Legal & General Group Plc · LSE:LGEN
Legal & General — Investor Day (2022)
28 slides from Legal & General's investor day presentation, 2022
Slide 1: An introduction to IFRS 17
An introduction to IFRS 17 Jeff Davies, Group CFO
Slide 2: Forward-looking statements
Forward-looking statements This document may contain certain forward-looking statements relating to Legal & General, its plans and its current goals and expectations relating to future financial condition, performance results, strategy and objectives. Forward-looking statements often use words such
Slide 3: IFRS 17 does not change strategy, capital generation, solvency or dividends
IFRS 17 does not change strategy, capital generation, solvency or dividends IFRS 17: • Is an accounting change, which does not change the underlying economics of our insurance contracts • Will change the timing of recognition of insurance earnings, not the quantum • Will result in more stable and pr
Slide 4: No change in commitment to delivering on our 2020-2024 capital generation and dividend ambitions
No change in commitment to delivering on our 2020-2024 capital generation and dividend ambitions The Board’s confidence in the Group achieving its 5 year ambitions is unchanged. The Board’s aim is to continue to grow the dividend at 5% per annum to FY24 2020-2024 Ambition Status £8-9bn of cumulative
Slide 5: IFRS 17 and IFRS 9: timeline and our planned communications approach
IFRS 17 and IFRS 9: timeline and our planned communications approach IFRS 17 is a new insurance accounting standard, replacing IFRS 4, that delays the timing of profit recognition so that profits materialise gradually over the duration of the insurance contract IFRS 9 (already implemented by all oth
Slide 6: What does IFRS 17 mean for L&G?
What does IFRS 17 mean for L&G? 6
Slide 7: IFRS 17 will impact shareholders' equity and the timing of profit recognition
IFRS 17 will impact shareholders' equity and the timing of profit recognition for our annuity and protection businesses We are required to apply IFRS 17 to all existing in-force contracts. We are applying the General Measurement Model to all our business measured under IFRS 17 This means that we der
Slide 8: IFRS 17 introduces the concept of CSM: a store of future profits
IFRS 17 introduces the concept of CSM: a store of future profits held on the balance sheet to be released over time Illustrative (simplified) measurement of an annuity contract under IFRS 4 vs IFRS 17 The contractual service margin (CSM) created on writing new Day 1 New business is set up to ensure
Slide 9: Indicatively, IFRS 17 will create a 'transition day' CSM and RA stock of £13-14bn
Indicatively, IFRS 17 will create a ‘transition day’ CSM and RA stock of £13-14bn1: future value that will unwind into profits Indicative Group Shareholders' Equity impact • At transition, we expect shareholders’ equity to reduce by c.£5.5bn, primarily due to the requirement to set up a CSM with off
Slide 10: The CSM represents a discounted store of future value that can be added to IFRS 17 equity
The CSM represents a discounted store of future value that can be added to IFRS 17 equity from a valuation perspective The combination of CSM (net of tax) and IFRS 17 equity is broadly comparable to Tier 1 Solvency II Own Funds CSM (net of tax) £13.5 - 14.5bn £13.3bn Equity Tier 1 Solvency II IFRS 1
Slide 11: The CSM represents a key driver of future insurance business accounting profits
The CSM represents a key driver of future insurance business accounting profits • The CSM balance is expected to release into profit over time New business • The CSM provides a view of both stored value of our Existing business in-force insurance business, in addition to the growth derived from new
Slide 12: CSM + RA stock 'at transition' releases into profit over time
CSM + RA stock ‘at transition’ releases into profit over time CSM and RA £13-14bn1 Illustrative: Release from existing Annuities CSM + RA Similar size • The annual release of CSM, Protection release into release of RA and expected profit investment margins are the main drivers of operating profit un
Slide 13: The CSM will grow as we continue to write profitable business
The CSM will grow as we continue to write profitable business, creating growth in future profits Illustrative movement in CSM from writing £10bn of UK PRT per annum • We will continue to write profitable new business volumes in line with our stated ambitions • This should result in growth in future
Slide 14: Investment return continues to be a key driver of profit
Investment return continues to be a key driver of profit Expected investment return on surplus assets and investment margins on assets backing liabilities (i.e. the prudence in the discount rate) of over £300m to be recorded through operating profit We will continue to adopt a similar level of prude
Slide 15: Financial metrics under IFRS 17
Financial metrics under IFRS 17 15
Slide 16: Initial reduction in Operating Profit due to deferral of new business profits
Initial reduction in Operating Profit due to deferral of new business profits and assumption review impacts Deferral of new business profit and assumption review impacts, based on their average contribution over recent years, and after allowing for a higher release from in-force, indicatively reduce
Slide 17: RoE to increase under IFRS 17
RoE to increase under IFRS 17 RoE should increase due to the initial reduction in shareholders' equity at transition and a more gradual release of profit over time No change to the definition: • Numerator: Profit after tax will initially reduce due to the deferral of new business profits and Profit
Slide 18: Rating agencies and debt leverage
Rating agencies and debt leverage L&G Credit Rating1: A+ AM Best Fitch Moody’s S&P “Our expectation is that the introduction of “IFRS 17…will transform insurance “The accounting change is, by itself, unlikely IFRS 17 will have limited impact on our accounting but will not change insurers' to trigger
Slide 19: More stable and predictable earnings
More stable and predictable earnings 19
Slide 20: IFRS 17 earnings will be more predictable with less volatility
IFRS 17 earnings will be more predictable with less volatility The biggest sources of insurance profit will emerge from the release of CSM and RA, as well as the expected return on assets above the discount rate As previously highlighted, the impact of new business and changes in non-financial risk
Slide 21: Insurance operating profit profile will be more stable and predictable under IFRS 17
Insurance operating profit profile will be more stable and predictable under IFRS 17 IFRS 17 defers new business gains over the life of the contract, under IFRS 4 we recognised these up front. The impact of any assumption changes will also be spread over the remaining lifetime of the contract Day 1
Slide 22: P&L accounting choices reduce areas of volatility in earnings
P&L accounting choices reduce areas of volatility in earnings c.£7.4bn of our proprietary assets1 (£97.6bn) will be reclassified as amortised cost or fair value through OCI2 Accounting choices L&G approach Impact on earnings volatility Annuities: A portion of annuity assets, broadly Reduces volatili
Slide 23: Closing comments
eae General Closing comments 23 |
Slide 24: IFRS 17 doesn't change our strategy, solvency or dividends
IFRS 17 doesn’t change our strategy, solvency or dividends. We will hold a further education session in May 2023 Key messages • This is just an accounting change • It changes the timing of recognition of Insurance earnings, not the quantum • It will result in more stable and predictable earnings fro
Slide 25: Appendix
eae General Appendix
Slide 26: Our implementation choices and approach
Our implementation choices and approach Key areas L&G approach Applying the General Measurement Model to all business measured under IFRS 17, this is the default Measurement basis model for the business we write Intend to use Other Comprehensive Income (OCI) for the vast majority of our liabilities
Slide 27: The key drivers of IFRS 17 insurance operating profits
The key drivers of IFRS 17 insurance operating profits IFRS 17 key profit drivers Explanation Reflects the release of un-earned insurance profits as the insurance service is provided CSM release over time Reflects compensation for taking non-financial risks. This is released if experience plays Risk
Slide 28: IFRS 4 vs IFRS 17 differences in profit composition
IFRS 4 vs. IFRS 17 differences in profit composition IFRS 4 IFRS 17 NON-INSURANCE Earnings Earnings on on our our non-insurance non-insurance businesses businesses are are unchanged unchanged Day 1 profit deferred on the balance sheet and spread over Expected profit recognised on day 1 New business