Legal & General Group Plc

Half-year Results 2017 Part 3

 

Asset and premium flows                                                                                                                 Page 65

 

3.01 Legal & General investment management total assets

 

			Active
			fixed	Solu-	Real	Active	Total
For the six months		Index	income	tions1	assets	equities	AUM
ended 30 June 2017		£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2017		319.8	134.8	411.9	19.6	8.1	894.2
External inflows		25.4	8.3	16.0	0.8	0.1	50.6
External outflows		(29.7)	(3.0)	(9.0)	(0.5)	(0.1)	(42.3)
Overlay/advisory net flows		-	-	13.4	-	-	13.4
External net flows2		(4.3)	5.3	20.4	0.3	-	21.7
Internal net flows		(0.3)	(0.4)	0.4	0.5	(1.3)	(1.1)
Disposal of LGN5		(0.3)	(0.5)	-	-	-	(0.8)
Total net flows		(4.9)	4.4	20.8	0.8	(1.3)	19.8
Cash management movements3		-	4.1	-	-	-	4.1
Market and other movements2		16.6	1.7	13.4	0.8	0.5	33.0
At  30 June 20174		331.5	145.0	446.1	21.2	7.3	951.1
Assets attributable to:
External							853.2
Internal							97.9
Assets attributable to:
UK							752.8
International							198.3

 

			Active
			fixed	Solu-	Real	Active	Total
For the six months		Index	income	tions1	assets	equities	AUM
ended 30 June 2016		£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2016		274.3	106.8	338.2	18.3	8.5	746.1
External inflows		17.6	4.8	9.3	0.8	-	32.5
External outflows		(20.0)	(2.2)	(6.6)	(0.7)	(0.1)	(29.6)
Overlay/advisory net flows		-	-	6.7	-	-	6.7
External net flows2		(2.4)	2.6	9.4	0.1	(0.1)	9.6
Internal net flows		(0.4)	0.7	(0.1)	0.1	-	0.3
Total net flows		(2.8)	3.3	9.3	0.2	(0.1)	9.9
Cash management movements3		-	(0.6)	-	-	-	(0.6)
Market and other movements2		28.9	16.3	41.6	(0.1)	(0.6)	86.1
At 30 June 20164		300.4	125.8	389.1	18.4	7.8	841.5
Assets attributable to:
External							749.8
Internal							91.7
Assets attributable to:
UK							689.6
International							151.9
1. Solutions include liability driven investments, multi-asset funds, and include £280.8bn at 30 June 2017 (30 June 2016: £244.0bn) of derivative notionals associated with the Solutions business.
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. The total value of these assets at 30 June 2017 was £81.7bn (30 June 2016: £71.0bn) and the movement in these assets is included in market and other movements for Solutions assets.
3. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.
4. Total assets under management have been reconciled to the financial investments and investment property held on the Consolidated Balance Sheet in note 3.04.
5. L&G Netherlands was sold on 6 April 2017 to Chesnara Plc.

 

 

 

Asset and premium flows                                                                                                                 Page 66

 

3.01 Legal & General investment management total assets (continued)

 

			Active
			fixed	Solu-	Real	Active	Total
For the year ended		Index	income	tions1	assets	equities	AUM
31 December 2016		£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2016		274.3	106.8	338.2	18.3	8.5	746.1
External inflows5		35.2	10.8	19.9	1.4	-	67.3
External outflows5		(45.0)	(6.5)	(12.4)	(1.2)	(0.2)	(65.3)
Overlay/advisory net flows		-	-	27.2	-	-	27.2
External net flows2		(9.8)	4.3	34.7	0.2	(0.2)	29.2
Internal net flows		(0.3)	1.5	-	0.7	0.1	2.0
Total net flows		(10.1)	5.8	34.7	0.9	(0.1)	31.2
Cash management movements3		-	(0.7)	-	-	-	(0.7)
Market and other movements2,5		55.6	22.9	39.0	0.4	(0.3)	117.6
At 31 December 20164		319.8	134.8	411.9	19.6	8.1	894.2
Assets attributable to:
External							796.7
Internal							97.5
Assets attributable to:
UK							716.8
International							177.4
1. Solutions include liability driven investments, multi-asset funds and included £251.8bn at 31 December 2016 of derivative notionals associated with the Solutions business.
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. The total value of these assets at 31 December 2016 was £52.6bn, and the movement in these assets is included in Market and other movements for Solutions assets.
3. Cash management movements include external holdings in money market funds and other cash mandares held for clients' liquidity management purposes.
4. Total assets under management have been reconciled to the financial investments and investment property held on the Consolidated Balance Sheet in note 3.04.
5. Switches between asset classes are included in the gross inflows and outflows, and moved out of Market and other movements.

 

 

 

Asset and premium flows                                                                                                                 Page 67

 

3.02 Legal & General investment management total assets half-yearly progression

 

			Active
			fixed	Solu-	Real	Active	Total
For the year ended		Index	income	tions1	assets	equities	AUM
31 December 2016		£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2016		274.3	106.8	338.2	18.3	8.5	746.1
External inflows5		17.6	4.8	9.3	0.8	-	32.5
External outflows5		(20.0)	(2.2)	(6.6)	(0.7)	(0.1)	(29.6)
Overlay/ advisory net flows		-	-	6.7	-	-	6.7
External net flows2		(2.4)	2.6	9.4	0.1	(0.1)	9.6
Internal net flows		(0.4)	0.7	(0.1)	0.1	-	0.3
Total net flows		(2.8)	3.3	9.3	0.2	(0.1)	9.9
Cash management movements3		-	(0.6)	-	-	-	(0.6)
Market and other movements5		28.9	16.3	41.6	(0.1)	(0.6)	86.1
At 30 June 2016		300.4	125.8	389.1	18.4	7.8	841.5
External inflows5		17.6	6.0	10.6	0.6	-	34.8
External outflows5		(25.0)	(4.3)	(5.8)	(0.5)	(0.1)	(35.7)
Overlay / advisory net flows		-	-	20.5	-	-	20.5
External net flows2		(7.4)	1.7	25.3	0.1	(0.1)	19.6
Internal net flows		0.1	0.8	0.1	0.6	0.1	1.7
Total net flows		(7.3)	2.5	25.4	0.7	-	21.3
Cash management movements3		-	(0.1)	-	-	-	(0.1)
Market and other movements5		26.7	6.6	(2.6)	0.5	0.3	31.5
At 31 December 20164		319.8	134.8	411.9	19.6	8.1	894.2
1. Solutions include liability driven investments, multi-asset funds, and include £251.8bn at 31 December 2016 of derivative notionals associated with the Solutions business.
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. The total value of these assets at 31 December 2016 was £52.6bn and the movement in these assets is included in Market and other movements for Solutions assets.
3. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.
4. Total assets under management have been reconciled to the financial investments and investment property on the Consolidated Balance Sheet in note 3.04.
5. Switches between asset classes are included in the gross inflows and outflows, and moved out of Market and other movements.

 

							As at	As at	As at
							30.06.17	30.06.16	31.12.16
							£bn	£bn	£bn
Total assets attributable to:
External							853.2	749.8	796.7
Internal							97.9	91.7	97.5
Total assets attributable to:
UK							752.8	689.6	716.8
International							198.3	151.9	177.4

 

 

 

Asset and premium flows                                                                                                                 Page 68

 

3.03 Legal & General investment management total external assets under management net flows

 

					6	6	6
					months	months	months
					to	to	to
					30.06.17	31.12.16	30.06.16
					£bn	£bn	£bn
LGIM total external AUM net flows1					21.7	19.5	9.6
Attributable to:
International					17.9	7.8	6.7
UK Institutional
- Defined contribution					1.7	1.2	0.8
- Defined benefit					0.4	9.8	1.4
UK Retail					1.7	0.7	0.7
1. External net flows exclude movements in short term overlay assets, with maturity as determined by client agreements and cash management movements.

 

3.04 Assets under management reconciliation to Consolidated Balance Sheet financial assets

 

	As at	As at1	As at1
	30.06.17	31.12.16	30.06.16
	£bn	£bn	£bn
Assets under management	951.1	894.2	841.5
Derivative notionals2	(280.8)	(251.8)	(244.0)
Third party assets3	(225.1)	(234.7)	(202.3)
Derivative liabilities	7.4	9.0	15.4
Other4	(8.0)	20.0	0.9
Total group financial investments and investment property	444.6	436.7	411.5
1. H1 16 and FY16 Cash Equivalents and Financial Investments values have been restated. Refer to footnote 1 in the Consolidated Cash Flow Statement.
2. Derivative notionals are included in the assets under management but not for IFRS reporting and are thus removed.
3. Third party assets are those that LGIM manage on behalf of others, for which the group does not have the risks or rewards and thus are not included on the IFRS balance sheet.
4. Other includes assets that are managed by third parties on behalf of the group and cash and broker balances.

 

 

 

Asset and premium flows                                                                                                                 Page 69

 

3.05 Assets under administration

 

							LGIM
				Consol-
			Mature	idation				Retail
		Suffolk	Retail	adjust-	Total	Nethe-	Work-	Invest-
For the six months ended	Platforms1	Life	Savings2	ment3	Savings	rlands	place	ments4	Annuities5
30 June 2017	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2017	83.6	-	30.7	(4.9)	109.4	1.8	20.8	25.4	54.4
Gross inflows	-	-	0.4	-	0.4	-	3.4	2.4	2.0
Gross outflows	-	-	(1.9)	-	(1.9)	-	(0.6)	(1.6)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(1.6)
Net flows	-	-	(1.5)	-	(1.5)	-	2.8	0.8	0.4
Market and other movements	-	-	1.0	-	1.0	-	1.3	1.3	0.8
Disposals1,7	(83.6)	-	-	4.9	(78.7)	(1.8)	-	-	-
At 30 June 2017	-	-	30.2	-	30.2	-	24.9	27.5	55.6
							LGIM
				Consol-
			Mature	idation				Retail
		Suffolk	Retail	adjust-	Total	Nethe-	Work-	Invest-
For the six months	Platforms1	Life	Savings2	ment3	Savings	rlands	place	ments4	Annuities5
ended 30 June 2016	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
As at 1 January 2016	76.9	8.6	29.6	(6.8)	108.3	1.6	14.7	22.6	43.4
Gross inflows1	2.2	0.5	0.5	(0.2)	3.0	0.1	2.3	3.0	4.0
Gross outflows	(2.9)	(0.3)	(1.8)	0.3	(4.7)	(0.1)	(0.5)	(3.2)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(1.4)
Net flows	(0.7)	0.2	(1.3)	0.1	(1.7)	-	1.8	(0.2)	2.6
Market and other
movements	1.3	-	1.1	-	2.4	0.2	0.8	0.9	5.0
Disposals6	-	(8.8)	-	1.8	(7.0)	-	-	-	-
At 30 June 2016	77.5	-	29.4	(4.9)	102.0	1.8	17.3	23.3	51.0
							LGIM
				Consol-
			Mature	idation				Retail
		Suffolk	Retail	adjust-	Total	Nethe-	Work-	Invest-
For the year ended	Platforms1	Life	Savings2	ment3	Savings	rlands	place	ments4	Annuities5
31 December 2016	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2016	76.9	8.6	29.6	(6.8)	108.3	1.6	14.7	22.6	43.4
Gross inflows1	24.2	0.5	0.8	(0.1)	25.4	0.2	4.4	6.7	7.3
Gross outflows	(25.5)	(0.3)	(3.8)	0.5	(29.1)	(0.2)	(1.1)	(6.7)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(3.0)
Net flows	(1.3)	0.2	(3.0)	0.4	(3.7)	-	3.3	-	4.3
Market and other movements	8.0	-	4.1	(0.3)	11.8	0.2	2.8	2.8	6.7
Disposals6	-	(8.8)	-	1.8	(7.0)	-	-	-	-
At 31 December 2016	83.6	-	30.7	(4.9)	109.4	1.8	20.8	25.4	54.4
1. Prior period platforms gross inflows included Cofunds institutional net flows. At 31 December 2016 Platforms comprised £39.4bn (30 June 2016: £37.2bn) of retail assets and £44.2bn (30 June 2016: £40.3bn) of assets held on behalf of institutional clients. At 31 December 2016 platforms AUA comprised ISAs: £21.4bn (30 June 2016: £20.1bn); onshore bonds £2.8bn (30 June 2016 £2.8bn); offshore bonds £0.1bn (30 June 2016 £0.1bn); platform SIPPs £3.9bn (30 June 2016 £3.6bn) and non-wrapped funds £54.0bn (30 June 2016 £49.5bn). Platforms was sold in January 2017 to Aegon as part of the sale of Cofunds.
2. Mature Retail Savings products include with-profits products, bonds and retail pensions.
3. Consolidation adjustment represents Suffolk Life and Mature Retail Savings assets included in the Platforms column.
4. Retail Investments include £2.4bn (30 June 2016: £1.8bn) of LGIM unit trust assets held on the Cofunds platform and £3.7bn (30 June 2016: £3.4bn) of LGIM unit trust assets held on the IPS platform. The Cofunds and IPS platforms were sold in January 2017.
5. Annuities exclude LGRe and LGA assets.
6. Suffolk Life was sold on 25 May 2016 to Curtis Banks Group plc.
7. Legal & General Netherlands was sold on 6 April 2017 to Chesnara Plc.

 

 

 

Asset and premium flows                                                                                                                 Page 70

 

3.06 Assets under administration half-yearly progression

 

							LGIM
				Consol-
			Mature	idation				Retail
		Suffolk	Retail	adjust-	Total	Nether-	Work-	Invest-
For the year ended	Platforms1,2	Life	Savings3	ment4	Savings	lands	place	ments5	Annuities6
31 December 2016	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
At 1 January 2016	76.9	8.6	29.6	(6.8)	108.3	1.6	14.7	22.6	43.4
Gross inflows1	2.2	0.5	0.5	(0.2)	3.0	0.1	2.3	3.0	4.0
Gross outflows	(2.9)	(0.3)	(1.8)	0.3	(4.7)	(0.1)	(0.5)	(3.2)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(1.4)
Net flows	(0.7)	0.2	(1.3)	0.1	(1.7)	-	1.8	(0.2)	2.6
Market and other movements	1.3	-	1.1	-	2.4	0.2	0.8	0.9	5.0
Disposals7	-	(8.8)	-	1.8	(7.0)	-	-	-	-
At 30 June 2016	77.5	-	29.4	(4.9)	102.0	1.8	17.3	23.3	51.0
Gross inflows1	22.0	-	0.3	0.1	22.4	0.1	2.1	3.7	3.3
Gross outflows	(22.6)	-	(2.0)	0.2	(24.4)	(0.1)	(0.6)	(3.5)	-
Payments to pensioners	-	-	-	-	-	-	-	-	(1.6)
Net flows	(0.6)	-	(1.7)	0.3	(2.0)	-	1.5	0.2	1.7
Market and other movements	6.7	-	3.0	(0.3)	9.4	-	2.0	1.9	1.7
At 31 December 2016	83.6	-	30.7	(4.9)	109.4	1.8	20.8	25.4	54.4
1. Platforms gross inflows include Cofunds institutional net flows. Total 2016 Platforms comprise £39.4bn (30 June 2016: £37.2bn) of retail assets and £44.2bn (30 June 2016: £40.3bn) of assets held on behalf of institutional clients.
2. Platforms AUA comprise ISAs: £21.4bn (30 June 2016: £20.1bn); onshore bonds £2.8bn (30 June 2016 £2.8bn); offshore bonds £0.1bn (30 June 2016 £0.1bn); platform SIPPs £3.9bn (30 June 2016 £3.6bn) and non-wrapped funds £54.0bn (30 June 2016 £49.5bn).
3. Mature Retail Savings products include with-profits products, bonds and retail pensions.
4. Consolidation adjustment represents Suffolk Life (until disposal) and Mature Retail Savings assets included in the Platforms column.
5. At 31 December 2016 Retail Investments included £2.4bn (30 June 2016: £1.8bn) of LGIM unit trust assets held on our Cofunds platform and £3.7bn (30 June 2016: £3.4bn) of LGIM unit trust assets held on our IPS platform.
6. Annuities exclude LGRe and LGI US assets.
7.  Suffolk Life was sold on 25 May 2016 to Curtis Banks Group plc.

 

 

 

Asset and premium flows                                                                                                                 Page 71

 

3.07 LGR new business

 

						6	6	6
						months	months	months
						to	to	to
						30.06.17	31.12.16	30.06.16
						£m	£m	£m
Backbook acquisitions						-	-	2,945
Pension risk transfer
- UK						1,504	2,698	640
- USA						115	302	45
Individual Annuities						345	220	158
Lifetime Mortgage Advances						424	389	231
Longevity Insurance1						800	900	-
Total LGR new business						3,188	4,509	4,019
1. The H1 17 value represents a reinsured longevity insurance deal transacted in June 2017. The figure quoted represents the notional size of the transaction and is based on the present value of the fixed leg cash flows discounted at the LIBOR curve. The first year's fixed cash flow is £33.8m.

 

3.08 Insurance new business

 

						6	6	6
						months	months	months
						to	to	to
						30.06.17	31.12.16	30.06.16
						£m	£m	£m
UK Retail Protection						86	88	82
UK Group Protection						28	22	36
Netherlands Protection						1	2	2
US Protection						38	34	28
Total Insurance new business						153	146	148

 

3.09 Gross written premiums on Insurance business

 

						6	6	6
						months	months	months
						to	to	to
						30.06.17	31.12.16	30.06.16
						£m	£m	£m
UK Retail Protection						609	597	582
UK Group Protection						224	100	233
General Insurance						173	170	156
Netherlands Protection						14	27	25
US Protection						491	477	420
Longevity Insurance						175	160	161
Total gross written premiums on insurance business						1,686	1,531	1,577

 

 

 

Asset and premium flows                                                                                                                 Page 72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Capital and Investments                                                                                                                   Page 73

 

4.01 Group regulatory capital - Solvency II Directive

 

From 1 January 2016, the group has been required to comply with the requirements established by the Solvency II Framework Directive, as adopted by the Prudential Regulation Authority (PRA) in the UK and to measure and monitor its capital resources on this basis.

 

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

 

In December 2015, the group received approval to calculate its Solvency II capital requirements using a Partial Internal Model (together with the approval by the PRA in December 2016 of an application for major model change). The vast majority of the risk to which the group is exposed is assessed on the Internal Model basis approved by the PRA. Capital requirements for a handful of smaller entities are assessed using the Standard Formula basis on materiality grounds. The group's US insurance businesses are valued on a local statutory basis, following the PRA's approval of the group's application to use the Deduction and Aggregation method of including these businesses in the group solvency calculation.

 

The table below shows the estimated group Own Funds, Solvency Capital Requirement and Surplus Own Funds of the group, based on the Partial Internal Model, Matching Adjustment and Transitional Measures on Technical Provisions, including a management estimate of the recalculated Transitional Measures for Technical Provisions (Estimated TMTP) at end June 2017 as we believe this provides the most up to date and meaningful view of our Solvency II position. In line with PRA guidance, a formal recalculation of the Group's TMTP will take place no later than 1 January 2018.

 

(a) Capital position
As at 30 June 2017 the group had a Solvency II surplus of £6.7bn (FY 16: £5.7bn) over its Solvency Capital Requirement, corresponding to a coverage ratio on a "shareholder view" basis of 186% (31 December 2016: 171%). The shareholder view of the Solvency II capital position is as follows:
								30.06.17		31.12.16
								£bn		£bn
Core tier 1 Own Funds								11.6		11.0
Tier 1 subordinated liabilities1								-		0.6
Tier 2 subordinated liabilities2								3.1		2.1
Eligibility restrictions								(0.2)		(0.1)
Own Funds3,4								14.5		13.6
Solvency Capital Requirement (SCR)								(7.8)		(7.9)
Solvency II surplus								6.7		5.7
SCR coverage ratio5								186%		171%
1. Tier 1 subordinated liabilities of £0.6bn were repaid on 2 May 2017.
2. Tier 2 subordinated liabilities include $1.35bn of USD subordinated notes issued in 2017.
3. Own Funds do not include an accrual for the dividend of £256m (FY 16: £616m) declared after the balance sheet date.
4. Own Funds include risk margin of £6.1bn (FY 16: £6.4bn) and Estimated TMTP of £6.3bn (FY 16: £7bn).
5. Coverage ratio uses unrounded inputs.

 

The "shareholder view" basis excludes the SCR for the with-profits fund and the final salary pension schemes from both Own Funds and SCR. On a proforma basis the coverage ratio at 30 June 2017 would have been 180% (31 December 2016: 165%).

 

(b) Methodology

 

Own Funds comprise the excess of the value of assets over the liabilities, as valued on a Solvency II basis. Subordinated debt issued by the group is considered to be part of available capital, rather than a liability, as it is subordinate to policyholder claims. Own Funds include deductions in relation to fundability and transferability restrictions, where the surplus Own Funds of a specific group entity cannot be freely transferred around the group due to local legal or regulatory constraints.

 

Assets are valued at IFRS fair value with adjustments to remove intangibles and deferred acquisition costs, and to value reassurers' share of technical provisions on a basis consistent with the liabilities on the Solvency II balance sheet.

 

Liabilities are valued on a best estimate market consistent basis, with the application of a Solvency II Matching Adjustment for valuing annuity liabilities. This incorporates changes to the Internal Model and Matching Adjustment between June 2016 and June 2017 and the estimated impacts of a recalculation of the TMTP (Estimated TMTP) recalculated based on end June 2017 economic conditions as we believe this provides the most up to date and meaningful view of our Solvency II position. The Estimated TMTP of £6.3bn (FY 16: £7.0bn) has been amortised to 30 June 2017.

 

The liabilities include a Risk Margin of £6.1bn (FY 16: £6.4bn) which represents an allowance for the cost of capital for a purchasing insurer taking on the portfolio of liabilities and residual risks that are deemed to be not hedgeable under Solvency II, following the 1-in-200 stress event. This is calculated using a cost of capital of 6% as prescribed by the European Insurance and Occupational Pensions Authority (EIOPA).

 

The Solvency Capital Requirement is the amount of capital required to cover the 1-in-200 worst projected future outcome in the year following the valuation, allowing for realistic management and policyholder actions and the impact of the stress on the tax position of the group. This allows for diversification between the different firms within the group and between the risks to which they are exposed.

 

 

 

Capital and Investments                                                                                                                   Page 74

 

4.01 Group regulatory capital - Solvency II Directive (continued)

 

(b) Methodology (continued)

 

All material EEA insurance firms, including Legal & General Assurance Society Limited (the Society), Legal & General Insurance Limited, and Legal & General Assurance (Pensions Management) Limited (LGIM's insurance subsidiary) are incorporated into the group's Solvency II Internal Model assessment of required capital, assuming diversification of the risks between and within those firms. These firms, as well as the non-EEA insurance firm (Legal & General Reinsurance Company Limited (LGRe) based in Bermuda) contribute over 96% of the group's SCR.

 

Firms for which the capital requirements are less material are valued on a Solvency II Standard Formula basis. Firms which are not regulated but which carry material risks to group solvency are modelled in the Internal Model on the basis of applying an appropriate stress to their net asset value.

 

Legal & General America's Banner Life and its subsidiaries are incorporated into the calculation of group solvency using a Deduction and Aggregation basis. All risk exposure in these firms is valued on a local statutory basis, with capital requirements set to a multiple of local statutory Risk Based Capital (RBC) and further restrictions on the surplus contribution to the group. The US regulatory regime is considered to be equivalent to Solvency II by the European Commission. The contribution to group SCR is 150% of the local RBC Capital Adequacy Level (CAL). The contribution to group's Own Funds is the SCR together with any surplus capital in excess of 250% of RBC CAL.

 

All non-insurance regulated firms are included using their current regulatory surplus.

 

Allowance is made within the Solvency II balance sheet for the group's defined benefit pension schemes using results on an IFRS basis. Within the SCR an allowance is made by stressing the IFRS result position using the same Internal Model basis as for the insurance firms.

 

 

(c) Assumptions

 

The calculation of the Solvency II balance sheet and associated capital requirements requires a number of assumptions, including:

 

(i) assumptions required to derive the present value of best estimate liability cash flows. Non-market assumptions are consistent with those underlying the group's IFRS disclosures, but with the removal of any prudence margins. Future investment returns and discount rates are those defined by EIOPA, which means that the risk free rates used to discount liabilities are market swap rates, with a 16 basis points (FY 16: 17 basis points) deduction to allow for a credit risk adjustment for sterling denominated liabilities. For annuities that are eligible, the liability discount rate includes a Matching Adjustment. This Matching Adjustment varies between the Society and LGRe and by the currency of the relevant liabilities.

 

At 30 June 2017 the Matching Adjustment for UK GBP was 115 basis points (31 December 2016: 124 basis points) after deducting an allowance for the EIOPA fundamental spread equivalent to 54 basis points (31 December 2016: 58 basis points).

 

(ii) assumptions regarding management actions and policyholder behaviour across the full range of scenarios. The only management actions allowed for are those that have been approved by the Board and are in place at the balance sheet date;

 

(iii) assumptions regarding the volatility of the risks to which the group is exposed. Assumptions have been set using a combination of historic market, demographic and operating experience data. In areas where data is not considered robust, expert judgement has been used; and

 

(iv) assumptions on the dependencies between risks, which are calibrated using a combination of historic data and expert judgement.

 

 

 

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4.01 Group regulatory capital - Solvency II Directive (continued)

(d) Analysis of change

 

The table below shows the movement (net of tax) during the financial year in the group's Solvency II surplus.
			30.06.17	31.12.16
			surplus	surplus
			£bn	£bn
Surplus arising from back-book (including release of SCR)			0.6	1.2
Release of Risk Margin1			0.2	0.3
Amortisation of TMTP2			(0.2)	(0.3)
Operational Surplus Generation3			0.6	1.2
New Business Strain			(0.1)	(0.1)
Net Surplus Generation			0.5	1.1
Dividends paid4			(0.6)	(0.8)
Operating variances5			0.4	0.2
M&A6			0.1	-
Market movements7			0.1	(0.3)
Subordinated debt8			0.5	-
Total Surplus movement (after dividends paid in the period)			1.0	0.2
1. Based on the risk margin in force at end 2016 and does not include the release of any risk margin added by new business written in 2017.
2. TMTP amortisation based on a linear run down of the end-2016 TMTP of £5.9bn (net of tax, £7bn before tax) which was management's estimate of the TMTP on end-2016 market conditions.
3. Release of surplus generated by in-force business and includes management actions which at the start of the year could have been reasonably expected to take place. For H1 17 these are to deliver further eligible assets and liabilities into the Matching Adjustment portfolio in respect of a small amount of pension risk transfer business, an increase in direct investments allocation to the annuity back-book and amendments of certain FX hedging activities in the LGR portfolio.
4. Dividends paid are the amounts from the 2016 final dividend declaration paid in H1 17 (FY 16: 2015 final and 2016 interim dividend declarations).
5. Operating variances include the impact of experience variances, changes to valuation and capital calibration assumptions, changes to planned volumes of new business, tax rate changes, PRA approval of changes to the Internal Model and Matching Adjustment and other management actions including changes in asset mix, hedging strategies, Matching Adjustment optimisation and update to the longevity assumptions.
6. M&A reflects sale of Cofunds and LGN.
7. Market Movements is the impact of changes in investment market conditions over the period and changes to future economic assumptions. It also includes the capital impact of investment portfolio changes implemented by LGC. Market movements for June 2017 include a reduction to the Risk Margin of £0.2bn (net of tax), offset by management's estimate of a decrease in the Estimated TMTP of £0.2bn (net of tax). FY 16 included an increase to the risk margin of £1.1bn (net of tax) offset by an increase in the Estimated TMTP of £1.0bn (net of tax).
8. Movement in subordinated debt includes $1.35bn US Dollar subordinated notes issued  and £0.6bn of sub-debt redeemed.

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 real world assumed 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/Surplus is the cost of acquiring, and setting up Technical Provisions and SCR capital, on actual new business written over the year. It is based on economic conditions at the point of sale.

 

 

 

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4.01 Group regulatory capital - Solvency II Directive (continued)

(e) Reconciliation of IFRS Net Release from Operations to Solvency II Net Surplus Generation

 

Reconciliation of the group's IFRS Release from Operations to Solvency II Operational Surplus Generation.
			30.06.17	31.12.16
			£bn	£bn
IFRS Release from Operations			0.7	1.3
Expected release of IFRS prudential margins			(0.3)	(0.5)
Releases of IFRS specific reserves1			-	(0.1)
Solvency II investment margin2,3			0.1	0.2
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation4			0.2	0.4
Other Solvency II items and presentational differences			(0.1)	(0.1)
Solvency II Operational Surplus Generation			0.6	1.2
1. Release of prudence from IFRS specific reserves which are not included in Solvency II (e.g. long term expense margin or new business closure reserves).
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 the period.
4. Solvency II Operational Surplus Generation includes management actions which at the start of 2017 were expected to take place within the group plan. These were limited to actions by LGR to deliver further eligible assets into the Matching Adjustment portfolio and other asset based management actions.
(ii) Reconciliation of the group's IFRS New Business Surplus to Solvency II New Business Strain.
			30.06.17	31.12.16
			£bn	£bn
IFRS New Business Surplus			-	0.2
Removal of requirement to set up prudential margins above best estimate on New Business			0.2	0.5
Set up of Solvency II Capital Requirement on New Business			(0.2)	(0.7)
Set up of Risk Margin on New Business			(0.1)	(0.1)
Solvency II New Business Strain			(0.1)	(0.1)

 

 

(f) Reconciliation of IFRS shareholders' equity to Solvency II Own Funds

 

			30.06.17	31.12.16
			£bn	£bn
IFRS shareholders' equity			7.2	6.9
Remove DAC, goodwill and other intangible assets and liabilities			(1.9)	(2.1)
Add subordinated debt treated as available capital1			2.9	2.5
Insurance contract valuation differences2			7.1	7.9
Difference in value of net deferred tax liabilities			(0.3)	(0.5)
SCR for with-profits fund and final salary pension schemes			(0.7)	(0.7)
Other3			0.4	(0.3)
Eligibility restrictions4			(0.2)	(0.1)
Own Funds5			14.5	13.6
1. Treated as available capital on the Solvency II balance sheet as the liabilities are subordinate to policyholder claims.
2. Differences in the measurement of liabilities between IFRS and Solvency II. This includes value of shareholder transfers of £0.3bn at H1 17 (FY 16: £0.2bn).
3. Reflects valuation differences on other assets and liabilities, predominately in respect of borrowings measured at fair value under Solvency II.
4. Relating to the surplus of with-profits fund and Own Funds of non-insurance regulated entities, subject to local regulatory rules.
5. Own Funds do not include an accrual for the dividend of £256m (FY 16: £616m) declared after the balance sheet date.

 

 

 

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4.01 Group regulatory capital - Solvency II Directive (continued)

(g) Sensitivity analysis

 

The following sensitivities are provided to give an indication of how the group's Solvency II surplus as at 30 June 2017 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
				surplus	ratio	surplus	ratio
				30.06.17	30.06.17	31.12.16	31.12.16
				£bn	%	£bn	%
Credit spreads widen by 100bps assuming an escalating addition to ratings1,2				0.3	8	0.2	7
Credit migration3				(0.6)	(8)	(0.6)	(8)
15% fall in property markets				(0.3)	(3)	(0.2)	(3)
100bps increase in risk free rates				1.0	24	1.0	22
50bps fall in risk free rates4				(0.5)	(11)	(0.5)	(10)
1. The spread sensitivity applies to Legal & General's corporate bond (and similar) holdings, with no change in the firm's long term default expectations.
2. 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.
3. Credit migration stress covers the cost of an immediate big letter downgrade on c.20% of annuity portfolio bonds, or 3 times level expected in the next 12 months.
4. 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. These results all allow (on an approximate basis) for the recalculation of Estimated TMTP as at 30 June 2017 where the impact of the stress would cause this to change materially.    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.

 

 

 

Capital and Investments                                                                                                                   Page 78

 

4.02 Estimated Solvency II new business contribution

(a) New business by product¹

 

			Contri-
			bution
			from new
		PVNBP	business2	Margin3
For the six months ended 30 June 2017		£m	£m	%
LGR - UK annuity business		1,859	166	8.9
UK Protection Total		754	69	9.1
- Retail protection		632	61	9.6
- Group protection		122	8	6.5
US Protection4		376	48	12.8
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 uses unrounded inputs.
4. In local currency, US Protection reflects PVNBP of $489m and a contribution from new business of $62m.
			Contri-
			bution
			from new
		PVNBP	business2	Margin
For the year ended 31 December 20161		£m	£m	%
LGR - UK annuity business		6,661	693	10.4
UK Protection Total		1,466	153	10.4
- Retail protection		1,255	139	11.1
- Group protection		211	14	6.6
US Protection3		631	78	12.4
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. In local currency, US Protection reflects PVNBP of $855m and a contribution from new business of $106m.

 

 

 

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4.02 Estimated Solvency II new business contribution (continued)

(b) Assumptions

 

 

The key economic assumptions as at 30 June 2017 are as follows:

 

                                                                                                                                                        %                       

Risk Margin		3.1
Risk free rate
- UK		1.7
- US		2.1
Risk discount rate (net of tax)
- UK		4.8
- US		5.2
Long-term rate of return on non-profit annuities in LGR		3.1

 

The cashflows are discounted using duration-based discount rates, which is the sum of a duration-based risk free rate and a flat Risk Margin.  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.

 

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 used for the European Embedded Value reporting at end 2015 other than the cost of currency hedging which has been updated to reflect current market conditions and hedging activity in light of Solvency II. 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 based on a level rate deduction from the expected returns for the overall annuities portfolio of 18 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. These are normally reviewed annually.

 

 

Tax

 

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 19.25% and subsequent enacted future reductions in corporation tax to 19% from 1 April 2017 and 17% from 1 April 2020 onwards. The tax rate used for grossing up is the long term corporate tax rate in the territory concerned, which for the UK is 17%. 

 

US covered business profits are also grossed up using the long term corporate tax rate of 35%.

 

 

 

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4.02 Estimated Solvency II new business contribution (continued)

(c) Methodology

 

Basis of preparation

 

The group is required to comply with the requirements established by the EU Solvency II Directive. Consequently, a Solvency II value reporting framework, which incorporates a best estimate of cash flows in relation to insurance assets and liabilities, has replaced EEV reporting in the management information used internally to measure and monitor capital resources.  Solvency II new business contribution reflects the portion of Solvency II value added by new business written in the period, recognising that the statutory solvency in the UK is now on a Solvency II basis.  It has been calculated in a manner consistent with European Embedded Value (EEV) principles.

 

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

 

Description of methodology

 

The objective of the Solvency II new business contribution is to provide shareholders with information on the long term contribution of new business written in H1 17.

 

With the exception of the discount rate, cost of currency hedging and the statutory solvency basis, new business contribution arising from the new business premiums written during the reporting period has been calculated on the same economic and operating assumptions as would have been used under the EEV methodology.

 

The 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 calculation of the new business contribution for the financial period.

 

The new business margin is defined as new business contribution divided by the PVNBP. The premium volumes used to calculate the PVNBP are the same as those used to calculate new business contribution.

 

LGI US is consolidated into the group solvency balance sheet on a US Statutory solvency basis.  Intra-group reinsurance arrangements are in place between the US and UK businesses, and it is expected that these arrangements will be periodically extended to cover recent new business. LGI US new business premiums and contribution reflect the groupwide expected impact of LGI US directly-written business (i.e. looks through any intra-group reinsurance arrangements). 

 

Comparison to EEV new business contribution

 

The key difference between Solvency II and EEV new business contribution is the Statutory solvency basis used for UK business.  Due to the different reserving and capital bases under Solvency II compared to Solvency I, the timing of profit emergence changes.  The impact on new business contribution therefore largely reflects the cost of capital effect of this change in profit timing.  The impact on new business contribution of moving to a Solvency II basis will differ by type of business.  Products which are more capital consumptive under Solvency II will have a lower new business value and vice versa for less capital consumptive products.

 

Projection assumptions

 

Cash flow projections are determined using best estimate assumptions for each component of cash flow for each line of business. Future economic and investment return assumptions are based on conditions at the end of the financial period.

 

Detailed projection assumptions including mortality, morbidity, persistency and expenses reflect recent operating experience and are normally reviewed annually. Allowance is made for future improvements in annuitant mortality based on experience and externally published data. Favourable changes in operating experience are not anticipated until the improvement in experience has been observed.

 

All costs relating to new business, even if incurred elsewhere in the group, are allocated to the new business. The expense assumptions used for the cash flow projections therefore include the full cost of servicing this business.

 

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.

 

Risk discount rate

 

The risk discount rate (RDR) is duration-based and is a combination of the risk free curve and a flat Risk Margin, which reflects the residual risks inherent in the group's businesses, after taking account of margins in the statutory technical provisions, the required capital and the specific allowance for financial options and guarantees.

 

The risk free rates have been based on a swap curve net of the EIOPA-specified Credit Risk Adjustment 16 basis points for UK and 15basis points for US (FY 16: 17 basis points for UK and 15 basis points for US).

 

The Risk Margin has been determined based on an assessment of the group's weighted average cost of capital (WACC). This assessment incorporates a beta for the group, which measures the correlation of movements in the group's share price to movements in a relevant index. Beta values therefore allow for the market's assessment of the risks inherent in the business relative to other companies in the chosen index.

 

The WACC is derived from the group's cost of equity and debt, and the proportion of equity to debt in the group's capital structure measured using market values. Each of these three parameters is forward looking, although informed by historic information and appropriate judgements where necessary. The cost of equity is calculated as the risk free rate plus the equity risk premium for the chosen index multiplied by the company's beta.

 

 

 

Capital and Investments                                                                                                                   Page 81

 

4.02 Estimated Solvency II new business contribution (continued)

(c) Methodology (continued)

 

The cost of debt used in the WACC calculations takes account of the actual locked-in rates for our senior and subordinated long term debt. All debt interest attracts tax relief at a time adjusted rate of 17.5% (FY 16: 17.7%).

 

Whilst the WACC approach is a relatively simple and transparent calculation to apply, subjectivity remains within a number of the assumptions. Management believes that the chosen margin, together with the levels of required capital, the inherent strength of the group's regulatory reserves and the explicit deduction for the cost of options and guarantees, is appropriate to reflect the risks within the covered business.

 

(d) PVNBP to gross written premiums reconciliation
			30.06.17	31.12.16
		Notes	£bn	£bn
PVNBP		4.02(a)	3.0	8.8
Effect of capitalisation factor			(1.0)	(1.8)
New business premiums from selected lines			2.0	7.0
Other1			1.3	1.9
Total LGR, Insurance and LGI US new business		3.07/3.08	3.3	8.9
Annualisation impact of regular premium long-term business			(0.1)	(0.1)
IFRS gross written premiums from existing long-term insurance business			1.4	2.5
IFRS gross written premiums from Savings business			0.1	0.2
Deposit accounting for lifetime mortgage advances			(0.4)	(0.6)
General Insurance gross written premiums		3.09	0.2	0.3
Future premiums on longevity swap new business			(0.8)	(0.9)
Total gross written premiums			3.7	10.3
1. Other principally includes annuity sales in the US, lifetime mortgage advances and discounted future cash flows on longevity swap new business.