L&G Half Year Results 2019 Part 3

RNS Number : 1629I

Legal & General Group Plc

07 August 2019

 

Legal & General Group Plc

2019 Half Year Results Part 3

Capital                                                                                                                                                Page 73

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 to measure and monitor 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 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 end June 2019). The TMTP incorporates estimated impacts of end June 2019 economic conditions and changes during 2019 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 2019, and on the above basis, the group had a surplus of £5.9bn (31 December 2018: £6.9bn) over its Solvency Capital Requirement, corresponding to a Solvency II capital coverage ratio on a "shareholder view" basis of 171% (31 December 2018: 188%). The shareholder view of the Solvency II capital position is as follows:
						30 Jun 2019		31 Dec 2018
						£bn		£bn
Core tier 1 Own Funds						11.1		11.5
Tier 2 subordinated liabilities1						3.3		3.5
Eligibility restrictions						(0.2)		(0.2)
Solvency II Own Funds2,3						14.2		14.8
Solvency Capital Requirement						(8.3)		(7.9)
Solvency II surplus						5.9		6.9
SCR coverage ratio4						171%		188%
1. Tier 2 subordinated liabilities of £0.4bn were redeemed on 1 April 2019.
2. Solvency II Own Funds do not include an accrual for the interim dividend of £294m (31 December 2018: £704m) declared after the balance sheet date.
3. Solvency II Own Funds allow for a risk margin of £6.0bn (31 December 2018: £5.5bn) and TMTP of £5.7bn (31 December 2018: £5.2bn).
4. Coverage ratio is based on unrounded inputs.

The "shareholder view" basis excludes the contribution that the with-profits fund and the final salary pension scheme 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 scheme.

On a proforma basis, which includes the contribution of the with-profits fund and the final salary pension scheme in the group's Own Funds and corresponding SCR in the group's SCR, the coverage ratio at 30 June 2019 is 166% (31 December 2018: 181%).

On 6 December 2017 the group announced the sale of its Mature Savings business to Swiss Re. Swiss Re 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 2019, 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 Markets Act 2000. The impact of the risk transfer agreement is reflected in both Own Funds and SCR as at 30 June 2019.

On 31 May 2019 the group announced the sale of Legal & General Insurance Ltd. The Solvency II capital position as at 30 June 2019 does not reflect the expected impact of this sale. The transaction is expected to complete in H2 2019, at which point it is estimated that the impact of the sale will increase the group's Solvency II coverage ratio by 2%.

Capital                                                                                                                                                Page 74

6.01 Group regulatory capital - Solvency II (continued)

 

 (b) Methodology and assumptions

The methodology and assumptions and Partial Internal Model underlying the calculation of Solvency II Own Funds and associated capital requirements are consistent with those set out in the group's 2018 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 11 basis points (31 December 2018: 10 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 2019 the Matching Adjustment for UK GBP denominated liabilities was 121 basis points (31 December 2018: 138 basis points) after deducting an allowance for the EIOPA fundamental spread equivalent to 53 basis points (31 December 2018: 52 basis points).

(c) Analysis of change

The table below shows the movement (net of tax) during the 6 month period ended 30 June 2019 in the group's Solvency II surplus.
	30 Jun 2019	31 Dec 2018
	£bn	£bn
Surplus arising from back-book (including release of SCR)	0.8	1.4
Release of Risk Margin1	0.2	0.4
Amortisation of TMTP2	(0.2)	(0.4)
Operational Surplus Generation3	0.8	1.4
New Business Strain	(0.3)	(0.5)
Net Surplus Generation	0.5	0.9
Dividends paid4	(0.7)	(0.9)
Operating variances5	(0.2)	0.1
Mergers, acquisitions and disposals6	-	-
Market movements7	(0.2)	(0.5)
Subordinated debt	(0.4)	0.4
Total Surplus movement (after dividends paid in the period)	(1.0)	-
1. Based on the risk margin in force at end 2018 and does not include the release of any risk margin added by new business written in 2019.
2. TMTP amortisation based on a linear run down of the end-2018 TMTP of £4.4bn (net of tax, £5.2bn before tax).
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 2019 these are primarily related to the optimisation of structures used to make assets matching adjustment eligible and the planned reinsurance of backbook liabilities.
4. Dividends paid are the amounts from the 2018 final dividend declaration paid in H1 19 (FY 18: 2017 final and 2018 interim dividend declarations).
5. 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.
6. Mergers, acquisitions and disposals include the impact of the sale of IndiaFirst.
7. Market movements represent the impact of changes in investment market conditions over the period and changes to future economic assumptions. Market movements in H1 2019 include an increase in the risk margin of £0.4bn (net of tax) and an increase to TMTP of £0.5bn (net of tax).

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.

Capital                                                                                                                                                Page 75

6.01 Group regulatory capital - Solvency II (continued)

 

(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
			2019	2018
			£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	0.1
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation			0.3	0.6
Solvency II Operational Surplus Generation4			0.8	1.4
1. Release of prudence from IFRS specific reserves which are not included in Solvency II (e.g. long term expenses and longevity 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 2019.
4. Solvency II Operational Surplus Generation includes management actions which at the start of 2019 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
			2019	2018
			£bn	£bn
IFRS New Business Surplus			0.2	0.2
Removal of requirement to set up prudential margins above best estimate on New Business			0.1	0.2
Set up of Solvency II Capital Requirement on New Business			(0.5)	(0.7)
Set up of Risk Margin on New Business			(0.1)	(0.2)
Solvency II New Business Strain1			(0.3)	(0.5)
1. PRT new business volumes over H1 2019 were £6.7bn (including £4.6bn from the Rolls Royce UK Pension Fund) compared to £9.1bn over 2018.

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

A reconciliation of the group's IFRS shareholders' equity to Own Funds is given below:
			30 Jun 2019	31 Dec 20181
			£bn	£bn
IFRS shareholders' equity1			8.8	8.6
Remove DAC, goodwill and other intangible assets and associated liabilities1			(0.7)	(0.8)
Add IFRS carrying value of subordinated debt treated as available capital under Solvency II2			2.9	3.3
Insurance contract valuation differences3			4.7	5.1
Difference in value of net deferred tax liabilities			(0.4)	(0.3)
SCR for with-profits fund and final salary pension schemes			(0.9)	(0.8)
Other4			-	(0.1)
Eligibility restrictions5			(0.2)	(0.2)
Solvency II Own Funds6			14.2	14.8
1. Values are per the consolidated financial statements.
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. Reflects valuation differences on other assets and liabilities, predominantly in respect of borrowings measured at fair value under solvency II.
5. Relating to the Own Funds of non-insurance regulated entities that are subject to local regulatory rules.
6. Solvency II Own Funds do not include an accrual for the interim dividend of £294m (31 December 2018: £704m) declared after the balance sheet date.

Capital                                                                                                                                                Page 76

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 2019 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
			surplus8	ratio8	surplus8	ratio8
			30 Jun	30 Jun	31 Dec	31 Dec
			2019	2019	2018	2018
			£bn	%	£bn	%
Credit spreads widen by 100bps assuming an escalating addition to ratings1,2			0.3	9	0.3	10
Credit migration3			(0.8)	(10)	(0.8)	(10)
25% fall in equity markets4			(0.6)	(6)	(0.5)	(6)
15% fall in property markets 5			(0.6)	(7)	(0.6)	(7)
100bps increase in risk free rates 6			1.2	25	0.9	24
50bps decrease in risk free rates6,7			(0.7)	(12)	(0.5)	(12)
1. The spread sensitivity applies to group's corporate bond (and similar) holdings, with no change in the firm's long term default expectations. Restructured lifetime mortgages are excluded.
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 20% of all assets where the capital treatment depends on a credit rating (including corporate bonds, sale and leaseback rental strips and lifetime mortgage senior notes).
4. 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.
5. Assets stressed include residual values from sale and leaseback, the full amount of lifetime mortgages and direct investments treated as property.
6. Assuming a recalculation of the Transitional Measure on Technical Provisions that partially offsets the impact on Risk Margin.
7. In the interest rate down stress negative rates are allowed, i.e. there is no floor at zero rates.
8. Both the 2018 and 2019 sensitivities exclude the impact from the Mature Savings business (including the With-Profits fund) as the risks have been transferred to ReAssure division of Swiss Re from 1 January 2018.
The above sensitivity analysis does not reflect all management actions which could be taken to reduce the impacts due to the complex nature of the modelling. 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.

Capital                                                                                                                                                Page 77

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:
			Contri-			Contri-
			bution			bution
			from new			from new
		PVNBP	business2	Margin3	PVNBP	business2	Margin3
		6 months	6 months	6 months	Full year	Full year	Full year
		2019	2019	2019	2018	2018	2018
		£m	£m	%	£m	£m	%
LGR - UK annuity business		6,813	533	7.8	9,148	722	7.9
UK Protection Total		862	68	7.9	1,609	115	7.1
- Retail Protection		679	56	8.2	1,271	93	7.3
- Group Protection		183	12	6.6	338	22	6.4
US Protection4		440	48	10.8	854	96	11.2
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 $559m (31 December 2018: $1,088m) and a contribution from new business of $61m (31 December 2018: $122m).
LGR margin remains at similar levels to full year 2018 on increased volumes, reflecting our strong pricing discipline, which we have maintained in a competitive market. For UK protection new business the increase in profitability was driven by a shift in the mix of business by product combined with continued price optimisation. The US Protection margin of 10.8% remains strong, albeit down slightly from full year 2018, reflecting an exceptionally competitive environment for term life business during the first six months of 2019.

(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 2018 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 2019 and looks through the intra-group arrangements.

Capital                                                                                                                                                Page 78

6.02 Estimated Solvency II new business contribution (continued)

 

(c) Assumptions

The key economic assumptions are as follows:

	30 Jun 2019	31 Dec 2018
	%	%
Margin for Risk	3.4	3.2
Risk free rate
- UK	1.2	1.5
- US	2.0	2.7
Risk discount rate (net of tax)
- UK	4.6	4.7
- US	5.4	5.9
Long-term rate of return on non profit annuities in LGR	3.4	3.4

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.

The methodology and assumptions used to calculate the above margins comply with the CFO Forum EEV Principles (dated April 2016) in all material respects. Key assumptions to note are:

·      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 2018 equates to a level rate deduction from the expected returns for the overall annuities portfolio of 20 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 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% and subsequent enacted future tax rate of 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 grossed up using the long term corporate tax rate of 21%.

Capital                                                                                                                                                Page 79

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
		2019	2018
		£bn	£bn
PVNBP		8.1	11.6
Effect of capitalisation factor		(1.0)	(2.0)
New business premiums from selected lines		7.1	9.6
Other1		0.7	2.1
Total LGR and LGI new business		7.8	11.7
Annualisation impact of regular premium long-term business		(0.1)	(0.2)
IFRS gross written premiums from existing long-term insurance business		1.5	2.8
Deposit accounting for lifetime mortgage advances		(0.5)	(1.2)
Future premiums on longevity swap new business		-	(0.3)
Total gross written premiums2		8.7	12.8
1. Other principally includes annuity sales in the US, lifetime mortgage advances and discounted future cash flows on longevity swap new business.
2. This excludes gross written premiums from discontinued operations.

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Investments                                                                                                                                     Page 81

7.01 Investment portfolio

 

				Market	Market	Market
				value	value	value
				30 Jun	30 Jun	31 Dec
				2019	2018	2018
				£m	£m	£m
Worldwide total assets under management1				1,141,593	990,379	1,019,858
Client and unit-linked policyholder assets				(1,036,229)	(907,834)	(930,516)
Non-unit linked with-profits assets				(10,372)	(10,673)	(9,893)
Investments to which shareholders are directly exposed				94,992	71,872	79,449
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	LGC2	shareholder
		investments	investments	investments	investments	Total	Total	Total
		30 Jun	30 Jun	30 Jun	30 Jun	30 Jun	30 Jun	31 Dec
		2019	2019	2019	2019	2019	2018	2018
	Notes	£m	£m	£m	£m	£m	£m	£m
Equities3,6		162	13	2,741	226	3,142	2,727	2,785
Bonds	7.03	66,907	1,859	2,002	490	71,258	55,826	63,096
Derivative assets4		11,523	-	109	1	11,633	4,225	4,411
Property	7.04	3,131	-	144	-	3,275	2,871	3,055
Cash, cash equivalents and loans5		1,555	587	1,541	634	4,317	5,104	4,894
Financial investments		83,278	2,459	6,537	1,351	93,625	70,753	78,241
Other assets6		90	-	1,277	-	1,367	1,119	1,208
Total investments		83,368	2,459	7,814	1,351	94,992	71,872	79,449
2. LGC property includes £23m of shareholder investment property.
3. Equity investments include a total of £362m (30 June 2018: £125m; 31 December 2018: £260m) in respect of associates and joint ventures.
4. Derivative assets are shown gross of derivative liabilities of £6.9bn (30 June 2018: £3.3bn; 31 December 2018: £3.3bn). 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.
5. Loans include reverse repurchase agreements of £960m (30 June 2018: £752m; 31 December 2018: £857m).
6. Other assets includes the consolidated net asset value of the group's investments in CALA Homes and other housing businesses.

Investments                                                                                                                                     Page 82

7.02 Direct Investments

 

(a) Analysed by asset class
	Direct1	Traded2		Direct	Traded		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
	2019	2019	2019	2018	2018	2018	2018	2018	2018
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Equities	1,300	1,842	3,142	890	1,837	2,727	1,166	1,619	2,785
Bonds3	15,824	55,434	71,258	10,800	45,026	55,826	13,369	49,727	63,096
Derivative assets	-	11,633	11,633	-	4,225	4,225	-	4,411	4,411
Property4	3,275	-	3,275	2,871	-	2,871	3,055	-	3,055
Cash, cash equivalents and loans	410	3,907	4,317	580	4,524	5,104	418	4,476	4,894
Financial investments	20,809	72,816	93,625	15,141	55,612	70,753	18,008	60,233	78,241
Other assets	1,367	-	1,367	1,119	-	1,119	1,208	-	1,208
Total investments	22,176	72,816	94,992	16,260	55,612	71,872	19,216	60,233	79,449
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 £3,990m (30 June 2018: £2,674m; 31 December 2018: £3,227m).
4. A further breakdown of property is provided in Note 7.04.

Investments                                                                                                                                     Page 83

7.02 Direct Investments (continued)

 

(b) Analysed by segment
					LGR	LGC1	LGI	Total
					30 Jun	30 Jun	30 Jun	30 Jun
					2019	2019	2019	2019
					£m	£m	£m	£m
	-
Equities					6	1,233	61	1,300
Bonds2					15,148	3	673	15,824
Property3					3,131	144	-	3,275
Cash, cash equivalents and loans					-	64	346	410
Financial investments					18,285	1,444	1,080	20,809
Other assets4					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.
3. A further breakdown of property is provided in Note 7.04.
4. Other assets include finance leases of £90m and the consolidated net asset value of the group's investments in CALA Homes and other housing businesses.

					LGR	LGC1	LGI	Total
					30 Jun	30 Jun	30 Jun	30 Jun
					2018	2018	2018	2018
Equities					-	851	39	890
Bonds2					10,432	30	338	10,800
Property3					2,791	80	-	2,871
Cash, cash equivalents and loans					175	77	328	580
Financial investments					13,398	1,038	705	15,141
Other assets4					92	1,027	-	1,119
Total direct investments					13,490	2,065	705	16,260
1. LGC included £40m of equities, £27m of bonds and £23m of property that belong to other shareholder funds.
2. Bonds included lifetime mortgages of £2,674m.
3. A further breakdown of property is provided in Note 7.04.
4. Other assets include finance leases of £92m and the consolidated net asset value of the group's investments in CALA Homes and other housing businesses.

					LGR	LGC1	LGI	Total
					31 Dec	31 Dec	31 Dec	31 Dec
					2018	2018	2018	2018
					£m	£m	£m	£m
Equities					6	1,124	36	1,166
Bonds2					12,716	3	650	13,369
Property3					2,930	125	-	3,055
Cash, cash equivalents and loans					-	64	354	418
Financial investments					15,652	1,316	1,040	18,008
Other assets4					91	1,117	-	1,208
Total direct investments					15,743	2,433	1,040	19,216
1. LGC included £51m of equities and £23m of property that belong to other shareholder funds.
2. Bonds include lifetime mortgages of £3,227m.
3. A further breakdown of property is provided in Note 7.04.
4. Other assets include finance leases of £91m and the consolidated net asset value of the group's investments in CALA Homes and other housing businesses.

Investments                                                                                                                                     Page 84

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 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. Unstructured lifetime mortgages have been categorised as AA.
2. The group's bond portfolio is dominated by LGR investments. These account for £66,907m, representing 94% of the total group portfolio.

Investments                                                                                                                                     Page 85

7.03 Bond portfolio summary (continued)

 

(a) Sectors analysed by credit rating (continued)
					BB or
	AAA	AA	A	BBB	below	Other	Total	Total
As at 30 June 2018	£m	£m	£m	£m	£m	£m	£m	%
Sovereigns, Supras and Sub-Sovereigns	1,266	9,102	160	323	43	-	10,894	20
Banks:
- Tier 1	-	-	-	-	-	1	1	-
- Tier 2 and other subordinated	-	-	76	38	2	-	116	-
- Senior	-	1,184	2,411	62	-	8	3,665	7
- Covered	173	-	-	-	-	-	173	-
Financial Services:
- Tier 1	1	-	-	-	-	1	2	-
- Tier 2 and other subordinated	-	187	104	17	-	-	308	1
- Senior	-	84	354	59	10	-	507	1
Insurance:
- Tier 1	-	-	-	1	-	-	1	-
- Tier 2 and other subordinated	-	109	1	48	-	-	158	-
- Senior	-	168	456	91	-	-	715	1
Consumer Services and Goods:
- Cyclical	-	512	825	1,435	220	1	2,993	5
- Non-cyclical	209	498	1,360	2,006	295	1	4,369	8
- Health Care	3	52	276	325	3	-	659	1
Infrastructure:
- Social	95	788	3,276	905	127	-	5,191	9
- Economic	180	23	1,079	2,353	43	-	3,678	7
Technology and Telecoms	84	151	759	2,035	52	1	3,082	6
Industrials	-	3	817	374	43	-	1,237	2
Utilities	-	105	4,912	3,657	5	19	8,698	16
Energy	-	-	103	548	15	-	666	1
Commodities	-	-	248	491	13	-	752	1
Oil and Gas	-	341	557	617	111	-	1,626	3
Real estate	-	-	1,048	1,145	56	-	2,249	4
Structured finance ABS / RMBS / CMBS / Other	324	656	195	128	10	-	1,313	2
Lifetime mortgage loans1	1,533	588	219	211	-	123	2,674	5
CDOs	-	24	61	14	-	-	99	-
Total £m	3,868	14,575	19,297	16,883	1,048	155	55,826	100
Total %	7	26	35	30	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 £50,847m, representing 90% of the total group portfolio.

Investments                                                                                                                                     Page 86

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 2018	£m	£m	£m	£m	£m	£m	£m	%
Sovereigns, Supras and Sub-Sovereigns	1,385	9,591	181	410	48	-	11,615	18
Banks:
- Tier 1	-	-	-	1	-	1	2	-
- Tier 2 and other subordinated	-	-	87	24	2	-	113	-
- Senior	18	1,971	2,946	59	-	42	5,036	8
- Covered	191	1	-	-	-	-	192	-
Financial Services:
- Tier 1	-	-	-	-	-	-	-	-
- Tier 2 and other subordinated	-	165	91	11	-	6	273	-
- Senior	-	282	69	305	8	-	664	1
Insurance:
- Tier 1	-	-	-	-	-	-	-	-
- Tier 2 and other subordinated	-	113	1	46	-	-	160	-
- Senior	-	177	543	94	-	-	814	1
Consumer Services and Goods:
- Cyclical	-	604	663	1,343	134	2	2,746	4
- Non-cyclical	216	970	1,138	2,639	308	1	5,272	8
- Health Care	-	150	375	405	4	-	934	2
Infrastructure:
- Social	92	768	3,425	829	38	-	5,152	8
- Economic	331	23	1,420	2,335	42	-	4,151	7
Technology and Telecoms	93	166	933	2,296	53	1	3,542	7
Industrials	-	3	709	629	42	-	1,383	2
Utilities	-	153	5,498	4,129	5	27	9,812	16
Energy	-	-	464	590	10	-	1,064	2
Commodities	-	-	242	481	11	-	734	1
Oil and Gas	-	382	583	535	110	-	1,610	3
Real estate	-	-	1,233	1,425	125	-	2,783	4
Structured finance ABS / RMBS / CMBS / Other	430	873	180	250	8	1	1,742	3
Lifetime mortgage loans1	1,938	718	249	219	-	103	3,227	5
CDOs	-	-	61	14	-	-	75	-
Total £m	4,694	17,110	21,091	19,069	948	184	63,096	100
Total %	7	27	34	30	2	-	100
1. The credit ratings attributed to lifetime mortgages are allocated in accordance with the internal Matching Adjustment structuring. Unstructured lifetime mortgages have been categorised as AA.
2. The group's bond portfolio is dominated by LGR investments. These account for £57,355m, representing 91% of the total group portfolio.

Investments                                                                                                                                     Page 87

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 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

Investments                                                                                                                                     Page 88

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 2018	£m	£m	£m	£m	£m
Sovereigns, Supras and Sub-Sovereigns	8,702	1,005	774	413	10,894
Banks	1,643	703	932	677	3,955
Financial Services	291	127	397	2	817
Insurance	132	541	113	88	874
Consumer Services and Goods:
- Cyclical	530	1,888	467	108	2,993
- Non-cyclical	1,284	2,717	350	18	4,369
- Health care	10	649	-	-	659
Infrastructure:
- Social	4,860	294	-	37	5,191
- Economic	3,000	381	71	226	3,678
Technology and Telecoms	690	1,352	599	441	3,082
Industrials	199	690	264	84	1,237
Utilities	4,449	1,377	2,162	710	8,698
Energy	36	572	5	53	666
Commodities	10	272	38	432	752
Oil and Gas	272	471	348	535	1,626
Real estate	1,582	341	58	268	2,249
Structured Finance ABS / RMBS / CMBS / Other	947	295	48	23	1,313
Lifetime mortgages	2,674	-	-	-	2,674
CDOs	-	24	-	75	99
Total	31,311	13,699	6,626	4,190	55,826

Investments                                                                                                                                     Page 89

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 2018	£m	£m	£m	£m	£m
Sovereigns, Supras and Sub-Sovereigns	9,238	1,038	1,009	330	11,615
Banks	1,817	1,012	1,373	1,141	5,343
Financial Services	287	104	544	2	937
Insurance	134	542	215	83	974
Consumer Services and Goods:
- Cyclical	479	1,692	427	148	2,746
- Non-cyclical	1,328	3,478	430	36	5,272
- Health care	9	916	9	-	934
Infrastructure:
- Social	4,819	295	-	38	5,152
- Economic	3,340	463	87	261	4,151
Technology and Telecoms	688	1,814	549	491	3,542
Industrials	196	848	253	86	1,383
Utilities	5,154	1,740	2,374	544	9,812
Energy	363	610	2	89	1,064
Commodities	11	285	35	403	734
Oil and Gas	270	524	349	467	1,610
Real estate	1,864	373	241	305	2,783
Structured Finance ABS / RMBS / CMBS / Other	985	681	45	31	1,742
Lifetime mortgages	3,227	-	-	-	3,227
CDOs	-	-	-	75	75
Total	34,209	16,415	7,942	4,530	63,096

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 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 30 June 2018				£m	£m	£m
AAA				2,117	1,751	3,868
AA				12,901	1,674	14,575
A				16,062	3,235	19,297
BBB				13,045	3,838	16,883
BB or below				730	318	1,048
Other				15	140	155
Total				44,870	10,956	55,826
				Externally	Internally
				rated	rated1	Total
As at 31 December 2018				£m	£m	£m
AAA				2,390	2,304	4,694
AA				14,386	2,724	17,110
A				16,731	4,360	21,091
BBB				14,928	4,141	19,069
BB or below				723	225	948
Other				55	129	184
Total				49,213	13,883	63,096
1. Where external ratings are not available an internal rating has been used where practicable to do so.

Investments                                                                                                                                     Page 91

7.04 Property analysis

 

Property exposure within direct investments by status
					LGR1	LGC2,3	Total
As at 30 June 2019					£m	£m	£m	%
Fully let					3,131	-	3,131	95
Development					-	23	23	1
Land					-	121	121	4
Total					3,131	144	3,275	100
					LGR1	LGC2	Total
As at 30 June 2018					£m	£m	£m	%
Fully let					2,791	11	2,802	97
Development					-	23	23	1
Land					-	46	46	2
Total					2,791	80	2,871	100
					LGR1	LGC2	Total
As at 31 December 2018					£m	£m	£m	%
Fully let					2,930	-	2,930	96
Development					-	23	23	1
Land					-	102	102	3
Total					2,930	125	3,055	100
1. The fully let LGR property includes £3.0bn (30 June 2018: £2.6bn; 31 December 2018: £2.8bn) let to investment grade tenants.
2. Development includes £23m (30 June 2018 and 31 December 2018: £23m) of shareholder investment property.
3. 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 2019 the group held a total of £1,910m (30 June 2018: £1,427m; 31 December 2018: £1,687m) of such assets.

                                                                                                                                                               Page 92

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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 (previously labelled as '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 LGA 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 target 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 interim report 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 annualised IFRS profit after tax attributable to equity holders 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 for the period attributable to equity holders

- Equity attributable to owners of the parent

Reconciliation

Calculated using annualised profit for the period of £1,748m (30 June 2018: £1,542m; 31 December 2018: £1,827m) and average equity attributable to the owners of the parent of £8,671m (30 June 2018: £7,595m; 31 December 2018: £8,048m)

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

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 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 (previously labelled as '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

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 (previously labelled as '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 pension scheme services are provided to a scheme by the same service provider. Typically, all investment and administration costs are passed onto the scheme members.

CAGR

Compound annual growth rate.

Combined operating ratio (COR)

The COR is a measure of the underwriting profitability of the general insurance business. It is calculated as the sum of the net incurred claims, expenses and net commission, divided by the net earned premium for the period.

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.

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.

Glossary                                                                                                                                            Page 95

 

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 and 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 (previously labelled as '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.

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 60 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.

Glossary                                                                                                                                            Page 96

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

Taking effect from 1 January 2016, 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.

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.

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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 2019. This will be submitted to the PRA in August 2019.

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 Solvency Capital Requirement. 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 and administration pension scheme 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.

 

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