Legal & General Group PLC · LSE:LGEN
Legal & General — BofA Merrill Lynch Conference 2013
36 slides from Legal & General's conference presentation, Sep 24, 2013
Slide 1: Tightrope Walking in the Fog. Time for Beveridge 2.0 and Schumpeter 2.0?
TIGHTROPE WALKING IN THE FOG. 1 TIME FOR BEVERIDGE 2.0 AND SCHUMPETER 2.0? EVERY BofA MERRILL LYNCH CONFERENCE DAY NIGEL WILSON, 24 SEPTEMBER 2013 MATTERS
Slide 2: Titans of Economics and Innovation
2 TITANS OF ECONOMICS AND INNOVATION. Bevan Jobs Gates Keynes Beveridge Schumpeter Berners-Lee 1. No great economic problem solvers and policy makers delivering Beveridge 2.0 and Schumpeter 2.0 solutions that drive economic prosperity and efficiency. 2. No major leaders of innovation – western corpo
Slide 3: Legal & General's Financial Performance Has Been Strong 2009-2013
3 LEGAL & GENERAL’S FINANCIAL PERFORMANCE HAS BEEN STRONG 2009-2013. 10.10p Dividend per share 9.00p 7.65p 6.40p 5.97p 4.75p 4.06p 3.84p 2.4 2.01 1.96 1.87 1.33 1.66 1.11 2007 2008 2009 2010 2011 2012 2013 Analyst 2014 Analyst 250 Interim Final consensus consensus Source: Bloomberg as at 19th Septem
Slide 4: Our Financial Results Remain Strong
4 OUR FINANCIAL RESULTS REMAIN STRONG. FINANCIAL HIGHLIGHTS 30 JUNE 2013. LGIM flows Up 66% to £25bn, net flows up 100% to £8bn Bulk annuity premiums Up 900% to £670m Individual annuity premiums Up 44% to £754m Net cash Up 23% to £500m Operational cash Up 14% to £537m Operating profit Up 10% to £571
Slide 5: Many Economic Problems – But Few Realistic Solutions
5 MANY ECONOMIC PROBLEMS – BUT FEW REALISTIC SOLUTIONS…… 1. Real wages falling – record jobs but at lower wages (UK, US, Germany). 2. Productivity falling –lack of investment, low risk, low paid labour instead of risk capital. 3. Asset prices rising – driven by QE monetary methadone, Bernanke and Dr
Slide 6: Distortions Caused by Monetary Policy Actions Without Supply Side Reform
6 ….DISTORTIONS CAUSED BY MONETARY POLICY ACTIONS WITHOUT SUPPLY SIDE REFORM. 6. Corporates under investing in Capital, hoarding cash – “risk off” after being “buried” in 2000/1 and 2007/8. China has adopted opposite strategy. 7. Technology gains remain low – Apple and Microsoft buying back shares,
Slide 7: Bernanke, Osborne and Merkel: Mission Accomplished?
7 BERNANKE, OSBORNE AND MERKEL: “MISSION ACCOMPLISHED”? LGIM Forecasts US UK GERMANY 2013 2014 2015 2013 2014 2015 2013 2014 2015 Real GDP Growth 1.6 2.6 2.8 1.4 2.4 2.8 0.6 1.7 1.9 (%) Inflation (%) 1.6 2.4 3.0 2.7 2.4 2.2 1.5 1.5 1.5 Unemployment (%) 7.5 7.0 6.5 7.7 7.9 7.6 5.4 5.6 5.4 Budget bala
Slide 8: How Useful Are Government Targets in an Uncertain Economy?
HOW USEFUL ARE GOVERNMENT TARGETS IN 8 AN UNCERTAIN ECONOMY? OBR forecasts of UK public sector financial balance % of GDP (excluding Royal Mail, BoE coupon payments) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0 £’bn 11/12 12/13 13/14 14/15 15/16 16/17 17/18 Forecast -2 error Gov’nt 694 701 72
Slide 9: How Long Can Financial Repression Last?
9 HOW LONG CAN FINANCIAL REPRESSION LAST? 4.5 4 Excluding QE 3.5 August 2013 3 January 2013 2.5 2 1.5 1 0.5 0 1Y 18M 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 12Y 15Y 20Y 25Y 30Y 8 % of %stock of gilts in 2012 by duration in years of stock of gilts in 2012 by duration in ye ars 100 90 7 80 6 70 5 Stock by maturit
Slide 10: US: Obsessed About Financial Markets; China: Obsessed About Capital Investment
10 US: OBSESSED ABOUT FINANCIAL MARKETS AND S&P PERFORMANCE. CHINA: OBSESSED ABOUT CAPITAL INVESTMENT AND 7% GROWTH. S&P 500 V SHANGHAI STOCK EXCHANGE GROSS FIXED CAPITAL INVESTMENT IN G20. GFCF % 160% US 50% GDP China 140% 45% China EM G20 ex China 120% 40% G20 US-EU-Japan 35% 100% 30% 80% China 25
Slide 11: QE: By the Rich, For the Rich?
11 QE: BY THE RICH, FOR THE RICH? UK REAL WAGES PER WORKER (WEEKLY EARNINGS/RPI) 220 200 180 Declining 1965=100 160 1%-2% real growth per annum 140 120 100 65 70 75 80 85 90 95 00 05 10 £ per week, 2012 prices REAL AVERAGE WEEKLY EARNINGS AT A 12-YEAR LOW 520 510 500 490 480 470 460 450 440 430 420
Slide 12: Economic Austerity Leads to Political Unemployment
12 ECONOMIC AUSTERITY LEADS TO POLITICAL UNEMPLOYMENT. Pre 2010 2012 2014 Sarkozy 55% 35% 34% Exit 2014 Euro elections. Hollande Elected 51% 30% 27% approval rating Senate and House of Obama 65% 50% Re-elected Representatives elections. 44% approval rating Sept 2013 General Election Merkel 60% 63% 6
Slide 13: UK Jobs: Hardworking, Mobile Labour Force
13 UK JOBS: HARDWORKING, MOBILE LABOUR FORCE…..IMMIGRATION ACCOUNTS FOR ALL NEW JOBS. CUMULATIVE CHANGE IN UK EMPLOYMENT SINCE 2004 2.0 Overseas born, overseas national 1.5 Overseas born, UK national UK born 1.0 millions 0.5 0.0 -0.5 -1.0 04 05 06 07 08 09 10 11 12 13 Source: Reuters EcoWin
Slide 14: US Participation Rates Declining – Where Are the Real Jobs?
14 US PARTICIPATION RATES DECLINING – WHERE ARE THE REAL JOBS? % OF CIVILIAN POPULATION ECONOMICALLY ACTIVE (WORKING OR LOOKING FOR WORK). 68 67 66 65 Percent 64 63 62 61 60 Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- 78 81 84 87 90 93 96 99 02 05 08 11 US UK Source: Reuters EcoWin
Slide 15: Infrastructure Pushing UK Productivity Down
INFRASTRUCTURE PUSHING UK PRODUCTIVITY 15 Health/social work Education Public UNDER-INVESTMENT AND POOR admin/defence Change Jan 07-13 Finance/insurance Change 97-07 Wholesale/retail Construction Manufacturing DOWN. Agriculture 5 4 3 2 1 0 -1 -2 %
Slide 16: Schumpeter 2.0: Creative Destruction in Further Education?
16 SCHUMPETER 2.0: DO WE NEED CREATIVE DESTRUCTION IN FURTHER EDUCATION? STUDENT LOANS IN ENGLAND 2005-2013 GRADUATE EMPLOYMENT Student Loans in England 2005-2013 Graduate employment 50 47 45 40 34% 35 30 30 £bn 25 20 15 66% 15 10 5 0 Unemployed or do low-skill jobs Graduate Job 2005-2006 2009-2010
Slide 17: Excessive Housing Inflation, Insufficient Housing Supply
17 EXCESSIVE HOUSING INFLATION, INSUFFICIENT HOUSING SUPPLY – A POLICY FAILURE. HOUSE BUILDING, HOUSE PRICES AND GROWTH IN ENGLAND Source: Shelter
Slide 18: Housing Vicious Circle
18 HOUSING VICIOUS CIRCLE: UNDERBUILDING PUSHES UP RENTS, DIVERTS CAPEX TO WELFARE, SUPPLY DIMINISHES FURTHER. RELATIVE GROWTH IN HOUSING BENEFIT HOUSING EXPENDITURE (CURRENT 5 EXPENDITURE AND CASELOAD YEAR CYCLE) £5bn £95bn Housing Benefit House Building In 1975, more than 80% of public expenditure
Slide 19: UK, US and Europe Need Beveridge 2.0
19 UK, US AND EUROPE NEED BEVERIDGE 2.0. WELFARE EXPECTATIONS UNREALISTIC. US GOVERNMENT SPENDING V REVENUE UK PUBLIC SECTOR EXPENDITURE ON SERVICES % of GDP 2007-08 2011-12 % (£bn) (£bn) change 25 Discretionary Pensions 99 127 28 20 Interest Current taxes Welfare 90 115 28 15 Health 102 121 19 Heal
Slide 20: Social Spending % of GDP
20 SOCIAL SPENDING % OF GDP. “If Europe today accounts for just over 7 percent of the world’s population, produces around 25% of global GDP and has to finance 50% of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life.” – Angela Me
Slide 21: Long Term Demographic Trends Are Favourable for Legal & General
21 LONG TERM DEMOGRAPHIC TRENDS ARE FAVOURABLE FOR LEGAL & GENERAL. “The world is becoming grey. Over 60s rising from 600 million to 2 billion by 2050” WORLD POPULATION GROWTH 1950-2050 ASIA EUROPE 6 0.8 5 0.7 0.6 4 0.5 Billions Billions 3 0.4 0.3 2 0.2 1 0.1 0 0 1950 1970 1990 2010 2030 2050 1950 1
Slide 22: The Need for Beveridge 2.0
22 THE NEED FOR BEVERIDGE 2.0. BENEFIT SPENDING NOMINAL BENEFIT SPENDING REAL TERMS 41% of British adults believe that public spending on Almost 70% of the pre-war generation, and welfare benefits should be cut, while 31% think the state 61% of baby-boomers, believe that the welfare provision should
Slide 23: Falling UK Dependency Ratios Boost Need for Retirement Solutions
23 FALLING UK DEPENDENCY RATIOS BOOST NEED FOR RETIREMENT SOLUTIONS. UK 2000 UK 2025 Dependency Ratio 1950 2030 (Est) Japan 12.2 1.8 Germany 7.1 2.1 Italy 8.0 2.3 France 5.8 2.4 UK 5.9 2.9 US 8.1 3.0 Sources: ONS, United Nations Population Division.
Slide 24: Risk Sharing: Time for 'Beveridge 2.0'
24 RISK SHARING: TIME FOR ‘BEVERIDGE 2.0’. 1942: 5 Giants – “Want, Disease, Ignorance, Squalor, Idleness” “must be achieved by co-operation between the state and the individual” Compulsion via National Insurance and Contributory benefits, but…. “should not stifle incentive, opportunity, responsibili
Slide 25: Macro Trends – Winning Strategies
25 5 MACRO TRENDS – 5 WINNING STRATEGIES. MACRO DRIVERS OF LEGAL & GENERAL’S GROWTH. GROWTH DRIVERS GROUP RESPONSE KEY TRENDS PROGRESS Over 60s will grow from 600m today to over AGEING RETIREMENT 2 billion by 2050, Corporates move to DC and POPULATIONS SOLUTIONS derisking. Individual accountability
Slide 26: Strategic and Financial Evolution
26 STRATEGIC AND FINANCIAL EVOLUTION. 2009 and Ongoing 2012 2013 and beyond CASH: CERTAINTY AND CASH PLUS ORGANIC GROWTH PLUS SUSTAINABILITY CASH PLUS ORGANIC GROWTH SELECTIVE ACQUISITONS • Industrialised and • Identification of five key macro • Accelerated growth in annuities, automated processes d
Slide 27: LGIM International and LDI Expansion
27 LGIM INTERNATIONAL AND LDI EXPANSION. INTERNATIONAL AUM International: • Europe: Record sales in H1 with 9 new clients from CAGR £52bn the region. We plan to launch our first SICAV by the 32% end of the year. • Gulf: Strong inflows in the first half. We have a healthy pipeline for both Index and
Slide 28: Providing UK Retirement Solutions
28 PROVIDING UK RETIREMENT SOLUTIONS. DE-RISKING JOURNEY Diversify Hedge Insure • UK net inflows were driven by strong flows of £4bn into our market leading LDI strategies • We rolled out, on a targeted basis, our digital solution to help smaller DB clients de-risk, ahead of its official launch late
Slide 29: Annuities: Responding to Demand
29 ANNUITIES: RESPONDING TO DEMAND. FINANCIAL HIGHLIGHTS £m H1 2013 H1 2012 INDIVIDUAL ANNUITIES GROWTH Operational cash generation 130 121 £1,320m New business surplus 17 1 R 11% G CA Net cash generation 147 122 +44% £868m £754m Operating profit 151 139 Individual Annuities single premiums 754 522
Slide 30: Annuities: Strong Growth Potential
30 ANNUITIES: STRONG GROWTH POTENTIAL. DEFINED BENEFIT PENSION LIABILITIES1 MARKET DEMAND £2,000bn Corporates looking to de-risk DB pension schemes £1,000bn L&G offer LDI, bulk purchase annuities and longevity insurance £600bn £400bn Ability to export UK expertise internationally US UK Canada Nether
Slide 31: Direct Investments
31 DIRECT INVESTMENTS. • Purchased alongside private • £116m accommodation project equity £210m in Clapham for Imperial College • Sentinel Housing, private • University of Hertfordshire placement (registered student accommodation project social housing provider in • £145m infrastructure debt and Ham
Slide 32: Infrastructure Investment
32 INFRASTRUCTURE INVESTMENT. • Tesco distribution hub • Solaris direct debt at Reading investment • Financing of 4 operational UK ground mounted solar parks • Road, Rail and Airports • Education • No recent investment • Accommodation only • Health • Energy • No recent investment • No recent sizeabl
Slide 33: Further Upside from Executing Well in Businesses We're Not Big In
33 FURTHER UPSIDE FROM EXECUTING WELL IN BUSINESSES WE’RE NOT BIG IN: BUT CAN BE. BUSINESS AREA LOGIC ACTION PROGRESS International Index • Global homogenous customer market • Launch in US in 2013 • £9.3bn of gross Funds • Regulatory approval received from US • Asia in 2013 International inflows, in
Slide 34: Protection Market Leadership. Well Placed in Risk Sharing
34 PROTECTION MARKET LEADERSHIP. WELL PLACED IN RISK SHARING. UK GROSS PREMIUMS £1,268m STRATEGIC SUMMARY • UK: Increased digital engagement, £782m expand link with housing • Europe: Expand footprint building £291m both Retail Protection and Group Protection 2001 2005 2012 • US: Expand distribution
Slide 35: Conclusions
35 CONCLUSIONS. 1. Five major macro trends underpin delivery of five winning strategies. 2. We can reduce costs, we can employ capital more efficiently – technology, talent and regulatory certainty will drive change. 3. Accelerating the “path to profitability” in our new business model means focusin
Slide 36: Forward Looking Statements
36 FORWARD LOOKING STATEMENTS. This document may contain certain forward-looking statements relating to Legal & General Group, its plans and its current goals and expectations relating to future financial condition, performance and results. By their nature, forward- looking statements involve uncert
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