REG - Legal & General Grp - L&G Full Year Results 2020 Part 3
10/03/2021 07:00
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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 2020 £bn £bn £bn £bn £bn £bn
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 £340.1bn (31 December
2019: £335.7bn) 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 £45.8bn (31 December 2019: £67.1bn) 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 2019 £bn £bn £bn £bn £bn £bn
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 £335.7bn 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 £67.1bn 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
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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 2020 £bn £bn £bn £bn £bn £bn
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 £340.1bn (30 June 2020:
£348.3bn; 31 December 2019: £335.7bn) 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 £45.8bn (30 June 2020: £62.3bn; 31 December 2019: £67.1bn) 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
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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 2019 £bn £bn £bn £bn £bn £bn
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 £335.7bn 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 £67.1bn 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
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4.03 LGIM total external assets under management and net flows
Assets under management at Net flows for the period 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
£bn £bn £bn £bn £bn £bn £bn £bn
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 £388bn as at 31 December 2020 (2019: £370bn).
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 £1.4bn (2019: £1.6bn) 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
£bn £bn
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
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4.05 Assets under administration
Workplace(1) Annuities(2) Workplace Annuities
2020 2020 2019 2019
£bn £bn £bn £bn
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
£50.7bn (2019: £40.2bn) of assets under management included in Note 4.01.
2. Annuities assets under administration as at 31 December 2020 includes
£79.4bn (2019: £70.1bn) 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 £bn £bn £bn £bn
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
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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
£m £m £m £m £m £m
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
£m £m £m £m £m £m
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
£m £m £m £m £m £m
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
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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
£7.4bn (2019: £7.3bn) 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
£bn £bn
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 £0.5bn during
the year.
3. Solvency II Own Funds allow for a Risk Margin of £6.1bn (2019: £5.9bn)
and TMTP of £5.6bn (2019: £5.7bn).
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
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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 £5.6bn (31
December 2019: £5.7bn) is net of amortisation to 31 December 2020.
The liabilities include a Risk Margin of £6.1bn (31 December 2019: £5.9bn)
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
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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
£bn £bn
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 £0.7bn (net of
tax) and an increase to TMTP of £0.7bn (net of tax).
7. Restricted Tier 1 convertible notes represent an issuance of £0.5bn in the
year (2019: nil).
8. Subordinated liabilities includes an issuance of £0.5bn in the year (2019:
redemption of £0.4bn and an issuance of £0.6bn).
9. Dividends paid are the amounts from the 2019 final and 2020 interim
dividend declarations (2019: 2018 final and 2019 interim dividend
declarations).
Capital
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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
£bn £bn
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 0.6 0.7
amortisation
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
£bn £bn
IFRS New business surplus 0.3 0.3
Removal of requirement to set up prudential margins above best estimate on new 0.3 0.2
business
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 £7.6bn, compared to £10.3bn
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)
( ) ( ) ( ) £bn £bn
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.
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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 on Impact on Impact on Impact on
net of tax net of tax net of tax net of tax
Solvency II Solvency II Solvency II Solvency II
capital coverage capital coverage
surplus(1) ratio(1) surplus(1) ratio(1)
2020 2020 2019 2019
£bn % £bn %
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 (0.7) (12) (0.4) (9)
ratings(2,3)
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 (0.4) (5) (0.3) (6)
addition to ratings(2,4)
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.
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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.
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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 year Full year
2020 2020 2020 2019 2019 2019
£m £m % £m £m %
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.
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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%.
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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.
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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 £bn £bn
PVNBP 5.02 (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 £114m of gross written premiums relating
to a residual reinsurance treaty following the disposal of the General
Insurance business
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82
6.01 Investment portfolio
Market Market
value value
2020 2019
£m £m
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 £m £m £m £m £m £m
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 £288m (31 December 2019: £324m) 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 £21.2bn (31
December 2019: £11.5bn). 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 £4,117m (31 December 2019:
£1,262m).
7. Other assets include finance leases of £88m (31 December 2019: £90m) and
the consolidated net asset value of the group's investments in CALA Home and
other housing businesses.
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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
£m £m £m £m £m £m
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 £6,036m (31 December 2019: £4,733m).
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
£m £m £m £m
-
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 £47m of equities that belong to other shareholder funds.
2. Bonds include lifetime mortgages of £6,036m.
LGR LGC(1) LGI Total
2019 2019 2019 2019
£m £m £m £m
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 £48m of equities that belong to other shareholder funds.
2. Bonds include lifetime mortgages of £4,733m.
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.
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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 £m £m £m £m £m £m £m %
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 £m 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 £80,438m, representing 94% of the total group portfolio.
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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 £m £m £m £m £m £m £m %
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 £m 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 £70,061m, 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.
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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 £m £m £m £m £m
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
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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 £m £m £m £m £m
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
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6.03 Bond portfolio summary (continued)
(c) Bond portfolio analysed by credit rating
Externally Internally
rated rated(1) Total
As at 31 December 2020 £m £m £m
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 £m £m £m
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
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6.03 Bond portfolio summary (continued)
(d) Sectors analysed by Direct investments and Traded
Direct
investments Traded Total
As at 31 December 2020 £m £m £m
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
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6.03 Bond portfolio summary (continued)
(d) Sectors analysed by Direct investments and Traded (continued)
Direct
investments Traded Total
As at 31 December 2019 £m £m £m
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
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6.04 Property analysis
Property exposure within Direct investments by status
LGR(1) LGC(2) Total
As at 31 December 2020 £m £m £m %
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 £m £m £m %
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 £3.8bn (31 December 2019: £3.2bn) 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 £2,179m (31
December 2019: £2,120m) of such assets.
Investments
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Alternative Performance Measures
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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 profit 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
£1,607m (2019: £1,834m) and average equity attributable to the owners of the
parent of £9,270m (2019: £8,974m)
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
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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 beneficially 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) defined 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 beneficially 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 financial metric which can be used to measure the
profitability and strength of a company over time. It is the total
shareholder profit after tax divided by the number of shares outstanding. EPS
uses a weighted average number of shares outstanding during the year.
Glossary
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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
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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, inflation
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 final 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
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97
Solvency II
The Solvency II regulatory regime is a harmonised prudential framework for
insurance firms 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.
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