56,909 18,562 75,471
1. As part of a change in accounting policy for LGIA universal
life and annuity reserves, certain financial investments were reclassified
from designated as amortised cost to designated as fair value through
profit or loss. Accordingly, the 2019 balances for Structured finance
ABS / RMBS / CMBS / Other have been restated to reflect the fair
value of those assets. Further details on the change in accounting
policy are provided in Note 3.01.
Investments Page 89
6.03 Bond portfolio summary (continued)
(d) Sectors analysed by Direct investments
and Traded
Direct
investments Traded Total
As at 31 December 2020 GBPm GBPm GBPm
Sovereigns, Supras and Sub-Sovereigns 889 15,355 16,244
Banks 644 4,796 5,440
Financial Services 310 971 1,281
Insurance 282 1,177 1,459
Consumer Services and Goods:
- Cyclical 351 2,890 3,241
- Non-cyclical 396 8,353 8,749
- Health care 363 1,634 1,997
Infrastructure:
- Social 3,283 3,172 6,455
- Economic 3,726 1,743 5,469
Technology and Telecoms 93 5,074 5,167
Industrials 64 1,446 1,510
Utilities 1,475 10,319 11,794
Energy 355 877 1,232
Commodities 59 1,218 1,277
Oil and Gas 58 2,416 2,474
Real estate 2,301 1,097 3,398
Structured Finance ABS / RMBS / CMBS
/ Other 870 1,337 2,207
Lifetime mortgages 6,036 - 6,036
CDOs - 72 72
Total 21,555 63,947 85,502
Investments Page 90
6.03 Bond portfolio summary (continued)
(d) Sectors analysed by Direct investments and
Traded (continued)
Direct
investments Traded Total
As at 31 December 2019 GBPm GBPm GBPm
Sovereigns, Supras and Sub-Sovereigns 723 11,960 12,683
Banks 495 5,226 5,721
Financial Services 237 1,011 1,248
Insurance 251 979 1,230
Consumer Services and Goods:
- Cyclical 208 3,301 3,509
- Non-cyclical 347 7,011 7,358
- Health care 264 1,205 1,469
Infrastructure:
- Social 3,288 2,510 5,798
- Economic 3,234 1,817 5,051
Technology and Telecoms 202 4,216 4,418
Industrials 71 1,372 1,443
Utilities 1,195 9,583 10,778
Energy 267 899 1,166
Commodities 55 857 912
Oil and Gas 55 2,148 2,203
Real estate 2,437 1,115 3,552
Structured Finance ABS / RMBS /
CMBS / Other (1) 822 1,295 2,117
Lifetime mortgages 4,733 - 4,733
CDOs - 82 82
Total 18,882 56,589 75,471
1. As part of a change in accounting policy for LGIA universal
life and annuity reserves, certain financial investments were reclassified
from designated as amortised cost to designated as fair value through
profit or loss. Accordingly, the 2019 balances for Structured finance
ABS / RMBS / CMBS / Other have been restated to reflect the fair
value of those assets. Further details on the change in accounting
policy are provided in Note 3.01.
Investments Page 91
6.04 Property analysis
Property exposure within Direct investments by
status
LGR(1) LGC(2) Total
As at 31 December 2020 GBPm GBPm GBPm %
Fully let 3,974 - 3,974 89
Development 345 29 374 8
Land - 134 134 3
4,319 163 4,482 100
LGR(1) LGC(2) Total
As at 31 December 2019 GBPm GBPm GBPm %
Fully let 3,414 - 3,414 87
Development 384 23 407 10
Land - 136 136 3
3,798 159 3,957 100
1. The fully let LGR property includes GBP3.8bn (31 December 2019:
GBP3.2bn) let to investment grade tenants.
2. The above analysis does not include assets related to the group's
investments in CALA Homes and other housing businesses, which are
accounted for as inventory within Receivables and other assets on
the group's Consolidated Balance Sheet and measured at the lower
of cost and net realisable value. At 31 December 2020 the group
held a total of GBP2,179m (31 December 2019: GBP2,120m) of such
assets.
Investments Page 92
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Alternative Performance Measures Page 93
An alternative performance measure (APM) is a financial measure
of historic or future financial performance, financial position, or
cash flows, other than a financial measure defined under IFRS or
the regulations of Solvency II. APMs offer investors additional
information on the company's performance and the financial effect
of 'one-off' events and the group uses a range of these metrics to
provide a better understanding of its underlying performance. The
APMs used by the group are listed in this section, along with their
definition/ explanation, their closest IFRS measure and reference
to the reconciliations to those IFRS measures.
Group adjusted operating profit
Definition
Group adjusted operating profit measures the pre-tax result
excluding the impact of investment volatility, economic assumption
changes and exceptional items. It therefore reflects longer-term
economic assumptions for the group's insurance businesses and
shareholder funds, except for LGC's trading businesses (which
reflects the IFRS profit before tax). Variances between actual and
long term expected investment return on traded and real assets are
reported below group adjusted operating profit, as well as economic
assumption changes (e.g. credit default and inflation) and any
difference between the actual allocated asset mix and the target
long-term asset mix on new pension risk transfer business. Group
adjusted operating profit also excludes the yield associated with
assets held for future new pension risk transfer business from the
valuation discount rate. Exceptional income and expenses which
arise outside the normal course of business in the period, such as
merger and acquisition, disposals and start-up costs, are also
excluded from group adjusted operating profit.
Group adjusted operating profit was previously described as
'operating profit'. In order to maintain a consistent understanding
of the group's performance the term 'operating profit' will
continue to be used throughout the full year report as a substitute
for group adjusted operating profit.
Closest IFRS measure
Profit before tax attributable to equity holders.
Reconciliation
Note 1.01 Operating profit.
Return on Equity (ROE)
Definition
ROE measures the return earned by shareholders on shareholder
capital retained within the business. ROE is calculated as IFRS pro
t after tax divided by average IFRS shareholders' funds (by
reference to opening and closing shareholders' funds as provided in
the IFRS consolidated statement of changes in equity for the
year).
Closest IFRS measure
Calculated using:
- Profit attributable to equity holders
- Equity attributable to owners of the parent
Reconciliation
Calculated using profit attributable to equity holders for the
year of GBP1,607m (2019: GBP1,834m) and average equity attributable
to the owners of the parent of GBP9,270m (2019: GBP8,974m)
Assets under Management
Definition
Funds which are managed by our fund managers on behalf of
investors. It represents the total amount of money investors have
trusted with our fund managers to invest across our investment
products.
Closest IFRS measures
- Financial investments
- Investment property
- Cash and cash equivalents
Reconciliation
Note 4.04 Reconciliation of assets under management to
Consolidated Balance Sheet financial investments, investment
property and cash and cash equivalents.
Net release from operations
Definition
Release from operations plus new business surplus / (strain).
Net release from operations was previously referred to as net cash,
and includes the release of prudent margins from the back book,
together with the premium received less the setup of prudent
reserves and associated acquisition costs for new business.
Closest IFRS measure
Profit before tax attributable to equity holders.
Reconciliation
Notes 1.01 Operating profit and 1.02 Reconciliation of release
from operations to operating profit before tax .
Adjusted profit before tax attributable to equity holders
Definition
The APM measures profit before tax attributable to shareholders
incorporating actual investment returns experienced during the year
and the pre-tax results of discontinued operations.
Closest IFRS measure
Profit before tax attributable to equity holders.
Reconciliation
Note 1.01 Operating profit.
Glossary Page 94
* These items represent an alternative performance measure (APM)
Ad valorem fees
Ongoing management fees earned on assets under management,
overlay assets and advisory assets as defined below.
Adjusted profit before tax attributable to equity holders*
Refer to the alternative performance measures section.
Advisory assets
These are assets on which Global Index Advisors (GIA) provide
advisory services. Advisory assets are bene cially owned by GIA's
clients and all investment decisions pertaining to these assets are
also made by the clients. These are different from Assets under
Management (AUM) de ned below.
Alternative performance measures (APMs)
An alternative performance measure is a financial measure of
historic or future financial performance, financial position, or
cash flows, other than a financial measure defined under IFRS or
the regulations of Solvency II.
Annual premium
Premiums that are paid regularly over the duration of the
contract such as protection policies.
Annuity
Regular payments from an insurance company made for an agreed
period of time (usually up to the death of the recipient) in return
for either a cash lump sum or a series of premiums which the
policyholder has paid to the insurance company during their working
lifetime.
Assets under administration (AUA)
Assets administered by Legal & General which are bene cially
owned by clients and are therefore not reported on the Consolidated
Balance Sheet. Services provided in respect of assets under
administration are of an administrative nature, including
safekeeping, collecting investment income, settling purchase and
sales transactions and record keeping.
Assets under management (AUM)*
Refer to the alternative performance measures section.
Back book acquisition
New business transacted with an insurance company which allows
the business to continue to utilise Solvency II transitional
measures associated with the business.
Bundled DC solution
Where investment and administration services are provided to a
scheme by the same service provider. Typically, all investment and
administration costs are passed onto the scheme members.
Bundled pension schemes
Where the fund manager bundles together the investment provider
role and third-party administrator role, together with the role of
selecting funds and providing investment education, into one
proposition.
CAGR
Compound annual growth rate.
Credit rating
A measure of the ability of an individual, organisation or
country to repay debt. The highest rating is usually AAA and the
lowest Unrated. Ratings are usually issued by a credit rating
agency (e.g. Moody's or Standard & Poor's) or a credit
bureau.
Deduction and aggregation (D&A)
A method of calculating group solvency on a Solvency II basis,
whereby the assets and liabilities of certain entities are excluded
from the group consolidation. The net contribution from those
entities to group Own Funds is included as an asset on the group's
Solvency II balance sheet. Regulatory approval has been provided to
recognise the (re)insurance subsidiaries of LGI US on this
basis.
Defined benefit pension scheme (DB scheme)
A type of pension plan in which an employer/sponsor promises a
specified monthly benefit on retirement that is predetermined by a
formula based on the employee's earnings history, tenure of service
and age, rather than depending directly on individual investment
returns.
Defined contribution pension scheme (DC scheme)
A type of pension plan where the pension benefits at retirement
are determined by agreed levels of contributions paid into the fund
by the member and employer. They provide benefits based upon the
money held in each individual's plan specifically on behalf of each
member. The amount in each plan at retirement will depend upon the
investment returns achieved and on the member and employer
contributions.
Derivatives
Derivatives are not a separate asset class but are contracts
usually giving a commitment or right to buy or sell assets on
specified conditions, for example on a set date in the future and
at a set price. The value of a derivative contract can vary.
Derivatives can generally be used with the aim of enhancing the
overall investment returns of a fund by taking on an increased
risk, or they can be used with the aim of reducing the amount of
risk to which a fund is exposed.
Direct investments
Direct investments, which generally constitute an agreement with
another party, represent an exposure to untraded and often less
volatile asset classes. Direct investments also include physical
assets, bilateral loans and private equity, but exclude hedge
funds.
Dividend cover
Dividend cover measures how many times over the net release from
operations in the year could have paid the full year dividend. For
example, if the dividend cover is 3, this means that the net
release from operations was three times the amount of dividend paid
out.
Earnings per share (EPS)
EPS is a common nancial metric which can be used to measure the
pro tability and strength of a company over time. It is the total
shareholder pro t after tax divided by the number of shares
outstanding. EPS uses a weighted average number of shares
outstanding during the year.
Glossary Page 95
Eligible Own Funds
Eligible Own Funds represents the capital available to cover the
group's Solvency II Capital Requirement. Eligible Own Funds
comprise the excess of the value of assets over liabilities, as
valued on a Solvency II basis, plus high quality hybrid capital
instruments, which are freely available (fungible and transferable)
to absorb losses wherever they occur across the group. Eligible Own
Funds (shareholder view basis) excludes the contribution to the
group's solvency capital requirement of with-profits funds and
final salary pension schemes.
Employee satisfaction index
The Employee satisfaction index measures the extent to which
employees report that they are happy working at Legal &
General. It is measured as part of our Voice surveys, which also
include questions on commitment to the goals of Legal & General
and the overall success of the company.
ETF
LGIM's European Exchange Traded Fund platform.
Euro Commercial paper
Short term borrowings with maturities of up to 1 year typically
issued for working capital purposes.
FVTPL
Fair value through profit or loss. A financial asset or
financial liability that is measured at fair value in the
Consolidated Balance Sheet reports gains and losses arising from
movements in fair value within the Consolidated Income Statement as
part of the profit or loss for the year.
Full year dividend
Full year dividend is the total dividend per share declared for
the year (including interim dividend but excluding, where
appropriate, any special dividend).
Generally accepted accounting principles (GAAP)
These are a widely accepted collection of guidelines and
principles, established by accounting standard setters and used
by the accounting community to report financial information.
Gross written premiums (GWP)
GWP is an industry measure of the life insurance premiums due
and the general insurance premiums underwritten in the reporting
period, before any deductions for reinsurance.
Group adjusted operating profit*
Refer to the alternative performance measures section.
ICAV - Irish Collective Asset-Management Vehicle
A legal structure investment fund, based in Ireland and aimed at
European investment funds looking for a simple, tax-efficient
investment vehicle.
Index tracker (passive fund)
Index tracker funds invest in most or all of the same shares,
and in a similar proportion, as the index they are tracking, for
example the FTSE 100 index. Index tracker funds aim to produce a
return in line with a particular market or sector, for example,
Europe or technology. They are also sometimes known as 'tracker
funds'.
International financial reporting standards (IFRS)
These are accounting guidelines and rules that companies and
organisations follow when completing financial statements.
They are designed to enable comparable reporting between
companies, and they are the standards that all publicly listed
groups in the European Union (EU) are required to use.
Key performance indicators (KPIs)
These are measures by which the development, performance or
position of the business can be measured effectively. The group
Board reviews the KPIs annually and updates them where
appropriate.
LGA
Legal & General America.
LGAS
Legal and General Assurance Society Limited.
LGC
Legal & General Capital.
LGI
Legal & General Insurance.
LGI new business
New business arising from new policies written on retail
protection products and new deals and incremental business on group
protection products.
LGIA
Legal & General Insurance America.
LGIM
Legal & General Investment Management
LGR
Legal & General Retirement, which includes Legal &
General Retirement Institutional (LGRI) and Legal & General
Retirement Retail (LGRR).
LGR new business
Single premiums arising from annuity sales and back book
acquisitions (including individual annuity and pension risk
transfer), the volume of lifetime and retirement interest only
mortgage lending and the notional size of longevity insurance
transactions, based on the present value of the fixed leg cash
flows discounted at the LIBOR curve.
Liability driven investment (LDI)
A form of investing in which the main goal is to gain sufficient
assets to meet all liabilities, both current and future. This form
of investing is most prominent in final salary pension plans, whose
liabilities can often reach into billions of pounds for the largest
of plans.
Glossary Page 96
Lifetime mortgages
An equity release product aimed at people aged 60 years and
over. It is a mortgage loan secured against the customer's house.
Customers do not make any monthly payments and continue to own and
live in their house until they move into long term care or on
death. A no negative equity guarantee exists such that if the house
value on repayment is insufficient to cover the outstanding loan,
any shortfall is borne by the lender.
Matching adjustment
An adjustment to the discount rate used for annuity liabilities
in Solvency II balance sheets. This adjustment reflects the fact
that the profile of assets held is sufficiently well-matched to the
profile of the liabilities, that those assets can be held to
maturity, and that any excess return over risk-free (that is not
related to defaults) can be earned regardless of asset value
fluctuations after purchase.
Mortality rate
Rate of death, influenced by age, gender and health, used in
pricing and calculating liabilities for future policyholders of
life and annuity products, which contain mortality risks.
Net release from operations*
Refer to the alternative performance measures section.
New business surplus/strain
The net impact of writing new business on the IFRS position,
including the benefit/cost of acquiring new business and the
setting up of reserves, for UK non profit annuities, workplace
savings, protection and savings, net of tax. This metric provides
an understanding of the impact of new contracts on the IFRS profit
for the year.
Open architecture
Where a company offers investment products from a range of other
companies in addition to its own products. This gives customers a
wider choice of funds to invest in and access to a larger pool of
money management professionals.
Overlay assets
Overlay assets are derivative assets that are managed alongside
the physical assets held by LGIM. These instruments include
interest rate swaps, in ation swaps, equity futures and options.
These are typically used to hedge risks associated with pension
scheme assets during the derisking stage of the pension life
cycle.
Pension risk transfer (PRT)
PRT represents bulk annuities bought by entities that run nal
salary pension schemes to reduce their responsibilities by closing
the schemes to new members and passing the assets and obligations
to insurance providers.
Platform
Online services used by intermediaries and consumers to view and
administer their investment portfolios. Platforms usually provide
facilities for buying and selling investments (including, in the UK
products such as Individual Savings Accounts (ISAs), Self-Invested
Personal Pensions (SIPPs) and life insurance) and for viewing an
individual's entire portfolio to assess asset allocation and risk
exposure.
Present value of future new business premiums (PVNBP)
PVNBP is equivalent to total single premiums plus the discounted
value of annual premiums expected to be received over the term of
the contracts using the same economic and operating assumptions
used for the new business value at the end of the financial period.
The discounted value of longevity insurance regular premiums and
quota share reinsurance single premiums are calculated on a net of
reinsurance basis to enable a more representative margin figure.
PVNBP therefore provides an estimate of the present value of the
premiums associated with new business written in the year.
Purchased interest in long term business (PILTB)
An estimate of the future profits that will emerge over the
remaining term of life and pensions policies that have been
acquired via a business combination.
Real assets
Real assets encompass a wide variety of tangible debt and equity
investments, primarily real estate, infrastructure and energy. They
have the ability to serve as stable sources of long term income in
weak markets, while also providing capital appreciation
opportunities in strong markets.
Release from operations
The expected release of IFRS surplus from in-force business for
the UK non-profit Insurance and Savings and LGR businesses, the
shareholder's share of bonuses on with-profits business, the
post-tax operating profit on other UK businesses, including the
medium term expected investment return on LGC invested assets, and
dividends remitted from LGA. Release from operations was previously
referred to as operational cash generation.
Retirement Interest Only Mortgages
A Retirement Interest Only (RIO) mortgage is a standard
retirement mortgage available for non-commercial borrowers above 55
years old. A RIO mortgage is very similar to a standard
interest-only mortgage, with two key differences:
- The loan is usually only paid off on death, move into long
term care or sale of the house.
- The borrowers only have to prove they can afford the monthly
interest repayments and not the capital remaining at the end of the
mortgage term.
No repayment solution is required as repayment defaults to sale
of property.
Return on Equity (ROE)*
Refer to the alternative performance measures section.
Risk appetite
The aggregate level and types of risk a company is willing to
assume in its exposures and business activities in order to achieve
its business objectives.
Single premiums
Single premiums arise on the sale of new contracts where the
terms of the policy do not anticipate more than one premium being
paid over its lifetime, such as in individual and bulk annuity
deals.
Glossary Page 97
Solvency II
The Solvency II regulatory regime is a harmonised prudential
framework for insurance rms in the EEA. This single market approach
is based on economic principles that measure assets and liabilities
to appropriately align insurers' risk with the capital they hold to
safeguard the policyholders' interest.
Solvency II capital coverage ratio
The Eligible Own Funds on a regulatory basis divided by the
group solvency capital requirement. This represents the number of
times the SCR is covered by Eligible Own Funds.
Solvency II capital coverage ratio (proforma basis)
The proforma basis Solvency II SCR coverage ratio incorporates
the impacts of a recalculation of the Transitional Measures for
Technical Provisions and the contribution of with-profits funds
(2019 only) and our defined benefit pension schemes in both Own
Funds and the SCR in the calculation of the SCR coverage ratio.
Solvency II capital coverage ratio (shareholder view basis)
In order to represent a shareholder view of group solvency
position, the contribution of with-profits funds and our defined
benefit pension schemes are excluded from both, the group's Own
Funds and the group's solvency capital requirement, by the amount
of their respective solvency capital requirements, in the
calculation of the SCR coverage ratio. This incorporates the
impacts of a recalculation of the Transitional Measures for
Technical Provisions based on end of period economic conditions.
The shareholder view basis does not reflect the regulatory capital
position as at 31 December 2020. This will be submitted to the PRA
in April 2021.
Solvency II new business contribution
Reflects present value at the point of sale of expected future
Solvency II surplus emerging from new business written in the
period using the risk discount rate applicable at the end of the
reporting period.
Solvency II risk margin
An additional liability required in the Solvency II balance
sheet, to ensure the total value of technical provisions is equal
to the current amount a (re)insurer would have to pay if it were to
transfer its insurance and reinsurance obligations immediately to
another (re)insurer. The value of the risk margin represents the
cost of providing an amount of Eligible Own Funds equal to the
Solvency Capital Requirement (relating to non-market risks)
necessary to support the insurance and reinsurance obligations over
the lifetime thereof.
Solvency II surplus
The excess of Eligible Own Funds on a regulatory basis over the
SCR. This represents the amount of capital available to the company
in excess of that required to sustain it in a 1-in-200 year risk
event.
Solvency Capital Requirement (SCR)
The amount of Solvency II capital required to cover the losses
occurring in a 1-in-200 year risk event.
Total shareholder return (TSR)
TSR is a measure used to compare the performance of different
companies' stocks and shares over time. It combines the share price
appreciation and dividends paid to show the total return to the
shareholder.
Transitional Measures on Technical Provisions (TMTP)
This is an adjustment to Solvency II technical provisions to
bring them into line with the pre-Solvency II equivalent as at 1
January 2016 when the regulatory basis switched over, to smooth the
introduction of the new regime. This will decrease linearly over
the 16 years following Solvency II implementation but may be
recalculated to allow for changes impacting the relevant business,
subject to agreement with the PRA.
Unbundled DC solution
When investment services and administration services are
supplied by separate providers. Typically the sponsoring employer
will cover administration costs and scheme members the investment
costs.
With-profits funds
Individually identifiable portfolios where policyholders have a
contractual right to receive additional benefits based on factors
such as the performance of a pool of assets held within the fund,
as a supplement to any guaranteed benefits. An insurer may either
have discretion as to the timing of the allocation of those
benefits to participating policyholders or
may have discretion as to the timing and the amount of the
additional benefits.
Yield
A measure of the income received from an investment compared to
the price paid for the investment. It is usually expressed as a
percentage.
This information is provided by RNS, the news service of the
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