7th Apr 2005 15:36
Legal & General Group PLC07 April 2005 7 April 2005 Legal & General Assurance Society Ltd. Publication of FSA Return for the year ended 31 December 2004 On 31 March 2005, Legal & General Assurance Society Ltd (Society) submitted itsAnnual Return (Return) to the Financial Services Authority (FSA) for the yearended 31 December 2004. Commenting, Andrew Palmer, Group Director (Finance) said: "The Return shows thatthe total capital resources available to Society of £7.0bn exceed the totalcapital requirement by £4.0bn. These figures underline the financial strengthwhich underpins our strategy of delivering profitable market share growth." This is the first Return to be prepared under the rules of the FSA's PrudentialSourcebook which came into effect on 31 December 2004. Society's Return for 2004 is available in pdf format on the Legal & Generalwebsite at http://investor.legalandgeneral.com/financialreports.cfm. Thisannouncement gives a brief overview of the key solvency aspects of the Return. The Return implements the FSA's 'twin peaks' approach to liability measurementand capital requirements. Under this approach, an insurer is required tocalculate the liabilities and capital requirements for its with-profits businessusing both a regulatory (Peak 1) and a realistic (Peak 2) basis and to haveassets sufficient to cover both results. For other long term insurance business,only the regulatory basis is used. The Return also implements the FSA's approach to capital tiering, which setsminimum requirements for the quality and loss absorbency of an insurer'scapital. References to lines or pages in parentheses below refer to the relevantlocations in the Return. Components of capital resources, Form 3 (page 4) This form sets out the capital resources available to Society, divided betweenTier 1, Upper Tier 2 and Lower Tier 2. These categories are specified by the FSAto recognise the ability of different types of capital to absorb losses. CoreTier 1 capital, the highest quality, includes equity capital, retained profitsand surpluses in long term insurance funds. Society's capital resources for its long term insurance business, beforeimplicit items, are £6.2bn (line 79), of which £5.9bn (line 39) is Tier 1. Statement of solvency - Long term insurance business, Form 2 (page 2) This form compares the capital resources of Society's long term insurancebusiness with the FSA's capital requirements. The Minimum Capital Requirement (MCR) (1) of £2.0bn is shown in line 34. Tier 1capital must cover at least 50% of the MCR. Tier 1 plus Upper Tier 2 capitalmust cover 75% of the MCR. Line 35 shows that Tier 1 capital exceeds the required amount by £4.9bn. Line 36shows that Tier 1 plus Upper Tier 2 capital exceeds the required amount by£4.7bn. Neither of these two excess amounts includes any credit for an implicititem. The Enhanced Capital Requirement (ECR) for Society's long term business of£3.0bn is shown in line 38. This is the MCR (line 34) plus the With-ProfitsInsurance Capital Component (line 37) of £995m derived from Form 18 andexplained below. The total capital resources available to Society of £7.0bn (line 13), whichinclude an implicit item of £755m in respect of non-profit business, exceed thetotal capital requirement by £4.0bn (line 42). Footnote: (1) This includes the long term insurance capital requirement plus resiliencecapital requirement. Previously, these two capital items were generally known asthe solvency margin and resilience reserve respectively. With-Profits Insurance Capital Component, Form 18 (page 21) This form gives effect to the FSA's twin peaks approach for with-profitsbusiness by comparing the excess capital in the with-profits fund on both theregulatory (Peak 1) and realistic (Peak 2) bases. The regulatory excess is thenlimited, if necessary, to the realistic excess by means of an additional Peak 1capital requirement, the With-Profits Insurance Capital Component (WPICC). Line 49 shows that the excess capital on a regulatory basis (Peak 1) is £1,215m.The excess capital on a realistic basis (Peak 2) is lower at £220m, as shown inline 51. This is largely because liabilities calculated on a realistic basisinclude an allowance for the value of future bonuses which for these purposesare assumed to be added to with-profits policies. Therefore, a WPICC of £995m(line 64) is added to Society's Peak 1 capital requirements. Realistic balance sheet, Form 19 (page 22) This form reports the realistic (Peak 2) valuation of the with-profits part ofSociety's long term fund (with-profits fund), including the future costs ofguarantees, options and smoothing for with-profits policies (lines 41 to 44). Line 68 of the Return shows that the Working Capital of the with-profits fund is£864m. This is the excess of the realistic assets over the realistic liabilitiesand is known as the with-profits estate. It takes account of management actionsin relation to bonus policy but not of any other actions available to managementand assumes an unchanged investment mix from that in effect on 31 December 2004. The required Risk Capital Margin (RCM) for the with-profits fund is £643m (line65). This value is obtained by recalculating the realistic assets andliabilities in financially stressed conditions. The RCM was fully covered by the Working Capital of the with-profits fund at theend of 2004. The increase in the RCM from £370m as at 30 June 2004 isprincipally due to the more stringent stress tests required by the PrudentialSourcebook. The Society's Board remains committed to the objective of ensuring that theassets of the with-profits fund are sufficient to meet its liabilities withoutthe need for additional capital. Financial strength ratios Traditionally, the financial strength of insurance companies has been measuredusing a Free Asset Ratio calculated from Form 9 of the old FSA return. The newReturn does not lend itself readily to reproducing this ratio. However, forinformation, the ratio is shown below: 31 Dec 2004 31 Dec 2003 % % Form 9 ratio 15.7 13.0 Form 9 ratio excluding implicit items 13.9 10.4 Enquiries Investors:Andrew Palmer, Group Director (Finance) 020 7528 6286Peter Horsman, Head of Investor Relations 020 7528 6362 Media:John Morgan, Media Relations Director 020 7528 6213 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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