Legal & General (LGEN)

[Dod101]

Just to follow up on this. The Institute and The Faculty of Actuaries have written an entire paper abut this. Contractual Service Margin is intended to represent the unearned profit that an entity expects to earn as it provides services. It goes on at length about how this is dealt with in practice. It says this is necessary because pre IFRS 17, entities (we are talking about insurers) recognised profit from long term contracts in many different ways, often it seems booking all the profit immediately. This is supposed to regulate how profit is handled and the effect will be to release profits as they are earned as the contract proceeds.

If therefore L & G recognised expected profit in annuity contracts ab initio, then the application of IFRS will indeed delay this recognition and that is the point I have been making. Seen in that light, the RNS from L & G yesterday makes absolute sense. The CSM is obviously another reserve to be released over a period of time and of course added to as new business comes in.

The effect will be to reduce profits for now and increase them in the future, wef 1 January 2023. This will presumably be reflected in the half year results due to be announced soon which I expect is why they gave us yesterday's announcement.

Anyone with views contrary to what I have written is welcome to comment as I am simply applying common sense in my interpretation.

Dod

[Alaric]

Anyone with views contrary to what I have written is welcome to comment as I am simply applying common sense in my interpretation.

I think you are correct. Fifty years ago, actuaries came up with the concept of embedded value. This was when they first got their hands on "personal" computing even if it was time sharing using Basic on an IBM 360. What you could then do was project sample policies forward in time and see the profits emerging each revenue year, This could then be discounted back to the present day as "Present Value of Future Profits", later renamed "Embedded Value". Whilst an interesting idea for modelling and business planning, when it escaped into accounting methods, it lead to profits being declared way before there was any certainty about them.

[Dod101]

Anyone with views contrary to what I have written is welcome to comment as I am simply applying common sense in my interpretation.

I think you are correct. Fifty years ago, actuaries came up with the concept of embedded value. This was when they first got their hands on "personal" computing even if it was time sharing using Basic on an IBM 360. What you could then do was project sample policies forward in time and see the profits emerging each revenue year, This could then be discounted back to the present day as "Present Value of Future Profits", later renamed "Embedded Value". Whilst an interesting idea for modelling and business planning, when it escaped into accounting methods, it lead to profits being declared way before there was any certainty about them.

Yes and of course that sort of accounting has got many a contractor into trouble. Anyway it will be interesting to see what L & G's half year profits look like. In their statement yesterday they confirmed that they will be increasing their diividend by 5% for this year and next, that is no change from their previous stated undertaking.

Dod

[monabri]

Just to follow up on this. The Institute and The Faculty of Actuaries have written an entire paper abut this. Contractual Service Margin is intended to represent the unearned profit that an entity expects to earn as it provides services. It goes on at length about how this is dealt with in practice. It says this is necessary because pre IFRS 17, entities (we are talking about insurers) recognised profit from long term contracts in many different ways, often it seems booking all the profit immediately. This is supposed to regulate how profit is handled and the effect will be to release profits as they are earned as the contract proceeds.

If therefore L & G recognised expected profit in annuity contracts ab initio, then the application of IFRS will indeed delay this recognition and that is the point I have been making. Seen in that light, the RNS from L & G yesterday makes absolute sense. The CSM is obviously another reserve to be released over a period of time and of course added to as new business comes in.

The effect will be to reduce profits for now and increase them in the future, wef 1 January 2023. This will presumably be reflected in the half year results due to be announced soon which I expect is why they gave us yesterday's announcement.

Anyone with views contrary to what I have written is welcome to comment as I am simply applying common sense in my interpretation.

Dod

I would have termed this as "Prudent Trading". As a former programme manager the business we were in was very careful about taking margin and would only realise margin incrementally on key milestone events logged in a project risk register. Booking margin on day 1 is asking for trouble. IFRS 17 seems to be introducing a similar approach.

From https://www.cambridge.org/core/journals ... E072E53E2B

Section 2.1.4

“Currently, insurers recognise profits inconsistently over time. The timing of recognition of profit for insurance services can vary significantly by jurisdiction and by product. Some insurers recognise profit immediately when an insurance contract is written. Other insurers recognise profit only when the contract terminates. Other insurers recognise profit over the duration of the insurance contract on the basis of the passage of time.”

There's a good example in that section relating to annuities...especially when profits are effectively at risk over decades (ie if the annuitant dies early then the profit is better than for an annuitant that lives to the +3 sigma end of the age spectrum).

Do I think it will make any significant difference to LGEN - not really but I'm not an expert in this area but LGEN are, it's their day job and they've already flagged up no issue.


To be honest, after browsing some of the report linked above, I ran out of steam! (It's a detailed, lengthy report) It's one for Mr Lgen to digest and they've already said

"Looking forwards, we expect the adoption of IFRS 17 to result in a more stable and predictable operating profit profile for L&G through steady CSM and RA releases. We expect the contribution to the CSM and RA from new insurance business and assumption changes (which impact the CSM only) to continue to exceed the run-off from our in-force insurance book. As a result, we expect insurance earnings to grow over time."

(Earned Value Management might be the same as your "Embedded Value" ..I don't know).

[Dod101]

And I think that over the very large book that L & G has, they will get a stable outcome anyway, whichever method they use, at least once this transition period is past.

Dod

[monabri]

https://news.sky.com/story/amp/water-gi ... l-12918572

"The FTSE-100 water group United Utilities (UU) has struck a £1.8bn deal to offload a chunk of its pension liabilities amid unprecedented scrutiny on the industry's financial resilience.

Sky News has learnt that UU, which has more than seven million customers across the northwest of England, has signed an agreement with Legal & General (L&G) to make future payments to pension scheme members.

The agreement is one of a deluge of so-called pension risk transfer (PRT) deals being struck with specialists such as L&G, Aviva and Pension Insurance Corporation (PIC)."

[idpickering]

L&G Half Year Results 2023 Part 1.

H1 2023 Results: £0.95bn of operating profit and capital generation, stock of deferred profits up to £13.8bn, DPS up 5% to 5.71p and SII ratio of 230%
Resilient financial performance1

· Operating profit of £941m (H1 2022: £958m)

· Solvency II coverage ratio2 of 230%, with surplus of £9.2bn (H1 2022: 212%)

· Solvency II operational surplus generation of £947m (H1 2022: £946m)

· Profit after tax3 of £316m (H1 2022: £575m)

· Interim dividend of 5.71p, up 5% (H1 2022: 5.44p)

£947m capital generation with significant dividend headroom4

· We are on track to achieve our five-year (2020-2024) ambitions. To date:

‒ Capital generation of £5.9bn (£8.0-9.0bn by 2024)

‒ Dividends of £3.6bn (£5.6-5.9bn by 2024)

‒ Net surplus generation over dividends of £0.6bn5

· The Board's intention is to continue to grow the dividend at 5% per annum to FY246

Stock of deferred profits up to £13.8bn as new business outpaces backbook release7

· New business deferred profits of £0.6bn

‒ LGRI premiums of £5.0bn (H1 2022: £4.4bn) generating deferred profit of £0.4bn8

‒ In H2, LGRI has already written a further £1.8bn UK and $1.0bn US PRT

"We remain on track to achieve our five-year ambitions and deliver attractive returns for our shareholders. In H1, we delivered £0.95bn of both IFRS operating profit and capital generation, together with a Solvency II ratio of 230% and a surplus of £9.2bn. The dividend is up by 5%. LGRI and LGC performed strongly, LGIM results stabilised, and Retail's performance - while impacted by competition in some areas - was bolstered by growing annuity sales and progress in US protection. We wrote £4.9bn of UK PRT, deploying just £106m of capital, underlining the benefits of our synergistic business model. I'd like to thank my colleagues for their contribution and ongoing commitment to inclusive capitalism, serving our shareholders, customers and wider society."

Sir Nigel Wilson, Group Chief Executive

https://www.investegate.co.uk/announcem ... -1/7695803

Part 2;

https://www.investegate.co.uk/announcem ... -2/7695865

Div 5.71p Ex div 24 Aug 23, paid 26 Sep 23.

Ian (I hold).

[Dod101]

These results are not all that exciting with Profit after tax down from £575 mill to £316 mill mainly I think owing to investment losses of £617 mill, including the closure of their modular housing factory. Does not look as if Sir Nigel is going out in a blaze of glory. Predictably, in a weakish market (when is it not these days?) the shares are down 1.76%

Interim Dividend up 5% per their plan and payable on 26 Sept.

Dod

[idpickering]

Further to my last, as of now LGEN are down 3.4%, which is overdone imho. However, I see other insurers and financial shares are down as I type too, so I'm not going to be unduly worried about LGENs' SP today.

Ian.

[idpickering]

Legal & General Group Plc Board announces the appointment of Lesley Knox as Senior Independent Director.

The Board of Legal & General Group Plc (the "Company") is pleased to announce that Lesley Knox will succeed Philip Broadley as Senior Independent Director with immediate effect. Philip will remain a Non-Executive Director of the Company and as a member of the Group Audit Committee, Group Corporate Governance and Nominations Committee, Group Remuneration Committee, Group Risk Committee and Group Technology Committee.

https://www.investegate.co.uk/announcem ... or/7771670

Ian.

[Dod101]

Legal & General Group Plc Board announces the appointment of Lesley Knox as Senior Independent Director.

The Board of Legal & General Group Plc (the "Company") is pleased to announce that Lesley Knox will succeed Philip Broadley as Senior Independent Director with immediate effect. Philip will remain a Non-Executive Director of the Company and as a member of the Group Audit Committee, Group Corporate Governance and Nominations Committee, Group Remuneration Committee, Group Risk Committee and Group Technology Committee.

https://www.investegate.co.uk/announcem ... or/7771670

Ian.

This is the same Lesley Knox who was at one time Chair of Alliance Trust and presided over that disastrous decade when they totally lost their way. Since then she has appeared on various Company Boards. Maybe she has found her niche because she could hardly be conning everyone all the time, but I do not think much of her.

Dod

[bluedonkey]

Maybe she's clubbable.

[Dod101]

Maybe she's clubbable.

To be fair I wrote to her a lot in that decade I mentioned and she always responded, not that she did much about anything I complained about. Her judgement at that time, at least in my opinion, was very poor.

But as you say, she must have the knack of getting on with people. Incidentally, I note in the RNS from L and G that she has been made Senior Independent Director only so that they can improve their credentials on diversity in their directors. In other words to tick the right box!

Dod

[idpickering]

Legal & General agrees £4.8 billion full buy-in for the Boots Pension Scheme.

UK's largest single buy-in by premium size

Legal & General Group plc ("Legal & General") today announces that it has agreed a £4.8 billion full buy-in with the Boots Pension Scheme ("the Scheme"). This buy-in secures the benefits of all 53,000 retirees and deferred members of the Scheme, making it the UK's largest single transaction of its kind by premium size and, for L&G, the largest single transaction by number of members.

The sponsoring company, Boots ("the Sponsor"), founded 174 years ago, is the UK's leading health and beauty business with over 2,000 stores and 52,000 employees.

Legal & General has a long-standing relationship with Boots, having provided investment management services to the Scheme for over 20 years. This buy-in begins the conclusion of a de-risking process that the scheme first embarked on in 2001.

This transaction represents another innovative step forward in DB pension de-risking by providing a combined investment and insurance solution for the Scheme's asset holdings, allowing the Scheme to achieve the certainty of a transaction whilst also maximising value by transferring its assets (or the associated sale proceeds) to Legal & General.

https://www.investegate.co.uk/announcem ... me/7900679

Ian (I hold LGEN).

[monabri]

A muted response from the market!

[BullDog]

A muted response from the market!

Despite it's qualities, Legal and General doesn't seem to be able to do anything that keeps Mr Market in a good mood. With a very subdued economic outlook, I don't see that changing any time soon.

[Steveam]

I’m happy enough if they just keep sending me the dividends. I try not to sweat the small stuff (capital value) if I’ve no intention of selling.

Best wishes, Steve

[idpickering]

I’m happy enough if they just keep sending me the dividends. I try not to sweat the small stuff (capital value) if I’ve no intention of selling.

Best wishes, Steve

Well said. Have a rec/thanks. My feelings on this are in line with yours. In fact LGEN are a double holding in my HYP. I'm a happy holder of LGEN and have no intention of selling my LGEN shares, if ever perhaps?

Ian.

[idpickering]

BERENBERG UPGRADES LEGAL & GENERAL TO 'BUY' AS MACRO OUTLOOK IMPROVES

Berenberg has upgraded its rating for insurance and investment group Legal & General from 'hold' to 'buy', saying that the macro environment should support the shares heading into 2024.
"At the start of 2023, the macroeconomic environment was not supportive for Legal & General shares," said analyst Thomas Bateman.

Investor concerns about credit risk and property valuations have hampered the stock since January 2022, but the tide is turning going into 2024, driven by a greater certainty about the interest-rate outlook.

Looking ahead, Bateman said: "Fears of credit risk and real estate valuations are subsiding, but the benefits of higher interest rates for L&G, such as strong annuity volumes, are here to stay, and we expect strong annuity volumes to drive a step-up in capital generation."

Meanwhile, he said that L&G offers one of the best dividend prospects for income investors, being the seventh-highest yielding stock on the FTSE 100, trading at an 8.5% 12-month forward dividend yield. A predicted "step-up" in capital generation growth could also drive higher dividends, Bateman said.

https://www.hl.co.uk/shares/shares-sear ... .5p-shares

The above item can be seen via the Company News link on the above LGEN page on HL.

LGEN are up 2.5% as I type.

Ian.

[idpickering]

L&G Full Year Results 2023 Part 1 and 2.

Set to achieve our 5 year ambitions, with record new business volumes and resilient in-year profit generation
António Simões, CEO
"Everything I have seen since joining the business in January has confirmed what attracted me to Legal & General. We have an authentic sense of purpose and stand out for our market-leading businesses, performance track record and strong balance sheet, delivered by talented colleagues.
Our 2023 performance reflects these strengths. We are on course to achieve our five-year targets, and demonstrated resilience in challenging markets to achieve record new business volumes in pension risk transfer, UK annuities and US protection, increasing our store of future profit. Our international assets under management and alternative assets portfolio continue to grow, as does our position in the UK defined contribution pensions market.
We must be as ambitious for Legal & General's future as we are proud of our history. This is the right moment to take a fresh perspective, build on our track record and set out a vision for profitable and sustainable growth. I look forward to outlining our strategy and plans at our Capital Markets Event on 12 June."
Resilient financial performance1
· Operating profit of £1,667m (2022: £1,663m)

· Profit after tax2 of £457m (2022: £783m)

· Solvency II capital generation of £1.8bn (2022: £1.8bn)

· Solvency II coverage ratio3 of 224%, with surplus of £9.2bn (2022: 236%, £9.9bn)

· Dividend per share of 20.34p, up 5% (2022: 19.37p)

Growth in our store of future profit: up 9% to £14.7bn4
· Record volumes across our insurance businesses:

‒ £13.7bn of institutional annuities (£10.5bn retained premium5)

‒ £1.4bn of individual annuities

‒ $175m of US protection new business premium

· New business CSM contributed £1.2bn (2022: £0.9bn)

· CSM has grown 9% to £13.0bn (2022: £11.9bn)

And later from part 2;

Subsequent to 31 December 2023, the directors declared a final dividend for 2023 of 14.63 pence per ordinary share. This dividend will be paid on 6 June 2024. It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2024 and is not included as a liability in the Consolidated Balance Sheet as at 31 December 2023.

https://www.investegate.co.uk/announcem ... -1/8072678

Part 2; https://www.investegate.co.uk/announcem ... -2/8072750

Ian (I hold).