Financial Review
The key drivers of the financial performance
of LSL in 2012 are summarised below
Income Statement
Revenue
12
GROUP REVENUE claims which had been made against the
Revenue increased by 12% to £243.8m in Group as at 31st December 2012. The main
the year ended 31st December 2012 (2011: factors considered in quantifying the Specific
+ % £218.4m). On a like-for-like basis, excluding
Marsh & Parsons, revenue increased slightly
Provision were the likelihood that a claim would
be successful, an assessment of the likely
2012 £243.8m to £216.6m (2011: £215.7m). cost for each claim, including any associated
legal costs, and whether any reduction in the
2011 £218.4m operating Expenses Excluding Exceptional claim is considered likely due to contributory
costs, Amortisation and Share Based Payment negligence of the lender.
Operating expenses increased by 12% to
The IBNR provision, was based on the Directors’
£211.1m (2011: £189.0m). This was mainly in
35.1
GROUP UNDERLYING OPERATING PROFIT
estimates on the number of claims which
the Estate Agency Division and was due to
would be received in the future with regard to
higher revenue. The average number of full
work completed before 31st December 2012.
£ m time equivalent employees during the year
was 4,113 (2011: 3,930).
The Directors have then applied an average cost
per case, based on historical averages,
2012 £35.1m
underlying operating Profit to estimate the IBNR provision.
2011 £31.1m Group Underlying Operating Profit increased The increase in the PI provision was partly
by 13% to £35.1m (2011: £31.1m) with the driven by lenders, most of whom are no longer
Underlying Operating Profit Margin of 14.4% active in the market, pursuing notifications and
26.9
OPERATING CASH FLOW AFTER CAPITAL EXPENDITURE (2011: 14.2%). claims previously considered dormant.
It has also been necessary to make additional
Exceptional items
provisions for existing claims which are being
£ m
Total net exceptional costs in 2012 were £21.4m
aggressively pursued by lenders who often use
(2011: £2.4m). The main exceptional costs in
solicitors engaged on a no win, no fee basis.
2012 £26.9m 2012 were PI costs of £17.3m; movements in
This trend has increased recently in advance
the provision for contingent consideration on
of April 2013 when it is expected that the
2011 £21.1m acquisitions which were expensed through the
legislation governing civil litigation will change.
income statement of £4.2m; and redundancy
Both these factors have had a significant impact
and other associated branch closure costs
on the IBNR provision required for notifications
26.6
NET BANK DEBT including onerous lease provisions of £1.9m.
and claims estimated to be received in the
These costs were offset by a gain on the sale of
future for the 2004 to 2008 period. The
the freehold properties totaling £1.4m. In 2011,
primary statutory limitation for this period
£ m the main exceptional costs were acquisition
costs of £1.6m associated with the purchase of
ends during 2014. It should be noted this was
the Directors’ best estimate of future claims
2012 £26.6m Marsh & Parsons.
and the conclusions on the appropriate level of
2011 £35.7m Provision for PI Claims/Notifications IBNR provision are sensitive to small changes
During 2012 the Group has seen a in assumptions and are therefore highly
deterioration in claims experienced relating to subjective. The additional charge relating to the
the 2004 to 2008 period, which was a period 2004 to 2008 risk years has been included as an
of relatively high risk lending characterised by exceptional item.
higher house prices, high loan-to-value ratios Further, we have however continued to build
and considerable levels of buy-to-let and a provision for estimated PI costs relating
sub-prime lending. As a result the provision to valuations completed since 2009, and an
for PI costs has been increased. Income Statement charge has been made
The PI provision was made up of a ‘Specific in these results and the charge has been
Provision’ and ‘Incurred But Not Reported’ considered as an operating expense rather than
(IBNR). The Specific Provision was based on as an exceptional cost.
the Group’s review of any notifications or
20 ANNUAL REPORT AND ACCOUNTS 2012