REG - Legal & General Grp - L&G H1 2014 Results Part 1 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 2
29/10/2014 10:32
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equivalent to 5p per share (H1 2013: 5p per share).
The external assets component of LGIM is included at the IFRS net asset value
of £0.6bn (H1 2013: £0.5bn), equivalent to 10p per share (H1 2013: 8p 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 (15p per share) to £2.6bn (45p 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 H1 2014 H1 2014
p per share £bn
Look through value of profits on covered business 5 0.3
Net asset value 10 0.6
Current value of LGIM in Group embedded value 15 0.9
LGIM VIF 30 1.7
Alternative discounted value of LGIM future cash flows 45 2.6
Including LGIM, this scenario equates to an indicative valuation per share of
196 pence.
Indicative valuation including LGIM H1 2014 H1 2014
p per share £bn
EEV as reported 166 9.9
LGIM VIF 30 1.7
Total including LGIM 196 11.6
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 Changes in regulation or legislation may have a detrimental effect on our strategy. Legislation and government fiscal policy influence our product design, the period of retention of products and our required reserves for future liabilities. Regulation defines the overall framework for the design, marketing and distribution of our products; and the prudential capital that we hold. Significant changes in legislation or regulation may reduce our future revenues and profitability or require us to hold more capital. We are particularly exposed to risk where legislative or regulatory change is unanticipated or implemented without prior consultation and engagement with the financial services sector. The nature of long term business can also result in some changes in regulation, and the differing interpretation of regulation by regulators over time, having a retrospective effect on our businesses and in force books of business, impacting the value of embedded future profits implicit in those books of business. trend, outlook and MITIGATION The recent changes in annuity compulsion announced in the UK budget illustrate how the sector can be impacted by sudden changes in
legislative or regulatory frameworks. Whilst we believe our Workplace savings products, a comprehensive suite of low cost retail solutions, and the Cofunds platform,
position us well for the evolution of a modern pensions market in the UK, we remain vigilant to the risk that future changes may have unintended consequences for the
financial service sectors in which we operate. Other areas of uncertainty include Solvency II (SII) and the distribution landscape post the Retail Distribution Review
(RDR). With regard to SII, the new capital regulations continue to be targeted for implementation in early 2016. Revised capital calibrations for long term business
provide sufficient flexibility to address many of the adverse capital impacts for UK insurance firms. Challenges remain, however, in ensuring that final implementation is
proportionate and cost effective for the insurance sector. We continue to seek to actively participate with government and regulatory bodies in the UK and Europe to
assist in the evaluation of change so as to develop outcomes that meet the needs of all stakeholders. Internally, we evaluate the impact of all legislative and regulatory
change as part of our formal risk identification and assessment processes, with material matters being considered at the Group Risk Committee and the Group Board.
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 investment assets we hold in shareholders' funds and those to meet the obligations arising from insurance business. Interest rate movement and inflation can also change the value of the obligations. We use a range of techniques to manage mismatches between assets and liabilities. However, financial loss can still arise from adverse investment markets. In addition, significant falls in investment values can reduce the fee income of our investment management business. Broader economic conditions impact the timing of the purchase and the period of retention of retail financial services products, impacting our profitability. Current macro-economic policies continue to drive record equity markets, bond values and house prices. Whilst we consider the immediate outlook remains positive, a number
of factors could result in rapid changes in asset values. These include a toughening of monetary policy and political uncertainty. There is limited resilience in the
current investment market environment for such 'shocks' with potential for significant falls in the value of certain asset classes should markets reassess returns.
Extreme market shocks may impact our ability to execute hedging strategies that ensure the profile of our asset and liability cash flows is appropriately matched.
Economic shocks may also impact consumer attitudes in the markets in which we operate. We continue to model our business plans across a broad range of economic scenarios
and take account of alternative economic outlooks within our overall business strategy. Our business plans seek to focus upon those market segments that we expect to be
resilient across a range of projected conditions.
In dealing with issuers of debt and other types of counterparty the Group is exposed to the risk of financial loss. A systematic default event within the corporate sector, or a major sovereign debt event, could result in dislocation of bond markets, significantly widening credit spreads, and may result in default of even strongly rated issuers of debt, exposing us to financial loss. We are also exposed to banking, money market and reinsurance counterparties, and settlement, custody and other bespoke business services, a failure of which could expose us to both financial loss and operational disruption of our business processes. Credit spreads continue to reflect market confidence in the issuers of investment grade bonds, and at Legal & General we have continued to experience low levels of
default on our corporate bond portfolio. We also continue to diversify the asset classes backing our annuities business, to include the use of property lending, sale and
leaseback and other forms of direct investment. There remains, however, a range of factors that could trigger write downs in our investment assets, leading to reduced
profitability or financial loss. These factors include deterioration in market confidence in banks particularly in the euro zone and a financial crisis in emerging
markets. Whilst we carefully select and monitor the financial strength of all our counterparties, an economic shock or significant change in the current economic outlook
may increase potential for a supplier of business services being unable to meet their obligations to us.
As a UK-based Group, our earnings are influenced by the performance and perception of the UK financial services sector as a whole. The financial crisis, subsequent investment performance and low interest rate environment, together with consumers' perceptions of the robustness of financial institutions, may impact consumer attitudes to long-term savings. Regulatory actions may also adversely impact consumers' perception of the value of insurance products and result in changes to the regulatory and legislative environment in which we operate, adversely impacting our future revenues and profitability.i As a significant participant in the long-term savings markets, we are exposed to changes in consumer sentiment. We are also exposed to increased costs of regulatory
compliance through regulatory and legislative responses to events in the broader financial services sector. Recent examples include the EU transaction tax and the central
clearing of certain derivative instruments, which would increase the costs associated with pension savings products and annuities, respectively. In mitigation of sector
contagion risks we actively manage our brand and seek to differentiate our business model from that of our competitors. To ensure regulation is appropriate and
proportionate we also seek to engage with our regulators to support their understanding of the risk drivers in the financial services markets. The nature of the business
environment in which we operate, however, means that we cannot remove ourselves from the adverse consequences of market events and we will continue to be exposed to
residual contagion risks.
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. We regularly appraise the assumptions underpinning the business that we write taking account of demographic trends and long term economic outlook. In our annuities
business we are, however, exposed to factors such as improvements in medical science beyond those anticipated leading to unexpected changes in life expectancy. In
protection business we remain inherently exposed to loss from events causing widespread mortality/morbidity or significant policy lapse rates. There is also potential for
legislative intervention in the pricing of insurance products irrespective of risk factors, such as age or health.
The Group may not maximise opportunities from structural and other changes within the financial services sector.Significant changes in the markets in which we operate may require the review and realignment of elements of our business strategy. A failure to be sufficiently responsive to potential change and understand the implication to our businesses, or the incorrect execution of change may impact the achievement of our strategic objectives, and in turn future revenues and profitability. Macro trends in the markets in which we operate include an ageing population, the increasing use of digital technologies and significant reform in the provision of state
welfare. Within the investment management business asset classes are increasingly homogeneous providing opportunities for businesses with scale such as us. The
retrenchment of the banks also provides opportunity for insurance firms to participate in investment and lending activities. Responding to these macro trends potentially
creates organisational challenges and management stretch across the range of initiatives. We remain vigilant to these risks and have structure our business to support
their practical management.
A material failure in our business processes may result in unanticipated financial loss or reputation damage. We have constructed our framework of internal controls to minimise the risk of unanticipated financial loss or damage to our reputation. However, no system of internal control can completely eliminate the risk of error, financial loss, fraudulent actions or reputational damage to our brand. Our plans for growth inherently will also increase the profile of operational risks across our businesses. We continue to invest in our systems capabilities and business processes so that we meet the expectations of our customers; comply with regulatory, legal and financial
reporting requirements; and mitigate the risk of significant financial loss or reputational damage from operational risk events. Our risk governance model seeks to ensure
that business management are actively engaged in ensuring an appropriate control environment is in place, with risk oversight and independent assurance of our internal
control environment being provided by our Group Risk and Group Internal Audit functions, respectively.
The financial services sector is increasingly becoming a target of 'cyber crime'. As we and our business partners increasingly digitalise our businesses, we are inherently exposed to the risk that third parties may seek to disrupt our on-line business operations, steal customer data or perpetrate acts of fraud using digital media. A significant cyber event could result in reputation damage and financial loss. Cyber-crime and attempts by third parties to seek and exploit perceived vulnerabilities in IT systems remains a key risk within the financial services sector. Potential
threats include denial of service attacks, network intrusions to steal data for the furtherance of financial crime, and the electronic diversion of funds. We continue
focus on maintaining a secure IT environment that protects our customer and corporate data and seek to proactively address emerging threats. The nature of cyber threats,
however, means residual risk remains.
Enquiries.
Investors:
Laura Doyle
Head of Investor Relations
020 3124 2088
Stephen Thomas Investor
Relations Manager
020 3124 2047
Media:
John Godfrey
Group Communications Director
020 3124 2090
Richard King
Head of Media Relations
020 3124 2095
Michelle Clarke
Tulchan Communications
020 7353 4200
Katharine Wynne
Tulchan Communications
020 7353 4200
Notes
A copy of this announcement can be found in "Results", under the "Financial
information" section of our shareholder website at
http://www.legalandgeneralgroup.com/investors/results.cfm.
A presentation to analysts and fund managers will take place at 10.30 GMT
today at One Coleman Street, London, EC2R 5AA. There will be a live webcast of
the presentation which can be accessed at
http://investor.legalandgeneral.com/results.cfm. A replay will be available on
this website later today.
There will be a live listen only teleconference link to the presentation.
Details below:
Participant dial-in numbers
Location you are dialling in from Number you should dial
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