REG - Legal & General Grp - L&G Half-year Report 2017 Part 3 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 2
09/08/2017 07:07
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(251.8) (244.0)
Third party assets3 (225.1) (234.7) (202.3)
Derivative liabilities 7.4 9.0 15.4
Other4 (8.0) 20.0 0.9
Total group financial investments and investment property 444.6 436.7 411.5
1. H1 16 and FY16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. Derivative notionals are included in the assets under management but not for IFRS reporting and are thus removed.
3. Third party assets are those that LGIM manage on behalf of others, for which the group does not have the risks or rewards and thus are not included on the IFRS balance sheet.
4. Other includes assets that are managed by third parties on behalf of the group and cash and broker balances.
Asset and premium flows
Page 69
3.05 Assets under administration
LGIM
Consol-
Mature idation Retail
Suffolk Retail adjust- Total Nethe- Work- Invest-
For the six months ended Platforms1 Life Savings2 ment3 Savings rlands place ments4 Annuities5
30 June 2017 £bn £bn £bn £bn £bn £bn £bn £bn £bn
At 1 January 2017 83.6 - 30.7 (4.9) 109.4 1.8 20.8 25.4 54.4
Gross inflows - - 0.4 - 0.4 - 3.4 2.4 2.0
Gross outflows - - (1.9) - (1.9) - (0.6) (1.6) -
Payments to pensioners - - - - - - - - (1.6)
Net flows - - (1.5) - (1.5) - 2.8 0.8 0.4
Market and other movements - - 1.0 - 1.0 - 1.3 1.3 0.8
Disposals1,7 (83.6) - - 4.9 (78.7) (1.8) - - -
At 30 June 2017 - - 30.2 - 30.2 - 24.9 27.5 55.6
LGIM
Consol-
Mature idation Retail
Suffolk Retail adjust- Total Nethe- Work- Invest-
For the six months Platforms1 Life Savings2 ment3 Savings rlands place ments4 Annuities5
ended 30 June 2016 £bn £bn £bn £bn £bn £bn £bn £bn £bn
As at 1 January 2016 76.9 8.6 29.6 (6.8) 108.3 1.6 14.7 22.6 43.4
Gross inflows1 2.2 0.5 0.5 (0.2) 3.0 0.1 2.3 3.0 4.0
Gross outflows (2.9) (0.3) (1.8) 0.3 (4.7) (0.1) (0.5) (3.2) -
Payments to pensioners - - - - - - - - (1.4)
Net flows (0.7) 0.2 (1.3) 0.1 (1.7) - 1.8 (0.2) 2.6
Market and other
movements 1.3 - 1.1 - 2.4 0.2 0.8 0.9 5.0
Disposals6 - (8.8) - 1.8 (7.0) - - - -
At 30 June 2016 77.5 - 29.4 (4.9) 102.0 1.8 17.3 23.3 51.0
LGIM
Consol-
Mature idation Retail
Suffolk Retail adjust- Total Nethe- Work- Invest-
For the year ended Platforms1 Life Savings2 ment3 Savings rlands place ments4 Annuities5
31 December 2016 £bn £bn £bn £bn £bn £bn £bn £bn £bn
At 1 January 2016 76.9 8.6 29.6 (6.8) 108.3 1.6 14.7 22.6 43.4
Gross inflows1 24.2 0.5 0.8 (0.1) 25.4 0.2 4.4 6.7 7.3
Gross outflows (25.5) (0.3) (3.8) 0.5 (29.1) (0.2) (1.1) (6.7) -
Payments to pensioners - - - - - - - - (3.0)
Net flows (1.3) 0.2 (3.0) 0.4 (3.7) - 3.3 - 4.3
Market and other movements 8.0 - 4.1 (0.3) 11.8 0.2 2.8 2.8 6.7
Disposals6 - (8.8) - 1.8 (7.0) - - - -
At 31 December 2016 83.6 - 30.7 (4.9) 109.4 1.8 20.8 25.4 54.4
1. Prior period platforms gross inflows
included Cofunds institutional net flows. At
31 December 2016 Platforms comprised £39.4bn
(30 June 2016: £37.2bn) of retail assets and
£44.2bn (30 June 2016: £40.3bn) of assets held
on behalf of institutional clients. At 31
December 2016 platforms AUA comprised ISAs:
£21.4bn (30 June 2016: £20.1bn); onshore bonds
£2.8bn (30 June 2016 £2.8bn); offshore bonds
£0.1bn (30 June 2016 £0.1bn); platform SIPPs
£3.9bn (30 June 2016 £3.6bn) and non-wrapped
funds £54.0bn (30 June 2016 £49.5bn).
Platforms was sold in January 2017 to Aegon as
part of the sale of Cofunds.
2. Mature Retail Savings products include with
-profits products, bonds and retail pensions.
3. Consolidation adjustment represents Suffolk
Life and Mature Retail Savings assets included
in the Platforms column.
4. Retail Investments include £2.4bn (30 June
2016: £1.8bn) of LGIM unit trust assets held
on the Cofunds platform and £3.7bn (30 June
2016: £3.4bn) of LGIM unit trust assets held
on the IPS platform. The Cofunds and IPS
platforms were sold in January 2017.
5. Annuities exclude LGRe and LGA assets.
6. Suffolk Life was sold on 25 May 2016 to
Curtis Banks Group plc.
7. Legal & General Netherlands was sold on 6
April 2017 to Chesnara Plc.
Asset and premium flows
Page 70
3.06 Assets under administration half-yearly progression
LGIM
Consol-
Mature idation Retail
Suffolk Retail adjust- Total Nether- Work- Invest-
For the year ended Platforms1,2 Life Savings3 ment4 Savings lands place ments5 Annuities6
31 December 2016 £bn £bn £bn £bn £bn £bn £bn £bn £bn
At 1 January 2016 76.9 8.6 29.6 (6.8) 108.3 1.6 14.7 22.6 43.4
Gross inflows1 2.2 0.5 0.5 (0.2) 3.0 0.1 2.3 3.0 4.0
Gross outflows (2.9) (0.3) (1.8) 0.3 (4.7) (0.1) (0.5) (3.2) -
Payments to pensioners - - - - - - - - (1.4)
Net flows (0.7) 0.2 (1.3) 0.1 (1.7) - 1.8 (0.2) 2.6
Market and other movements 1.3 - 1.1 - 2.4 0.2 0.8 0.9 5.0
Disposals7 - (8.8) - 1.8 (7.0) - - - -
At 30 June 2016 77.5 - 29.4 (4.9) 102.0 1.8 17.3 23.3 51.0
Gross inflows1 22.0 - 0.3 0.1 22.4 0.1 2.1 3.7 3.3
Gross outflows (22.6) - (2.0) 0.2 (24.4) (0.1) (0.6) (3.5) -
Payments to pensioners - - - - - - - - (1.6)
Net flows (0.6) - (1.7) 0.3 (2.0) - 1.5 0.2 1.7
Market and other movements 6.7 - 3.0 (0.3) 9.4 - 2.0 1.9 1.7
At 31 December 2016 83.6 - 30.7 (4.9) 109.4 1.8 20.8 25.4 54.4
1. Platforms gross inflows include Cofunds institutional net flows. Total 2016 Platforms comprise £39.4bn (30 June 2016: £37.2bn) of retail assets and £44.2bn (30 June 2016: £40.3bn) of assets held on behalf of institutional clients.
2. Platforms AUA comprise ISAs: £21.4bn (30 June 2016: £20.1bn); onshore bonds £2.8bn (30 June 2016 £2.8bn); offshore bonds £0.1bn (30 June 2016 £0.1bn); platform SIPPs £3.9bn (30 June 2016 £3.6bn) and non-wrapped funds £54.0bn (30 June 2016 £49.5bn).
3. Mature Retail Savings products include with-profits products, bonds and retail pensions.
4. Consolidation adjustment represents Suffolk Life (until disposal) and Mature Retail Savings assets included in the Platforms column.
5. At 31 December 2016 Retail Investments included £2.4bn (30 June 2016: £1.8bn) of LGIM unit trust assets held on our Cofunds platform and £3.7bn (30 June 2016: £3.4bn) of LGIM unit trust assets held on our IPS platform.
6. Annuities exclude LGRe and LGI US assets.
7. Suffolk Life was sold on 25 May 2016 to Curtis Banks Group plc.
Asset and premium flows
Page 71
3.07 LGR new business
6 6 6
months months months
to to to
30.06.17 31.12.16 30.06.16
£m £m £m
Backbook acquisitions - - 2,945
Pension risk transfer
- UK 1,504 2,698 640
- USA 115 302 45
Individual Annuities 345 220 158
Lifetime Mortgage Advances 424 389 231
Longevity Insurance1 800 900 -
Total LGR new business 3,188 4,509 4,019
1. The H1 17 value represents a reinsured longevity insurance deal transacted in June 2017. The figure quoted represents the notional size of the transaction and is based on the present value of the fixed leg cash flows discounted at the LIBOR curve. The first year's fixed cash flow is £33.8m.
3.08 Insurance new business
6 6 6
months months months
to to to
30.06.17 31.12.16 30.06.16
£m £m £m
UK Retail Protection 86 88 82
UK Group Protection 28 22 36
Netherlands Protection 1 2 2
US Protection 38 34 28
Total Insurance new business 153 146 148
3.09 Gross written premiums on Insurance business
6 6 6
months months months
to to to
30.06.17 31.12.16 30.06.16
£m £m £m
UK Retail Protection 609 597 582
UK Group Protection 224 100 233
General Insurance 173 170 156
Netherlands Protection 14 27 25
US Protection 491 477 420
Longevity Insurance 175 160 161
Total gross written premiums on insurance business 1,686 1,531 1,577
Asset and premium flows
Page 72
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Capital and Investments
Page 73
4.01 Group regulatory capital - Solvency II Directive
From 1 January 2016, the group has been required to comply with the requirements established by the Solvency II Framework
Directive, as adopted by the Prudential Regulation Authority (PRA) in the UK and to measure and monitor its capital
resources on this basis.
The Solvency II results are estimated. Further explanation of the underlying methodology and assumptions is set out in the
sections below.
In December 2015, the group received approval to calculate its Solvency II capital requirements using a Partial Internal
Model (together with the approval by the PRA in December 2016 of an application for major model change). The vast majority
of the risk to which the group is exposed is assessed on the Internal Model basis approved by the PRA. Capital requirements
for a handful of 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 of the group's application to use
the Deduction and Aggregation method of including these businesses in the group solvency calculation.
The table below shows the estimated group Own Funds, Solvency Capital Requirement and Surplus Own Funds of the group, based
on the Partial Internal Model, Matching Adjustment and Transitional Measures on Technical Provisions, including a
management estimate of the recalculated Transitional Measures for Technical Provisions (Estimated TMTP) at end June 2017 as
we believe this provides the most up to date and meaningful view of our Solvency II position. In line with PRA guidance, a
formal recalculation of the Group's TMTP will take place no later than 1 January 2018.
(a) Capital position
As at 30 June 2017 the group had a Solvency II surplus of £6.7bn (FY 16: £5.7bn) over its Solvency Capital Requirement, corresponding to a coverage ratio on a "shareholder view" basis of 186% (31 December 2016: 171%). The shareholder view of the Solvency II capital position is as follows:
30.06.17 31.12.16
£bn £bn
Core tier 1 Own Funds 11.6 11.0
Tier 1 subordinated liabilities1 - 0.6
Tier 2 subordinated liabilities2 3.1 2.1
Eligibility restrictions (0.2) (0.1)
Own Funds3,4 14.5 13.6
Solvency Capital Requirement (SCR) (7.8) (7.9)
Solvency II surplus 6.7 5.7
SCR coverage ratio5 186% 171%
1. Tier 1 subordinated liabilities of £0.6bn were repaid on 2 May 2017.
2. Tier 2 subordinated liabilities include $1.35bn of USD subordinated notes issued in 2017.
3. Own Funds do not include an accrual for the dividend of £256m (FY 16: £616m) declared after the balance sheet date.
4. Own Funds include risk margin of £6.1bn (FY 16: £6.4bn) and Estimated TMTP of £6.3bn (FY 16: £7bn).
5. Coverage ratio uses unrounded inputs.
The "shareholder view" basis excludes the SCR for the with-profits fund and the final salary pension schemes from both Own
Funds and SCR. On a proforma basis the coverage ratio at 30 June 2017 would have been 180% (31 December 2016: 165%).
(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 fundability 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. This incorporates changes to the Internal Model and Matching Adjustment between
June 2016 and June 2017 and the estimated impacts of a recalculation of the TMTP (Estimated TMTP) recalculated based on end
June 2017 economic conditions as we believe this provides the most up to date and meaningful view of our Solvency II
position. The Estimated TMTP of £6.3bn (FY 16: £7.0bn) has been amortised to 30 June 2017.
The liabilities include a Risk Margin of £6.1bn (FY 16: £6.4bn) which represents an allowance for the cost of capital for a
purchasing insurer taking on the portfolio of liabilities and residual risks that are deemed to be not hedgeable under
Solvency II, following the 1-in-200 stress event. 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.
Capital and Investments
Page 74
4.01 Group regulatory capital - Solvency II Directive (continued)
(b) Methodology (continued)
All material EEA insurance firms, including Legal & General Assurance Society Limited (the Society), Legal & General
Insurance Limited, and Legal & General Assurance (Pensions Management) Limited (LGIM's insurance subsidiary) 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 96% of the group's SCR.
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 group 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 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 RBC Capital Adequacy Level (CAL). The contribution to
group's Own Funds is the SCR together with any surplus capital in excess of 250% of RBC CAL.
All non-insurance regulated firms are included using their current regulatory surplus.
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 result position using the same Internal Model basis
as for the insurance firms.
(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 a 16 basis points (FY 16: 17 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 the Society and LGRe and by the currency of the relevant
liabilities.
At 30 June 2017 the Matching Adjustment for UK GBP was 115 basis points (31 December 2016: 124 basis points) after
deducting an allowance for the EIOPA fundamental spread equivalent to 54 basis points (31 December 2016: 58 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.
Capital and Investments
Page 75
4.01 Group regulatory capital - Solvency II Directive (continued)
(d) Analysis of change
The table below shows the movement (net of tax) during the financial year in the
group's Solvency II surplus.
30.06.17 31.12.16
surplus surplus
£bn £bn
Surplus arising from back-book (including release of SCR) 0.6 1.2
Release of Risk Margin1 0.2 0.3
Amortisation of TMTP2 (0.2) (0.3)
Operational Surplus Generation3 0.6 1.2
New Business Strain (0.1) (0.1)
Net Surplus Generation 0.5 1.1
Dividends paid4 (0.6) (0.8)
Operating variances5 0.4 0.2
M&A6 0.1 -
Market movements7 0.1 (0.3)
Subordinated debt8 0.5 -
Total Surplus movement (after dividends paid in the period) 1.0 0.2
1. Based on the risk margin in force at end 2016 and does not include the release of
any risk margin added by new business written in 2017.
2. TMTP amortisation based on a linear run down of the end-2016 TMTP of £5.9bn (net
of tax, £7bn before tax) which was management's estimate of the TMTP on end-2016
market conditions.
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
H1 17 these are to deliver further eligible assets and liabilities into the Matching
Adjustment portfolio in respect of a small amount of pension risk transfer business,
an increase in direct investments allocation to the annuity back-book and amendments
of certain FX hedging activities in the LGR portfolio.
4. Dividends paid are the amounts from the 2016 final dividend declaration paid in H1
17 (FY 16: 2015 final and 2016 interim dividend declarations).
5. Operating variances include the impact of experience variances, changes to
valuation and capital calibration assumptions, changes to planned volumes of new
business, tax rate changes, PRA approval of changes to the Internal Model and
Matching Adjustment and other management actions including changes in asset mix,
hedging strategies, Matching Adjustment optimisation and update to the longevity
assumptions.
6. M&A reflects sale of Cofunds and LGN.
7. Market Movements is the impact of changes in investment market conditions over the
period and changes to future economic assumptions. It also includes the capital
impact of investment portfolio changes implemented by LGC. Market movements for June
2017 include a reduction to the Risk Margin of £0.2bn (net of tax), offset by
management's estimate of a decrease in the
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