REG - Legal & General Grp - L&G Half-year results 2015 Part 1 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 2
05/08/2015 07:01
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LGR 170 146
Insurance excluding General Insurance 135 144
Savings 64 64
LGA 52 44
LGC 92 82
Sub-total 513 480
LGIM 150 132
General Insurance 30 22
Operational cash generation from divisions 693 634
Group debt costs (60) (49)
Other costs (9) (7)
Total operational cash generation 624 578
New business surplus / (strain) 5 (11)
Net cash generation 629 567
The table above is set out in the format of the cash guidance for 2015 given
at the time of the 2014 results announcement.
CLEAR VISIBILITY between cash generation and earnings
The table below highlights the linkage between the operational and net cash
generation of the business, and the profit of the Group.
Op Strain Net Variances Profit Tax Profit
Cash Cash and after before
£m other tax tax
LGR 170 22 192 39 231 49 280
Insurance 165 - 165 (13) 152 40 192
Savings 64 (5) 59 (19) 40 10 50
LGIM 150 (12) 138 (1) 137 39 176
- LGIM (excluding Workplace) 139 - 139 - 139 40 179
- Workplace Savings 11 (12) (1) (1) (2) (1) (3)
LGC 92 - 92 - 92 23 115
LGA 52 - 52 (34) 18 22 40
Operating profit from divisions 693 5 698 (28) 670 183 853
Group debt and other costs (69) - (69) (13) (82) (21) (103)
Operating profit 624 5 629 (41) 588 162 750
Investment and other variances - - - (41) (41) (37) (78)
Total 624 5 629 (82) 547 125 672
Per share 10.49 10.58 9.20
Dividend per share 3.45 3.45
IGD Capital resources
As at 30 June 2015 the Insurance Group's Directive (IGD) surplus was £3.8bn
(FY 2014: £3.9bn).
The Group's capital resources totalled £7.7bn, covering the capital resources
requirement of £3.9bn by 1.98 times. Profits generated in the first half of
2015 offset the repayment of E600m of Euro subordinated notes, classified as
Lower Tier 2 capital prior to redemption, resulting in a broadly flat IGD
surplus.
In LGPL, the Group's main annuity company, we maintain a provision of £2.3bn
(FY 2014: £2.3bn) to provide for the risk of credit default. Over the last
five years we have experienced total actual defaults of less than £10m.
Capital (£bn) H1 2015 FY 2014
Group capital resources 7.7 7.7
Group capital resources requirements 3.9 3.8
IGD surplus 3.8 3.9
Coverage ratio (%) 198 201
economic capital
Economic capital is the amount of capital that the Board believes the Group
needs to hold, over and above its liabilities, in order to meet the Group's
strategic objectives. These numbers do not represent our view of the Solvency
II outcome for the Group. Solvency II has elements which L&G considers to be
inconsistent with the Group's definition of economic capital, so there will be
differences between the two balance sheets. We expect the final outcome of
Solvency II to result in a lower Group capital surplus and solvency ratio than
the Economic Capital basis. Our Economic Capital model has not been reviewed
by the Prudential Regulatory Authority (PRA), nor will it be.
As at 30 June 2015 Legal & General Group had an economic capital surplus of
£6.4bn (FY 2014: £7.0bn), corresponding to an economic capital coverage ratio
of 220% (FY 2014: 229%).
Eligible own funds decreased by £0.7bn to £11.8bn (FY 2014: £12.5bn) primarily
as a result of the payment of the 2014 final dividend of £496m and the
repayment of E600m of subordinated debt in June 2015.
The economic capital requirement remained broadly flat at £5.4bn (FY 2014:
£5.5bn), with new business written in H1 2015 being marginally positive.
Capital (£bn) H1 2015 FY 2014
Eligible own funds 11.8 12.5
Economic capital requirement 5.4 5.5
Economic capital surplus 6.4 7.0
1-in-200 coverage ratio 220 229
Analysis of movement from 1 January to 30 June 2015 (£bn) Economic Capital surplus
Economic solvency position as at 1 January 2015 7.0
New business surplus 0.1
Existing business expected release 0.4
Subordinated debt redemption (0.5)
Dividends declared in the period (0.5)
Other capital movements (0.1)
Economic solvency position as at 30 June 2015 6.4
supplementary eev disclosure
EEV highlights (Pence) H1 2015 H1 2014
Equity per share including LGIM 211 196
Equity per share 184 166
Analysis of EEV results (£m) H1 2015 H1 2014
Contribution from new business 196 421
Expected return from in-force business 238 238
Experience variances and assumption changes 38 9
Development costs (9) (14)
Contribution from shareholder net worth 102 93
EEV operating profit on covered business 565 747
Business reported on an IFRS basis 107 103
EEV operating profit 672 850
Economic variances (55) 8
Gains attributable to non-controlling interests 8 6
EEV profit before tax 625 864
Tax and other (105) (145)
EEV profit after tax 520 719
New business contribution
Contribution from new business reduced to £196m (H1 2014: £421m) as a result
of lower new business for LGR, with H1 2014 benefitting from the £3bn bulk
annuity transaction with the ICI pension fund.
Worldwide EEV new business margin reduced to 3.9% (H1 2014: 5.4%) primarily
due to reduced new business margin in LGR of 7.2% (H1 2014: 8.4%). This is as
a consequence of increased levels of longevity reinsurance being used for new
bulk annuity business written.
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 TREND, OUTLOOK AND MITIGATION
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. 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. There also remains potential for
legislative intervention in the pricing of insurance products irrespective of risk factors, such as age or health. We undertake significant analysis of longevity and mortality risks to ensure an appropriate premium is charged for the risks we take on and
that our reserves remain appropriate. We remain focused on developing a comprehensive understanding of annuitant mortality and we continue to evolve and develop our underwriting capabilities. We seek to ensure that legislators understand the benefits to
consumers of pricing insurance products based on the risk factors that each policy presents.
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. Whilst global investment markets have returned to pre-financial crisis levels, in the current environment there is still limited resilience in financial markets for shocks; with potential for significant falls in asset values should markets reassess
returns. Factors of continuing uncertainty that may result in shocks include a deterioration in geo-political stability for example as a consequence of tensions in Eastern Europe and the Middle East; an abrupt change in the monetary policies of the
leading economies; or a further crisis in the Euro zone. Financial markets may also reappraise asset valuations as a result of changes in the outlook for the global economy. We model our business plans across a broad range of economic scenarios and take
account of alternative economic outlooks within our overall business strategy. As part of our business plans we have sought to ensure focus upon those market segments that we expect to be resilient in 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. In 2015 we have continued to see stable credit spreads reflecting market confidence in the issuers of investment grade bonds, and at Legal & General we continue to experience low levels of default on our corporate bond portfolio. There remains, however, a
range of factors that could trigger defaults by the issuers of debt, leading to reduced profitability or financial loss. These include a Sovereign debt event or a banking crisis developing, for example in emerging markets. An economic shock or significant
change in the current economic outlook may also increase potential for a supplier of business services being unable to meet their obligations to us. We actively manage our exposure to default risks, setting counterparty selection criteria and exposure
limits and hold reserves against our assessment of counterparty debt defaults. We 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.
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. The prominence of the risk increases where change is implemented without prior engagement with the sector. The nature of long term business can also result in some changes in regulation, and the re-interpretation of regulation over time, having a retrospective effect on our in force books of business, impacting the value of embedded future profits. The regulatory landscape continues to evolve. The Solvency II capital regime will be implemented by the PRA on 1 January 2016; however, the capital that we will be required to hold under the regime will not be certain until PRA agreement of our internal
model. We also continue to see the development of consumer regulation by the FCA including a focus on the way products have been designed and sold in the past. More broadly, as illustrated by the emergency budget in July, the government continues to evolve
its approach to retirement, with consultation proposed for a radical change to the pension savings system. We remain vigilant to the risk that future legislative and regulatory change may have unintended consequences for the sectors in which we operate.
We 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. We maintain a flexible business model to respond to changing regulation and market
trends.
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 regulatory actions in the sector, may impact consumer attitudes to long-term savings and insurance products. Regulatory actions may also lead to changes to the regulatory and legislative environment in which we operate. As a significant participant in the long-term savings and insurance 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
financial services sector. We actively manage our brand and seek to differentiate our business model from that of our competitors, focusing on our customers' needs through a diversified portfolio of risk, savings and investment businesses. We also
actively engage with our regulators to support understanding of the risk drivers in the markets in which we operate, and highlight matters where we believe the industry needs to change.
The Group may not maximise opportunities from structural and other changes within the financial services sector, adversely impacting future earnings.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. Macro trends in the markets in which we operate remain those of an ageing population; reform in the provision of state welfare; retrenchment by the banks; the globalisation of asset markets; and the increasing use of digital technologies. Responding to
these trends potentially creates people and change risks, such as organisational challenges and management stretch across the range of initiatives. Regulatory changes and political risks may also present complexity in delivering our responses. We've
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