Legal & General Plc (“Legal & General” or the “Group”) will provide an update on IFRS 17 to investors and analysts, releasing a recorded video and accompanying slides at 14:00 GMT followed by virtual Q&A at 14:45 GMT today, Tuesday 29 November.
IFRS 17 – a global standard due to be implemented by the sector on 1 January 2023 – is an accounting change which does not change our strategy, solvency or dividends. The introduction of a CSM (Contractual Service Margin) and Risk Adjustment (RA) creates a significant store of future value (£13-14bn) that will result in more predictable and growing Insurance profits from a lower base.
The Board’s confidence in the Group achieving its 5 year ambitions is unchanged. IFRS 17 does not change the underlying economics of our Insurance contracts. It will not impact LGIM or LGC. It will impact the reporting of our annuity and protection businesses (LGRI, Retail), changing the timing of recognition of earnings from these products but not the quantum. It does not change our:
IFRS 17 introduces the balance sheet concepts of a contractual service margin (CSM) and risk adjustment (RA). These represent discounted, future value that will unwind into profits over time. We expect the CSM to be an important driver of Insurance earnings. Based on transition at 1 January 2022 we expect to create a CSM and RA stock of around £13.5 billion – a significant store of future value. We expect equity to reduce by around £5.5bn. We expect return on equity to increase under IFRS 17 due to the reduction in equity.
IFRS 17 also introduces a more stable and predictable profit profile through the CSM release. For Legal & General, this benefit emerges through the deferral of new business profit and demographic assumption changes to the CSM, which will then be spread and released into profit consistently over the lifetime of the contract. Historically, these two components have made a meaningful contribution to Group operating profit from divisions.
Indicatively, the removal of these two components, with an adjustment to reflect the higher anticipated release from the in-force book, would reduce divisional operating profit by c20-25%.4 We expect Insurance earnings to grow in a more stable and predictable way from this new base.
We are confident in our ability to continue to write profitable new annuity and protection business, and therefore to grow the CSM and related profits over time. Indicatively, writing £10bn of UK PRT per annum would result in 6-7% CAGR in related operating profit over five years. This would be higher if we wrote more than £10bn per annum.
We continue to see compelling investment opportunities across all our businesses, providing further scope to deliver growth beyond this level.
Expectations for FY22 operating profit and capital generation unchanged.
Consistent with the guidance provided at HY22, we expect to deliver resilient FY22 operating profit growth in line with the 8% delivered in H1 (£1.16bn vs £1.08bn) and FY22 capital generation of £1.8bn.
1 Ratings shown are Legal and General Assurance Society Limited Financial strength rating
2 Dividends declared
3 Absent market shocks / events outside of our control
4 Based on average new business premiums and assumption changes over last 3 years
Established in 1836, Legal & General is one of the UK's leading financial services groups and a major global investor, with over £1.2 trillion in total assets under management* of which 39% is international. We have a unique and highly synergistic business model, which continues to drive strong returns. Legal & General provides powerful asset origination and management capabilities directly to clients, which also underpin our leading retirement and protection solutions. We are a leading international player in Pension Risk Transfer, in UK and US life insurance, and in UK workplace pensions and retirement income. Our purpose is to improve the lives of our customers and create value for our shareholders. Through inclusive capitalism, we are investing in long-term assets, such as real estate and infrastructure, that can help build a better society for the future.
*as at HY 2023