L&G Half Year Results 2020 Part 3

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Asset and premium flows                                                                                              Page 68

 

5.01 LGIM total assets under management¹ (AUM)

		Active	Multi		Real	Total
	Index	strategies	Asset	Solutions2	assets	AUM
For the six month period to 30 June 2020	£bn	£bn	£bn	£bn	£bn	£bn
As at 1 January 2020	403.6	177.2	58.0	526.6	30.8	1,196.2
External inflows	27.7	9.5	4.3	10.9	0.6	53.0
External outflows	(32.3)	(9.0)	(2.7)	(22.7)	(0.4)	(67.1)
Overlay net flows	-	-	-	20.1	-	20.1
ETF net flows	0.2	-	-	-	-	0.2
External net flows3	(4.4)	0.5	1.6	8.3	0.2	6.2
Internal net flows	-	(0.2)	(0.7)	(0.1)	0.4	(0.6)
Total net flows	(4.4)	0.3	0.9	8.2	0.6	5.6
Cash management movements4	-	2.8	-	-	-	2.8
Market and other movements3	(4.1)	9.2	(1.8)	32.0	0.7	36.0
As at 30 June 2020	395.1	189.5	57.1	566.8	32.1	1,240.6
Assets attributable to:
External						1,134.9
Internal						105.7
1. Assets under management (AUM) includes assets on our Investment Only Platform that are managed by third parties, on which fees are earned.
2. Solutions include liability driven investments and £348.3bn (30 June 2019: £301.9bn; 31 December 2019: £335.7bn) of derivative notionals associated with the Solutions business.
3. External net flows exclude movements in short-term Solutions assets, as their maturity dates are determined by client agreements and are subject to a higher degree of variability. The total value of these assets at 30 June 2020 was £62.3bn (30 June 2019: £49.4bn; 31 December 2019: £67.1bn) and the movement in these assets is included in market and other movements for Solutions assets.
4. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Asset and premium flows                                                                                              Page 69

 

5.01 LGIM total assets under management¹ (AUM) (continued)

 

			Active	Multi		Real	Total
		Index	strategies	Asset	Solutions2	assets	AUM5
For the six month period to 30 June 2019		£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2019		307.1	160.4	43.6	477.9	26.5	1,015.5
External inflows		60.8	5.7	6.5	8.8	0.8	82.6
External outflows		(26.1)	(4.8)	(1.4)	(11.0)	(0.8)	(44.1)
Overlay net flows		-	-	-	22.0	-	22.0
ETF net flows		(0.2)	-	-	-	-	(0.2)
External net flows3		34.5	0.9	5.1	19.8	-	60.3
Internal net flows		(0.1)	(2.0)	(0.3)	3.6	1.2	2.4
Total net flows		34.4	(1.1)	4.8	23.4	1.2	62.7
Cash management movements4		-	0.5	-	-	-	0.5
Market and other movements3		43.9	12.4	6.0	(7.7)	1.2	55.8
At 30 June 2019		385.4	172.2	54.4	493.6	28.9	1,134.5
Assets attributable to:
External							1,032.7
Internal							101.8
1. Assets under management (AUM) includes assets on our Investment Only Platform that are managed by third parties, on which fees are earned.
2. Solutions include liability driven investments and £301.9bn of derivative notionals associated with the Solutions business.
3. External net flows exclude movements in short-term Solutions assets, as their maturity dates are determined by client agreements and are subject to a higher degree of variability. The total value of these assets at 30 June 2019 was £49.4bn and the movement in these assets is included in market and other movements for Solutions assets.
4. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.
5. AUM have been reanalysed from those previously reported in order to present Multi Asset separately. This has resulted in the removal of the Global Fixed income and Active equities categories, the inclusion of Multi Asset and Active Strategies, and a reallocation of AUM across the revised categorisation. Total AUM, and the split between external and internal, remains unchanged.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Asset and premium flows                                                                                              Page 70

 

5.01 LGIM total assets under management¹ (AUM) (continued)

 

		Active	Multi		Real	Total
	Index	strategies	asset	Solutions2	assets	AUM
For the year ended 31 December 2019	£bn	£bn	£bn	£bn	£bn	£bn
As at 1 January 2019	307.1	160.4	43.6	477.9	26.5	1,015.5
External inflows	96.2	14.0	11.2	25.5	1.8	148.7
External outflows	(58.9)	(11.2)	(3.5)	(26.2)	(1.7)	(101.5)
Overlay net flows	-	-	-	38.8	-	38.8
ETF net flows	0.4	-	-	-	-	0.4
External net flows3	37.7	2.8	7.7	38.1	0.1	86.4
Internal net flows	(0.3)	(0.4)	(0.9)	1.9	2.5	2.8
Total net flows	37.4	2.4	6.8	40.0	2.6	89.2
Cash management movements4	-	(0.6)	-	-	-	(0.6)
Market and other movements3	59.1	15.0	7.6	8.7	1.7	92.1
As at 31 December 2019	403.6	177.2	58.0	526.6	30.8	1,196.2
Assets attributable to:
External						1,092.2
Internal						104.0
1. Assets under management (AUM) includes assets on our Investment Only Platform, that are managed by third parties, on which fees are earned.
2. Solutions include liability driven investments and £335.7bn of derivative notionals associated with the Solutions business.
3. External net flows exclude movements in short-term Solutions assets, as their maturity dates are determined by client agreements and are subject to a higher degree of variability. The total value of these assets at 31 December 2019 was £67.1bn and the movement in these assets is included in market and other movements for Solutions assets.
4. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Asset and premium flows                                                                                              Page 71

 

5.02 LGIM total external assets under management and net flows

 

	Assets under management					Net flows2
	30 Jun	30 Jun	31 Dec			30 Jun		30 Jun	31 Dec
	2020	2019	2019			2020		2019	2019
	£bn	£bn	£bn			£bn		£bn	£bn
International1	289.5	248.6	276.7			(3.2)		44.6	14.6
UK Institutional
- Defined contribution	96.7	86.4	94.3			5.5		3.6	3.7
- Defined benefit	706.7	659.7	679.3			2.5		10.7	4.8
UK Retail
- Retail intermediary	33.3	30.0	33.1			1.2		1.7	2.5
- Personal investing3	5.2	5.6	5.7			-		(0.1)	(0.1)
ETF	3.5	2.4	3.1			0.2		(0.2)	0.6
Total external	1,134.9	1,032.7	1,092.2			6.2		60.3	26.1
1. International asset are shown on the basis of client domicile.  Total International AUM including assets managed internationally on behalf of UK clients amounted to £385bn as at 30 June 2020 (30 June 2019: £343bn; 31 December 2019: £370bn).
2. External net flows exclude movements in short-term solutions assets, with maturity as determined by client agreements and are subject to a higher degree of variability.
3. Personal investing includes £1.4bn as at 30 June 2020 (30 June 2019: £1.9bn; 31 December 2019: £1.6bn) of AUM relating to legacy Banks and Building Society customers which is driving net outflows.
5.03 Reconciliation of assets under management to Consolidated Balance Sheet financial investments, investment property and cash and cash equivalents
					30 Jun 2020		30 Jun 2019		31 Dec 2019
					£bn		£bn		£bn
Assets under management					1,241		1,135		1,196
Derivative notionals1					(348)		(302)		(336)
Third party assets2					(399)		(362)		(379)
Other3					72		47		63
Total financial investments, investment property and cash and cash equivalents					566		518		544
Less: assets of operations classified as held for sale					(23)		(26)		(24)
Financial investments, investment property and cash and cash equivalents					543		492		520
1. Derivative notionals are included in the assets under management measure but are not for IFRS reporting and are thus removed.
2. Third party assets are those that LGIM manage on behalf of others which are not included on the group's Consolidated Balance Sheet.
3. Other includes assets that are managed by third parties on behalf of the group, other assets and liabilities related to financial investments, derivative assets and pooled funds.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Asset and premium flows                                                                                              Page 72

 

5.04 Assets under administration

 

	Workplace1	Annuities2	Workplace	Annuities	Workplace	Annuities
	30 Jun 2020	30 Jun 2020	30 Jun 2019	30 Jun 2019	31 Dec 2019	31 Dec 2019
	£bn	£bn	£bn	£bn	£bn	£bn
As at 1 January	40.3	75.9	30.0	63.0	30.0	63.0
Gross inflows	3.3	3.8	3.5	7.2	7.3	12.4
Gross outflows	(0.9)	-	(0.9)	-	(2.0)	-
Payments to pensioners	-	(2.1)	-	(2.0)	-	(4.1)
Net flows	2.4	1.7	2.6	5.2	5.3	8.3
Market and other movements	(1.2)	3.1	3.5	3.9	5.0	4.6
As at 30 June/31 December	41.5	80.7	36.1	72.1	40.3	75.9
1. Workplace assets under administration as at 30 June 2020 includes £41.5bn (30 June 2019: £36.0bn; 31 December 2019: £40.2bn) of assets under management included in Note 5.01.
2. Annuities assets under administration as at 30 June 2020 includes £73.8bn (30 June 2019: £67.9bn; 31 December 2019: £70.1bn) of assets under management included in Note 5.01.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Asset and premium flows                                                                                              Page 73

 

5.05 LGR new business

 

	6 months	6 months	6 months	Full year
	30 Jun	30 Jun	31 Dec	31 Dec
	2020	2019	2019	2019
	£m	£m	£m	£m
Pension risk transfer
- UK	3,176	6,316	4,009	10,325
- US	248	223	670	893
- Bermuda	-	138	36	174
Individual annuities	421	497	473	970
Lifetime mortgage advances	362	489	476	965
Total LGR new business	4,207	7,663	5,664	13,327

 

5.06 LGI new business
	6 months	6 months	6 months	Full year
	30 Jun	30 Jun	31 Dec	31 Dec
	2020	2019	2019	2019
	£m	£m	£m	£m
UK Retail protection	83	91	83	174
UK Group protection	65	44	32	76
US protection1	44	43	46	89
Total LGI new business	192	178	161	339
1. In local currency, US protection reflects new business of $56m for 2020 (H1 19: $55m; H2 19: $58m).

 

5.07 Gross written premiums on insurance business
	6 months	6 months	6 months	Full year
	30 Jun	30 Jun	31 Dec	31 Dec
	2020	2019	2019	2019
	£m	£m	£m	£m
UK Retail protection	680	658	669	1,327
UK Group protection	245	233	112	345
US Protection1	550	518	539	1,057
Longevity insurance	159	190	186	376
Total gross written premiums on insurance business2	1,634	1,599	1,506	3,105
1. In local currency, US protection reflects gross written premiums of $693m for 2020 (H1 19: $670m; H2 19: $679m).
2. Total gross written premiums includes £58m (YE 19: £66m) of general insurance premiums relating to a residual reinsurance treaty.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Capital                                                                                                                           Page 74

 

6.01 Group regulatory capital - Solvency II

 

The group complies with the requirements established by the Solvency II Framework Directive, as adopted by the Prudential Regulation Authority (PRA) in the UK and measures and monitors its capital resources on this basis.

 

The Solvency II results are estimated and unaudited. Further explanation of the underlying methodology and assumptions are set out in the sections below.

 

The group calculates its Solvency II capital requirements using a Partial Internal Model. The vast majority of the risk to which the group is exposed is assessed on the Partial Internal Model basis approved by the PRA. Capital requirements for a few smaller entities are assessed using the Standard Formula basis on materiality grounds. The group's US insurance businesses are valued on a local statutory basis, following the PRA's approval to use the Deduction and Aggregation method of including these businesses in the group solvency calculation.

 

The table below shows the "shareholder view" of the group Own Funds, Solvency Capital Requirement (SCR) and Surplus Own Funds, based on the Partial Internal Model, Matching Adjustment and Transitional Measures on Technical Provisions (TMTP) (recalculated as at 30 June 2020). The TMTP incorporates estimated impacts of end June 2020 economic conditions and changes during 2020 to the Internal Model and Matching Adjustment. This is in line with group's management of the capital position on a dynamic TMTP basis.

 

(a) Capital position
As at 30 June 2020, and on the above basis, the group had a surplus of £7.3bn (31 December 2019: £7.3bn) over its Solvency Capital Requirement, corresponding to a Solvency II capital coverage ratio on a "shareholder view" basis of 173% (31 December 2019: 184%). The shareholder view of the Solvency II capital position is as follows:
						30 Jun 2020		31 Dec 2019
						£bn		£bn
Unrestricted Tier 1 Own Funds						12.3		12.4
Restricted Tier 1 Own Funds1						0.5		-
Tier 2 Subordinated liabilities2						4.7		3.9
Eligibility restrictions						(0.2)		(0.2)
Solvency II Own Funds3,4						17.3		16.1
Solvency Capital Requirement						(10.0)		(8.8)
Solvency II surplus						7.3		7.3
SCR Coverage ratio5						173%		184%
1. Restricted Tier 1 Own Funds represent perpetual restricted tier 1 contingent convertible notes issued during the period. See note 4.07 for details.
2. Tier 2 subordinated liabilities include new debt issue of £0.5bn during the period.
3. Solvency II Own Funds do not include an accrual for the interim dividend of £294m (31 December 2019: £754m) declared after the balance sheet date.
4. Solvency II Own Funds allow for a risk margin of £6.7bn (31 December 2019: £5.9bn) and TMTP of £6.3bn (31 December 2019: £5.7bn).
5. SCR Coverage ratio is based on unrounded inputs.

 

The "shareholder view" basis excludes the contribution that the with-profits fund and the final salary pension schemes would normally make to the group position. This is reflected by reducing the group's Own Funds and the group's SCR by the amount of the SCR for the with-profits fund and the final salary pension schemes.

 

On a proforma basis, which includes the contribution of with-profits fund and that of the final salary pension schemes in the group's Own Funds and corresponding SCR in the group's SCR, the coverage ratio at 30 June 2020 is 169% (31 December 2019: 179%).

 

On 6 December 2017 the group announced the sale of its Mature Savings business to ReAssure Limited. ReAssure Limited assumed the economic exposure of the business from 1 January 2018 via a risk transfer agreement. It is expected that the formal transfer of the business will be completed in H2 20, subject to satisfaction of normal conditions for a transaction including court sanction. The transfer will be effected by way of a Part VII transfer under the Financial Services and Markets Act 2000. The impact of the risk transfer agreement is reflected in both Own Funds and SCR.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Capital                                                                                                                           Page 75

 

6.01 Group regulatory capital - Solvency II (continued)

 (b) Methodology and assumptions

 

The methodology, assumptions and Partial Internal Model underlying the calculation of Solvency II Own Funds and associated capital requirements are broadly consistent with those set out in the group's 2019 Annual Reports and Accounts and Full Year Results.

 

Non-market assumptions are consistent with those underlying the group's IFRS disclosures, but with the removal of any margins for prudence. Future investment returns and discount rates are those defined by EIOPA, which means that the risk free rates used to discount liabilities are market swap rates net of credit risk adjustment of 14 basis points (31 December 2019: 11 basis points) for sterling denominated liabilities. For annuities that are eligible, the liability discount rate includes a Matching Adjustment. This Matching Adjustment varies between LGAS and LGRe and by the currency of the relevant liabilities.

 

At 30 June 2020 the Matching Adjustment for UK GBP denominated liabilities was 158 basis points (31 December 2019: 110 basis points) after deducting an allowance for the EIOPA fundamental spread equivalent to 58 basis points (31 December 2019: 53 basis points).

 

 

(c) Analysis of change

 

 

The table below shows the movement (net of tax) during the six month period ended 30 June 2020 in the group's Solvency II surplus.
	6 months	Full year
	30 Jun 2020	31 Dec 2019
	£bn	£bn
Surplus arising from back-book (including release of SCR)	0.7	1.5
Release of risk margin1	0.3	0.4
Amortisation of TMTP2	(0.2)	(0.3)
Total operational surplus generation3	0.8	1.6
Operational surplus generation - continuing operations	0.8	1.5
Operational surplus generation - discontinued operations	-	0.1
Total operational surplus generation3	0.8	1.6
New business strain - continuing operations	(0.1)	(0.5)
New business strain - discontinued operations	-	(0.1)
New business strain	(0.1)	(0.6)
Net surplus generation	0.7	1.0
Operating variances4	0.1	0.3
Mergers, acquisitions and disposals5	(0.1)	0.1
Market movements6	(0.9)	(0.2)
Restricted Tier 1 convertible notes7	0.5	-
Subordinated liabilities8	0.5	0.2
Dividends paid9	(0.8)	(1.0)
Total surplus movement (after dividends paid in the period)	-	0.4
1. Based on the risk margin in force at 31 December 2019 and does not include the release of any risk margin added by new business written in 2020.
2. TMTP amortisation based on a linear run down of the 31 December 2019 TMTP of £4.9bn (net of tax, £5.7bn before tax) (2019: £4.4bn net of tax, £5.2bn before tax), based on management's estimate of the TMTP on 31 December 2019 market conditions.
3. Release of surplus generated by in-force business and includes management actions which at the start of the year could have been reasonably expected to take place. For 2020 these are primarily related to the optimisation of structures used to make assets Matching Adjustment eligible and the planned reinsurance of backbook liabilities.
4. Operating variances include the impact of experience variances, changes to valuation and capital calibration assumptions, other management actions including changes in asset mix, hedging strategies, and Matching Adjustment optimisation.
5. Mergers, acquisitions and disposals include the impacts of the sale of the Mature Savings business, expected to complete in H2 20.
6. Market movements represent the impact of changes in investment market conditions over the period and changes to future economic assumptions. Market movements in 2020 include an increase in the risk margin of £1.0bn (net of tax) and an increase to TMTP of £1.0bn (net of tax).
7. Restricted Tier 1 convertible notes represent an issuance of £0.5bn in the period (2019: nil).
8. Subordinated liabilities includes an issuance of £0.5bn in the period (2019: redemption of £0.4bn and an issuance of £0.6bn).
9. Dividends paid are the amounts from the 2019 final dividend paid in H1 20 (2019: 2018 final and 2019 interim dividend declarations).

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Capital                                                                                                                           Page 76

 

6.01 Group regulatory capital - Solvency II (continued)

Operational Surplus Generation is the expected surplus generated from the assets and liabilities in-force at the start of the year. It is based on assumed real world returns and best estimate non-market assumptions. It includes the impact of management actions to the extent that, at the start of the year, these were reasonably expected to be implemented over the year.

 

New Business Strain is the cost of acquiring, and setting up Technical Provisions and SCR (net of any premium income), on actual new business written over the year. It is based on economic conditions at the point of sale.

 

(d) Reconciliation of IFRS Net Release from Operations to Solvency II Net Surplus Generation
(i) The table below provides a reconciliation of the group's IFRS Release from Operations to Solvency II Operational Surplus Generation.
			6 months	Full year
			2020	2019
			£bn	£bn
IFRS Release from Operations			0.7	1.3
Expected release of IFRS prudential margins			(0.2)	(0.5)
Releases of IFRS specific reserves1			(0.1)	(0.1)
Solvency II investment margin2,3			0.1	0.2
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation			0.3	0.7
Solvency II Operational Surplus Generation4			0.8	1.6
1. Release of prudence from IFRS specific reserves which are not included in Solvency II (e.g. long term longevity and expense margins).
2. Release of prudence related to differences between the EIOPA-defined fundamental spread and Legal & General's best estimate default assumption.
3. Expected market returns earned on LGR's free assets in excess of risk free rates over H1 20.
4. Solvency II Operational Surplus Generation includes management actions which at the start of 2020 were expected to take place within the group plan.
(ii) The table below provides a reconciliation of the group's IFRS New Business Surplus to Solvency II New Business Strain.
			6 months	Full year
			2020	2019
			£bn	£bn
IFRS New business surplus			0.1	0.3
Removal of requirement to set up prudential margins above best estimate on New Business			0.2	0.2
Set up of SCR on new business			(0.3)	(0.9)
Set up of risk margin on new business			(0.1)	(0.2)
Solvency II New business strain1			(0.1)	(0.6)
1. UK PRT new business volumes during H1 20 were £3.2bn, compared to £10.3bn over 2019.

 

(e) Reconciliation of IFRS equity to Solvency II Own Funds

A reconciliation of the group's IFRS equity to Solvency II Own Funds is given below:
			30 Jun 2020	31 Dec 2019
			£bn	£bn
IFRS equity1			9.4	9.4
Remove DAC, goodwill and other intangible assets and associated liabilities			(0.5)	(0.5)
Add IFRS carrying value of subordinated borrowings2			4.1	3.5
Insurance contract valuation differences3			6.0	5.2
Difference in value of net deferred tax liabilities			(0.7)	(0.5)
SCR for with-profits fund and final salary pension schemes			(0.8)	(0.8)
Eligibility restrictions4			(0.2)	(0.2)
Solvency II Own Funds5			17.3	16.1
1. IFRS equity represents IFRS equity attributable to owners of the parent and restricted tier 1 convertible notes as per the Consolidated Balance Sheet.
2. Treated as available capital on the Solvency II balance sheet as the liabilities are subordinate to policyholder claims.
3. Differences in the measurement of technical provisions between IFRS and Solvency II.
4. Relating to the Own Funds of non-insurance regulated entities that are subject to local regulatory rules.
5. Solvency II Own Funds do not include an accrual for the interim dividend of £294m (31 December 2019: £754m) declared after the balance sheet date.

 

 

Legal & General Group Plc

Half Year Report 2020 Part 3

 

Capital                                                                                                                           Page 77

 

6.01 Group regulatory capital - Solvency II (continued)

 

(f) Sensitivity analysis   The following sensitivities are provided to give an indication of how the group's Solvency II surplus as at 30 June 2020 would have changed in a variety of adverse events. These are all independent stresses to a single risk. In practice, the balance sheet is impacted by combinations of stresses and the combined impact can be larger than adding together the impacts of the same stresses in isolation. It is expected that, particularly for market risks, adverse stresses will happen together.
			Impact on	Impact on	Impact on	Impact on
			net of tax	net of tax	net of tax	net of tax
			Solvency II	Solvency II	Solvency II	Solvency II
			capital	coverage	capital	coverage
			surplus1	ratio1	surplus1	ratio1
			2020	2020	2019	2019
			£bn	%	£bn	%
Credit spreads widen by 100bps assuming an escalating addition to ratings2,3			0.3	7	0.3	8
Credit spreads narrow by 100bps assuming an escalating addition to ratings2,3			(0.3)	(8)	(0.4)	(9)
Credit spreads widen by 100bps assuming a level addition to ratings2			0.4	10	0.5	11
Credit spreads of sub investment grade assets widen by 100bps assuming a level addition to ratings2,4			(0.3)	(5)	(0.3)	(6)
Credit migration5			(1.5)	(15)	(0.8)	(9)
25% fall in equity markets6			(0.5)	(4)	(0.5)	(5)
15% fall in property markets7			(0.7)	(6)	(0.7)	(6)
100bps increase in risk free rates8			0.7	15	1.0	22
50bps decrease in risk free rates8,9			(0.4)	(8)	(0.6)	(11)
1. Both the 2020 and 2019 sensitivities exclude the impact from the Mature Savings business (including the With-Profits fund) as the risks have been transferred to ReAssure Limited from 1 January 2018.
2. The spread sensitivity applies to the group's corporate bond (and similar) holdings, with no change in long term default expectations. Restructured lifetime mortgages are excluded as the underlying exposure is to property.
3. The stress for AA bonds is twice that for AAA bonds, for A bonds it is three times, for BBB four times and so on, such that the weighted average spread stress for the portfolio is 100 basis points. To give a 100bps increase on the total portfolio the spread stress increases in steps of 32bps, i.e. 32bps for AAA, 64bps for AA etc.
4. No stress for bonds rated BBB and above. For bonds rated BB and below the stress is 100bps.  The spread widening on the total portfolio is 1bp as the group holds only 2% in bonds rated BB and below. The impact is primarily an increase in SCR arising from the modelled cost of trading downgraded bonds back to a higher rating in the stress scenarios in the SCR calculation. We estimate the widening between BBB and BB bonds over H1 20 to be c.115bps.
5. Credit migration stress covers the cost of an immediate big letter downgrade on 20% of all assets where the capital treatment depends on a credit rating (including corporate bonds, sale and leaseback rental strips, lifetime mortgage senior notes are excluded). Downgraded assets are assumed to be traded to their original credit rating, so the impact is primarily a reduction in Own Funds from the loss of value on downgrade.  The impact of the sensitivity will depend upon the market levels of spreads at the balance sheet date.
6. This relates primarily to equity exposure in LGC but will also include equity-based mutual funds and other investments that receive an equity stress (for example, certain investments in subsidiaries). Some assets have factors that increase or decrease the stress relative to general equity levels via a beta factor.
7. Assets stressed include residual values from sale and leaseback, the full amount of lifetime mortgages and direct investments treated as property.
8. Assuming a recalculation of the Transitional Measure on Technical Provisions that partially offsets the impact on Risk Margin.
9. In the interest rate down stress negative rates are allowed, i.e. there is no floor at zero rates.
The above sensitivity analysis does not reflect all management actions which could be taken to reduce the impacts. In practice, the group actively manages its asset and liability positions to respond to market movements. Other than in the interest rate stresses, we have not allowed for the recalculation of TMTP.   The impacts of these stresses are not linear therefore these results should not be used to interpolate or extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.

 

 

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Capital                                                                                                                           Page 78

 

6.02 Estimated Solvency II new business contribution

 

(a) New business by product1
Management estimates of the present value of new business premium (PVNBP) and the margin for selected lines of business are provided below:
			Contribution			Contribution
			from new			from new
		PVNBP	business2	Margin3	PVNBP	business2	Margin3
		6 months	6 months	6 months	Full year	Full year	Full year
		2020	2020	2020	2019	2019	2019
		£m	£m	%	£m	£m	%
LGR - UK annuity business		3,597	382	10.6	11,295	890	7.9
UK Protection Total		919	86	9.4	1,604	122	7.6
- Retail Protection		636	61	9.6	1,284	98	7.6
- Group Protection		283	25	8.8	320	24	7.5
US Protection4		452	52	11.5	850	94	11.1
1. Selected lines of business only.
2. The contribution from new business is defined as the present value at the point of sale of expected future Solvency II surplus emerging from new business written in the period using the risk discount rate applicable at the end of the reporting period.
3. Margin is based on unrounded inputs.
4. In local currency, US Protection reflects PVNBP of $570m (31 December 2019: $1,085m) and a contribution from new business of $66m (31 December 2019: $120m).
The increase in LGR margin was driven by the longer average duration for the schemes written in the first six months of the year, compared to the schemes written in prior year.   For UK Protection new business the increase in profitability was driven by a shift in the product mix combined with continued price optimisation. The margin was further increased by the fall in interest rates during H1 20, which led to lower discount rates and in turn higher profitability.   The US Protection margin improved compared to the prior year. The increase is driven by changes to local statutory regulatory reserving standards in 2020, which reduce excess reserve levels and subsequently reduce financing costs.

 

(b) Basis of preparation

 

Solvency II new business contribution reflects the portion of Solvency II value added by new business written in the period. It has been calculated in a manner consistent with principles and methodologies which were set out in the group's 2019 Annual Report and Accounts and Full Year Results.

 

Solvency II new business contribution has been calculated for the group's most material insurance-related businesses, namely, LGR, LGI and LGA.

 

Intra-group reinsurance arrangements are in place between US, UK and Bermudan businesses and it is expected that these arrangements will be periodically extended to cover recent new business. The LGA new business margin assumes that the new business will continue to be reinsured in 2020 and looks through the intra-group arrangements.

 

 

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6.02 Estimated Solvency II new business contribution (continued)

 

(c) Assumptions

 

The key economic assumptions are as follows:

 

	30 Jun 2020	31 Dec 2019
	%	%
Margin for Risk	4.6	3.5
Risk free rate
- UK	0.4	1.1
- US	0.7	1.9
Risk discount rate (net of tax)
- UK	5.0	4.6
- US	5.3	5.4
Long-term rate of return on non profit annuities in LGR	2.4	2.8

 

The future earnings are discounted using duration-based discount rates, which is the sum of a duration-based risk free rate and a flat margin for risk. The risk free rates have been based on a swap curve net of the EIOPA-specified Credit Risk Adjustment. The risk free rate shown above is a weighted average based on the projected cash flows.

 

Other than updating for recent experience, all other economic and non-economic assumptions and methodologies that would have a material impact on the margin for these contracts are unchanged from those previously used by the group for its European Embedded Value reporting, other than the cost of currency hedging which has been updated to reflect current market conditions and hedging activity in light of Solvency II. In particular:

 

·      The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to the portfolio yield on the relevant backing assets held at market value at the end of the reporting period. The calculated return takes account of derivatives and other credit instruments in the investment portfolio. The returns on fixed and index-linked assets are calculated net of an allowance for default risk which takes account of the credit rating and the outstanding term of the assets. The allowance for corporate and other unapproved credit asset defaults within the new business contribution is calculated explicitly for each bulk annuity scheme written, and the weighted average deduction for business written in 2020 equates to a level rate deduction from the expected returns for the overall annuities portfolio of 15 basis points.

 

·      Non-economic assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses (excluding development costs). An allowance is made for future mortality improvement. For new business, mortality assumptions may be modified to take certain scheme specific features into account.

 

Tax

 

The projections take into account all tax which is expected to be paid, based on best estimate assumptions, applying current legislation and practice together with substantively enacted future changes.

 

The profits on the new business are calculated on an after tax basis and are grossed up by the notional attributed tax rate. For the UK, the after tax basis assumes the annualised current rate of 19%. The tax rate used for grossing up is the long term corporate tax rate in the territory concerned, which for the UK is 19%.

 

US covered business profits are grossed up using the long term corporate tax rate of 21%.

 

 

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6.02 Estimated Solvency II new business contribution (continued)

 

(d) Reconciliation of PVNBP to gross written premium
A reconciliation of PVNBP and gross written premium is given below:
		6 months	Full year
		2020	2019
	Notes	£bn	£bn
PVNBP	6.02 (a)	5.0	13.7
Effect of capitalisation factor		(1.2)	(1.9)
New business premiums from selected lines		3.8	11.8
Other1		0.6	1.9
Total LGR and LGI new business	5.05,5.06	4.4	13.7
Annualisation impact of regular premium long-term business		(0.1)	(0.2)
IFRS gross written premiums from existing long-term insurance business		1.6	2.9
Deposit accounting for investment products		(0.4)	(1.2)
Total gross written premiums2	3.01	5.5	15.2
1. Other principally includes annuity sales in the US and lifetime mortgage advances.
2. Total gross written premiums exclude gross written premiums from discontinued operations.

 

 

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7.01 Investment portfolio

 

				Market	Market	Market
				value	value	value
				30 Jun	30 Jun	31 Dec
				2020	2019	2019
				£m	£m	£m
Worldwide total assets under management1				1,247,942	1,141,593	1,202,425
Client and policyholder assets				(1,119,803)	(1,036,229)	(1,092,626)
Non-unit linked with-profits assets				(9,854)	(10,372)	(10,190)
Investments to which shareholders are directly exposed				118,285	94,992	99,609
1. Worldwide total assets under management include LGIM AUM and other group assets not managed by LGIM.

 

Analysed by investment class:
			Other
			non profit		Other
		LGR	insurance	LGC	shareholder
		investments	investments	investments	investments	Total	Total	Total
		30 Jun	30 Jun	30 Jun	30 Jun	30 Jun	30 Jun	31 Dec
		2020	2020	2020	2020	2020	2019	2019
	Notes	£m	£m	£m	£m	£m	£m	£m
Equities2		206	22	2,772	86	3,086	3,142	3,131
Bonds	7.03	76,406	2,103	2,161	327	80,997	71,258	75,142
Derivative assets3		22,095	-	293	-	22,388	11,633	11,556
Property	7.04	4,016	-	157	-	4,173	3,275	3,957
Cash, cash equivalents and loans4		2,858	577	2,064	538	6,037	4,317	4,275
Financial investments		105,581	2,702	7,447	951	116,681	93,625	98,061
Other assets5		89	-	1,515	-	1,604	1,367	1,548
Total investments		105,670	2,702	8,962	951	118,285	94,992	99,609
2. Equity investments include a total of £328m (30 June 2019: £362m; 31 December 2019: £324m) in respect of associates and joint ventures.
3. Derivative assets are shown gross of derivative liabilities of £24.9bn (30 June 2019: £6.9bn; 31 December 2019: £11.5bn). Exposures arise from use of derivatives for efficient portfolio management, especially the use of interest rate swaps, inflation swaps, credit default swaps and foreign exchange forward contracts for asset and liability management.
4. Loans include reverse repurchase agreements of £1,868m (30 June 2019: £960m; 31 December 2019: £1,262m).
5. Other assets include finance leases of £89m (2019: £90m) and the consolidated net asset value of the group's investments in CALA Homes and other housing businesses.

 

 

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7.02 Direct investments

 

(a) Analysed by asset class
	Direct1	Traded2		Direct1	Traded2		Direct1	Traded2
	Investments	securities	Total	Investments	securities	Total	Investments	securities	Total
	30 Jun	30 Jun	30 Jun	30 Jun	30 Jun	30 Jun	31 Dec	31 Dec	31 Dec
	2020	2020	2020	2019	2019	2019	2019	2019	2019
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Equities	1,355	1,731	3,086	1,300	1,842	3,142	1,282	1,849	3,131
Bonds3	20,272	60,725	80,997	15,824	55,434	71,258	18,553	56,589	75,142
Derivative assets	-	22,388	22,388	-	11,633	11,633	-	11,556	11,556
Property4	4,173	-	4,173	3,275	-	3,275	3,957	-	3,957
Loans and other receivables	467	5,570	6,037	410	3,907	4,317	408	3,867	4,275
Financial investments	26,267	90,414	116,681	20,809	72,816	93,625	24,200	73,861	98,061
Other assets	1,604	-	1,604	1,367	-	1,367	1,548	-	1,548
Total investments	27,871	90,414	118,285	22,176	72,816	94,992	25,748	73,861	99,609
1. Direct investments, which generally constitute an agreement with another party, represent an exposure to untraded and often less volatile asset classes. Direct Investments also include physical assets, bilateral loans and private equity, but exclude hedge funds.
2. Traded securities are defined by exclusion. If an instrument is not a Direct Investment, then it is classed as a traded security.
3. Bonds include lifetime mortgages of £5,478m (30 June 2019: £3,990m; 31 December 2019: £4,733m).
4. A further breakdown of property is provided in Note 7.04.

 

 

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7.02 Direct investments (continued)

 

(b) Analysed by segment
					LGR	LGC1	LGI	Total
					30 Jun	30 Jun	30 Jun	30 Jun
					2020	2020	2020	2020
					£m	£m	£m	£m
	-
Equities					16	1,261	78	1,355
Bonds2					19,444	3	825	20,272
Property					4,016	157	-	4,173
Loans and other receivables					-	145	322	467
Financial investments					23,476	1,566	1,225	26,267
Other assets					89	1,515	-	1,604
Total direct investments					23,565	3,081	1,225	27,871
1. LGC includes £48m of equities that belong to other shareholder funds.
2. Bonds include lifetime mortgages of £5,478m.

 

					LGR	LGC1	LGI	Total
					30 Jun 2019	30 Jun 2019	30 Jun 2019	30 Jun 2019
					£m	£m	£m	£m
Equities					6	1,233	61	1,300
Bonds2					15,148	3	673	15,824
Property					3,131	144	-	3,275
Loans and other receivables					-	64	346	410
Financial investments					18,285	1,444	1,080	20,809
Other assets					90	1,277	-	1,367
Total direct investments					18,375	2,721	1,080	22,176
1. LGC includes £58m of equities and £23m of property that belong to other shareholder funds.
2. Bonds include lifetime mortgages of £3,990m.

 

					LGR	LGC1	LGI	Total
					31 Dec	31 Dec	31 Dec	31 Dec
					2019	2019	2019	2019
					£m	£m	£m	£m
Equities					9	1,211	62	1,282
Bonds2					17,711	4	838	18,553
Property					3,798	159	-	3,957
Loans and other receivables					-	93	315	408
Financial investments					21,518	1,467	1,215	24,200
Other assets					90	1,458	-	1,548
Total direct investments					21,608	2,925	1,215	25,748
1. LGC included £48m of equities that belong to other shareholder funds.
2. Bonds include lifetime mortgages of £4,733m.

 

 

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7.03 Bond portfolio summary

 

(a) Sectors analysed by credit rating
					BB or
	AAA	AA	A	BBB	below	Other	Total2	Total2
As at 30 June 2020	£m	£m	£m	£m	£m	£m	£m	%
Sovereigns, Supras and Sub-Sovereigns	2,521	11,299	738	449	26	-	15,033	19
Banks:
- Tier 1	-	-	-	1	-	1	2	-
- Tier 2 and other subordinated	-	-	69	42	5	-	116	-
- Senior	-	1,335	2,192	545	1	-	4,073	5
- Covered	187	-	4	-	-	-	191	-
Financial Services:
- Tier 2 and other subordinated	-	120	70	11	-	4	205	-
- Senior	2	447	176	267	9	-	901	1
Insurance:
- Tier 2 and other subordinated	56	139	8	63	-	-	266	-
- Senior	-	257	538	311	-	-	1,106	1
Consumer Services and Goods:
- Cyclical	-	354	1,089	1,961	333	2	3,739	5
- Non-cyclical	305	883	2,803	4,006	316	1	8,314	10
- Health Care	-	376	856	636	7	-	1,875	2
Infrastructure:
- Social	216	771	4,331	877	89	-	6,284	8
- Economic	332	58	920	3,626	337	-	5,273	7
Technology and Telecoms	206	204	1,612	2,844	41	-	4,907	6
Industrials	-	12	847	681	27	-	1,567	2
Utilities	-	221	5,540	5,733	6	-	11,500	15
Energy	-	-	424	859	12	-	1,295	2
Commodities	-	-	286	748	17	-	1,051	1
Oil and Gas	-	649	1,037	539	274	-	2,499	3
Real estate	-	7	1,685	1,608	101	-	3,401	4
Structured finance ABS / RMBS / CMBS / Other	372	662	220	391	192	1	1,838	2
Lifetime mortgage loans1	3,427	1,384	304	350	-	13	5,478	7
CDOs	-	57	11	15	-	-	83	-
Total £m	7,624	19,235	25,760	26,563	1,793	22	80,997	100
Total %	9	24	32	33	2	-	100
1. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal Matching Adjustment structuring. 2. The group's bond portfolio is dominated by LGR investments. These account for £76,406m, representing 94% of the total group portfolio.

 

 

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7.03 Bond portfolio summary (continued)

 

(a) Sectors analysed by credit rating (continued)
					BB or
	AAA	AA	A	BBB	below	Other	Total2	Total2
As at 30 June 2019	£m	£m	£m	£m	£m	£m	£m	%
Sovereigns, Supras and Sub-Sovereigns	1,585	9,472	297	456	59	-	11,869	17
Banks:
- Tier 1	-	-	-	2	-	-	2	-
- Tier 2 and other subordinated	-	47	84	27	2	-	160	-
- Senior	23	1,693	2,830	81	-	-	4,627	6
- Covered	132	-	-	-	-	-	132	-
Financial Services:
- Tier 2 and other subordinated	-	93	91	10	-	4	198	-
- Senior	2	469	73	303	8	-	855	1
Insurance:
- Tier 2 and other subordinated	28	125	3	53	-	-	209	-
- Senior	-	233	551	205	-	-	989	1
Consumer Services and Goods:
- Cyclical	-	632	951	1,903	142	2	3,630	5
- Non-cyclical	240	1,100	2,060	3,698	209	1	7,308	10
- Health Care	-	138	465	472	7	-	1,082	2
Infrastructure:
- Social	110	790	3,719	847	40	-	5,506	8
- Economic	336	27	1,683	2,781	55	-	4,882	7
Technology and Telecoms	116	168	1,133	2,819	52	-	4,288	6
Industrials	-	12	750	679	26	-	1,467	2
Utilities	-	181	5,863	4,513	4	35	10,596	15
Energy	-	-	300	874	14	-	1,188	2
Commodities	-	-	261	584	15	-	860	1
Oil and Gas	-	419	917	698	113	1	2,148	3
Real estate	-	6	1,692	1,542	131	-	3,371	5
Structured finance ABS / RMBS / CMBS / Other	446	766	251	336	21	1	1,821	3
Lifetime mortgage loans1	2,403	886	326	276	-	99	3,990	6
CDOs	-	-	66	14	-	-	80	-
Total £m	5,421	17,257	24,366	23,173	898	143	71,258	100
Total %	8	24	34	33	1	-	100
1. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal Matching Adjustment structuring.
2. The group's bond portfolio is dominated by LGR investments. These account for £66,907m, representing 94% of the total group portfolio.

 

 

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7.03 Bond portfolio summary (continued)

 

 

(a) Sectors analysed by credit rating (continued)
					BB or
	AAA	AA	A	BBB	below	Other	Total2	Total2
As at 31 December 2019	£m	£m	£m	£m	£m	£m	£m	%
Sovereigns, Supras and Sub-Sovereigns	2,188	9,543	535	390	27	-	12,683	17
Banks:
- Tier 1	-	-	-	1	-	1	2	-
- Tier 2 and other subordinated	-	-	73	24	3	-	100	-
- Senior	6	1,893	2,794	758	1	-	5,452	7
- Covered	165	-	2	-	-	-	167	-
Financial Services:
- Tier 2 and other subordinated	-	196	91	10	-	4	301	-
- Senior	4	381	231	322	9	-	947	1
Insurance:
- Tier 2 and other subordinated	49	131	6	56	-	-	242	-
- Senior	-	232	549	207	-	-	988	1
Consumer Services and Goods:
- Cyclical	-	425	963	1,985	134	2	3,509	5
- Non-cyclical	260	868	2,185	3,827	217	1	7,358	10
- Health care	-	309	728	425	7	-	1,469	2
Infrastructure:
- Social	121	772	4,044	781	80	-	5,798	8
- Economic	338	27	1,436	3,148	102	-	5,051	7
Technology and Telecoms	202	173	1,196	2,805	42	-	4,418	6
Industrials	-	11	817	588	27	-	1,443	2
Utilities	-	190	5,885	4,669	2	32	10,778	15
Energy	-	-	340	814	12	-	1,166	2
Commodities	-	-	244	654	14	-	912	1
Oil and Gas	-	593	799	702	108	1	2,203	3
Real estate	3	8	1,787	1,629	125	-	3,552	5
Structured finance ABS / RMBS / CMBS / Other	406	735	247	367	32	1	1,788	2
Lifetime mortgage loans1	2,798	1,253	362	309	-	11	4,733	6
CDOs	-	-	68	14	-	-	82	-
Total £m	6,540	17,740	25,382	24,485	942	53	75,142	100
Total %	9	23	34	33	1	-	100
1. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal Matching Adjustment structuring. 2. The group's bond portfolio is dominated by LGR investments. These account for £70,061m, representing 93% of the total group portfolio.

 

 

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7.03 Bond portfolio summary (continued)

 

(b) Sectors analysed by domicile
			EU
			excluding	Rest of
	UK	US	UK	the World	Total
As at 30 June 2020	£m	£m	£m	£m	£m
Sovereigns, Supras and Sub-Sovereigns	11,035	2,603	859	536	15,033
Banks	998	1,696	1,181	507	4,382
Financial Services	415	189	490	12	1,106
Insurance	111	934	203	124	1,372
Consumer Services and Goods:
- Cyclical	539	2,666	367	167	3,739
- Non-cyclical	1,715	6,037	424	138	8,314
- Health care	204	1,603	68	-	1,875
Infrastructure:
- Social	5,670	452	111	51	6,284
- Economic	3,945	830	190	308	5,273
Technology and Telecoms	593	2,677	755	882	4,907
Industrials	78	1,075	348	66	1,567
Utilities	6,597	2,332	2,055	516	11,500
Energy	228	813	112	142	1,295
Commodities	4	346	167	534	1,051
Oil and Gas	253	644	796	806	2,499
Real estate	2,196	381	618	206	3,401
Structured Finance ABS / RMBS / CMBS / Other	941	870	12	15	1,838
Lifetime mortgages	5,478	-	-	-	5,478
CDOs	-	-	-	83	83
Total	41,000	26,148	8,756	5,093	80,997

 

 

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7.03 Bond portfolio summary (continued)

 

(b) Sectors analysed by domicile (continued)
			EU
			excluding	Rest of
	UK	US	UK	the World	Total
As at 30 June 2019	£m	£m	£m	£m	£m
Sovereigns, Supras and Sub-Sovereigns	9,279	1,500	704	386	11,869
Banks	1,468	1,209	1,450	794	4,921
Financial Services	354	91	597	11	1,053
Insurance	137	769	206	86	1,198
Consumer Services and Goods:
- Cyclical	624	2,232	615	159	3,630
- Non-cyclical	1,619	5,158	491	40	7,308
- Health care	18	1,018	46	-	1,082
Infrastructure:
- Social	5,106	358	-	42	5,506
- Economic	3,905	563	95	319	4,882
Technology and Telecoms	717	2,217	653	701	4,288
Industrials	96	932	372	67	1,467
Utilities	5,928	1,869	2,300	499	10,596
Energy	266	780	4	138	1,188
Commodities	14	335	66	445	860
Oil and Gas	294	659	438	757	2,148
Real estate	2,080	401	525	365	3,371
Structured Finance ABS / RMBS / CMBS / Other	1,019	754	22	26	1,821
Lifetime mortgages	3,990	-	-	-	3,990
CDOs	-	-	-	80	80
Total	36,914	20,845	8,584	4,915	71,258

 

 

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7.03 Bond portfolio summary (continued)

 

(b) Sectors analysed by domicile (continued)
			EU
			excluding	Rest of
	UK	US	UK	the World	Total
As at 31 December 2019	£m	£m	£m	£m	£m
Sovereigns, Supras and Sub-Sovereigns	9,764	1,995	645	279	12,683
Banks	2,002	1,328	1,669	722	5,721
Financial Services	501	95	639	13	1,248
Insurance	103	858	186	83	1,230
Consumer Services and Goods
- Cyclical	637	2,325	341	206	3,509
- Non-cyclical	1,716	5,123	479	40	7,358
- Health care	182	1,233	54	-	1,469
Infrastructure
- Social	5,357	290	106	45	5,798
- Economic	3,823	705	174	349	5,051
Technology and Telecoms	685	2,321	673	739	4,418
Industrials	76	1,036	273	58	1,443
Utilities	6,259	1,927	2,108	484	10,778
Energy	265	768	11	122	1,166
Commodities	5	305	137	465	912
Oil and Gas	288	665	583	667	2,203
Real estate	2,290	377	489	396	3,552
Structured finance ABS / RMBS / CMBS / Other	979	766	21	22	1,788
Lifetime mortgage loans	4,733	-	-	-	4,733
CDOs	-	-	-	82	82
Total	39,665	22,117	8,588	4,772	75,142

 

 

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Investments                                                                                                                   Page 90

 

7.03 Bond portfolio summary (continued)

 

(c) Bond portfolio analysed by credit rating
				Externally	Internally
				rated	rated1	Total
As at 30 June 2020				£m	£m	£m
AAA				3,808	3,816	7,624
AA				15,720	3,515	19,235
A				19,457	6,303	25,760
BBB				20,835	5,728	26,563
BB or below				1,114	679	1,793
Other				8	14	22
Total				60,942	20,055	80,997
				Externally	Internally
				rated	rated1	Total
As at 30 June 2019				£m	£m	£m
AAA				2,647	2,774	5,421
AA				14,631	2,626	17,257
A				19,173	5,193	24,366
BBB				18,199	4,974	23,173
BB or below				658	240	898
Other				10	133	143
Total				55,318	15,940	71,258
				Externally	Internally
				rated	rated1	Total
As at 31 December 2019				£m	£m	£m
AAA				3,364	3,176	6,540
AA				14,568	3,172	17,740
A				19,320	6,062	25,382
BBB				18,990	5,495	24,485
BB or below				655	287	942
Other				12	41	53
Total				56,909	18,233	75,142
1. Where external ratings are not available an internal rating has been used where practicable to do so.

 

 

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Investments                                                                                                                   Page 91

 

7.04 Property analysis

 

Property exposure within Direct investments by status
				LGR1	LGC2	Total
As at 30 June 2020				£m	£m	£m	%
Fully let				3,663	-	3,663	88
Development				353	25	378	9
Land				-	132	132	3
				4,016	157	4,173	100
				LGR1	LGC2	Total
As at 30 June 2019				£m	£m	£m	%
Fully let				2,715	-	2,715	83
Development3				416	23	439	13
Land				-	121	121	4
				3,131	144	3,275	100
				LGR1	LGC2	Total
As at 31 December 2019				£m	£m	£m	%
Fully let				3,414	-	3,414	87
Development				384	23	407	10
Land				-	136	136	3
				3,798	159	3,957	100
1. The fully let LGR property includes £3.5bn (30 June 2019: £3.0bn; 31 December 2019: £3.2bn) let to investment grade tenants.
2. The above analysis does not include assets related to the group's investments in CALA Homes and other housing businesses, which are accounted for as inventory within Receivables and other assets on the group's Consolidated Balance Sheet and measured at the lower of cost and net realisable value. At 30 June 2020 the group held a total of £2,261m (30 June 2019: £1,910m; 31 December 2019: £2,120m) of such assets.
3. The 30 June 2019 balance for LGR has been represented, by reallocating £416m from Fully let to Development, to more appropriately reflect the status of that property exposure.

 

 

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Alternative Performance Measures                                                                                   Page 93

 

An alternative performance measure (APM) is a financial measure of historic or future financial performance, financial position, or cash flows, other than a financial measure defined under IFRS or the regulations of Solvency II.  APMs offer investors additional information on the company's performance and the financial effect of 'one-off' events and the group uses a range of these metrics to provide a better understanding of its underlying performance.  The APMs used by the group are listed in this section, along with their definition/ explanation, their closest IFRS measure and reference to the reconciliations to those IFRS measures.

Group adjusted operating profit

Definition

Group adjusted operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items. It therefore reflects longer-term economic assumptions for the group's insurance businesses and shareholder funds, except for LGC's trading businesses (which reflects the IFRS profit before tax) and LGIA non-term business (which excludes unrealised investment returns to align with the liability measurement under US GAAP). Variances between actual and smoothed investment return assumptions are reported below group adjusted operating profit, as well as any differences between investment return on actual assets and the long-term asset mix. Exceptional income and expenses which arise outside the normal course of business in the period, such as merger and acquisition and start-up costs, are also excluded from group adjusted operating profit.

Group adjusted operating profit was previously described as 'operating profit'. In order to maintain a consistent understanding of the group's performance the term 'operating profit' will continue to be used throughout the annual report and accounts as a substitute for group adjusted operating profit.

Closest IFRS measure

Profit before tax attributable to equity holders.

Reconciliation

Note 2.01 Operating profit.

Return on Equity (ROE)

Definition

ROE measures the return earned by shareholders on shareholder capital retained within the business. ROE is calculated as IFRS profit after tax divided by average IFRS shareholders' funds (by reference to opening and closing shareholders' funds as provided in the IFRS consolidated statement of changes in equity for the period).

Closest IFRS measure

Calculated using:

 

- Profit attributable to equity holders

- Equity attributable to owners of the parent

 

Reconciliation

Calculated using annualised profit attributable to equity holders for the period of £580m (30 June 2019: £1,748m; 31 December 2019: £1,834m) and average equity attributable to the owners of the parent of £9,140m (30 June 2019: £8,671m; 31 December 2019: £8,974m)

 

Assets under Management

Definition

Funds which are managed by our fund managers on behalf of investors. It represents the total amount of money investors have trusted with our fund managers to invest across our investment products.

Closest IFRS measures

- Financial investments

- Investment property

- Cash and cash equivalents

 

Reconciliation

Note 5.03 Reconciliation of assets under management to Consolidated Balance Sheet financial investments, investment property and cash and cash equivalents.

Net release from operations

Definition

Release from operations plus new business surplus / (strain). Net release from operations was previously referred to as net cash, and includes the release of prudent margins from the back book, together with the premium received less the setup of prudent reserves and associated acquisition costs for new business.

Closest IFRS measure

Profit before tax attributable to equity holders.

Reconciliation

Notes 2.01 Operating profit and 2.02 Reconciliation of release from operations to operating profit before tax.

Adjusted profit before tax attributable to equity holders

Definition

The APM measures profit before tax attributable to shareholders incorporating actual investment returns experienced during the year and the pre-tax results of discontinued operations.

Closest IFRS measure

Profit before tax attributable to equity holders.

Reconciliation

Note 2.01 Operating profit.

 

 

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Half Year Report 2020 Part 3

 

Glossary                                                                                                                            Page 94

 

* These items represent an alternative performance measure (APM)

 

Ad valorem fees

 

Ongoing management fees earned on assets under management, overlay assets and advisory assets as defined below.

 

Adjusted profit before tax attributable to equity holders*

 

Refer to the alternative performance measures section.

 

Advisory assets

 

These are assets on which Global Index Advisors (GIA) provide advisory services. Advisory assets are beneficially owned by GIA's clients and all investment decisions pertaining to these assets are also made by the clients. These are different from Assets under Management (AUM) defined below.

 

Alternative performance measures (APMs)

 

An alternative performance measure is a financial measure of historic or future financial performance, financial position, or cash flows, other than a financial measure defined under IFRS or the regulations of Solvency II. 

 

Annual premium

 

Premiums that are paid regularly over the duration of the contract such as protection policies.

 

Annual premium equivalent (APE)

 

A standardised measure of the volume of new life insurance business written. It is calculated as the sum of (annualised) new recurring premiums and 10% of the new single premiums written in an annual reporting period.

 

Annuity

 

Regular payments from an insurance company made for an agreed period of time (usually up to the death of the recipient) in return for either a cash lump sum or a series of premiums which the policyholder has paid to the insurance company during their working lifetime.

 

Assets under administration (AUA)

 

Assets administered by Legal & General which are beneficially owned by clients and are therefore not reported on the Consolidated Balance Sheet. Services provided in respect of assets under administration are of an administrative nature, including safekeeping, collecting investment income, settling purchase and sales transactions and record keeping.

 

Assets under management (AUM)*

 

Refer to the alternative performance measures section.

 

Back book acquisition

 

New business transacted with an insurance company which allows the business to continue to utilise Solvency II transitional measures associated with the business.

 

Bundled DC solution

 

Where investment and administration services are provided to a scheme by the same service provider. Typically, all investment and administration costs are passed onto the scheme members.

 

Bundled pension schemes

 

Where the fund manager bundles together the investment provider role and third-party administrator role, together with the role of selecting funds and providing investment education, into one proposition.

 

CAGR

 

Compound annual growth rate.

 

Credit rating

 

A measure of the ability of an individual, organisation or country to repay debt. The highest rating is usually AAA and the lowest Unrated. Ratings are usually issued by a credit rating agency (e.g. Moody's or Standard & Poor's) or a credit bureau.

 

Deduction and aggregation (D&A)

 

A method of calculating group solvency on a Solvency II basis, whereby the assets and liabilities of certain entities are excluded from the group consolidation. The net contribution from those entities to group Own Funds is included as an asset on the group's Solvency II balance sheet. Regulatory approval has been provided to recognise the (re)insurance subsidiaries of LGI US on this basis.

 

Defined benefit pension scheme (DB scheme)

 

A type of pension plan in which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns.

 

Defined contribution pension scheme (DC scheme)

 

A type of pension plan where the pension benefits at retirement are determined by agreed levels of contributions paid into the fund by the member and employer. They provide benefits based upon the money held in each individual's plan specifically on behalf of each member. The amount in each plan at retirement will depend upon the investment returns achieved and on the member and employer contributions.

 

Derivatives

Derivatives are not a separate asset class but are contracts usually giving a commitment or right to buy or sell assets on specified conditions, for example on a set date in the future and at a set price. The value of a derivative contract can vary. Derivatives can generally be used with the aim of enhancing the overall investment returns of a fund by taking on an increased risk, or they can be used with the aim of reducing the amount of risk to which a fund is exposed.

 

Direct investments

Direct investments, which generally constitute an agreement with another party, represent an exposure to untraded and often less volatile asset classes. Direct investments also include physical assets, bilateral loans and private equity, but exclude hedge funds.

 

Dividend cover

 

Dividend cover measures how many times over the net release from operations in the year could have paid the full year dividend. For example, if the dividend cover is 3, this means that the net release from operations was three times the amount of dividend paid out.

 

 

 

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Glossary                                                                                                                            Page 95

 

 

Earnings per share (EPS)

 

EPS is a common financial metric which can be used to measure the profitability and strength of a company over time. It is the total shareholder profit after tax divided by the number of shares outstanding. EPS uses a weighted average number of shares outstanding during the year.

 

Eligible Own Funds

 

Eligible Own Funds represents the capital available to cover the group's Solvency II Capital Requirement. Eligible Own Funds comprise the excess of the value of assets over liabilities, as valued on a Solvency II basis, plus high quality hybrid capital instruments, which are freely available (fungible and transferable) to absorb losses wherever they occur across the group.  Eligible Own Funds (shareholder view basis) excludes the contribution to the group's solvency capital requirement of with-profits funds and final salary pension schemes.

 

Employee engagement index

 

The Employee engagement index measures the extent to which employees are committed to the goals of Legal & General and are motivated to contribute to the overall success of the company, whilst working with their manager to enhance their own sense of development and well-being.

 

ETF

 

LGIM's European Exchange Traded Fund platform.

Euro Commercial paper

 

Short term borrowings with maturities of up to 1 year typically issued for working capital purposes.

 

FVTPL

 

Fair value through profit or loss. A financial asset or financial liability that is measured at fair value in the Consolidated Balance Sheet reports gains and losses arising from movements in fair value within the Consolidated Income Statement as part of the profit or loss for the year.

 

Full year dividend

 

Full year dividend is the total dividend per share declared for the year (including interim dividend but excluding, where appropriate, any special dividend).

 

Generally accepted accounting principles (GAAP)

 

These are a widely accepted collection of guidelines and principles, established by accounting standard setters and used

by the accounting community to report financial information.

 

Gross written premiums (GWP)

 

GWP is an industry measure of the life insurance premiums due and the general insurance premiums underwritten in the reporting period, before any deductions for reinsurance.

 

Group adjusted operating profit*

 

Refer to the alternative performance measures section.

 

ICAV - Irish Collective Asset-Management Vehicle

 

A legal structure investment fund, based in Ireland and aimed at European investment funds looking for a simple, tax-efficient investment vehicle.

 

Index tracker (passive fund)

 

Index tracker funds invest in most or all of the same shares, and in a similar proportion, as the index they are tracking, for example the FTSE 100 index. Index tracker funds aim to produce a return in line with a particular market or sector, for example, Europe or technology. They are also sometimes known as 'tracker funds'.

 

International financial reporting standards (IFRS)

 

These are accounting guidelines and rules that companies and organisations follow when completing financial statements.

They are designed to enable comparable reporting between companies, and they are the standards that all publicly listed

groups in the European Union (EU) are required to use.

 

Key performance indicators (KPIs)

 

These are measures by which the development, performance or position of the business can be measured effectively. The group Board reviews the KPIs annually and updates them where appropriate.

 

LGA

 

Legal & General America.

 

LGAS

 

Legal and General Assurance Society Limited.

 

LGC

 

Legal & General Capital.

 

LGI

 

Legal & General Insurance.

 

LGI new business

New business arising from new policies written on retail protection products and new deals and incremental business on group protection products.

LGIA

 

Legal & General Insurance America.

 

LGIM

Legal & General Investment Management

LGR

Legal & General Retirement, which includes Legal & General Retirement Institutional (LGRI) and Legal & General Retirement Retail (LGRR).

LGR new business

 

Single premiums arising from annuity sales and back book acquisitions (including individual annuity and pension risk transfer), the volume of lifetime mortgage lending and the notional size of longevity insurance transactions, based on the present value of the fixed leg cash flows discounted at the LIBOR curve.

 

 

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Glossary                                                                                                                            Page 96

 

 

Liability driven investment (LDI)

 

A form of investing in which the main goal is to gain sufficient assets to meet all liabilities, both current and future. This form of investing is most prominent in final salary pension plans, whose liabilities can often reach into billions of pounds for the largest of plans.

 

Lifetime mortgages

 

An equity release product aimed at people aged 55 years and over. It is a mortgage loan secured against the customer's house. Customers do not make any monthly payments and continue to own and live in their house until they move into long term care or on death. A no negative equity guarantee exists such that if the house value on repayment is insufficient to cover the outstanding loan, any shortfall is borne by the lender.

 

Matching adjustment

 

An adjustment to the discount rate used for annuity liabilities in Solvency II balance sheets. This adjustment reflects the fact that the profile of assets held is sufficiently well-matched to the profile of the liabilities, that those assets can be held to maturity, and that any excess return over risk-free (that is not related to defaults) can be earned regardless of asset value fluctuations after purchase.

 

Mortality rate

 

Rate of death, influenced by age, gender and health, used in pricing and calculating liabilities for future policyholders of life and annuity products, which contain mortality risks.

 

Net release from operations*

 

Refer to the alternative performance measures section.

 

New business surplus/strain

The net impact of writing new business on the IFRS position, including the benefit/cost of acquiring new business and the setting up of reserves, for UK non profit annuities, workplace savings, protection and savings, net of tax. This metric provides an understanding of the impact of new contracts on the IFRS profit for the year.

 

Open architecture

 

Where a company offers investment products from a range of other companies in addition to its own products. This gives customers a wider choice of funds to invest in and access to a larger pool of money management professionals.

 

Overlay assets

 

Overlay assets are derivative assets that are managed alongside the physical assets held by LGIM. These instruments include interest rate swaps, inflation swaps, equity futures and options. These are typically used to hedge risks associated with pension scheme assets during the derisking stage of the pension life cycle.

 

Pension risk transfer (PRT)

 

PRT represents bulk annuities bought by entities that run final salary pension schemes to reduce their responsibilities by closing the schemes to new members and passing the assets and obligations to insurance providers.

 

Platform

 

Online services used by intermediaries and consumers to view and administer their investment portfolios. Platforms usually provide facilities for buying and selling investments (including, in the UK products such as Individual Savings Accounts (ISAs), Self-Invested Personal Pensions (SIPPs) and life insurance) and for viewing an individual's entire portfolio to assess asset allocation and risk exposure.

 

Present value of future new business premiums (PVNBP)

 

PVNBP is equivalent to total single premiums plus the discounted value of annual premiums expected to be received over the term of the contracts using the same economic and operating assumptions used for the new business value at the end of the financial period. The discounted value of longevity insurance regular premiums and quota share reinsurance single premiums are calculated on a net of reinsurance basis to enable a more representative margin figure.  PVNBP therefore provides an estimate of the present value of the premiums associated with new business written in the year.

 

Purchased interest in long term business (PILTB)

 

An estimate of the future profits that will emerge over the remaining term of life and pensions policies that have been

acquired via a business combination.

 

Real assets

 

Real assets encompass a wide variety of tangible debt and equity investments, primarily real estate, infrastructure and energy.  They have the ability to serve as stable sources of long term income in weak markets, while also providing capital appreciation opportunities in strong markets.

 

Release from operations

The expected release of IFRS surplus from in-force business for the UK non-profit Insurance and Savings and LGR businesses, the shareholder's share of bonuses on with-profits business, the post-tax operating profit on other UK businesses, including the medium term expected investment return on LGC invested assets, and dividends remitted from LGA. Release from operations was previously referred to as operational cash generation.

 

Return on Equity (ROE)*

 

Refer to the alternative performance measures section.

 

Risk appetite

 

The aggregate level and types of risk a company is willing to assume in its exposures and business activities in order

to achieve its business objectives.

 

Single premiums

 

Single premiums arise on the sale of new contracts where the terms of the policy do not anticipate more than one premium being paid over its lifetime, such as in individual and bulk annuity deals.

 

Solvency II

 

The Solvency II regulatory regime is a harmonised prudential framework for insurance firms in the EEA. This single market approach is based on economic principles that measure assets and liabilities to appropriately align insurers' risk with the capital they hold to safeguard the policyholders' interest.

 

 

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Glossary                                                                                                                            Page 97

 

 

Solvency II capital coverage ratio

The Eligible Own Funds on a regulatory basis divided by the group solvency capital requirement. This represents the number of times the SCR is covered by Eligible Own Funds.

 

Solvency II capital coverage ratio (proforma basis)

The proforma basis Solvency II SCR coverage ratio incorporates the impacts of a recalculation of the Transitional Measures for Technical Provisions and the contribution of with-profits funds and our defined benefit pension schemes in both Own Funds and the SCR in the calculation of the SCR coverage ratio.

 

Solvency II capital coverage ratio (shareholder view basis)

In order to represent a shareholder view of group solvency position, the contribution of with-profits funds and our defined benefit pension schemes are excluded from both, the group's Own Funds and the group's solvency capital requirement, by the amount of their respective solvency capital requirements, in the calculation of the SCR coverage ratio. This incorporates the impacts of a recalculation of the Transitional Measures for Technical Provisions based on end of  period economic conditions. The shareholder view basis does not reflect the regulatory capital position as at 30 June 2020. This will be submitted to the PRA in August 2020.

 

Solvency II new business contribution

 

Reflects present value at the point of sale of expected future Solvency II surplus emerging from new business written in the period using the risk discount rate applicable at the end of the reporting period.

 

Solvency II risk margin

 

An additional liability required in the Solvency II balance sheet, to ensure the total value of technical provisions is equal to the current amount a (re)insurer would have to pay if it were to transfer its insurance and reinsurance obligations immediately to another (re)insurer. The value of the risk margin represents the cost of providing an amount of Eligible Own Funds equal to the Solvency Capital Requirement (relating to non-market risks) necessary to support the insurance and reinsurance obligations over the lifetime thereof.

 

Solvency II surplus

 

The excess of Eligible Own Funds on a regulatory basis over the SCR. This represents the amount of capital available to the company in excess of that required to sustain it in a 1-in-200 year risk event.

 

Solvency Capital Requirement (SCR)

 

The amount of Solvency II capital required to cover the losses occurring in a 1-in-200 year risk event.

 

Total shareholder return (TSR)

 

TSR is a measure used to compare the performance of different companies' stocks and shares over time. It combines the share price appreciation and dividends paid to show the total return to the shareholder.

 

Transitional Measures on Technical Provisions (TMTP)

 

This is an adjustment to Solvency II technical provisions to bring them into line with the pre-Solvency II equivalent as at 1 January 2016 when the regulatory basis switched over, to smooth the introduction of the new regime. This will decrease linearly over the 16 years following Solvency II implementation but may be recalculated to allow for changes impacting the relevant business, subject to agreement with the PRA.

 

Unbundled DC solution

 

When investment services and administration services are supplied by separate providers. Typically the sponsoring employer will cover administration costs and scheme members the investment costs.

 

With-profits funds

 

Individually identifiable portfolios where policyholders have a contractual right to receive additional benefits based on factors such as the performance of a pool of assets held within the fund, as a supplement to any guaranteed benefits. An insurer may either have discretion as to the timing of the allocation of those benefits to participating policyholders or

may have discretion as to the timing and the amount of the additional benefits.

 

Yield

 

A measure of the income received from an investment compared to the price paid for the investment. It is usually expressed as a percentage.