TIDMLGEN
RNS Number : 5323B
Legal & General Group Plc
05 March 2014
Legal & General Group PLC Preliminary Results 2013
Stock Exchange Release
05 March 2014
NET CASH UP 16% TO GBP1BN. DIVIDEND UP 22%.
net cash dividend cover towards 1.5 in two years.
FINANCIAL HIGHLIGHTS - CONTINUED STRONG PERFORMANCE:
-- NET CASH GENERATION UP 16% TO GBP1,002M (2012: GBP865M)
-- OPERATIONAL CASH GENERATION UP 9% TO GBP1,042M (2012: GBP958M)
-- OPERATING PROFIT UP 7% TO GBP1,158M (2012: GBP1,087M)
-- PROFIT BEFORE TAX UP 10% TO GBP1,134M (2012: GBP1,033M)
-- PROFIT AFTER TAX UP 12% TO GBP896M (2012: GBP798M)
-- EARNINGS PER SHARE UP 10% TO 15.20P (2012: 13.84P)
-- RETURN ON EQUITY 16.1% (2012: 15.4%)
-- FULL YEAR DIVIDEND UP 22% TO 9.30P PER SHARE (2012: 7.65P PER SHARE)
-- NET CASH DIVIDEND COVER TOWARDS 1.5 IN TWO YEARS
Nigel Wilson, Group Chief Executive, said:
"Disciplined investment in growth, effective management and
rigorous cost control has enabled us to more than triple net cash
since the financial crisis: it has grown from GBP320m in 2008 to
GBP1,002m in 2013. We have grown dividends again by over 20% and
due to the strength of the business intend to move dividend cover
from 1.8 towards 1.5 times over the next two years.
Legal & General moved up another gear in 2013, delivering
record financial results and accelerating growth across all areas.
Net inflows were GBP17bn including GBP9bn in LGIM and GBP8bn into
Cofunds. LGIM now has GBP450bn of AUM, and Cofunds, with GBP64bn of
assets is the UK's largest Savings platform. Annuity premiums grew
by 78% to over GBP4bn, protection gross premiums were over
GBP1.3bn, and we intermediated GBP28bn of mortgages. We
successfully completed four acquisitions in 2013 and have announced
a further acquisition in 2014.
We have delivered significant outperformance during lean
economic times and are building momentum as the economy recovers.
We now have over 10 million customers who we provide with good
quality, good value products and excellent service, including
through the recent floods.
Our business has continued to perform strongly in the first two
months of 2014 but external risks to the broader economy and
markets remain. There is inherent uncertainty as the 'monetary
methadone' of QE is withdrawn, and the possibility of further
'butterfly-wing' effects for emerging markets and the Eurozone. The
single largest risk to economic progress remains the persistent
backdrop of political and regulatory uncertainty, which could
undermine the confidence of businesses to invest for long-term
growth in the UK. As the largest institutional investor in the UK
we are front and centre in delivering the steady, stable investment
in debt, equity and physical infrastructure required for
recovery."
FINANCIAL SUMMARY
Growth
Financial highlights 2013 2012 %
GBPm
--------------------------------------- -------------- --------------- -------
Analysis of operating profit(1)
--------------------------------------- -------------- --------------- -------
Legal & General Retirement 310 281 10
--------------------------------------- -------------- --------------- -------
Legal & General Investment Management 304 272 12
--------------------------------------- -------------- --------------- -------
Legal & General Assurance Society 444 462 (4)
--------------------------------------- -------------- --------------- -------
Legal & General Capital 179 163 10
--------------------------------------- -------------- --------------- -------
Legal & General America 92 99 (7)
--------------------------------------- -------------- --------------- -------
Operating profit from divisions 1,329 1,277 4
--------------------------------------- -------------- --------------- -------
Group debt costs (127) (127) -
--------------------------------------- -------------- --------------- -------
Investment projects and expenses (44) (63) 30
--------------------------------------- -------------- --------------- -------
Operating profit 1,158 1,087 7
--------------------------------------- -------------- --------------- -------
Investment and other variances
(incl. minority interests) (24) (54) 56
--------------------------------------- -------------- --------------- -------
Profit before tax 1,134 1,033 10
--------------------------------------- -------------- --------------- -------
Operational cash generation 1,042 958 9
--------------------------------------- -------------- --------------- -------
New business strain (40) (93) 57
--------------------------------------- -------------- --------------- -------
Net cash generation(1) 1,002 865 16
--------------------------------------- -------------- --------------- -------
LEGAL & GENERAL RETIREMENT (LGR)
Growth
GBPbn 2013 2012 %
------------------------------------- ----- ----- -------
Annuity assets 34.4 32.2 7
------------------------------------- ----- ----- -------
Longevity insurance premiums (GBPm) 212 70 203
------------------------------------- ----- ----- -------
Annuity premiums(2) 4.1 2.3 78
------------------------------------- ----- ----- -------
Annuity net inflows 2.1 0.6 250
------------------------------------- ----- ----- -------
LEGAL & GENERAL INVESTMENT MANAGEMENT (LGIM)
Growth
GBPbn 2013 2012 %
---------------------------- ----- ----- -------
Assets under management(3) 450 406 11
---------------------------- ----- ----- -------
Gross external inflows 52.0 37.1 40
---------------------------- ----- ----- -------
Net external inflows 9.3 5.3 75
---------------------------- ----- ----- -------
LEGAL & GENERAL ASSURANCE SOCIETY (LGAS)
Growth
GBPm 2013 2012 %
----------------------------------- ------ ------ ----------
UK Protection gross premiums 1,326 1,268 5
----------------------------------- ------ ------ ----------
General Insurance gross premiums 375 349 7
----------------------------------- ------ ------ ----------
UK Protection new business annual
premiums 218 221 (1)
----------------------------------- ------ ------ ----------
Savings assets (GBPbn)(4) 109 55 98
----------------------------------- ------ ------ ----------
Savings net flows (GBPbn) 6.8 0.1 n/a
----------------------------------- ------ ------ ----------
LEGAL & GENERAL CAPITAL (LGC)
Growth
GBPbn 2013 2012 %
------------------------- ----- ----- -------
Assets under management 4.7 4.7 -
------------------------- ----- ----- -------
LEGAL & GENERAL AMERICA (LGA)
Growth
$m 2013 2012 %
-------------------- ------ ----- -------
Gross premiums 1,024 922 11
-------------------- ------ ----- -------
New business sales 155 142 9
-------------------- ------ ----- -------
1. Operating profit and net cash generation are defined below in this announcement.
2. 2013 Annuity premiums exclude GBP270m of new business annual
premium equivalent from longevity insurance.
3. LGIM assets under management include GBP34bn (2012: GBP32bn)
managed on behalf of LGR and GBP38bn (2012: GBP38bn) managed on
behalf of LGAS Savings.
4. 2013 Savings assets include GBP40bn of additional assets
acquired as part of the purchase of Cofunds in May 2013.
STRATEGIC EXECUTION DRIVING STRONG PERFORMANCE
In 2013 the Group continued to execute on its clear and focused
strategy based on five key macro trends: ageing populations;
globalisation of asset markets; welfare reform; digital lifestyles
and retrenching banks. In response to these trends we have five
strategic responses: Retirement Solutions; LGIM international
expansion; Protection; Digital Solutions and Direct Investments.
Delivering on this strategy through strong organic growth, in
addition to a selective, disciplined approach to acquisitions, will
drive growth in our cash and earnings.
As a result of delivering on the Group's strategy net cash
generation increased by 16% to GBP1,002m (2012: GBP865m) through
increased operational cash generation, up 9% to GBP1,042m (2012:
GBP958m) and an improved new business strain of GBP(40)m (2012:
GBP(93)m). This cash generation is predictable and high quality
with 88% (2012: 87%) of net cash generated paid as dividends to the
Group.
Operating profit increased by 7% to GBP1,158m (2012: GBP1,087m),
reflecting the growth in net cash generation, enabling us to
deliver earnings per share up 10% to 15.20 pence (2012: 13.84
pence) and a return on equity of 16.1% (2012: 15.4%).
General outlook:
Our view is that UK and US real GDP will grow by around 3% and
that the Bank of England is unlikely to raise the Bank Rate in
2014. However, structural issues in the economy remain, for example
low productivity levels, low real wage growth and sizeable
government deficits, together with regulatory uncertainty. Macro
economic policy responses since the 2008 crisis have contributed to
a significant rise in equity markets, bond values and house prices.
Since 2008 we have demonstrated resilience to macro economic
impacts and believe the comparative strength of our balance sheet
and risk management capabilities position us well.
We expect the growth in our business which has been driven by
the five key macro trends to continue in 2014 and beyond. This will
be complemented by a continued focus on operational efficiency to
ensure we maintain attractive returns and allow our growth
businesses to invest in these opportunities.
Retirement Solutions
In Retirement Solutions, despite a competitive market, we
continued to see strong demand for our Defined Benefit (DB) pension
de-risking solutions, defined contribution proposition and
individual annuity products. LGR completed GBP2.8bn of bulk annuity
premiums, up 180% on 2012, across a broad range of solutions, and
three longevity insurance contracts covering a total of GBP5.0bn of
liabilities. External net inflows into LGIM's Liability Driven
Investment (LDI) and Active Fixed Income capabilities were up 154%
to GBP9.4bn. Individual annuity premiums were GBP1.3bn (2012:
GBP1.3bn), an excellent performance in the context of an overall
decline in the market of 15%. In LGAS, assets on our Workplace
platform increased 45% to GBP8.7bn.
Outlook:
We expect growth in 2014 to be driven by our bulk annuity and
longevity insurance pension scheme de-risking solutions. The
combination of higher equity markets and rising interest rates are
helpful for schemes to de-risk and we have a strong quote pipeline
of bulk purchase annuity deals. We expect the Individual Annuity
market to remain subdued for at least the first half of 2014 and
expect continued regulatory focus on this market. We will continue
to exercise pricing discipline across all areas of our annuity and
longevity insurance propositions.
Our Workplace Savings proposition will continue to grow as
employers with 59 to 499 eligible employees auto enrol during the
year. We continue to invest in the business to secure further
scheme auto enrolees and deliver the necessary cost efficiencies to
convert our increasing scale into profitability over the next few
years.
LGIM International Expansion
LGIM's International expansion accelerated as net inflows more
than doubled to GBP15.7bn (2012: GBP7.8bn), helped by strong demand
for LGIM America's LDI and Active Fixed Income capabilities, where
net inflows were $7.8bn (2012: $5.2bn). LGIM's international assets
under management were up 37% to GBP59bn (2012: GBP43bn). In total
LGIM AUM increased by 11% to GBP450bn (2012: GBP406bn).
Outlook:
LGIM's International expansion has started the year well and we
expect the strong demand for our Index, Liability Driven Investment
and Active Fixed Income capabilities experienced in 2013 to
continue in 2014. To build on LGIM's international capability, in
February 2014 we acquired Global Index Advisors (GIA), subject to
Fund shareholder approval. GIA is an Atlanta-based investment
adviser to $15.6bn of assets focused on index target date funds. We
expect LGIM's international net inflows to accelerate, and over
time for maturing UK DB net outflows to be offset by growth in
retail and DC.
Protection
In Protection, each of our businesses continued to grow. UK
protection gross premiums were up 5% to GBP1.3bn as our market
leading business continued to grow market share. General Insurance
premiums were up 7% to GBP375m and underwriting discipline,
improved claims handling processes and more benign weather despite
the December floods supported an improved combined operating ratio
of 84% (2012: 95%). In LGA, continued growth in our distribution
reach increased premiums by 11% to $1,024m.
Outlook:
The strong momentum with which Retail Protection finished the
year has continued into 2014. Our mortgage network and market
leading presence with banks and building societies positions us
well to benefit from the projected growth in the housing market. We
continue to see a strong pipeline for our Group Protection products
which will benefit from our auto enrolment proposition.
We have been working with our customers affected by the floods
in the UK during January and February 2014 to ensure fast payment
of claims and to get help to them as quickly as possible. As a
result of the floods we anticipate that claims will be around
GBP12m higher in the first two months of 2014, compared to the
equivalent period in 2013.
In our US Protection business we will continue to refine our new
business pricing as we prioritise long term value creation.
Digital Solutions
In May 2013 we acquired Cofunds, the UK's largest investment
platform, to enhance the Group's digital capabilities. Cofunds
assets increased to GBP64bn with net inflows of GBP7.9bn. Our
Retail Protection digital platform now operates with in excess of
80% of applications automatically underwritten at point of sale and
the ability to re-price within 24 hours, to respond to competitor
activity. In December we launched our online enhanced annuity
capability to provide customers with an automatic and fully
underwritten annuity quote.
Outlook:
We are investing in the Cofunds platform to enhance its
capabilities and ensure we take advantage of the significant growth
we expect in this market over the coming years. In parallel we will
deliver operational efficiencies to enhance platform profitability
into 2015. The market is increasingly moving to digital tools to
engage and attract customers and Cofunds will play an important
role in offering the Group this capability, in Savings and other
products.
Direct Investments
During 2013 we increased the Direct Investment portfolio to
GBP2.9bn (2012: GBP1.4bn) on investments across our annuity and
shareholder funds. Within the shareholder funds LGC completed the
acquisition of a 46.5% shareholding in the house builder CALA Homes
in March 2013 and a further GBP8m of equity later in the year to
continue to accelerate CALA's growth and develop its landbank.
Outlook:
In Direct Investments we see a strong pipeline of transactions.
We have completed GBP0.3bn of investment in the first two months of
2014, including in both Affordable Housing and Student
Accommodation. In 2014 we are developing potential initiatives in
the Private Rented Sectors and expect to develop our private
placement lending business to SMEs.
capital management and dividend
Our Solvency I IGD capital surplus was GBP4.0bn at the end of
2013 (2012: GBP4.1bn). This equated to a capital coverage ratio of
222% (2012: 234%), within our preferred longer term range of 175%
to 225%.
During the second half of 2013 there was encouraging progress on
the development of the proposed Solvency II regulatory regime. We
now believe that the worst case scenarios have been avoided to the
benefit of customers and the wider economy. While full clarity on
Solvency II capital will not emerge for at least another 18 months,
we currently anticipate that our Solvency II capital surplus will
be no lower than our Solvency I IGD capital surplus.
We continue to see profitable growth opportunities, both organic
and via selective acquisitions, in which to deploy some of our
capital. We also expect to increase the proportion of net cash we
return to our shareholders as dividends while maintaining a strong
but efficient balance sheet. More specifically, assuming we
continue to anticipate a Solvency II surplus being no lower than
Solvency I, we expect over the next two years to reduce our net
cash coverage of dividend towards 1.5 times. We will provide
dividend guidance for subsequent years when Solvency II clarity has
emerged. The Board remains committed to a progressive dividend
policy over the long term.
Consistent with this revised dividend guidance the Board
recommends a final 2013 dividend of 6.90p (2012: 5.69p) giving a
full year dividend of 9.30p (2012: 7.65p), 22% higher than 2012.
This represents a net cash dividend coverage of 1.82 times, reduced
from 1.91 times in 2012.
LEGAL & GENERAL RETIREMENT.
Financial highlights 2013 2012
GBPm
-------------------------------------------- ----- -----
Operational cash generation 260 243
-------------------------------------------- ----- -----
New business surplus 33 14
-------------------------------------------- ----- -----
Net cash generation 293 257
-------------------------------------------- ----- -----
Experience variances, assumption changes,
tax and non-cash movements 17 24
-------------------------------------------- ----- -----
Operating profit 310 281
-------------------------------------------- ----- -----
Individual annuity single premiums (GBPbn) 1.3 1.3
-------------------------------------------- ----- -----
Bulk annuity single premiums (GBPbn) 2.8 1.0
-------------------------------------------- ----- -----
Total annuity single premiums (GBPbn) 4.1 2.3
-------------------------------------------- ----- -----
Annuities net inflows (GBPbn) 2.1 0.6
-------------------------------------------- ----- -----
Annuities assets (GBPbn) 34.4 32.2
-------------------------------------------- ----- -----
Longevity insurance gross premiums (GBPm) 212 70
-------------------------------------------- ----- -----
New business EEV margin (%) 8.7 8.8
-------------------------------------------- ----- -----
CONTINUED DEMAND FOR OUR BROAD RANGE OF RETIREMENT SOLUTIONS
Net cash generation increased by 14% to GBP293m (2012: GBP257m)
as the scale of the business continued to grow, leading to a 7%
increase in operational cash generation to GBP260m (2012: GBP243m).
The new business surplus of GBP33m (2012: GBP14m) reflects a good
mix of business sold, our innovative asset strategy and the
acquisition of Lucida. As a result operating profit increased 10%
to GBP310m (2012: GBP281m).
Legal & General Retirement (LGR) offers a broad range of
retirement solutions to both Corporate and Retail customers,
through our bulk purchase annuity, longevity insurance and
individual annuity products. In 2013 the business has delivered
significant growth with annuity premiums up 78% to GBP4.1bn (2012:
GBP2.3bn) and net inflows (premiums received less annuity payments)
of GBP2.1bn (2012: GBP0.6bn). Total assets for LGR increased to
GBP34.4bn (2012: GBP32.2bn), of which GBP21.1bn (2012: GBP19.4bn)
represents bulk purchase annuity business.
LGR provides income to 770,000 pensioners (2012: 705,000). In
total we insure one million customers, including deferred
pensioners who rely on us for their future pension arrangements and
the pensioners whose financial security we support by protecting
their pension schemes against longevity risk.
We continue to benefit from operating through a wide range of
distribution channels and being a key player in all the main
markets for retirement solutions and pension scheme de-risking. We
are able to target our sales appetite to the areas where we expect
to optimise our risk-adjusted return on capital.
RECORD BPA AND LONGEVITY INSURANCE PREMIUMS
In the Bulk Annuity market, we completed 94 policies with
premiums up 180% to GBP2.8bn (2012: 90 policies worth GBP1.0bn). We
offer a broad spectrum of solutions to a range of corporate
clients. In 2013 we continued our growth in the large scheme bulk
annuity market in addition to our traditional strength in small
schemes; conducted our first non-UK transaction with New Ireland
Assurance; and completed our first back-book acquisition with the
purchase of Lucida, the closed annuity buy-out company.
During the year we have seen rising equity markets, increasing
the level of scheme assets, and rising interest rates, reducing
defined benefit scheme liabilities. Together this has made
conditions more favourable for pension trustees and their corporate
sponsors to transact.
In 2013 LGR completed three longevity insurance transactions
covering GBP5.0bn of associated liabilities and 48,000 existing
pensioners. In a year that saw a record level of risk transfer in
the longevity market, we completed over 50% of the business,
including the largest longevity insurance contract in the UK to
date. We retained 28% of the liabilities with the remainder being
reinsured.
individual annuity premiums keep pace with record levels of
2012
Individual Annuities achieved sales of GBP1.3bn, broadly in-line
with the record sales achieved in 2012 (2012: GBP1.3bn). This
reflects an excellent performance in the context of an overall
decline in the market of 15% in 2013, as pensioners defer
retirement and the introduction of gender neutral pricing and the
Retail Distribution Review impacted on overall volumes.
Over the years the annuity market has become more sophisticated
by moving towards greater personalisation of solutions offered to
individual customers. Technology is playing an increasingly
important role, particularly for enhanced annuities where the
process for gathering medical information and quoting can be
cumbersome. We expect the market will ultimately move to a
situation where all annuities are individually underwritten. In
December we launched a new online enhanced annuity capability,
delivered on-time and within budget, to provide customers with an
automatic and fully underwritten annuity quote.
Annuities guarantee pensioners a lifelong income, and are the
right product for the majority of savers in a defined contribution
pension scheme. We believe it is important that consumers have
confidence in the market and are able to access the most
appropriate product. We have consistently supported the Open Market
Option - we offer competitive rates and in 2013 three quarters of
our individual annuity sales came from external sources. During
2013, we improved prices by 11% on average, partly as a result of
the improved investment returns achieved through our direct
investments programme, and expanded our presence in the enhanced
annuity segment.
We welcome the FCA's thematic review and will work closely with
regulators and the government to deliver changes to the market,
improving transparency and enabling consumers to shop around. This
will benefit customers as well as competitive, open market-focused
providers, including Legal & General.
We constantly review the asset portfolio and longevity exposure
within LGR. Annuity assets and liabilities are well matched and the
impact of rising interest rates has little impact on profitability,
as assets move in line with the liabilities. We also maintain a
provision of GBP1.8bn against the risk of default on the GBP34bn of
assets. In 2013 we experienced no defaults (2012: GBP0.2m).
In addition to reinsuring 72% of our longevity insurance new
business we also reinsured a proportion of our individual enhanced
annuity business and GBP1.0bn of our back-book liabilities. This
allows us to grow our annuity business in a way that both optimises
our risk and capital and reduces potential earnings volatility.
We continue to maintain our pricing discipline, writing business
with the primary aim of achieving at least our target return on
economic capital. On an EEV basis, the margin was broadly in line
with the prior year at 8.7% (2012: 8.8%), and new business
contribution was up 112% to GBP436m (2012: GBP206m) reflecting the
higher annuity and longevity insurance new business.
LEGAL & GENERAL INVESTMENT MANAGEMENT.
Financial highlights 2013 2012(1)
GBPm
--------------------------------- ------ --------
Total revenue 594 533
--------------------------------- ------ --------
Total costs (290) (261)
--------------------------------- ------ --------
Operating profit 304 272
--------------------------------- ------ --------
Net cash generation 239 219
--------------------------------- ------ --------
Cost:income ratio (%) 49 49
--------------------------------- ------ --------
External gross inflows (GBPbn) 52.0 37.1
--------------------------------- ------ --------
External net inflows (GBPbn) 9.3 5.3
--------------------------------- ------ --------
of which International 15.7 7.8
--------------------------------- ------ --------
Closing assets under management
(GBPbn) 450 406
--------------------------------- ------ --------
of which International 59 43
--------------------------------- ------ --------
1. Reclassified to include Legal & General Retail
Investments, following the Group's reorganisation in July 2013.
ACCELERATING INTERNATIONAL EXPANSION
Operating profit of GBP304m increased 12% compared to the
previous year (2012: GBP272m), reflecting strong revenue growth
whilst maintaining an excellent cost:income ratio. Total revenue of
GBP594m was up 11% (2012: GBP533m) as assets under management were
lifted further by equity markets. Total costs of GBP290m increased
by 11% in 2013 as Legal & General Investment Management (LGIM)
continued to invest in its strategic areas for growth. We continue
to target a cost:income ratio of 50% or below.
LGIM external net inflows of GBP9.3bn in 2013 increased by 75%
compared to the previous year (2012: GBP5.3bn). Record net inflows
of GBP15.7bn were received from international clients in 2013 as
LGIM's international expansion continued to gain momentum. In the
UK, net outflows of GBP6.4bn include pension payments from defined
benefit funds as the market continues to mature.
International AUM grew by 37% to GBP59bn (2012: GBP43bn) with
significant inflows from our key target regions, where LGIM
continued to enhance its product offering. LGIM Asia received its
regulatory licence in the second half of 2013 and is now actively
marketing across the region.
In the US, LGIM's Active Fixed Income and LDI proposition
continued to find favour among pension fund clients and
consultants. In the second half of 2013, momentum accelerated with
strong net inflows from new and existing investors. During 2013
LGIM America (LGIMA) received net inflows of GBP5.0bn into active
products, an increase of 52% compared to the previous year (2012:
GBP3.3bn). LGIMA now manages assets on behalf of four of the 10
largest corporate pension schemes in the US, and has a healthy
pipeline going into 2014. To add to our US capabilities, in
February 2014 we acquired Global Index Advisors (GIA), subject to
Fund shareholder approval. GIA is an Atlanta-based investment
adviser to $15.6bn of assets focused on index target date
funds.
We continue to build on our presence in Europe and the Gulf with
record sales in each region in 2013, driven by an innovative range
of passive and Active Fixed Income strategies. We are also well
positioned for further expansion in 2014, following the launch of
our range of SICAV funds, as we target institutional investors and
fund platforms across Europe.
LGIM continues to support UK defined benefit pension schemes
looking to de-risk as the market matures. This market trend has
resulted in an increasing number of scheme restructures as clients
move out of equities and transition towards LDI and then on to the
buyout stage. We have experienced some large UK DB outflows from
passive equity funds in 2013, which includes assets used to make
benefit payments to scheme members. However, we also benefited from
strong flows into the Solutions business and fixed income products
as these plans de-risk.
UK defined contribution (DC) pension AUM increased 22% to
GBP31bn (2012: GBP25bn) in 2013. This included over GBP1bn of net
inflows from Legal & General's Workplace Savings platform. We
will continue to invest in our UK DC proposition to benefit from
the expected growth in this market.
The integration of the Retail Investment business into LGIM is
progressing well as we enhance its retail proposition and align it
with LGIM's institutional capabilities. Our competitive retail
passive fund offering has benefited from the introduction of the
Retail Distribution Review, with gross inflows up 39%. This,
coupled with the repositioning of our active equity and multi-asset
products, leaves us well placed to grow our share of the UK retail
market. The Retail Investment business, including structured
products,has assets of GBP17.0bn (2012: GBP15.6bn) with operating
profit of GBP37m (2012: GBP29m).
RECORD INFLOWS
Active Active Property
Asset movements Index Solutions Fixed Income Equities & other Total
GBPbn
---------------------------- ------- ---------- -------------- ---------- --------- -------
AUM (at 1 January
2013) 243.2 64.0 82.2 7.7 8.9 406.0
---------------------------- ------- ---------- -------------- ---------- --------- -------
Gross inflows 31.3 8.6 11.0 0.1 1.0 52.0
---------------------------- ------- ---------- -------------- ---------- --------- -------
Gross outflows (31.8) (5.2) (5.0) (0.4) (0.3) (42.7)
---------------------------- ------- ---------- -------------- ---------- --------- -------
External net flows (0.5) 3.4 6.0 (0.3) 0.7 9.3
---------------------------- ------- ---------- -------------- ---------- --------- -------
Internal net flows 0.7 0.8 (1.7) (0.2) 0.2 (0.2)
---------------------------- ------- ---------- -------------- ---------- --------- -------
Total net flows 0.2 4.2 4.3 (0.5) 0.9 9.1
---------------------------- ------- ---------- -------------- ---------- --------- -------
Market and other movements 26.4 2.2 2.9 1.4 1.5 34.4
---------------------------- ------- ---------- -------------- ---------- --------- -------
AUM (at 31 December
2013) 269.8 70.4 89.4 8.6 11.3 449.5
---------------------------- ------- ---------- -------------- ---------- --------- -------
The AUM of LGIM's market-leading Solutions business increased to
GBP70bn, a gain of 10% over the year, reflecting gross inflows of
GBP8.6bn (2012: GBP5.9bn). We continue to help our clients de-risk
their portfolios as rising equity markets and interest rates make
market conditions increasingly conducive to de-risking.
Active Fixed Income AUM increased to over GBP89bn (2012:
GBP82bn). LGIM's strong performance track record across its range
of funds continued to attract strong gross flows in the UK from
pension schemes looking to de-risk. Over five years, 84% of these
funds outperformed their benchmarks. For LGIMA, every product
composite outperformed its benchmark, over one, three and five
years (gross of fees), supporting LGIM's growth in the region.
Legal & General Property (LGP) is the fourth largest
institutional real estate manager in the UK with over GBP11bn in
AUM. LGIM's property team plays an integral role in the group's
initiative to increase Direct Investments. Over the year we
completed transactions totalling in excess of GBP1bn on behalf of
L&G Retirement. Earlier in the period, LGP was selected by the
National Employment Savings Trust (NEST) to run two real estate
mandates, representing NEST's first direct investment into
commercial property.
Our index capabilities have both scale and efficiency. These
capabilities have driven much of our success in Europe and the Gulf
as well as providing the basis for growth in the retail and DC
businesses. Index AUM increased to GBP270bn (2012: GBP243bn).
LEGAL & GENERAL ASSURANCE SOCIETY.
Financial highlights 2013 2012
----- ------
GBPm
------------------------------------------------------------ ----- ------
Operational cash generation 474 436
------------------------------------------------------------ ----- ------
New business strain (73) (107)
------------------------------------------------------------ ----- ------
Net cash generation 401 329
------------------------------------------------------------ ----- ------
Experience variances, assumption changes, tax and non-cash
movements 43 133
------------------------------------------------------------ ----- ------
Operating profit 444 462
------------------------------------------------------------ ----- ------
TRANSITIONING FROM LEGACY TO DIGITAL
Operational cash generation increased by 9% to GBP474m (2012:
GBP436m) as our Protection and Savings businesses continued to grow
their stocks of premiums and assets respectively. New business
strain improved by GBP34m to GBP(73)m in the year, benefiting from
changes to the tax legislation on Retail protection. These tax
changes have an offsetting impact of cGBP50m in non-cash
movements.
The LGAS operating profit reduced to GBP444m (2012: GBP462m).
The operating profit of Protection was GBP355m (2012: GBP359m)
benefiting from significantly improved profitability in General
Insurance of GBP69m (2012: GBP30m). This was offset by lower Retail
Protection new business margins following the introduction of
gender neutral pricing and changes to tax legislation. Savings
operating profit was GBP89m (2012: GBP103m) with Workplace savings
losses increasing to GBP(29)m (2012: GBP(14)m) as the costs and
continued investment associated with securing 0.5 million new auto
enrolees outweighed the low early years' revenue.
The Legal & General Assurance Society (LGAS) business unit
was created in July 2013, bringing together the Protection and
Savings businesses into a clear customer focused business. During
2013 we took a number of actions to integrate these businesses.
This included removing the duplication of functions created by
merging the businesses, which will generate annualised cost savings
of GBP34m at a cost of GBP14m. We continuously review the cost base
to ensure LGAS can deliver attractive returns from both our mature
and growth businesses while investing in the opportunities our
businesses have.
PROTECTION
Financial highlights 2013 2012
GBPm
-------------------------------------------- ------ ------
UK Protection new business annual premiums 218 221
-------------------------------------------- ------ ------
UK Protection new business EEV margin (%) 8.9 11.8
-------------------------------------------- ------ ------
UK Protection gross premiums 1,326 1,268
------ ------
General Insurance gross premiums 375 349
-------------------------------------------- ------ ------
Total UK gross premiums 1,701 1,617
-------------------------------------------- ------ ------
Retail Protection continued its strong growth with gross
premiums up 5% to GBP990m (2012: GBP947m). Our digital platform
operates with in excess of 80% of applications automatically
underwritten at point of sale and the ability to re-price within 24
hours, to respond to competitor activity. This efficiency and our
market leading scale enable us to offer competitive pricing,
driving continuing growth in our market share.
The business has strong distribution covering IFAs, where we
lead the market; building societies, where we are the sole provider
to societies covering around 85% of customers; and the Legal &
General Network, which facilitated GBP28bn, or approximately 1 in 6
of all UK mortgages. Around half of retail protection sales are
typically sold alongside a mortgage, and therefore we expect the
strength of our distribution, alongside the growing housing market
to benefit the business.
Sales in the second half of 2013 were up 5% on the same period
in 2012. This is an excellent performance, especially given the
impact of gender neutral pricing in December 2012, which meant some
customers brought forward purchases into Q4 2012. Over the full
year, sales were down marginally to GBP148m (2012: GBP151m),
reflecting the impact of the gender neutral legislation.
Group Protection delivered a 5% increase in gross premiums to
GBP336m (2012: GBP321m) with new business sales in-line with last
year's sharply higher volumes of GBP70m (2012: GBP70m). Our
innovative employee rehabilitation program, which helped return
three in four employees to work within six months, continues to
drive demand for our group income protection products. We also
benefited from auto enrolment, as schemes reviewed their wider
employee benefits along with their pension scheme.
The UK Protection new business EEV margin of 8.9% (2012: 11.8%)
is strong compared to long term average levels, although below the
exceptional levels experienced in 2012.
General Insurance gross premiums increased by 7% to GBP375m
(2012: GBP349m) as we became the fastest growing home insurer in
direct sales. Profitability in the year benefited from strong
underwriting discipline, improved claims handling and, despite the
December floods, more benign weather over the year. This improved
our combined operating ratio to 84% (2012: 95%).
SAVINGS
Suffolk Mature Consol.
Asset movements Platforms(1) Workplace Life Savings Adj Total
GBPbn
------------------------ ------------- ---------- -------- --------- -------- ------
Assets (at 1 January
2013) 8.6 6.0 5.1 36.2 (1.4) 54.5
------------------------ ------------- ---------- -------- --------- -------- ------
Gross inflows 11.0 2.1 1.3 1.4 (0.3) 15.5
------------------------ ------------- ---------- -------- --------- -------- ------
Gross outflows (3.1) (0.6) (0.4) (5.1) 0.5 (8.7)
------------------------ ------------- ---------- -------- --------- -------- ------
Net flows 7.9 1.5 0.9 (3.7) 0.2 6.8
------------------------ ------------- ---------- -------- --------- -------- ------
Acquisition of Cofunds 45.7 - - - (5.4) 40.3
------------------------ ------------- ---------- -------- --------- -------- ------
Market movements 1.9 1.2 0.6 3.8 (0.2) 7.3
------------------------ ------------- ---------- -------- --------- -------- ------
Assets (at 31 December
2013) 64.1 8.7 6.6 36.3 (6.8) 108.9
------------------------ ------------- ---------- -------- --------- -------- ------
1. Platforms include Cofunds and Investor Portfolio Services
(IPS).
Growth in LGAS' savings business is based on developing highly
scalable and efficient platforms, to offer our straight-forward,
low-cost investment products.
To enhance our digital growth strategy, in May 2013 we acquired
Cofunds, the UK's largest investment platform. Our Platform
business now has assets of GBP64bn with net inflows in 2013 of
GBP7.9bn. We continue to integrate our own Investor Portfolio
Services (IPS) business with Cofunds. We are on track to deliver
GBP11m pa of cost savings by 2015, at an initial cost of GBP17m, as
a result of this integration.
The retail investment platform market is forecast to more than
double over the next five years. To ensure we take advantage of
this opportunity we are investing in Cofunds' technology, both to
enhance the functionality of the platform and to improve the
efficiency of back office processing. This investment will continue
beyond 2014.
In Workplace, assets are up 45% to GBP8.7bn (2012: GBP6.0bn)
with 903k employees now on the platform (2012: 381k employees) as
opt out rates remained low at under 10% in aggregate. Regular
contributions to the platform increased 57% to GBP1.2bn in 2013.
Net inflows were GBP1.5bn (2012: GBP1.6bn) reflecting the higher
regular contributions; offset by a lower number of one-off scheme
transfers than 2012. Workplace contributions will continue to grow
as more schemes reach their auto enrolment staging dates and the
legislative minimum contribution rate increases from the current 2%
to 8% by 2018. The Defined Contribution market is a significant
long term opportunity for LGAS and the wider Group.
Our SIPP business, Suffolk Life, delivered net inflows of
GBP0.9bn (2012: GBP0.5bn). The business continues to grow through
demand for its bespoke SIPP proposition and from back-book
transactions as we continue to see consolidation in the SIPP
market. As a result the assets of Suffolk Life increased by 29% in
the year to GBP6.6bn (2012: GBP5.1bn).
In Mature Savings assets were GBP36.3bn (2012: GBP36.2bn). Net
outflows of GBP3.7bn (2012: GBP3.2bn) were in-line with our
expectations and offset by positive market movements of GBP3.8bn
(2012: GBP3.0bn).
LEGAL & GENERAL CAPITAL.
Financial highlights 2013 2012
GBPm
----------------------------- ----- -----
Operating profit 179 163
----------------------------- ----- -----
Operational cash generation 137 123
----------------------------- ----- -----
Group Investment Variance 29 (23)
----------------------------- ----- -----
increasing principal returns
Legal & General Capital (LGC) contributed GBP179m to the
Group's operating profit. It is a new division with a core purpose
of increasing the risk adjusted returns on the Group's GBP43.4bn
(2012: GBP42.9bn) principal balance sheet, which excludes assets
where our customers have the total market risk and reward.
Assets under direct managementwere in-line with the prior year
at GBP4.7bn (2012: GBP4.7bn). The Group's strong cash generation
offset the payment of GBP0.5bn of external dividends and deployment
of GBP280m in selective acquisitions. During 2013 GBP131m of funds
were utilised to acquire Cofunds, the UK's largest investment
platform and GBP149m to acquire Lucida, the closed UK annuity
company.
In addition to Direct Investments, LGC assets are also utilised
in providing GBP1.0bn of seed capital into LGIM funds to support
the development of LGIM's capabilities.
The LGC operating profit of GBP179m (2012: GBP163m) includes the
smoothed investment return on the LGC assets. The return is
calculated asset class by asset class and equates to an annualised
average smoothed investment return of 4.1% (2012: 3.9%) on the
average balance of invested assets of GBP4.5bn (2012: GBP4.3bn).
The actual return on these assets in 2013 was 4.4%.
holistic management of investment risk
LGC advises and implements the Group investment strategies for
the GBP43.4bn (2012: GBP42.9bn) principal balance sheet and
GBP17.4bn (2012: GBP18.6bn) of with-profits assets of the Group. We
operate the strategy within a group control framework, with a core
responsibility for assessing the long term economic outlook and
risks of unexpected losses, alongside ensuring that the regulatory
requirements are met.
Asset portfolio 2013
-----------------------------
GBPbn LGR(1) LGC Other Total
--------------------------- ------- ---- ------ ------
Bonds: 30.0 1.8 3.9 35.7
--------------------------- ------- ---- ------ ------
Sovereigns 4.8 0.4 1.3 6.5
--------------------------- ------- ---- ------ ------
Banks 2.1 0.5 0.4 3.0
--------------------------- ------- ---- ------ ------
Other bonds 23.1 0.9 2.2 26.2
--------------------------- ------- ---- ------ ------
Property 1.3 0.1 - 1.4
--------------------------- ------- ---- ------ ------
Equities 0.1 1.5 - 1.6
--------------------------- ------- ---- ------ ------
Derivatives 2.1 0.2 - 2.3
--------------------------- ------- ---- ------ ------
Cash and cash equivalents 0.7 1.1 0.6 2.4
--------------------------- ------- ---- ------ ------
Total Asset Portfolio 34.2 4.7 4.5 43.4
--------------------------- ------- ---- ------ ------
1. LGR assets represent those used to back the Group's non
profit annuity business.
The investment variance across the Group was GBP29m (2012:
GBP(23)m) primarily as a result of strong equity returns in the
Shareholder Funds and a positive impact from the increase in
exposure to direct investments in LGR. This was partly offset by
variances related to our defined benefit pension schemes and
LGAS.
In LGPL, the Group's main annuity company, we maintain a
provision of GBP1.8bn (2012: GBP1.7bn) to provide for the risk of
credit default. The provisioning for default in LGPL is driven by
the credit quality of the assets. In 2013, the UK Government was
downgraded to Aa1/AA+ by Moody's/Fitch, as a result of which we
created an explicit provision against UK Gilts.
Legal & General continues to have a strong liquidity
position reflecting its requirements for working capital and
derivative collateral. In addition the Group's outstanding
borrowings total GBP2.6bn (2012: GBP2.7bn), including GBP2.4bn
(2012: GBP2.4bn) of long term financing and GBP0.2bn (2012:
GBP0.3bn) of short term borrowings.
Group debt costs of GBP127m are in-line with the prior year
(2012: GBP127m) and reflect an average cost of debt of 4.8% per
annum (2012: 4.9%) on average nominal value of debt balances of
GBP2.7bn (2012: GBP2.6bn).
DIRECT INVESTMENTS growing strongly
2013
------------------------
GBPbn LGR LGC LGA Total
-------------------- ---- ---- ---- ------
Direct Investments 2.5 0.3 0.1 2.9
-------------------- ---- ---- ---- ------
Our Direct Investment strategy of acquiring a portfolio of real
assets on our principal balance sheet continues to expand
successfully. Direct Investments are chosen if they have higher
risk adjusted returns and provide a natural fit for Legal &
General. In our annuity fund, direct investments help us to offer
competitive annuity pricing to our customers and invest in UK
infrastructure. The UK insurance industry has agreed in principle
to invest GBP25bn in UK infrastructure and Housing and we are
actively seeking opportunities to invest our share of this
amount.
During 2013 we increased the Direct Investment portfolio to
GBP2.9bn (2012: GBP1.4bn) in our annuity and shareholder funds. We
have invested in Social Housing and Student Accommodation; in the
Healthcare Sector, including investment to build the new Royal
Liverpool University Hospital; provided finance to large corporates
through sale and leaseback agreements; and provided loans and
commercial finance to UK businesses.
In 2013 we commenced a program to increase the level of Direct
Investments within Legal & General America's asset portfolio.
This will see $900m of assets, currently in traded bonds, being
invested in US commercial mortgages and private placements.
We are increasingly utilising operational management and
development to increase our supply of direct investments. Within
the shareholder funds LGC completed the acquisition of a 46.5%
shareholding in the house builder CALA Homes in March 2013, with a
further GBP8m of equity later in the year to continue to accelerate
CALA's growth and develop its landbank. We are developing our
existing landbank including a 1,000-unit site at Crowthorne and a
2,000-unit site in Winchester, via our investment in CALA and our
English Cities Fund; a public-private joint venture to deliver
inner city regeneration in five UK locations. In 2013 we increased
our principal capability with the transfer of LGV Capital from LGIM
into LGC.
LEGAL & GENERAL AMERICA.
Financial highlights 2013 2012
$m
----------------------------- ------ -----
Operating profit 145 156
----------------------------- ------ -----
Operational cash generation 69 63
----------------------------- ------ -----
Gross premium income 1,024 922
----------------------------- ------ -----
New business APE 155 142
----------------------------- ------ -----
CONTINUED GROWTH IN PREMIUMS AND SALES
In 2013 Legal & General America's (LGA) sales were up 9% to
$155m (2012: $142m), representing a further improvement in market
share. LGA has now delivered double digit sales growth, in its core
term product, in each of the last three years. This has been
achieved through a strategy of developing better relationships with
its brokerage general agents (BGAs), who distribute term assurance
in the US market. The growth in sales resulted in an increase in
gross premiums by 11% to $1,024m (2012: $922m).
During the year an ongoing cost efficiency program, coupled with
the benefits from higher sales, reduced new business unit costs by
5% in 2013. In a recent benchmarking study of 15 US life companies
LGA was ranked the lowest for new business costs.
LGA operating profit in 2013 was $145m (2012: $156m). During the
second half of the year we experienced higher mortality claims than
expected on our smaller universal life portfolio. The operating
profit also reflects the lower investment returns achieved during
the year. This was partially offset by continued cost reductions.
In order to improve the yield on the $3.3bn of assets held by LGA,
$0.9bn of these funds have been earmarked for direct investments.
These investments will be made over the following eighteen
months.
Operational cash generation increased by 10% to $69m (2012:
$63m). This represents the ordinary and preference dividends paid
to the Group during 2013. In February 2014 LGA paid a further
ordinary dividend to the Group of $73m (2013: $66m). This dividend
will be recognised in operational cash generation in the Q1 2014
results.
cash generation.
STRONG CORRELATION BETWEEN CASH GENERATION AND EARNINGS
The table below highlights the linkage between the operational
and net cash generation of the business, and the profit of the
Group.
Op cash Strain Net Variances Profit Tax Profit
cash and other after before
GBPm tax tax
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGR 260 33 293 (52) 241 69 310
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGIM 239 - 239 - 239 65 304
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGAS 474 (73) 401 (62) 339 105 444
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGC 137 - 137 - 137 42 179
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGA 44 - 44 14 58 34 92
----------------------- -------- ------- ------ ----------- ------- ----- --------
Operating profit from
divisions 1,154 (40) 1,114 (100) 1,014 315 1,329
----------------------- -------- ------- ------ ----------- ------- ----- --------
Group debt and other
costs (112) - (112) (19) (131) (40) (171)
----------------------- -------- ------- ------ ----------- ------- ----- --------
Operating profit 1,042 (40) 1,002 (119) 883 275 1,158
----------------------- -------- ------- ------ ----------- ------- ----- --------
Investment and other
variances - - - 13 13 (37) (24)
----------------------- -------- ------- ------ ----------- ------- ----- --------
Total 1,042 (40) 1,002 (106) 896 238 1,134
----------------------- -------- ------- ------ ----------- ------- ----- --------
Dividend 550 550
----------------------- -------- ------- ------ ----------- ------- ----- --------
Dividend coverage 1.82 1.63
----------------------- -------- ------- ------ ----------- ------- ----- --------
cash generation backed by dividends to group
In 2013, 88% of the net cash generation was distributed to the
group (2012: 87%). This demonstrates the high quality, liquid
nature of the cash generation.
2013 2012
------------------------------- -------------------------------
Net cash Dividend Dividend Net cash Dividend Dividend
GBPm GBPm % of GBPm GBPm % of
GBPm cash cash
---------------------- --------- --------- --------- --------- --------- ---------
LGR 293 257
---------------------- --------- --------- --------- --------- --------- ---------
627 90 539 92
---------------------- --------- --------- --------- --------- --------- ---------
LGAS 401 329
---------------------- --------- --------- --------- --------- --------- ---------
LGIM 239 213 89 219 175 80
---------------------- --------- --------- --------- --------- --------- ---------
LGA 44 44 100 40 40 100
---------------------- --------- --------- --------- --------- --------- ---------
Sub-total 977 884 90 845 754 89
---------------------- --------- --------- --------- --------- --------- ---------
LGC 137 123
---------------------- --------- --------- --------- --------- --------- ---------
Group debt and other
costs (112) (103)
---------------------- --------- --------- --------- --------- --------- ---------
Total 1,002 884 88 865 754 87
---------------------- --------- --------- --------- --------- --------- ---------
OPERATIONAL CASH GENERATION GUIDANCE
2014 Guidance 2013
GBPm
----------------------------------- --------------- ------
LGR c. 290 260
----------------------------------- --------------- ------
LGAS excluding General Insurance c. 430 421
----------------------------------- --------------- ------
LGA c.45 44
----------------------------------- --------------- ------
Sub-total c. 765 725
----------------------------------- --------------- ------
LGIM 239
---------------------------------------------------- ------
LGC 137
---------------------------------------------------- ------
LGAS General Insurance 53
---------------------------------------------------- ------
Operational cash generation from
divisions 1,154
---------------------------------------------------- ------
Group debt and other costs (112)
---------------------------------------------------- ------
Total operational cash generation 1,042
---------------------------------------------------- ------
New business strain (40)
---------------------------------------------------- ------
Net cash generation 1,002
---------------------------------------------------- ------
For LGR, LGA and LGAS, excluding the General Insurance business,
we estimate operational cash generation will increase in 2014 by 6%
to GBP765m.
CAPITAL RESOURCES - STRONG BALANCE SHEET
As at 31 December 2013 the Solvency I Insurance Group's
Directive (IGD) surplus was GBP4.0bn (2012: GBP4.1bn).
The Group's capital resources totalled GBP7.3bn, covering the
capital resources requirement of GBP3.3bn by 2.22 times. This is
after allowing for the accrual of the 2013 final dividend of
GBP408m.
Capital 2013 2012
GBPbn
------------------------------------- ----- -----
Group capital resources 7.3 7.2
------------------------------------- ----- -----
Group capital resources requirement 3.3 3.1
------------------------------------- ----- -----
IGD surplus 4.0 4.1
------------------------------------- ----- -----
Coverage ratio % 222 234
------------------------------------- ----- -----
TAXATION.
GROUP TAX RATES - EFFECTIVE TAX RATE OF 21.0%
Equity holders' effective tax rate 2013 2012
%
------------------------------------ ------ -----
Total Effective Tax Rate 21.0 22.7
------------------------------------ ------ -----
Annualised rate of UK corporation
tax 23.25 24.5
------------------------------------ ------ -----
In 2013, the Group's effective tax rate remained slightly below
the UK corporation tax rate due to a number of differences between
the measurement of accounting profit and taxable profits.
The UK has a deferred tax asset of GBP93m in respect of trading
losses (2012: GBP127m). The movement in the year includes a GBP70m
(2012: GBP72m) contribution to net cash generation in LGR and LGAS
Protection from the utilisation of tax losses. This has been
partially offset by other tax deductions, non-taxable income and
losses acquired within Lucida and Cofunds. It is expected that
trading losses will be available to LGR throughout 2014.
Supplementary EEV disclosure.
EEV highlights 2013 2012
Pence
--------------------------------- ----- -----
Equity per share including LGIM 190 173
--------------------------------- ----- -----
Equity per share 162 151
--------------------------------- ----- -----
Analysis of EEV results 2013 2012
GBPm
-------------------------------------------------- ------ ------
Contribution from new business 651 475
-------------------------------------------------- ------ ------
Expected return from in-force business 426 448
-------------------------------------------------- ------ ------
Experience variances and assumption changes (32) (76)
-------------------------------------------------- ------ ------
Development costs (40) (37)
-------------------------------------------------- ------ ------
Contribution from shareholder net worth 125 145
-------------------------------------------------- ------ ------
EEV operating profit on covered business 1,130 955
-------------------------------------------------- ------ ------
Business reported on an IFRS basis 211 86
-------------------------------------------------- ------ ------
EEV operating profit 1,341 1,041
-------------------------------------------------- ------ ------
Economic variances 215 (195)
-------------------------------------------------- ------ ------
Losses attributable to non-controlling interests 3 (12)
-------------------------------------------------- ------ ------
EEV profit before tax 1,559 834
-------------------------------------------------- ------ ------
Tax and other (270) (101)
-------------------------------------------------- ------ ------
EEV profit after tax 1,289 733
-------------------------------------------------- ------ ------
EEV PER SHARE
The Group delivered GBP1,289m of EEV profit after tax, which
after external dividend payments in the year of GBP479m and foreign
exchange, pension deficit and other adjustments of GBP(124)m,
increased EEV shareholders' equity to GBP9,586m (2012: GBP8,900m),
equivalent to 162 pence per share (2012: 151 pence per share).
Including LGIM's external funds in the calculation increases the
EEV per share to 190 pence (2012: 173 pence).
NEW BUSINESS CONTRIBUTION
Contribution from new business increased to GBP651m (2012:
GBP475m). The increase reflects the strong increase in the
contribution from Legal & General Retirement, where sales
increased to GBP4.1bn (2012: GBP2.3bn).
Worldwide EEV new business margin increased to 5.1% (2012: 4.7%)
primarily due to the higher mix of annuity business.
EEV OPERATING PROFIT
EEV operating profit increased by 29% to GBP1,341m (2012:
GBP1,041m), as the Group benefited from its growth strategy and
higher sales. Experience variances and assumption changes were
GBP(32)m (2012: GBP(76)m) with positive experience in LGAS and LGR
offset by negative operating assumption changes in LGA. The
operating profit also benefited from strong results in Investment
Management and General Insurance which are largely reported on an
IFRS basis within the EEV operating profit.
ECONOMIC VARIANCES
Positive economic variances of GBP215m (2012: GBP(195)m) arose
from a number of factors including equity market outperformance,
favourable default experience, actions to improve the yield on
annuity assets and a lower risk margin offset by a higher risk free
rate.
VALUE OF IN-FORCE
The table below illustrates how the discounted and undiscounted
value of in-force (VIF) has increased throughout the year.
Reconciliation of LGAS and LGR VIF Discounted Undiscounted(1)
GBPbn
--------------------------------------------------- ----------- ----------------
Opening VIF at 1 January 2013 4.5 9.1
--------------------------------------------------- ----------- ----------------
Contribution from new business 0.5 1.0
--------------------------------------------------- ----------- ----------------
Unwind of discount rate 0.3 n/a
--------------------------------------------------- ----------- ----------------
Expected release from non profit and with-profits
businesses(2) (0.7) (0.7)
--------------------------------------------------- ----------- ----------------
Experience variances / assumption changes - 0.2
--------------------------------------------------- ----------- ----------------
Investment variance / economic assumption
changes 0.2 0.8
--------------------------------------------------- ----------- ----------------
Other 0.1 0.1
--------------------------------------------------- ----------- ----------------
Closing VIF at 31 December 2013 4.9 10.5
--------------------------------------------------- ----------- ----------------
1. Management estimates.
2. Comprises the expected release from non profit business of
GBP635m and with-profits transfer of GBP54m.
ADDITIONAL VALUE OF LGIM
Within the calculation of Group embedded value, LGIM profits on
internally sourced business are included on a look through basis at
GBP0.3bn (2012: GBP0.2bn), equivalent to 5p per share (2012: 4p per
share).
The external assets component of LGIM is included at the IFRS
net asset value of GBP0.4bn (2012: GBP0.4bn), equivalent to 7p per
share (2012: 7p per share).
Including the external assets component of LGIM on an embedded
value basis would increase the contribution of LGIM to the Group
embedded value from GBP0.7bn (12p per share) to GBP2.3bn (40p per
share). In line with the rest of the Group, the embedded value for
LGIM excludes any value for future new business.
Estimated LGIM discounted cash flow valuation 2013 2013
p per share GBPbn
----------------------------------------------- ------------- ------
Look through value of profits on covered
business 5 0.3
----------------------------------------------- ------------- ------
Net asset value 7 0.4
----------------------------------------------- ------------- ------
Current value of LGIM in Group embedded
value 12 0.7
----------------------------------------------- ------------- ------
LGIM VIF 28 1.6
----------------------------------------------- ------------- ------
Alternative discounted value of LGIM future
cash flows 40 2.3
----------------------------------------------- ------------- ------
Including LGIM, this scenario equates to an indicative valuation
per share of 190 pence (2012: 173 pence).
Indicative valuation including LGIM 2013 2013
p per share GBPbn
------------------------------------- ------------ ------
EEV as reported 162 9.6
------------------------------------- ------------ ------
LGIM VIF 28 1.6
------------------------------------- ------------ ------
Total including LGIM 190 11.2
------------------------------------- ------------ ------
PRINCIPAL RISKS AND UNCERTAINTIES.
Legal & General runs a portfolio of risk taking businesses;
we accept risk in the normal course of business and aim to deliver
sustainable returns on risk based capital to our investors in
excess of our cost of capital. We manage the portfolio of risk that
we accept to build a sustainable franchise for the interests of all
our stakeholders; we do not aim to eliminate that risk. We have an
appetite for risks that we understand deeply and are rewarded for,
and which are consistent with delivery of our strategic objectives.
Risk management is embedded within the business. The Group is
exposed to a number of key risk categories.
RISKS AND UNCERTAINTIES trend, outlook and MITIGATION
Changes in regulation or The implementation of the
legislation may have a detrimental Retail Distribution (RDR)
effect on our strategy. at the start of 2013 has resulted
Legislation and government in dramatic shifts in the
fiscal policy influence our distribution landscape. The
product design, the period retrenchment by the banks
of retention of products and challenges to IFA distribution
and our required reserves models in response to RDR
for future liabilities. Regulation and other regulatory initiatives,
defines the overall framework together with a slow transition
for the design, marketing of consumers to the RDR model
and distribution of our products; has presented broader market
and the prudential capital uncertainty for products that
that we hold. The nature rely on customers' access
of long term business can to advice. Solvency II is
result in some changes in targeted for implementation
regulation having a retrospective in early 2016. Revised capital
effect on our businesses. calibrations for long term
Significant changes in regulation business provide sufficient
may reduce our earnings and flexibility to address many
profitability or require of the adverse capital impacts
us to hold more capital. for UK insurance firms. Challenges
remain, however, in ensuring
that final implementation
is proportionate and cost
effective for the insurance
sector.
We seek to actively participate
with Government and regulatory
bodies in the UK and Europe
to assist in the evaluation
of change so as to develop
outcomes that meet the needs
of all stakeholders. Internally,
we evaluate the impact of
all legislative and regulatory
change as part of our formal
risk identification and assessment
processes, with material matters
being considered at the Group
Risk Committee and the Group
Board. We maintain a flexible
distribution model to respond
to changing market trends.
Investment market performance Global investment markets
or conditions in the broader have returned to pre-financial
economy may adversely impact crisis levels, responding
our earnings and profitability. both to the more positive
The performance and liquidity economic outlook and the conditions
of investment markets, interest created by the monetary policies
rate movements and inflation being exercised by central
impact the value of investment banks. There is limited resilience,
assets we hold in shareholders' however, in the current environment
funds and those to meet the for 'shocks' such as those
obligations arising from from an abrupt change in monetary
insurance business. Interest policy, with potential for
rate movement and inflation significant falls in the value
can also change the value of certain asset classes should
of the obligations. We use markets reassess returns.
a range of techniques to
manage mismatches between We model our business plans
assets and liabilities. However, across a broad range of economic
financial loss can still scenarios and take account
arise from adverse investment of alternative economic outlooks
markets. In addition, significant within our overall business
falls in investment values strategy. As part of our business
can reduce the fee income plans we have sought to ensure
of our investment management focus upon those market segments
business. Broader economic that we expect to be resilient
conditions impact the timing in projected conditions.
of the purchase and the period
of retention of retail financial
services products.
In dealing with issuers of 2013 saw a further narrowing
debt and other types of counterparty of credit spreads reflecting
the Group is exposed to the market confidence in the issuers
risk of financial loss. of investment grade bonds.
A systemic default event We have continued to experience
within the corporate sector, low levels of default on our
or a major sovereign debt corporate bond portfolio.
event, could result in dislocation There remains, however, a
of bond markets, significantly range of factors that could
widening credit spreads, trigger write downs in our
and may result in default investment assets. These factors
of even strongly rated issuers include a deterioration in
of debt, exposing us to financial the confidence in banks within
loss. We are also exposed the Euro zone or the currency
to banking, money market area itself; a failure to
and reinsurance counterparties, definitively resolve the US
and settlement, custody and government debt ceiling; and
other bespoke business services, a financial crisis in emerging
a failure of which could markets.
expose us to both financial
loss and operational disruption We actively manage our exposure
of our business processes. to default risks, setting
counterparty selection criteria
and exposure limits and hold
reserves against our assessment
of counterparty debt defaults.
We continue to diversify the
asset classes backing our
annuities business, to include
the use of property lending,
sale and leaseback and other
forms of direct investment.
As a UK-based Group, our As a significant participant
earnings are influenced by in the long-term savings markets,
the performance and perception we are exposed to changes
of the UK financial services in consumer sentiment. We
sector as a whole. are also exposed to increased
The financial crisis, subsequent costs of regulatory compliance
investment performance and through regulatory and legislative
low interest rate environment, responses to events in the
together with consumers' financial services sector.
perceptions of the robustness Recent examples include the
of financial institutions, EU transaction tax and the
may impact consumer attitudes central clearing of certain
to long-term savings. Regulatory derivative instruments, which
actions may also adversely would increase the costs associated
impact consumers' perception with pension savings products
of the value of insurance and annuities, respectively.
products and result in changes
to the regulatory and legislative We actively manage our brand
environment in which we operate. and seek to differentiate
our business model from that
of our competitors, focusing
on our customers' needs through
a diversified portfolio of
risk, savings and investment
businesses. We also actively
engage with our regulators
to support understanding of
the risk drivers in the markets
in which we operate, and highlight
matters where we believe the
industry need to change.
Reserves for long-term business We regularly appraise the
may require revision as a assumptions underpinning the
result of changes in experience, business that we write. In
regulation or legislation. our annuities business we
The writing of long-term are, however, exposed to factors
insurance business requires such as improvements in medical
the setting of assumptions science beyond those anticipated
for long-term trends in factors leading to unexpected changes
such as mortality, lapse in life expectancy. In protection
rates and persistency, valuation business we remain inherently
interest rates, expenses exposed to loss from events
and credit defaults. Actual causing widespread mortality/morbidity
experience may result in or significant policy lapse
the need to recalibrate these rates. As illustrated by the
assumptions reducing profitability. implementation of the EU gender
Forced changes in reserves neutral pricing legislation,
can also be required because there is also potential for
of regulatory or legislative legislative intervention in
intervention in the way that the pricing of insurance products
products are priced, reducing irrespective of risk factors,
profitability and future such as age or health
earnings.
We undertake significant analysis
of longevity and mortality
risks to ensure an appropriate
premium is charged for the
risks we take on and that
our reserves remain appropriate.
We remain focused on developing
a comprehensive understanding
of annuitant mortality and
we continue to evolve and
develop our underwriting capabilities.
We also continue to ensure
that legislators recognise
the benefits to consumers
of pricing insurance products
based on the risk factors
that each policy presents.
The Group may not maximise Macro trends in the markets
opportunities from structural in which we operate include
and other changes within an ageing population, the
the financial services sector, increasing use of digital
adversely impacting future technologies and significant
earnings. reform in the provision of
Significant changes in the state welfare. Within the
markets in which we operate investment management business
may require the review and asset classes are increasingly
realignment of elements of homogeneous providing opportunities
our business strategy. A for businesses with scale
failure to be sufficiently such as us. The retrenchment
responsive to potential change of the banks also provides
and understand the implication opportunity for insurance
to our businesses, or the firms to participate in investment
incorrect execution of change and lending activities. Responding
may impact the achievement to these macro trends potentially
of our strategic objectives. creates organisational challenges
and management stretch across
the range of initiatives.
We have clear strategies to
respond to the macro trends.
Risks arising from macro trends
have been considered as part
of the Group Risk Committee
focused business and risk
reviews. The Committee and
the Group Board has also debated
the risks of management stretch,
with strategic projects being
re-focused as appropriate.
During 2013 we undertook a
significant re-structure of
our businesses to deliver
our strategic responses to
the changes in the markets
in which we operate.
A material failure in our As we grow we continue to
business processes may result invest in our system capabilities
in unanticipated financial and business processes to
loss or reputation damage. ensure that we meet the expectations
We have constructed our framework of our customers; comply with
of internal controls to minimise regulatory, legal and financial
the risk of unanticipated reporting requirements; and
financial loss or damage mitigate the risks of loss
to our reputation. However, or reputational damage from
no system of internal control operational risk events. The
can completely eliminate restructure of our business
the risk of error, financial divisions seeks to support
loss, fraudulent actions the positioning of appropriate
or reputational damage. Our resources to manage these
plans for growth inherently risks.
will increase the profile
of operational risks across Our risk governance model
our businesses. seeks to ensure that business
management are actively engaged
in ensuring an appropriate
control environment is in
place. The Group Risk team
provides expert advice and
guidance on the required control
environment, together with
objective challenge in the
way risks are being managed.
Our Internal Audit function
provides independent assurance
on the adequacy and effectiveness
of our controls.
The financial services sector The financial services sector
is increasingly becoming has seen a significant rise
a target of 'cyber crime'. in attempts by third parties
As we and our business partners to seek and exploit perceived
increasingly digitalise our vulnerabilities in IT systems.
businesses, we are inherently Potential threats include
exposed to the risk that denial of service attacks,
third parties may seek to network intrusions to steal
disrupt our on-line business data for the furtherance of
operations, steal customer financial crime, and the electronic
data or perpetrate acts of diversion of funds.
fraud using digital media.
A significant cyber event We're focused on maintaining
could result in reputation a robust and secure IT environment
damage and financial loss. that protects our customer
and corporate data. Working
with our business partners
we deploy control techniques
to evaluate the security of
our systems and proactively
address emerging threats.
During 2013 the Group Risk
Committee reviewed cyber risks
and our control framework,
with further review scheduled
for 2014. We remain vigilant
to the range of risks, however,
the evolving nature of cyber
threats means that residual
risks will remain.
Enquiries.
Investors:
Bernie Hickman
Group Financial Controller and Investor Relations Director 020 3124 2043
Ian Baker
Investor Relations Manager 020 3124 2047
Media:
John Godfrey
Group Communications Director 020 3124 2090
Richard King
Head of Media Relations 020 3124 2095
Michelle Clarke
Tulchan Communications 020 7353 4200
Katharine Wynne
Tulchan Communications 020 7353 4200
Notes
A copy of this announcement can be found in "Results", under the
"Financial information" section of our shareholder website at
http://www.legalandgeneralgroup.com/investors/results.cfm.
A presentation to analysts and fund managers will take place at
10.00 GMT today at One Coleman Street, London, EC2R 5AA. There will
be a live webcast of the presentation which can be accessed at
http://investor.legalandgeneral.com/results.cfm. A replay will be
available on this website later today.
There will be a live listen only teleconference link to the
presentation. Details below:
Participant dial-in numbers
--------------------------------------------------------------------------------
Location you are dialling in Number you should dial
from
--------------------------------- ---------------------------------------------
UNITED KINGDOM 0800 368 0649
--------------------------------- ---------------------------------------------
All other locations + 44 20 3059 8125
--------------------------------- ---------------------------------------------
Conference Entry via QR Code
To gain access to the conference using
the QR code, please ensure you have
the appropriate software on your mobile
device and scan the image.
--------------------------------- ---------------------------------------------
Financial Calendar Date
------------------------------------- ---------------
Ex-dividend date 23 April 2014
------------------------------------- ---------------
Record date 25 April 2014
------------------------------------- ---------------
Annual general meeting 21 May 2014
------------------------------------- ---------------
Payment date of 2013 final dividend 04 June 2014
------------------------------------- ---------------
Q1 Interim Management Statement 2014 07 May 2014
------------------------------------- ---------------
Half-year results 2014 06 August 2014
------------------------------------- ---------------
04 November
Q3 Interim Management Statement 2014 2014
------------------------------------- ---------------
The Preliminary Results for the year ended 31 December 2013 do
not constitute statutory accounts as defined in section 434 of the
Companies Act 2006. The Group's statutory accounts for 2012 and
2013 have been audited by PricewaterhouseCoopers LLP and their
reports were unqualified and did not contain a statement under
section 498(2) or (3) of the Companies Act 2006. The Group's 2012
statutory accounts have been filed with the Registrar of
Companies.
Forward-looking statements
This announcement may contain certain forward-looking statements
relating to Legal & General, its plans and its current goals
and expectations relating to future financial condition,
performance and results. By their nature, forward-looking
statements involve uncertainty because they relate to future events
and circumstances which are beyond Legal & General's control,
including, among others, UK domestic and global economic and
business conditions, market related risks such as fluctuations in
interest rates and exchange rates, the policies and actions of
regulatory and Governmental authorities, the impact of competition,
the timing impact of these events and other uncertainties of future
acquisition or combinations within relevant industries. As a
result, Legal & General's actual future condition, performance
and results may differ materially from the plans, goals and
expectations set out in these forward-looking statements and
persons reading this announcement should not place reliance on
forward-looking statements. These forward-looking statements are
made only as at the date on which such statements are made and
Legal & General Group Plc does not undertake to update
forward-looking statements contained in this announcement or any
other forward-looking statement it may make.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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