REG - Legal & General Grp - L&G H1 2014 Results Part 3 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 7
29/10/2014 10:33
- Part 7: For the preceding part double click ID:nRSF3773Of
fewer retail protection lapses and better longevity
experience. LGA experience variance primarily relates to
adverse persistency experience and mortality experience
within term assurance and universal life products
respectively.
3. LGAS and LGR assumption changes primarily reflects
mortality assumption changes in LGR. LGA assumption
changes primarily relate to improved modelling of term
business in the period after the end of the guaranteed
level premium period.
4. LGAS and LGR non-covered business primarily reflects
GI operating profit of £69m.
5. LGIM operating profit includes Retail Investments and
excludes £34m of profits arising from the provision of
investment management services at market referenced
rates to the covered business on a look through basis
and as a consequence are included in the LGAS and LGR
covered business on an EEV basis.
6. LGC and group expenses non-covered business primarily
reflects Group debt costs and investment projects and
expenses, partly offset by investment returns from non
-covered shareholder assets.
7. The LGAS and LGR positive variance has resulted from
a number of factors including equity market
outperformance, favourable default experience, actions
to improve the yield on annuity assets and a lower risk
margin offset by a higher risk free rate. The higher
risk free rate has contributed to a negative variance in
LGA.
8. Primarily reflects the implementation of the UK
planned future reductions in the corporation tax rate to
20% on 1 April 2015.
European Embedded Value
102
5.06 New business by product1
Present Contri-
value of Capital- bution
Annual annual isation Single from new
premiums premiums factor2 premiums PVNBP business3 Margin
For the six months ended 30 June 2014 £m £m £m £m £m %
UK Protection 123 668 5.4 - 668 62 9.3
Overseas business 38 266 7.0 180 446 2 0.4
UK Savings 341 1,212 3.6 1,420 2,632 11 0.4
Total LGAS 502 2,146 4.3 1,600 3,746 75 2.0
LGR n/a - n/a 3,518 3,518 295 8.4
LGA 47 474 10.1 - 474 51 10.8
Total new business 549 2,620 4.8 5,118 7,738 421 5.4
Cost of capital 82
Contribution from new business before cost of capital 503
Present Contri-
value of Capital- bution
Annual annual isation Single from new
premiums premiums factor2 premiums PVNBP business3 Margin
For the six months ended 30 June 2013 £m £m £m £m £m %
UK Protection 105 528 5.0 - 528 35 6.7
Overseas business 30 230 7.7 183 413 3 0.8
UK Savings 314 1,162 3.7 1,203 2,365 (2) (0.1)
Total LGAS 449 1,920 4.3 1,386 3,306 36 1.1
LGR4 n/a 692 n/a 1,424 2,116 177 8.4
LGA 45 440 9.7 - 440 44 10.0
Total new business 494 3,052 6.2 2,810 5,862 257 4.4
Cost of capital 30
Contribution from new business before cost of capital 287
1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at the point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.
4. LGR for H1 13 and FY 13 includes present value of annual premiums for longevity insurance on a net of reinsurance basis to enable a more representative margin figure. The gross of reinsurance longevity insurance annual premium for H1 13 is £175m; FY 13: £270m. The LGR PVNBP contribution from new business and margin for H1 13 and FY 13 are also inclusive of longevity insurance. There has been no longevity insurance sales during H1 14.
European Embedded Value
103
5.06 New business by product (continued)1
Present Contri-
value of Capital- bution
Annual annual isation Single from new
premiums premiums factor2 premiums PVNBP business3 Margin
For the year ended 31 December 2013 £m £m £m £m £m %
UK Protection 218 1,141 5.2 - 1,141 101 8.9
Overseas business 30 229 7.6 371 600 5 0.8
UK Savings 724 2,516 3.5 2,495 5,011 2 -
Total LGAS 972 3,886 4.0 2,866 6,752 108 1.6
LGR4 n/a 939 n/a 4,089 5,028 436 8.7
LGA 99 926 9.4 - 926 107 11.6
Total new business 1,071 5,751 5.4 6,955 12,706 651 5.1
Cost of capital 72
Contribution from new business before cost of capital 723
1. Covered business only.
2. The capitalisation factor is the present value of annual premiums divided by the amount of annual premiums.
3. The contribution from new business is defined as the present value at the point of sale of assumed profits from new business written in the period and then rolled forward to the end of the financial period using the risk discount rate applicable at the end of the reporting period.
4. LGR includes present value of annual premiums for longevity insurance on a net of reinsurance basis to enable a more representative margin figure. The gross of reinsurance longevity insurance annual premium is £270m. The LGR PVNBP contribution from new business and margin are also inclusive of longevity insurance.
European Embedded Value
104
5.07 Assumptions
UK assumptions
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. Indicative yields on the portfolio,
excluding annuities within LGR, but after allowance for long term default risk, are shown below.
For LGR, separate returns are calculated for new and existing business. Indicative combined yields, after allowance for
long term default risk and the following additional assumptions, are also shown below. These additional assumptions are:
i. Where cash balances and debt securities are held at the reporting date in excess of, or below strategic investment
guidelines, then it is assumed that these cash balances or debt securities are immediately invested or disinvested at
current yields.
ii. Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the
proceeds reinvested in corporate bonds with a redemption yield 0.70% p.a. (0.70% p.a. at 30 June 2013; 0.70% p.a. at 31
December 2013) greater than the swap rate at that time (i.e. the long term credit rate).
iii. Where reinvestment or disinvestment is necessary to rebalance the asset portfolio in line with projected outgo, this
is also assumed to take place at the long term credit rate above the swap rate at that time.
The returns on fixed and index-linked securities are calculated net of an allowance for default risk which takes account of
the credit rating, outstanding term of the securities, and increase in the expectation of credit defaults over the economic
cycle. The allowance for corporate securities expressed as a level rate deduction from the expected returns for annuities
was 26bps at 30 June 2014 (26bps at 30 June 2013; 27bps at 31 December 2013).
UK covered business
i. Assets are valued at market value.
ii. Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders'
portion of the with-profits business in accordance with established practice. The proportion of profits derived from
with-profits business allocated to shareholders amounts to almost 10% throughout the projection.
iii. The value of in-force business reflects the cost, including administration expenses, of providing for benefit
enhancement or compensation in relation to certain products.
iv. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including
those for mortality, morbidity, persistency and maintenance expenses (excluding the development costs referred to below).
These are normally reviewed annually.
An allowance is made for future mortality improvement. For new business, mortality assumptions may be modified to take
certain scheme specific features into account.
v. Development costs relate to investment in strategic systems and development capability that are charged to the
covered business. Projects charged to the non-covered business are included within Group Investment projects in LGC and
group expenses.
Overseas covered business
vi. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including
those for mortality, morbidity, persistency and maintenance expenses.
European Embedded Value
105
5.07 Assumptions (continued)
Economic assumptions
As at As at As at
30.06.14 30.06.13 31.12.13
% p.a. % p.a. % p.a.
Risk margin 3.3 3.5 3.4
Risk free rate1
- UK 3.2 3.0 3.4
- Europe 1.4 2.1 2.2
- US 2.5 2.6 3.1
Risk discount rate (net of tax)
- UK 6.5 6.5 6.8
- Europe 4.7 5.6 5.6
- US 5.8 6.1 6.5
Reinvestment rate (US) 5.0 5.1 5.8
Other UK business assumptions
Equity risk premium 3.3 3.3 3.3
Property risk premium 2.0 2.0 2.0
Investment return (excluding annuities in LGR )
- Gilts:
- Fixed interest 2.5 - 3.2 2.5 - 3.0 2.7 - 3.4
- RPI linked 3.2 3.1 3.6
- Non gilts:
- Fixed interest 2.2 - 3.3 1.9 - 3.4 2.2 - 3.6
- Equities 6.5 6.3 6.7
- Property 5.2 5.0 5.4
Long-term rate of return on non profit annuities in LGR 4.3 4.7 4.6
Inflation
- Expenses/earnings 3.9 3.8 4.1
- Indexation 3.4 3.3 3.6
1. The risk free rate is the gross redemption yield on the 15 year gilt index. The Europe risk free rate is the 10 year
ECB AAA-rated euro area central government bond par yield. The LGA risk free rate is the 10 year US Treasury effective
yield.
Tax
vii. The profits on the covered business, except for the profits on the Society shareholder capital held outside the
long term fund, are calculated on an after tax basis and are grossed up by the notional attributed tax rate for
presentation in the income statement. For the UK, the after tax basis assumes the annualised current tax rate of 21.5% and
the subsequent enacted future reduction in corporation tax to 20% from 1 April 2015. The tax rate used for grossing up is
the long term corporate tax rate in the territory concerned, which for the UK is 20% (30 June 2013: 20%; 31 December 2013:
20%) taking into account the expected further rate reduction to 20% by 1 April 2015. The profits on the Society shareholder
capital held outside the long term fund are calculated before tax and therefore tax is calculated on an actual basis.
US, Netherlands and France covered business profits are also grossed up using the long term corporate tax rates of the
respective territories i.e. US is 35% (30 June 2013: 35%; 31 December 2013: 35%), France is 34.43% (30 June 2013: 34.43%;
31 December 2013: 34.43%) and Netherlands is 25% (30 June 2013: 25%; 31 December 2013: 25%).
European Embedded Value
106
5.07 Assumptions (continued)
Stochastic calculations
viii. The time value of options and guarantees is calculated using economic and non-economic assumptions consistent
with those used for the deterministic embedded value calculations.
A single model has been used for UK and international business, with different economic assumptions for each territory
reflecting the significant asset classes in each territory.
Government nominal interest rates are generated using a LIBOR Market Model projecting full yield curves at annual
intervals. The model provides a good fit to the initial yield curve.
The total annual returns on equities and property are calculated as the return on 1 year bonds plus an excess return. The
excess return is assumed to have a lognormal distribution. Corporate bonds are modelled separately by credit rating using
stochastic credit spreads over the risk free rates, transition matrices and default recovery rates. The real yield curve
model assumes that the real short rate follows a mean-reverting process subject to two normally distributed random shocks.
The significant asset classes are:
- UK with-profits business - equities, property and fixed rate bonds of various durations;
- UK annuity business - fixed rate and index-linked bonds of various durations; and
- International business - fixed rate bonds of various durations.
The risk discount rate is scenario dependent within the stochastic projection. It is calculated by applying the
deterministic risk margin to the risk free rate in each stochastic projection.
European Embedded Value
107
5.08 Methodology
Basis of preparation
The supplementary financial information has been prepared in accordance with the European Embedded Value (EEV) Principles
issued in May 2004 by the European Insurance CFO Forum.
The supplementary financial information has been reviewed by PricewaterhouseCoopers LLP and prepared with assistance from
our consulting actuary Milliman in the USA.
Changes to accounting policy - IASB consolidation project
On 1st January 2014 the application of IFRS 10, 'Consolidated Financial Statements' became compulsory for entities
reporting in the EU.
IFRS 10, 'Consolidated Financial Statements' defines the principal of control and establishes control as the basis for
determining which entities are consolidated in the consolidated financial statements. This states that an investor controls
an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee. The application of IFRS 10 has resulted in the Group
consolidating a small number of investment vehicles which were not previously consolidated which impacted the gain
attributable to non-controlling interest.
As a result, the prior period disclosure in the Group embedded value summary and Note 5.05 have been restated to reflect
the adoption by the Group of IFRS 10, 'Consolidated Financial Statements'. The effect on amounts previously reported at 30
June 2013 and 31 December 2013 is shown below. Embedded value at 30 June 2013 and 31 December 2013 remains unaffected by
the
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