REG - Legal & General Grp - L&G Half Year Results 2016 Part 1 <Origin Href="QuoteRef">LGEN.L</Origin> - Part 2
09/08/2016 07:05
- Part 2: For the preceding part double click ID:nRSI5862Ga
June 2016 77.5 29.4 (4.9) 102.0 -
Our Platforms business net flows of £(0.7)bn (H1 2015: £1.1bn). Assets under
administration (AUA) increased to £77.5bn (H1 2015: £74.6bn).
Whilst our platform pension AUA has grown in H1 2016, we have seen outflows
increase mainly through partial encashment as customers withdraw money for
income and other purposes. In Mature Savings, assets were £29.4bn (H1 2015:
£34.8bn). Mature Savings net outflows have improved year on year due to
improved retention of our books and in our With-Profits business due to the
reducing maturity profile of some products, particularly Endowments.
FREEDOM AND CHOICE
Since the introduction of the Pensions Reform legislation we have seen an
increase in the proportion of customers wishing to take their pension pots as
cash withdrawals, with approximately 90%, or 27,000 customers, electing to
take cash payments. Our average payment size is £11k. This compares to
approximately 60% of customers taking cash before the reform legislation was
announced.
LEGAL & GENERAL AMERICA
FINANCIAL HIGHLIGHTS $m H1 2016 H1 2015
Operational cash generation 88 80
Operating profit 62 61
Gross premium income 601 588
New business sales (APE) 41 62
improved cash generation
Operational cash generation increased by 10% to $88m (H1 2015: $80m). This
represents the dividends paid by Legal & General America (LGA) to the Group
and reflects the focus of LGA to deliver operational cash generation.
Operating profit was $62m (H1 2015: $61m) in spite of the ongoing low interest
rate environment reflecting continued growth in premium revenue.
Gross premium revenue increased 2% to $601m (H1 2015: $588m) and continues to
benefit from strong relationships with the brokerage general agents, (BGAs),
who distribute term assurance in the US market. LGA is the 10th largest
provider of term life assurance, by annual premium equivalent, in the US and
remains the 3rd largest provider through the key distribution channel of BGAs.
LGA now has 1.22m policies (H1 2015: 1.18m).
new business focus on margin improvement
New business volumes were $41m (H1 2015: $62m). LGA continues to focus on
increasing margins and sustaining strong cash generation to the Group. New
business volumes for H2 2016 are expected to be broadly consistent with H2
2015 of $44m.
Facilitating US Pension risk transfer (PRT) Business
LGA is important to the expansion of the Group in the US and will continue to
provide the regulatory balance sheet, administrative services and payments to
annuitants for LGR America and back office support for LGIM America.
borrowings
Legal & General continues to have a strong liquidity position reflecting its
requirements for working capital and derivative collateral. The Group's
outstanding core borrowings total £3.1bn (FY 2015: £3.1bn). There is also a
further £0.4bn (FY 2015: £0.5bn) of operational borrowings including £0.2bn
(FY 2015: £0.6bn) of non-recourse borrowings.
Group debt costs of £86m (H1 2015: £75m) reflect an average cost of debt of
5.4% per annum (H1 2015: 5.1% per annum) on average nominal value of debt
balances of £3.2bn (H1 2015: £3.0bn).
taxation - effective tax rate of 19.2%
Equity holders' Effective Tax Rate (%) H1 2016 H1 2015
Equity holders' total Effective Tax Rate 19.2 18.6
Annualised rate of UK corporation tax 20.00 20.25
In H1 2016, the Group's effective tax rate remained slightly below the UK
corporation tax rate due to a number of differences between the measurement of
accounting profit and taxable profits.
Trading losses within Legal & General Pensions Limited, which previously
benefitted both LGR and Insurance, were fully utilised in 2015.
operational and net CASH GENERATION
The table below is set out in the format of the operational cash generation
guidance for 2016 given at the time of the 2015 results announcement. Net cash
generation increased by 16%. This includes the full year ordinary dividend of
$88m from LGA which was received in Q1 2016.
Updated
£m H1 2016 H1 2015 2016 FY guidance
LGR 205 171
Insurance excluding General Insurance 134 131
Savings 51 67
LGA 61 52
LGC 113 92
Sub-total (on which we provide guidance) 564 513 + c.5%
LGIM 145 150
General Insurance 25 30
Operational cash generation from divisions 734 693
Group debt costs (69) (60)
Other costs (10) (9)
Total operational cash generation 655 624
New business surplus 72 5
Net cash generation 727 629
The revised operational cash generation guidance above, for FY 2016, reflects
a higher proportion of cash and cash equivalents assets in the LGC portfolio
than anticipated at the time of our FY 2015 results.
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 Gen Gen other tax tax
LGR 205 79 284 50 334 72 406
LGIM 145 (11) 134 - 134 37 171
- LGIM (excluding Workplace) 136 - 136 - 136 38 174
- Workplace Savings 9 (11) (2) - (2) (1) (3)
LGC 113 - 113 - 113 22 135
Insurance 159 7 166 (56) 110 28 138
Savings 51 (3) 48 (9) 39 10 49
LGA 61 - 61 (43) 18 25 43
Operating profit from divisions 734 72 806 (58) 748 194 942
Group debt and other costs (79) - (79) (17) (96) (24) (120)
Adjusted operating profit 655 72 727 (75) 652 170 822
Kingswood closure costs - - - (36) (36) (9) (45)
Operating profit 655 72 727 (111) 616 161 777
Investment and other variances - - - 51 51 (2) 49
Total 655 72 727 (60) 667 159 826
Per share 10.95 12.21 11.21
Dividend per share 4.00 4.00
SOLVENCY II
As at 30 June 2016 the Group had an estimated Solvency II surplus of £5.3bn
over its Solvency capital requirement, corresponding to a Solvency II coverage
ratio of 158%.
Capital (£bn) 1 H1 2016 FY 2015
Group capital resources 14.3 13.5
Group capital resources requirements (9.0) (8.0)
Surplus 5.3 5.5
SCR Coverage ratio (%) 158% 169%
1. Solvency II position on a proforma basis as at 30 June 2016 and before the
accrual of the interim dividend.
Analysis of movement from 1 January to 30 June 2016 (£bn) Solvency II surplus
Solvency II surplus as at 1 January 2016 5.5
Operating experience expected release 0.5
Operating experience new business -
Market movements (0.6)
Other capital movements 0.5
Dividends declared in the period (0.6)
Solvency II surplus as at 30 June 2016 5.3
When stated on a shareholder basis, excluding the SCR attributable to our
With-Profits fund of £651m from both the Group's eligible own funds and the
SCR, the Group's coverage ratio increases to 163%.
estimated solvency II new business contribution
Following our decision to discontinue European Embedded Value reporting, we
committed to provide the market with a replacement measure of new business
profitability under the new Solvency II regime.
The "Solvency II Value Metric" provides a measure of the value created in the
business allowing for the run-off of Solvency II capital. The Value Metric
essentially follows the principles of the EEV, but assumes profit emergence
based on a Solvency II basis instead of the previous Solvency I Pillar 1
regime. Other methodologies are unchanged.
Management estimates of the value of new business and the margin as at H1 2016
are shown below:
Contribution from
PVNBP new business Margin %
LGR1 (£m) 3,743 382 10.2
UK Insurance Total (£m) 727 81 11.1
- Individual protection 565 69 12.2
- Workplace health and protection 162 12 7.4
LGA ($m) 435 54 12.4
1. UK annuity business.
Key assumptions in calculating the Solvency II new business contribution are
shown below:
Risk margin 3.5%
Risk free rate
- UK 1.1%
- US 1.3%
Risk discount rate (net of tax)
- UK 4.6%
- US 4.8%
Long term rate of return on non-profit annuities in LGR 3.2%
All other assumptions and methodologies that would have a material impact on
the margin for these contracts are unchanged from end 2015 other than the cost
of currency hedging which has been updated to reflect current market
conditions and hedging activity in light of Solvency II.
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. Our Economic Capital model is not subject to review or
approval by the Prudential Regulatory Authority (PRA).
As at 30 June 2016 Legal & General Group had an economic capital surplus of
£8.1bn (FY 2015: £7.6bn), corresponding to an economic capital coverage ratio
of 235% (FY 2015: 230%).
Eligible own funds increased by £0.5bn to £14.0bn (FY 2015: £13.5bn). The
economic capital requirement was £5.9bn (FY 2015: £5.9bn).
Capital (£bn) H1 2016 2015
Eligible own funds 14.0 13.5
Economic capital requirement (5.9) (5.9)
Economic capital surplus 8.1 7.6
Coverage ratio (%) 235 230
Analysis of movement from 1 January to 30 June 2016 (£bn) Economic Capital surplus
Economic solvency position as at 1 January 2016 7.6
Operating experience expected release 0.5
Operating experience new business 0.2
Market movements 0.1
Other capital movements 0.3
Dividends declared in the period (0.6)
Economic solvency position as at 30 June 2016 8.1
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 and our assessment of capital requirements 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, valuation interest rates, expenses and credit defaults. Actual experience may result in the need to recalibrate these assumptions reducing profitability. Management estimates are also required in the derivation of Solvency II capital metrics. These include modelling simplifications to reflect that it is not possible to perfectly model the external environment, with adjustment necessitated where new data emerges. Forced changes in reserves can also arise from regulatory or legislative intervention in the way that products are priced, reducing profitability and future earnings. We undertake significant analysis of the variables associated with writing long-term insurance business to ensure that a suitable premium is charged for the risks we take on, and that reserves continue to remain appropriate. Certain extreme events,
however, could require us to adjust our reserves. For example in our annuities business, while recent trend data suggests the rate of longevity improvement may be slowing, we are inherently exposed to the risk that a dramatic advance in medical science
beyond that anticipated leads to an unexpected change in life expectancy. This could require adjustment to reserves as improvements in mortality emerged. In our protection businesses, the emergence of new factors with potential to cause widespread
mortality / morbidity or significant policy lapse rates may similarly require us to re-evaluate reserves. To mitigate these risks we remain focused on developing a comprehensive understanding of longevity science and continue to evolve and develop our
underwriting capabilities for protection business. Our selective use of reinsurance also acts to reduce the impacts of these risk factors.
Investment market performance and conditions in the broader economy may adversely impact earnings, profitability or surplus capital. 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, with the movement in certain investments directly impacting profitability. Interest rate movements 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. Interest rate expectations leading to falls in the risk free yield curve can also create a greater degree of inherent volatility to be managed in the Solvency II balance sheet, than the underlying economic position would dictate, potentially impacting capital requirements and surplus capital. 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. During the first half of 2016, we have seen volatility in financial markets as they have responded to uncertainties in the global economy and more recently to the outcome of the UK referendum on membership of the EU. For Legal & General the vote to leave
has little direct impact on trading, as our customer base is located very largely in the UK, the US and Asia. It is, however, probable that a potentially lengthy period of negotiation and an uncertain outcome will create on-going uncertainty for financial
markets and the broader UK economy in which we operate; with potential for asset price shifts should markets reappraise their value in the light of uncertainties. Whilst the monetary policies of leading economies now look set to remain loose, with a
further sustained period of low interest rates, potential exists for renewed financial stress in Europe driven by political uncertainty and residual weaknesses in the Euro currency banking systems. Broader geo-political events also have potential to cause
shocks to financial markets, with on-going illiquidity in bond markets having potential to exaggerate the impacts of any significant market corrections. Overall, we seek as part of our business planning activity to model a broad range of economic and
financial market scenarios so as to ensure our strategies remain resilient; however, it is not possible to completely remove risk from external market and economic factors.
In dealing with issuers of debt and other types of counterparty the group is exposed to the risk of financial loss. A systemic default event within the corporate sector, or a major sovereign debt event, could result in dislocation of bond markets, significantly widening credit spreads with consequential impacts on the value of our bond portfolios, 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. Under Solvency II, a widespread widening of credit spreads and downgrades can also result in a reduction in our Solvency II balance sheet surplus, despite already setting aside significant capital for credit risk. Any deterioration in economic conditions inherently increases default risks, which in turn may impact our Solvency II balance sheet surplus. Current risk factors include the changing global economic outlook with uncertainties following the UK referendum on
EU membership potentially exacerbating down side risks, a renewed banking crisis within the Euro zone area and default on debt linked to commodity markets. We continue to actively manage our exposure to default risks within our bond portfolios, setting
selection criteria and exposure limits, and using the capabilities of LGIM's global credit team to ensure the risks are effectively controlled, and if appropriate traded out to improve credit quality. We also seek to closely manage risks to our Solvency
II balance sheet through monitoring factors that could give rise to a heightened level of default risk. We continue to diversify the asset classes backing our annuities business, investing in real assets and property lending investments, continuing to be
highly selective in the counterparties with which we will deal. However, we can never completely eliminate default risks or their impacts to our Solvency II balance sheet, although we seek to hold a strong balance sheet that we believe to be prudent for a
range of adverse scenarios.
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, taxation and distribution of our products; and the prudential capital that we hold. Significant changes in legislation or regulation may increase our cost base, reduce our future revenues and impact 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 future cash generation. There remains a significant regulatory change agenda, both from the EU and from within the UK. Current changes in EU driven regulation include UCITS V, MIFID II and PRIIPS. While over the longer term, "Brexit" will potentially lead to a re-writing of some
elements of the financial services legislation applicable to UK businesses, until the UK formally exits the EU
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