TIDMLGEN
RNS Number : 3532O
Legal & General Group Plc
06 August 2014
Legal & General Group Plc Interim Management Report 2014
Stock Exchange Release
06 August 2014
DIVIDENDS UP 21%, NET CASH UP 13%
Financial highlights:
-- NET CASH GENERATION UP 13% TO GBP567M (H1 2013: GBP500M)
-- OPERATIONAL CASH GENERATION UP 8% TO GBP578M (H1 2013: GBP537M)
-- OPERATING PROFIT UP 11% TO GBP636M (H1 2013: GBP571M)
-- PROFIT AFTER TAX UP 9% TO GBP507M (H1 2013: GBP466M)
-- EARNINGS PER SHARE UP 9% TO 8.51P (H1 2013: 7.82P)
-- RETURN ON EQUITY 17.6% (H1 2013: 16.8%)
-- INTERIM DIVIDEND UP 21% TO 2.90P PER SHARE (H1 2013: 2.40P)
Business highlights:
-- ANNUITY ASSETS UP 20% TO GBP38.5BN (H1 2013: GBP32.2BN)
-- RECORD ANNUITY SALES OF GBP3.5BN (H1 2013: GBP1.4BN)
-- LGIM AUM UP 7% TO GBP465.1BN (H1 2013: GBP433.0BN)
-- LGIM TOTAL ASSETS(1) UP 13% TO GBP653.7BN (H1 2013: GBP578.7BN)
-- UK PROTECTION GWP UP 7% TO GBP743M (H1 2013: GBP692M)
-- UK PROTECTION SALES UP 17% TO GBP123M (H1 2013: GBP105M)
-- SAVINGS AUA UP 17% TO GBP117.8BN (H1 2013: GBP100.4BN)
-- LGC NEW DIRECT INVESTMENT OF GBP1.6BN (H1 2013: GBP0.9BN)
-- LGA SALES UP 11% TO $78M (H1 2013: $70M)
1.LGIM total assets includes GBP465bn (H1 2013: GBP433bn) of AUM
and GBP189bn (H1 2013: GBP146bn) of derivative overlay and GIA
advisory assets.
Nigel Wilson, Group Chief Executive, said:
"These are strong financial results with dividends once again
growing over 20% and a return on equity of 17.6%. We continue to
deliver good growth on all other key metrics. We are successfully
executing our strategy connecting our five long-term macroeconomic
and demographic trends to real business outcomes. Strong business
performance across a well-diversified range of insurance, savings
and investment markets underpins consistent earnings quality and
dividend growth and enables us to respond positively to the ever
changing political and regulatory landscape.
We were early adopters of institutional 'slow money' and have
provided GBP5bn to drive major investment in housing and
infrastructure. We increasingly use digital technology to power
cheaper insurance, savings and investment products for customers:
pension auto-enrolment, where we cap charges at 0.5% will
ultimately transform welfare provision - Beveridge 2.0.
A growing number of partners from all sectors - CALA Homes,
Places for People, English Cities Fund, Shelter, and government -
local and central - not only share our thinking, but are working
with us to deliver it.
We have the scale and the skill to play a major role investing
in the fabric of the UK to drive growth and competitiveness. Our
economically and socially useful products address long-term,
intergenerational issues for young and old, that go to the heart of
improving quality of life for individuals and families, while
strategic clarity and operational excellence drive consistent
improvement in shareholder returns."
FINANCIAL SUMMARY
Growth
Financial highlights H1 2014 H1 2013 %
GBPm
--------------------------------------- -------- -------- -------
Analysis of operating profit
--------------------------------------- -------- -------- -------
Legal & General Retirement 188 151 25
--------------------------------------- -------- -------- -------
Legal & General Investment Management 159 152 5
--------------------------------------- -------- -------- -------
Legal & General Assurance Society 223 213 5
--------------------------------------- -------- -------- -------
Legal & General Capital 102 86 19
--------------------------------------- -------- -------- -------
Legal & General America 43 53 (19)
--------------------------------------- -------- -------- -------
Operating profit from divisions 715 655 9
--------------------------------------- -------- -------- -------
Group debt costs (63) (64) 2
--------------------------------------- -------- -------- -------
Investment projects and expenses (16) (20) 20
--------------------------------------- -------- -------- -------
Operating profit 636 571 11
--------------------------------------- -------- -------- -------
Investment and other variances (incl.
minority interests) - 23 n/a
--------------------------------------- -------- -------- -------
Profit before tax 636 594 7
--------------------------------------- -------- -------- -------
Operational cash generation 578 537 8
--------------------------------------- -------- -------- -------
New business strain (11) (37) 70
--------------------------------------- -------- -------- -------
Net cash generation 567 500 13
--------------------------------------- -------- -------- -------
LEGAL & GENERAL RETIREMENT (LGR)
Growth
GBPbn H1 2014 H1 2013 %
------------------------------------- -------- -------- -------
Annuity assets 38.5 32.2 20
------------------------------------- -------- -------- -------
Longevity insurance premiums (GBPm) 167 92 82
------------------------------------- -------- -------- -------
Annuity sales 3.5 1.4 147
------------------------------------- -------- -------- -------
Annuity net inflows 2.5 0.5 400
------------------------------------- -------- -------- -------
LEGAL & GENERAL INVESTMENT MANAGEMENT (LGIM)
Growth
GBPbn H1 2014 H1 2013 %
--------------------------------- -------- -------- -------
LGIM AUM(1) 465.1 433.0 7
--------------------------------- -------- -------- -------
LGIM total assets 653.7 578.7 13
--------------------------------- -------- -------- -------
LGIM International total assets 82.8 61.2 35
--------------------------------- -------- -------- -------
LGIM total net flows 10.4 13.4 (22)
--------------------------------- -------- -------- -------
LGIM International net flows 5.9 7.6 (22)
--------------------------------- -------- -------- -------
LEGAL & GENERAL ASSURANCE SOCIETY (LGAS)
Growth
GBPm H1 2014 H1 2013 %
----------------------------------- -------- -------- -------
UK Protection new business annual
premiums 123 105 17
----------------------------------- -------- -------- -------
UK Protection gross premiums 743 692 7
----------------------------------- -------- -------- -------
General Insurance gross premiums 178 183 (3)
----------------------------------- -------- -------- -------
Savings AUA (GBPbn) 117.8 100.4 17
----------------------------------- -------- -------- -------
Savings net flows (GBPbn) 2.6 0.3 n/a
----------------------------------- -------- -------- -------
LEGAL & GENERAL CAPITAL (LGC)
Growth
GBPbn H1 2014 H1 2013 %
------------ -------- -------- -------
LGC assets 5.2 4.7 11
------------ -------- -------- -------
LEGAL & GENERAL AMERICA (LGA)
Growth
$m H1 2014 H1 2013 %
---------------------------------- -------- -------- -------
LGA new business annual premiums 78 70 11
---------------------------------- -------- -------- -------
LGA gross premiums 553 503 10
---------------------------------- -------- -------- -------
1. LGIM AUM includes GBP38.5bn (H1 2013: GBP32.2bn) managed on
behalf of LGR and GBP43.3bn (H1 2013: GBP40.7bn) managed on behalf
of LGAS Savings.
FINANCIAL HIGHLIGHTS - INCREASED MOMENTUM
Legal & General delivered excellent growth in operational
and net cash generation, operating profit and earnings per share.
The business continues to deliver significant increases in the
drivers of our growth, with annuity assets increasing 20% to
GBP38.5bn (H1 2013: GBP32.2bn), Insurance premiums increasing 9% to
GBP1.5bn (H1 2013: GBP1.4bn) and Savings assets increasing 17% to
GBP117.8bn (H1 2013: GBP100.4bn). LGIM further increased its total
assets by 13% to GBP653.7bn (H1 2013: GBP578.7bn).
Operational cash generation increased by 8% to GBP578m (H1 2013:
GBP537m). LGR increased cash by GBP16m, to GBP146m (H1 2013:
GBP130m) reflecting the increasing stock of annuity assets under
administration. LGAS increased cash by 3% to GBP237m (H1 2013:
GBP231m), including an 11% increase in Protection operational cash.
LGIM's cash generation increased 5% to GBP125m (H1 2013: GBP119m)
reflecting its growing stock of assets, whilst LGC and LGA
contributed GBP82m and GBP44m, up 21% and 2%, respectively. Group
debt costs and other expenses contributed GBP(56)m (H1 2013:
GBP(54)m) to cash.
Net cash generation increased by 13% to GBP567m (H1 2013:
GBP500m), driven by the strong operational cash generation, reduced
new business strain in LGAS Protection and LGAS Savings, as well as
improved positive new business surplus for Annuities.
Operating profit increased by 11% to GBP636m (H1 2013: GBP571m),
reflecting the strong underlying performance of our divisions.
Profit before tax increased 7% to GBP636m (H1 2013: GBP594m). The
strong profit and net cash generation growth has enabled us to
deliver earnings per share up 9% to 8.51 pence (H1 2013: 7.82
pence) and a higherannualised return on equity of 17.6% (H1 2013:
16.8%).
The Board has confidence in the strength and growth prospects
for the business. This underpins the decision to increase the
interim dividend by 21% to 2.90 pence (H1 2013: 2.40 pence) per
share and is in line with our dividend guidance announced at the
2013 full year results.
BUSINESS HIGHLIGHTS - DRIVING GROWTH
The Group continues 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, through both organic growth and selective
bolt-on acquisitions. Our response to these trends: Retirement
Solutions; LGIM international expansion; Protection; Digital
Solutions and Direct Investments are continuing to drive growth in
our cash and earnings.
LGR more than quadrupled bulk annuity new business premium to
GBP3.1bn (H1 2013: GBP0.7bn) including the largest ever UK Bulk
Annuity contract increasing our stock of annuity assets by 20% to
GBP38.5bn (H1 2013: GBP32.2bn). Individual Annuity premiums reduced
to GBP0.4bn (H1 2013: GBP0.7bn) reflecting the impact we expected
from the budgetary reforms to the UK pensions market.
LGIM total AUM increased 7% to GBP465.1bn (H1 2013: GBP433.0bn),
with total assets, including derivative overlay and advisory
assets, increasing 13% to GBP653.7bn (H1 2013: GBP578.7bn).
Net AUM flows of GBP(2.0)bn (H1 2013: GBP7.7bn) included
International AUM flows of GBP4.0bn (H1 2013: GBP7.5bn) as LGIM
continues to expand overseas, with continued growth in LGIM
America's LDI and Active Fixed Income products. As a result
International AUM increased by 25% to GBP65.3bn (H1 2013:
GBP52.4bn).
Total Index net outflows of GBP(8.4)bn (H1 2013: inflows of
GBP2.7bn) included cGBP5bn of assets being withdrawn by three large
clients in the UK to either be managed in-house or to fund bulk
annuity transactions. LGIM's market leading Liability Driven
Investment (LDI) proposition delivered net AUM flows of GBP3.6bn
(H1 2013: GBP4.6bn), increasing LDI AUM to GBP78.2bn (H1 2013:
GBP70.9bn).
Protection premiums continued to grow, with UK Protection
premiums up 7% to GBP743m (H1 2013: GBP692m) with strong increases
in both our highly automated Retail Protection business, with
premiums up 6% to GBP514m (H1 2013: GBP484m) and a 10% increase in
Group Protection premium to GBP229m (H1 2013: GBP208m). In the US,
our protection business delivered a 10% increase in gross premium,
up to $553m (H1 2013: $503m).
General Insurance delivered a robust operating profit of GBP28m
(H1 2013: GBP39m) with a combined operating ratio of 88% (H1 2013:
81%) despite GBP12m of additional weather related claims in Q1.
Our Savings business continued to deliver on strategy with
assets under administration increasing to GBP117.8bn (H1 2013:
GBP100.4bn). Workplace assets have increased 30% to GBP9.5bn (H1
2013: GBP7.3bn), whilst Platform assets increased 26% to GBP67.4bn
(H1 2013: GBP53.7bn).
LGC increased operating profit to GBP102m and invested GBP1.6bn
in direct investments (H1 2013 GBP0.9bn) over the first half of the
year supporting improved returns in LGR, LGA and LGC assets,
continuing the broad principal investment strategy of increasing
risk adjusted returns for the Group whilst supporting the economy
directly in housing, infrastructure and healthcare.
OUTLOOK:
General Outlook
Legal & General's two key economies are the UK and USA, both
of which are enjoying some of the strongest growth amongst
developed countries. Each of our five core businesses are focused
on large markets where we see long term structural growth
potential. Our scale, efficiency and track record of innovation
mean we are ideally placed to take advantage of these growth
opportunities. We estimate the global defined benefit (DB) market,
which is at an early stage of a structural de-risking trend, to be
approaching $10 trillion on a buyout basis. In the UK defined
contribution (DC) market, where we already have a 20% market share
of new schemes, we anticipate around 12 million auto-enrolled
pension savers by 2030. Our recent acquisition of Global Index
Advisors (GIA) gives us access to the $6trillion US defined
contribution market.
We believe that aligning our strategy to the five macro trends
creates a high degree of resilience, although no model can be
completely immunised from global risks and uncertainties.
Legal & General Retirement (LGR)
Our expertise in the bulk annuity and longevity insurance
markets and the clear intention of the majority of defined benefit
schemes to de-risk means we are confident in our ability to more
than offset reductions in individual annuity sales with higher bulk
annuity volumes. With continued strength in our quote pipeline we
expect further bulk business to be written in the second half of
2014. In July we completed an internal transfer of GBP1.9bn of
annuity liabilities from our with-profits fund, increasing the size
of the annuity portfolio that delivers cashflows and earnings for
shareholders.
The changes introduced in the March Budget have introduced
greater flexibility for individuals in retirement. These changes
will enable us to add further earnings streams and we are already
developing a range of individual retirement solutions to address
this evolving market.
We do not believe the recent consultation outcome on private
sector DB to DC transfers will have a material impact on the
current low volume of these transfers given the safeguards
announced and the valuable benefit that a DB pension income
provides.
Legal & General Investment Management (LGIM)
As the UK defined benefit market matures we expect it to
continue to de-risk. This will impact our passive equity funds
backing DB schemes but will benefit our growing LDI business, where
LGIM is the number one player in the market. Also in the UK, we
expect growth in the defined contribution market as well as our
property and multi-asset offerings.
LGIM's international business continues to gather momentum,
particularly in the US, where we are expanding our distribution
capabilities and enhancing our product offering across LDI and
active fixed income, and into indexed products. Elsewhere LGIM
remains focused on opportunities in Europe, the Gulf and Asia.
Legal & General Assurance Society (LGAS)
We expect our Protection business to leverage its market leading
position. We have recently signed new exclusive distribution deals
with National Australia Group and TSB which we expect to contribute
to further growth in 2015.
In General Insurance we are seeking to increase the contribution
to Group earnings both through organic growth and potential bolt-on
acquisition opportunities.
In Savings we continue to enhance Cofunds, the biggest platform
in the UK with GBP67bn of assets. We expect to have a Legal &
General D2C proposition available around the end of the year.
In Workplace savings, having secured an estimated 20% of
auto-enrolees to date, we expect the strength of our proposition
including our 50bps charge cap to deliver further growth. In the
immediate future we are on track to halve the 2013 losses of GBP29m
this year.
Legal & General Capital (LGC)
LGC is broadening the asset base of the Group and driving more
attractive risk adjusted returns across the divisions. As our
direct investment capability develops, we see increasing
opportunities and growing pipeline through 2014 including EUR250m
investment into European SME loans through our investment in
Pemberton Asset Management and developing a UK Private Rented
Sector portfolio. Following its acquisition of Banner Homes in
March, CALA Group is accelerating its growth, with plans to treble
in size with turnover in excess of GBP800m by 2016.
Legal & General America (LGA)
Our recently introduced price changes are anticipated to result
in marginally lower new business volumes in the second half of 2014
when compared to the first half of 2014. LGA remains focused on net
cash generation.
LEGAL & GENERAL RETIREMENT.
Financial highlights H1 2014 H1 2013
GBPm
-------------------------------------------- -------- --------
Operational cash generation 146 130
-------------------------------------------- -------- --------
New business surplus 20 17
-------------------------------------------- -------- --------
Net cash generation 166 147
-------------------------------------------- -------- --------
Experience variances, assumption changes,
tax and non-cash movements 22 4
-------------------------------------------- -------- --------
Operating profit 188 151
-------------------------------------------- -------- --------
Bulk annuity single premiums (GBPbn) 3.1 0.7
-------------------------------------------- -------- --------
Individual annuity single premiums (GBPbn) 0.4 0.7
-------------------------------------------- -------- --------
Total annuity single premiums (GBPbn) 3.5 1.4
-------------------------------------------- -------- --------
Annuities net inflows (GBPbn) 2.5 0.5
-------------------------------------------- -------- --------
Bulk annuity assets (GBPbn) 24.6 19.6
-------------------------------------------- -------- --------
Individual annuity assets (GBPbn) 13.9 12.6
-------------------------------------------- -------- --------
Total annuity assets (GBPbn) 38.5 32.2
-------------------------------------------- -------- --------
Longevity insurance gross premiums 167 92
-------------------------------------------- -------- --------
New business EEV margin (%) 8.4 8.4
-------------------------------------------- -------- --------
RECORD PREMIUMS AND INCREASED CASH
Operational cash generation increased 12% to GBP146m (H1 2013:
GBP130m) reflecting the growth in scale of the business. Net cash
generation increased by 13% to GBP166m (H1 2013: GBP147m), with new
business surplus increasing to GBP20m (H1 2013: GBP17m), reflecting
our continued ability to source attractively priced assets and
effective portfolio strategies to back our new business.
Operating profit increased 25% to GBP188m (H1 2013: GBP151m)
reflecting this growth, with the stock of annuity assets increasing
20% to GBP38.5bn (H1 2013: GBP32.2bn). 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 remain confident that we will exceed the GBP4.1bn of annuity
premiums written in 2013 as we continue to have a strong quote
pipeline. Due to their inherent complexity and size of bulk annuity
deals, the timing of deal flows will be unevenly distributed
between quarterly reporting periods.
NEW BUSINESS MARGINS REMAIN STRONG
We continue to see the annuity market as an attractive place to
deploy capital and have delivered a strong new business margin of
8.4% (H1 2013: 8.4%) in the first half.
Our comprehensive range of products, comprising buy-in and
buy-out bulk annuities, individual annuities and longevity
insurance means that we are able to target our sales appetite to
the areas where we expect to optimise our return on economic
capital. We have grown annuity premiums by 147% to GBP3.5bn (H1
2013: GBP1.4bn) with increased bulk annuity sales dwarfing the
lower volumes of individual annuities. We have written more billion
pound bulk annuity transactions in the UK over the last three years
than all other providers combined due to our numerous competitive
advantages built up over nearly three decades, including specialist
expertise across longevity, investment management and asset
transitioning.
LGC has successfully sourced increased amounts of new assets to
back our annuity business, matching the illiquid and long duration
profile of our liabilities, including housing and UK
infrastructure.These investments enhance risk adjusted yields
enabling competitively priced new business and attractive returns
to shareholders.
iNCREASING DEMAND FOR GLOBAL DE-RISKING SOLUTIONS
Bulk Annuity single premiums increased 368% to GBP3.1bn (H1
2013: GBP0.7bn), including the largest ever UK Bulk Annuity
contract with the ICI pension fund, covering GBP3bn of the Fund's
liabilities.
We continue to explore opportunities to use our specialist
experience and robust capital base in the global de-risking market.
Private defined benefit buy-out liabilities in the key markets of
the UK, US, Netherlands and Canada are estimated at approaching $10
trillion, with de-risking solutions becoming increasingly
affordable with supportive equity markets.
The acquisition of Lucida, completed in August 2013 is now fully
integrated into Legal & General. In an industry where business
combinations can be seen as problematic in terms of legacy systems,
this was done using only existing resources and systems. On
completion of the integration we have released almost GBP200m from
Lucida, recouping the acquisition cost of GBP149m and covering the
majority of the incremental capital required. The Lucida
transaction has demonstrated our ability to deliver significant
benefits from bolt-on acquisitions.
INDIVIDUAL RETIREMENT
Individual Annuity sales were down 49% to GBP383m (H1 2013:
GBP754m) following the recent budget changes. In this period of
change, we are focused on maintaining pricing discipline. We
continue to expect the market to remain subdued with volumes down
50% for 2014 and down a further 50% in 2015.
The flexibility introduced by the Chancellor in his recent
budget will increase the choice available to consumers in their
retirement. Our individual retirement business is responding to
changing consumer demand, presenting new earnings
opportunities.
We already offer income drawdown solutions to higher net worth
customers, supported by LGAS's existing capabilities, and intend to
refresh and relaunch this into a simple income drawdown account to
provide flexible access for all retirement savers. LGIM has been
developing managed funds, suitable for individuals in retirement,
which we expect to form an important part of our product
offering.
Many people will not have saved sufficiently to fund the
retirement income they would like. We therefore expect that
increasing numbers of customers will seek to use the equity in
their homes to supplement their retirement income. We are assessing
the viability of launching lifetime mortgages to help them do
this.
LEGAL & GENERAL INVESTMENT MANAGEMENT.
Financial highlights H1 2014 H1 2013
GBPm
--------------------------------------- -------- --------
Total revenue 309 292
--------------------------------------- -------- --------
Total costs 150 140
--------------------------------------- -------- --------
Operating profit 159 152
--------------------------------------- -------- --------
Net cash generation 125 119
--------------------------------------- -------- --------
Cost:income ratio (%) 49 48
--------------------------------------- -------- --------
External net flows (GBPbn) 8.0 13.7
--------------------------------------- -------- --------
Internal net flows (GBPbn) 2.4 (0.3)
--------------------------------------- -------- --------
Total net flows (GBPbn) 10.4 13.4
--------------------------------------- -------- --------
of which International (GBPbn) 5.9 7.6
--------------------------------------- -------- --------
H1 2014 FY 2013
--------------------------------------- -------- --------
Assets under management (GBPbn) 465.1 449.5
--------------------------------------- -------- --------
Overlay assets(1) (GBPbn) 174.9 162.1
--------------------------------------- -------- --------
GIA advisory assets(2) (GBPbn) 13.7 -
--------------------------------------- -------- --------
Total assets (GBPbn) 653.7 611.6
--------------------------------------- -------- --------
International assets under management
(GBPbn) 65.3 59.2
--------------------------------------- -------- --------
International overlay assets (GBPbn) 3.8 2.1
--------------------------------------- -------- --------
GIA advisory assets (GBPbn) 13.7 -
--------------------------------------- -------- --------
Total international assets (GBPbn) 82.8 61.2
--------------------------------------- -------- --------
1. Overlay assets, presented for the first time, represent the
notional value of derivative instruments on which LGIM earns fees.
Fees are charged on notional values and as such are not subject to
positive or negative market movements.
2. Advisory assets represent the assets on which Global Index
Advisors (GIA) provide advisory services.
CONTINUED GROWTH IN CASH AND PROFITS
Operating profit increased 5% to GBP159m (H1 2013: GBP152m),
reflecting growth in revenues whilst maintaining a steady
cost:income ratio of 49% (H1 2013: 48%). LGIM continues to invest
in its client service proposition and systems infrastructure to
ensure it is able to provide innovative investment solutions that
are scalable. Total revenues increased 6% to GBP309m (H1 2013:
GBP292m), with assets under management up 7% to GBP465bn (H1 2013:
GBP433bn), benefitting from strong demand for de-risking solutions
and active strategies, together with positive market returns.
Total asset net flows for the period were GBP10.4bn (H1 2013:
GBP13.4bn). International asset net flows of GBP5.9bn (H1 2013:
GBP7.6bn), were driven by strong fixed income and LDI flows in the
US and included LGIM's first passive mandate in Asia. In the UK,
net inflows of GBP4.5bn (H1 2013: GBP5.8bn) reflected strong demand
for LGIM's LDI solutions with increasing net derivative overlay
asset inflows.
Net flows in our UK passive book included cGBP5bn of assets
being withdrawn by three large clients to either be managed
in-house or to fund bulk annuity transactions. Due to the
institutional nature of our clients, passive fund flows are
variable in nature.
STRONG INTERNATIONAL GROWTH
International assets grew by 52% to GBP82.8bn (H1 2013:
GBP54.4bn). In the US, LGIM's Active Fixed Income and LDI
proposition continued to grow rapidly with net inflows of GBP4.6bn
(H1 2013: GBP1.8bn). LGIM's continued success in the US has been
driven by a combination of excellent investment performance, with
the majority of composites outperforming their benchmarks over one,
three and five years, and a growing need from defined benefit
clients for de-risking solutions. LGIM's acquisition of US based
Global Index Advisors (GIA) was completed in mid-May, with $23.3bn
of advised assets as at the end of June.
In Europe, LGIM won its first flows into its SICAV fund range
from the Netherlands. It continues to make progress in Asia as it
invests in resources and infrastructure, winning its first passive
mandate in the region together with additional active fixed income
funds in the first half of the year.
MARKET LEADING DE-RISKING SOLUTIONS
Active
Fixed Active Property Total Overlay GIA Advisory Total
Asset movements Index Solutions Income Equities & other AUM Assets assets assets
GBPbn
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
AUM at 1 January
2014 269.8 70.4 89.4 8.6 11.3 449.5 162.1 - 611.6
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
Acquisition of GIA
assets - - - - - - - 13.4 13.4
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
Gross inflows 10.5 4.7 3.7 0.1 0.6 19.6 - - 19.6
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
Gross outflows (19.1) (2.1) (2.5) (0.1) (0.2) (24.0) - - (24.0)
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
Overlay / Advisory
net flows - - - - - - 12.3 0.1 12.4
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
External net flows (8.6) 2.6 1.2 - 0.4 (4.4) 12.3 0.1 8.0
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
Internal net flows 0.2 1.0 0.7 (0.2) 0.7 2.4 - - 2.4
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
Total net flows (8.4) 3.6 1.9 (0.2) 1.1 (2.0) 12.3 0.1 10.4
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
Market and other
mvmts 7.3 4.2 5.9 (0.2) 0.4 17.6 0.5 0.2 18.3
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
As at 30 June 2014 268.7 78.2 97.2 8.2 12.8 465.1 174.9 13.7 653.7
-------------------- ------- ---------- -------- ---------- --------- ------- -------- ------------- --------
Strong equity markets are conducive to de-risking. This has led
to clients moving out of passive equity funds and transitioning
towards LDI, ahead of potential buy-out. As a result, LGIM has
experienced strong inflows and switches into its LDI and active
funds, where it benefitted from external net AUM flows of GBP4.2bn
(H1 2013: GBP6.2bn) in the period. According to KPMG's most recent
LDI survey, LGIM is the largest LDI manager in the UK increasing
its share of the market to 44%. Total LDI assets, including overlay
assets, increased 17% to GBP253.1bn (H1 2013: GBP216.6bn) in the
period. Overlay assets of GBP174.9bn (H1 2013: GBP145.7bn), a key
component of Solutions revenue, represent the value of derivative
instruments used to help LGIM's clients manage the risk of meeting
their future liabilities. LGIM's capabilities and market position
means that the Solutions business is extremely well placed to
capitalise on the continuing de-risking trend.
Legal & General Property (LGP), the fourth largest
institutional real estate manager in the UK, increased AUM by 36%
to GBP12.8bn (H1 2013: GBP9.4bn), driven by strong net inflows of
GBP1.1bn (H1 2013: GBP0.2bn). LGIM's property team is attracting
growing flows from both retail and institutional clients, whilst it
continues to play an integral role in the group's initiative to
increase Direct Investments, completing transactions totalling in
excess of GBP0.8bn on behalf of LGC and LGR during the period.
WELL POSITIONED FOR UK SAVINGS TRENDS
UK defined contribution (DC) pension AUM increased 15% to
GBP33.0bn (H1 2013: GBP28.7bn). Total net inflows of GBP1.2bn
included GBP0.8bn of net inflows from Legal & General's
Workplace Savings platform. LGIM continues to invest in its UK DC
proposition, adding resources and creating innovative new products
designed to meet the specific needs of DC investors. A core part of
this involves the launch of the Real Income Growth Strategy (RIGS)
by LGIM's active equities team, which has a real return objective,
while its Multi-asset and Solutions teams are developing
complementary retirement income strategies. The scale and
efficiency of LGIM's passive management and asset allocation
capabilities continue to provide competitive advantage to the
Group's workplace proposition, particularly in light of the
recently announced capping of charges on auto-enrolment default
funds at 75bps.
The integration of the Retail arm into LGIM is now complete and
is already leveraging the synergies. In July we announced bespoke
pricing of our multi-index funds through Cofunds. These funds
provide customers with combined exposure to LGIM's Index funds and
UK Property Trust, combining the scale of manufacturing of LGIM
with Cofunds' distribution capabilities.
LEGAL & GENERAL ASSURANCE SOCIETY.
Financial highlights H1 2014 H1 2013
-------- --------
GBPm
------------------------------------------- -------- --------
Operational cash generation 237 231
------------------------------------------- -------- --------
New business strain (31) (54)
------------------------------------------- -------- --------
Net cash generation 206 177
------------------------------------------- -------- --------
Experience variances, assumption changes,
tax and non-cash mvnts 17 36
------------------------------------------- -------- --------
Operating profit 223 213
------------------------------------------- -------- --------
INCREASING SCALE AND EFFICIENCY
Operational cash generation increased by 3% to GBP237m (H1 2013:
GBP231m) as our Protection and Savings businesses grew their stock
of premiums and assets respectively. New business strain of
GBP(31)m (H1 2013: GBP(54)m) included a GBP15m improvement in
Protection new business strain.
LGAS operating profit increased 5% to GBP223m (H1 2013:
GBP213m). The operating profit of Protection was GBP179m (H1 2013:
GBP168m) benefitting from increased contribution of our market
leading Retail Protection business. This was partially offset by
lower profits from our General Insurance business following adverse
weather experience in Q1 2014, which resulted in additional claims
of GBP12m and marginally lower Savings operating profit of GBP44m
(H1 2013: GBP45m).
PROTECTION
Financial highlights H1 2014 H1 2013
GBPm
-------------------------------------------- -------- --------
UK Protection new business annual premiums 123 105
-------------------------------------------- -------- --------
UK Protection new business EEV margin (%) 9.3 6.7
-------------------------------------------- -------- --------
UK Protection gross premiums 743 692
-------- --------
General Insurance gross premiums 178 183
-------------------------------------------- -------- --------
Total UK gross premiums 921 875
-------------------------------------------- -------- --------
Retail Protection continued its strong growth with gross
premiums up 6% to GBP514m (H1 2013: GBP484m). Premiums continued to
benefit from the scale and efficiency established with a digital
platform that can automatically underwrite in excess of 80% of
applications at point of sale. We continue to be the leading
provider of Retail Protection to both Independent Financial
Advisers (IFAs) and in the market in total and benefit from being
the sole provider of Retail Protection to building society partners
covering 85% of the sector. Direct Retail Protection APE has
increased 56% compared to H1 2013 and now accounts for 16% of new
business (H1 2013: 13%) as our business evolves to meet changing
consumer purchasing preferences.
Group Protection delivered a 10% increase in gross premiums to
GBP229m (H1 2013: GBP208m) including a number of large scheme wins,
demonstrating the robustness of our market proposition.
UK Protection new business margin increased to 9.3% (H1 2013:
6.7%), benefiting from higher sales and ever increasing operational
efficiency.
General Insurance gross premiums were marginally down at GBP178m
(H1 2013: GBP183m). Operating profit of GBP28m (H1 2013: GBP39m)
resulted from a strong combined operating ratio to 88% (H1 2013:
81%) and included a GBP12m impact of the adverse weather
experienced at the start of the year.
Legal & General France (LGF) increased APE by 30% to EUR57m
(H1 2013: EUR44m) demonstrating the strength of our distribution
and synergies with our UK Protection business, as we continue to
leverage our existing relationships. We continue to see
opportunities to grow our business in a large and evolving French
Group Protection market.
SAVINGS
Suffolk Mature Consol. Total
Asset movements Platforms(1) Workplace Life Savings Overseas Adj LGAS
GBPbn
------------------ ------------- ---------- -------- --------- --------- -------- ------
As at 1 January
2014 64.1 8.7 6.6 36.3 4.5 (6.8) 113.4
------------------ ------------- ---------- -------- --------- --------- -------- ------
Gross inflows 4.8 1.3 0.6 0.7 0.2 (0.2) 7.4
------------------ ------------- ---------- -------- --------- --------- -------- ------
Gross outflows (2.3) (0.3) (0.2) (2.2) (0.2) 0.4 (4.8)
------------------ ------------- ---------- -------- --------- --------- -------- ------
Net flows 2.5 1.0 0.4 (1.5) - 0.2 2.6
------------------ ------------- ---------- -------- --------- --------- -------- ------
Market movements 0.8 (0.2) 0.2 1.1 - (0.1) 1.8
------------------ ------------- ---------- -------- --------- --------- -------- ------
As at 30 June
2014 67.4 9.5 7.2 35.9 4.5 (6.7) 117.8
------------------ ------------- ---------- -------- --------- --------- -------- ------
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. Savings operating profit was GBP44m
(H1 2013: GBP45m) with reduced contribution from our mature savings
business being offset by better performance in our workplace
business as it continues to increase in scale.
Our platform business delivered net flows of GBP2.5bn (H1 2013:
GBP1.0bn) as assets under administration increased 26% to GBP67.4bn
(H1 2013: GBP53.7bn) with positive net flows from both our
institutional and retail customer base.
The retail savings market is expected to benefit from the
greater flexibility in pensions savings, as introduced in the
recent budgetary reforms which, coupled with higher ISA limits, is
expected to increase retail savings levels. We continue to enhance
our existing functionality and improve our operational efficiency
to deliver high quality, low cost savings products to existing and
potential customers to capitalise on these trends. In June we
leveraged our existing Cofunds technology to offer four LGIM index
tracker and mixed asset funds to customers of Nationwide Building
Society and continue to explore further opportunities to enhance
our distribution.
Legal & General expects to have a Direct to Consumer ('D2C')
solution available around the end of the year, to complement and
capitalise on the platform capabilities and efficiencies already
developed with our intermediated Cofunds platform.
We continue to target an annualised cost saving of GBP11m p.a.
by 2015 from integrating our IPS and Cofunds platforms with a total
expected cost to the Group of GBP17m. To date this initiative has
delivered GBP6m of annualised cost savings.
In Workplace, assets have increased 30% to GBP9.5bn (H1 2013:
GBP7.3bn) with 1.1 million employees and 1,900 schemes now on the
platform. This represents a further 180k customers added since the
end of 2013.
Our workplace proposition continues to benefit from incremental
enrolment into pre-existing schemes and new schemes, where we
currently have a market share of c20% of new schemes being
enrolled. Participation rates remain high at more than 90%. The
defined contribution market, with the expected tripling of DC
savings in the UK over the next 10 years, provides a significant
opportunity to the Group. We continue to offer our default
auto-enrolment funds at 50bps, below the 75bps cap recently
prescribed, capitalising on LGIM's scale and passive fund
capabilities.
Workplace has delivered a 50% reduction in unit costs over the
last two years, as our auto-enrolment proposition moves towards
break-even levels of assets under administration. In H1 2014
Workplace operating losses were GBP9m.
Our SIPP business, Suffolk Life, delivered net inflows of
GBP0.4bn (H1 2013: GBP0.3bn). The business continues to grow
through demand for its bespoke SIPP proposition. As a result the
assets of Suffolk Life have increased 26% in the period to GBP7.2bn
(H1 2013: GBP5.7bn). We continue to look at opportunities to
leverage Suffolk Life's existing capped and flexible drawdown
expertise in conjunction with LGR, to develop consumer focused
products in the evolving UK pensions market.
In Mature Savings assets were GBP35.9bn (H1 2013: GBP35.7bn).
Net outflows of GBP(1.5)bn (H1 2013: GBP(1.8)bn) were in-line with
our expectations and partially offset by positive market movements
of GBP1.1bn (H1 2013: GBP1.3bn).
LEGAL & GENERAL CAPITAL.
POSITIVE CONTRIBUTION TO CASH AND PROFITS
Financial highlights H1 2014 H1 2013
GBPm
----------------------------- -------- --------
Operating profit 102 86
----------------------------- -------- --------
Operational cash generation 82 68
----------------------------- -------- --------
Legal & General Capital (LGC) increased operating profits by
19% to GBP102m (H1 2013: GBP86m) representing the smoothed expected
return on LGC assets after expenses, and equates to an assumed
annualised investment return of 4.4% (H1 2013: 3.9%) on an average
asset base of GBP4.7bn (H1 2013 GBP4.6bn). LGC assets at the half
year increased 11% to GBP5.2bn (H1 2013: GBP4.7bn).
More generally LGC continues to develop three core functions:
(1) direct investments for the principal balance sheet, (2)
implementing the Group-wide Asset Liability Management (ALM) and
investment strategy and (3) providing Group Treasury services.
GBP1.6BN FURTHER DIRECT INVESTMENT COMPLETED
H1 2014 FY 2013
-------------------------------- --------
GBPbn LGR LGC LGA & other Total Total
-------------------- ---- ---- ------------ ------ --------
Direct Investments 3.7 0.6 0.3 4.6 2.9
-------------------- ---- ---- ------------ ------ --------
LGC continues to broaden the asset base of the Group into
attractively priced direct investments and is increasingly using
the LGC assets to facilitate the widening of investment
opportunities, working with LGIM to develop their capabilities and
successfully collaborating with investment partners.
LGC continues to invest in housing, investing a further
GBP1.0bn, on behalf of LGC and LGR in the period. This includes a
GBP52m equity injection into CALA Homes to acquire Banner Homes,
over GBP500m of co-purchased property portfolios with LGR and the
GBP252m Places for People deal to acquire 4,000 homes and to help
finance 7,000 new homes over 7 years. In addition, a further
GBP181m of commercial lending and GBP210m of infrastructure
investment was completed on behalf of the Group in the first 6
months of the year.
These investments underpin the benefits of Legal & General's
strong capital position to diversify the revenue opportunities of
the Group. LGC has developed a broad range of partners to ensure
good access to direct investments and we continue to see a good
pipeline of opportunities for the remainder of the year. In the US
in particular, LGC has worked with LGA and external managers to
build a portfolio of $375m private placements and USD Commercial
Real Estate Lending, with further investments planned.
In July we purchased a 40% stake in Pemberton Asset Management,
with a commitment to invest EUR250m into SME loans across LGAS and
LGR, developing a European Private Placement capability. Further
asset classes are planned for 2014 including working with Legal
& General Property to launch investments in the Private Rented
Sector.
RESILIENT GROUP-WIDE INVESTMENT STRATEGY
LGC implements the Group-wide ALM and investment strategy for
the GBP48.2bn (H1 2013: GBP41.9bn) principal balance sheet and
GBP17.1bn (H1 2013: GBP17.9bn) of with-profits assets of the Group.
The principal portfolio is well positioned for the medium term and
is predominantly an Investment Grade debt portfolio with low bank
sub-debt and peripheral European exposure, closely hedged to
liabilities. Over H1, LGC supported LGR in the successful
completion of the investment and ALM implementation of the GBP3bn
ICI pension fund bulk purchase deal.
Asset portfolio H1 2014
-----------------------------
GBPbn LGR(1) LGC Other Total
----------------------------- ------- ---- ------ ------
Bonds: 34.0 1.6 3.7 39.3
----------------------------- ------- ---- ------ ------
Sovereigns 6.6 0.3 1.4 8.3
----------------------------- ------- ---- ------ ------
Banks 2.0 0.4 0.2 2.6
----------------------------- ------- ---- ------ ------
Other bonds 25.4 0.9 2.1 28.4
----------------------------- ------- ---- ------ ------
Property 1.7 0.3 - 2.0
----------------------------- ------- ---- ------ ------
Equities 0.1 1.6 - 1.7
----------------------------- ------- ---- ------ ------
Derivatives 2.2 0.1 - 2.3
----------------------------- ------- ---- ------ ------
Cash and cash equivalents 0.6 1.6 0.6 2.8
----------------------------- ------- ---- ------ ------
Total financial investments 38.6 5.2 4.3 48.1
----------------------------- ------- ---- ------ ------
Other assets 0.1 0.1
----------------------------- ------- ---- ------ ------
Total investments 38.7 5.2 4.3 48.2
----------------------------- ------- ---- ------ ------
1. LGR assets represent those used to back the Group's
non-profit annuity business.
The medium term strategy is to increase direct investments
across LGR, LGC and LGA as part of one of Legal & General's
core themes, and diversify the portfolio by sector and geography.
The GBP48.2bn balance sheet includes GBP1.7bn equity investment
(3.5% of principal assets) held predominantly in the LGC asset
portfolio.
The investment variance across the Group was GBP26m (H1 2013:
GBP42m) primarily as a result of changes in LGR's investment
portfolio, with greater levels of direct investment, offset by
equity returns in LGC asset portfolio which were lower than longer
term assumptions.
In LGPL, the Group's main annuity company, we maintain a
provision of GBP2.0bn (FY 2013: GBP1.8bn) to provide for the risk
of credit default. We have experienced minimal defaults over the
last five years.
EXTENDING THE DEBT MATURITY OF THE GROUP
Legal & General continues to have a strong liquidity
position reflecting its requirements for working capital and
derivative collateral. In addition the Group's outstanding core
borrowings total GBP3.0bn (FY 2013: GBP2.5bn). There is also a
further GBP0.7bn (FY 2013: GBP0.8bn) of operational borrowings
including GBP0.6bn (FY 2013: GBP0.6bn) of non recourse borrowings.
In June 2014 we issued a further GBP600m of subordinated Tier 2
debt, with a maturity date of 2064 (with a call date of 2044), and
coupon rate of 5.5% and extended the overall average maturity of
the group's borrowings significantly.
Group debt costs of GBP63m (H1 2013: GBP64m) reflect an average
cost of debt of 5.2% per annum (H1 2013: 4.7% per annum) on average
nominal value of debt balances of GBP2.5bn (H1 2013: GBP2.7bn).
LEGAL & GENERAL AMERICA.
Financial highlights H1 2014 H1 2013
$m
----------------------------- -------- --------
Operating profit 72 81
----------------------------- -------- --------
Operational cash generation 73 66
----------------------------- -------- --------
Gross premium income 553 503
----------------------------- -------- --------
New business APE 78 70
----------------------------- -------- --------
CONTINUED GROWTH IN PREMIUMS AND SALES
In H1 2014 Legal & General America (LGA) continued to grow.
Sales increased 11% to $78m (H1 2013: $70m), representing a further
increase in market share. The growth in sales resulted in a further
increase in gross premiums of 10% to $553m (H1 2013: $503m) as we
continue to benefit from strong relationships with the brokerage
general agents (BGAs), who distribute term assurance in the US
market. LGA is the 4(th) largest provider of term life assurance by
premium in the US and remains the largest provider through the key
distribution channel of BGAs.
Operational cash generation increased by 11% to $73m (H1 2013:
$66m). This represents the ordinary dividend paid to the Group,
which is received in Q1 each year. New business margin has
increased to 10.8% (H1 2013: 10.0%) due to mix of business and
lower unit costs.
Operating profit was lower at $72m (H1 2013: $81m) due to higher
first quarter mortality claims consistent with the general
experience across the US life industry. Claims are expected to
normalise at expected levels in the second half of the year.
Operating profit benefited from a 6% reduction in unit costs for in
force management due to the growing number of contracts in force,
cost-saving actions and successful negotiations to acquire
underwriting data at lower costs.
In May, LGA introduced a more refined pricing model, allowing
the pricing of risk at a more granular level. As a consequence
prices have been raised at lower margin price points and reduced
elsewhere. This has led to a change in business mix and we expect a
slight reduction in new business volume in H2 2014 as a result.
cash generation.
The sources of our cash generation are transparent and the table
below highlights the cash generation by segment. Net cash
generation increased by 13%, reflecting increased net cash
generation across all 5 of our business divisions. This includes
the full year ordinary dividend of $73m from LGA which was received
in Q1 2014.
H1 2014 H1 2013
GBPm
------------------------------- -------- --------
LGAS ex. General Insurance 215 201
------------------------------- -------- --------
LGR 146 130
------------------------------- -------- --------
LGA 44 43
------------------------------- -------- --------
Sub total 405 374
------------------------------- -------- --------
LGIM 125 119
------------------------------- -------- --------
LGC 82 68
------------------------------- -------- --------
LGAS General Insurance 22 30
------------------------------- -------- --------
Total from divisions 634 591
------------------------------- -------- --------
Group debt and other expenses (56) (54)
------------------------------- -------- --------
Total operational cash 578 537
------------------------------- -------- --------
New business strain (11) (37)
------------------------------- -------- --------
Total net cash 567 500
------------------------------- -------- --------
The table above is set out in the format of the cash guidance
for 2014 given at the time of the 2013 results announcement.
CLEAR VISIBILITY 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
----------------------- -------- ------- ------ ----------- ------- ----- --------
- Protection 166 (8) 158 (20) 138 41 179
----------------------- -------- ------- ------ ----------- ------- ----- --------
- Savings 71 (23) 48 (13) 35 9 44
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGAS 237 (31) 206 (33) 173 50 223
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGR 146 20 166 (18) 148 40 188
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGIM 125 - 125 - 125 34 159
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGC 82 - 82 - 82 20 102
----------------------- -------- ------- ------ ----------- ------- ----- --------
LGA 44 - 44 (17) 27 16 43
----------------------- -------- ------- ------ ----------- ------- ----- --------
Operating profit from
divisions 634 (11) 623 (68) 555 160 715
----------------------- -------- ------- ------ ----------- ------- ----- --------
Group debt and other
costs (56) - (56) (6) (62) (17) (79)
----------------------- -------- ------- ------ ----------- ------- ----- --------
Operating profit 578 (11) 567 (74) 493 143 636
----------------------- -------- ------- ------ ----------- ------- ----- --------
Investment and other
variances - - - 14 14 (14) -
----------------------- -------- ------- ------ ----------- ------- ----- --------
Total 578 (11) 567 (60) 507 129 636
----------------------- -------- ------- ------ ----------- ------- ----- --------
Per share 9.82 9.64 8.62
----------------------- -------- ------- ------ ----------- ------- ----- --------
Dividend per share 2.90 2.90
----------------------- -------- ------- ------ ----------- ------- ----- --------
BALANCE SHEET STRENGTH.
IGD CAPITAL RESOURCES
As at 30 June 2014 the Insurance Group's Directive (IGD) surplus
was GBP4.7bn (FY 2013: GBP4.0bn).
The Group's capital resources totalled GBP8.2bn, covering the
capital resources requirement of GBP3.5bn by 2.36 times. This
capital buffer is in addition to the GBP2.0bn of LGPL credit
default provision. Capital resources have increased following the
issuance of GBP600m of Lower Tier 2 debt in June and benefits from
the release of GBP122m of capital following the Part VII transfer
of the Lucida book of business to LGAS. The IGD surplus includes
allowance for the interim dividend of GBP172m (FY 2013: final
dividend of GBP408m).
Capital H1 2014 H1 2013
GBPbn
------------------------------------- -------- --------
Group capital resources 8.2 7.3
------------------------------------- -------- --------
Group capital resources requirement 3.5 3.3
------------------------------------- -------- --------
IGD surplus 4.7 4.0
------------------------------------- -------- --------
Coverage ratio % 236 221
------------------------------------- -------- --------
ECONOMIC CAPITAL
For the first time we have included details of the Group's
economic capital position, which is outlined in more granular
detail on pages 77 to 80. Economic capital is the amount of capital
that the Board believes the Group needs to hold, over and above its
liabilities, in order to meet the Group's strategic objectives.
These numbers do not represent our view of the Solvency II outcome
for the Group. Solvency II has elements which L&G considers to
be inconsistent with the Group's definition of economic capital, so
there will be differences between the two balance sheets.Our
Economic Capital model has not been reviewed by the Prudential
Regulatory Authority ("PRA"), nor will it be.
As at 31 December 2013 Legal & General Group had an economic
capital surplus of GBP6.9bn, corresponding to an economic capital
coverage ratio of 251%. This increased to a surplus of GBP7.6bn and
coverage of 261% as at 30 June 2014, in part reflecting the
issuance of GBP600m of Tier 2 capital during the period. The
economic capital position, excluding dividends proposed, is as
follows:
Capital H1 2014 H1 2013
GBPbn
------------------------------ -------- --------
Eligible own funds 12.3 11.4
------------------------------ -------- --------
Economic capital requirement 4.7 4.5
------------------------------ -------- --------
Economic capital surplus 7.6 6.9
------------------------------ -------- --------
1-in-200 coverage ratio (%) 261 251
------------------------------ -------- --------
TAXATION.
GROUP TAX RATES - EFFECTIVE TAX RATE OF 20.3%
Equity holders' effective tax rate H1 2014 H1 2013
%
------------------------------------ -------- --------
Total effective tax rate 20.3 21.6
------------------------------------ -------- --------
Annualised rate of UK corporation
tax 21.50 23.25
------------------------------------ -------- --------
In H1 2014, 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.
DEFERRED TAX ASSET UTILISATION
The UK has a deferred tax asset of GBP53m in respect of trading
losses carried forward in Group companies (FY 2013: GBP93m). The
movement in the year includes a GBP35m (H1 2013: GBP38m)
contribution to net cash generation in LGR and LGAS protection from
the utilisation of trading losses. It is expected that the trading
losses within LGR remain available throughout the remainder of
2014.
Supplementary EEV disclosure.
EEV highlights H1 2014 H1 2013
Pence
------------------------------ -------- --------
EEV per share including LGIM 196 190
------------------------------ -------- --------
EEV per share 166 162
------------------------------ -------- --------
Analysis of EEV results H1 2014 H1 2013
GBPm
-------------------------------------------------- -------- --------
Contribution from new business 421 257
-------------------------------------------------- -------- --------
Expected return from in-force business 238 211
-------------------------------------------------- -------- --------
Experience variances and assumption changes 9 29
-------------------------------------------------- -------- --------
Development costs (14) (18)
-------------------------------------------------- -------- --------
Contribution from shareholder net worth 93 71
-------------------------------------------------- -------- --------
EEV operating profit on covered business 747 550
-------------------------------------------------- -------- --------
Business reported on an IFRS basis 103 90
-------------------------------------------------- -------- --------
EEV operating profit 850 640
-------------------------------------------------- -------- --------
Economic variances 8 264
-------------------------------------------------- -------- --------
Losses attributable to non-controlling interests 6 7
-------------------------------------------------- -------- --------
EEV profit before tax 864 911
-------------------------------------------------- -------- --------
Tax and other (145) (126)
-------------------------------------------------- -------- --------
EEV profit after tax 719 785
-------------------------------------------------- -------- --------
EEV PER SHARE
The Group delivered GBP719m of EEV profit after tax, which after
payment of the 2013 final dividend of GBP408m and foreign exchange,
pension deficit and other adjustments of GBP(54)m, increased EEV
shareholders' equity to GBP9,843m (FY 2013: GBP9,586m), equivalent
to 166 pence per share (FY 2013: 162 pence per share). Including
LGIM's external funds in the calculation increases the EEV per
share to 196 pence (FY 2013: 190 pence).
NEW BUSINESS CONTRIBUTION
Contribution from new business increased to GBP421m (H1 2013:
GBP257m). The increase reflects increases in each of our three
divisions reported on a covered basis, with sales increasing on a
PVNBP basis by 32% to GBP7.7bn (H1 2013: GBP5.9bn). Worldwide EEV
new business margin increased to 5.4% (H1 2013: 4.4%). UK
Protection business of 9.3% (H1 2013: 6.7%) benefitted from a
continuation of higher new business volumes. LGR delivered a strong
and sustained margin of 8.4% (H1 2013: 8.4%) on significantly
higher volumes following the ICI bulk annuity deal completed in Q1
2014.
EEV OPERATING PROFIT
EEV operating profit increased 33% to GBP850m (H1 2013: GBP640m)
as the Group benefitted from higher new business contribution which
resulted from an 82% increase in single premium business to
GBP5,118m (H1 2013: GBP2,810), a 11% increase in annual premium to
GBP549m (H1 2013: GBP494m) and improved new business margins.
EEV PROFIT AFTER TAX
EEV profit after tax was down at GBP719m (H1 2013: GBP785m)
predominantly as a result of the outperformance in equity markets
in H1 2013, not repeated in the first half of 2014, more than
offsetting the growth in operating profit.
VALUE OF IN-FORCE (VIF)
The table below illustrates how the discounted and undiscounted
value of in-force (VIF) has increased throughout the year.
Discounted Undiscounted(1)
Reconciliation of UK long term business
VIF
GBPbn
--------------------------------------------------- ----------- ----------------
Opening VIF at 1 January 2014 4.9 10.5
--------------------------------------------------- ----------- ----------------
Contribution from new business 0.3 0.8
--------------------------------------------------- ----------- ----------------
Unwind of discount rate 0.2 n/a
--------------------------------------------------- ----------- ----------------
Expected release from non-profit and with-profits
businesses(2) (0.3) (0.4)
--------------------------------------------------- ----------- ----------------
Experience variances / assumption changes - 0.2
--------------------------------------------------- ----------- ----------------
Investment variance / economic assumption
changes - (0.4)
--------------------------------------------------- ----------- ----------------
Other - -
--------------------------------------------------- ----------- ----------------
Closing VIF at 30 June 2014 5.1 10.7
--------------------------------------------------- ----------- ----------------
1. Management estimates.
2. Comprises the expected release from non-profit business of
GBP322m and with-profits transfer of GBP22m.
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 (H1 2013: GBP0.3bn), equivalent to 5p per share (H1 2013:
5p per share).
The external assets component of LGIM is included at the IFRS
net asset value of GBP0.6bn (H1 2013: GBP0.5bn), equivalent to 10p
per share (H1 2013: 8p 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 GBP0.9bn (15p per share) to GBP2.6bn (45p 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 H1 2014 H1 2014
p per share GBPbn
----------------------------------------------- ------------- --------
Look through value of profits on covered
business 5 0.3
----------------------------------------------- ------------- --------
Net asset value 10 0.6
----------------------------------------------- ------------- --------
Current value of LGIM in Group embedded
value 15 0.9
----------------------------------------------- ------------- --------
LGIM VIF 30 1.7
----------------------------------------------- ------------- --------
Alternative discounted value of LGIM future
cash flows 45 2.6
----------------------------------------------- ------------- --------
Including LGIM, this scenario equates to an indicative valuation
per share of 196 pence.
Indicative valuation including LGIM H1 2014 H1 2014
p per share GBPbn
------------------------------------- ------------ --------
EEV as reported 166 9.9
------------------------------------- ------------ --------
LGIM VIF 30 1.7
------------------------------------- ------------ --------
Total including LGIM 196 11.6
------------------------------------- ------------ --------
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 recent changes in annuity
legislation may have a detrimental compulsion announced in the
effect on our strategy. UK budget illustrate how the
Legislation and government sector can be impacted by
fiscal policy influence our sudden changes in legislative
product design, the period or regulatory frameworks.
of retention of products Whilst we believe our Workplace
and our required reserves savings products, a comprehensive
for future liabilities. Regulation suite of low cost retail solutions,
defines the overall framework and the Cofunds platform,
for the design, marketing position us well for the evolution
and distribution of our products; of a modern pensions market
and the prudential capital in the UK, we remain vigilant
that we hold. Significant to the risk that future changes
changes in legislation or may have unintended consequences
regulation may reduce our for the financial service
future revenues and profitability sectors in which we operate.
or require us to hold more
capital. We are particularly Other areas of uncertainty
exposed to risk where legislative include Solvency II (SII)
or regulatory change is unanticipated and the distribution landscape
or implemented without prior post the Retail Distribution
consultation and engagement Review (RDR). With regard
with the financial services to SII, the new capital regulations
sector. The nature of long continue to be targeted for
term business can also result implementation in early 2016.
in some changes in regulation, Revised capital calibrations
and the differing interpretation for long term business provide
of regulation by regulators sufficient flexibility to
over time, having a retrospective address many of the adverse
effect on our businesses capital impacts for UK insurance
and in force books of business, firms. Challenges remain,
impacting the value of embedded however, in ensuring that
future profits implicit in final implementation is proportionate
those books of business. and cost effective for the
insurance sector.
We continue to 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.
Investment market performance Current macro-economic policies
or conditions in the broader continue to drive record equity
economy may adversely impact markets, bond values and house
our earnings and profitability. prices. Whilst we consider
The performance and liquidity the immediate outlook remains
of investment markets, interest positive, a number of factors
rate movements and inflation could result in rapid changes
impact the value of investment in asset values. These include
assets we hold in shareholders' a toughening of monetary policy
funds and those to meet the and political uncertainty.
obligations arising from There is limited resilience
insurance business. Interest in the current investment
rate movement and inflation market environment for such
can also change the value 'shocks' with potential for
of the obligations. We use significant falls in the value
a range of techniques to of certain asset classes should
manage mismatches between markets reassess returns.
assets and liabilities. However,
financial loss can still Extreme market shocks may
arise from adverse investment impact our ability to execute
markets. In addition, significant hedging strategies that ensure
falls in investment values the profile of our asset and
can reduce the fee income liability cash flows is appropriately
of our investment management matched. Economic shocks may
business. Broader economic also impact consumer attitudes
conditions impact the timing in the markets in which we
of the purchase and the period operate. We continue to model
of retention of retail financial our business plans across
services products, impacting a broad range of economic
our profitability. scenarios and take account
of alternative economic outlooks
within our overall business
strategy. Our business plans
seek to focus upon those market
segments that we expect to
be resilient across a range
of projected conditions.
In dealing with issuers of Credit spreads continue to
debt and other types of counterparty reflect market confidence
the Group is exposed to the in the issuers of investment
risk of financial loss. grade bonds, and at Legal
A systematic default event & General we have continued
within the corporate sector, to experience low levels of
or a major sovereign debt default on our corporate bond
event, could result in dislocation portfolio. We also continue
of bond markets, significantly to diversify the asset classes
widening credit spreads, backing our annuities business,
and may result in default to include the use of property
of even strongly rated issuers lending, sale and leaseback
of debt, exposing us to financial and other forms of direct
loss. We are also exposed investment. There remains,
to banking, money market however, a range of factors
and reinsurance counterparties, that could trigger write downs
and settlement, custody and in our investment assets,
other bespoke business services, leading to reduced profitability
a failure of which could or financial loss. These factors
expose us to both financial include deterioration in market
loss and operational disruption confidence in banks particularly
of our business processes. in the euro zone and a financial
crisis in emerging markets.
Whilst we carefully select
and monitor the financial
strength of all our counterparties,
an economic shock or significant
change in the current economic
outlook may increase potential
for a supplier of business
services being unable to meet
their obligations to us.
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' broader financial services
perceptions of the robustness sector. Recent examples include
of financial institutions, the EU transaction tax and
may impact consumer attitudes the 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 In mitigation of sector contagion
to the regulatory and legislative risks we actively manage our
environment in which we operate, brand and seek to differentiate
adversely impacting our future our business model from that
revenues and profitability.i of our competitors. To ensure
regulation is appropriate
and proportionate we also
seek to engage with our regulators
to support their understanding
of the risk drivers in the
financial services markets.
The nature of the business
environment in which we operate,
however, means that we cannot
remove ourselves from the
adverse consequences of market
events and we will continue
to be exposed to residual
contagion risks.
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 taking
regulation or legislation. account of demographic trends
The writing of long-term and long term economic outlook.
insurance business requires In our annuities business
the setting of assumptions we are, however, exposed to
for long-term trends in factors factors such as improvements
such as mortality, lapse in medical science beyond
rates and persistency, valuation those anticipated leading
interest rates, expenses to unexpected changes in life
and credit defaults. Actual expectancy. In protection
experience may result in business we remain inherently
the need to recalibrate these exposed to loss from events
assumptions reducing profitability. causing widespread mortality/morbidity
Forced changes in reserves or significant policy lapse
can also be required because rates. There is also potential
of regulatory or legislative for legislative intervention
intervention in the way that in the pricing of insurance
products are priced, reducing products irrespective of risk
profitability. factors, such as age or health.
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
Significant changes in the technologies and significant
markets in which we operate reform in the provision of
may require the review and state welfare. Within the
realignment of elements of investment management business
our business strategy. A asset classes are increasingly
failure to be sufficiently homogeneous providing opportunities
responsive to potential change for businesses with scale
and understand the implication such as us. The retrenchment
to our businesses, or the of the banks also provides
incorrect execution of change opportunity for insurance
may impact the achievement firms to participate in investment
of our strategic objectives, and lending activities. Responding
and in turn future revenues to these macro trends potentially
and profitability. creates organisational challenges
and management stretch across
the range of initiatives.
We remain vigilant to these
risks and have structure our
business to support their
practical management.
A material failure in our We continue to invest in our
business processes may result systems capabilities and business
in unanticipated financial processes so that we meet
loss or reputation damage. the expectations of our customers;
We have constructed our framework comply with regulatory, legal
of internal controls to minimise and financial reporting requirements;
the risk of unanticipated and mitigate the risk of significant
financial loss or damage financial loss or reputational
to our reputation. However, damage from operational risk
no system of internal control events. Our risk governance
can completely eliminate model seeks to ensure that
the risk of error, financial business management are actively
loss, fraudulent actions engaged in ensuring an appropriate
or reputational damage to control environment is in
our brand. Our plans for place, with risk oversight
growth inherently will also and independent assurance
increase the profile of operational of our internal control environment
risks across our businesses. being provided by our Group
Risk and Group Internal Audit
functions, respectively.
The financial services sector Cyber-crime and attempts by
is increasingly becoming third parties to seek and
a target of 'cyber crime'. exploit perceived vulnerabilities
As we and our business partners in IT systems remains a key
increasingly digitalise our risk within the financial
businesses, we are inherently services sector. Potential
exposed to the risk that threats include denial of
third parties may seek to service attacks, network intrusions
disrupt our on-line business to steal data for the furtherance
operations, steal customer of financial crime, and the
data or perpetrate acts of electronic diversion of funds.
fraud using digital media. We continue focus on maintaining
A significant cyber event a secure IT environment that
could result in reputation protects our customer and
damage and financial loss. corporate data and seek to
proactively address emerging
threats. The nature of cyber
threats, however, means residual
risk remains.
Enquiries.
Investors:
Laura Doyle Head of Investor Relations 020 3124 2088
Stephen Thomas 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
10.30 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 27 August 2014
-------------------------------------- ----------------
Record date 29 August 2014
-------------------------------------- ----------------
Payment date of 2014 interim dividend 1 October 2014
-------------------------------------- ----------------
Q3 Interim Management Statement 2014 4 November 2014
-------------------------------------- ----------------
Preliminary Results 2014 4 March 2015
-------------------------------------- ----------------
DEFINITIONS
Operational cash generation is the expected release from
in-force business for the UK non-profit LGAS and LGR businesses,
the shareholder's share of bonuses on with-profits business, the
post-tax operating profit on other UK businesses, including the
expected investment return on LGC invested assets, and dividends
remitted from our international businesses.
Net cash generation is defined as operational cash generation
less new business strain.
Annualised return on equity is calculated by taking annualised
profit after tax attributable to equity holders of the Company
(calculated as twice the half-year number) as a percentage of the
average shareholders' capital employed, being an average of the
opening and closing shareholders' equity during the period.
The Group's principal balance sheet includes those assets to
which shareholders are exposed, excluding assets where our
customers have the total market risk and reward.
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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