REG - Legal & General Grp - L&G FY 2014 Results Part 1 <Origin Href="QuoteRef">LGEN.L</Origin> <Origin Href="QuoteRef">MRON.L</Origin> - Part 2

Legal & GeneralAnnouncement

04/03/2015 07:01

- Part 2: For the preceding part double click  ID:nRSD4590Ga 

in market conditions, increases in surplus
assets which attract risk capital and the capital requirements on new business
written. Overall the new business written in 2014 has covered its capital
requirements. 
 
 Capital                       2014  2013  
 £bn                                       
 Eligible own funds            12.5  11.4  
 Economic capital requirement  5.5   4.5   
 Economic capital surplus      7.0   6.9   
                                           
 1-in-200 coverage ratio (%)   229   251   
 
 
Supplementary EEV disclosure. 
 
 EEV highlights                   2014  2013  
 Pence                                        
 Equity per share including LGIM  212   190   
 Equity per share                 185   162   
 
 
 Analysis of EEV results                                                2014   2013   
 £m                                                                                   
 Contribution from new business                                         850    651    
 Intra-group transfer of annuities from With-Profit to Non-Profit Fund  100    -      
 Expected return from in-force business                                 490    426    
 Experience variances and assumption changes                            (185)  (32)   
 Development costs                                                      (32)   (40)   
 Contribution from shareholder net worth                                194    125    
 EEV operating profit on covered business                               1,417  1,130  
 Business reported on an IFRS basis                                     164    211    
 EEV operating profit                                                   1,581  1,341  
 Economic variances                                                     790    215    
 Losses attributable to non-controlling interests                       7      13     
 EEV profit before tax                                                  2,378  1,569  
 Tax and other                                                          (362)  (270)  
 EEV profit after tax                                                   2,016  1,299  
 
 
EEV PER SHARE 
 
The Group delivered £2,016m of EEV profit after tax, which after external
dividend payments in the year of £580m and foreign exchange, pension deficit
and other adjustments of £(45)m, increased EEV shareholders' equity to
£10,975m (2013: £9,586m), equivalent to 185p per share (2013: 162p per share).
Including LGIM's external funds in the calculation increases the EEV per share
to 212p (2013: 190p). 
 
NEW BUSINESS CONTRIBUTION 
 
Contribution from new business increased to £850m (2013: £651m). The increase
reflects the strong increase in the contribution from Legal & General
Retirement, where sales increased to £6.6bn (2013: £4.1bn), excluding the
internal transfer of annuities from with-profits to our shareholder fund in
July. 
 
Worldwide EEV new business margin increased to 5.8% (2013: 5.1%) primarily due
to the higher mix and improved margin of our annuity business. 
 
EEV OPERATING PROFIT 
 
EEV operating profit increased by 18% to £1,581m (2013: £1,341m), as the Group
benefited from its growth strategy and higher sales. Experience variances and
assumption changes were £(185)m (2013: £(32)m) with positive experience and
assumption changes in LGAS and LGR being more than offset by negative
operating assumption changes in LGA of £(241)m. LGA has adjusted its mortality
embedded value assumptions to reflect the potential impact of industry wide
mortality tables issued for consultation in the second half of 2014. 
 
Operating profit also benefited from strong results in Investment Management
and General Insurance which are largely reported on an IFRS basis within the
EEV operating profit. 
 
ECONOMIC VARIANCES 
 
Positive economic variances of £790m (2013: £215m) arose from a number of
factors including gains of £0.8bn resulting from a reduction in the UK risk
discount rate to 5.5% (2013: 6.8%) and £0.2bn arising from equity market
gains, offset by £(0.4)bn resulting from the reduction in the UK risk free
rate to 2.2% (2013: 3.4%) impacting expected longer-term investment returns. 
 
VALUE OF IN-FORCE 
 
The table below illustrates how the discounted and undiscounted value of
in-force (VIF) has increased throughout the year. 
 
 Reconciliation of LGAS and LGR VIF                             Discounted  Undiscounted1  
 £bn                                                                                       
 Opening VIF at 1 January 2014                                  4.9         10.5           
 Contribution from new business                                 0.6         1.4            
 Intragroup transfer from with-profit to non-profit fund        0.1         0.2            
 Unwind of discount rate                                        0.3         n/a            
 Expected release from non profit and with-profits businesses2  (0.7)       (0.8)          
 Experience variances / assumption changes                      -           0.2            
 Investment variance / economic assumption changes              0.9         0.6            
 Other                                                          0.2         -              
 Closing VIF at 31 December 2014                                6.3         12.1           
 
 
1. Management estimates. 
 
2. Comprises the expected release from non-profit business of £645m and
with-profits transfer of £43m. 
 
ADDITIONAL VALUE OF LGIM 
 
Within the calculation of Group embedded value, LGIM profits on internally
sourced business are included on a look through basis at £0.4bn (2013:
£0.3bn), equivalent to 6p per share (2013: 5p per share). 
 
The external assets component of LGIM is included at the IFRS net asset value
of £0.5bn (2013: £0.4bn), equivalent to 8p per share (2013: 7p per share). 
 
Including the external assets component of LGIM on an embedded value basis
would increase the contribution of LGIM to the Group embedded value from
£0.9bn (14p per share) to £2.5bn (41p per share). In line with the rest of the
Group, the embedded value for LGIM excludes any value for future new
business. 
 
 Estimated LGIM discounted cash flow valuation           2014         2014  
                                                         p per share  £bn   
 Look through value of profits on covered business       6            0.4   
 Net asset value                                         8            0.5   
 Current value of LGIM in Group embedded value           14           0.9   
 LGIM VIF                                                27           1.6   
 Alternative discounted value of LGIM future cash flows  41           2.5   
 
 
Including LGIM, this scenario equates to an indicative valuation per share of
212p (2013: 190p). 
 
 Indicative valuation including LGIM  2014         2014  
                                      p per share  £bn   
 EEV as reported                      185          11.0  
 LGIM VIF                             27           1.6   
 Total including LGIM                 212          12.6  
 
 
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 Reserves for long-term business may require revision as a result of changes in experience, regulation or legislation. The writing of long-term insurance business requires the setting of assumptions for long-term trends in factors such as mortality, lapse rates and persistency, valuation interest rates, expenses and credit defaults. Actual experience may result in the need to recalibrate these assumptions reducing profitability. Forced changes in reserves can also be required because of regulatory or legislative intervention in the way that products are priced, reducing profitability and future earnings.  Investment market performance or conditions in the broader economy may adversely impact our earnings and profitability.The performance and liquidity of investment markets, interest rate movements and inflation impact the value of investments we hold in shareholders' funds and those to meet the obligations from insurance business. Interest rate movement and inflation can also change the value of our obligations. We use a range of techniques to manage mismatches between assets and liabilities. However, loss can still arise from adverse markets. In addition, significant falls in investment values can reduce fee income to our investment management business, while broader economic conditions can impact the purchase and the retention of retail financial services products, impacting profitability.    trend, outlook and MITIGATION We regularly appraise the assumptions underpinning the business that we write. In our annuities     
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  business we are, however, exposed to factors such as dramatic advances in medical science beyond those anticipated leading to     
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  unexpected changes in life expectancy. In protection business we remain inherently exposed to rates of mortality diverging from   
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  assumptions and to loss from events that cause widespread mortality/morbidity or significant policy lapse rates. As illustrated   
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  by the implementation of the EU gender neutral pricing legislation, there is also potential for legislative intervention in the   
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  pricing of insurance products irrespective of risk factors, such as age or health. We undertake significant analysis of