Statement re US Capital Restr

RNS Number : 5405A

Legal & General Group Plc

02 February 2011

 



This replaces RNS 5098A.

In the IGD table, in the first line - Repurchase of Potomac securities at discount - the figure should be £50m not £450m.

Stock Exchange Release
2 February 2011

LEGAL & GENERAL COMPLETES FIRST PHASE OF US CAPITAL RESTRUCTURING PROGRAMME, INCREASING GROUP EMBEDDED VALUE BY £100m

US External Funding Replaced with Internal Reinsurance Arrangement

·     Buyback at a discount of external debt of Triple-X funding vehicle, resulting in IFRS profit before tax of $72m (£46m)

·     Replacement of Triple-X solution through internal reinsurance structure via UK life company gives a sustainable reduction in the Group's external funding costs of $12m (£8m) per annum

Improvements to Group Capital Fungibility and Cashflow Sustainability

·     Group IGD surplus increased by $129m (£82m)

·     Transaction capital and related profits to be repatriated from the US in cash

Tim Breedon, Group Chief Executive, said:

"This announcement demonstrates our continued focus on improving return on capital from every business within the Group.  Following the receipt of a $50m dividend from the US business in March 2010, we are pleased to announce the completion of the first phase of our US capital management programme.

"The execution of this transaction is beneficial to both our US and UK businesses.  For the Group overall, IGD surplus is enhanced by $129m (£82m), embedded value is increased by $155m (£100m) and the US business's annual external funding costs are reduced by an estimated $12m (£8m).  The new internal reinsurance solution also demonstrates the potential for further capital and profit enhancing transactions from our US capital management programme.

"We remain committed to optimising the Group's worldwide capital structure for the benefit of shareholders."

Strategy and Background
Legal & General America (LGA) is a wholly owned subsidiary of Legal & General Group plc.  It was established in 1981 upon the acquisition of Banner Life, and subsequently William Penn, and it operates in the USA under these brands.  LGA focuses exclusively on writing mortality protection products in the term life and universal life markets.   LGA competes in the protection market by focusing on being a low cost operator and delivering expert, medical-based underwriting on higher sum assured policies.  LGA has in force sums assured in excess of $400bn with an average sum assured in excess of $500,000 and in force premiums of approximately $800m which has grown at 11% p.a. since 1999. In 2009, LGA delivered $135m of IFRS operating profit before tax - its 29^th consecutive year of positive profits.

US Life insurance reserves represent portions of current and past premiums held as reserves to fund higher future claims as insured lives age.  Because of US Triple-X regulatory requirements, LGA is required to hold reserves that are much greater than reasonably conservative future expected mortality should require. These reserves are often referred to as 'excess' or 'redundant' Triple-X reserves.  Over the last 10 years Legal & General has executed a number of transactions to support around $3bn of Triple-X reserves.  Each transaction relates to a specific tranche of LGA business with structures and costs varying according to capital market conditions and regulatory requirements at the time of execution. 

Since 2009 our strategy has focussed on the twin aims of; improving cash flow from the US business to the UK parent and; improving return on capital through a capital management programme by reducing both the amount of capital tied up in the US and the associated funding costs.

In March 2010, the Group received a $50m (£33m) dividend from LGA which was reflected in the Group's net cash generation of £526m for the nine months ending September 2010.  This dividend from the US business is expected to be both sustainable and growing.

The transaction we are announcing today is the result of the first phase of our capital management programme.

The Transaction
In 2004, a block of LGA's business was reinsured to a wholly owned captive insurer, First British American Reinsurance Company (FBARC).  FBARC was funded by a $540m issue of Potomac Trust Capital Class A Money Market Securities (Potomac securities).  These Potomac securities were actively traded in the US domestic Dutch Auction Market prior to the failure of that market in 2007, due to the financial crisis. 

In 2009, Legal & General commenced a buyback of the Potomac securities.  The initial open market transaction was announced on 17 November 2009 and further transactions were completed in 2010. $440m of debt has been repurchased at a total profit before tax (i.e. discount to par) of $72m. The repurchase has been financed via a temporary capital contribution to LGA from L&G Group which will be repaid in quarter 1 2011.

In December 2010, a reinsurance arrangement was established from LGA's subsidiaries to Legal & General Assurance Society (LGAS) which replaced the original reinsurance of this block of business from LGA's subsidiaries to FBARC.  As security for the reinsurance in accordance with US regulations, LGAS posted assets of $565m from the Shareholders Retained Capital (SRC) of the long term fund to US trusts.  LGAS is required to hold an additional £35m in respect of prudential reserves and solvency capital to back the new reinsurance liabilities. 

The completion of the reinsurance arrangement enables LGA to collapse the Potomac Triple-X structure and redeem the remaining Potomac securities at par using the assets within the existing structure. Funds equal to the par value of the internally held Potomac securities, together with capital which had become trapped within the FBARC structure will then be released to LGA, and enable exceptional dividends /capital repatriation to Group¹.

1 Dividends are subject to regulatory approval when year end accounts are drawn up

Financial Effects²

Legal & General has developed and successfully executed what we believe to be a repeatable, cost effective, solution for satisfying redundant Triple-X reserve requirements which leverages the financial synergies and risk diversification of both the US and UK businesses. 

The solution generates several benefits to the US and UK subsidiaries: 

·     Increased capital efficiency and related returns;

·     Future external Triple-X financing costs are saved;

·     Increased IGD surplus and cash generation capacity from the US operations.

This particular transaction generated further exceptional benefits:

·     Additional profit from repurchasing our Triple-X related debt at a discount;

·     Release of capital trapped within FBARC as a result of the financial crisis and its impact in 2007 on the Dutch Auction Market.

The effect of the transaction on the Group's EEV is approximately £100m, of which the key elements are:

£m	EEV Impact
Repurchase of Potomac Securities at discount (net of transaction costs)	50
Present value of internalised financing costs	50
Reduced cost of capital from locked-in FBARC assets	20
Other impacts including cost of capital for reinsured risks	(20)
Total	100

The effect of this transaction is to increase Group IGD surplus by £82m.  This increase can be broken down approximately as below:

£m	IGD Impact
Repurchase of Potomac Securities at discount (net of transaction costs)	50
Trapped assets released from FBARC	58
Other impacts, including reserves for reinsured risks	(26)
Total	82

The repurchase of the Potomac securities at a discount enhances Group IFRS profits before tax by approximately £46m, of which £18m was recognised in the investment variance section of the 2009 results.  In addition, the removal of the external funding costs of the Potomac paper will increase future years' Group profits by a further £8m per annum.

Outlook

The completion of this transaction represents the first phase in the restructuring of the US capital base.  We are exploring additional options to further rationalise the structure and costs of Triple-X reserves in the US business through similar transactions to this one as well as other potential structures.  We will update the market further upon completion of future transactions.

² All figures are unaudited and subject to finalisation.  The different accounting treatment for the repurchase of Potomac securities under IFRS and EEV result in a different profit under each basis.

Enquiries

Investors:
Matt Hotson	Director, Investor Relations & Strategy	020 3124 2150
Adrian Liew	Investor Relations Manager	020 3124 2044
Ching-Yee Chan	Investor Relations Executive	020 3124 2345
Media:
John Godfrey	Director Communications Director	020 3124 2090
Richard King	Head of Media Relations	020 3124 2095
James Bradley	Tulchan Communications	020 7353 4200
Mal Patel	Tulchan Communications	020 7353 4200

·     A teleconference will be held at 15.00 GMT (10.00 EST).  Investors should dial [phone].  An archive of the call will be available which can be accessed by dialling [phone], no passcode required.

·     A copy of this announcement can be found in "US capital management", under the "Financial information" section of our shareholder website at http://investor.legalandgeneral.com/investors/US_capital_mgt.cfm.

Financial Calendar 2010/2011	Date
2010 Preliminary results and Q4 new business	17 March 2011
Ex-dividend date	20 April 2011
Record date	26 April 2011
Dividend Payment date	1 June 2011
Q1 Interim Management Statement	4 may 2011
Annual General Meeting	25 May 2011

Forward Looking Statements

This document may contain certain forward-looking statements relating to Legal & General Group, its plans and its current goals and expectations relating to future financial condition, performance and results. By their nature, forward-looking statements involve uncertainty because they relate to future events and circumstances which are beyond Legal & General's control including, among others, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory and Governmental authorities, the impact of competition, the timing impact of these events and other uncertainties of future acquisition or combinations within relevant industries. As a result, Legal & General Group's actual future condition, performance and results may differ materially from the plans, goals and expectations set out in these forward-looking statements and persons reading this announcement should not place reliance on forward-looking statements. These forward-looking statements are made only as at the date on which such statements are made and Legal & General Group does not undertake to update forward-looking statements contained in this document or any other forward-looking statement it may make.

 

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