REG - Legal & General Grp - L&G Full Year Results 2016 Part 1 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 2
08/03/2017 07:06
- Part 2: For the preceding part double click ID:nRSH7988Ya
through the brokerage
channel. LGI US has 1.2m policies in force (2015: 1.2m).
In 2015, LGI US adjusted its protection new business pricing to be better
positioned in the market. These changes allowed for the pricing of risk at a
more granular level which has raised prices at lower margin price points and
reduced prices elsewhere. The impact of this has been improved new business
margins and reduced new business volumes. LGI US maintained this disciplined
approach in 2016, resulting in a strong Solvency II new business margin of
12.4%. New annual premiums decreased 21% to $84m (2015: $106m).
Legal & General America paid its 2017 dividend in February of this year, up
10% to $100m (2015: $91m).
General Insurance
FINANCIAL HIGHLIGHTS £m 2016 2015
Net release from operations 42 41
Experience variances, assumption changes, tax and non-cash movements 10 10
Operating profit 52 51
Investment and other variances 16 (8)
Profit before tax 68 43
General Insurance gross premiums 326 337
Combined operating ratio (%) 89 89
increase in profits and direct premium income
Operating profit increased to £52m (2015: £51m) with a combined operating
ratio of 89% (2015: 89%). This was despite the introduction of the annual
Flood Re levy of £9m which added 3% to the combined operating ratio.
General Insurance gross premiums were down 3% at £326m (2015: £337m) as we
maintained pricing discipline in a competitive market. Our direct business
delivered GWP of £121m in 2016, representing 20% growth on 2015 and now
accounts for 37% of gross premiums (2015: £101m, 30% of gross premiums).
In December 2016, Cheryl Agius was appointed Chief Executive Officer of
General Insurance. The division has 1.3m policyholders (2015: 1.4m) covering
household, travel and pet insurance products. Additionally, General Insurance
signed distribution agreements with several leading UK financial institutions
which in aggregate are expected to increase 2017 gross premiums by around
10%.
savings
FINANCIAL HIGHLIGHTS £m 2016 2015
Release from operations 104 125
New business strain (5) (9)
Net release from operations 99 116
Experience variances, assumption changes, tax and non-cash movements - (9)
Operating profit 99 107
- Mature Savings 105 106
- Digital Savings (6) 1
Investment and other variances 9 3
Net profit / (loss) on disposals (60) -
Profit before tax 48 110
lower contribution from mature savings
Release from operations reduced to £104m (2015: £125m) as we continue to
manage the reducing contribution from our declining Mature Savings business.
Net release from operations was £17m lower at £99m (2015: £116m), with new
business strain of £5m (2015: £9m) as we actively manage the cost base.
Operating profit in Mature Savings remains strong at £99m (2015: £107m). The
introduction of robotics has increased automation and allowed us to reduce
unit costs. Favourable market movements contributed £9m (2015: £3m) to profit
before tax.
The Group completed the sale of Cofunds and IPS to Aegon on 1st January 2017
for a total consideration of £147.5m, resulting in a £64m impairment loss in
2016. On 25th May 2016, the Group announced the completion of the sale of
Suffolk Life to Curtis Banks Group for £45m, resulting in a £4m profit on
disposal.
The Digital Savings operating loss in 2016 was £6m (2015: £1m operating
profit).
Mature Retail Savings business outflows of £(3.0)bn (2015: £(5.8)bn), and
assets under administration of £30.7bn (2015: £29.6bn).
Mature Savings outflows reduced year on year due to the reducing maturity
profile of some products, particularly Endowments. Since the introduction of
the Pensions Reform legislation we have seen an increase in the proportion of
customers wishing to take their pension pots as cash withdrawals, with c.80%
or 13,000 customers, electing to take cash payments. Our average payment size
is £14k. This compares to c.60% of customers taking cash before the reform
legislation was announced.
Disposals
On 1st January 2017, the Group completed the sale of Cofunds and IPS to Aegon
for total consideration of £147.5m. The Cofunds business was acquired in
stages between 2005 and 2013, for a total cash consideration of £153m.
Investment in Cofunds subsequent to the acquisition as well as our IPS
platform, including capitalised costs in respect of the Retail Distribution
Review, resulted in an impairment loss of £64m. This was offset by a £4m
profit on disposal of Suffolk Life, resulting in total net loss on disposals
of £60m in 2016.
In November 2016, Legal & General reached an agreement in principle with
Chesnara plc to sell Legal & General Nederland Levensverzekering Maatschappij
N.V. for E160m. The sale is expected to complete in H1 2017. During the year,
Legal & General Netherlands contributed £70m (2015: £29m) of dividends to LGI
due to a favourable surplus capital position.
The sale of Legal & General France to APICIL Prévoyance completed on 31st
December 2015.
Net release from operations BACKED BY dividends TO GROUP
The 2016 full year dividend of £854m reflects net release from operations
coverage of 1.65 times (2015: 1.58 times).
2016 2015
Netrelease from operations Subsidiaries'dividendsto Group Dividend% of Net release from operations Netrelease from operations Subsidiaries' dividends to Group Dividend% of Net release from operations
£m
Total 1,411 1,085 77 1,256 1,003 80
External dividend 854 797
Dividend coverage 1.65 1.58
borrowings
Legal & General continues to have a strong liquidity position reflecting its
requirements for working capital and derivative collateral. The Group's
outstanding core borrowings total £3.1bn (2015: £3.1bn). There is also a
further £0.4bn (2015: £0.5bn) of operational borrowings including £0.2bn
(2015: £0.6bn) of non-recourse borrowings.
Group debt costs of £172m (2015: £153m) reflect an average cost of debt of
5.4% per annum (2015: 5.3% per annum) on average nominal value of debt
balances of £3.2bn (2015: £2.9bn).
taxation - effective tax rate of 20.0%
Equity holders' Effective Tax Rate (%) 2016 2015
Equity holders' total Effective Tax Rate 20.0 19.3
Annualised rate of UK corporation tax 20.00 20.25
In 2016, the Group's effective tax rate was in line with the UK corporation
tax rate. This reflects the overall positive impact from differences between
the measurement of accounting and taxable profits, offset by the average
higher rates of taxes applied on overseas profits.
SOLVENCY II
As at 31st December 2016, the Group had an estimated Solvency II surplus of
£5.7bn over its Solvency Capital Requirement, corresponding to a Solvency II
coverage ratio of 171% on a shareholder basis. The Cofunds disposal, which
completed on 1st January 2017, will provide a c.1.5% coverage ratio benefit in
2017.
Capital (£bn)1 2016 2015
Own Funds 13.6 12.8
Solvency Capital Requirement (SCR) (7.9) (7.3)
Solvency II surplus 5.7 5.5
SCR coverage ratio (%) 171% 176%
1. Solvency II position on a shareholder basis as at 31st December
and before the accrual of the final dividend.
Analysis of movement from 1st January to 31st December 2016 (£bn) Solvency II surplus
Operational surplus generation 1.2
New business strain (0.1)
Net surplus generation 1.1
Dividends paid (0.8)
Operating variances 0.2
Market movements (0.3)
Total surplus movement (after dividends paid in the year) 0.2
The increase in surplus reflects the surplus generated over 2016 net of
dividends paid of £0.8bn and interest payments on the Group's debt of £0.2bn.
The net surplus generation was £1.1bn, after allowing for the amortisation of
1/16th of the opening Transitional Measures on Technical Provisions (TMTP).
New business strain was £0.1bn. The total surplus generation includes a
negative investment variance of £0.3bn reflecting market movements over 2016,
in particular falls in risk free rates.
Operating variances include the impact of experience variances, changes to
valuation and capital calibration assumptions, changes to planned volumes of
new business, tax rate changes, PRA approval of changes to the Internal Model
and Matching Adjustment, (in particular the inclusion of Lifetime Mortgages as
assets eligible for Matching Adjustment), and other management actions
including changes in asset mix and hedging strategies.
When stated on a proforma basis, including the SCR attributable to our
With-profits fund of £0.5bn and the final salary pension schemes of £0.2bn in
both the Group's Own Funds and the SCR, the Group's coverage ratio was 165%
(2015: 169%).
The analysis incorporates management's estimate of a recalculation of the TMTP
as at the end of 2016. The conditions set out by the the PRA to allow a formal
recalculation of the Group's TMTP were not met as at end 2016 but, in line
with PRA guidance, a formal recalculation will take place no later than 1st
January 2018. Therefore, the disclosed Solvency II position on a shareholder
basis and proforma basis do not reflect the regulatory capital position as at
31st December 2016. This will be made public in May 2017.
reconcilation of ifrs net release from operations to solvency ii net
surplus generation
The table below gives a reconciliation of the Group's IFRS Release from
operations and Solvency II Operational surplus generation in 2016:
£bn
IFRS Release from operations 1.3
Expected release of IFRS prudential margins (0.5)
Release of IFRS specific reserves (0.1)
Solvency II investment margin 0.2
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation 0.4
Other Solvency II items and presentational differences (0.1)
Solvency II Operational surplus generation 1.2
The table below gives a reconciliation of the Group's IFRS New business
surplus to Solvency II New business strain in 2016:
£bn
IFRS New business surplus 0.2
Removal of requirement to set up prudential margins above best estimate on new business 0.5
Set up of Solvency II Capital Requirement on new business (0.7)
Set up of Risk Margin on new business (0.1)
Solvency II New business strain (0.1)
Sensitivity analysis
Impact on net of tax Solvency II capital surplus 2016 £bn Impact on net of tax Solvency II coverage ratio 2016%
Credit spreads widen by 100bps assuming a level addition to all ratings 0.4 10
Credit spreads widen by 100bps assuming an escalating addition to ratings 0.2 7
Credit spreads narrow by 100bps assuming a level addition to all ratings (0.4) (9)
Credit spreads narrow by 100bps assuming an escalating addition to ratings (0.2) (7)
Credit migration (0.6) (8)
20% fall in equity markets (0.4) (5)
40% fall in equity markets (0.8) (9)
20% rise in equity markets 0.5 5
15% fall in property markets (0.2) (3)
15% rise in property markets 0.2 3
100bps increase in risk free rates 1.0 22
50bps fall in risk free rates (0.5) (10)
Future inflation expectation increase by 50bps (0.1) (3)
1% reduction in annuitant base mortality (0.2) (2)
1% increase in annuitant base mortality 0.2 2
Substantially reduced Risk Margin 0.1 1
The above sensitivity analysis does not reflect all of the management actions
which could be taken to reduce the impacts. In practice, the group actively
manages its asset and liability positions to respond to market movements.
These results all allow (on an approximate basis) for the recalculation of
estimated TMTP as at 31st December 2016 where the impact of the stress would
cause this to change materially. The impacts of these stresses are not linear
therefore these results should not be used to interpolate or extrapolate the
impact of a smaller or larger stress. The results of these tests are
indicative of the market conditions prevailing at the balance sheet date. The
results would be different if performed at an alternative reporting date.
Solvency II new business contribution
Management estimates of the value of new business and the margin as at 31st
December 2016 are shown below:
Contribution from
PVNBP new business Margin %
LGR1(£m) 6,661 693 10.4
UK Protection Total (£m) 1,466 153 10.4
- Individual protection 1,255 139 11.1
- Workplace health and protection 211 14 6.6
US Protection (£m) 631 78 12.4
1. UK annuity business.
Key assumptions in calculating the Solvency II new business contribution are
shown below:
Risk margin 3.1%
Risk free rate
- UK 1.7%
- US 2.1%
Risk discount rate (net of tax)
- UK 4.8%
- US 5.2%
Long term rate of return on non-profit annuities in LGR 3.1%
Demographic assumptions and reserving methodologies have been updated in line
with our Solvency II and Economic Capital balance sheets. Other assumptions
and methodologies that would have a material impact on the margin for these
contracts are unchanged from end 2015 other than the cost of currency hedging
which has been updated to reflect current market conditions and hedging
activity in light of Solvency II.
principal risks and UNCERTAINTIES
Legal & General runs a portfolio of risk taking businesses; we accept risk in
the normal course of business and aim to deliver sustainable returns on risk
based capital to our investors in excess of our cost of capital. We manage the
portfolio of risk that we accept to build a sustainable franchise for the
interests of all our stakeholders; we do not aim to eliminate that risk. We
have an appetite for risks that we understand deeply and are rewarded for, and
which are consistent with delivery of our strategic objectives. Risk
management is embedded within the business. The Group is exposed to a number
of key risk categories.
RISKS AND UNCERTAINTIES TREND, OUTLOOK AND MITIGATION
Reserves and our assessment of capital requirements 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, valuation interest rates, expenses and credit defaults. Actual experience may require recalibration of these assumptions impacting profitability. Management estimates are also required in the derivation of Solvency II capital metrics. These include modelling simplifications to reflect that it is not possible to perfectly model the external environment, with adjustment necessitated where new data emerges. Forced changes in reserves can also arise from regulatory or legislative intervention impacting capital requirements and profitability. We regularly appraise the assumptions underpinning the business that we write. Certain extreme events, however, could require us to adjust our reserves. For example in our annuities business, while recent trend data suggests the rate of longevity
improvement may be slowing, we're inherently exposed to the risk that a dramatic advance in medical science beyond that anticipated leads to an unexpected change in life expectancy. This could require adjustment to reserves as improvements in mortality
emerged. In our protection businesses, the emergence of new factors with potential to cause widespread mortality/morbidity or significant policy lapse rates may similarly require us to re-evaluate reserves. We undertake significant analysis of the
variables associated with writing long-term insurance business to ensure that a suitable premium is charged for the risks we take on, and that reserves continue to remain appropriate for factors including mortality, lapse rates, valuation interest rates,
expenses and credit defaults. We remain focused on developing a comprehensive understanding of longevity science and continue to evolve and develop our underwriting capabilities for our protection business. Our use of reinsurance also acts to reduce the
impacts of significant variations in life expectancy and mortality.
Investment market performance and conditions in the broader economy may adversely impact earnings, profitability or surplus capital.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 movements 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. Interest rate expectations leading to falls in the risk free yield curve can also create a greater degree of inherent volatility to be managed in the Solvency II balance sheet, than the underlying economic position would dictate, potentially impacting capital requirements and surplus capital. In addition, significant falls in investment values can reduce fee income to our investment management business. 2016 has seen volatility in financial markets as they have responded to uncertainties in the global economy and political events, such as the UK referendum on membership of the EU. For Legal & General the vote to leave has little direct impact on trading,
as our customer base is located very largely in the UK, the US and Asia. It is, however, probable that a potentially lengthy period of negotiation and an uncertain outcome will create ongoing uncertainty for financial markets and the broader UK economy in
which we operate; with potential for asset price shifts should uncertainty lead markets to reappraise their value. Potential also exists for renewed financial stress in Europe driven by political events and residual weaknesses in the Euro currency banking
systems. Broader geo-political events also have potential to cause shocks to financial markets, with stressed conditions having potential to create illiquidity in bond markets exaggerating the impacts of any significant market correction. 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 anintegral part in our business planning ensuring a clear link between capital
sufficiency and the nature of risks to which we may be exposed. We have sought to ensure focus upon those market segments that we expect to be resilient in projected conditions. For example, investing in real assets provides both enhanced returns to our
'slow money' and reduces exposure to the volatilities of traded investments.
In dealing with issuers 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 and in extreme scenarios trigger defaults impacting the value of bond portfolios. 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. Under Solvency II, a widespread widening of credit spreads and downgrades can also result in a reduction in our Solvency II balance sheet surplus, despite already setting aside significant capital for credit risk. A material deterioration in economic conditions inherently increases potential for a widening in credit spreads as financial markets price for increased uncertainty, which in turn may impact our Solvency II balance sheet surplus. Current factors that may
trigger a reassessment include the changing global economic outlook with uncertainties following the UK referendum on EU membership and other political events potentially exacerbating down side risks; a renewed banking crisis within the Euro zone area; and
default on debt linked to emerging markets. We actively manage our exposure to default risks within our bond portfolios, setting selection criteria and exposure limits, and using the capabilities of LGIM's global credit team to ensure the risks are
effectively controlled, and if appropriate trade out to improve credit quality. We also seek to closely manage risks to our Solvency II balance sheet through monitoring factors that could give rise to a heightened level of default risk. However, we can
never completely eliminate default risks or their impacts to our Solvency II balance sheet, although we seek to hold a strong balance sheet that we believe to be prudent for a range of adverse scenarios.
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