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First-half operating profits at Legal & General climbed 27% year-on-year to 988m ($1.28bn), with more than half of the increase arising from a review of longevity assumptions in its annuity book.

Decades of sustained improvement in longevity in the UK appears to have reversed in recent years, in particular among older age groups. Commentators have attributed this to a variety of causes, such as less government spending on health and old-age care, and virulent winter flu outbreaks.

The trend towards lower longevity improvements means that annuity underwriters may have to set aside fewer reserves, and has led some analysts to consider how much reserve could be released and returned to shareholders.

In todays half-year results announcement, L&G revealed it had released 126m of reserves. But this was based on a review of its base mortality assumptions the current levels of mortality being experienced by pensioners not the mortality trends.

In preparing the half-year results, we have not adjusted our assumptions for the rate of future longevity improvement; they remain consistent with those disclosed last year.

L&G said it will review its longevity improvement assumptions at the year end, including the appropriateness of using theContinuous Mortality Investigation (CMI) 2015 model.

There is increasing evidence that the higher than expected level of recent mortality is in part due to medium or long-term influences rather than short-term events. In performing this review, consideration will be given as to whether, and over what period, to move to newer versions of the CMI model.

L&Gs Retirement division responsible for writing individual and bulk annuities, longevity insurance and equity-release mortgages has a gross longevity exposure of 61.4bn across its annuity and longevity insurance business. The firm has reinsured 15.9bn of longevity risk with 11 reinsurance counterparties, leaving a net exposure of 45.5bn. Going forward, the firm plans to reinsure 80-90% of longevity risk from new bulk annuity business.

L&Gs Solvency II ratio climbed by 15 percentage points over the six months to 30 June, to reach 180%. The figure incorporates an estimated impact from recalculating the transitional measures for technical provisions (TMTP) as at 30 June.

Christopher Cundy

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Longevity review boosts L&G's half year profits - insuranceERM

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