REG - Legal & General Grp - L&G Full Year Results 2015 Part 1 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 2
15/03/2016 07:05
- Part 2: For the preceding part double click ID:nRSO0687Sa
improvement
in new business margins to 12.1% (2014: 9.9%). In 2016 we expect to maintain
margins on new business consistent with 2015.
Facilitating US Pension risk transfer Business
LGA is important to the expansion of the Group in the US and will continue to
provide the regulatory balance sheet, administrative services and payments to
annuitants for LGR America and back office support for LGIM America.
Group investment variance
The Group investment variance in 2015 was £(57)m. This was mainly driven by
the traded equity portfolio within LGC, which produced a negative investment
variance of £110m, as a result of equity markets performing below longer term
expected outcomes, partially offset by benign default experience in LGR.
NET CASH GENERATION BACKED BY DIVIDENDS TO GROUP
In 2015, 80% of the net cash generation was distributed to the Group (2014:
86%).
2015 2014
Net Dividend Dividend Net Dividend Dividend
£m Cash to Group % of cash Cash to Group % of cash
LGR, Insurance, Savings and LGC 1,062 739 70 929 685 74
LGIM 281 210 74 262 213 81
LGA 54 54 100 46 46 100
Sub-total 1,397 1,003 72 1,237 944 76
Group debt and other costs (141) - - (133)
Total 1,256 1,003 80 1,104 944 86
External dividend 797 668
Dividend coverage 1.58 1.65
OPERATIONAL CASH GENERATION GUIDANCE
2015 2016
£m Guidance
LGR 372
Insurance excluding General Insurance 282
Savings 119
LGA1 54
LGC 187
Sub-total 1,014 + 6-7%
LGIM 303
General Insurance 41
Operational cash generation from divisions 1,358
Group debt costs (122)
Other costs (19)
Total operational cash generation 1,217
1. LGA has already paid its 2016 ordinary dividend of $88m in February
2016.
taxation - effective tax rate of 19.3%
Equity holders' Effective Tax Rate (%) 2015 2014
Total Effective Tax Rate 19.3 19.9
Annualised rate of UK corporation tax 20.25 21.5
In 2015, the Group's effective tax rate remained slightly below the UK
corporation tax rate due to a number of differences between the measurement of
accounting profit and taxable profits.
The UK has a deferred tax asset of £6m in respect of trading losses carried
forward in Group companies (2014: £45m) relating mainly to Cofunds. Trading
losses within Legal & General Pensions Limited, which benefit both LGR and
Insurance, were fully utilised in 2015. The contribution to net cash
generation in LGR and Insurance from the utilisation of tax was £31m for 2015
(2014: £73m).
focus on efficiency and core activities
We continue to rationalise our business model to focus on core activities
where we believe we can achieve significant scale and attractive returns on
capital. During 2015 we disposed of Legal & General International (Ireland)
for £15m (carrying value: £14m), our Egyptian business for £33m (carrying
value: £14m), Legal & General France for a loss of £43m compared to the
carrying value and Legal & General Gulf for £1 (carrying value: £2m). As a
result of these transactions we have reflected a £25m net loss within
investment and other variances representing the difference between previous
carrying values and sale proceeds.
On 14th January 2016 we agreed to sell Suffolk Life to Curtis Bank for £45m,
subject to regulatory approval, and as a consequence it has been classified as
held for sale in our 2015 results.
Effective and sustainable management of costs remain key to our strategy. We
exceeded our £80m cost saving target in 2015, incurring £50m of one-off costs
in doing so. In 2016 we plan to invest £40m to deliver a further reduction in
management expenses and operating costs in both nominal and real terms.
borrowings
Legal & General continues to have a strong liquidity position reflecting its
requirements for working capital and derivative collateral. The Group's
outstanding core borrowings total £3.1bn (2014: £3.0bn). There is also a
further £0.5bn (2014: £0.7bn) of operational borrowings including £0.6bn
(2014: £0.7bn) of non-recourse borrowings. In June 2015 we redeemed E600m of
4.0% Euro dated subordinated notes at par. In October 2015 we issued £600m of
5.375% Sterling Subordinated notes.
Group debt costs of £153m (2014: £142m) reflect an average cost of debt of
5.3% per annum (2014: 5.2% per annum) on average nominal value of debt
balances of £2.9bn (2014: £2.7bn).
SOLVENCY II
As at 31 December 2015 the Group had a proforma Solvency II surplus of £5.5bn
over its Solvency capital requirement, corresponding to a Solvency II coverage
ratio of 169%. The Group has set a preferred Solvency II coverage ratio of
greater than 140%.
Capital (£bn) 1 2015
Eligible own funds 13.5
Solvency capital requirement (SCR) (8.0)
Surplus 5.5
SCR Coverage ratio (%) 169
1. Solvency II position on a proforma basis as at 31 December 2015 and
before the accrual of the final dividend.
sensitivity analysis
Impact on net of tax capital surplus £bn Impact in SII coverage ratio%
Credit spreads widen by 100bps using the same 100bps addition to all ratings (0.3) (1)
Credit spreads widen by 100bps assuming an escalating addition to ratings (0.6) (8)
Credit spreads tighten by 100bps using the same 100bps deduction to all ratings 0.2 1
Credit spreads tighten by 100bps assuming an escalating deduction to ratings 0.6 7
A worsening in our expectation of future default and downgrade to 115% of our assumed best estimate level (0.5) (11)
20% fall in equity markets (0.4) (4)
40% fall in equity markets (0.7) (8)
20% rise in equity markets 0.5 5
15% fall in property markets (0.3) (3)
100bps increase in risk free rates 0.6 19
100bps fall in risk free rates (0.4) (11)
1% reduction in annuitant base mortality (0.1) (2)
1% increase in annuitant base mortality 0.1 2
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. The above sensitivity analysis does not reflect all management
actions which could be taken to reduce the impacts. Transitional relief on
technical provisions is assumed to be recalculated in the interest rate
sensitivities.
IGD Capital resources
As at 31 December 2015 the Insurance Group's Directive (IGD) surplus was
£4.4bn (2014: £3.9bn).
The Group's capital resources totalled £8.2bn, covering the capital resources
requirement of £3.8bn by 2.17 times.
The Group maintains a provision of £2.2bn (2014: £2.3bn) to provide for the
risk of credit default in our annuity fund. Over the last five years we have
experienced total actual defaults of less than £10m. However, we have incurred
losses over these years, including 2015, (accounted for through investment
variance) where we have traded out of names where we are no longer comfortable
with the credit position.
Capital (£bn) 2015 2014
Group capital resources 8.2 7.7
Group capital resources requirements (3.8) (3.8)
IGD surplus 4.4 3.9
Coverage ratio (%) 217 201
economic capital
Economic capital is the amount of capital that the Board believes the Group
needs to hold, over and above its liabilities, in order to meet the Group's
strategic objectives. Our Economic Capital model has not been reviewed by the
Prudential Regulatory Authority (PRA), nor will it be.
As at 31 December 2015 Legal & General Group had an economic capital surplus
of £7.6bn (2014: £7.0bn), corresponding to an economic capital coverage ratio
of 230% (2014: 229%).
Eligible own funds increased by £1.0bn to £13.5bn (2014: £12.5bn). The
economic capital requirement increased to £5.9bn (2014: £5.5bn).
Capital (£bn) 2015 2014
Eligible own funds 13.5 12.5
Economic capital requirement (5.9) (5.5)
Economic capital surplus 7.6 7.0
Coverage ratio (%) 230 229
Analysis of movement from 1 January to 31 December 2015 (£bn) Economic Capital surplus
Economic solvency position as at 1 January 2015 7.0
Operating experience 0.7
New business surplus 0.1
Non-operating experience 0.4
New Sterling subordinated debt issuance 0.6
Repayment of Euro subordinated debt (0.5)
Dividends paid in the period (0.7)
Economic solvency position as at 31 December 2015 7.6
supplementary eev disclosure
EEV highlights (Pence) 2015 2014
Equity per share including LGIM 221 212
Equity per share 195 185
Analysis of EEV results (£m) 2015 2014
Contribution from new business 529 850
Intra-group transfer of annuities from With-Profit to Non-Profit Fund - 100
Expected return from in-force business 474 490
Experience variances and assumption changes (31) (185)
Development costs (25) (32)
Contribution from shareholder net worth 202 194
EEV operating profit on covered business 1,149 1,417
Business reported on an IFRS basis 161 164
EEV operating profit 1,310 1,581
Economic and other variances 140 790
Gains attributable to non-controlling interests 19 7
EEV profit before tax 1,469 2,378
Tax on profit and other tax impacts (133) (362)
EEV profit after tax 1,336 2,016
This is the last time that the Group will be providing supplementary EEV
disclosure. The Group instead will focus on providing economic and regulatory
capital disclosures from H1 2016.
principal risks and UNCERTAINTIES
Legal & General runs a portfolio of risk taking businesses; we accept risk in
the normal course of business and aim to deliver sustainable returns on risk
based capital to our investors in excess of our cost of capital. We manage the
portfolio of risk that we accept to build a sustainable franchise for the
interests of all our stakeholders; we do not aim to eliminate that risk. We
have an appetite for risks that we understand deeply and are rewarded for, and
which are consistent with delivery of our strategic objectives. Risk
management is embedded within the business. The Group is exposed to a number
of key risk categories.
RISKS AND UNCERTAINTIES TREND, OUTLOOK AND MITIGATION
Reserves for long-term business may require revision as a result of changes in experience, regulation or legislation. The writing of long-term insurance business requires the setting of assumptions for long-term trends in factors such as mortality, lapse rates and persistency, valuation interest rates, expenses and credit defaults. Actual experience may result in the need to recalibrate these assumptions reducing profitability. Forced changes in reserves can also be required because of regulatory or legislative intervention in the way that products are priced, reducing profitability and future earnings. We regularly appraise the assumptions underpinning the business that we write. In our annuities business we are, however, exposed to factors such as dramatic advances in medical science beyond those anticipated leading to unexpected changes in life
expectancy. In protection business we remain inherently exposed to rates of mortality diverging from assumptions and to loss from events that cause widespread mortality/morbidity or significant policy lapse rates. There is also potential for legislative
intervention in the pricing of insurance products irrespective of risk factors, such as age or health. We undertake significant analysis of longevity and mortality risks to ensure an appropriate premium is charged for the risks we take on and that our
reserves remain appropriate. We remain focused on developing a comprehensive understanding of annuitant mortality and we continue to evolve and develop our underwriting capabilities. Our risk based capital model also takes account of unanticipated rates
of mortality improvements in determining our prudential capital requirement.
Investment market performance or conditions in the broader economy may adversely impact our earnings and profitability.The performance and liquidity of investment markets, interest rate movements and inflation impact the value of investments we hold in shareholders' funds and those to meet the obligations from insurance business, with the movement in certain investments directly impacting profitability. Interest rate movement and inflation can also change the value of our obligations. We use a range of techniques to manage mismatches between assets and liabilities. However, loss can still arise from adverse markets. In addition, significant falls in investment values can reduce fee income to our investment management business, while broader economic conditions can impact the purchase and the retention of retail financial services products, impacting profitability. Ongoing uncertainty in the global economic outlook is expected to cause continued volatility in financial markets as they respond to falling growth rates in emerging economies and speculation to future monetary policies, with potential for more disruptive
asset price shifts should markets reappraise the degree to which a further deterioration in the outlook has been priced into asset values. Current illiquidity in bond markets could exaggerate the impacts of a significant market correction further
depressing asset prices. Whilst the international impact of a euro default has diminished, there also remains potential for renewed financial stress in Europe driven by political uncertainty, as well as from geo-political events. The referendum on UK
membership of the European Union also has potential to increase financial market volatility as markets speculate on the impact of potential outcomes. We model our business plans across a broad range of economic scenarios and take account of alternative
economic outlooks within our overall business strategy. Our ORSA process plays an integral part in our business planning ensuring a clear link between capital sufficiency and the nature of risks to which
we may be exposed. We have sought to ensure focus upon those market segments that we expect to be resilient in projected conditions. For example investing our long-term funds into real assets provides both enhanced returns to our 'slow money' and reduces
exposure to the volatilities of short-term financial markets.
In dealing with issuers of debt and other types of counterparty the group is exposed to the risk of financial loss. A systemic default event within the corporate sector, or a major sovereign debt event, could result in dislocation of bond markets, significantly widening credit spreads with consequential impacts on the value of our bond portfolios, and may result in default of even strongly rated issuers of debt, exposing us to financial loss. We are also exposed to banking, money market and reinsurance counterparties, and settlement, custody and other bespoke business services, a failure of which could expose us to both financial loss and operational disruption of our business processes. The current economic outlook inherently increases the risk of default by some issuers of bonds, and recent months have seen a widening of credit spreads, with high yield markets showing particular signs of stress. There remain, however, a range of factors
that could lead to more widespread stress in bond markets as a whole resulting in reduced profitability or financial loss to the Group. Such factors include a significant deterioration in global economic conditions or a banking crisis. An economic shock or
significant change in the current economic outlook may also increase potential for a supplier of business services being unable to meet their obligations to us. We actively manage our exposure to default risks, setting counterparty selection criteria and
exposure limits, and using the capabilities of LGIM's credit management team to ensure risks in our bond portfolio are effectively controlled, and if appropriate traded out. Alongside holding reserves for our assessment of default, we continue to diversify
the asset classes backing our annuities business, investing in real assets and property lending investments. While our capital-lite strategy for bulk annuities will increase our counterparty risk exposure, we continue to be selective in the counterparties
with which we will deal.
A material failure in our business processes may result in unanticipated financial loss or reputation damage. We have constructed our framework of internal controls to minimise the risk of unanticipated financial loss or damage to our reputation. However, no system of internal control can completely eliminate the risk of error, financial loss, fraudulent actions or reputational damage. Our plans for growth together with the regulatory change agenda inherently will increase the profile of operational risks across our businesses. We continue to invest in our system capabilities and business processes to ensure that we meet the expectations
of our customers; comply with regulatory, legal and financial reporting requirements; and mitigate the risks of loss or reputational damage from operational risk events. Our risk governance model seeks to ensure that business management are actively
engaged in maintaining an appropriate control environment, supported by risk functions led by the group chief risk officer, with independent assurance from Group Internal Audit.
Changes in regulation or legislation may have a detrimental effect on our strategy. Legislation and government fiscal policy influence our product design, the period of retention of products and our required reserves for future liabilities. Regulation defines the overall framework for the design, marketing, taxation and distribution of our products; and the prudential capital that we hold. Significant changes in legislation or regulation may increase our cost base, Although the Solvency II regime came into operation on 1 January 2016, there continues to be a significant pipeline of other regulatory change. EU driven regulation includes UCITS V, MiFID II and PRIIPs, as well as various new tax rules. Within the US a
reduce our future revenues and impact profitability or require us to hold more capital. The prominence of the risk increases where change is implemented without prior engagement with the sector. The nature new statutory reserving regime, Principle Based Reserves (PBR), will come into operation in January 2017. In the UK alongside the PRA ensuring the effective operation of the Solvency II regime and an ongoing requirement upon Legal & General to ensure
of long-term business can also result in compliance with the new regulatory framework, the FCA continues to develop its approach to consumer regulation, and there remain challenges in ensuring that regulatory interpretation of rules is proportionate and cost effective for the insurance sector,
some changes in regulation, and the re-interpretation of regulation over time, having a retrospective effect on our in-force books of business, impacting the value of embedded future profits. and aligns with the industry as businesses become increasingly digitalised. The FCA programme of thematic reviews of industry practices may also lead to additional business remediation costs. More broadly we continue to see legislative and regulatory
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