L&G Full Year Results 2019 Part 3

RNS Number : 9182E

Legal & General Group Plc

04 March 2020

 

Legal & General Group Plc

Full Year Results 2019 Part 3

Asset and premium flows    Page 59

4.01 LGIM Total assets under management¹ (AUM)

			Active		Multi				Real		Total
	Index		strategies		Asset		Solutions2		assets		AUM
For the year ended 31 December 2019	£bn		£bn		£bn		£bn		£bn		£bn
As at 1 January 2019	307.1		160.4		43.6		477.9		26.5		1,015.5
External inflows	96.2		14.0		11.2		25.5		1.8		148.7
External outflows	(58.9)		(11.2)		(3.5)		(26.2)		(1.7)		(101.5)
Overlay net flows	-		-		-		38.8		-		38.8
ETF net flows	0.4		-		-		-		-		0.4
External net flows3	37.7		2.8		7.7		38.1		0.1		86.4
Internal net flows	(0.3)		(0.4)		(0.9)		1.9		2.5		2.8
Total net flows	37.4		2.4		6.8		40.0		2.6		89.2
Cash management movements4	-		(0.6)		-		-		-		(0.6)
Market and other movements3	59.1		15.0		7.6		8.7		1.7		92.1
As at 31 December 2019	403.6		177.2		58.0		526.6		30.8		1,196.2
Assets attributable to:
External											1,092.2
Internal											104.0
1. Assets under management (AUM) includes assets on our Investment Only Platform that are managed by third parties, on which fees are earned.
2. Solutions include liability driven investments and £335.7bn of derivative notionals associated with the Solutions business.
3. External net flows exclude movements in short-term Solutions assets, as their maturity dates are determined by client agreements and are subject to a higher degree of variability. The total value of these assets at 31 December 2019 was £67.1bn and the movement in these assets is included in market and other movements for Solutions assets.
4. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.
				Active		Multi				Real		Total
		Index1		strategies1		asset1		Solutions1,2		assets1		AUM
For the year ended 31 December 2018		£bn		£bn		£bn		£bn		£bn		£bn
As at 1 January 2018		338.2		148.2		38.8		435.1		23.0		983.3
Canvas acquisition3		2.4		-		-		-		-		2.4
External inflows		54.2		16.3		9.7		24.1		1.5		105.8
External outflows		(69.0)		(6.4)		(2.3)		(13.8)		(1.6)		(93.1)
Overlay/advisory net flows		-		-		-		29.9		-		29.9
External net flows4		(14.8)		9.9		7.4		40.2		(0.1)		42.6
Internal net flows		(0.7)		1.5		(0.8)		0.1		2.5		2.6
Total net flows		(15.5)		11.4		6.6		40.3		2.4		45.2
Cash management movements5		-		(0.5)		-		-		-		(0.5)
Market and other movements4		(18.0)		1.3		(1.8)		2.5		1.1		(14.9)
As at 31 December 2018		307.1		160.4		43.6		477.9		26.5		1,015.5
Assets attributable to:
External												921.7
Internal												93.8
1. AUM have been reanalysed from those previously reported in order to present Multi Asset separately. This has resulted in the removal of the Global Fixed income and Active equities categories, the inclusion of Multi Asset and Active Strategies, and a reallocation of AUM across the revised categorisation. Total AUM, and the split between external and internal, remains unchanged.
2. Solutions include liability driven investments and £303.9bn of derivative notionals associated with the Solutions business.
3. The acquisition of Canvas was completed in March 2018.
4. External net flows exclude movements in short-term Solutions assets, as their maturity dates are determined by client agreements and are subject to a higher degree of variability. The total value of these assets as at 31 December 2018 was £60.1bn and the movement in these assets is included in market and other movements for Solutions assets.
5. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.

Asset and premium flows    Page 60

4.02 LGIM Total assets under management¹ half-yearly progression

			Active	Multi		Real	Total
		Index	strategies	Asset	Solutions2	assets	AUM
For the year ended 31 December 2019		£bn	£bn	£bn	£bn	£bn	£bn
As at 1 January 2019		307.1	160.4	43.6	477.9	26.5	1,015.5
External inflows		60.8	5.7	6.5	8.8	0.8	82.6
External outflows		(26.1)	(4.8)	(1.4)	(11.0)	(0.8)	(44.1)
Overlay/ advisory net flows		-	-	-	22.0	-	22.0
ETF Net Flows		(0.2)	-	-	-	-	(0.2)
External net flows3		34.5	0.9	5.1	19.8	-	60.3
Internal net flows		(0.1)	(2.0)	(0.3)	3.6	1.2	2.4
Total net flows		34.4	(1.1)	4.8	23.4	1.2	62.7
Cash management movements4		-	0.5	-	-	-	0.5
Market and other movements3		43.9	12.4	6.0	(7.7)	1.2	55.8
As at 30 June 2019		385.4	172.2	54.4	493.6	28.9	1,134.5
External inflows		35.4	8.3	4.7	16.7	1.0	66.1
External outflows		(32.8)	(6.4)	(2.1)	(15.2)	(0.9)	(57.4)
Overlay / advisory net flows		-	-	-	16.8	-	16.8
ETF Net Flows		0.6	-	-	-	-	0.6
External net flows3		3.2	1.9	2.6	18.3	0.1	26.1
Internal net flows		(0.2)	1.6	(0.6)	(1.7)	1.3	0.4
Total net flows		3.0	3.5	2.0	16.6	1.4	26.5
Cash management movements4		-	(1.1)	-	-	-	(1.1)
Market and other movements3		15.2	2.6	1.6	16.4	0.5	36.3
As at 31 December 2019		403.6	177.2	58.0	526.6	30.8	1,196.2
1. AUM includes assets on our Investment Only Platform, that are managed by third parties, on which fees are earned.
2. Solutions include liability driven investments and £335.7bn of derivative notionals associated with the Solutions business.
3. External net flows exclude movements in short-term Solutions assets, as their maturity dates are determined by client agreements and are subject to a higher degree of variability. The total value of these assets at 31 December 2019 was £67.1bn and the movement in these assets is included in market and other movements for Solutions assets.
4. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.

Asset and premium flows    Page 61

4.02 LGIM Total assets under management¹ half-yearly progression (continued)

			Active	Multi		Real	Total
		Index1	Strategies1	asset1	Solutions1,2	assets1	AUM
For the year ended 31 December 2018		£bn	£bn	£bn	£bn	£bn	£bn
As at 1 January 2018		338.2	148.2	38.8	435.1	23.0	983.3
Canvas Acquisition3		2.4	-	-	-	-	2.4
External inflows		22.4	9.2	5.1	13.1	0.6	50.4
External outflows		(41.2)	(2.3)	(0.9)	(7.8)	(0.5)	(52.7)
Overlay/ advisory net flows		-	-	-	16.7	-	16.7
ETF net flows		0.2	-	-	-	-	0.2
External net flows4		(18.6)	6.9	4.2	22.0	0.1	14.6
Internal net flows		(0.3)	(2.6)	(0.4)	0.1	0.6	(2.6)
Total net flows		(18.9)	4.3	3.8	22.1	0.7	12.0
Cash management movements5		-	1.0	-	-	-	1.0
Market and other movements4		(0.4)	(2.3)	0.2	(12.3)	0.9	(13.9)
As at 30 June 2018		321.3	151.2	42.8	444.9	24.6	984.8
External inflows		31.8	7.1	4.6	11.0	0.9	55.4
External outflows		(27.8)	(4.1)	(1.4)	(6.0)	(1.1)	(40.4)
Overlay / advisory net flows		-	-	-	13.2	-	13.2
ETF net flows		(0.2)	-	-	-	-	(0.2)
External net flows4		3.8	3.0	3.2	18.2	(0.2)	28.0
Internal net flows		(0.4)	4.1	(0.4)	-	1.9	5.2
Total net flows		3.4	7.1	2.8	18.2	1.7	33.2
Cash management movements5		-	(1.5)	-	-	-	(1.5)
Market and other movements4		(17.6)	3.6	(2.0)	14.8	0.2	(1.0)
As at 31 December 2018		307.1	160.4	43.6	477.9	26.5	1,015.5
1. AUM have been reanalysed from those previously reported in order to present Multi Asset separately. This has resulted in the removal of the Global Fixed income and Active equities categories, the inclusion of Multi Asset and Active Strategies, and a reallocation of AUM across the revised categorisation. Total AUM, and the split between external and internal, remains unchanged.
2. Solutions include liability driven investments and £303.9bn of derivative notionals associated with the Solutions business.
3. The acquisition of Canvas was completed in March 2018.
4. External net flows exclude movements in short-term Solutions assets, as their maturity dates are determined by client agreements and are subject to a higher degree of variability. The total value of these assets as at 31 December 2018 was £60.1bn and the movement in these assets is included in market and other movements for Solutions assets.
5. Cash management movements include external holdings in money market funds and other cash mandates held for clients' liquidity management purposes.

Asset and premium flows    Page 62

4.03 LGIM Total external assets under management and net flows

	Assets under management1					Net flows2
	31 December	30 June	31 December	30 June		31 December	30 June	31 December	30 June
	2019	2019	2018	2018		2019	2019	2018	2018
	£bn	£bn	£bn	£bn		£bn	£bn	£bn	£bn
International1	276.7	248.6	177.7	165.8		14.6	44.6	9.7	9.9
UK Institutional
- Defined contribution	94.3	86.4	70.8	64		3.7	3.6	4.9	3.5
- Defined benefit	679.3	659.7	640.3	625.4		4.8	10.7	12.1	(0.3)
UK Retail
- Retail intermediary	33.1	30	25.5	25.1		2.5	1.7	1.6	1.4
- Personal investing3	5.7	5.6	5.1	5.7		(0.1)	(0.1)	(0.1)	(0.1)
ETF	3.1	2.4	2.3	2.8		0.6	(0.2)	(0.2)	0.2
Total external	1,092.2	1,032.7	921.7	888.8		26.1	60.3	28.0	14.6
1. International asset are shown on the basis of client domicile.  Total International AUM including assets managed internationally on behalf of UK clients amounted to £370bn as at December 2019 (2018: £258bn).
2. External net flows exclude movements in short-term solutions assets, with maturity as determined by client agreements and are subject to a higher degree of variability.
3. Personal investing includes £1.6bn (2018: £1.8bn) of AUM relating to legacy Banks and Building Society customers which is driving net outflows.

4.04 Reconciliation of Assets under management to Consolidated Balance Sheet financial investments, investment property and cash and cash equivalents
	2019	2018
	£bn	£bn
Assets under management	1,196	1,015
Derivative notionals 1	(336)	(304)
Third party assets 2	(379)	(284)
Other 3	63	53
Total financial investments, investment property and cash and cash equivalents	544	480
Less: assets of operations classified as held for sale 4	(24)	(25)
Financial investments, investment property and cash and cash equivalents	520	455
1. Derivative notionals are included in the assets under management measure but are not for IFRS reporting and are thus removed.
2. Third party assets are those that LGIM manage on behalf of others which are not included on the group's Consolidated Balance Sheet.
3. Other includes assets that are managed by third parties on behalf of the group, other assets and liabilities related to financial investments, derivative assets and pooled funds.
4. Disclosure related to assets of operations classified as held for sale is included in Note 3.04.

Asset and premium flows    Page 63

4.05 Assets under administration

	Workplace1	Annuities2	Workplace	Annuities
	2019	2019	2018	2018
	£bn	£bn	£bn	£bn
As at 1 January	30.0	63.0	27.7	58.2
Gross inflows	7.3	12.4	5.6	9.9
Gross outflows	(2.0)	-	(1.8)	-
Payments to pensioners	-	(4.1)	-	(3.5)
Net flows	5.3	8.3	3.8	6.4
Market and other movements	5.0	4.6	(1.5)	(1.6)
As at 31 December	40.3	75.9	30.0	63.0
1. Workplace assets under administration as at 31 December 2019 includes £40.2bn of assets under management included in Note 4.01.
2. Annuities assets under administration as at 31 December 2019 includes £70.1bn of assets under management included in Note 4.01.

4.06 Assets under administration half-yearly progression
	Workplace	Annuities	Workplace	Annuities
	2019	2019	2018	2018
For the year ended 31 December 2019	£bn	£bn	£bn	£bn
As at 1 January 2019	30.0	63.0	27.7	58.2
Gross inflows	3.5	7.2	2.7	1.1
Gross outflows	(0.9)	-	(0.8)	-
Payments to pensioners	-	(2.0)	-	(1.7)
Net flows	2.6	5.2	1.9	(0.6)
Market and other movements	3.5	3.9	0.1	(1.2)
As at 30 June 2019	36.1	72.1	29.7	56.4
Gross inflows	3.8	5.2	2.9	8.8
Gross outflows	(1.1)	-	(1.0)	-
Payments to pensioners	-	(2.1)	-	(1.8)
Net flows	2.7	3.1	1.9	7.0
Market and other movements	1.5	0.7	(1.6)	(0.4)
As at 31 December 2019	40.3	75.9	30.0	63.0

Asset and premium flows  Page 64

4.07 LGR new business

		6 months to	6 months to		6 months to	6 months to
	Total	31 December	30 June	Total	31 December	30 June
	2019	2019	2019	2018	2018	2018
	£m	£m	£m	£m	£m	£m
Pension risk transfer
- UK	10,325	4,009	6,316	8,351	7,844	507
- US	893	670	223	646	426	220
- Bermuda	174	36	138	143	135	8
Individual annuities	970	473	497	795	458	337
Lifetime mortgage advances	965	476	489	1,197	676	521
Longevity insurance1	-	-	-	287	287	-
Total LGR new business	13,327	5,664	7,663	11,419	9,826	1,593
1. 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.

4.08 LGI new business
		6 months to	6 months to		6 months to	6 months to
	Total	31 December	30 June	Total	31 December	30 June
	2019	2019	2019	2018	2018	2018
	£m	£m	£m	£m	£m	£m
UK Retail protection	174	83	91	175	88	87
UK Group protection	76	32	44	83	49	34
US protection1	89	46	43	85	43	42
Total LGI new business	339	161	178	343	180	163
1. In local currency, US protection reflects new business of $113m for 2019 (H2: $58m; H1: $55m) (H2 18: $56m; H1 18: $58m).

4.09 Gross written premium on insurance business
		6 months to	6 months to		6 months to	6 months to
	Total	31 December	30 June	Total	31 December	30 June
	2019	2019	2019	2018	2018	2018
	£m	£m	£m	£m	£m	£m
UK Retail protection	1,327	669	658	1,279	646	633
UK Group protection	345	112	233	329	106	223
US Protection1	1,057	539	518	972	511	461
Longevity insurance	376	186	190	379	192	187
Total gross written premiums on insurance business2	3,105	1,506	1,599	2,959	1,455	1,504
1. In local currency, US protection reflects new business of $1,349m for 2019 (H2: $679m; H1: $670m)  (H2 18: $664m; H1 18: $635m). 2. Total insurance gross written premiums exclude gross written premiums of the General Insurance division following the group's announcement to sell the business to Allianz but in 2019 include £66m of gross written premiums relating to a residual reinsurance treaty. Balances for 2018 have been adjusted to reflect the removal of the General Insurance business.

Capital  Page 65

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

The table below shows the "shareholder view" of the group Own Funds, Solvency Capital Requirement (SCR) and Surplus Own Funds, based on the Partial Internal Model, Matching Adjustment and Transitional Measures on Technical Provisions (TMTP) (recalculated as at end December 2019).

(a) Capital position
As at 31 December 2019, and on the above basis, the group had a surplus of £7.3bn (31 December 2018: £6.9bn) over its Solvency Capital Requirement, corresponding to a Solvency II capital coverage ratio on a "shareholder view" basis of 184% (31 December 2018: 188%). The shareholder view of the Solvency II capital position is as follows:
						2019		2018
						£bn		£bn
Tier 1 Own Funds						12.4		11.5
Tier 2 subordinated liabilities1						3.9		3.5
Eligibility restrictions						(0.2)		(0.2)
Solvency II Own Funds2,3						16.1		14.8
Solvency Capital Requirement						(8.8)		(7.9)
Solvency II surplus						7.3		6.9
SCR coverage ratio4						184%		188%
1. Tier 2 subordinated liabilities include redemption of a £0.4bn and an issuance of £0.6bn during the year.
2. Solvency II Own Funds do not include an accrual for the final dividend of £753m (31 December 2018: £704m) declared after the balance sheet date.
3. Solvency II Own Funds allow for a risk margin of £5.9bn (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 schemes would normally make to the group position. This is reflected by reducing the group's Own Funds and the group's SCR by the amount of the SCR for the with-profits fund and the final salary pension schemes.

On a proforma basis, which includes the contribution of with-profits fund and that of the final salary pension schemes in the group's Own Funds and corresponding SCR in the group's SCR, the coverage ratio at 31 December 2019 is 179% (31 December 2018: 181%).

On 6 December 2017 the group announced the sale of its Mature Savings business to ReAssure Limited (a subsidiary of Swiss Re). ReAssure Limited assumed the economic exposure of the business from 1 January 2018 via a risk transfer agreement. It is expected that the formal transfer of the business will be completed in 2020, 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.

On 31 May 2019, the group announced the sale of its General Insurance business to Allianz and the transaction completed on 31 December 2019, improving the Group's Solvency II coverage ratio by c.1%.

Capital    Page 66

5.01 Group regulatory capital - Solvency II (continued)

 (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 fungibility 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. Own Funds incorporate changes to the Internal Model and Matching Adjustment during 2019 and the impacts of a recalculation of the TMTP as at end December 2019. The recalculated TMTP of £5.7bn (31 December 2018: £5.2bn) is net of amortisation to 31 December 2019.

The liabilities include a Risk Margin of £5.9bn (31 December 2018: £5.5bn) which represents an allowance for the cost of capital for a purchasing insurer to take on the portfolio of liabilities and residual risks that are deemed to be not hedgeable under Solvency II. 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.

All material EEA insurance firms, including Legal and General Assurance Society Limited (LGAS) and Legal and General Assurance (Pensions Management) Limited, 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 93% of the group's SCR.

Insurance 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 the group's 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 (LGA) 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 Company Action Level RBC (CAL RBC). The contribution to group's Own Funds is the SCR together with any surplus capital in excess of 250% of CAL RBC.

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 an 11 basis point (2018: 10 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 LGAS and LGRe and by the currency of the relevant liabilities.

At 31 December 2019 the Matching Adjustment for UK GBP was 110 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).

(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.

Capital  Page 67

5.01 Group regulatory capital - Solvency II (continued)

 (d) Analysis of change

The table below shows the movement (net of tax) during the year ended 31 December 2019 in the group's Solvency II surplus.
	2019	2018
	£bn	£bn
Surplus arising from back-book (including release of SCR)	1.5	1.4
Release of risk margin1	0.4	0.4
Amortisation of TMTP2	(0.3)	(0.4)
Operational surplus generation 3	1.6	1.4
New business strain	(0.6)	(0.5)
Net surplus generation	1.0	0.9
Operating variances4	0.3	0.1
Mergers, acquisitions and disposals5	0.1	-
Market movements6	(0.2)	(0.5)
Subordinated debt	0.2	0.4
Dividends paid7	(1.0)	(0.9)
Total surplus movement (after dividends paid in the year)	0.4	-
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), based on management's estimate of the TMTP on end-2019 market conditions.
3. Release of surplus generated by in-force business and includes management actions which at the start of the year could have been reasonably expected to take place. For 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. Operating variances include the impact of experience variances, changes to valuation and capital calibration assumptions, other management actions including changes in asset mix, hedging strategies, and Matching Adjustment optimisation.
5. Mergers, acquisitions and disposals include the impacts of the sale of Legal & General Insurance Limited and group's stake in IndiaFirst Life Insurance Company Limited.
6. Market movements represent the impact of changes in investment market conditions over the period and changes to future economic assumptions. Market movements in 2019 include an increase in the risk margin of £0.5bn (net of tax) and an increase to TMTP of £0.6bn (net of tax).
7. Dividends paid are the amounts from the 2018 final and 2019 interim dividend declarations paid in 2019 (2018: 2017 final and 2018 interim dividend declarations).

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 68

5.01 Group regulatory capital - Solvency II (continued)

(e) 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.
			2019	2018
			£bn	£bn
IFRS Release from Operations			1.3	1.3
Expected release of IFRS prudential margins			(0.5)	(0.5)
Releases of IFRS specific reserves1			(0.1)	(0.1)
Solvency II investment margin2,3			0.2	0.1
Release of Solvency II Capital Requirement and Risk Margin less TMTP amortisation			0.7	0.6
Solvency II Operational Surplus Generation 4			1.6	1.4
1. Release of prudence from IFRS specific reserves which are not included in Solvency II (e.g. long term longevity and expense margins).
2. Release of prudence related to differences between the EIOPA-defined fundamental spread and Legal & General's best estimate default assumption.
3. Expected market returns earned on LGR's free assets in excess of risk free rates over 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.
			2019	2018
			£bn	£bn
IFRS New business surplus			0.3	0.2
Removal of requirement to set up prudential margins above best estimate on New Business			0.2	0.2
Set up of SCR on new business			(0.9)	(0.7)
Set up of risk margin on new business			(0.2)	(0.2)
Solvency II New business strain 1			(0.6)	(0.5)
1. UK PRT new business volumes over 2019 were £10.3bn, compared to £8.4bn over 2018.

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

A reconciliation of the group's IFRS shareholders' equity to Solvency II Own Funds is given below:
			2019	2018
			£bn	£bn
IFRS shareholders' equity1			9.4	8.6
Remove DAC, goodwill and other intangible assets and associated liabilities			(0.5)	(0.8)
Add IFRS carrying value of subordinated borrowings2			3.5	3.3
Insurance contract valuation differences3			5.2	5.1
Difference in value of net deferred tax liabilities			(0.5)	(0.3)
SCR for with-profits fund and final salary pension schemes			(0.8)	(0.8)
Other4			-	(0.1)
Eligibility restrictions5			(0.2)	(0.2)
Solvency II Own Funds6			16.1	14.8
1. Value is as per the Consolidated Balance Sheet.
2. Treated as available capital on the Solvency II balance sheet as the liabilities are subordinate to policyholder claims.
3. Differences in the measurement of technical provisions between IFRS and Solvency II.
4. Reflects valuation differences on other assets and liabilities, predominantly in respect of borrowings measured at fair value under Solvency II which are largely offsetting in 2019.
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 final dividend of £753m (31 December 2018: £704m) declared after the balance sheet date.

Capital  Page 69

5.01 Group regulatory capital - Solvency II (continued)

(g) Sensitivity analysis The following sensitivities are provided to give an indication of how the group's Solvency II surplus as at 31 December 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
			surplus1	ratio1	surplus1	ratio1
			2019	2019	2018	2018
			£bn	%	£bn	%
Credit spreads widen by 100bps assuming an escalating addition to ratings2,3			0.3	8	0.3	10
Credit spreads narrow by 100bps assuming an escalating addition to ratings2,3			(0.4)	(9)	(0.4)	(10)
Credit migration4			(0.8)	(9)	(0.8)	(10)
25% rise in equity markets5			0.5	4	0.5	6
25% fall in equity markets5			(0.5)	(5)	(0.5)	(6)
15% rise in property markets6			0.6	6	0.5	5
15% fall in property markets6			(0.7)	(6)	(0.6)	(7)
100bps increase in risk free rates7			1.0	22	0.9	24
50bps decrease in risk free rates7,8			(0.6)	(11)	(0.5)	(12)
Substantially reduced Risk Margin9			0.6	6	0.4	5
1. Both the 2019 and 2018 sensitivities exclude the impact from the Mature Savings business (including the With-Profits fund) as the risks have been transferred to ReAssure Limited from 1 January 2018.
2. The spread sensitivity applies to the group's corporate bond (and similar) holdings, with no change in long term default expectations. Restructured lifetime mortgages are excluded.
3. The stress for AA bonds is twice that for AAA bonds, for A bonds it is three times, for BBB four times and so on, such that the weighted average spread stress for the portfolio is 100 basis points.
4. 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).
5. 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.
6. Assets stressed include residual values from sale and leaseback, the full amount of lifetime mortgages and direct investments treated as property.
7. Assuming a recalculation of the Transitional Measure on Technical Provisions that partially offsets the impact on Risk Margin.
8. In the interest rate down stress negative rates are allowed, i.e. there is no floor at zero rates.
9. Assuming a 2/3 reduction in the Risk Margin, allowing for offset from the Transitional Measure on Technical Provisions.
The above sensitivity analysis does not reflect all management actions which could be taken to reduce the impacts. In practice, the group actively manages its asset and liability positions to respond to market movements. Other than in the interest rate stresses, we have not allowed for the recalculation of TMTP. The impacts of these stresses are not linear therefore these results should not be used to interpolate or extrapolate the impact of a smaller or larger stress. The results of these tests are indicative of the market conditions prevailing at the balance sheet date. The results would be different if performed at an alternative reporting date.

Capital  Page 70

5.01 Group regulatory capital - Solvency II (continued)

(h) Analysis of Group Solvency Capital Requirement
The table below shows a breakdown of the group's SCR by risk type. The split is shown before the effects of diversification and tax.
		2019	2018
		%	%
Interest rate		1	1
Equity		6	5
Property		9	8
Credit1		27	23
Currency		4	3
Inflation		6	5
Total Market risk 2		53	45
Counterparty risk		2	2
Life mortality		3	3
Life longevity3		22	30
Life mass lapse		2	1
Life non-mass lapse		2	2
Life catastrophe		5	5
Expense		3	2
Total Insurance risk		37	43
Non-life underwriting		1	3
Operational risk		5	5
Miscellaneous4		2	2
Total SCR		100	100
1. Credit risk is one of the group's most significant exposures, arising predominantly from the portfolio of bonds and bond-like assets backing the group's annuity business.
2. In addition to credit risk the group also has significant exposure to other market risks, primarily due to the investment holdings within the shareholder funds but also the risk to fee income from assets backing unit linked Savings business.
3. Longevity risk is the group's most significant insurance risk exposure, arising from the annuity book on which the majority of the longevity risk on the backbook is retained. However we expect this to reduce over time as we continue to reinsure the majority of the exposure on the new business written post the implementation of Solvency II.
4. Miscellaneous includes LGA on a Deduction and Aggregation basis and the sectoral capital requirements for non-insurance regulated firms.

Capital  Page 71

5.02 Estimated Solvency II new business contribution

(a) New business by product 1
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
		2019	2019	2019	2018	2018	2018
		£m	£m	%	£m	£m	%
LGR - UK annuity business		11,295	890	7.9	9,148	722	7.9
UK Protection Total		1,604	122	7.6	1,609	115	7.1
- Retail Protection		1,284	98	7.6	1,271	93	7.3
- Group Protection		320	24	7.5	338	22	6.4
US Protection4		850	94	11.1	812	91	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 $1,085m (31 December 2018: $1,088m) and a contribution from new business of $120m (31 December 2018: $122m). US Protection PVNBP and contribution from new business for 2018 have been restated for conversion of USD values based average exchange rate. The use of average exchange rate has no impact on the margins previously reported in 2018.
LGR margin remains at similar levels to 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 remains robust and broadly unchanged compared to the prior year. The 0.1% decrease in 2019 is being driven by the competitive environment for term life business in the US.

Capital  Page 72

5.02 Estimated Solvency II new business contribution (continued)

 (b) Assumptions

The key economic assumptions are as follows:

	2019	2018
	%	%
Margin for Risk	3.5	3.2
Risk free rate
- UK	1.1	1.5
- US	1.9	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	2.8	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.

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

· The assumed future pre-tax returns on fixed interest and RPI linked securities are set by reference to the portfolio yield on the relevant backing assets held at market value at the end of the reporting period. The calculated return takes account of derivatives and other credit instruments in the investment portfolio. The returns on fixed and index-linked assets are calculated net of an allowance for default risk which takes account of the credit rating and the outstanding term of the assets. The allowance for corporate and other unapproved credit asset defaults within the new business contribution is calculated explicitly for each bulk annuity scheme written, and the weighted average deduction for business written in 2019 equates to a level rate deduction from the expected returns for the overall annuities portfolio of 15 basis points.

· Non-economic assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses (excluding development costs). An allowance is made for future mortality improvement. For new business, mortality assumptions may be modified to take certain scheme specific features into account. 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 73

5.02 Estimated Solvency II new business contribution (continued)

 (c) Methodology

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 as set out in the group's 2019 Annual Report and Accounts and Full Year Results.

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

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 2019.

The Solvency II new business contribution has been calculated as the present value of future shareholder profits arising from business written in 2019. Cash flow projections are determined using best estimate assumptions for each component of cash flow and for each policy group. Best estimate assumptions including mortality, morbidity, persistency and expenses reflect recent operating experience and are set in accordance with the CFO Forum EEV Principles, dated April 2016.

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.

LGA is consolidated into the group solvency balance sheet on a US Statutory solvency basis.  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 future new business. The LGA new business margin looks through the intra-group arrangements.

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 Margin for Risk.

The risk free rates have been based on a swap curve net of the EIOPA-specified Credit Risk Adjustment of 11 basis points for GBP and 13 basis points for USD (31 December 2018: 10 basis points for GBP and 18 basis points for USD).

The Margin for Risk 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.

Capital  Page 74

5.02 Estimated Solvency II new business contribution (continued)

(c) Methodology (continued)

The WACC is derived from the group's cost of equity, cost of 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.

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 17.17% (31 December 2018: 17.3%).

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 and the inherent strength of the group's regulatory reserves, is appropriate to reflect the risks within the covered business.

(d) Reconciliation of PVNBP to gross written premium
A reconciliation of PVNBP and gross written premium is given below:
		2019	2018
	Notes	£bn	£bn
PVNBP		13.7	11.6
Effect of capitalisation factor		(1.9)	(2.0)
New business premiums from selected lines		11.8	9.6
Other1		1.9	2.1
Total LGR and LGI new business	4.07,4.08	13.7	11.7
Annualisation impact of regular premium long-term business		(0.2)	(0.2)
IFRS gross written premiums from existing long-term insurance business		2.9	2.8
Deposit accounting for investment products		(1.2)	(1.2)
Future premiums on longevity swap new business		-	(0.3)
Total gross written premiums2	2.01	15.2	12.8
1. Other principally includes annuity sales in the US and lifetime mortgage advances. In 2018 it also included discounted future cash flows on longevity swap new business.
2. Total gross written premiums exclude gross written premiums from discontinued operations. 2018 balances have been restated to reflect the removal of the General Insurance business.

Investments  Page 75

6.01 Investment portfolio

				Market	Market
				value	value
				2019	2018
				£m	£m
Worldwide total assets under management1				1,202,425	1,019,858
Client and policyholder assets				(1,092,626)	(930,516)
Non-unit linked with-profits assets				(10,190)	(9,893)
Investments to which shareholders are directly exposed				99,609	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	LGC	shareholder
		investments	investments	investments	investments	Total	Total
		2019	2019	2019	2019	2019	2018
	Notes	£m	£m	£m	£m	£m	£m
Equities 2		203	14	2,843	71	3,131	2,785
Bonds	6.03	70,061	2,065	2,933	83	75,142	63,096
Derivative assets 3		11,448	-	108	-	11,556	4,411
Property	6.04	3,798	-	159	-	3,957	3,055
Loans and other receivables 4		1,769	579	1,489	438	4,275	4,894
Financial investments		87,279	2,658	7,532	592	98,061	78,241
Other assets 5		90	-	1,458	-	1,548	1,208
Total investments		87,369	2,658	8,990	592	99,609	79,449
2. Equity investments include a total of £324m (31 December 2018: £259m) in respect of associates and joint ventures.
3. Derivative assets are shown gross of derivative liabilities of £11.5bn (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.
4. Loans include reverse repurchase agreements of £1,262m (31 December 2018 £857m).
5. Other assets include finance leases of £90m (2018: £91m) and the consolidated net asset value of the group's investments in CALA Homes and other housing businesses.

Investments  Page 76

6.02 Direct investments

(a) Analysed by asset class
	Direct1	Traded2		Direct1	Traded2
	Investments	securities	Total	Investments	securities	Total
	2019	2019	2019	2018	2018	2018
	£m	£m	£m	£m	£m	£m
Equities	1,282	1,849	3,131	1,166	1,619	2,785
Bonds 3	18,553	56,589	75,142	13,369	49,727	63,096
Derivative assets	-	11,556	11,556	-	4,411	4,411
Property 4	3,957	-	3,957	3,055	-	3,055
Loans and other receivables	408	3,867	4,275	418	4,476	4,894
Financial investments	24,200	73,861	98,061	18,008	60,233	78,241
Other assets	1,548	-	1,548	1,208	-	1,208
Total investments	25,748	73,861	99,609	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 £4,733m (31 December 2018: £3,227m).
4. A further breakdown of property is provided in Note 6.04.

Investments  Page 77

6.02 Direct Investments (continued)

(b) Analysed by segment
					LGR	LGC 1	LGI	Total
					2019	2019	2019	2019
					£m	£m	£m	£m
	-
Equities					9	1,211	62	1,282
Bonds2					17,711	4	838	18,553
Property3					3,798	159	-	3,957
Loans and other receivables					-	93	315	408
Financial investments					21,518	1,467	1,215	24,200
Other assets4					90	1,458	-	1,548
Total direct investments					21,608	2,925	1,215	25,748
1. LGC includes £48m of equities that belong to other shareholder funds.
2. Bonds include lifetime mortgages of £4,733m.
3. A further breakdown of property is provided in Note 6.04.
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	LGI2	Total
					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
Loans and other receivables					-	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 6.04.
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 78

6.03 Bond portfolio summary

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

Investments  Page 79

6.03 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 2 and other subordinated	-	165	91	11	-	6	273	-
- Senior	-	282	69	305	8	-	664	1
Insurance:
- 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 80

6.03 Bond portfolio summary (continued)

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

Investments  Page 81

6.03 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 mortgage loans	3,227	-	-	-	3,227
CDOs	-	-	-	75	75
Total	34,209	16,415	7,942	4,530	63,096

Investments  Page 82

6.03 Bond portfolio summary (continued)

(c) Bond portfolio analysed by credit rating
				Externally	Internally
				rated	rated1	Total
As at 31 December 2019				£m	£m	£m
AAA				3,364	3,176	6,540
AA				14,568	3,172	17,740
A				19,320	6,062	25,382
BBB				18,990	5,495	24,485
BB or below				655	287	942
Other				12	41	53
Total				56,909	18,233	75,142
				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 83

6.04 Property analysis

Property exposure within direct investments by status
				LGR1	LGC2	Total
As at 31 December 2019				£m	£m	£m	%
Fully let				3,414	-	3,414	87
Development				384	23	407	10
Land				-	136	136	3
				3,798	159	3,957	100
1. The fully let LGR property includes £3.2bn let to investment grade tenants.
2. The above analysis does not include assets related to the group's investments in CALA Homes and other housing businesses, which are accounted for as inventory within Receivables and other assets on the group's Consolidated Balance Sheet and measured at the lower of cost and net realisable value. At 31 December 2019 the group held a total of £2,120m of such assets.
				LGR1	LGC2,3	Total
As at 31 December 2018				£m	£m	£m	%
Fully let				2,685	-	2,685	88
Development4				245	23	268	9
Land				-	102	102	3
				2,930	125	3,055	100
1. The fully let LGR property includes £2.5bn let to investment grade tenants.
2. Development within LGC represents 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 31 December 2018 the group held a total of £1,687m of such assets.
4. The 2018 balance for LGR has been represented, by reallocating £245m from Fully let to Development, to more appropriately reflect the status of that property exposure.

Investments  Page 84

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Alternative Performance Measures  Page 85

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

Group adjusted operating profit

Definition

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

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

Closest IFRS measure

Profit before tax attributable to equity holders.

Reconciliation

Note 1.01 Operating Profit.

Return on Equity (ROE)

Definition

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

Closest IFRS measure

Calculated using:

- Profit for the year

- Equity attributable to owners of the parent

Reconciliation

Calculated using profit for the year of £1,834m (2018: £1,872m) and average equity attributable to the owners of the parent of £8,974m (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

Note 4.04   Reconciliation of Assets under management to Consolidated Balance sheet financial investments, investment property and cash and cash equivalents.

Net release from operations

Definition

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

Closest IFRS measure

Profit before tax attributable to equity holders.

Reconciliation

Notes 1.01 Operating Profit and 1.02 Reconciliation of release from operations to operating profit before tax .

Adjusted profit before tax attributable to equity holders

Definition

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

Closest IFRS measure

Profit before tax attributable to equity holders.

Reconciliation

Note 1.01 Operating Profit.

Glossary  Page 86

* These items represent an alternative performance measure (APM)

Ad valorem fees

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

Adjusted profit before tax attributable to equity holders*

Refer to the alternative performance measures section.

Advisory assets

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

Alternative performance measures (APMs)

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

Annual premium

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

Annual premium equivalent (APE)

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

Annuity

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

Assets under administration (AUA)

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

Assets under management (AUM)*

Refer to the alternative performance measures section.

Back book acquisition

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

Bundled DC solution

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

Bundled pension schemes

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

CAGR

Compound annual growth rate.

Credit rating

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

Deduction and aggregation (D&A)

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

Defined benefit pension scheme (DB scheme)

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

Defined contribution pension scheme (DC scheme)

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

Derivatives

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

Direct investments

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

Dividend cover

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

Glossary  Page 87

Earnings per share (EPS)

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

Eligible Own Funds

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

Employee engagement index

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

ETF

LGIM's European Exchange Traded Fund platform.

Euro Commercial paper

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

FVTPL

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

Full year dividend

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

Generally accepted accounting principles (GAAP)

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

by the accounting community to report financial information.

Gross written premiums (GWP)

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

Group adjusted operating profit*

Refer to the alternative performance measures section.

ICAV - Irish Collective Asset-Management Vehicle

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

Index tracker (passive fund)

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

International financial reporting standards (IFRS)

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

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

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

Key performance indicators (KPIs)

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

LGA

Legal & General America.

LGAS

Legal and General Assurance Society Limited.

LGC

Legal & General Capital.

LGI

Legal & General Insurance.

LGI new business

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

LGIA

Legal & General Insurance America.

LGIM

Legal & General Investment Management

LGR

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

LGR new business

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

Glossary  Page 88

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.

Matching adjustment

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

Mortality rate

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

Net release from operations*

Refer to the alternative performance measures section.

New business surplus/strain

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

Open architecture

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

Overlay assets

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

Pension risk transfer (PRT)

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

Platform

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

Present value of future new business premiums (PVNBP)

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

Purchased interest in long term business (PILTB)

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

acquired via a business combination.

Real assets

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

Release from operations

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

Return on Equity (ROE)*

Refer to the alternative performance measures section.

Risk appetite

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

to achieve its business objectives.

Single premiums

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

Solvency II

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

Glossary  Page 89

Solvency II capital coverage ratio

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

Solvency II capital coverage ratio (proforma basis)

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

Solvency II capital coverage ratio (shareholder view basis)

In order to represent a shareholder view of group solvency position, the contribution of with-profits funds and our defined benefit pension schemes are excluded from both, the group's Own Funds and the group's solvency capital requirement, by the amount of their respective solvency capital requirements, in the calculation of the SCR coverage ratio. This incorporates the impacts of a recalculation of the Transitional Measures for Technical Provisions based on end of  period economic conditions. The shareholder view basis does not reflect the regulatory capital position as at 31 December 2019. This will be submitted to the PRA in April 2020.

Solvency II new business contribution

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

Solvency II risk margin

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

Solvency II surplus

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

Solvency Capital Requirement (SCR)

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

Total shareholder return (TSR)

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

Transitional Measures on Technical Provisions (TMTP)

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

Unbundled DC solution

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

With-profits funds

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

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

Yield

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

 

END

 

 

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