Legal & General Group PLC Preliminary Results 2013
Stock Exchange Release
05 March 2014
NET CASH UP 16% TO £1BN. DIVIDEND UP 22%.
net cash dividend cover towards 1.5 in two years.
FINANCIAL HIGHLIGHTS - CONTINUED STRONG PERFORMANCE:
· NET CASH GENERATION UP 16% TO £1,002M (2012: £865M)
· OPERATIONAL CASH GENERATION UP 9% TO £1,042M (2012: £958M)
· OPERATING PROFIT UP 7% TO £1,158M (2012: £1,087M)
· PROFIT BEFORE TAX UP 10% TO £1,134M (2012: £1,033M)
· PROFIT AFTER TAX UP 12% TO £896M (2012: £798M)
· EARNINGS PER SHARE UP 10% TO 15.20P (2012: 13.84P)
· RETURN ON EQUITY 16.1% (2012: 15.4%)
· FULL YEAR DIVIDEND UP 22% TO 9.30P PER SHARE (2012: 7.65P PER SHARE)
· NET CASH DIVIDEND COVER TOWARDS 1.5 IN TWO YEARS
Nigel Wilson, Group Chief Executive, said:
"Disciplined investment in growth, effective management and rigorous cost control has enabled us to more than triple net cash since the financial crisis: it has grown from £320m in 2008 to £1,002m in 2013. We have grown dividends again by over 20% and due to the strength of the business intend to move dividend cover from 1.8 towards 1.5 times over the next two years.
Legal & General moved up another gear in 2013, delivering record financial results and accelerating growth across all areas. Net inflows were £17bn including £9bn in LGIM and £8bn into Cofunds. LGIM now has £450bn of AUM, and Cofunds, with £64bn of assets is the UK's largest Savings platform. Annuity premiums grew by 78% to over £4bn, protection gross premiums were over £1.3bn, and we intermediated £28bn of mortgages. We successfully completed four acquisitions in 2013 and have announced a further acquisition in 2014.
We have delivered significant outperformance during lean economic times and are building momentum as the economy recovers. We now have over 10 million customers who we provide with good quality, good value products and excellent service, including through the recent floods.
Our business has continued to perform strongly in the first two months of 2014 but external risks to the broader economy and markets remain. There is inherent uncertainty as the 'monetary methadone' of QE is withdrawn, and the possibility of further 'butterfly-wing' effects for emerging markets and the Eurozone. The single largest risk to economic progress remains the persistent backdrop of political and regulatory uncertainty, which could undermine the confidence of businesses to invest for long-term growth in the UK. As the largest institutional investor in the UK we are front and centre in delivering the steady, stable investment in debt, equity and physical infrastructure required for recovery."
FINANCIAL SUMMARY
Financial highlights |
2013 |
2012 |
Growth % |
£m |
|
|
|
Analysis of operating profit1 |
|
|
|
Legal & General Retirement |
310 |
281 |
10 |
Legal & General Investment Management |
304 |
272 |
12 |
Legal & General Assurance Society |
444 |
462 |
(4) |
Legal & General Capital |
179 |
163 |
10 |
Legal & General America |
92 |
99 |
(7) |
Operating profit from divisions |
1,329 |
1,277 |
4 |
Group debt costs |
(127) |
(127) |
- |
Investment projects and expenses |
(44) |
(63) |
30 |
Operating profit |
1,158 |
1,087 |
7 |
Investment and other variances (incl. minority interests) |
(24) |
(54) |
56 |
Profit before tax |
1,134 |
1,033 |
10 |
|
|
|
|
Operational cash generation |
1,042 |
958 |
9 |
New business strain |
(40) |
(93) |
57 |
Net cash generation1 |
1,002 |
865 |
16 |
LEGAL & GENERAL RETIREMENT (LGR)
£bn |
2013 |
2012 |
Growth % |
Annuity assets |
34.4 |
32.2 |
7 |
Longevity insurance premiums (£m) |
212 |
70 |
203 |
Annuity premiums2 |
4.1 |
2.3 |
78 |
Annuity net inflows |
2.1 |
0.6 |
250 |
LEGAL & GENERAL INVESTMENT MANAGEMENT (LGIM)
£bn |
2013 |
2012 |
Growth % |
Assets under management3 |
450 |
406 |
11 |
Gross external inflows |
52.0 |
37.1 |
40 |
Net external inflows |
9.3 |
5.3 |
75 |
LEGAL & GENERAL ASSURANCE SOCIETY (LGAS)
£m |
2013 |
2012 |
Growth % |
UK Protection gross premiums |
1,326 |
1,268 |
5 |
General Insurance gross premiums |
375 |
349 |
7 |
UK Protection new business annual premiums |
218 |
221 |
(1) |
Savings assets (£bn)4 |
109 |
55 |
98 |
Savings net flows (£bn) |
6.8 |
0.1 |
n/a |
LEGAL & GENERAL CAPITAL (LGC)
£bn |
2013 |
2012 |
Growth % |
Assets under management |
4.7 |
4.7 |
- |
LEGAL & GENERAL AMERICA (LGA)
$m |
2013 |
2012 |
Growth % |
Gross premiums |
1,024 |
922 |
11 |
New business sales |
155 |
142 |
9 |
1. Operating profit and net cash generation are defined below in this announcement.
2. 2013 Annuity premiums exclude £270m of new business annual premium equivalent from longevity insurance.
3. LGIM assets under management include £34bn (2012: £32bn) managed on behalf of LGR and £38bn (2012: £38bn) managed on behalf of LGAS Savings.
4. 2013 Savings assets include £40bn of additional assets acquired as part of the purchase of Cofunds in May 2013.
STRATEGIC EXECUTION DRIVING STRONG PERFORMANCE
In 2013 the Group continued to execute on its clear and focused strategy based on five key macro trends: ageing populations; globalisation of asset markets; welfare reform; digital lifestyles and retrenching banks. In response to these trends we have five strategic responses: Retirement Solutions; LGIM international expansion; Protection; Digital Solutions and Direct Investments. Delivering on this strategy through strong organic growth, in addition to a selective, disciplined approach to acquisitions, will drive growth in our cash and earnings.
As a result of delivering on the Group's strategy net cash generation increased by 16% to £1,002m (2012: £865m) through increased operational cash generation, up 9% to £1,042m (2012: £958m) and an improved new business strain of £(40)m (2012: £(93)m). This cash generation is predictable and high quality with 88% (2012: 87%) of net cash generated paid as dividends to the Group.
Operating profit increased by 7% to £1,158m (2012: £1,087m), reflecting the growth in net cash generation, enabling us to deliver earnings per share up 10% to 15.20 pence (2012: 13.84 pence) and a return on equity of 16.1% (2012: 15.4%).
General outlook:
Our view is that UK and US real GDP will grow by around 3% and that the Bank of England is unlikely to raise the Bank Rate in 2014. However, structural issues in the economy remain, for example low productivity levels, low real wage growth and sizeable government deficits, together with regulatory uncertainty. Macro economic policy responses since the 2008 crisis have contributed to a significant rise in equity markets, bond values and house prices. Since 2008 we have demonstrated resilience to macro economic impacts and believe the comparative strength of our balance sheet and risk management capabilities position us well.
We expect the growth in our business which has been driven by the five key macro trends to continue in 2014 and beyond. This will be complemented by a continued focus on operational efficiency to ensure we maintain attractive returns and allow our growth businesses to invest in these opportunities.
Retirement Solutions
In Retirement Solutions, despite a competitive market, we continued to see strong demand for our Defined Benefit (DB) pension de-risking solutions, defined contribution proposition and individual annuity products. LGR completed £2.8bn of bulk annuity premiums, up 180% on 2012, across a broad range of solutions, and three longevity insurance contracts covering a total of £5.0bn of liabilities. External net inflows into LGIM's Liability Driven Investment (LDI) and Active Fixed Income capabilities were up 154% to £9.4bn. Individual annuity premiums were £1.3bn (2012: £1.3bn), an excellent performance in the context of an overall decline in the market of 15%. In LGAS, assets on our Workplace platform increased 45% to £8.7bn.
Outlook:
We expect growth in 2014 to be driven by our bulk annuity and longevity insurance pension scheme de-risking solutions. The combination of higher equity markets and rising interest rates are helpful for schemes to de-risk and we have a strong quote pipeline of bulk purchase annuity deals. We expect the Individual Annuity market to remain subdued for at least the first half of 2014 and expect continued regulatory focus on this market. We will continue to exercise pricing discipline across all areas of our annuity and longevity insurance propositions.
Our Workplace Savings proposition will continue to grow as employers with 59 to 499 eligible employees auto enrol during the year. We continue to invest in the business to secure further scheme auto enrolees and deliver the necessary cost efficiencies to convert our increasing scale into profitability over the next few years.
LGIM International Expansion
LGIM's International expansion accelerated as net inflows more than doubled to £15.7bn (2012: £7.8bn), helped by strong demand for LGIM America's LDI and Active Fixed Income capabilities, where net inflows were $7.8bn (2012: $5.2bn). LGIM's international assets under management were up 37% to £59bn (2012: £43bn). In total LGIM AUM increased by 11% to £450bn (2012: £406bn).
Outlook:
LGIM's International expansion has started the year well and we expect the strong demand for our Index, Liability Driven Investment and Active Fixed Income capabilities experienced in 2013 to continue in 2014. To build on LGIM's international capability, in February 2014 we acquired Global Index Advisors (GIA), subject to Fund shareholder approval. GIA is an Atlanta-based investment adviser to $15.6bn of assets focused on index target date funds. We expect LGIM's international net inflows to accelerate, and over time for maturing UK DB net outflows to be offset by growth in retail and DC.
Protection
In Protection, each of our businesses continued to grow. UK protection gross premiums were up 5% to £1.3bn as our market leading business continued to grow market share. General Insurance premiums were up 7% to £375m and underwriting discipline, improved claims handling processes and more benign weather despite the December floods supported an improved combined operating ratio of 84% (2012: 95%). In LGA, continued growth in our distribution reach increased premiums by 11% to $1,024m.
Outlook:
The strong momentum with which Retail Protection finished the year has continued into 2014. Our mortgage network and market leading presence with banks and building societies positions us well to benefit from the projected growth in the housing market. We continue to see a strong pipeline for our Group Protection products which will benefit from our auto enrolment proposition.
We have been working with our customers affected by the floods in the UK during January and February 2014 to ensure fast payment of claims and to get help to them as quickly as possible. As a result of the floods we anticipate that claims will be around £12m higher in the first two months of 2014, compared to the equivalent period in 2013.
In our US Protection business we will continue to refine our new business pricing as we prioritise long term value creation.
Digital Solutions
In May 2013 we acquired Cofunds, the UK's largest investment platform, to enhance the Group's digital capabilities. Cofunds assets increased to £64bn with net inflows of £7.9bn. Our Retail Protection digital platform now operates with in excess of 80% of applications automatically underwritten at point of sale and the ability to re-price within 24 hours, to respond to competitor activity. In December we launched our online enhanced annuity capability to provide customers with an automatic and fully underwritten annuity quote.
Outlook:
We are investing in the Cofunds platform to enhance its capabilities and ensure we take advantage of the significant growth we expect in this market over the coming years. In parallel we will deliver operational efficiencies to enhance platform profitability into 2015. The market is increasingly moving to digital tools to engage and attract customers and Cofunds will play an important role in offering the Group this capability, in Savings and other products.
Direct Investments
During 2013 we increased the Direct Investment portfolio to £2.9bn (2012: £1.4bn) on investments across our annuity and shareholder funds. Within the shareholder funds LGC completed the acquisition of a 46.5% shareholding in the house builder CALA Homes in March 2013 and a further £8m of equity later in the year to continue to accelerate CALA's growth and develop its landbank.
Outlook:
In Direct Investments we see a strong pipeline of transactions. We have completed £0.3bn of investment in the first two months of 2014, including in both Affordable Housing and Student Accommodation. In 2014 we are developing potential initiatives in the Private Rented Sectors and expect to develop our private placement lending business to SMEs.
capital management and dividend
Our Solvency I IGD capital surplus was £4.0bn at the end of 2013 (2012: £4.1bn). This equated to a capital coverage ratio of 222% (2012: 234%), within our preferred longer term range of 175% to 225%.
During the second half of 2013 there was encouraging progress on the development of the proposed Solvency II regulatory regime. We now believe that the worst case scenarios have been avoided to the benefit of customers and the wider economy. While full clarity on Solvency II capital will not emerge for at least another 18 months, we currently anticipate that our Solvency II capital surplus will be no lower than our Solvency I IGD capital surplus.
We continue to see profitable growth opportunities, both organic and via selective acquisitions, in which to deploy some of our capital. We also expect to increase the proportion of net cash we return to our shareholders as dividends while maintaining a strong but efficient balance sheet. More specifically, assuming we continue to anticipate a Solvency II surplus being no lower than Solvency I, we expect over the next two years to reduce our net cash coverage of dividend towards 1.5 times. We will provide dividend guidance for subsequent years when Solvency II clarity has emerged. The Board remains committed to a progressive dividend policy over the long term.
Consistent with this revised dividend guidance the Board recommends a final 2013 dividend of 6.90p (2012: 5.69p) giving a full year dividend of 9.30p (2012: 7.65p), 22% higher than 2012. This represents a net cash dividend coverage of 1.82 times, reduced from 1.91 times in 2012.
LEGAL & GENERAL RETIREMENT.
Financial highlights |
2013 |
2012 |
£m |
|
|
Operational cash generation |
260 |
243 |
New business surplus |
33 |
14 |
Net cash generation |
293 |
257 |
Experience variances, assumption changes, tax and non-cash movements |
17 |
24 |
Operating profit |
310 |
281 |
|
|
|
Individual annuity single premiums (£bn) |
1.3 |
1.3 |
Bulk annuity single premiums (£bn) |
2.8 |
1.0 |
Total annuity single premiums (£bn) |
4.1 |
2.3 |
|
|
|
Annuities net inflows (£bn) |
2.1 |
0.6 |
|
|
|
Annuities assets (£bn) |
34.4 |
32.2 |
Longevity insurance gross premiums (£m) |
212 |
70 |
|
|
|
New business EEV margin (%) |
8.7 |
8.8 |
CONTINUED DEMAND FOR OUR BROAD RANGE OF RETIREMENT SOLUTIONS
Net cash generation increased by 14% to £293m (2012: £257m) as the scale of the business continued to grow, leading to a 7% increase in operational cash generation to £260m (2012: £243m). The new business surplus of £33m (2012: £14m) reflects a good mix of business sold, our innovative asset strategy and the acquisition of Lucida. As a result operating profit increased 10% to £310m (2012: £281m).
Legal & General Retirement (LGR) offers a broad range of retirement solutions to both Corporate and Retail customers, through our bulk purchase annuity, longevity insurance and individual annuity products. In 2013 the business has delivered significant growth with annuity premiums up 78% to £4.1bn (2012: £2.3bn) and net inflows (premiums received less annuity payments) of £2.1bn (2012: £0.6bn). Total assets for LGR increased to £34.4bn (2012: £32.2bn), of which £21.1bn (2012: £19.4bn) represents bulk purchase annuity business.
LGR provides income to 770,000 pensioners (2012: 705,000). In total we insure one million customers, including deferred pensioners who rely on us for their future pension arrangements and the pensioners whose financial security we support by protecting their pension schemes against longevity risk.
We continue to benefit from operating through a wide range of distribution channels and being a key player in all the main markets for retirement solutions and pension scheme de-risking. We are able to target our sales appetite to the areas where we expect to optimise our risk-adjusted return on capital.
RECORD BPA AND LONGEVITY INSURANCE PREMIUMS
In the Bulk Annuity market, we completed 94 policies with premiums up 180% to £2.8bn (2012: 90 policies worth £1.0bn). We offer a broad spectrum of solutions to a range of corporate clients. In 2013 we continued our growth in the large scheme bulk annuity market in addition to our traditional strength in small schemes; conducted our first non-UK transaction with New Ireland Assurance; and completed our first back-book acquisition with the purchase of Lucida, the closed annuity buy-out company.
During the year we have seen rising equity markets, increasing the level of scheme assets, and rising interest rates, reducing defined benefit scheme liabilities. Together this has made conditions more favourable for pension trustees and their corporate sponsors to transact.
In 2013 LGR completed three longevity insurance transactions covering £5.0bn of associated liabilities and 48,000 existing pensioners. In a year that saw a record level of risk transfer in the longevity market, we completed over 50% of the business, including the largest longevity insurance contract in the UK to date. We retained 28% of the liabilities with the remainder being reinsured.
individual annuity premiums keep pace with record levels of 2012
Individual Annuities achieved sales of £1.3bn, broadly in-line with the record sales achieved in 2012 (2012: £1.3bn). This reflects an excellent performance in the context of an overall decline in the market of 15% in 2013, as pensioners defer retirement and the introduction of gender neutral pricing and the Retail Distribution Review impacted on overall volumes.
Over the years the annuity market has become more sophisticated by moving towards greater personalisation of solutions offered to individual customers. Technology is playing an increasingly important role, particularly for enhanced annuities where the process for gathering medical information and quoting can be cumbersome. We expect the market will ultimately move to a situation where all annuities are individually underwritten. In December we launched a new online enhanced annuity capability, delivered on-time and within budget, to provide customers with an automatic and fully underwritten annuity quote.
Annuities guarantee pensioners a lifelong income, and are the right product for the majority of savers in a defined contribution pension scheme. We believe it is important that consumers have confidence in the market and are able to access the most appropriate product. We have consistently supported the Open Market Option - we offer competitive rates and in 2013 three quarters of our individual annuity sales came from external sources. During 2013, we improved prices by 11% on average, partly as a result of the improved investment returns achieved through our direct investments programme, and expanded our presence in the enhanced annuity segment.
We welcome the FCA's thematic review and will work closely with regulators and the government to deliver changes to the market, improving transparency and enabling consumers to shop around. This will benefit customers as well as competitive, open market-focused providers, including Legal & General.
We constantly review the asset portfolio and longevity exposure within LGR. Annuity assets and liabilities are well matched and the impact of rising interest rates has little impact on profitability, as assets move in line with the liabilities. We also maintain a provision of £1.8bn against the risk of default on the £34bn of assets. In 2013 we experienced no defaults (2012: £0.2m).
In addition to reinsuring 72% of our longevity insurance new business we also reinsured a proportion of our individual enhanced annuity business and £1.0bn of our back-book liabilities. This allows us to grow our annuity business in a way that both optimises our risk and capital and reduces potential earnings volatility.
We continue to maintain our pricing discipline, writing business with the primary aim of achieving at least our target return on economic capital. On an EEV basis, the margin was broadly in line with the prior year at 8.7% (2012: 8.8%), and new business contribution was up 112% to £436m (2012: £206m) reflecting the higher annuity and longevity insurance new business.
LEGAL & GENERAL INVESTMENT MANAGEMENT.
Financial highlights |
2013 |
20121 |
£m |
|
|
Total revenue |
594 |
533 |
Total costs |
(290) |
(261) |
Operating profit |
304 |
272 |
|
|
|
Net cash generation |
239 |
219 |
|
|
|
Cost:income ratio (%) |
49 |
49 |
|
|
|
External gross inflows (£bn) |
52.0 |
37.1 |
External net inflows (£bn) |
9.3 |
5.3 |
of which International |
15.7 |
7.8 |
|
|
|
Closing assets under management (£bn) |
450 |
406 |
of which International |
59 |
43 |
1. Reclassified to include Legal & General Retail Investments, following the Group's reorganisation in July 2013.
ACCELERATING INTERNATIONAL EXPANSION
Operating profit of £304m increased 12% compared to the previous year (2012: £272m), reflecting strong revenue growth whilst maintaining an excellent cost:income ratio. Total revenue of £594m was up 11% (2012: £533m) as assets under management were lifted further by equity markets. Total costs of £290m increased by 11% in 2013 as Legal & General Investment Management (LGIM) continued to invest in its strategic areas for growth. We continue to target a cost:income ratio of 50% or below.
LGIM external net inflows of £9.3bn in 2013 increased by 75% compared to the previous year (2012: £5.3bn). Record net inflows of £15.7bn were received from international clients in 2013 as LGIM's international expansion continued to gain momentum. In the UK, net outflows of £6.4bn include pension payments from defined benefit funds as the market continues to mature.
International AUM grew by 37% to £59bn (2012: £43bn) with significant inflows from our key target regions, where LGIM continued to enhance its product offering. LGIM Asia received its regulatory licence in the second half of 2013 and is now actively marketing across the region.
In the US, LGIM's Active Fixed Income and LDI proposition continued to find favour among pension fund clients and consultants. In the second half of 2013, momentum accelerated with strong net inflows from new and existing investors. During 2013 LGIM America (LGIMA) received net inflows of £5.0bn into active products, an increase of 52% compared to the previous year (2012: £3.3bn). LGIMA now manages assets on behalf of four of the 10 largest corporate pension schemes in the US, and has a healthy pipeline going into 2014. To add to our US capabilities, in February 2014 we acquired Global Index Advisors (GIA), subject to Fund shareholder approval. GIA is an Atlanta-based investment adviser to $15.6bn of assets focused on index target date funds.
We continue to build on our presence in Europe and the Gulf with record sales in each region in 2013, driven by an innovative range of passive and Active Fixed Income strategies. We are also well positioned for further expansion in 2014, following the launch of our range of SICAV funds, as we target institutional investors and fund platforms across Europe.
LGIM continues to support UK defined benefit pension schemes looking to de-risk as the market matures. This market trend has resulted in an increasing number of scheme restructures as clients move out of equities and transition towards LDI and then on to the buyout stage. We have experienced some large UK DB outflows from passive equity funds in 2013, which includes assets used to make benefit payments to scheme members. However, we also benefited from strong flows into the Solutions business and fixed income products as these plans de-risk.
UK defined contribution (DC) pension AUM increased 22% to £31bn (2012: £25bn) in 2013. This included over £1bn of net inflows from Legal & General's Workplace Savings platform. We will continue to invest in our UK DC proposition to benefit from the expected growth in this market.
The integration of the Retail Investment business into LGIM is progressing well as we enhance its retail proposition and align it with LGIM's institutional capabilities. Our competitive retail passive fund offering has benefited from the introduction of the Retail Distribution Review, with gross inflows up 39%. This, coupled with the repositioning of our active equity and multi-asset products, leaves us well placed to grow our share of the UK retail market. The Retail Investment business, including structured products,has assets of £17.0bn (2012: £15.6bn) with operating profit of £37m (2012: £29m).
RECORD INFLOWS
Asset movements |
Index |
Solutions |
Active Fixed Income |
Active Equities |
Property & other |
Total |
£bn |
|
|
|
|
|
|
AUM (at 1 January 2013) |
243.2 |
64.0 |
82.2 |
7.7 |
8.9 |
406.0 |
Gross inflows |
31.3 |
8.6 |
11.0 |
0.1 |
1.0 |
52.0 |
Gross outflows |
(31.8) |
(5.2) |
(5.0) |
(0.4) |
(0.3) |
(42.7) |
External net flows |
(0.5) |
3.4 |
6.0 |
(0.3) |
0.7 |
9.3 |
Internal net flows |
0.7 |
0.8 |
(1.7) |
(0.2) |
0.2 |
(0.2) |
Total net flows |
0.2 |
4.2 |
4.3 |
(0.5) |
0.9 |
9.1 |
Market and other movements |
26.4 |
2.2 |
2.9 |
1.4 |
1.5 |
34.4 |
AUM (at 31 December 2013) |
269.8 |
70.4 |
89.4 |
8.6 |
11.3 |
449.5 |
The AUM of LGIM's market-leading Solutions business increased to £70bn, a gain of 10% over the year, reflecting gross inflows of £8.6bn (2012: £5.9bn). We continue to help our clients de-risk their portfolios as rising equity markets and interest rates make market conditions increasingly conducive to de-risking.
Active Fixed Income AUM increased to over £89bn (2012: £82bn). LGIM's strong performance track record across its range of funds continued to attract strong gross flows in the UK from pension schemes looking to de-risk. Over five years, 84% of these funds outperformed their benchmarks. For LGIMA, every product composite outperformed its benchmark, over one, three and five years (gross of fees), supporting LGIM's growth in the region.
Legal & General Property (LGP) is the fourth largest institutional real estate manager in the UK with over £11bn in AUM. LGIM's property team plays an integral role in the group's initiative to increase Direct Investments. Over the year we completed transactions totalling in excess of £1bn on behalf of L&G Retirement. Earlier in the period, LGP was selected by the National Employment Savings Trust (NEST) to run two real estate mandates, representing NEST's first direct investment into commercial property.
Our index capabilities have both scale and efficiency. These capabilities have driven much of our success in Europe and the Gulf as well as providing the basis for growth in the retail and DC businesses. Index AUM increased to £270bn (2012: £243bn).
LEGAL & GENERAL ASSURANCE SOCIETY.
Financial highlights |
2013 |
2012 |
£m |
|
|
Operational cash generation |
474 |
436 |
New business strain |
(73) |
(107) |
Net cash generation |
401 |
329 |
Experience variances, assumption changes, tax and non-cash movements |
43 |
133 |
Operating profit |
444 |
462 |
TRANSITIONING FROM LEGACY TO DIGITAL
Operational cash generation increased by 9% to £474m (2012: £436m) as our Protection and Savings businesses continued to grow their stocks of premiums and assets respectively. New business strain improved by £34m to £(73)m in the year, benefiting from changes to the tax legislation on Retail protection. These tax changes have an offsetting impact of c£50m in non-cash movements.
The LGAS operating profit reduced to £444m (2012: £462m). The operating profit of Protection was £355m (2012: £359m) benefiting from significantly improved profitability in General Insurance of £69m (2012: £30m). This was offset by lower Retail Protection new business margins following the introduction of gender neutral pricing and changes to tax legislation. Savings operating profit was £89m (2012: £103m) with Workplace savings losses increasing to £(29)m (2012: £(14)m) as the costs and continued investment associated with securing 0.5 million new auto enrolees outweighed the low early years' revenue.
The Legal & General Assurance Society (LGAS) business unit was created in July 2013, bringing together the Protection and Savings businesses into a clear customer focused business. During 2013 we took a number of actions to integrate these businesses. This included removing the duplication of functions created by merging the businesses, which will generate annualised cost savings of £34m at a cost of £14m. We continuously review the cost base to ensure LGAS can deliver attractive returns from both our mature and growth businesses while investing in the opportunities our businesses have.
PROTECTION
Financial highlights |
2013 |
2012 |
£m |
|
|
UK Protection new business annual premiums |
218 |
221 |
|
|
|
UK Protection new business EEV margin (%) |
8.9 |
11.8 |
|
|
|
UK Protection gross premiums |
1,326 |
1,268 |
General Insurance gross premiums |
375 |
349 |
Total UK gross premiums |
1,701 |
1,617 |
Retail Protection continued its strong growth with gross premiums up 5% to £990m (2012: £947m). Our digital platform operates with in excess of 80% of applications automatically underwritten at point of sale and the ability to re-price within 24 hours, to respond to competitor activity. This efficiency and our market leading scale enable us to offer competitive pricing, driving continuing growth in our market share.
The business has strong distribution covering IFAs, where we lead the market; building societies, where we are the sole provider to societies covering around 85% of customers; and the Legal & General Network, which facilitated £28bn, or approximately 1 in 6 of all UK mortgages. Around half of retail protection sales are typically sold alongside a mortgage, and therefore we expect the strength of our distribution, alongside the growing housing market to benefit the business.
Sales in the second half of 2013 were up 5% on the same period in 2012. This is an excellent performance, especially given the impact of gender neutral pricing in December 2012, which meant some customers brought forward purchases into Q4 2012. Over the full year, sales were down marginally to £148m (2012: £151m), reflecting the impact of the gender neutral legislation.
Group Protection delivered a 5% increase in gross premiums to £336m (2012: £321m) with new business sales in-line with last year's sharply higher volumes of £70m (2012: £70m). Our innovative employee rehabilitation program, which helped return three in four employees to work within six months, continues to drive demand for our group income protection products. We also benefited from auto enrolment, as schemes reviewed their wider employee benefits along with their pension scheme.
The UK Protection new business EEV margin of 8.9% (2012: 11.8%) is strong compared to long term average levels, although below the exceptional levels experienced in 2012.
General Insurance gross premiums increased by 7% to £375m (2012: £349m) as we became the fastest growing home insurer in direct sales. Profitability in the year benefited from strong underwriting discipline, improved claims handling and, despite the December floods, more benign weather over the year. This improved our combined operating ratio to 84% (2012: 95%).
SAVINGS
Asset movements |
Platforms1 |
Workplace |
Suffolk Life |
Mature Savings |
Consol. Adj |
Total |
£bn |
|
|
|
|
|
|
Assets (at 1 January 2013) |
8.6 |
6.0 |
5.1 |
36.2 |
(1.4) |
54.5 |
Gross inflows |
11.0 |
2.1 |
1.3 |
1.4 |
(0.3) |
15.5 |
Gross outflows |
(3.1) |
(0.6) |
(0.4) |
(5.1) |
0.5 |
(8.7) |
Net flows |
7.9 |
1.5 |
0.9 |
(3.7) |
0.2 |
6.8 |
Acquisition of Cofunds |
45.7 |
- |
- |
- |
(5.4) |
40.3 |
Market movements |
1.9 |
1.2 |
0.6 |
3.8 |
(0.2) |
7.3 |
Assets (at 31 December 2013) |
64.1 |
8.7 |
6.6 |
36.3 |
(6.8) |
108.9 |
1. Platforms include Cofunds and Investor Portfolio Services (IPS).
Growth in LGAS' savings business is based on developing highly scalable and efficient platforms, to offer our straight-forward, low-cost investment products.
To enhance our digital growth strategy, in May 2013 we acquired Cofunds, the UK's largest investment platform. Our Platform business now has assets of £64bn with net inflows in 2013 of £7.9bn. We continue to integrate our own Investor Portfolio Services (IPS) business with Cofunds. We are on track to deliver £11m pa of cost savings by 2015, at an initial cost of £17m, as a result of this integration.
The retail investment platform market is forecast to more than double over the next five years. To ensure we take advantage of this opportunity we are investing in Cofunds' technology, both to enhance the functionality of the platform and to improve the efficiency of back office processing. This investment will continue beyond 2014.
In Workplace, assets are up 45% to £8.7bn (2012: £6.0bn) with 903k employees now on the platform (2012: 381k employees) as opt out rates remained low at under 10% in aggregate. Regular contributions to the platform increased 57% to £1.2bn in 2013. Net inflows were £1.5bn (2012: £1.6bn) reflecting the higher regular contributions; offset by a lower number of one-off scheme transfers than 2012. Workplace contributions will continue to grow as more schemes reach their auto enrolment staging dates and the legislative minimum contribution rate increases from the current 2% to 8% by 2018. The Defined Contribution market is a significant long term opportunity for LGAS and the wider Group.
Our SIPP business, Suffolk Life, delivered net inflows of £0.9bn (2012: £0.5bn). The business continues to grow through demand for its bespoke SIPP proposition and from back-book transactions as we continue to see consolidation in the SIPP market. As a result the assets of Suffolk Life increased by 29% in the year to £6.6bn (2012: £5.1bn).
In Mature Savings assets were £36.3bn (2012: £36.2bn). Net outflows of £3.7bn (2012: £3.2bn) were in-line with our expectations and offset by positive market movements of £3.8bn (2012: £3.0bn).
LEGAL & GENERAL CAPITAL.
Financial highlights |
2013 |
2012 |
£m |
|
|
Operating profit |
179 |
163 |
|
|
|
Operational cash generation |
137 |
123 |
|
|
|
Group Investment Variance |
29 |
(23) |
increasing principal returns
Legal & General Capital (LGC) contributed £179m to the Group's operating profit. It is a new division with a core purpose of increasing the risk adjusted returns on the Group's £43.4bn (2012: £42.9bn) principal balance sheet, which excludes assets where our customers have the total market risk and reward.
Assets under direct managementwere in-line with the prior year at £4.7bn (2012: £4.7bn). The Group's strong cash generation offset the payment of £0.5bn of external dividends and deployment of £280m in selective acquisitions. During 2013 £131m of funds were utilised to acquire Cofunds, the UK's largest investment platform and £149m to acquire Lucida, the closed UK annuity company.
In addition to Direct Investments, LGC assets are also utilised in providing £1.0bn of seed capital into LGIM funds to support the development of LGIM's capabilities.
The LGC operating profit of £179m (2012: £163m) includes the smoothed investment return on the LGC assets. The return is calculated asset class by asset class and equates to an annualised average smoothed investment return of 4.1% (2012: 3.9%) on the average balance of invested assets of £4.5bn (2012: £4.3bn). The actual return on these assets in 2013 was 4.4%.
holistic management of investment risk
LGC advises and implements the Group investment strategies for the £43.4bn (2012: £42.9bn) principal balance sheet and £17.4bn (2012: £18.6bn) of with-profits assets of the Group. We operate the strategy within a group control framework, with a core responsibility for assessing the long term economic outlook and risks of unexpected losses, alongside ensuring that the regulatory requirements are met.
Asset portfolio |
2013 |
£bn |
LGR1 |
LGC |
Other |
Total |
Bonds: |
30.0 |
1.8 |
3.9 |
35.7 |
Sovereigns |
4.8 |
0.4 |
1.3 |
6.5 |
Banks |
2.1 |
0.5 |
0.4 |
3.0 |
Other bonds |
23.1 |
0.9 |
2.2 |
26.2 |
Property |
1.3 |
0.1 |
- |
1.4 |
Equities |
0.1 |
1.5 |
- |
1.6 |
Derivatives |
2.1 |
0.2 |
- |
2.3 |
Cash and cash equivalents |
0.7 |
1.1 |
0.6 |
2.4 |
Total Asset Portfolio |
34.2 |
4.7 |
4.5 |
43.4 |
1. LGR assets represent those used to back the Group's non profit annuity business.
The investment variance across the Group was £29m (2012: £(23)m) primarily as a result of strong equity returns in the Shareholder Funds and a positive impact from the increase in exposure to direct investments in LGR. This was partly offset by variances related to our defined benefit pension schemes and LGAS.
In LGPL, the Group's main annuity company, we maintain a provision of £1.8bn (2012: £1.7bn) to provide for the risk of credit default. The provisioning for default in LGPL is driven by the credit quality of the assets. In 2013, the UK Government was downgraded to Aa1/AA+ by Moody's/Fitch, as a result of which we created an explicit provision against UK Gilts.
Legal & General continues to have a strong liquidity position reflecting its requirements for working capital and derivative collateral. In addition the Group's outstanding borrowings total £2.6bn (2012: £2.7bn), including £2.4bn (2012: £2.4bn) of long term financing and £0.2bn (2012: £0.3bn) of short term borrowings.
Group debt costs of £127m are in-line with the prior year (2012: £127m) and reflect an average cost of debt of 4.8% per annum (2012: 4.9%) on average nominal value of debt balances of £2.7bn (2012: £2.6bn).
DIRECT INVESTMENTS growing strongly
|
2013 |
£bn |
LGR |
LGC |
LGA |
Total |
|
|
|
|
|
Direct Investments |
2.5 |
0.3 |
0.1 |
2.9 |
Our Direct Investment strategy of acquiring a portfolio of real assets on our principal balance sheet continues to expand successfully. Direct Investments are chosen if they have higher risk adjusted returns and provide a natural fit for Legal & General. In our annuity fund, direct investments help us to offer competitive annuity pricing to our customers and invest in UK infrastructure. The UK insurance industry has agreed in principle to invest £25bn in UK infrastructure and Housing and we are actively seeking opportunities to invest our share of this amount.
During 2013 we increased the Direct Investment portfolio to £2.9bn (2012: £1.4bn) in our annuity and shareholder funds. We have invested in Social Housing and Student Accommodation; in the Healthcare Sector, including investment to build the new Royal Liverpool University Hospital; provided finance to large corporates through sale and leaseback agreements; and provided loans and commercial finance to UK businesses.
In 2013 we commenced a program to increase the level of Direct Investments within Legal & General America's asset portfolio. This will see $900m of assets, currently in traded bonds, being invested in US commercial mortgages and private placements.
We are increasingly utilising operational management and development to increase our supply of direct investments. Within the shareholder funds LGC completed the acquisition of a 46.5% shareholding in the house builder CALA Homes in March 2013, with a further £8m of equity later in the year to continue to accelerate CALA's growth and develop its landbank. We are developing our existing landbank including a 1,000-unit site at Crowthorne and a 2,000-unit site in Winchester, via our investment in CALA and our English Cities Fund; a public-private joint venture to deliver inner city regeneration in five UK locations. In 2013 we increased our principal capability with the transfer of LGV Capital from LGIM into LGC.
LEGAL & GENERAL AMERICA.
Financial highlights |
2013 |
2012 |
$m |
|
|
Operating profit |
145 |
156 |
|
|
|
Operational cash generation |
69 |
63 |
|
|
|
Gross premium income |
1,024 |
922 |
|
|
|
New business APE |
155 |
142 |
|
|
|
CONTINUED GROWTH IN PREMIUMS AND SALES
In 2013 Legal & General America's (LGA) sales were up 9% to $155m (2012: $142m), representing a further improvement in market share. LGA has now delivered double digit sales growth, in its core term product, in each of the last three years. This has been achieved through a strategy of developing better relationships with its brokerage general agents (BGAs), who distribute term assurance in the US market. The growth in sales resulted in an increase in gross premiums by 11% to $1,024m (2012: $922m).
During the year an ongoing cost efficiency program, coupled with the benefits from higher sales, reduced new business unit costs by 5% in 2013. In a recent benchmarking study of 15 US life companies LGA was ranked the lowest for new business costs.
LGA operating profit in 2013 was $145m (2012: $156m). During the second half of the year we experienced higher mortality claims than expected on our smaller universal life portfolio. The operating profit also reflects the lower investment returns achieved during the year. This was partially offset by continued cost reductions. In order to improve the yield on the $3.3bn of assets held by LGA, $0.9bn of these funds have been earmarked for direct investments. These investments will be made over the following eighteen months.
Operational cash generation increased by 10% to $69m (2012: $63m). This represents the ordinary and preference dividends paid to the Group during 2013. In February 2014 LGA paid a further ordinary dividend to the Group of $73m (2013: $66m). This dividend will be recognised in operational cash generation in the Q1 2014 results.
cash generation.
STRONG CORRELATION 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.
£m |
Op cash |
Strain |
Net cash |
Variances and other |
Profit after tax |
Tax |
Profit before tax |
LGR |
260 |
33 |
293 |
(52) |
241 |
69 |
310 |
LGIM |
239 |
- |
239 |
- |
239 |
65 |
304 |
LGAS |
474 |
(73) |
401 |
(62) |
339 |
105 |
444 |
LGC |
137 |
- |
137 |
- |
137 |
42 |
179 |
LGA |
44 |
- |
44 |
14 |
58 |
34 |
92 |
Operating profit from divisions |
1,154 |
(40) |
1,114 |
(100) |
1,014 |
315 |
1,329 |
Group debt and other costs |
(112) |
- |
(112) |
(19) |
(131) |
(40) |
(171) |
Operating profit |
1,042 |
(40) |
1,002 |
(119) |
883 |
275 |
1,158 |
Investment and other variances |
- |
- |
- |
13 |
13 |
(37) |
(24) |
Total |
1,042 |
(40) |
1,002 |
(106) |
896 |
238 |
1,134 |
|
|
|
|
|
|
|
|
Dividend |
|
|
550 |
|
550 |
|
|
Dividend coverage |
|
|
1.82 |
|
1.63 |
|
|
cash generation backed by dividends to group
In 2013, 88% of the net cash generation was distributed to the group (2012: 87%). This demonstrates the high quality, liquid nature of the cash generation.
|
2013 |
2012 |
£m |
Net cash £m |
Dividend £m |
Dividend % of cash |
Net cash £m |
Dividend £m |
Dividend % of cash |
LGR |
293 |
|
|
257 |
|
|
|
|
627 |
90 |
|
539 |
92 |
LGAS |
401 |
|
|
329 |
|
|
LGIM |
239 |
213 |
89 |
219 |
175 |
80 |
LGA |
44 |
44 |
100 |
40 |
40 |
100 |
Sub-total |
977 |
884 |
90 |
845 |
754 |
89 |
LGC |
137 |
|
|
123 |
|
|
Group debt and other costs |
(112) |
|
|
(103) |
|
|
Total |
1,002 |
884 |
88 |
865 |
754 |
87 |
OPERATIONAL CASH GENERATION GUIDANCE
|
2014 Guidance |
2013 |
£m |
|
|
LGR |
c. 290 |
260 |
LGAS excluding General Insurance |
c. 430 |
421 |
LGA |
c.45 |
44 |
Sub-total |
c. 765 |
725 |
LGIM |
|
239 |
LGC |
|
137 |
LGAS General Insurance |
|
53 |
Operational cash generation from divisions |
|
1,154 |
Group debt and other costs |
|
(112) |
Total operational cash generation |
|
1,042 |
New business strain |
|
(40) |
Net cash generation |
|
1,002 |
For LGR, LGA and LGAS, excluding the General Insurance business, we estimate operational cash generation will increase in 2014 by 6% to £765m.
CAPITAL RESOURCES - STRONG BALANCE SHEET
As at 31 December 2013 the Solvency I Insurance Group's Directive (IGD) surplus was £4.0bn (2012: £4.1bn).
The Group's capital resources totalled £7.3bn, covering the capital resources requirement of £3.3bn by 2.22 times. This is after allowing for the accrual of the 2013 final dividend of £408m.
Capital |
2013 |
2012 |
£bn |
|
|
Group capital resources |
7.3 |
7.2 |
Group capital resources requirement |
3.3 |
3.1 |
IGD surplus |
4.0 |
4.1 |
|
|
|
Coverage ratio % |
222 |
234 |
TAXATION.
GROUP TAX RATES - EFFECTIVE TAX RATE OF 21.0%
Equity holders' effective tax rate |
2013 |
2012 |
% |
|
|
Total Effective Tax Rate |
21.0 |
22.7 |
Annualised rate of UK corporation tax |
23.25 |
24.5 |
In 2013, 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.
The UK has a deferred tax asset of £93m in respect of trading losses (2012: £127m). The movement in the year includes a £70m (2012: £72m) contribution to net cash generation in LGR and LGAS Protection from the utilisation of tax losses. This has been partially offset by other tax deductions, non-taxable income and losses acquired within Lucida and Cofunds. It is expected that trading losses will be available to LGR throughout 2014.
Supplementary EEV disclosure.
EEV highlights |
2013 |
2012 |
Pence |
|
|
Equity per share including LGIM |
190 |
173 |
Equity per share |
162 |
151 |
Analysis of EEV results |
2013 |
2012 |
£m |
|
|
Contribution from new business |
651 |
475 |
Expected return from in-force business |
426 |
448 |
Experience variances and assumption changes |
(32) |
(76) |
Development costs |
(40) |
(37) |
Contribution from shareholder net worth |
125 |
145 |
EEV operating profit on covered business |
1,130 |
955 |
Business reported on an IFRS basis |
211 |
86 |
EEV operating profit |
1,341 |
1,041 |
Economic variances |
215 |
(195) |
Losses attributable to non-controlling interests |
3 |
(12) |
EEV profit before tax |
1,559 |
834 |
Tax and other |
(270) |
(101) |
EEV profit after tax |
1,289 |
733 |
EEV PER SHARE
The Group delivered £1,289m of EEV profit after tax, which after external dividend payments in the year of £479m and foreign exchange, pension deficit and other adjustments of £(124)m, increased EEV shareholders' equity to £9,586m (2012: £8,900m), equivalent to 162 pence per share (2012: 151 pence per share). Including LGIM's external funds in the calculation increases the EEV per share to 190 pence (2012: 173 pence).
NEW BUSINESS CONTRIBUTION
Contribution from new business increased to £651m (2012: £475m). The increase reflects the strong increase in the contribution from Legal & General Retirement, where sales increased to £4.1bn (2012: £2.3bn).
Worldwide EEV new business margin increased to 5.1% (2012: 4.7%) primarily due to the higher mix of annuity business.
EEV OPERATING PROFIT
EEV operating profit increased by 29% to £1,341m (2012: £1,041m), as the Group benefited from its growth strategy and higher sales. Experience variances and assumption changes were £(32)m (2012: £(76)m) with positive experience in LGAS and LGR offset by negative operating assumption changes in LGA. The operating profit also benefited from strong results in Investment Management and General Insurance which are largely reported on an IFRS basis within the EEV operating profit.
ECONOMIC VARIANCES
Positive economic variances of £215m (2012: £(195)m) arose 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.
VALUE OF IN-FORCE
The table below illustrates how the discounted and undiscounted value of in-force (VIF) has increased throughout the year.
Reconciliation of LGAS and LGR VIF |
Discounted |
Undiscounted1 |
£bn |
|
|
Opening VIF at 1 January 2013 |
4.5 |
9.1 |
Contribution from new business |
0.5 |
1.0 |
Unwind of discount rate |
0.3 |
n/a |
Expected release from non profit and with-profits businesses2 |
(0.7) |
(0.7) |
Experience variances / assumption changes |
- |
0.2 |
Investment variance / economic assumption changes |
0.2 |
0.8 |
Other |
0.1 |
0.1 |
Closing VIF at 31 December 2013 |
4.9 |
10.5 |
1. Management estimates.
2. Comprises the expected release from non profit business of £635m and with-profits transfer of £54m.
ADDITIONAL VALUE OF LGIM
Within the calculation of Group embedded value, LGIM profits on internally sourced business are included on a look through basis at £0.3bn (2012: £0.2bn), equivalent to 5p per share (2012: 4p per share).
The external assets component of LGIM is included at the IFRS net asset value of £0.4bn (2012: £0.4bn), equivalent to 7p per share (2012: 7p 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 £0.7bn (12p per share) to £2.3bn (40p 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 |
2013 |
2013 |
|
p per share |
£bn |
Look through value of profits on covered business |
5 |
0.3 |
Net asset value |
7 |
0.4 |
Current value of LGIM in Group embedded value |
12 |
0.7 |
LGIM VIF |
28 |
1.6 |
Alternative discounted value of LGIM future cash flows |
40 |
2.3 |
Including LGIM, this scenario equates to an indicative valuation per share of 190 pence (2012: 173 pence).
Indicative valuation including LGIM |
2013 |
2013 |
|
p per share |
£bn |
EEV as reported |
162 |
9.6 |
LGIM VIF |
28 |
1.6 |
Total including LGIM |
190 |
11.2 |
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. The nature of long term business can result in some changes in regulation having a retrospective effect on our businesses. Significant changes in regulation may reduce our earnings and profitability or require us to hold more capital. |
|
trend, outlook and MITIGATION The implementation of the Retail Distribution (RDR) at the start of 2013 has resulted in dramatic shifts in the distribution landscape. The retrenchment by the banks and challenges to IFA distribution models in response to RDR and other regulatory initiatives, together with a slow transition of consumers to the RDR model has presented broader market uncertainty for products that rely on customers' access to advice. Solvency II is 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 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 distribution model to respond to changing market trends. |
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. |
|
Global investment markets have returned to pre-financial crisis levels, responding both to the more positive economic outlook and the conditions created by the monetary policies being exercised by central banks. There is limited resilience, however, in the current environment for 'shocks' such as those from an abrupt change in monetary policy, with potential for significant falls in the value of certain asset classes should markets reassess returns. 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 systemic 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. |
|
2013 saw a further narrowing of credit spreads reflecting market confidence in the issuers of investment grade bonds. We have continued to experience low levels of default on our corporate bond portfolio. There remains, however, a range of factors that could trigger write downs in our investment assets. These factors include a deterioration in the confidence in banks within the Euro zone or the currency area itself; a failure to definitively resolve the US government debt ceiling; and a financial crisis in emerging markets. 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. |
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. |
|
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 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. 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 need to change. |
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. |
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We regularly appraise the assumptions underpinning the business that we write. 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. As illustrated by the implementation of the EU gender neutral pricing legislation, there is also 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 also continue to ensure that legislators recognise the benefits to consumers of pricing insurance products based on the risk factors that each policy presents. |
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. |
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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 have clear strategies to respond to the macro trends. Risks arising from macro trends have been considered as part of the Group Risk Committee focused business and risk reviews. The Committee and the Group Board has also debated the risks of management stretch, with strategic projects being re-focused as appropriate. During 2013 we undertook a significant re-structure of our businesses to deliver our strategic responses to the changes in the markets in which we operate. |
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. Our plans for growth inherently will increase the profile of operational risks across our businesses. |
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As we grow we continue to invest in our system capabilities and business processes to ensure that we meet the expectations of our customers; comply with regulatory, legal and financial reporting requirements; and mitigate the risks of loss or reputational damage from operational risk events. The restructure of our business divisions seeks to support the positioning of appropriate resources to manage these risks. Our risk governance model seeks to ensure that business management are actively engaged in ensuring an appropriate control environment is in place. The Group Risk team provides expert advice and guidance on the required control environment, together with objective challenge in the way risks are being managed. Our Internal Audit function provides independent assurance on the adequacy and effectiveness of our controls. |
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. |
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The financial services sector has seen a significant rise in attempts by third parties to seek and exploit perceived vulnerabilities in IT systems. 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're focused on maintaining a robust and secure IT environment that protects our customer and corporate data. Working with our business partners we deploy control techniques to evaluate the security of our systems and proactively address emerging threats. During 2013 the Group Risk Committee reviewed cyber risks and our control framework, with further review scheduled for 2014. We remain vigilant to the range of risks, however, the evolving nature of cyber threats means that residual risks will remain. |
Enquiries.
Investors:
Bernie Hickman
Group Financial Controller and Investor Relations Director 020 3124 2043
Ian Baker
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 10.00 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
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Conference Entry via QR Code
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To gain access to the conference using the QR code, please ensure you have the appropriate software on your mobile device and scan the image.
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Financial Calendar |
Date |
Ex-dividend date |
23 April 2014 |
Record date |
25 April 2014 |
Annual general meeting |
21 May 2014 |
Payment date of 2013 final dividend |
04 June 2014 |
Q1 Interim Management Statement 2014 |
07 May 2014 |
Half-year results 2014 |
06 August 2014 |
Q3 Interim Management Statement 2014 |
04 November 2014 |
The Preliminary Results for the year ended 31 December 2013 do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The Group's statutory accounts for 2012 and 2013 have been audited by PricewaterhouseCoopers LLP and their reports were unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The Group's 2012 statutory accounts have been filed with the Registrar of Companies.
Forward-looking statements
This announcement may contain certain forward-looking statements relating to Legal & General, its plans and its current goals and expectations relating to future financial condition, performance and results. By their nature, forward-looking statements involve uncertainty because they relate to future events and circumstances which are beyond Legal & General's control, including, among others, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory and Governmental authorities, the impact of competition, the timing impact of these events and other uncertainties of future acquisition or combinations within relevant industries. As a result, Legal & General's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in these forward-looking statements and persons reading this announcement should not place reliance on forward-looking statements. These forward-looking statements are made only as at the date on which such statements are made and Legal & General Group Plc does not undertake to update forward-looking statements contained in this announcement or any other forward-looking statement it may make.
