Group chief financial officer Q&A

Mark Gregory became group chief financial officer for Legal & General in July 2013, having been a Board member since 2009. He previously successfully led our savings business.

His role is to ensure Legal & General continues to provide security for our customers and to maintain a strong balance sheet while delivering growing sustainable cash generation to support a progressive dividend for shareholders.

Once again Legal & General has produced strong results in 2014, despite much external turbulence, demonstrating our business model’s resilience. I’m pleased the Board is able to recommend a full year dividend of 11.25p which is an increase of 21% on 2013.”

Mark Gregory, group chief financial officer

QMark, in your first full year as CFO, Legal & General has had an eventful year: what were your highlights?

AIt’s been both a challenging and successful year for us. Our businesses have made good progress. I’m particularly pleased with the way we’ve responded to some unexpected external events this year. The budget changes fundamentally reduced the size of the individual annuity market. We have responded by developing new individual retirement solutions, while at the same time exploiting our competitive advantages in the bulk annuity market. We completed £8.5 billion of total annuity transactions, more than double last year’s amount. Elsewhere, LGIM manages more than $1 trillion of total assets and our LDI business overtook our passive business in terms of assets. Our workplace defined contribution AUA passed £11 billion and our UK retail protection business achieved more than £1 billion of gross premiums for the first time, although our US protection business incurred higher than expected mortality claims.

QWith operating cash up 6% and net cash generation up 10% this year, how sustainable is this going forward?

AWe’ve delivered another good set of results. We run the business with a long term focus so while each set of annual results is important, it is the successful delivery over the long term that we focus on. The key to success is growing our stock of assets. This drives the predictability of our operating cash generation. We’ve maintained discipline in growing our business in areas which meet our hurdles for return on economic capital. So I believe high quality returns are sustainable going forward.

QAt last year’s preliminary results the Board announced a dividend policy which aimed to reduce the net cash cover of dividend towards 1.5 times in 2015. When can we expect updated guidance?

AProgressive dividends are our primary way of rewarding shareholders. We will provide updated guidance once clarity on Solvency II has fully emerged.

QCan we speak more about Solvency II given it goes live on 1 January 2016? How close are you to knowing what your capital requirements will be?

ASolvency II rules will permit insurers to use a risk based capital model to determine their capital requirement as an alternative to a standard formula. Models will need to calculate the amount of capital needed to survive a worse case 1-in-200 year event. This includes looking at the possible impact on our business of a combined situation when the world suffers through scenarios like the recent financial crisis, Great Depression or an epidemic like the Spanish Flu outbreak in 1919 –1920. The model that we use needs to be agreed by our regulator, the Prudential Regulation Authority (PRA). We’re due to submit our formal model application in the second quarter of 2015 and the PRA then has six months within which to either approve our internal model or not. It is therefore likely to be the end of the year before we know our new regulatory capital requirements under Solvency II, which goes live on 1 January 2016.

QCompanies’ tax affairs have been big news recently, what’s Legal & General’s tax approach?

AOur profits and therefore our tax payments arise where we employ people and take part in economic activity. Of course, we consider tax as part of our normal business decisions, risk management and governance approach. So I’m comfortable we’ve got the balance right. Our published tax policy is clear on what we will and won’t do. We have a ‘low risk’ rating from HMRC and we work hard to be transparent in our tax disclosures, including providing country- by-country tax information. We have been recognised as highly commended for tax reporting in the FTSE 100 in the PwC Building Public Trust Awards 2014.

QThat all sounds great Mark, but what worries do you have?

In 2014, Mark Gregory provided leadership for our ‘Everyday Money’ financial education programme. (photo)

In 2014, Mark Gregory provided leadership for our ‘Everyday Money’ financial education programme.

AWell, recent market volatility is a reminder of the ongoing market uncertainty that exists, and the upcoming UK election, as well as those in the US and Europe, could increase that volatility. But whilst no model can be completely immunised, we believe our strategy creates a high degree of resilience.

We’ve been very upfront about some of the challenges facing us: like the trend in maturing UK DB schemes moving out of index funds; legacy product run off; changes to mortality assumptions; and unexpected UK-specific regulatory changes and political risks. However we work hard at mitigating these exposures. For example, we’ve been targeting the derisking trend by DB pension schemes, being the only provider to offer the full range of pension derisking strategies, are expanding our LGIM operations into the US, reducing our dependence on the UK market and developing a new range of individual retirement solutions aimed at providing choice to our customers who have increased freedoms post April.

Our strategy is clear and focused. The challenge as always is to continue to execute it effectively. I’m proud of how well we have responded to the changes this year and have confidence in Legal & General going forward.

Sustainability of our growth

Delivering sustainable growth is a cornerstone of our strategy. Our strategy is designed to respond to the five global macro trends identified earlier (see 5 Macro trends section), while at the same time maintaining financial and risk discipline by focusing on:

  • Growth in stock of business
  • Quality cash generation
  • Use of return on economic capital hurdles to ensure quality new business written
  • Balanced return of cash to shareholders against investment in growth

The following pages describe our performance in these areas.

Progressive dividend policy [Full year dividend: 2009 3.84 pence, 2010 4.75 pence, 2011 6.40 pence, 2012 7.65 pence, 2013 9.30 pence, 2014 11.25 pence]; [Dividend cover: 2009 3.11, 2010 2.72, 2011 2.26, 2012 1.91, 2013 1.82, 2014 1.65, 2015 target: 1.5] (bar and line chart)

Read a textual description of the above chart

Progressive dividend policy

We announced new dividend guidance in 2014. Should our Solvency II surplus be no lower than Solvency I, we expect that we will move towards returning two thirds of net cash to shareholders via dividends (1.5 times cover) by the end of 2015.

We will provide updated dividend guidance when Solvency II clarity has fully emerged. The Board remains committed to a progressive dividend policy over the long term.